The SEC threw a lifeline to certain investors who invested with Stanford Group Company, a U.S. broker-dealer.  They were victimized in the massive Ponzi scheme perpetrated by Allen Stanford.  So, on the basis that the fraud was operated through a U.S. broker-dealer - the SEC determined that certain investors are entitled to the protections of the Securities Investor Protection Act of 1970 (SIPA).  Using its discretionary authority under SIPA, the SEC asked the Securities Investor Protection Corporation (SIPC) to initiate a court proceeding under SIPA to liquidate the broker-dealer. 

According to its 2009 complaint, the SEC alleged that Allen Stanford operated a Ponzi scheme in which certain investors were sold certificates of deposit issued by Stanford International Bank Ltd. (SIBL) through the Stanford Group Company, a SIPC member.

SEC Analysis.   In an analysis provided to SIPC, the SEC explains that, on the specific facts of this case, investors with brokerage accounts at SGC who purchased the CDs through the broker-dealer qualify for protected “customer” status under SIPA.  The SEC cites the conclusions in the report of the court appointed-receiver for SGC, who noted that the many companies controlled and directly or indirectly owned by Stanford “were operated in a highly interconnected fashion, with a core objective of selling” the CDs.  Among other things, the receiver noted:  

“[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 benefited Allen Stanford personally.”

The SEC further determined that, in light of all of the facts and circumstances in this case, the customers’ claims should be based on their net investment in the fraudulent CDs used to carry out the Ponzi scheme.  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 Commission 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.

For additional details, go to [SEC PR 11-129, 6/15/11]  and  [195-pp SEC Analysis  Provided to SIPC]