A bipartisan group of House and Senate members is seeking to make it easier for investment fraud victims to seek compensation, after investors in Allen Stanford's Ponzi scheme were deemed ineligible under current law to file claims.
The bill, introduced by Louisiana Republican Sen. David Vitter, New York Democratic Sen. Charles Schumer, New Jersey Republican Rep. Scott Garrett and New York Democratic Rep. Carolyn Maloney, would bestow securities regulators with greater powers to oversee the process of determining whether customers of failed brokerages qualify for compensation.
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The SEC is trying to get the court to force an industry-backed fund that protects investors to start court proceedings so Stanford victims can file claims to recover a least a portion of the millions they lost.
The Securities Investor Protection Corp. (SIPC), which administers the fund, has refused the SEC's request, saying Stanford investors do not meet the legal definition of "customer'' under the federal law designed to protect investors if their brokerage collapses.
SIPC uses funds paid by the brokerage industry to compensate investors in the event of a bankruptcy, such as the one that occurred at Lehman Brothers in 2008.
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Allen Stanford was sentenced in 2012 to 110 years in prison for bilking investors with fraudulent certificates of deposit issued by Stanford International Bank, his bank in Antigua.
Many of the investors who purchased the products, however, did so through his Houston, Texas-based brokerage, Stanford Group.
SIPC argues that investors in the scheme entrusted their money to the offshore, unregulated Antiguan bank and not to the U.S. broker-dealer. Moreover, it says that Stanford's investors actually did receive their certificates of deposit, as promised, even though they turned out to be virtually worthless.
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A federal district judge agreed with SIPC's legal position in July 2012, and tossed out the SEC's lawsuit.
The SEC appealed the ruling before the U.S. Court of Appeals for the District of Columbia in October, and is awaiting a decision.
SIPC's refusal to let Stanford victims file claims has frustrated many lawmakers on Capitol Hill, including Vitter, who has been among the most vocal in fighting for the Stanford victims.
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"The Stanford Ponzi scheme devastated many Louisiana families who invested their hard-earned savings in good faith that it would be there for them when they retire,'' Vitter said in a statement Wednesday.
"Our bill will fix a key problem we've seen with the system, which currently allows SIPC's Wall Street members to benefit economically from the SIPC guarantee while denying the claims of legitimate victims.''
The legislative proposal by the four lawmakers will be vetted in a hearing before a subcommittee of the House Financial Services Committee on Thursday.
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Among the witnesses scheduled to testify are Stephen Harbeck, the president of SIPC, a representative from Wall Street's leading brokerage trade group, and Angie Kogutt, a Stanford victim in charge of the Stanford Victims Coalition.
The 19-page bill would amend the definition of "customer'' to ensure that investors who deposit cash to buy securities can still be covered by SIPC protection, even if the money is initially given to a firm that is not a SIPC member.
It would also give the SEC more authority to force SIPC to act without the need for court approval.