Will SIPC's Brokerage Insurance Scam Help Allen Stanford Walk?Commentary by Laurence Kotlikoff
September 05, 2014
If you experience an insured loss and the insurance company doesn’t pay, you know you’ve been scammed. As I’ve discussed in a series of columns posted at www.kotlikoff.net, SIPC (the Securities Investor Protection Corporation) is running an enormous scam in claiming to insure our brokerage accounts against fraud. SIPC’s refusal to pay the legitimate claims of most Madoff victims and all Stanford victims makes this abundantly clear.
Even worse, SIPC is placing all brokerage account holders at enormous additional risk by standing ready to sue them if they earn a return on their investments and spend the proceeds. In fact, thanks to precedents SIPC established in the Madoff case, SIPC can declare the loss of your securities to be the result of a Ponzi scheme and sue you for up to every dollar you withdrew in the up to six years prior to the fraud’s discovery!
Reread that last sentence. It is saying that if you have made money investing with a broker, directly or indirectly, say through your IRA, you can not safely spend (or, indeed, withdraw and reinvest) your assets for up to six years from the time you’ve withdrawn them! But it is even worse than this. When you withdraw money from your IRA, you have to pay up to 40 percent in taxes. You can be sued for the amount you pay the IRS in taxes as well!
Anyone at any age can get defrauded first by his broker and then by SIPC. But those who are most likely to get hit by SIPC’s scam are retirees, since they’ve invested for longer, have had much longer to earn a positive cumulative return, and have needed to use some or all of their assets in the prior six years to fund their retirement and major uninsured medical expenses.
Now Ponzi schemes may seem like really rare events. They aren’t. A new one is being discovered every four days! Your brokerage account may be next.
This is why I’ve been urging anyone with a brokerage account to close it immediately pending passage of H.R. 3482 and S. 1725 – the Restoring Main Street Investor Protection and Confidence Act, which would shut down SIPC’s scam – actually Wall Street’s scam, since SIPC is a owned and operated by Wall Street firms. This bill would also prevent SIPC from suing innocent victims (some of which are my and maybe your relatives, friends, and colleagues) and force SIPC to honor claims the Securities and Exchange Commission, not Wall Street, determines are legitimate.
Will SIPC Help Allen Stanford Walk?
In its thus far successful attempt to swindle Allen Stanford’s victims, SIPC has taken its financial malfeasance to a new low. SIPC’s court victory over the SEC, which sued SIPC to get it to pay Stanford’s SPIC-insured brokerage customers their insurance claims, may give Allen Stanford a ticket out of jail.
Yes, SIPC’s “victory” over the SEC (and all Americans with brokerage accounts) was based on the same argument that Allen Stanford is using to get free. And since the SEC just today made the horrendous decision not to appeal the DC Circuit Court’s July 18th ruling to the Supreme Court, Allen Stanford is all set to see some or all of his 110-year sentence overturned on appeal.
SIPC’s excuse—well, at least one of their excuses — for not paying Stanford victims is that the investors were, in effect, his partners – that they didn’t invest through Stanford’s companies, but that they invested in his companies by lending their money through the purchase of “debt instruments” – certificates of deposits purportedly issued by Stanford International Bank, Ltd. (SIBL), which unbeknownst to many Stanford investors was chartered in Antigua.
In other words, Stanford didn’t sell fraudulent securities and, therefore, shouldn’t be jailed for securities fraud. He just borrowed money from people to run his enterprise, and it failed.
The fact that the fictitious CDs bore the name “Stanford” was what SIPC used to claim that Stanford’s thousands of victims weren’t investing through Stanford, but rather were investing in or with Stanford—triggering a statutory exclusion under the Securities Investor Protection Act (SIPA) for creditors and shareholders of brokerage firms.
That SIPC would mince words to this degree to avoid fulfilling its fiduciary responsibility to thousands of American investors is characteristic of its longstanding insurance scam. It gets investors to place their money with brokerage firms on the promise that their accounts are insured. Then it goes to extreme lengths when fraud is discovered to discredit the victims and even sue them if possible while using every trick in the book—and the best attorneys money can buy —to deny legitimate insurance claims.
