Ponzi Victims Can’t Seek Compensation from SIPC

WASHINGTON (CN) - Victims of Allen Stanford's $7 billion Ponzi scheme cannot seek compensation from the federally-mandated Securities Investor Protection Corporation, the D.C. Circuit ruled.

In an unprecedented move, the Securities & Exchange Commission sued the SIPC in December 2011 in D.C. federal court after it refused to force liquidation proceedings in Dallas federal court that would result in victims being compensated. The SIPC is a self-regulating organization comprised of US-registered broker dealers that was mandated by Congress. It administers a fund that compensates investors in case a member fails.

Stanford was sentenced to 110 years in federal prison in June 2012 for stealing the money through the sale of phony certificates of deposit marketed by Stanford Group Company in Houston and issued by Stanford International Bank Ltd. in Antigua. SGC was a member of the SIPC, SIBL was not. The SEC argued that investors in SIBL's CDs qualified as "customers" of SGC under the Securities Investor Protection Act, anyway.

U.S. District Judge Robert Wilkins ruled against the SEC in July 2012. He concluded that although SGC belonged to the SIPC, it would be a stretch to cover investors who actually deposited money with the non-member bank. A three-judge panel with the D.C. Circuit agreed with Wilkins, unanimously affirming his ruling on July 18.

Writing for the panel, Judge Sri Srinivasan echoed Wilkins being "truly sympathetic to the plight of the victims" of the Ponzi scheme."But we also agree with the district court's conclusion that SIBL CD investors were not SGC 'customers' under the [Securities Investor Protection] Act."

"We therefore affirm the district court's denial of the SEC's application for an order compelling SIPC to commence liquidation of SGC,"the 23-page opinion stated.

SEC spokesman John Nester said Wednesday the agency is reviewing the decision.

Follow @davejourno

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