Bloomberg News

SIPC Says Stanford Investments Aren’t Eligible for Payouts

February 17, 2012

(Updates with court filing in second paragraph.)

Feb. 16 (Bloomberg) -- The Securities Investor Protection Corp. told a U.S. judge that federal law prevents it from setting up a claims process for the victims of R. Allen Stanford’s alleged investment fraud.

SIPC, a nonprofit corporation funded by the brokerage industry, said in a court filing today that there is no basis to require it to guarantee investments with an entity that isn’t a member, in this case Antigua-based Stanford International Bank Ltd.

The Securities Investor Protection Act “does not even permit, much less require, the initiation of a liquidation for purchasers of the offshore bank certificates of deposit at issue here,” SIPC said in the filing in U.S. District Court in Washington.

U.S. District Judge Robert Wilkins last week told SIPC to explain 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 tied to Stanford’s alleged 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.

In June, the Securities and Exchange Commission told SIPC to start a process that could grant as much as $500,000 for each Stanford client -- the same maximum amount it offers in any case. After SIPC balked, the SEC for the first time sued the congressionally chartered group.

Madoff Coverage

SIPC is responsible for providing coverage for individual investors who lose money or securities held by insolvent or failing member brokerage firms. It has agreed to cover losses sustained by victims of Bernard Madoff’s multibillion-dollar Ponzi scheme and investors who may have lost money in the October collapse of commodities broker MF Global Holdings Ltd.

The SEC sued SIPC in December to compel coverage. Investors and their advocates in Congress say SIPC is deliberately taking a narrow view of the law to protect brokers from higher assessments.

In a hearing last month, Eugene Assaf, a lawyer for SIPC, said a liquidation proceeding would cause significant expense for the insurer.

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

--Editors: Stephen Farr, Peter Blumberg

To contact the reporters on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net; Edvard Pettersson in Los Angeles at epettersson@bloomberg.net

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


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