The only way this is going to change is for Congress to pass H.R. 3482 and S. 1725. And the only way Congress will be pushed to pass this bill is when enough smart investors realize they are facing extreme risk investing in SIPC-insured brokerage accounts and act in their self interest by closing their brokerage accounts – unless, of course, they have no interest in spending the proceeds of their investments.
On July 31, Allen Stanford filed an emergency motion to introduce the DC Circuit Court’s opinion in SEC vs SIPC as new evidence to vacate the Receivership proceedings while he proves his “innocence” in the pending Fifth Circuit appeal of his criminal and civil cases. He lost the battle to stop the Receivership proceedings last week, but the door remains open for him to use the favorable DC Circuit’s opinion in his appeal.
What message does it send investors when the only safety net the securities industry has not only washes its hands entirely of the second-largest Ponzi scheme in history–a fraud perpetrated by the sole owner of a SIPC-member brokerage firm operating out of 33 offices across the country –but then takes the side of the very criminal who stole billions of dollars?
The message is that SIPC is colluding with criminals.
I provided some background about SIPC’s scam of Stanford victims in a prior column. But I want to spend a few of your minutes explaining the particulars so you will, to repeat, Close Your Brokerage Account, for your own protection, and Support H.R. 3482 and S. 1725.
The Full Story of the Stanford/SIPC Scam
More than five and a half years after the SEC filed suit against Robert “Allen” Stanford, et. al., the facts surrounding the Stanford Financial Group (SFG) Ponzi scheme are still poorly known to the public. This is partially due to the complexity of the multi-billion dollar crime, but primarily the result of a broad-reaching strategic public relations campaign led by a not so surprising source and aimed at disseminating misleading and inaccurate information—SIPC.
Ponzi schemer Allen Stanford perpetuated a $7.2 billion Ponzi scheme that stole the life savings of 5,000 U.S. citizens as well as thousands more from over 130 countries around the world. Appropriately so, justice was served on February 12, 2012, when the District Court for the Southern District of Texas handed down a sentence that would ensure Stanford would never be a free man again. He’s currently serving his sentence at Coleman II in Sumpter County, Fla., while his victims have lost 99 cents of every dollar they invested.
In the U.S., the Stanford Ponzi Scheme Was Fronted by a SIPC Member
Stanford Group Company (SGC) was an SEC-registered broker dealer and an investment advisory firm. SGC was chartered in 1996 to serve one primary purpose—to reach an enormous new market of investors to feed a growing Ponzi scheme that would ultimately steal billions of dollars.
Allen Stanford was the sole owner of Stanford Group Company. He was also the sole owner of the Antiguan Shell Bank Stanford International Bank, Ltd., Stanford Trust Company (STC), a state-chartered financial institution in Louisiana, and over 100 other entities that made up the umbrella of companies known as the Stanford Financial Group.
Until the late 90s, SIBL had “issued” certificates of deposit primarily to Latin American investors. That would eventually change with the legitimacy of a U.S.-registered SIPC-member-brokerage firm that was a member of the Financial Industry Regulatory Authority (FINRA).
SGC recruited some of the top brokers in the business—paying lucrative signing bonuses, generous salaries, above-market commissions and lavish sales incentives like top-of-the-line BMWs and luxury vacations. These established brokers from firms like Merrill Lynch, Morgan Stanley, Citigroup and Deutsche Bank brought with them decades of credibility and large books of business that included thousands of loyal and trusting investors ripe for the convincing sales pitch for what became SGC’s signature product — conservative certificates of deposit .
With the “Member: FINRA/SIPC” logo emblazoned on everything from SGC’s front doors, stationery, marketing materials, contracts, pens, and even the labels on the branded water bottles, customers were aggressively sold the CDs in SGC’s 33 luxurious offices across the southeast U.S. And they were constantly bombarded with reminders of the industry safeguards, i.e., SIPC’s brokerage account insurance that came with doing business with SGC.
