SEC Fraud

This week, the Securities and Exchange Commission decided to press forth with a first of its kind lawsuit against SIPC, the Securities Investor Protection Corp., for its unwillingness to pay investors who lost money in an alleged Ponzi scheme.
The Ponzi scheme was orchestrated by R. Allen Stanford, an investor who is accused of falsely promising high returns to people who bought certificates of deposit from Stanford International Bank Ltd. The CDs were worthless and Stanford invested the money in various unprofitable business ventures. It is alleged that he misused $7 billion of investor capital in this manner.
The SIPC is a federally-authorized agency that provides compensation to investors who lose money in a failed brokerage firm. When such an investment is lost due to misuse, illegal activity, or systematic failure, an individual can receive up to $500,000 dollars in SIPC compensation.
According to the SEC, this compensation entitlement should apply to Stanford’s misled investors. Although the Ponzi scheme revolved around the worthless investments made in CDs, these CDs were purchased through Stanford Group, a brokerage firm and a SIPC member. Since there is indeed a failed and deceitful brokerage at the heart of the Stanford crisis, the SEC believes that SIPC is liable to get involved.
But SIPC maintains that Stanford’s did not lose their money in a failed brokerage firm. Rather, they bought bank-issued CDs that they still possess; even though these CDs are worthless, it is not the responsibility of SIPC to act in such situations.
The SEC and SIPC have been negotiating in recent months to settle the dispute outside of court. But SIPC’s final offer – a maximum payment of up to $250,000 for each Stanford victim – was rejected by the members of the SEC.
In light of recent events, the two groups are acting with starkly different interests in mind. The SEC is motivated, in large part, by the fallout from the Bernard Madoff Ponzi scheme – a colossal investment scam that the SEC failed to catch. On the other hand, SIPC needs to answer to the Securities Industry and Financial Markets Association, a group that supports its reserve fund and is strongly opposed to any expansion of SIPC protection. Even if SIPC is forced to pay, then, it is determined not to do so without a fight.
R. Allen Stanford denies the charges against him. It appears, for all parties involved, that a good deal of litigation sits on the horizon.

A GlaxoSmithKline subsidiary Stiefel Laboratories has been been charged by the US Securities and Exchange commission with defrauding shareholders out of more than 100 million dollars. Formed in 2000, GlaxoSmithKline is a global pharmaceutical and health care company and is third in the industry behind Johnson and Johnson and Pfizer. The company employees more than 90,000 people worldwide. GlaxoSmithKline acquired Stiefel Laboroties in 2009 for the price tag of $2.9 billion.

The news of the indictment against CEO Charles Stiefel and Stiefel Laborities comes as the SEC continues to up its effort to crack down on insider trading and other corporate crimes. Earlier this year, hedge fund manager and Galleon Group founder Raj Rajaratnam was accused of an insider trading scheme worth $63 million. This was just one of many in the past few years. Investigators have been aided by new software that is able to calibrate patterns from a vast database of financial information. The SEC uses such technology to see if any suspicious trading activity transpires before major mergers, company announcements, or huge share purchases.

In the case of Stiefel, FEDs allege the crime reared on deliberately mis-valued stock and deceitful business practices. When GlaxoSmithKline bought Stiefel Labs in 2009, the family-owned company was the largest private dermatology manufacturer in the world. Mr. Stiefel had recently bought 800 shares valued at $16,494 a piece. After it was acquired by GSK, these same shares were honored at $68,000 a share, gaining 300% profitability. This was just the first in a series of similar transactions during that time frame. In other words, between 2006 and 2009 CEO Charles Stiefel bought back shares at prices that undervalued the stock and failed to alert shareholders of the higher potential value. He also directly lied to shareholders by telling them that the company would remain family-owned while actively leveraging the company for sale to GSK

The SEC plans to retrieve the money that was defrauded, a process known as disgorgement, and prevent Charles Stiefel from ever serving as a corporate officer. According to a brief statement, Stiefel will contest the charges. The SEC seems poised to prosecute to the full extent of the law, saying “Private companies and their officers must understand that they are not immune from the federal securities laws…” With the recent stigma attached to corporate corruption and the public outrage over high-finance malfeasance, it’s likely this case will not be taken lightly.