When regulators froze R. Allen Stanford’s assets two years ago and accused him of running a $7 billion Ponzi scheme, 20,000 investors were left wondering if they’d ever get their money back.
Now the Securities and Exchange Commission and a federally chartered investor protection group are clashing over whether Stanford’s clients should be eligible for payments like the victims of Bernard Madoff. The dispute highlights how the rules can get murky when politics collides with securities law.
The group — the Securities Investor Protection Corp., known as the SIPC — has maintained that the law doesn’t provide for payouts to investors in the Stanford case because it involves only fraud, not theft.
The SEC’s staff initially agreed, but SEC chairwoman Mary Schapiro and two other commissioners rejected the analysis and ordered it redone, according to people with knowledge of the matter.
On June 15, the SEC told the SIPC to start a process that could give as much as $500,000 to each qualified Stanford investor. The agency further surprised the SIPC by threatening to sue if it didn’t carry out the plan.
Stephen Harbeck, the SIPC President, has said publicly that he doesn’t think the Stanford investors are eligible for repayments. The 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.
The question will remain unsettled until at least mid-September, when the SIPC board meets to decide whether to follow the SEC’s opinion.
The SEC decision came after more than two years of political pressure on Schapiro. More than 50 lawmakers signed letters asking her to explain why Stanford investors weren’t getting aid from the SIPC, which is helping a court-appointed receiver return billions of dollars to Madoff victims.
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