The U.S. Securities and Exchange Commission urged a judge to order the federal Securities Investor Protection Corp. to create a claims process for R. Allen Stanford’s alleged investment fraud victims.
SEC lawyers asked U.S. District Judge Robert Wilkins during a hearing today in Washington to require SIPC, a nonprofit corporation funded by the brokerage industry, to start a liquidation proceeding in federal court in Texas to handle more than $1 billion in possible claims related to the alleged Stanford fraud.
“Ultimately, what we’re seeking here is to provide a forum where claimants can seek judicial review of their claims,” Matthew Martens, the SEC’s chief litigator, told the judge during a three-hour hearing.
At issue is whether more than 7,000 brokerage customers who invested in the alleged $7 billion Ponzi scheme run by Stanford are entitled to have their losses covered by SIPC.
SIPC, a congressionally chartered group that insures customers against losses caused by broker theft, says the Stanford investments don’t fit into the confines of the federal law that governs who’s eligible for the payouts. Investors and their advocates in Congress say SIPC is deliberately taking a narrow view of the law to protect brokers from higher assessments. ‘Proof of Customers’
“There has to be proof of customers to start a liquidation,” Eugene Assaf, a lawyer for SIPC, argued today.
Assaf, of Kirkland & Ellis LLP in Washington, said the SEC was trying to open a liquidation proceeding in Texas without any judicial review of whether the Stanford investors are “customers” under the law. He asked Wilkins to require the SEC to refile its lawsuit, allow the parties to seek discovery and then decide whether the Stanford investors are covered by the Securities Investor Protection Act.
“This is our only opportunity to convince the court whether a liquidation should be ordered or not,” said Assaf, adding that a liquidation proceeding would cause significant expense for SIPC.
Martens told Wilkins that a SIPC-appointed trustee and the U.S. bankruptcy court in Texas would be responsible for reviewing whether individual claimants qualified for payouts. ‘Under Advisement’
Wilkins said he would take the matter “under advisement” and issue a ruling “as soon as I can.”
Stanford allegedly used his brokerage to entice investors to buy high-interest certificates of deposit through his private Stanford International Bank Ltd. in Antigua. Instead, according to prosecutors, much of the money was used to support Stanford’s businesses and lifestyle.
Opening statements in Stanford’s criminal trial began today in Houston.
Stanford, 61, was the ringleader of a $7 billion investment fraud, the U.S. said in a 14-count indictment accusing him of mail fraud and wire fraud, crimes that carry maximum sentences of 20 years in prison. He’s also charged with conspiracy to commit mail fraud and wire fraud and to obstruct an SEC probe.
“I plead not guilty to every count,” Stanford, wearing a light gray plaid suit and a white dress shirt and no necktie, told the jury today. ‘Lie After Lie’
Stanford stole from investors “so that he could live the lifestyle of a billionaire,” Assistant U.S. Attorney Gregg Costa said in his opening statement. “He told them lie after lie after lie.”
In the defense’s opening remarks, Robert Scardino, one of Stanford’s court-appointed lawyers, told the jury: “Mr. Stanford’s financial empire was real and did make a lot of money and did pay every penny of what was owed to depositors for 22 years.”
In June, the SEC ordered SIPC to start a process that could grant as much as $500,000 for each Stanford client -- the same maximum amount it offers in any case. After SIPC balked, the SEC for the first time sued the group in federal court in Washington.
SIPC is responsible for providing coverage for individual investors who lose money or securities held by insolvent or failing member brokerage firms. It has agreed to cover losses sustained by victims of Bernard Madoff’s multibillion-dollar Ponzi scheme and investors who may have lost money in the October collapse of commodities broker MF Global Holdings Ltd. (MFGLQ)
SIPC may be best known for its logo, which dues-paying brokerage firms put on their marketing materials to show customers they’re protected. Unlike the protection that the Federal Deposit Insurance Corp. gives to bank accounts, SIPC doesn’t run a general insurance fund or cover investment losses. Under the Securities Investor Protection Act, it’s supposed to aid investors when their securities or cash are stolen or go missing. Offshore Banks
SIPC doesn’t guarantee an investment’s value or protect against fraud, the agency said in court papers. It also doesn’t cover investments with offshore banks or non-member firms.
