Bloomberg News

SIPC Ordered to Say Why It Shouldn’t Cover Stanford Victims

February 15, 2012

(Updates with excerpt from ruling in fourth paragraph.)

Feb. 9 (Bloomberg) -- The Securities Investor Protection Corp. was ordered by a federal judge to explain why it shouldn’t begin a claims process for the victims of R. Allen Stanford’s alleged investment fraud.

U.S. District Judge Robert Wilkins in Washington today ruled that SIPC, a nonprofit corporation funded by the brokerage industry, must tell the court by Feb. 16 why it shouldn’t be ordered to start a liquidation proceeding in federal court in Texas to handle more than $1 billion in possible claims related to the alleged Stanford fraud.

At issue is whether more than 7,000 brokerage customers who invested in the alleged $7 billion Ponzi scheme run by Stanford are entitled to have their losses covered by SIPC. The Securities and Exchange Commission sued SIPC in December to compel coverage.

“The court must determine whether SIPC has refused to commit its funds or otherwise refused to act for the protection of customers of any SIPC member,” Wilkins said in the ruling.

Wilkins said he will decide whether SIPC must file an application for a protective decree in federal court in Texas.

SIPC, a congressionally chartered group that insures customers against losses caused by broker theft, says the Stanford investments don’t fit into the confines of the federal law that governs who’s eligible for the payouts. Investors and their advocates in Congress say SIPC is deliberately taking a narrow view of the law to protect brokers from higher assessments.

The case is Securities and Exchange Commission v. Securities Investor Protection Corp., 11-mc-00678, U.S. District Court, District of Columbia (Washington).

--Editors: Fred Strasser, Peter Blumberg

To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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