By ANDREW ACKERMAN
WASHINGTON—A federal judge on Tuesday rejected the Securities and Exchange Commission's lawsuit against an agency that insures U.S. brokerage accounts to force it to pay investors in R. Allen Stanford's $7 billion Ponzi scheme.
U.S. District Court Judge Robert Wilkins ruled the SEC had failed to meet its burden in proving that the victims of the Ponzi scheme constitute "victims" eligible for compensation by the Securities Investor Protection Corp., under the narrow definition of the law.
The dispute hinged on how SIPC's mission is interpreted and builds on the SEC's bid to protect investors more aggressively in the wake of several high-profile cases. SIPC maintains a special reserve fund authorized by Congress to compensate investors who lose money in failed brokerage firms.
SIPC maintained it couldn't intervene because Stanford's victims didn't lose money in a failed brokerage firm; they bought certificates of deposit issued by a foreign bank and continued to hold those assets, even if they are worthless.
While "the court is truly sympathetic to the plight" of Stanford customers, Judge Wilkins wrote, "the SEC has failed to meet its burden, by a preponderance of the evidence."
Angela Shaw, director of the Stanford Victims Coalition, said the ruling is "absolutely shocking."
"The only entity that Stanford owned that we gave our money to was a SIPC-member broker dealer, and he's been convicted in the U.S. of using the broker-dealer to steal investor funds," she said.
An SEC spokesman said the agency is reviewing the decision. The agency has 60 days to decide on an appeal.
Stephen Harbeck, the chief executive of SIPC, said his agency believes the court reached the correct decision but stressed it opposed paying Stanford victims only "reluctantly after great deliberation."
"The statute that we operate under simply doesn't cover these victims," he said. "It was never designed to replace value lost for fraud," but instead to ensure custody of customer funds, he said.
At a congressional hearing earlier this year, Mr. Harbeck said SIPC had privately offered to commit its funds to pay Stanford victims, as part of its negotiations with the SEC. Mr. Harbeck declined to say Tuesday if that offer was still on the table.
Federal prosecutors and the SEC charged Mr. Stanford in 2009 with fabricating high returns to lure investors around the world to buy about $7 billion of fictitious CDs from Stanford International Bank Ltd. in Antigua, the island where he was knighted.
In March, Mr. Stanford was found guilty of masterminding the misappropriation of billions of dollars of investor money and investing much of the money in unprofitable private businesses he controlled. He was sentenced to 110 years in federal prison last month.
The SEC filed its lawsuit against SIPC in December, after negotiations between the two agencies reached an impasse on the Stanford matter. It was the SEC's first lawsuit against SIPC in the insurance fund's 42-year history.
Republican Sen. David Vitter of Louisiana, the home of many Stanford victims, said Tuesday's decision is "horribly disappointing news," but said he would urge the SEC not to drop the matter.
"I will be encouraging the Securities and Exchange Commission Chairwomen Mary Schapiro to explore every possible appeal option," he said. "The Stanford Ponzi scheme victims should be first in line for protection, not last in line way behind SIPC's Wall Street members."
Roughly 7,800 American customers bought their CDs through Stanford Group, a defunct U.S. broker-dealer that was a SIPC member, according to estimates by the court-appointed receiver in the case, Ralph Janvey.
In a June 2011 analysis, the SEC argued that SIPC's position against victim payouts ignores the fact that Stanford structured the various entities of his financial empire principally to carry out a single fraudulent Ponzi scheme.
But in his decision, Judge Wilkins said that take is at odds with a position top SEC officials have maintained for nearly 30 years: that the clients of an introducing broker-dealer are not necessarily its customers.
Write to Andrew Ackerman at andrew.ackerman@dowjones.com
Posted By: Tyler Dean Mueller
Tuesday, July 3rd 2012 at 5:14PM
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