Court Hearing Urged for Ponzi Scheme Investors

Jack Humphrey, Regulatory journalist
June 20, 2011 /

The Securities and Exchange Commission (SEC) has concluded that certain Ponzi scheme investors through Stanford Group whose name has been stained by the fraud are entitled to a protection under the Securities Investor Protection Act of 1970 (SIPA).

Stanford Group is a U.S. broker-dealer owned and used by Allen Stanford to perpetrate a massive Ponzi scheme.

Earlier this month, a longtime employee at Bernard L. Madoff Investment Securities LLC (BMIS) has consented to the settlements of the SEC for helping Bernard Madoff and his firm to deceive and defraud investors and regulators about the massive Ponzi scheme.

On the other hand, the SEC has asked the Securities Investor Protection Corporation (SIPC) to initiate a court proceeding under SIPA to liquidate the broker-dealer. The move allows the SEC to exercise its discretionary authority under SIPA. It is also based on the totality of the facts and circumstances of the case.

In a complaint filed in 2009, the SEC claimed that Allen Stanford orchestrated a Ponzi scheme in which Stanford sold certificates of deposit (CDs) to investors. There certificates were allegedly issued by Stanford International Bank Ltd. (SIBL) through the Stanford Group Company (SGC).

SGC is a SIPC Member.

According to the securities regulator, investors with brokerage accounts at SGC who purchased the CDs through the broker-dealer qualify for protected “customer” status under SIPA.

The conclusion was based on an analysis provided to SIPC on the back of certain facts of the case.

Deciding on the case, the SEC cited the conclusions in the report of the court appointed-receiver for SGC, who noted that the companies directly or indirectly owned by Stanford “were operated in a highly interconnected fashion, with a core objective of selling” the CDs.

The receiver further noted that the “[c]orporate separateness was not respected within the Stanford empire. … Money was transferred from entity to entity as needed, irrespective of legitimate business need. Ultimately, all of the fund transfers supported the Ponzi scheme in one way or another, or benefitted Allen Stanford personally.”

The investors’ claims were further determined to be based on their net investment in the fraudulent CDs used to carry out the Ponzi scheme, the SEC noted.

“A SIPA liquidation proceeding would allow investors with accounts at SGC to file claims with a trustee selected by SIPC. The trustee would decide whether the investors have “customer” claims that are protected by the statute. An investor who disagreed with the trustee’s determination could seek court review,” the SEC explained.

The SEC has authorized its staff to file an action in federal district court under SIPA to compel SIPC to initiate a liquidation proceeding in the event SIPC does not do so.


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