“SIPC helped SGC deceive its customers with false assurances and a false sense of confidence in the firm by requiring SGC to include the SIPC logo on basically every tangible object and communication a customer received,” said Angela Shaw Kogutt, Director and Founder of the grassroots advocacy organization Stanford Victims Coalition (SVC).
The SIBL CDs were disclosed to the Securities and Exchange Commission as Regulation D exempt securities under Section 4(2) of the Securities Act of 1933, meaning the CDs would only be sold to “Accredited Investors.” Many of the SIBL CD investors did not meet the statutory criteria to be deemed an Accredited Investor, but SGC sold them the tainted SIBL CDs anyway.
From 1996-2009, approximately 250 SGC Registered Representatives sold SIBL CDs totaling $3.5 billion to 7,800 clients from the U.S. and abroad (37 percent of the 20,000 CD holders). SGC Registered Representatives, as dual-registered brokers and investment advisors, owed a fiduciary duty to their customers to ensure the funds intended to purchase the SIBL CDs were in fact used to purchase the securities that were sold. That never happened.
The SEC-chosen forensic accountant for the Receiver has clearly documented that instead of purchasing CDs, SGC customer funds were either used to pay to cover redemptions by earlier investors, stolen by Allen Stanford, or acquired by SGC in order to bankroll the brokerage firm’s operations.
The SEC stated in its civil suit that SGC could not have kept its doors open had it not been for the firm’s acquisition of the SIBL CD funds –in the form of referral fees, commissions and bonuses for SGC employees, and shareholder contributions from Allen Stanford. As it was, SGC’s operating loss grew by 1,400% from 2001-2007 while its dependence on the stolen SIBL CD funds grew by the millions each quarter.
Investors Had a Legitimate Expectation They Were Doing Business with a SIPC-Backed Brokerage Firm
SGC customers executed “Customer Agreements” that stated all securities sold by SGC were insured by SIPC. Additionally, marketing materials used to pitch the SIBLs all stated the “bank” was a member of the Stanford Financial Group, which were all managed and operated out of its headquarters in Houston, Texas. The SIBL marketing materials were all neatly packaged in a folder that had both SIBL’s and SGC’s names and logos displayed in elegant gold foil. Underneath the words Stanford Group Company was the familiar phrase: “Member: FINRA/SIPC.”
To “purchase” SIBL CDs, SGC customers followed their SGC Rep’s instructions. Most were directed to fund their brokerage accounts at SGC’s clearing firm, Pershing, LLC, by wiring funds; writing checks; or transferring funds from their previous brokerage firm to their new brokerage account with SGC. For many SGC investors, brokerage accounts were opened for the sole purpose of purchasing the SIBL CDs. Once the customer’s brokerage account was funded, the SGC Registered Rep then effectuated the CD transactions by having funds wired to a Stanford-owned bank account at Toronto Dominion Bank.
No funds actually went to the “bank” in Antigua.
Once the CDs were “purchased,” SGC sent their clients confirmations and then regularly reported on the SIBL investments—along with the customer’s other holdings—in statements that included the “Member: FINRA/SIPC” logo. If an SGC U.S. customer had a question about their CDs and contacted SIBL directly, they were immediately instructed to contact their SGC Rep. At no time did SGC’s U.S. customers interact with SIBL employees.
Stanford Trust Company was another key player in the Stanford Ponzi scheme. STC was established as a state-regulated financial institution under the Louisiana Office of Financial Institutions. STC’s sole purpose was to evade the SEC’s oversight of SGC tapping into a new source of customer funds to feed the ever-growing Ponzi scheme—IRAs.
STC’s establishment allowed SGC to move its customers’ IRA funds to the fictitious SIBL CDs by the millions, and when the SEC took the Stanford entities into Receivership, STC purported to hold custody of $400 million in SIBL CDs in hundreds of SGC customers’ IRAs.
