(CN) – The Securities and Exchange Commission may get to force a protective order for victims of Allen Stanford’s alleged $8 billion Ponzi scheme, a federal judge ruled, in a novel application of the 42-year-old Securities Investor Protection Act.
Against the urging of the SEC, the Securities Investor Protection Corp. refused to pursue liquidation proceedings that would protect some of the victims of the brokerage firm, Stanford Group Company (SGC).
Allen Stanford allegedly stole billions in a Ponzi fraud focused on the sale of SGC-marketed certificates of deposit issued by his bank in Antigua.
The SIPC is authorized to help customers of failed brokerage firms by filing for liquidation proceedings and protective decrees in federal court.
But the SEC and the SIPC debated whether the Stanford Group customers who bought certificates of deposit qualified for the protection provided by the act.
The SIPC says politics motivated the disagreement. “It was only in June 2011 that the SEC abruptly reversed course, after two nominees to become SEC commissioners were poised for confirmation but a member of Congress announced that he would block their nominations until the SEC decided whether to refer the Stanford matter to SIPC for the commencement of a liquidation proceeding,” according to the nonprofit’s motion to strike.
That member of Congress was Sen. David Vitter of Louisiana. “Many of these folks in Louisiana and along the Gulf region lost their life savings, and they at least deserve a direct answer on their request for coverage,” Vitter said in a June 2011 statement.
“We’ve known for some time that the SEC waited far too long to take action against Allen Stanford, and now they’re dragging their feet in responding to the victims,” Vitter said. “I will continue to hold them accountable – including holding these nominations – until these fraud victims get an up-or-down answer from the SEC on SIPC so they can move forward in the process, and if necessary, file a judicial appeal.”
The SEC sued the SIPC in December, asking a Washington federal judge to compel the SIPC to commence liquidation proceedings in the Northern District of Texas.
In response, the SIPC pushed for the court to handle the case as a plenary proceeding.
“Both the SEC and SIPC advise the court that this is the first instance in the 42 years since SIPA was enacted that the SEC has filed such an application,” U.S. District Judge Robert Wilkins wrote, adding that “this is a matter of first impression.”
Wilkins granted the SEC’s ex parte motion for an order to show cause and denied the SIPC’s motion to strike on Thursday.
“Congress clearly intended that an application by SIPC for a protective decree should be a summary proceeding, specifying that if the debtor fails to consent to the issuance of the decree, the application shall be heard within three business days ‘or at such other time as the court shall determine, taking into consideration the urgency which the circumstances require,'” the 13-page order states. “As the SEC notes, the purpose of SIPA is to allow a prompt, summary proceeding when a protective decree is sought in order to protect the customers of the troubled SIPC member. This salient purpose would be frustrated if this court were to hold that the statute mandated a lengthy, full-blown plenary proceeding to resolve a dispute between the SEC and SIPC over whether an application for a protective decree should be filed in the first instance.”
“The court will defer ruling on all of the specific procedures that will be employed in this summary proceeding,” Wilkins wrote. “Up to this point, the parties have primarily sparred over whether this application should proceed as a plenary or summary proceeding. Therefore, the parties have not fully briefed what procedures should apply in a summary proceeding. The court hereby directs SIPC and the SEC to address that issue in their respective memoranda in response and reply to the SEC application. After the issues have been fully briefed, the court can make an informed decision on specific procedures.”
Wilkinson concluded by saying that “the court must determine whether SIPC has refused to commit its funds or otherwise refused to act for the protection of customers of any SIPC member.
“In doing so, the court must do so in summary fashion, on a short timeline, and with the understanding that this proceeding will only determine whether SIPC should be compelled to file an application for a protective decree in the Texas federal court,” he wrote.
“The parties should with scalpel-like precision, address in their remaining briefing the procedures, burdens, and discovery that are necessary and appropriate with these circumstances in mind,” Wilkinson concluded.