March 7, 2012
For Immediate Release
(Washington, D.C.) - U.S. Sen. David Vitter today was invited
to testify at the U.S. House Committee on Financial Services,
Subcommittee on Capital Markets about some of the ongoing
problems at the Securities Investor Protection Corporation (SIPC).
Vitter
testified about SIPC's refusal thus far to compensate the
victims of the Allen Stanford Ponzi scheme.
Since early 2009, Vitter has been the leading Congressional
advocate for Stanford victims, many of whom live in Louisiana.
The text of Vitter's testimony as prepared for delivery is below.
Thank you, Chairman Garrett and Ranking Member Waters and
members of the Capital Markets and Government Sponsored Enterprises
Subcommittee, for inviting me to testify here today. Congress
has given the Securities Investor Protection Corporation (SIPC)
incredible responsibility for protecting investors, and for
that reason, it's vitally important and appropriate that we point the
spotlight at SIPC to understand the ways that it is and is
not working.
If there is one common cause between Stanford and Madoff
investors, it's the way SIPC fought investors every step of the way and
has absolutely refused to protect the victims of fraud. For
three years the Stanford victims have been fighting just to have their
day in court - and unfortunately, it's SIPC that they have to
fight.
I fear we are in a situation where, if SIPC were a true financial regulator, we would call it regulatory capture. The actions of
SIPC are dictated by the member companies rather than by the law. SIPC is functioning more like a trade association and advocate
than a quasi-regulator.
I first became involved in the Stanford case because it has
affected thousands of victims in the United States, and many of them
live
in Louisiana. Allen Stanford was adept at preying upon the
savings of retired oil and gas workers in Louisiana in particular. Many
of
the victims have told me their entire savings has been lost
because of the Stanford fraud, and that they have been forced to sell
their
home and re-enter the work force.
I want to be absolutely clear. I don't believe there is
any need to change to the Securities Investor Protection Act in order to
provide coverage for the Stanford victims. These victims are
entitled to coverage under the law as it is currently written.
In the actual criminal case against Allen Stanford, he is accused of stealing customer funds.
Instead of purchasing Stanford
International Bank (SIB) "certificates of deposit" (CDs), the
Stanford Group Company (SGC) which was a SIPC member, acquired control
of its customers' funds and the funds were stolen by Allen
Stanford. The Securities Exchange Commission (SEC) and courts have taken
the position in litigation related to the receivership of
Stanford's estate, that the Stanford companies operated as a Ponzi
scheme
and, "a Ponzi scheme is, as a matter of law insolvent from
its inception." And, just yesterday, a jury convicted Allen Stanford on
13 of 14 counts related to this case.
In Old Naples Securities, Inc. the U.S. Court of Appeals for
the 11th Circuit held that customers of an introducing broker-dealer who
thought they were purchasing bonds through the broker- dealer
were "customers" of an introducing broker-dealer within the meaning of
SIPA and entitled to coverage under the statute. The court
held whether a claimant deposited cash with the debtor "does not...
depend
simply on to whom the claimant handed her cash or made her
check payable, or even where the funds were initially deposited."
Rather,
the issue was one of "actual receipt, acquisition or
possession of the property of a claimant by the brokerage firm under
liquidation."
Previously, the SEC has argued that "a customer's legitimate
expectations" ought to be protected "regardless of the fact that the
securities were fictitious." It is impossible for an insolvent entity issue legitimate securities.
In re New Times Securities
Services, Inc., the owner sold fictitious mutual funds, as
well as bona fide mutual funds to investors via a register broker dealer
that was a SIPC member and a non-broker-dealer entity.
Forensic accounting, which was done by the court appointed receiver, shows that the SIB CDs were not purchased by SGC for its customers,
and therefore they are not worthless securities with zero value as argued by SIPC. Instead, these CDs are fictitious.
The SGC customer funds were never transferred to the Antiguan bank and there was never any money standing
behind the CDs.
