[ by Melanie Gretchen ]

Allen Stanford's victims continue to lose;  after the Texas financier's Ponzi scheme spent $7 billion of investors' money, a federal district judge earlier this month rejected a request for an industry-backed fund to start a court proceeding that could lead to victim compensation.  [CI Note: Talk about adding insult to injury.]

Fighting for the Victims. The SEC had attempted to force the Securities Investor Protection Corp to start liquidation proceedings for the victims, some of whom lost millions of dollars to the fraud.  In a brokerage liquidation, a trustee winds down the business, returns securities and other assets to customers and creditors, and tries to recover additional assets in order to maximize what customers and creditors recover, and distribute assets fairly.

In its defense, SIPC successfully argued that the law limits it to protecting customers against the loss of missing cash or securities in the custody of failing or insolvent SIPC-member brokerage firms.  Regardless, SIPC said it was not chartered by Congress to combat fraud or guarantee an investment's value.

Judge Robert Wilkins found that the SEC did not meet its legal burden of showing why SIPC should be compelled to act.  While Stanford's Texas-based brokerage Stanford Group Company was a SIPC member, its offshore bank was not, placing it outside of SIPC's jurisdiction.  Stanford is currently serving 110 years in prison for bilking investors with fraudulent certificates of deposit issued by Stanford International Bank, his bank in Antigua, after his conviction in June.

A New Precedent. This is the first time in the 42-year-history of the Securities Investor Protection law that the SEC asked a court to try and force SIPC to start a liquidation proceeding.  "The court is truly sympathetic to the plight" of the victims, Judge Wilkins for the U.S. District Court for the District of Columbia wrote in dismissing the SEC's case.  "But this court has a duty to apply the SIPA statute as written by Congress."

Furthermore, the judge criticized the agency as having relied on an "extraordinarily broad" interpretation of the law on which to base its case.  SIPC's argument, he said, "cannot be squared with the SEC's longstanding interpretation" of the law over the years.

Going Forward. The SEC has 60 days to decide whether or not to appeal the judge's ruling, which the agency is reviewing, according to an agency spokesperson.  Other high-profile liquidations that SIPC has handled include Bernie Madoff's Ponzi scheme.

"This is horribly disappointing news, especially since it's clear that Allen Stanford was more than guilty in fraudulently losing the victims investments.  I will be encouraging the Securities and Exchange Commission Chairwoman Mary Schapiro to explore every possible appeal option. The Stanford Ponzi scheme victims should not take the fall over SIPC's concerns to cover their own losses." -- Republican Senator David Vitter.

For further details, go to  [Reuters,7/3/12].