SEC Efforts To Compel SIPIC Coverage For Stanford Victims Rejected

by Dorsey & Whitney LLP

The D.C. Circuit rejected efforts by the SEC to compel the Securities Investor Protection Corporation to liquidate a broker-dealer that was part of the Stanford Ponzi scheme empire. The investors had purchased CDs from an off-shore Stanford entity. The Circuit Court affirmed the decision of the District Court. SEC v. SIPC, No. 12-5286 (D.C. Cir. Decided July 18, 2014).

The case arose out of the massive financial fraud authored by Robert Allen Stanford. At the center of the scheme the SEC has called a Ponzi scheme, was a complex web of entities. Two are involved here. One is the Stanford International Bank, Ltd. or SIBL, a bank organized under Antiguan law. It sold debt assets that promised a fixed rate of return. The second is Stanford Group Company or SGC, a Huston-based broker-dealer registered with the SEC.

To purchase a CD, investors had to open an account with SIBL, according to the factual record which was largely stipulated. CD purchasers paid the bank for the instruments. The U.S. disclosure statements stated that SIPIC did not provide coverage for the CDs.

In 2009 the SEC brought a civil enforcement action against Mr. Stanford, SGC, SIBL and others. The court appointed a receiver for SGC and other entities. The receiver concluded that the bank had outstanding about $7.2 billion in CDs. The receiver asked SIPC to determine if it would liquidate SGC to protect the assets of those who had purchased CDs from SIBL. SIPIC determined that those investors were not covered. Eventually, the SEC prevailed in its case and imposed a $6 billion civil penalty. Mr. Stanford was convicted on criminal charges and sentenced to serve 110 years in prison. Antiguan authorities initiated separate proceedings to liquidate SIBL and process claims. Other civil litigation was initiated.

Two years later the SEC concluded SIPIC was wrong as to the SIBL issued CDs. It filed an application with the District Court to compel SIPC to commence liquidation proceedings. SIPIC declined. The District Court concluded that SIPIC was correct in determining that the CD purchasers were not customers within the meaning of the Act, a prerequisite to coverage. The District Court rejected the request for an order to compel SIPIC.

The critical question here, according to the Circuit Court, is whether those who purchased SIBL CDs at the suggestion of the broker-dealer are customers for purposes of the Securities Investor Protection Act. That Act, passed in 1970, created SIPIC to provide relief to customers of failing broker-dealers. When a SIPC member firm is in financial difficulty the non-profit corporation can initiate a liquidation proceeding in which a trustee can be appointed to oversee the liquidation of the firm after removal to bankruptcy court. The trustee is to return any customer cash and securities on deposit with the broker. If there are insufficient funds, SIPIC must cover the shortfall up to certain limits. The SEC has plenary authority to supervise SIPIC.

The Securities Investor Protection Act focuses on the custody function of brokers. It provides coverage for customer funds and securities held on deposit with the broker which, prior to the Act, were often depleted in the liquidation of the firm. The Act generally affords no protection against other types of losses.

A customer is generally defined as a person who has deposited cash with the broker for the purpose of purchasing securities. A claimant must generally demonstrate that the broker received or held the claimant’s property and that the transaction gave rise to the claim and contained the indicia of a fiduciary relationship between the customer and the broker.

In this case the purchasers of SIBL CDs are not customers within the meaning of the Act, the Court held. It is undisputed that the investors did not deposit cash with SGC. Since “SGC had no custody over the investors’ cash or securities, the investors do not qualify as SGC ‘customers’ under the ordinary operation of the statutory definition” the Court concluded.

The SEC argued, however, that given the interrelation of the Stanford entities, funds deposited with SIBL should be viewed as effectively on deposit with SGC – the entities should be viewed as one. This theory is grounded on the bankruptcy doctrine of “substantive consolidation” which, under equitable principles, would view the entities as one.

While that doctrine may be applicable here, it does not support the SEC’s contention. The SIPIC statute excludes from coverage investments in the debtor which add to its capital, the Court stated. Thus, even if the entities are viewed as one, since the CDs are a contractual investment in the entity which added to the capital of SIBL, they are excluded. While the SEC attempted to side-step this result by arguing that the CD proceeds became part of the capital of SIBL and not the broker dealer, if the entities are merged the funds become part of the capital of the merged entity.

Finally, in its reply brief the SEC claimed for the first time that funds given to a consolidated entity for the CDs should not become part of the entity’s capital because they were part of a Ponzi scheme. The SEC offered no authority for this contention which was rejected by the Court. The fact is the CD purchasers acted as lenders which are not covered. While the plight of these investors is unfortunate, the Court noted, they are not covered by the statute.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.