SEC Claims Authority in Stanford Appeal

Chidem Kurdas

Last week, just before Memorial Day weekend, the US Securities and Exchange Commission filed a reply to the Securities Investor Protection Corp. (SIPC) regarding the estate and victims of Allen Stanford’s Ponzi scheme.

SIPC was created by Congress to provide aid to the customers of failed brokerages. It has a fund for this purpose, paid for by brokerage firms. When it refused to get involved in financing the Stanford bankruptcy, the SEC went to court against SIPC—a highly unusual case by a government agency against a government-created entity.

A judge sided with SIPC; the SEC appealed. The recent brief is a response to SIPC in the appeal.

Stanford conned people by selling them certificates of deposit issued by his bank in Antigua. Scores of offices in the US, Latin America and Europe helped sell the fake CDs; among these was Stanford’s brokerage in Houston.

The SEC says those who bought the CDs via the brokerage should be treated as brokerage customers and receive SIPC money. But SIPC argued – and a court agreed – that the Stanford victims were ultimately customers of the bank, not the brokerage.

In the appeal, the SEC puts forth a number of arguments. It criticizes “SIPC’s formalistic construction of the term ‘customer’” on the ground that the whole Stanford network was centered on the fraudulent CDs. But that’s not really a new point.

It seems that if no other argument works, the SEC wants to force SIPC by simply asserting its own legal authority over the brokerage fund. SIPC, unlike the SEC, is not an agency. Congress created it as an brokerage industry body supervised by the SEC.

The SEC repeatedly points out that Congress gave it this supervisory role and that SIPC “is subject to the Commission’s plenary supervision.” So SIPC is supposed to do what it’s told by the Commission.

But then again, Congress could have give the SEC direct responsibility for the brokerage fund rather than creating a separate entity. Why have SIPC if the SEC does what it wants with the fund?

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