Stanford’s Ponzi Victims Can Advance on SEC

(CN) - Investors swindled by Allen Stanford's $7 billion Ponzi scheme can sue the Securities and Exchange Commission, a Miami federal judge ruled.

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Zelaya and George Glantz filed suit last year, claiming that the SEC received complaints about Stanford's Ponzi scheme as early as 1997 but waited until 2009 to take action.

They say regulators concluded that Stanford was engaged in a Ponzi scheme yet still failed to report the alleged activity to the Securities Investor Protection Corporation and approved the company's annual registration.

Congress created the SIPC in 1970 to protect investors when a broker-dealer fails. It organizes the distribution of customer cash and securities back to investors and provides insurance coverage up to $500,000 of the customer's net equity balance.

The SEC moved to dismiss, but U.S. District Judge Robert Scola Jr. ruled the complaint adequately alleges that the SEC failed to do its duty and report the scheme to the SIPC.

"The government's argument that a determination that Stanford's company was operating as a Ponzi scheme is not the same as a determination that the company was in or approaching financial difficulty is not convincing," Scola wrote. "A Ponzi scheme is a 'fraudulent investment scheme in which money contributed by later investors generates artificially high dividends or returns for the original investors. Money from the new investors is used directly to repay or pay interest to earlier investors, usually without any operation of revenue-producing activity other than the continual raising of new funds.'"

Scola concluded that a company operating a Ponzi scheme is "by definition" in financial difficulties, and that the SEC should have reported the Stanford entities.

The SEC also said that it did not know about Stanford's Ponzi scheme, but Scola said this is an issue for summary judgment.

Scola did dismiss claims that the SEC failed to comply with a "nondiscretionary duty" regarding the re-registration of Stanford's company as an investment advisor.

"The plaintiffs are unable to articulate any duty owed by the Securities and Exchange Commission regarding reviewing or approving investment advisors' registration amendments," the eight-page order states. "Without a statute or regulation prescribing a specific course of action for a federal employee to follow, any action or inaction by the Securities and Exchange Commission regarding the registration amendments was necessarily discretionary."

"Even if the Securities and Exchange Commission owed a duty to act upon the registration amendments, as if they were initial applications, the decision whether to grant or deny a registration amendment is discretionary," he added.

In March, a Houston federal jury convicted Stanford of 13 of 14 counts of conspiracy, wire fraud and mail fraud, after a seven-week trial. He was sentenced to 110 years in federal prison.

The SEC took the highly unusual action of filing a federal complaint against the SIPC in Washington that December, seeking an order to force the SIPC to initial liquidation proceedings to protect investors.

U.S. District Judge Robert Wilkins denied the application in July 2012, although he did express sympathy to the scheme's victims.

Meanwhile, injured investors have not stood idly by. In May, the Official Stanford Investors Committee went after Stanford's auditor, BDO, in Dallas.

"Despite the pervasive fraud that infected Stanford Financial Group's operations, BDO USA repeatedly issued unqualified audit opinions on its Stanford clients' annual financial statements," the committee's federal complaint states. "BDO USA's audit opinions on SGC's financial statements were critical to Stanford Financial Group's success."

Last year, U.S. District Judge David Godbey in Dallas refused to let investors intervene in the SEC's case against Stanford, despite their claims that court-appointed receiver Ralph Janvey had recovered little money and spent too much on lawyers.

Follow @davejourno

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