Monday, February 10, 2014

Senator Vitter Asks SIPC to Review Decision Not to Compensate Stanford Ponzi Scheme Victims

Senator David Vitter (R-LA) asked SIPC to revisit its decision not to compensate the Stanford Ponzi scheme victims. In a letter to Acting SIPC Chair Sharon Bowen, the Senator requested that Chair Bowen reconvene the SIPC board of directors and take a new vote on compensating the victims. Senator Vitter recently told the Acting Chair that because of evidence SIPC never considered concerning the SEC’s directive to compensate the victims, SIPC should revisit the case. Ms. Bowen is curr   ently a nominee for a seat on the CFTC.

Stanford Ponzi scheme. Late last year Senator Vitter sent the Acting SIPC Chair a letter highlighting the role that SIFMA played in the decision not to compensate the Stanford Ponzi scheme victims. He said that SIFMA’s General Counsel was not aware of the details of the Stanford case when they first voted on the Stanford scheme. The SEC concluded that the Stanford victims are entitled to receive SIPC coverage for their losses. The SEC ruling was appealed and the SIPC board refused to compensate. Meanwhile, Senator Vitter has introduced bi-partisan legislation to provide relief to the victims of the Stanford Ponzi scheme by reforming what the Senator calls the ``broken investor protection system.’’

In his latest letter to Acting Chair Bowen, Senator Vitter restated his request that the SIPC Board of Directors reconvene at its earliest opportunity to be presented with all of the factual information available from almost five years of litigation findings in the receivership proceedings that were not considered by the Board prior to its November 2011 vote. Additionally, the Board should take a new vote on this matter in order to ensure that they truly made an informed decision that fulfilled SIPC’s congressionally mandated purpose to provide unbiased governance that represents the public’s interests.

The case arose from a multi-billion-dollar Ponzi scheme run by Allen Stanford and various entities that he controlled, including a bank which issued fixed-return certificates of deposit (CDs) that the bank falsely claimed were backed by safe, liquid investments.  In fact, the claimed investments did not exist, and the bank had to use new CD sales proceeds to make interest and redemption payments on pre-existing CDs.

After the fraud was discovered, two groups of Louisiana investors filed suits in state court against a number of Stanford companies and employees claiming violations of Louisiana law. The defendants removed the Louisiana cases to federal court, and all of the actions were ultimately transferred to the Northern District of Texas, which dismissed the complaints as precluded under the Securities Litigation Uniform Standards Act (SLUSA)..  The district court held that, while the CDs themselves were not “covered securities,” the plaintiffs had nevertheless alleged misrepresentations made in connection with transactions in covered securities since the bank said that it invested its assets in highly marketable securities issued by stable governments and strong multinational companies. The district court found that the bank led the plaintiffs to believe that the CDs were backed, at least in part, by investments in SLUSA-covered securities.

The Fifth Circuit reversed, deeming the references to the bank portfolio being backed by covered securities to be merely tangentially related to the heart the defendants’ fraud.  Misrepresentations about the investments were only one of a host of misrepresentations, reasoned the appeals court, which also observed that, because the CDs promised a fixed rate of return, they were not tied to the success of any of the bank’s purported investments in covered securities.

The case is now under appeal to the Supreme Court. Oral argument has been heard amd a decision is expected by June of this year.