The Fall of an “Empire”
On February 17, 2009, the SEC filed a civil lawsuit accusing Allen Stanford, Stanford International Bank, Ltd., Stanford Group Company, Stanford Financial Group and its key executives of “massive, ongoing fraud,” and Stanford Financial Group’s global network of companies were taken into Receivership by the District Court for the Northern District of Texas. More than 30,000 SGC brokerage accounts were frozen at Pershing, LLC, leaving investors no access to any of their savings.
Within 24 hours of the filing of the SEC’s suit—without knowing where the SIBL CD funds went, if any other customer assets were missing, and generally no other facts about the case beyond what was alleged in the SEC’s initial complaint—SIPC, President Stephen Harbeck publicly declared that SIPC would not step in to protect SGC customers whose funds were alleged in the SEC’s complaint to have been misappropriated.
“It speaks volumes about SIPC’s true intentions when it immediately claimed no responsibility when even the head of the SEC’s Fort Worth Regional Office, which brought the case against Stanford, was telling investors (myself included) the SEC didn’t yet know how far-reaching the fraud was and that our brokerage accounts should be closely scrutinized to see if additional assets were missing,” said Louisiana Stanford Victims Group Co-Founder Jean Anne Mayhall, whose company ERISA Pension Plan had been converted to the SIB CDs at the advice of an SGC Registered Rep.
SEC Says “Yes”
Throughout 2009, the Receiver in Texas uncovered more and more facts that supported SGC customers’ right to protection under SIPA—but in true SIPC fashion, it continued to deny any obligation.
In November 2009, the Stanford Victims Coalition formally asked the SEC to use its statutory powers provided under SIPA to compel SIPC to discharge its obligations by initiating a SIPA liquidation of Stanford Group Company.
After 18 months of the victims suffering the burden of proof by producing thousands of documents to the SEC that proved their legal right to SIPA protection, the SEC finally answered the SVC’s request. On June 15, 2011 a vote of the Commissioners determined SGC customers were in need of protection under SIPA and ordered SIPC to initiate a liquidation of SGC so Stanford victims who purchased the fictitious SIB CDs could have a judicial review of their individual SIPC claims. The SEC’s opinion authorized an Enforcement Action if SIPC refused to act.
In its analysis, the SEC cited previous SIPA liquidations in which SIPC had protected investors in similar cases: New Times Securities, Old Naples Securities and Primeline Securities. SIPC had initially denied claims in each of these cases based on the exact same arguments made against SGC investors, but ultimately lost in three separate Circuit Courts and SIPC was forced to pay the claims.
The New Times Securities, Primeline Securities, and Old Naples Securities cases all involved the same set of facts as the SGC case:
A SIPC-member introducing broker sold debt securities (bonds, debentures and promissory notes);
The debt securities were issued by a commonly owned non-SIPC member entity;
The investors deposited their funds directly to the non-SIPC member firm (at the direction of their SIPC-member registered representative);
The SIPC member and the non-SIPC member entity were consolidated in liquidation; and
The securities were used to facilitate a Ponzi scheme.
Old Naples Securities, like SGC, was an introducing broker dealer and SIPC member. The owner of the brokerage also owned a non-SIPC member entity that issued securities sold to Old Naples customers. Like Allen Stanford, the owner of the two entities stole the funds in a Ponzi scheme. SIPC argued the investors did not meet the statutory requirement for customer status, but ultimately lost that argument on appeal in the Eleventh Circuit. The court found that if a SIPC member acquires possession of its customer’s funds, even indirectly, the investor meets SIPA’s “customer status” criteria. The Second Circuit had come to a similar conclusion in the New Times Securities case, and the Tenth Circuit agreed with the other two Circuits in the Primeline Securities case.
