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SIPC vs. SEC over bogus CDs

By Sheyna Steiner ·
Wednesday, December 14, 2011
Posted: 12 pm ET

CD scams are a dime-a-dozen, there is no shortage of scammers out there trying to take advantage of people. But wildly successful scams such as the one run by R. Allen Stanford are unusual -- he got away with it for years and operated right under the nose of regulators.

Stanford sold fake CD's in a Ponzi scheme reportedly worth between $7 and $8 billion. Stanford's brokerage was based in the U.S. in Houston and insured by the Securities Investor Protection Corp., or SIPC.

However, Stanford Financial Group also ran an offshore international bank in Antigua from which the fraudulent CDs were issued.

Stanford was arrested in 2009. Back in June of this year, the SEC decided that Stanford's case should be covered under the Securities Investor Protection Act which would allow the victims to file claims and seek restitution.

But SIPC disagreed, arguing that the CDs were sold from the offshore bank in Antigua thus beyond the purview of the act -- not to mention the fact that SIPC does not cover cases of fraud.

A story from July on, "SEC's Stanford Ponzi ruling provokes clash with investor fund," elaborates on :

(Stephen Harbeck, SIPC's president) has said publicly that he doesn’t think the Stanford investors are eligible for repayments. SIPC is supposed to aid investors when their securities are stolen or go missing at a brokerage. Stanford’s customers still have possession of their securities, he said, and fraud by itself isn’t covered.

On Monday of this week, the SEC took its case to court, filing papers to force SIPC to begin the liquidation proceedings.

Despite their magnanimous stance, the SEC may not be the good guys here. There's some speculation that the move by the SEC to force SIPC's hand is motivated only by the desire to avoid blame for the whole mess.

On Wednesday, the Wall Street Journal website ran an opinion piece, "A bailout for the SEC," that pointed out the many missteps regulators took when investigating Stanford.

With Madoff, SEC regulators ignored warnings from a private citizen named Harry Markopolos, a voice crying in the wilderness outside the SEC. In the Stanford case, SEC enforcers failed to act even when the SEC's own examiners repeatedly labeled the Stanford operation a probable Ponzi scheme and pleaded for an enforcement action. Some SEC staff issued their internal warnings as early as 1997, more than a decade before Mr. Stanford's 2009 criminal indictment.

According to a 2010 report by the SEC's inspector general, SEC enforcers had also ignored warnings from the Texas State Securities Board, an anonymous insider in the Stanford operation and U.S. Customs, which suspected that the Stanford organization was laundering money.

The SEC ended up doing worse than nothing by finally investigating in 2005 but then dropping the inquiry without taking action. Some investors interpreted it as a clean bill of health and gave even more money to the Stanford Group.

What is the moral here for investors?

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1 Comment
Joe Jones
December 14, 2011 at 2:20 pm

The crux of the problem with the SEC and other regulatory agencies has not been the lack of regulations, but the failure of the regulators and especially those in top positions to diligently and conscientiously apply enforcement action.

Our regulatory failures are about the same issues that pervade in every country with corruption problems such as Russia, Mexico, etc. It comes down to cronyism, political connections, favoritism and crony capitalism for a favored few.