Investors defrauded by Houston promoter Robert Allen Stanford are not entitled to coverage of life-altering losses by the Securities Investor Protection Corp., which is funded by the financial services industry, a federal judge ruled Tuesday in Washington, D.C.
The decision was bitter news for Stanford investors who lost billions of dollars in Louisiana and across the nation. It also was a slap at the Securities and Exchange Commission, because the SIPC has never before in its 42-year history refused a request by the SEC to cover individual investors for up to $500,000 of their losses.
Stanford, 62, is serving a 110-year prison term for his jury conviction this year on charges that he led a fraudulent scheme used to swindle more than $7 billion from approximately 25,000 investors in the United States and more than 100 other countries.
But U.S. District Judge Robert L. Wilkins ruled Tuesday that the SEC failed to prove that the SIPC refused “to commit its funds or otherwise to act for the protection of customers of any member of SIPC.”
SEC officials were asked Tuesday whether the commission will ask the U.S. Circuit Court of Appeals for the District of Columbia to overturn Wilkins’ decision, but they said a decision on a possible appeal has not been made.
“We are reviewing the decision,” SEC spokesman John J. Nester said. “We have 60 days to file a notice of appeal.”
U.S. Sen. David Vitter, R-La., said in a statement he wants an appeal of Wilkins’ decision.
“This is horribly disappointing news, especially since it’s crystal clear that Allen Stanford flagrantly defrauded so many investor victims,” Vitter said.
“I will be encouraging (SEC) Chair Mary Schapiro to explore every possible appeal option,” Vitter added. “The Stanford Ponzi scheme victims should be first in line for protection, not last in line, way behind SIPC’s Wall Street members.”
The SIPC offered last year to settle the dispute with the SEC by covering up to $250,000 of individual Stanford investor losses.
After the SEC went to court for the whole $500,000, the SIPC argued that such coverage could drain its $1.2 billion fund, forcing increased fees from its members.
Wilkins mentioned those estimated costs in his decision Tuesday.
“It is quite clear that the initiation of a (court-ordered) liquidation would potentially involve tens of thousands of claimants and entail millions of dollars in administrative costs,” Wilkins said. The judge said those costs would not be recoverable, even if all investor claims eventually were denied.
“Such a cost would place a great burden upon SIPC,” Wilkins said.
Those concerns were not appreciated by some Stanford victims.
Baton Rouge resident Blaine Smith, 56, lost approximately $1 million to Stanford.
Smith was among approximately 1,000 investors in the Baton Rouge, Lafayette and Covington areas estimated by Baton Rouge attorney Phillip W. Preis and state Sen. Bodi White, R-Central, to have suffered a combined loss of $1 billion.
“The intent of this statute (Securities Investor Protection Act) was to stop brokers from stealing investors’ money,” Smith said. “It was supposed to stop Ponzi schemes. Where in the hell do we go now?”
Regarding Wilkins, Smith mused: “Who was he really worried about? The brokers’ fund? Or investors who may be living on the street soon? I feel like a walking dead man.”
Smith added: “With a stroke of a pen, this judge has erased 40 years of my life. And we’re being terrorized by a quasi-public agency (SIPC). Abolish them. Get rid of them.”
The SIPC provided more than $500 million to some of the victims of admitted New York swindler Bernard Madoff, who is serving a prison term of 150 years. But that money went only to those investors who placed their cash directly with Madoff and his SIPC-member company. It did not go to firefighters, police officers, teachers and other small investors who placed their money through their pension or mutual funds.
In the Stanford fraud, Wilkins said, most losses were attributed to Stanford International Bank on the Caribbean island of Antigua.
Stanford investors, including Smith, have long argued that their investments were placed through Stanford Group Co., which was a SIPC member. Some of those same investors, Smith among them, were able to track their money to banks in the United States, not Antigua.
And the SEC, Wilkins wrote, supplied evidence that Stanford Group Co. was paid some of the bank investors’ money. But the judge concluded that Stanford Group Co.’s SIPC coverage could not be expanded to include the victims defrauded by Stanford’s bank scheme.
Preis, who represents scores of Stanford victims in other pending litigation, said the SEC should not drop the case now.
“I do think they (SEC officials) need to appeal,” Preis said. He said Wilkins’ decision “ignores the totality of what was going on.”
U.S. District Judge David Godbey, of Dallas, has ruled in the SEC’s civil suit against Stanford that all of Stanford’s companies should be viewed as a single entity, Preis said. Under such circumstances, separating the SIPC member, Stanford Group Co., from its related businesses may not hold up in an appeal, Preis added.
“Those investments were worthless from the beginning,” Preis said. “And everybody knows they were worthless.”