Stephen Harbeck, SIPC’s president, has said that SIPC shouldn’t get involved because investors received actual CDs after the brokerage passed their money to a bank. What happened after that isn’t under SIPC’s purview because the Stanford account holders have possession of their securities, he told a court-appointed receiver in 2009.
The SEC eventually decided that there was no true separation between Stanford’s bank and the brokerage firm. Customers who made investments with the bank were effectively depositing money with the brokerage and should get SIPC coverage, the SEC said.
Martens told Wilkins today that the SEC has full authority over SIPC, which is why the judge should enforce the SEC’s order to begin the liquidation proceeding.
U.S. Senator David Vitter, a Louisiana Republican whose state is home to many Stanford investors, asked SEC Chairman Mary Schapiro in a Capitol hearing last month to sue SIPC.
The case is Securities and Exchange Commission v. Securities Investor Protection Corp., 11-mc-00678, U.S. District Court, District of Columbia (Washington).
To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net.
To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.
Two former employees of R. Allen Stanford's financial services operation told federal jurors Wednesday that they saw problems with it years before investigators began targeting the former billionaire accused of masterminding a $7 billion investment fraud.
The first government witness, Michelle Chambliess, said she went to work in 1987 for Stanford's Guardian International Bank, an offshore institution that offered customers interest rates on certificates of deposit that were 2 percent to 4 percent higher than rates available from U.S. banks.
As a vice president of the bank's sales marketing arm and a fluent Spanish speaker, her job was to help push financial service products in Latin America, Chambliess testified under questioning by Assistant U.S. Attorney William Stellmach.
Chambliess said Stanford told her he located the bank offshore so it could avoid U.S. taxes and requirements involving insurance and minimum cash reserves.
Stanford told her that the lower overhead enabled the bank to offer better returns to investors, she testified, that deposits would be placed in conservative, liquid investments, and that CD investments would not be used fund bank loans.
At first, the operation raised no red flags, Chambliess said.
But in the late 1990s, an annual report showed that the bank - by then named Stanford International and moved to the neighboring Caribbean island of Antigua - had loaned Stanford $14 million.
Subsequent annual reports showed the loan repaid, Chambliess said, but it continued to nag at her.
She learned later that an airline and newspaper in which the bank invested - and the company that insured its deposits - were companies owned by Stanford, she said.
In 2002, Stanford pressured his sales staff to sell more CDs in Central and South America, Chambliess testified.
At a quarterly meeting that year, she was startled by Stanford's response when she told him it was increasingly difficult to convince prospects that their investments were safe.
"Do what you need to do," she said Stanford told her. "I don't care how you do it. Just don't tell me. I don't want to know."
Chambliess said she was "flabbergasted."
"I started floating my résumé," she said.
Soon after, Chambliess said, Stanford fired her over the phone because she wasn't meeting her sales quota.
"I was a month shy of my 15-year anniversary," she said, staring to the defense table at Stanford, who showed no reaction.
Prosecution documents showed that in 1987, Guardian reported $14 million in assets, and that by 2002, Stanford International Bank reported $1.7 billion in assets.
In 2009, the U.S. Securities and Exchange Commission sued to place Stanford's companies - all part of Houston-based Stanford Financial Group - into receivership and prosecutors obtained the criminal indictment against him and four others who will be tried later. They have pleaded not guilty.
The company's chief financial officer, James Davis, was charged separately and pleaded guilty to felony counts of mail fraud, conspiracy to commit fraud and conspiracy to obstruct an investigation. He is scheduled to testify for the prosecution next week.
Chambliess testified that Davis, Stanford's Baylor University roommate, came to work for the bank about a year after she did.
She said that Stanford was a hands-on company leader but conceded under questioning by defense lawyer Ali Fazel that Davis took a growing role in the day to day operations.
The government's second witness, Lionel Leo Mejia, said he left a graphics job at the Houston Chronicle to head an agency Stanford created to make sales brochures and buy advertising.
His responsibilities included preparing the bank's annual report, and he testified that he saw Stanford and Davis making changes to financial figures in the report just before it was sent to the printers.
His relationship with Stanford later soured, and he was fired, Mejia testified.
The Associated Press contributed to this report. Terri.Langford@chron.com
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