Stanford Scheme Victims Not Eligible for Securities Coverage: Court

A U.S. appeals court dealt a blow to the victims of Allen Stanford’s Ponzi scheme on Friday, ruling that they are not 0eligible under federal law to file claims seeking compensation for their losses.

The decision by the U.S. Court of Appeals for the District of Columbia Circuit also marks a major loss for the Securities and Exchange Commission and is likely to be precedent-setting.

The SEC was seeking to overturn a lower court’s decision from 2012 in which a federal judge rejected a request by the agency to force the Securities Investor Protection Corp (SIPC) to start court proceedings for the fraud victims, some of whom lost millions of dollars.

“In declining to grant the SEC’s requested relief, the district court expressed that it was ‘truly sympathetic to the plight’ of the victims,” wrote Judge Sri Srinivasan in the unanimous opinion.

“We fully agree. But we also agree with the district court’s conclusion…,” Srinivasan wrote.

A representative for the SEC and a spokeswoman for the coalition of Stanford investors who lost their money could not be immediately reached for comment on the decision.

The case marks the first time that the SEC, which oversees the SIPC, has ever filed a lawsuit against the nonprofit corporation to try and force it to start a court liquidation proceeding.

The SIPC, which was created by Congress, administers an industry-backed fund that is used to compensate investors if their brokerage collapses.

In a brokerage liquidation, a trustee winds down the business and returns securities and other assets to customers and creditors.

Over the years SIPC has handled high-profile liquidations, including Bernard Madoff’s Ponzi scheme.

But in the case of the Stanford victims, SIPC has said these investors did not qualify as “customers” under the law.

The law, SIPC argued, limits it to protecting customers against the loss of missing cash or securities in the custody of failing or insolvent SIPC-member brokerage firms.

While Stanford’s Texas-based brokerage Stanford Group Company was a SIPC member, its offshore bank was not. SIPC also said it was not chartered by Congress to combat fraud or guarantee an investment’s value.

Allen Stanford was convicted of fraud and sentenced in June 2012 to 110 years in prison for bilking investors with fraudulent certificates of deposit issued by Stanford International Bank, his bank in Antigua.

(Reporting by Sarah N. Lynch; Editing by Susan Heavey)