SEC wins dismissal of lawsuit over handling of $7 bln Stanford fraud

Published: Tuesday, 13 Aug 2013 | 12:40 PM ETBy: Jonathan Stempel



* SEC protected by exception to Federal Tort Claims Act

* Victims say SEC knew of Stanford Ponzi scheme in 1997

* Stanford serving 110-year prison term for $7.2 bln fraud

Aug 13 (Reuters) - A federal judge in Florida has thrown out a lawsuit accusing the U.S. Securities and Exchange Commission of negligence for failing to report that the now-imprisoned swindler Allen Stanford was running a $7.2 billion Ponzi scheme.

U.S. District Judge Robert Scola in Miami said the market regulator was shielded under an exception to the Federal Tort Claims Act that bars claims arising from misrepresentation or deceit.

The plaintiffs, Carlos Zelaya and George Glantz, said they lost a combined $1.65 million with Stanford, and sought class-action status on behalf of investors who were victims of his fraud. They plan to appeal Monday's decision, their lawyer Gaytri Kachroo said. SEC spokesman Kevin Callahan declined to comment.

Stanford, 63, is serving a 110-year prison sentence after he was convicted on criminal charges in March 2012 for a fraud that the government said was centered in certificates of deposit issued by his Antigua-based Stanford International Bank.

Zelaya and Glantz claimed that the SEC considered Stanford's business a fraud after each of four examinations between 1997 and 2004, but failed to advise the Securities Investor Protection Corp, which compensates victims of failed brokerages.

The SEC filed civil charges against Stanford in February 2009, two months after the multibillion-dollar Ponzi scheme of New York-based swindler Bernard Madoff was uncovered. In a typical Ponzi scheme, investors are promised high or consistent returns relative to the amount of risk taken, and older investors are paid with money from newer investors.

Last September, Scola let the lawsuit against the SEC go forward, saying the plaintiffs could argue that the regulator had breached a duty to report Stanford's misconduct.

But on Monday, he said the FTCA exception barring claims of misrepresentation deprived him of jurisdiction.

"The plaintiffs claim that they were induced into entering disadvantageous business transactions because of the SEC's misrepresentation," he wrote. "The plaintiffs' cause of action is a classic claim for misrepresentation."

Their lawyer Kachroo said: "We believe that the judge did not draw the appropriate distinction between a claim based on a misrepresentation and our claim based on a failure to warn in line with the SEC's mandatory duty to notify SIPC."

In 2010, the SEC's inspector general criticized the regulator, finding that it knew as early as 1997 that Stanford was likely running a Ponzi scheme.

Earlier this year, federal appeals courts in New York and California dismissed lawsuits against the SEC by victims of Madoff's fraud.

The case is Zelaya et al. v. U.S., U.S. District Court, Southern District of Florida, No. 11-62644.

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Investors Sue Insurance Company That Vouched for Stanford Ponzi Scam

By John Pacenti All Articles

Daily Business Review

July 12, 2013


The letters circulated by Stanford International Bank among would-be investors claimed deposits were insured by Lloyds of London and that the bank's employees were "first class business people."

The letters proclaimed the bank had undergone "stringent risk management review by an outside audit firm."

Stanford International Bank is now known as one of the world's largest Ponzi schemes, a $7 billion scam that is second only to the con pulled off by the former New York investment adviser and financier Bernard Madoff. The Stanford bank, which was based in Antigua and maintained a sizable footprint in Miami, went under in 2009.

So while the bank's founder and one-time billionaire, R. Allen Stanford, is serving a 110-year prison sentence for fraud, investors are looking for deep pockets to make them whole.

They hope they found it in Willis Group Holdings, the U.K.-based insurance company that provided Stanford with written endorsements. The investors are also suing Willis Group's American subsidiary based in Colorado.

Getting the litigation to stick in one jurisdiction, though, hasn't been easy. Filed in Miami-Dade Circuit Court in February, the plaintiffs' suit was transferred to U.S. District Court in Miami on June 3.

U.S. District Judge Jose E. Martinez stayed the case on June 14 after the Willis Group argued the U.S. Supreme Court is looking at the liability of insurance letters to investors in a related case against Willis Group.

Other lawsuits against Willis Group by similarly situated plaintiffs have ended up in multidistrict litigation in Dallas. One has also been stayed by a Miami federal judge.

A telephone call placed to attorney Edward Soto, a partner at Weil Gotshal & Manges in Miami who represents Willis Group, was not returned by deadline.

But in his motion to Martinez for a stay, Soto said the defendant expects the case and four others filed against Willis Group to be transferred to the U.S. Bankruptcy Court in Texas that oversees the estate of Stanford International Bank.

The plaintiffs attorney, Ervin Gonzalez, said businesses that vouch for criminal enterprises like Stanford need to be held accountable.

"If someone is going to give an endorsement ... they'd better be careful because people rely on those endorsements," said Gonzalez, a partner at Colson Hicks Eidson in Coral Gables, Fla. "They have an obligation and a duty to be accurate."

