Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, December 13, 2011

SEC Sues SIPC on behalf of Stanford Financial Group Investors

On December 12, the SEC sued SIPC (for the first time!), asserting that SIPC is not fulfilling its responsibilities to customers of Stanford Financial Group (SFG) because it has refused to recognize that they are entitled to the protections of SIPA.  SIPC has asserted that SIPA does not apply to SFG customers because they purchased CDs from a bank and did not lose cash or securities in a brokerage account. 

The SEC and SIPC have been disputing the coverage of SIPA since SFG was exposed as a Ponzi scheme.  After the SEC sent SIPC a letter on June 15, 2011, stating its position and requesting that SIPC take the necessary steps to institute a SIPA liquidation proceeding, SIPC announced that it would consider the SEC's request and make an announcement in mid-September.  This announcement was delayed, and the SEC has now taken matters into its own hands by filing this lawsuit.

SIPC said today that it will defend itself against the lawsuit:

"We have great sympathy for the victims of this extraordinary Ponzi scheme that inflicted heartbreaking losses on thousands of people across the world," said Orlan M. Johnson, Chairman of the Securities Investor Protection Corporation. "But, SIPC must adhere to the requirements established by Congress. After careful and exacting analysis, we believe the SEC's theory in this case conflicts with the Securities Investor Protection Act, the law that created SIPC and has guided it for the last 40 years."

"SIPC is not the equivalent of the FDIC for investment fraud," said Stephen P. Harbeck, President of the Securities Investor Protection Corporation. "Congress considered whether to guarantee investment losses and rejected that sort of protection as unrealistic and inappropriate."

"Given the diametrically opposed positions of the SEC and SIPC, this matter is going to have to be resolved in the courts," Mr. Harbeck said. "The courts have a process in place for examining both the facts and the law to test the SEC's position."

See the SEC's Declaration(Download SECvSPIC.Declaration) and Exhibit 2 (stating forth the correspondence and related documents) (Download SECvSIPC.Exhibit2) for the full story.

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