SIPC Says “No”
The SIPC Board of Directors’ mandate under SIPA is to represent the public’s interests and provide unbiased governance of SIPC in order to ensure SIPC fulfills its statutory mandate despite its inherent conflict of interest in protecting its members and its fund. However, the Board took the legal advice of the (hardly disinterested) Securities Industry and Financial Markets Association (SIFMA) and refused to consult with SGC customers or former SGC employees.
Six months after the SEC directed SIPC to initiate a liquidation of SGC, the SIPC Board challenged the SEC’s plenary authority over SIPC and announced that SIPC would not initiate a SIPA liquidation of SGC.
SIPC’s Settlement Offer of December 2, 2012
Despite denying it had any obligations to SGC customers, SIPC made a “secret” settlement offer to the SEC that purportedly amounted to $250K per SGC customer—the average amount lost in the SIBL CDs, but the offer was contingent on SIPC not initiating a liquidation as that would open the door to a judicial review of claims SIPC knew would be more likely to end favorably for the investors rather than SIPC.
The SEC Commissioners voted to decline SIPC’s offer because it was outside the law.
The SEC Initiates an Unprecedented Legal Action and SIPC Launches an Aggressive, Deceitful PR Campaign
On December 16, 2012, the SEC filed an application for the District Court for the District of Columbia to order SIPC to discharge its obligations under SIPA.
SIPC immediately launched a public relations campaign to discredit the legal merits of SGC customer’s rights to protection under SIPA. Overnight, SIPC had launched an extremely biased website to serve two purposes: 1) to play up the “offshore bank” angle as much as possible and 2) to sensationalize the SEC’s legal action by claiming the SEC had sued them when it had only filed an application for a court order — not a lawsuit.
SIPC’s motive was to rally the industry by creating the misleading impression the SEC had wrongfully sued SIPC to force it to protect losses in a “foreign bank fraud” that could cost the industry billions of dollars. SIPC wanted to turn the SEC’s application into a lawsuit so it could argue the whole case without initiating a liquidation that would open the doors to SGC customers being able to file individual claims that would be subject to a judicial review if denied. The URL for SIPC’s misleading propaganda, which still has a prominent link on SIPC’s website, is www.stanford-antigua-sec-lawsuit. There is, of course, no obvious mention of Stanford Group Company, i.e., of the insolvent SIPC-member firm.
SIPC also hired a team of expert private practice attorneys to prepare an aggressive defense against the SEC. SIPC has paid over $3 million in legal fees to fight its government authority (the SEC) and investors who deserve a judicial review of their individual claims.
SIPC’s Defense: SGC had “Clients,” not “Customers”
SIPC developed a multitude of legal arguments to avoid protecting SGC customers who “purchased” SIBL CDs—but its primary argument in denying SGC customers protection under SIPA has been that SGC’s customers who attempted to purchase the SIBL CDs do not fall within the statutory definition of “customer”—which SIPC pled in its filings is used in SIPA as a “statutory term of art” much narrower than its common English definition.
SIPA defines a customer as “any person who has a claim against the debtor for cash, securities, futures contracts, or options on futures contracts received, acquired…” (Emphasis added.)
SIPA only protects a broker dealer’s custodial function, so custody of customer property determines customer status for the purposes of SIPA. But as an introducing broker—like a vast majority of SIPC’s members—SGC did not (legally) hold custody of its customers’ assets. However, SIPC has (when forced) protected customers of introducing brokers when their assets were illegally acquired by the SIPC member—like the Old Naples, New Times and Primeline cases.
SIPC again sided with Allen Stanford when it refused to accept the Receiver’s forensic accountant’s testimony that SGC illegally acquired its customers’ funds intended to purchase SIBL CDs. That same testimony was used by the SEC to convict Allen Stanford, yet SIPC has no qualms in challenging our government by taking the side of a criminal if it saves its Wall Street owners money.
SIPC has argued that SGC “clients” received the securities they were sold, and therefore their assets were not missing from their SGC accounts when the firm was taken into Receivership—making the victims SGC “clients,” and SIBL “customers”—the exact same defense Allen Stanford has used to attempt to evade civil and criminal charges in the U.S. After all, the U.S. has no jurisdiction over an offshore bank in Antigua, right?
