Federal securities regulators want a judge in Washington to order liquidation proceedings to resolve potentially thousands of claims from investors who were caught up in the alleged multibillion-dollar fraud scheme executed by Texas financier R. Allen Stanford.
The U.S. Securities and Exchange Commission in December sued the congressionally created non-profit Securities Investor Protection Corporation over the group’s refusal to set up a claims process to help alleged Stanford Group Company victims recover funds.
U.S. District Judge Robert Wilkins of Washington federal trial court on Tuesday presided over a three-hour hearing in the dispute, which tests the power of the SEC to compel the investor protection corporation to act. The judge did not immediately rule.
SEC trial attorney Matthew Martens urged Wilkins to issue an order forcing the SIPC, a membership corporation, to respond to the agency’s application seeking liquidation. The issuance of a show-cause order, Martens said, would still allow the investor group the chance to respond to the application.
Martens said full-blown litigation in Washington federal district court over who is and who isn’t a customer of the Stanford brokerage isn’t appropriate.
Those issues, he said, should be resolved in liquidation proceedings in U.S. District Court for the Northern District of Texas. The SEC in February 2009 sued Stanford and others in Houston federal district court alleging a massive Ponzi scheme that lasted many years.
SIPC uses a special reserve fund to assist investors at failed brokerage firms.
Kirkland & Ellis partner Eugene Assaf Jr., representing the investor corporation, which is funded by member securities broker-dealers, described as “amorphous” the SEC’s application seeking to force liquidation.
The SEC, Assaf said, should have filed a civil complaint and moved for summary judgment on the merits. That would allow the lawyers in the dispute to play by the federal rules of civil procedure, he said. And it would put the facts in front of the judge.
The investor corporation, Assaf said, disputes the SEC’s contention that there are customers, as described in the law, that need the group’s protection. Customers are not investors, he said, who had transactions with a foreign subsidiary of a broker-dealer.
Assaf, a member of Kirkland’s worldwide management committee, said that SIPC hasn’t shied away from protecting investors over the years. The corporation, he noted, recently initiated the liquidation of MF Global, Inc.
Testimony began Tuesday in the criminal prosecution of Stanford in Houston federal district court.
Prosecutors contend Stanford orchestrated a $7 billion investment fraud scheme rooted in the sale of certificates of deposit administered by the Stanford International Bank Ltd, an offshore bank on the island of Antigua.
Gregg Costa, an assistant U.S. attorney, told jurors that Stanford “treated depositors’ savings like it was his own personal piggy bank,” the Associated Press reported.
An attorney for Stanford, Robert Scardino Jr. of Houston’s Scardino & Fazel, said his client ran a legitimate business that paid investors money promised to them.