Law

A Tussle Over Paying Stanford Fraud Victims


More than two years after R. Allen Stanford was accused of masterminding a $7 billion Ponzi scheme, the Securities and Exchange Commission and an investor protection fund are arguing over whether to reimburse victims of the alleged fraud. In June, the SEC recommended that the Securities Investor Protection Corp. offer some buyers of Stanford’s certificates of deposit as much as $500,000 each. The SIPC, a four-decade-old nonprofit corporation funded by brokerages, has helped to collect billions of dollars for victims of Bernard Madoff but has maintained that Stanford investors aren’t eligible for restitution.

SIPC President Stephen P. Harbeck advised a court-appointed receiver two years ago that Stanford investors wouldn’t be eligible for reimbursement because Stanford’s Houston brokerage didn’t steal the CDs. The money was sent to an affiliated bank, and the now-worthless CDs were delivered to the investors. The SIPC, he says, only protects securities that are stolen or lost in the collapse of a brokerage and not losses from fraud. “It is very difficult to explain the difference between theft and fraud,” Harbeck says. “Nobody is saying these people weren’t defrauded.”

The SEC initially agreed with that analysis but changed its mind, several people familiar with the matter say, after two years of pressure from more than 50 lawmakers. On June 15, the SEC told the SIPC to liquidate the Stanford Group brokerage and review thousands of accounts for possible restitution, threatening to sue if the SIPC didn’t do so. The SEC argues that the brokerage and the bank are effectively one entity. Because the investors gave cash to the brokerage, that makes the brokerage—a member of the SIPC—responsible, no matter who actually maintained possession of the CDs. The question won’t be settled until September, when the SIPC board is set to meet.

Some 20,000 investors bought into Stanford’s alleged scheme over two decades. Stanford’s assets were frozen in February 2009 when the SEC accused him of a “massive, ongoing fraud.” Later that year he was indicted on federal criminal charges of fraud and conspiracy. Though Stanford’s firm sold CDs through Stanford International Bank, a subsidiary in Antigua, much of the money went to Stanford himself via undocumented “loans” used to fund his businesses and lifestyle, authorities say. Stanford is in prison awaiting trial; he has denied all wrongdoing.

Congress established the SIPC in 1970 to help investors whose brokers go bankrupt or disappear with their securities. Funded by assessments from brokerages, it isn’t a government agency, though it’s overseen by the SEC and its board is appointed by the President and other agencies. The SIPC’s fund now holds about $1.3 billion; the maximum payout is $500,000 per investor.

Some Stanford investors believe the dispute will be settled in their favor. They’re simply asking for the same kind of protection available to those who invested with Madoff, says Angela Shaw, who founded the Stanford Victims Coalition after her family lost $4.6 million. “To aspire to be like the Madoff victims,” she says, “is a bad place to be.”

The bottom line: The SEC says victims of Stanford’s alleged $7 billion fraud are eligible for restitution; the fund that would reimburse them says they aren’t.

Schmidt is a reporter for Bloomberg News in Washington.

Later, Baby
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