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.