Wrong. The District Court in Texas overseeing the Receivership determined corporate disregard doctrine applies when the separate entities are created for the purpose of perpetuating a fraud as it would serve an injustice to the creditors of the estate. SIPC doesn’t mind that injustice.
Because Stanford’s web of commonly owned entities were so interconnected and funds were regularly co-mingled among the entities, the Receivership lumped all the Stanford entities together in one proceeding from day one. This meant SGC’s assets became SIBL’s assets, and vice versa. A claim with one Stanford entity was a claim with all Stanford entities—making an obligation of SIBL an obligation of SIPC-member SGC. SGC “clients” became its “customers.”
SIPC’s Host of Other Legal Arguments
SIPC did not rely solely on the custody/customer status argument. It threw every conceivable—and even inconceivable—argument out there to see what might stick.
Among these arguments were:
1. SIPC does not protect investors against a loss in value of a security because of fraud.
SGC customers didn’t experience a loss in value of their security due to fraud. Their money wasn’t ever truly invested in securities. Their money was stolen immediately, just as in the Madoff case. SIPC could easily have treated the Stanford case just like it had the Madoff Ponzi scheme by initiating a SIPA liquidation and allowing investors to argue their rights in court.
2. SIPC does not protect bad investments, market losses or worthless securities.
The decline in value of the SIBL CDs is in no way the result of market losses. The CDs were worthless because the funds were stolen in a Ponzi scheme. The Fifth Circuit has ruled that Ponzi schemes are “insolvent from inception,” and as such, the CDs never existed. SGC customers incurred a loss OF their investments, not losses IN their investments. Arguments to the contrary serve only to legitimize Stanford’s Ponzi scheme.
3. SGC’s brokerage arm did not act as a sales agent for SIBL—its investment advisory arm just made referrals.
SGC’s FINRA-registered Reps received commissions and bonuses for their CD sales. The Reps handled every single aspect of the CD investment—from address changes, to depositing additional funds in the CDs and even redemptions. Additionally, as previously cited, SGC was one company that was dually registered as a broker dealer and investment advisor. There were not separate divisions for the broker and the investment advisor. It was all one and the same, and the SGC Reps who sold the CDs were both brokers and investment advisors.
4. SGC customers received the physical CD certificates so no securities were missing when the SGC brokerage became insolvent.
While the CD certificates were merely fictitious pieces of paper, most SGC customers never saw them. SIPC was provided with affidavits from many SGC customers stating they never received any certificates, and in some cases were told the certificates were being held by SGC until maturity. One former SGC Rep provided the SEC with a list of dozens of his customers whose certificates were held at the brokerage office—i.e. SGC held physical custody of the CDs for at least some customers.
5. SIBL is in liquidation in Antigua, and SGC customers have claims with that estate.
SIPC’s assertion that SIBL was a real bank directly contradicts the SEC’s successful civil suit against Allen Stanford, et al. and supports Stanford’s appeal arguments that the U.S. government had no authority to take over his “bank” in Antigua. The fact of the matter is SIBL is in liquidation right here in the U.S., and Allen Stanford and his co-conspirators were convicted in the U.S. for facilitating a Ponzi scheme in the U.S.
6. The SIBL CDs are “debt instruments,” that constituted loans to Stanford’s consolidated entities, making SGC investors’ claims part of the capital of the broker dealer and triggering the customer status exclusion under 15 U.S.C. § 78lll(2)(C), (C)(ii).
Indeed SIPA excludes from customer status “any person, to the extent that . . . such person has a claim for cash or securities which by contract, agreement, or understanding, or by operation of law, is part of the capital of the debtor.”
However, it was only upon SGC’s consolidation with SIBL—which occurred after SGC was taken into Receivership—that SIBL CD claims became claims for SGC’s capital. It was not until the Stanford entities were combined in Receivership that SGC customers realized their funds had been “loaned”—to all the Stanford entities. Up to that point, SGC customers had every expectation that SIBL was indeed a real bank that was issuing real CDs—which are in fact debt instruments but so are many other securities.