On June 5, 2011, the SEC Commission voted on a determination
that SIPC should provide coverage for the Stanford victims. In the
analysis of the case provided by the SEC to SIPC, the SEC
explains that on the specific facts of this case, investors with
brokerage
accounts at SGC who purchased the CDs through the
broker-dealer qualified for protected "customer" status under SIPA.
In reaching its determination, the SEC cited the conclusions
in the report of the court appointed-receiver for SGC, who noted that
the many companies controlled and directly or indirectly
owned by Stanford "were operated in a highly interconnected fashion,
with a
core objective of selling" the CDs. Among other things, the receiver also noted that "[c]orporate separateness was not
respected within the Stanford empire... Money was
transferred from entity to entity as needed, irrespective of legitimate
business need. Ultimately, all of the fund transfers
supported the Ponzi scheme in one way or another, or benefited Allen
Stanford
personally."
A SIPA liquidation proceeding would allow investors with
accounts at the SGC to file claims with a trustee selected by SIPC. The
trustee would decide whether the investors have "customer"
claims that are protected by the statute, and an investor who disagreed
with the trustee's determination could seek court review.
However, the ultimate roadblock to the victim's day in court is SIPC.
During the eight months since the SEC made its determination
instructing to provide protection to the Stanford victims, SIPC has
tried every conceivable idea to drag out making a final
determination.
After the SEC's determination, SIPC ran up $200,000 of charges in June and July of last summer in reviewing the court appointed
receiver's documents - a cost that will be ultimately be
paid for with the money set aside for the victims. When asked about
these charges, SIPC claimed that it was in order to do
research into a settlement offer to the victims. However, an official
settlement offer never materialized.
During the time between the SEC's determination and the SEC
ultimately filing an application with the DC Circuit Court to compel a
SIPA liquidation, I had many calls and meetings with Orlan
Johnson, then Chairman of SIPC and his staff, including Stephen
Harbeck.
Concerns were raised by both Mr. Johnson and his staff on a
reoccurring basis, as far back as our first meeting on this issue, about
the cost to the SIPC fund of covering Stanford victims and
how SIPC member companies would react to the need for SIPC to increase
its
assessments. I stressed in our discussions that I
believe the only focus should be on providing the victims with swift
resolution under the law in a manner that takes into account
the complex nature of the fraud and uses the forensic accounting that
had already been undertaken.
In these meetings and on these calls, it seemed to me, that SIPC
was more interested in the cost of the resolution and protecting
its Wall Street member companies than it was in doing their
duty, doing the right thing, and immediately initiating a formal
liquidation proceeding in the Stanford matter as ordered by
the SEC. In fact, I was told that SIPC felt they would be sued no
matter what they ultimately decided to do. SIPC was certain
they would either be sued by the SEC or sued by their member companies.
During the course of these meetings and phone calls it also
became obvious that SIPC hired lawyers to defend itself from the SEC
while
still negotiating a settlement offer, and SIPC has shown
every indication it will continue to litigate this matter in court.
Currently, SIPC is fighting the SEC in court trying to avoid
being compelled to file a protective order which would ultimately allow
individual victims to get a judicial review of the merits of
their claims against SIPC. While this judicial review is certainly part
of the SIPA process, it was intended to be more of a summary
proceeding, and I think everyone would be surprised at some of SIPC's
tactics they are willing to use in order to avoid
compensating the victims.
In a filing on February 16th, despite the fact that SIPC has
run up a charge of $200,000 dollars with the court-appointed receiver,
SIPC asked the judge to allow a discovery of documents
related to who the customers were, the certificates of deposit and the
corporate structure of the Stanford Companies. In addition,
on Monday of this week, SIPC asked the judge for approval to review all
of emails and documents of the SEC's legislative affairs team
in a fishing expedition in an attempt to find a past instance where a
staffer at the SEC might have said something that disagreed
with what the SEC ultimately voted on months or years later.
