Is SIPC afraid of lawsuits in the Stanford case?

December 2, 2011
By Loren Steffy

For years, almost 8,000 investors who lost money in the collapse of Stanford Financial's U.S. brokerage have been waiting for a decision on whether their losses will be covered by the Securities Investor Protection Corp. Back in June, the Securities and Exchange Commission said that they should. SIPC itself has yet to make a decision, and 18 members of Congress recently gave the insurance fund a Dec. 15 deadline for coming up with an answer.

Now, SIPC apparently is attempting to reach some sort of settlement with the SEC, though the details remain unclear. U.S. Sen. David Vitter, R-La., told the Advocate in Baton Rouge that in earlier discussions with him, SIPC Chairman Orlan Johnson "expressed concern that the organization could be sued in the Stanford matter by financial institutions who contribute to the fund, further delaying the compensation."

Vitter's press secretary, Luke Bolar, told me the senator has been working with SIPC and the SEC in hopes of reaching an agreement. SIPC is expected to present a settlement offer to the SEC next week, Bolar said. I haven't heard back from SIPC's spokeswoman yet.

The SEC, however, doesn't have to agree. It has the authority to sue SIPC and force it to comply with the commission's order in June. Presumably, some sort of agreement would speed any recovery to Stanford's investors, who have been waiting for almost three years. SIPC already is covering losses for victims of Bernard Madoff's Ponzi scheme and is planning to cover customers who lost money in the collapse of MF Global. Some of the brokerages that contribute to SIPC may be getting worried that they will be hit with big assessments to cover the payouts.

Unlike Madoff and MF Global, the Stanford case is more complicated. SIPC doesn't typically cover certificates of deposit, which is what most Stanford investors bought, but the CDs were sold though Stanford's SIPC-insured brokerage.

Meanwhile, Stanford Financial's founder, R. Allen Stanford, is scheduled to appear at a hearing later this month to determine if he's competent to begin his criminal trial, which is set to start in January.

Source.

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SEC to Release Finding on Stanford Clients' SIPC Eligibility

May 13, 2011
By Joshua Gallu

The U.S. Securities and Exchange Commission, faulted for missing R. Allen Stanford's alleged $7 billion fraud, said it will decide "in the near future" whether victims should receive federal insurance payments.

The SEC has devoted "substantial time and effort" to determine whether the Securities Investor Protection Corp. erred in denying investors coverage, SEC enforcement director Robert Khuzami and inspections chief Carlo di Florio said today at a House Financial Services Committee hearing in Washington.

Stanford, 61, was indicted in June 2009 on 21 criminal charges claiming he misled clients about the safety and oversight of certificates of deposit issued by his Antiguabased Bank. Investors, lawmakers and the SEC's inspector general have accused the agency and the Financial Industry Regulatory Authority of ignoring warnings about Stanford years before he was arrested.

"It's a tragedy that the investors have to pay the price of the SEC and Finra's failures," Representative Francisco Canseco, a Texas Republican, said at the hearing. Finra, the industry-funded brokerage regulator, oversaw the Stanford unit that sold the CDs.

Stephen Harbeck, the president of the Securities Investor Protection Corp., said in an August 2009 letter that Stanford investors weren't eligible for insurance payments because the government-sponsored regulator doesn't protect people who are sold worthless securities. SIPC, which was chartered to guard investors against broker theft or brokerage failure, is overseen by the SEC.

'Wrong Way'
"We're being told our money was stolen the wrong way," Stanford Kauffman, who invested in the alleged fraud, said in testimony at the hearing. "Stanford stole our savings, but the SEC and Finra held the door wide open."

Missing Stanford's alleged fraud wasn't a matter of faulty regulations so much as a failure to enforce existing statutes, Finra chairman and chief executive officer Richard Ketchum told lawmakers today.

Julie Preuitt, an SEC employee who worked on an examination of Stanford's business in 1997, said she had been rebuffed by supervisors after flagging possible fraud and pushing for a more thorough investigation.

Preuitt, now an assistant regional director in the SEC's regional office in Fort Worth, Texas, told the panel she was also reprimanded by management after complaining about changes to the examination program in 2007.

"I paid a heavy price for complaining," Preuitt said. "I was not only ignored, but was actively rebuffed in my attempts to perform at a fully functioning level."

Disciplinary Action
SEC Inspector General H. David Kotz urged in a report last year that the SEC consider taking disciplinary action against two managers in the Fort Worth office who punished Preuitt.

That hasn't happened, Preuitt said.

"The commission has failed to discipline anyone, at least not visibly, nor has there been any effort made to restore me to a position with similar duties and responsibilities to the one held before," Preuitt said.

Stanford, who has denied the allegations against him, has been in federal custody since 2009 while awaiting trial. He is being held in a hospital at the Butner Federal Correctional Complex in North Carolina where he is receiving treatment for a prescription drug dependency developed while in prison. 

