A U.S. senator on Wednesday attacked the Securities Investor Protection Corp (SIPC) for failing to help investors victimized by Allen Stanford's $7 billion Ponzi scheme.  Senator David Vitter's [LA-Rep] criticism of the firm that's responsible for covering investor claims when brokerage firms fail, came one day after a jury in Texas convicted Stanford of the crime. The SIPC, whose directors are confirmed by the Senate, has argued that it cannot help Stanford's victims because the bogus CD's (certificates of deposit) involved in the fraud were issued by Stanford's offshore bank - Antigua-based Stanford International Bank - and not by Stanford Group Co., the TX-based broker-dealer. Vitter's Specific Charges. Vitter testified recently before a House Financial Services panel, where he accused SIPC of ignoring investor protection laws that are designed to protect customer accounts when a brokerage fails.  He said SIPC failed to launch a liquidation process to allow Stanford clients to file claims over their losses.  Vitter, who said he had heard from dozens of Stanford victims in his home state, added:

"I do not think SIPC is focused enough on following the law and executing the law.  It is far too focused on serving the industry and its member companies and looking after their interests."

[C-I Note: In a brokerage liquidation, a trustee winds down the business, returns securities and other assets to customers and creditors, and often tries to recover additional assets.  The goal is to maximize what customers and creditors recover, and distribute assets fairly.]

SEC Also Opposed the SIPC. The SEC last year asked a federal judge in Washington, D.C., to order SIPC to start a liquidation proceeding in Texas so that investors can begin recovering losses.  At the time, SIPC argued that the law does not cover Stanford victims, and that its power is limited to protecting customers against the loss of missing cash or securities in the custody of failing or insolvent member brokerages. SIPC President and CEO Responds. Stephen Harbeck told lawmakers Wednesday that, "The investors in the Stanford case ... knowingly sent their money away from the brokerage firm to an offshore bank.  They were specifically told in writing that SIPC does not protect their investments." It didn't help that the SIPC has been often criticized for its handling of the Bernie Madoff Ponzi case - including the adoption of the "net equity method" for valuing investor losses. Harbeck added, "To base the payment on the last statement is to allow the fraudulent actor ... the final say on who wins and who loses." Lawyers for the SEC and SIPC argued the issue at a federal court hearing in Washington on Monday before an audience that included Stanford investors from around the country.  The court must now rule on the matter.   [Reuters, 3/7/12]