One day after Allen Stanford was convicted on March 6 of operating a $7 billion Ponzi scheme, the CEO of the Securities Investor Protection Corp. (SIPC) told lawmakers that SIPC is not responsible for reimbursing Stanford investors for their losses.
At the urging of lawmakers, the Securities and Exchange Commission is suing SIPC to regain funds for Stanford victims.
But SIPC’s president and CEO Stephen Harbeck, (above), told members of the House Financial Services Capital Markets Subcommittee that “SIPC protects the ‘custody’ function that brokerage firms perform.” This means, he said, that “customers are protected against the loss of the cash and securities held for them by their broker-dealer” when the BD fails. Stanford victims, however, “knowingly sent their money away from the brokerage” and bought certificates of deposit (CDs) issued by a bank in Antigua, he said.
“Let me be very clear: In the 40 year history of the Securities Investor Protection Act (SIPA), SIPC has never been interpreted to permit SIPC to refund the purchase price of a bad investment,” Harbeck said.
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Stanford was found guilty on 13 counts of a 14-count criminal indictment, including fraud, conspiracy and obstructing an investigation by the SEC. He was found not guilty on one count of wire fraud. The charges carry a possible prison sentence of nearly 20 years.
In late February, Rep. Scott Garrett, R-N.J., chairman of the subcommittee, introduced a bill, H.R. 757, the Equitable Treatment of Investors Act, that would expand SIPC payout to fraud victims. Two other such bills have been introduced as well. Harbeck said SIPC supports none of the bills.
Garrett said at the March 7 hearing that H.R. 757 “would reaffirm and clarify key protections for ordinary investors that were put in place when Congress passed and amended SIPA.” In particular, he said, “the bill aims to shield innocent individual investors who have already been defrauded and financially devastated by Bernie Madoff from further clawbacks by the SIPC trustee.”