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Court denies payout to Ponzi scheme victims

In yet another blow to the thousands of victims of the $7 billion Allen Stanford Ponzi scheme, a federal appeals panel in Washington has denied the SEC's bid to force the Securities Investor Protection Corp. (SIPC) to help cover investor losses.


Financier R. Allen Stanford arriving at the Bob Casey Federal Courthouse in Houston, Texas, U.S., on Monday, March 5, 2012 (file photo)
F. Carter Smith | Bloomberg | Getty Images
Financier R. Allen Stanford arriving at the Bob Casey Federal Courthouse in Houston, Texas, U.S., on Monday, March 5, 2012 (file photo)

SIPC, the industry-funded organization that insures securities in U.S. brokerage accounts for up to $500,000, denied coverage for Stanford investors early on. The group contends that because the losses were based on certificates of deposit issued by Stanford's offshore bank—which SIPC says are not securities—the investors do not qualify for coverage. And even if the CDs are securities, they are worthless.

The SEC, and Stanford investors, contended that because the CDs were sold by a U.S. broker-dealer and because the losses were clearly the result of fraud, the investors should qualify for coverage. Under heavy pressure from members of Congress, the SEC went to court in 2011 to force SIPC to pay.

On Friday, in a 23-page decision, a three-judge panel of the U.S. Court of Appeals for the District of Columbia sided with SIPC. The opinion says under the law, Stanford investors were not "customers" of the U.S. broker-dealer, but rather "lenders" to the Stanford offshore bank in Antigua.

The panel said it is "truly sympathetic" to the plight of the Stanford investors who are "searching desperately for relief," but said the law sides with SIPC.

The head of the Stanford Victims Coalition said the group is "obviously disappointed" in the decision, and called on the SEC to appeal the ruling to the Supreme Court. In the meantime, Angela Shaw Kogutt said the coalition "will continue to pursue all options available for Stanford victims."

Kogutt also had harsh words for the SEC, which argued for the investors in this case, but missed the unfolding Stanford Ponzi scheme for decades. She said the agency bungled key legal issues in its appeal.

"It is mind-boggling the SEC has failed to provide adequate representation for the victims of a Ponzi scheme it stood on the sidelines and watched grow by billions of dollars over the course of a decade," she said.

An SEC spokesman said the agency was reviewing the ruling.

In a statement, SIPC President Stephen Harbeck lauded the decision, but added, "I want to underscore that SIPC has the deepest sympathy for the victims of the Stanford Antigua bank fraud, which caused them significant harm."

Stanford's 18,000 U.S. victims have gotten little more than sympathy.

Earlier this month, a federal judge approved a request by court-appointed receiver Ralph Janvey to distribute $17.8 million to the victims, on top of $55 million Janvey began paying out last year. But the total losses to the U.S. investors are more than $5 billion, which works out to about 1 cent on the dollar.

Read MoreWhere is the Stanford Ponzi loot? This man knows

The SEC shut down Stanford Financial Group in 2009, alleging its billionaire founder, R. Allen Stanford, was running a global Ponzi scheme to fund his lavish lifestyle. Stanford, 64, is serving a 110-year prison sentence at a federal penitentiary in Florida. He is appealing his 2012 conviction on 13 criminal counts.

—By CNBC's Scott Cohn

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