The case that sent Houston entrepreneur R. Allen Stanford to federal prison for 110 years for swindling $7 billion from thousands of people in Louisiana and elsewhere is making legal history.
Court records in Washington, D.C., show the U.S. Securities and Exchange Commission is doing something it has never done before — attempting to force the financial-industry-funded Securities Investor Protection Corp. to cover investor losses.
The commission has statutory authority over the SIPC, which is required to bail out investors who lose money in some instances when their broker-dealers fail.
SIPC has bailed out investors in some other high-profile frauds, including more than $500 million paid to some of New York swindler Bernard Madoff’s victims. However, SIPC officials have refused to honor the SEC’s call for help with Stanford victims.
So, the unprecedented dispute has found its way to the chambers of a federal judge in Washington, D.C.
Although SIPC’s member dues paid for some of the Madoff losses, coverage was not extended to police officers, firefighters or other people who invested through pension funds or 401(k) mutual funds. Only investors who placed their money directly with SIPC member Madoff or his firm benefited from the bailout.
SIPC attorney Eugene F. Assaf acknowledged in court records that Stanford Group Co. was an SIPC member that acted as Stanford’s sales representative. But Assaf told U.S. District Judge Robert L. Wilkins, of Washington, D.C., in February that money lost by investors was earmarked for Stanford International Bank, which was not an SIPC member.
Assaf also suggested that extending SIPC coverage to Stanford victims, coupled with expenses from the Madoff case, could exhaust SIPC’s “$2.5 billion fund.”
Matthew T. Martens, the SEC’s chief litigation counsel, countered that Wilkins should require SIPC to at least set up a claims process, overseen by a trustee, to accept and consider the claims of Stanford investors.
Wilkins has not ruled in the case.
But he noted in February that it is the first time in the 42-year history of the Securities Investor Protection Act that the SEC has gone to court to force SIPC action.
The question of whether SIPC “has refused to commit funds or otherwise protect customers” must be decided”by the court, not unilaterally by the SEC,” the judge added.
Wilkins also said: “It makes no sense to grant more deference to the SEC than is granted to SIPC, based upon language that Congress wrote in a clearly less-deferential manner.”
If he decides that SIPC should be forced to seek court permission to initiate a claims process for Stanford investors, Wilkins said, he will not make that decision. Instead, the judge said, that ruling will come from a Texas federal court.
In Baton Rouge, attorney Phillip W. Preis said Wilkins’ position is puzzling.
“Historically, the courts defer to what the SEC says,” Preis said. “This judge is saying: ‘I’m going to decide it. You’re not.’ ”
Preis also asserted that SIPC’s handling of the Madoff and Stanford cases seems to reflect “an institutional bias … against blue-collar workers.”
Sophisticated investors who dealt directly with Madoff received SIPC assistance, while ordinary worker-investors received none, Preis said. He noted that many of Stanford’s investors in Louisiana and other states were blue-collar workers.
“SIPC is run by the people who put up the money to pay the bills,” Preis said, referring to the brokers and dealers of the financial services industry. “It makes no sense to me.”
In other litigation, Preis represents scores of devastated Stanford investors who are suing the Louisiana Office of Financial Institutions and SEI Investments Co., a Pennsylvania-based firm contracted by Stanford to manage his offices,
Those investors allege the Office of Financial Institutions and SEI Investments turned a blind eye to the entrepreneur’s frauds.
The 5th U.S. Circuit Court of Appeals in New Orleans has ruled that the case can proceed to trial before state District Judge Mike Caldwell.
Duris L. Holmes, a New Orleans attorney for SEI Investments, has repeatedly stated that the firm provided only office-administration services to Stanford. Holmes also said all allegations that SEI Investments performed any valuation or marketing services for Stanford are false.
Attorneys for OFI have said the state agency had no obligation to protect investors from risk and did not receive allegations of Stanford’s frauds before the SEC shut his businesses down in February 2009.
“They’ve asserted an ostrich defense, saying that they didn’t know anything,” Preis said of OFI and SEI. “We’re saying: ‘They should have asked.’ ”
Preis expressed no sympathy for Stanford, regarding the promoter’s 110-year prison sentence.
“The Stanford victims have been sentenced to a lifetime of poverty and turmoil,” Preis said. “They received their sentence three years ago. Stanford just got his yesterday (Friday).”