WASHINGTON (CN) - In an unprecedented move, the SEC on Monday sued the Securities Investor Protection Corporation, asking a federal judge to compel the SIPC cover some of the losses of investors who were victims of Allen Stanford's alleged $7 billion Ponzi scheme.
Stanford, who is in custody pending a criminal trial, is accused of defrauding investors by selling them certificates of deposit offering too-good-to-be-true interest rates issued by a bank he owned in Antigua.
The SEC sued Stanford, his companies, and Stanford executives in 2009.
The Justice Department charged him separately in the criminal proceeding.
In June this year the SEC determined that some of Stanford's victims were "customers" of his brokerage firm, Stanford Financial, and entitled to protection under the Securities Investment Protection Act (SIPA). It asked the SIPC to begin liquidation proceedings to recoup some of the investors' losses.
The SIPA provides that customers of a failed brokerage firm receive all non-negotiable securities - such as stocks or bonds - that are registered in their names or in the process of being registered, up to a maximum of $500,000 per customer.
But the SIPC said it could not help Stanford's victims because it is statutorily limited to covering securities, not certificates of deposit, even if the certificates were purchased through his brokerage firm.
Adding to the complexity of the alleged Ponzi scheme is that the CDs were issued through Stanford International Bank, which is based in Antigua and beyond the reach of domestic financial regulators.
"SIPC is not the equivalent of the FDIC [Federal Deposit Insurance Corporation] for investment fraud," SIPC president Stephen Harbeck said in a statement released before the SEC's lawsuit was made public. "Congress considered whether to guarantee investment losses and rejected that sort of protection as unrealistic and inappropriate."
Harbeck added that "if accepted, the SEC's unprecedented position would have serious and far-reaching consequences. The SEC is demanding protection for what we believe to be ineligible claims under the Securities Investor Protection Act. Expanding the protection in that way would ignore SIPC's statutory mandate, would vastly exceed SIPC's Fund, and would jeopardize the availability of the Fund for the legitimate purposes for which it was created."
The SEC disagrees. After providing SIPC with its analysis in June, the SEC directed SIPC, which it oversees, to take steps to initiate a liquidation proceeding under SIPA.
The liquidation would give customers of Stanford's brokerage firm a chance to file claims under SIPA to recover some of the more than $7.2 billion Stanford is accused of costing them.
Because SIPC declined do it, the SEC on Monday asked the Federal Court to compel it to do so.
It's an unusual move that highlights a process that regulators and Congress have been wrestling with: the practice of federal regulators to essentially allow the financial industry to police itself, and the problem of competing regulatory jurisdictions, depending upon whether a firm trades stocks, or commodities, or derivatives, or other things of presumed value.