Securities and Exchange Commission v. Securities Investor Protection Corporation

In 2009, a group of companies owned or controlled by Robert Allen Stanford collapsed. Stanford had owned the broker-dealer firm Stanford Group Company (SGC) and Antiguan bank Stanford International Bank, Ltd. (the bank). The bank issued certificates of deposit (CDs) that were marketed by the SGC. The arrangement involved the misappropriation of billions of dollars in the operation of a fraudulent Ponzi scheme. The investors wrote checks that were deposited into accounts at the bank and were paid principal and interest on their CDs from funds contributed by other investors. The scheme involved more than $7 billion in investors’ money, and $2 billion was unaccounted for. The Securities and Exchange Commission (SEC) brought a civil enforcement action against Stanford, and federal prosecutors also brought criminal charges. The Texas federal court appointed a receiver to oversee the assets of SGC and the bank. The receiver asked the Securities Investor Protection Corporation (SIPC) to review whether the SGC customers who were allegedly defrauded were entitled to protection from the SIPC. The SIPC concluded that SGC customers were not covered by the statute because SGC did not perform a custody function for the customers who purchased CDs from the bank. The SEC and SIPC disagreed with each other as to whether SIPC should commence a liquidation proceeding. Hence, the SEC sought an order compelling SIPC to commence such a liquidation proceeding.