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.