Source: http://sivg.org/article/SEC_SIPC_Eligibility.html

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Ketchum on monitoring Stanford: Finra could have done better

	May 13, 2011 By Dan Jamieson Financial Industry Regulatory Authority Inc. chief executive Richard Ketchum issued a mea culpa today for Finra's failure to uncover R. Allen Stanford's alleged $8 billion Ponzi scheme. "Finra clearly could have done better and we deeply regret we did not," Mr. Ketchum said today in prepared testimony to the House Financial Services Committee's Subcommittee on Oversight and Investigations. Mr. Ketchum recapped the findings of a September 2009 Finra review of its missteps in the case.
Finra boss, Richard Ketchum (Bloomberg News)
That internal review found that in 2005, Finra's Dallas office curtailed an investigation of Stanford, which had been prompted by an SEC referral letter. Finra enforcement staff weren't sure whether they had jurisdiction over Stanford's offshore CDs, Mr. Ketchum said. The Securities and Exchange Commission, though, is perhaps more to blame for missing the alleged Stanford fraud. A separate March 2010 report from the SEC's inspector general found that the SEC’s Fort Worth branch was aware since 1997 that Mr. Stanford was possibly operating a Ponzi scheme. Despite numerous exams of the Stanford firm that raised a number of red flags, SEC enforcement staff in Fort Worth refused to investigate. SEC enforcement staff believed that "novel or complex cases were disfavored" by the agency's management, said David Kotz, the SEC inspector general, in testimony today. Stanford, 61, was indicted in June 2009 on 21 criminal charges claiming he misled clients about the safety and oversight of certificates of deposit issued by his Antiguabased Bank. Investors, lawmakers and the SEC's inspector general have accused the agency and the Finra of ignoring warnings about Stanford years before he was arrested. "It's a tragedy that the investors have to pay the price of the SEC and Finra's failures," Representative Francisco Canseco, a Texas Republican, said at the hearing. Julie Preuitt, an SEC employee who worked on an examination of Stanford's business in 1997, said she had been rebuffed by supervisors after flagging possible fraud and pushing for a more thorough investigation. Ms. Preuitt, now an assistant regional director in the SEC's regional office in Fort Worth, Texas, told the panel she was also reprimanded by management after complaining about changes to the examination program in 2007. "I paid a heavy price for complaining," Ms. Preuitt said. "I was not only ignored, but was actively rebuffed in my attempts to perform at a fully functioning level." Stanford, who has denied the allegations against him, has been in federal custody since 2009 while awaiting trial. He is being held in a hospital at the Butner Federal Correctional Complex in North Carolina, where he is receiving treatment for a prescription drug dependency developed while in prison. Stephen Harbeck, the president of the Securities Investor Protection Corp., said in an August 2009 letter that Stanford investors weren't eligible for insurance payments because the government-sponsored regulator doesn't protect people who are sold worthless securities. SIPC, which was chartered to guard investors against broker theft or brokerage failure, is overseen by the SEC. "We're being told our money was stolen the wrong way," Stanford Kauffman, who invested in the alleged fraud, said in testimony at the hearing. "Stanford stole our savings, but the SEC and Finra held the door wide open."

Source: http://sivg.org/article/Ketchum_Finra.html

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Letter to the Chronicle’s Editor Regarding the SEC’s Failure to Protect the Stanford Group’s Victims

Letters to the editor
HOUSTON CHRONICLE
March 15, 2011

Agencies failed

It has been more than two years since 1,290 Texans lost their life savings in the R. Allen Stanford debacle. Many of the victims were teachers, nurses and firefighters, and these losses reflect most, if not all, of the retirement funds they accumulated over many years of hard work. These Texans relied on the Securities Exchange Commission (SEC) to uphold its federal mandate to protect investors, and despite numerous warnings about Stanford Financial over several years, the SEC failed to act on behalf of investors.

In 2010, SEC Inspector General David Kotz revealed the SEC was aware as early as 1997 that Stanford investors’ funds were in jeopardy of being stolen. It wasn’t until 2004 — seven years after the SEC first became aware of problems at Stanford — that it opened an official investigation. By the time the SEC took action in this case, it was too late for the Stanford victims who had lost virtually everything.

To make matters worse, the Stanford investors were customers of Stanford Group Co. (SGC), a broker-dealer that was a member of the Securities Investor Protection Corp.(SIPC). SIPC allowed SGC to use its seal for brochures, promotional materials and correspondence to give investors additional confidence. “Member SIPC” was adorned on its correspondences to investors, yet to date SIPC, which is under SEC authority, has refused to provide any remedy for Stanford victims. Customers of the Stanford broker dealer have been denied coverage, despite previous cases where investors in similar situations were covered. Skip Swingle, a victim of SGC, aptly warned, “I don’t think it’s just Stanford victims that should be concerned about what’s going on, but everybody.”

