The Securities and Exchange Commission has concluded that certain individuals who invested money through the Stanford Group Company—a U.S. broker-dealer owned and used by Allen Stanford to perpetrate a massive Ponzi scheme—are entitled to the protections of the Securities Investor Protection Act of 1970.

In exercising its discretionary authority under SIPA and based on the totality of the facts and circumstances of the case, the SEC said Wednesday it asked the Securities Investor Protection Corporation 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. through the Stanford Group Company. SGC is a SIPC Member.

In an analysis provided to the SIPC, the SEC explained 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.

In reaching its determination, the SEC cited 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 also noted that “[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 Commission 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.

The SIPC, which maintains a special reserve fund mandated by Congress to protect the customers of insolvent brokerage firms, said that it would analyze the referral provided Wednesday by the SEC with respect to the Stanford Group Company.

On Feb. 17, 2009, the SEC filed an action in the U.S. District Court for the Northern District of Texas alleging that Robert Allen Stanford orchestrated an $8 billion fraud based on false promises of guaranteed returns related to certificates of deposit issued by the Antiguan-based Stanford International Bank. The SEC’s complaint alleged that SIB sold approximately $7.2 billion of CDs to investors by promising returns that were “improbable, if not impossible.”

In response to the SEC’s request for emergency relief, the court immediately issued a temporary restraining order, froze the defendants’ assets, and appointed a receiver to marshal those assets. The SEC filed a second amended complaint on June 19, 2009, alleging that Stanford conducted a Ponzi scheme.

SIPC President and CEO Stephen Harbeck said that SIPC would take the SEC’s referral in the Stanford case under advisement before deciding how to proceed. He indicated that a decision would be forthcoming in the near future. 

“SIPC’s board will review the referral, and analyze the SEC’s underlying documentation as quickly as possible,” said Harbeck.

The SEC’s referral of the matter this week is the first time the SEC has informed SIPC of the possibility that the Stanford matter is appropriate for a proceeding under the Securities Investor Protection Act.

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