By Michael L. Post
In its opening brief, the Securities and Exchange Commission established that the district court erred both in
incorrectly applying a preponderance standard of proof in this preliminary, summary proceeding and in applying
an unduly narrow construction of the statutory term "customer" to preclude the possibility of coverage under
the Securities Investor Protection Act of 1970 ("SIPA" or the "Act") for investors in the Stanford Ponzi scheme.
The arguments made by the Securities Investor Protection Corporation ("SIPC") in response are based on an incorrect
view of the nature of this proceeding and a misreading of the relevant statutory scheme, applicable case law, and
underlying facts.
Contrary to SIPC's contention, this proceeding will not lead
to a final determination of the key question at
issue-whether any of the Stanford victims qualify as
"customers" under SIPA. Nor did Congress confer greater
discretion on SIPC than on the Commission to make the
determination whether to seek to initiate a SIPA liquidation
proceeding. Given the preliminary nature of the proceeding
here, and the statutory relationship between the parties,
a probable cause standard of proof is appropriate. Moreover,
SIPC's formalistic construction of the term "customer"
to preclude the potential for SIPA coverage here erroneously
gives effect to both the fraudulent corporate boundaries
designed by Allen Stanford to USCA Case #12-5286 Document
#1437933 Filed: 05/24/2013 Page 9 of 40 facilitate his
scheme and the illegitimate securities sent to investors in
furtherance of that scheme.
Nor will the Commission's interpretation of the statutory definition of a "customer" undermine the statutory scheme
as SIPC and its amici contend. The Commission is not advocating that every customer of every Stanford entity would
have customer status under SIPA. See Brief of the SEC at 49 ("SEC __"). Rather, its position is that in the rare
circumstances presented here-where the Stanford entities (including Stanford International Bank, Ltd. ("SIBL") and
Stanford Group Company ("SGC")) were operated as a single fraudulent enterprise ignoring corporate boundaries, SGC
accountholders who purchased SIBL CDs were solicited by SGC and dealt substantially with SGC employees, and the
purported securities issued by SIBL were in reality interests in a Ponzi scheme-SGC accountholders who purchased
SIBL CDs through SGC should be deemed to have deposited funds with SGC. This interpretation is the correct one;
and it is at least a reasonable one that is entitled to deference.
Even apart from the lack of separateness of SGC and SIBL, the Commission's application
should be granted under the Old Naples and Primeline cases.
The Commission's position here is also supported by two court of appeals cases expressly holding that customer
status under SIPA "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." Old Naples, 223 F.3d at 1302; see Primeline, 295 F.3d at 1107.
Relying on a different opinion's erroneous description of those cases, SIPC argues that the customers in those
case provided money "to an ostensible agent of a broker-debtor." Br. 50 (quoting In re Bernard L. Madoff Inv.
Secs., LLC, 708 F.3d 422, 428 (2d Cir. 2013)). In fact, the claimants in Old Naples provided money to a "separate
company" that was owned by the same person who owned the SIPC-member introducing broker. 223 F.3d at 1299-1300.
And in Primeline, at least some of the claimants provided money directly to companies separately owned by a sales
representative of the broker-dealer. See 295 F.3d at 1104.
SIPC also argues that Old Naples and Primeline are distinguishable because they involved a broker that failed to
clear a transaction with its clearing broker. Br. 50. But this is a distinction without a difference. As the
Commission concluded, what matters is that depositing money with SIBL was "in reality no different than depositing
it with SGC." Analysis at 8-9; see SEC 51-54.
Similarly unpersuasive is SIPC's attempt to distinguish Old Naples and Primeline on the ground that the investors
there "never received the securities they intended to purchase." Br. 50. The court in Primeline expressly noted
that some investors "received fraudulent 'Debenture Certificates'" "[i]n exchange for their cash." 295 F.3d at
1109. Moreover, the physical CDs should be disregarded here. See SEC 54.
Finally, SIPC urges this Court to reject Old Naples and
Primeline as being against the supposed "weight of authority."
Br. 51. But those cases involved facts most similar to those
presented in this case, and SIPC points to no contrary
authority in analogous circumstances. For example, in Aozora
Bank Ltd., 480 B.R. 117 (S.D.N.Y. 2012), aff'd, 708 F.3.
422 (2d Cir. 2013), cited by SIPC, the investors at issue
did not have accounts with the broker-dealer, and did not
intend to open accounts with the broker-dealer. See 480 B.R.
at 123-24, 128. Rather, their dealings were with
independent entities which were not under common ownership
and control with the broker-dealer. See id. at 121; see
also SEC v. Kenneth Bove & Co., Inc., 378 F. Supp. 697,
698-99 (S.D.N.Y. 1974) (claimants, allegedly at debtor's
direction, sent shares of stock to an independent,
third-party broker). The Ninth Circuit's decision in Brentwood
Securities-which both Old Naples (223 F.3d at 1300) and
Primeline (295 F.3d at 1106) cited-is similarly far afield.
Unlike here, the investor funds in Brentwood Securities did
not get funneled back to the broker-dealer and "[n]othing
in the record establishe[d]" that the broker-dealer "had any
role at all" in the transactions at issue. 925 F.2d at
328.
SIPC and its amici argue that ruling in the Commission's
favor would "transform SIPC into an insurer against every
fraudulent scheme implicating a broker-dealer." Br. 47; see
SIFMA Br. 20-21; Law Professors Br. 19-20. But the
Commission's position depends on the rare factual situation
where, among other circumstances, there is a sufficient
basis both (1) to disregard the corporate form of the
broker-dealer and (2) to disregard the issuance of the purported
security to the investor. Moreover, this scenario is
substantially similar to recognized "customer" situations, such
as where a broker-dealer misappropriates cash deposited with
the broker-dealer or takes a deposit of cash but does
not purchase any securities for the depositor. See, e.g., In
re Bernard L. Madoff Inv. Secs. LLC, 654 F.3d 229, 236
(2d Cir. 2011). Amicus Financial Services Institute ("FSI")
contends that covering "all" of the SIBL CD investors'
losses would exhaust SIPC's reserve fund (FSI Br. 5), but
FSI fails to take account of the facts that (1) many investors
did not buy SIBL CDs through SGC and (2) the statute caps at
$500,000 each customer's potential SIPC advancement
(see 15 U.S.C. 78fff-3(a)).
Read more:
http://sivg.org/article/2013_SEC_Reply_to_SIPC_in_SEC_vs_SIPC.html