SGC customers intended to invest through SGC, not in SGC. They did not intend to loan their savings to their brokerage firm. SGC illegally obtained its customers’ funds intended to purchase the SIBL “debt instruments”—the very reason SGC customers now have claims with SGC.
SIPA insures missing securities—period. The law does not exclude certain types of securities because they are debt instruments. In fact, SIPA specifies CDs in its statutory definition of protected securities.
By making this argument, SIPC essentially claims the CDs weren’t securities—another example of SIPC making exactly the same arguments Allen Stanford has argued in defense of the charges for which he’s been convicted.
7. SGC customers deposited their funds directly with SIBL, not the SIPC-member.
As previously stated, SGC customers never had direct dealings with SIBL, and SGC effectuated the transactions to “purchase” the SIBL CDs. Additionally, the securities could only legally be sold in the U.S. by an entity registered to sell securities. SGC customers followed their SGC Rep’s directions to “buy” the CDs and either used funds in their brokerage account or handed checks to their Rep. What happened after that was solely in SGC’s hands—not the customer’s—making the Stanford case directly comparable to the Old Naples Securities case.
8. SGC customers signed a Disclosure Statement that said the SIBL CDs were not protected under SIPA.
Indeed some SGC clients who attempted to purchase the CDs signed a Disclosure Statement that stated the SIBL CDs were not protected by SIPC. And had the SIBL CDs described in the document actually been purchased, SIPC would not have been obligated for the losses. However, SIPC was created to replace customer assets that are missing when an insolvent brokerage fails to meet its obligations to its customers. SGC had an obligation and a fiduciary duty to purchase the securities described in the Disclosure Statement, but that did not happen because the funds were stolen.
This is another example of SIPC legitimizing Stanford’s fraud by alleging the SIBL CDs were real, and that SIBL issued the securities it sold to SGC customers—thereby relieving SIPC of its statutory obligations.
9. SGC clients do not fall within the Congressional intent of SIPA.
More than 100 members of Congress have weighed in on Stanford/SIPC matter—all stating SIPA’s legislative intent is to protect investors like Stanford victims.
SIPC’s brazen defiance of its government oversight authority is far beyond the powers SIPA has provided the organization. However, SIPC has no place telling Congress it better understands the Congressional intent of its mandate, which is only one symptom of a much bigger problem that calls for extensive overhaul of SIPC in order to abolish its anti-investor culture.
The SEC’s unambiguous authority over SIPC that is detailed in the “Restoring Main Street Investor Protection and Confidence Act” pending in the House and Senate (H.R. 3482 and S. 1725) not only reigns in a wayward Congressionally created organization, but also sends a message to the investing public that Congress will not stand back and allow Wall Street to control the U.S. government or dictate legislation.
The SEC Loses in the District Court and in its Appeal to the DC Circuit Court
SIPC unquestionably out-lawyered the SEC, and they pulled one over on both the District Court and then the DC Circuit Court—all while fighting their own government authority and even siding with the criminals who designed and carried out a multi-billion Ponzi scheme fronted by a SIPC-member.
SIPC even convinced the SEC to agree to stipulations that were absolutely false for most SGC customers—including the “facts” that a) the CD certificates were received by SGC customers, b) the SGC customers deposited funds directly with SIBL, and c) the SGC customers received statements from SIBL.
Those false stipulations were used as the basis for the District Court’s denial of the SEC’s application, and could not be “un-stipulated” in the appeal with the DC Circuit Court. However, an Amicus Curiae filed by the Official Stanford Investors Committee appointed by the District Court for the Northern District of Texas, the Examiner appointed by that same court, and the Stanford Victims Coalition disputed the stipulations and entered new evidence into the record—a landmark ruling from the District Court in Texas that was rendered after the DC District Court had ruled in SIPC’s favor. Not surprisingly, SIPC opposed the brief from being entered into the appeal record, but the Circuit allowed the new facts to be considered.
