US sues to recoup losses in Stanford case

The United States Securities and exchange Commission (SEC) has filed a suit against the Securities Investor Protection Corporation (SIPC) in an effort to help customers who lost money in an alleged multibillion-dollar Ponzi scheme ran by disgraced Texas financier Allen Stanford.

Stanford, who owned the Antigua-based Stanford International Bank (SIB), is being held in a Houston jail awaiting trial in the alleged scheme that defrauded thousands of investors through high-yield certificates of deposit (CDs) at the SIB.

He faces 14 criminal counts related to the investment business. The SEC also has filed a civil suit against him.

The new lawsuit seeks reimbursement for customers from Stanford-owned Stanford Financial Group (SFG).

The SEC and SIPC have been sparring in recent months over whether Stanford customers are eligible for protection under its rules.

SIPC backs customer accounts at brokerage firms against failure much like the Federal Deposit Insurance Corporation (FDIC) insures bank deposits.

Unlike the FDIC, however, SIPC does not regulate brokerage firms or conduct examinations of their businesses and accounts. The investor-protection corporation is an industry-backed group financed by assessments on brokerage firms.

Stanford Financial, owned and operated by Allen Stanford, managed more than US$7 billion of customer money that was supposed to be invested in safe, high-yielding certificates of deposit.

In 2009, US federal authorities seized the bank, and the SEC described the company in a court filing as a "massive Ponzi scheme" in which Stanford allegedly used the proceeds from 21,500 customers in part to finance a lavish lifestyle.

Restricted

SIPC has said that because the investments were certificates of deposit that were sold by a bank, they were not eligible for its coverage, which is restricted to accounts at brokerage firms.

But the SEC has argued that Stanford Financial included a brokerage firm, and that many customers opened brokerage accounts in order to buy the CDs. They were given papers upon purchase of their certificates that indicated that the transaction was covered by SIPC, the commission said.

In the filing in US Federal District Court in Washington, the SEC asked for a court order compelling the investor-protection corporation to begin liquidation of the Stanford Group, the brokerage firm.

Though there are thought to be few, if any, assets at the firm, the liquidation filing is a necessary step to allow customers to begin the quest to recover their losses. Investors are covered for losses of up to US$500,000 if a brokerage firm fails.

"Stanford's financial advisers used the apparent legitimacy offered by US regulation of Stanford's US brokerage subsidiary in order to generate sales" of the certificates of deposit, the SEC said in its filing.

Stanford's alleged scheme began coming apart when redemptions increased in 2008 and early 2009, in part because of the financial crisis, to the point where incoming funds were no longer sufficient to meet investor withdrawals, SEC officials said.

In 2009, SIPC said that Stanford customers were not entitled to coverage under its policies.

But, in June, the SEC said it had decided that investors should be covered by the insurance; the investor protection corporation said it would issue a decision on whether to heed that ruling by mid-September.

Since then, the SEC said both sides have been in negotiations, but they were unable to reach a deal.

The SEC has been under pressure from several members of the US Congress to get SIPC to disburse funds to defrauded customers.