The SIPA statute is 41 years old, and SIPC has never
challenged the authority of the SEC in court the way it is now. SIPC has
decided
to test the SEC's authority to compel SIPC to protect
investors. If SIPC persists on this pat, SIPC will undermine the faith
investors
have in markets and in SIPC coverage itself. Although I hope
SIPC will see the error of their logic, I realize that ship has already
sailed. I will continue to work on behalf of Stanford victims
and all of Louisiana victims of securities fraud.
Chairman Garrett, I want to close by once again commending
you on this timely hearing. I hope that my testimony shows that though
no
additional legislative action is needed to provide SIPC
coverage for the Stanford victims, they are facing what amounts to
regulatory
capture and are in a desperate search for ways to hold SIPC
accountable. Hearings like this one are a very important step in that
process. I encourage you to bring them back before this
committee on a regular basis to answer for their actions.
I hope at some point to hear Mr. Harbeck and Ms. Bowen tell
the victims why they feel comfortable running up a $200,000 tab at the
expense who have lost everything.
Thank you again Chairman Garrett, Ranking Member Waters and
Members of the Subcommittee for the opportunity to speak on behalf of
the victims.
Congressman Bill Cassidy questions CEO of SIPC Stephen Harbeck
Related article:
STIPULATED FACTS for SGC Customers
The Securities and Exchange Commission ("SEC") and the
Securities Investor Protection Corp. ("SIPC") have reached the
stipulated
facts that are attached hereto. In addition, the SEC is still
attempting to confirm and the parties are attempting to reach a
stipulation to the following effect: "SIBL did not provide
its investors with U.S. tax Form 1099 for the income purportedly earned
on the SIBL CD investments. SGC did not include SIBL CD
‘interest income' on the Forms 1099 it provided to investors."
The Securities and Exchange Commission ("SEC") and the
Securities Investor Protection Corp. ("SIPC") hereby stipulate and agree
to
the following facts only for purposes of the abovereferenced
matter:
At the specified times or at all relevant times:
1. Stanford Group Company ("SGC") was a Houston-based
broker-dealer that was registered with the Commission and a member of
SIPC.
2. Stanford International Bank, Ltd. ("SIBL") was a bank organized under the laws of Antigua.
3. SIBL offered certificates of deposit ("CDs") to investors.
In order to purchase a SIBL CD, an investor had to open an account
with SIBL. CD investors wrote checks that were deposited into
SIBL accounts and/or filled out or authorized wire transfer requests
asking that money be wired to SIBL for the purpose of opening
their accounts at SIBL and purchasing CDs.
4. Most SGC investors either received the physical CD
certificates or had them held by an authorized designee, including
Stanford
Trust Company. To the extent that some SIBL CD investors did
not receive the physical certificates, the SEC is not relying on that
fact to support its claims in this proceeding.
5. SIBL CD investors received periodic statements from SIBL
reflecting the balances in their SIBL accounts, including their CD
balances. (An example of such a periodic statement is
attached as Exhibit A.)
6. In the United States, disclosure statements for SIBL's CDs
stated that "SIBL's products are not subject to the reporting
requirements of any jurisdiction, nor are they covered by the
investor protection or securities insurance laws of any jurisdiction
such as the U.S. Securities Investor Protection Insurance
Corporation." (An example of such a disclosure document is attached as
Exhibit B.) A version of the marketing brochures for SIBL's
CDs stated that SIBL CDs "are not subject to the reporting requirements
of any jurisdiction outside of Antigua and Barbuda, nor are
they covered by the investor protection or securities insurance laws of
any jurisdiction such as the U.S. Securities Investor
Protection Insurance Corporation or the bonding requirements thereunder.
There is no guarantee investors will receive interest
distributions or the return of their principal." (An example of such a
marketing
document is attached as Exhibit C.)
7. SIBL and Stanford Trust Company are not and never have been members of SIPC.
8. For purposes of its Application in this proceeding, the
SEC is relying on investors' deposit of funds for the purchase of SIBL
CDs; it is not relying on transactions involving any other
securities (or funds for other securities).
Read more:
http://sivg.org/article/2012_Vitter_Testifies_at_House_Hearing.html