In its opinion, the DC Circuit quoted the Supreme Court on an unrelated matter describing the SIBL CDs as “debt instruments.” That reference did NOT imply the CDs are not securities, nor did it dispute CDs are included in SIPA’s definition of securities.
Nevertheless, and despite conflicting opinions in three other Circuits, the DC Circuit used that one phrase to side with SIPC’s arguments that SGC victims do not fall within SIPA’s statutory criteria for “customer status” because they loaned their savings to the Stanford entities by purchasing “debt instruments” rather than securities—triggering SIPA’s customer status exclusion under 15 U.S.C. § 78lll(2)(C), (C)(ii).
The DC Circuit’s opinion did not consider the fact that debt instruments ARE securities, and that no court in five and a half years of litigation in the Stanford case has disputed the fact the CDs are securities until now. And no parties except Allen Stanford and SIPC have made that argument.
Furthermore, the SEC vs. SIPC opinion doesn’t acknowledge the securities involved in the case law cited in its own opinion are also debt instruments, and therefore single out the CDs simply because they were referred to as “debt instruments” (rather than “debt securities”) in an unrelated Supreme Court opinion. The DC Circuit did not recognize that CDs ARE in fact included in SIPA’s definition of securities, and protection of SGC customers is justified by the very case law cited in the Circuit’s opinion (New Times, Primeline and Old Naples Securities).
The SIBL CDs still fall well within the statutory definition of securities—as do bonds, debentures, and promissory notes SIPC was previously forced to cover in the New Times, Primeline and Old Naples cases.
Shockingly, SIPC also argued in the above-cited cases that the claimants were excluded from SIPA customer status because their claims represented obligations of the SIPC member (loans), but those arguments were rejected by the other Circuits because the investment vehicles in question were SIPA-defined securities—as are certificates of deposit!
“SIPC President Stephen Harbeck has publically taken every possible opportunity to state how sympathetic SIPC is to the plight of the Stanford victims,” said Kogutt. “But behind the scenes and out of the public eye, he told Congressional staffers he would resign if SIPC is ever obligated to pay Stanford claims. That mindset, and the fact SIPC would make the same arguments against Stanford victims that it has already lost in three separate Circuit Courts in the last decade demonstrates just how compassionate SIPC and Mr. Harbeck really are.”
“Instead of looking to use its discretion to protect investors, SIPC has abused that privilege by using hyper-technical interpretations of SIPA and refusing to yield to the entity Congress assigned as its legislative authority,” said Kogutt. “Congress did not give SIPC greater—or even equal—powers over the federal government and SIPC’s ‘dancing on the head of a pin’ has enabled an absolute injustice to investors who were deceived by the SIPC logo only to be denied protection once their savings were stolen by SIPC’s member firm.”
Any Confidence an Investor Has in the Securities Industry is False Confidence
One would think the SEC, having botched much of the case on behalf of the Stanford victims, and having three closely related cases on which to base an appeal would, indeed, have appealed the D.C. Circuit’s SEC v. SIPC decision. They, just today, announced they would not appeal. This is, thus, a very sad day for the Stanford victims and for all American savers and investors.
For their part, brokers need to ask themselves a basic question. Do they really want to continue deceiving their customers with use of the SIPC logo and their claim that their client’s brokerage accounts are projected by SIPC? If they don’t, they should speak up, and hold SIPC and SIFMA responsible for their unethical conduct against investors. They should contact SIFMA today to let them know there are good brokers out there who want SIPC to provide meaningful protection for their customers.
SIPC’s aggressive tactics to avoid protecting investors have enabled the courts to rewrite SIPA in the name of Wall Street greed. The pending “Restoring Main Street Investor Protection and Confidence Act” (H.R. 3482 and S. 1725) must be enacted or your savings invested in the securities markets could be as good as gone.