S.E.C. Files Suit to Recoup Losses in Stanford Fraud Case

The S.E.C. and SIPC have been sparring in recent months over whether Stanford customers are eligible for protection under its rules. SIPC backs customer accounts at brokerage firms against failure much like the F.D.I.C. insures bank deposits.

Unlike the F.D.I.C., however, SIPC does not regulate brokerage firms or conduct examinations of their businesses and accounts. The investor protection corporation is an industry-backed group financed by assessments on brokerage firms.

Stanford Financial, owned and operated by R. Allen Stanford, managed more than $7 billion of customer money that was supposed to be invested in safe, high-yielding certificates of deposit. In 2009, federal authorities seized the bank, and the S.E.C. described the company in a court filing as a “massive Ponzi scheme” in which Mr. Stanford used the proceeds from 21,500 customers in part to finance a lavish lifestyle.

SIPC has said that because the investments were certificates of deposit that were sold by a bank, they were not eligible for its coverage, which is restricted to accounts at brokerage firms. The S.E.C. has argued that Stanford Financial included a brokerage firm, and that many customers opened brokerage accounts in order to buy the C.D.’s. They were given papers upon purchase of their certificates that indicated that the transaction was covered by SIPC, the commission said.

In a filing in Federal District Court in Washington, the S.E.C. asked for a court order compelling the investor protection corporation to begin a liquidation of the Stanford Group, the brokerage firm.

Though there are thought to be few if any assets at the firm, the liquidation filing is a necessary step to allow customers to begin the quest to recover their losses. Investors are covered for losses of up to $500,000 if a brokerage firm fails.

“Stanford’s financial advisers used the apparent legitimacy offered by U.S. regulation of Stanford’s U.S. brokerage subsidiary in order to generate sales” of the certificates of deposit, the S.E.C. said in its filing.

The Stanford scheme began coming apart when redemptions increased in 2008 and early 2009, in part because of the financial crisis, to the point where incoming funds were no longer sufficient to meet investor withdrawals.

Mr. Stanford is in jail awaiting trial on 14 criminal counts related to the investment business. The S.E.C. also has filed a civil suit against him.

SIPC officials could not be reached for comment Monday evening. In 2009, SIPC said that Stanford customers were not entitled to coverage under its policies. In June, the S.E.C. said it had decided that investors should be covered by the insurance; the investor protection corporation said it would issue a decision on whether to heed that ruling by mid-September.

Since then, the two sides have been in negotiations, but they were unable to reach a deal. The S.E.C. has been under pressure from several members of Congress to get SIPC to disburse funds to harmed customers.

Article source: http://feeds.nytimes.com/click.phdo?i=4f102ee8c86a384b8ba85462719d6407