Also representing the plaintiffs is attorney Luis Delgado, a partner at Miami's Homer & Bonner.

"From in or around August 2004 through 2008, Willis provided 'safety and soundness' letters to Stanford Financial's agents on Willis letterhead and signed by a Willis executive," the lawsuit claims.

The letters misled clients into believing their deposits were safe and insured, the lawsuit states.

The 29 plaintiffs are from Uruguay, Bolivia, Colombia and Venezuela and had a combined loss of $30 million when SIB collapsed. The lawsuit states they received identical Willis Group letters with the only difference being the date and address.

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News Summary: SEC paying $580,000 to settle suit by former assistant inspector general

By Associated Press

SEC SETTLES SUIT: The Securities and Exchange Commission is paying $580,000 to settle a lawsuit by a former assistant SEC inspector general who accused the agency of firing him in retaliation for bringing possible misconduct to light.
RAISED CONCERNS: The fired assistant inspector general, David Weber, had raised concerns about possible inappropriate relationships between the former SEC inspector general and women he worked with on investigations of the Ponzi schemes run by Bernard Madoff and Allen Stanford. Weber also warned of a security flaw in some SEC computers that contained sensitive stock-exchange data.

REVIEW BY ANOTHER IG: A report by the U.S. Postal Service’s inspector general, provided to the SEC in September, substantiated some of Weber’s allegations.

Source: http://www.washingtonpost.com/business/news-summary-sec-paying-580000-to-settle-suit-by-former-assistant-inspector-general/2013/06/10/54f23066-d22f-11e2-9577-df9f1c3348f5_story.html

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Stanford Judge Approves Interim Distribution to Victims

A plan by a court-appointed receiver to distribute assets recovered from R. Allen Stanford’s Ponzi scheme to investors was approved by a federal judge in Dallas.

U.S. District Judge David C. Godbey accepted the plan by Ralph Janvey, the receiver appointed in 2009 to marshal and liquidate Stanford’s personal and business assets, to make a $55 million interim distribution to about 17,000 claimants, or about 1 cent for each of the $5.1 billion lost in the fraud scheme.
“We will follow it up in a subsequent distribution as the money comes in,” Janvey’s attorney, Kevin Sadler of Baker Botts LLP, told Godbey at a court hearing in April.

Ponzi scheme victims of Bernard L. Madoff, who was arrested in December 2008, recovered more than $5.4 billion. Clients of the MF Global Inc. brokerage were paid about $4.9 billion after its parent, MF Global Holdings Ltd., failed in October 2011. Victims of a scheme by Peregrine Financial Group Inc. founder Russell Wasendorf, who prosecutors last year said stole $215 million, received an interim distribution of $123 million.

A federal jury in Houston last year found Stanford, 63, guilty of lying to investors about the nature and oversight of certificates of deposit issued by his Antigua-based bank. The jurors decided he must forfeit $330 million in accounts seized by the U.S. government.

The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas). The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston).

To contact the reporter on this story: Andrew Harris in the Chicago federal courthouse at
aharris16@bloomberg.net
To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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Law professors support SIPC in dispute with SEC over Stanford fraud

An amici brief filed by renowned law professors supports the industry-backed Securities Investor Protection Corp. in its dispute with the Securities and Exchange Commission over the liquidation of convicted Ponzi schemer R. Allen Stanford’s brokerage firm.

Phyllis Skupien (Westlaw Journal Securities Litigation and Regulation).

In an appeal before the District of Columbia U.S. Circuit Court of Appeals, the SEC seeks. to force the SIPC to liquidate Stanford Group Co. for the benefit of investors.

Like Bernard Madoff’s Ponzi scheme, which cost investors an estimated $17 billion, Allen Stanford’s fraud dwarfed most others and is estimated to have cost investors over $7 billion.

The SEC says Stanford’s victims are entitled to protection under the Securities Investor Protection Act, 15 U.S.C. § 78aaa, which compensates investors when their brokers become insolvent.

Prior proceedings

In 2009 the SEC charged Stanford and Stanford Group, which is currently in court-ordered receivership, with violating federal securities laws. SEC v. Pendergest-Holt et al., No. 09-CV-298, complaint filed (N.D. Tex. Feb. 17, 2009).

Stanford was sentenced to 110 years in prison in a related criminal proceeding last year for defrauding investors with fraudulent certificates of deposit issued by Stanford International Bank, his bank in Antigua. United States v. Stanford et al., No. 09-CR-00342, defendant sentenced (S.D. Tex., Houston June 14, 2012).

According to the SEC’s suit against the SIPC, the agency directed the SIPC in June 2011 to initiate proceedings to liquidate the Stanford Group, but the SIPC has refused to do so.

In July 2012 U.S. District Judge Robert L. Wilkins of the District of Columbia denied the SEC’s request for an order compelling the liquidation, and this appeal followed.

Not ‘customers’

The SIPC maintains it has no responsibility to the investors because the SEC cannot show that the Stanford Group ever physically possessed their funds at the time of their purchases.