On Monday I sent a letter to SEC Chairman Mary Schapiro asking again for an expedited review of this issue. No one can restore all that these victims lost. We cannot replace the trust that was violated, nor can we say that this fraud won’t happen again. What the SEC and SIPC can and should do is live up to the mandate of encouraging investment by establishing customer confidence. If they do not, brokerage firms across the country might reconsider the placement of the SIPC seal, and investors will see it as a symbol of caution, not protection.

— U.S. REP. JOHN CULBERSON,
7th Congressional District of Texas

Source.

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Forensic accountant gives Stanford investors a little hope

By LOREN STEFFY
HOUSTON CHRONICLE
February 15, 2011

For two years, Stanford Financial Group's victims have struggled with the grim reality of their situation. Not only is their money gone, but every safety net has failed them. Now, they're hoping a new finding by a forensic accountant will give them a better chance at getting some of their money back.

Last week, investors circulated a declaration by FTI Consulting, an accounting firm hired by receiver Ralph Janvey to determine whether Stanford investors should be covered by the Securities Investor Protection Corp - SIPC.

The ruling found that money that was supposed to buy certificates of deposit at Stanford's Antiguan bank was diverted for other purposes.

The finding "100 percent supports the legal argument we've made" to get investors covered by SIPC, Angela Shaw, the head of the Stanford Victims Coalition, said in an e-mail sent to other investors.

After all, SIPC is covering some of the losses for Bernie Madoff's victims because he never bought the stocks he told clients he'd bought for them.

While the two cases may seem similar, they aren't. Nothing about the accountant's findings in the Stanford case changes SIPC's determination that investors aren't covered, said Stephen Harbeck, SIPC's chief executive. "We don't see a customer that we can protect," he said.

SIPC doesn't cover lost investment value, even if there may be fraud involved. Stanford investors' money may have been diverted, but the CDs did exist and the bank still had records of investors owning them, the accountant's report found. What was falsified, according to the Securities and Exchange Commission, was the assets that backed up those CDs.

Hoping SEC will step in

Stanford investors, though, hope the FTI report will encourage the SEC, which missed so many warnings about Stanford for so long, to ask SIPC to extend the coverage. So far, it hasn't. The SEC could even sue SIPC to compel it to cover Stanford's victims, but that's never happened.

"In this instance, both parties agree that there's no cause to initiate coverage," Harbeck said. "We were not designed to replace the initial purchase price when a security goes down in value."

That, of course, is not what Stanford victims want to hear. And who can blame them? After all, they weren't chasing exorbitant returns on risky investments. They thought they were buying a safe haven low-risk CDs - in a time of market turmoil. In many cases, they were following the advice of their trusted brokers.

Confusing to investors

SIPC is a narrowly defined insurance fund. The arcane details of its limitations have confused investors for years - at least the few who were even aware it existed.

In creating SIPC, Congress was careful to insure against broker misconduct, but not to shield investors from risk that, recent Wall Street bailouts aside, is supposed to be a part of investing.

The Stanford case, though, raises the question of whether that law needs amending. After all, the SEC claims Stanford brokers peddled the bogus CDs, collecting commissions for selling them to clients of the company's brokerage operation, which was a SIPC member.

In other words, SIPC coverage enhanced the veneer of credibility that Stanford used to sell itself to investors, and the FTI report describes a SIPC member firm that was diverting funds from customer purchases without the customers' knowledge. The fact that the alleged fraud wasn't quite as blatant as Madoff's - an obfuscation instead of an outright lie - is a hairline distinction with multibillion-dollar consequences.

Improvements ahead?

Given all the damage from Stanford's collapse, perhaps some good can yet come from the ashes. Perhaps Congress can review the law and build better protections for future investors.

SIPC touts itself as investors' first line of defense. For Stanford investors, it may be their last hope. The forensic accounting declaration makes it very clear that any funds that were intended to buy securities did not in fact reach its purpose; no securities were ever purchased and in fact it was only “fictitious securities.” Fictitious securities have been covered by SIPC in previous cases.

SIPC was denied until now with the excuse that investors got securities, but they are worthless because the Bank got broke and SIPC doesn’t insure worthless securities. But now with this declaration of Karyl Van Tassel, all the victims will get SIPC cover based on previous similar cases.

Nonmember affiliate company were also granted with SIPC cover

SIPC member
Old Naples Securities
First Interregional Equity Corporation
Churchill Securities
New Times Securities Services (New Times)

Nonmember affiliate(s)
Old Naples Financial Services
First Interregional Advisors Corporation
CD Investment Group Churchill Mortgage Investment Corporation
New Age Securities (New Age)

Source: http://sivg.org/article/SGC_Forensic_Accounting_Van_Tassel.html

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