The amici brief supports the SIPC and says the investors were not “customers” of the domestic broker-dealer because they lent money to the offshore Antigua bank — a foreign institution not subject to regulation under U.S. law.

The amici brief was filed by Professor Joseph A. Grundfest of Stanford Law School, former SEC Commissioner Paul S. Atkins, former SEC General Counsel Simon M. Lorne, Emory Law School professor William J. Carney and Stanford Law School professor emeritus Kenneth E. Scott.

They say the SEC’s actions would dramatically expand the scope of persons covered by the SIPC and should be rejected.

The SEC’s proposal to “deem” purchasers of CDs issued by a foreign bank to be “customers” of a domestic broker-dealer is contrary to the Securities Investor Protection Act and is “at odds with 40 years of judicial precedent,” the amici say.

The SEC’s expansion of the definition of the term “customer” would substantially increase the financial exposure of the SIPC fund, they add.

The agency has presented no economic analysis for the implications of this expanded coverage, the professors say, noting that the industry itself must pay fees to support the SIPC fund.

The professors urge the appeals court to reject the SEC’s “unprecedented interpretation” of the term “customer” and affirm Judge Wilkins’ decision.

The Securities Industry and Financial Markets Association and the Financial Services Institute also filed amici briefs supporting the SIPC.

Securities and Exchange Commission v. Securities Investor Protection Corp., No. 12-5286, amici brief filed (D.C. Cir. Apr. 19, 2013)

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SEC, SIPC to argue in court over Stanford claims

Securities regulators are due in court on Tuesday to argue that a brokerage industry-backed protection fund should let thousands of victims of Allen Stanford's alleged Ponzi scheme file claims for compensation.
The Securities Investor Protection Corp, which has handled liquidation proceedings for Bernard Madoff's Ponzi scheme and the MF Global failure, has said the 40-year-old Securities Investor Protection law does not apply in the Stanford case.
The unprecedented legal face-off between SIPC and the U.S. Securities and Exchange Commission could have far-reaching consequences for how investors are compensated if their brokerage firm fails.
Stanford, 61, was arrested in 2009 over charges that he ran a $7.2 billion Ponzi scheme linked to certificates of deposit issued by his Antigua-based bank.
Tuesday's hearing in the U.S. District Court for the District of Columbia will come just a day after Stanford's criminal trial gets under way in another federal court in Texas.
The SEC asked the District of Columbia court in December to uphold its authority to order SIPC to help Stanford's victims after negotiations between the two entities had failed. It is unclear how soon Judge Robert Wilkins could rule.
SIPC is standing by its decision not to intervene on behalf of Stanford investors and has created a website to explain its position at http://www.stanford-antigua-sec-lawsuit.com/
It argues that it is limited by law to protecting customers against the loss of missing cash or securities in the custody of failing or insolvent SIPC-member brokerage firms.
While Stanford's Texas-based brokerage was a SIPC member, its offshore bank was not. And in any case, SIPC says it was not chartered by Congress to combat fraud or guarantee an investment's value.
"I think as a general policy matter, SIPC probably should win," said Seton Hall University School of Law professor Stephen Lubben. "If they don't, we are turning this insurance fund... into basically fraud protection across the board in all kinds of investments, which is going to be a lot more expensive."
Initially, some staff at the SEC seemed to agree with SIPC's view.
Former SEC General Counsel David Becker is quoted in a report released in September as saying "the law is the law" and that Stanford victims did not qualify.
Then in June, just one day after Senator David Vitter threatened to block the nominations of two SEC commissioners until the agency made a decision on Stanford claims, it announced that it was siding with the victims.
In a 195-page document, the SEC said that for SIPC to conclude that these customers did not actually deposit cash with Stanford Group "would elevate form over substance by honoring a corporate structure designed by Stanford in order to perpetrate an egregious fraud."
The timing of the SEC's announcement has raised some eyebrows at SIPC.
But Angela Shaw, the founder and director of the Stanford Victims Coalition, said the SEC's decision was not based on politics. It came, she said, after she turned over thousands of documents that helped convince the agency that investor money never went to the bank, but was instead spent by the brokerage.
"We have a broker-dealer that was a SIPC member that stole customers' funds," she said. "SIPC covers theft of investor funds when they are stolen by the broker-dealer, and the SEC has not alleged that this foreign bank stole our money."
TECHNICAL ARGUMENTS
It is not clear whether Tuesday's hearing will explore the merits of the arguments for or against SIPC coverage for Stanford investors.
The SEC, which has oversight authority over SIPC, plans to tell the judge that its position is "not subject to judicial review." It wants the court to simply weigh whether it has met the requirements to compel SIPC to launch a liquidation proceeding.
Stephen Harbeck, president and CEO of SIPC, rejects that argument entirely.
"I think it is fair to say that the SEC's position is as follows: The court may not look at the facts, the court may not look at the law, SIPC may not present any counter-argument, there is no appeal, and the court must do as we say," he said. "I am unaware of any jurisprudence that allows that."

SEC spokesman John Nester said Harbeck "apparently misunderstands our position, which is based on the facts and the law."

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