Stanford Investors, Unlike Madoff’s, Get No SIPC Help

By Laurel Brubaker Calkins and Andrew M. Harris

Sept. 4 (Bloomberg) -- Peter Kaltman, a retired accountant, says he was reassured by the Securities Investor Protection Corp. logo on the stationery of the brokerage that sold him $550,000 in Stanford International Bank certificates of deposit.

“The CDs were sold by a SIPC-insured organization,’’ Kaltman said, referring to Stanford Group Co., the Antigua-based bank’s sister firm. “At the bottom of their business cards and stationary, there was the SIPC logo. Any correspondence I received with account information also had it. I absolutely thought I was covered.”

Kaltman was wrong, unfortunately for him and other investors who lost $7 billion in the alleged Ponzi scheme involving Stanford CDs. The federal corporation won’t help any of them as it has some victims of swindler Bernard Madoff, SIPC’s president notified Stanford’s court-appointed receiver.

“There’s an inordinately fine line being drawn here,’’ Kaltman, 63, of Reno, Nevada, said of SIPC’s decision to treat the two groups viewed by the government as Ponzi scheme victims differently. “It’s worse than a slap in the face. If I was allowed to use four-letter words, I would.”

Under U.S. law, SIPC repays up to $500,000 in custodial losses to investors whose securities are missing from accounts at member firms, SIPC President Stephen Harbeck said in an interview. The protection doesn’t extend to investors who’ve got their certificates, even if the securities have been rendered worthless by fraudulent conduct, he said.

Fall in Value

“The fact that they went down in value is of no consequence,” Harbeck said Aug. 26. “The investors have custody of those CDs.”

If the fraudulent securities were issued by a non-member institution, such as Stanford International Bank, investors are doubly out of luck, Harbeck said. Bernard Madoff Investment Securities LLC in Manhattan was a SIPC member. Stanford International Bank, unlike the related brokerage, wasn’t.

Madoff was sentenced to 150 years in prison June 29 after pleading guilty to running a Ponzi scheme that paid fictitious returns without ever buying the securities customers paid for.

Stanford Group’s founder and chief executive officer, R. Allen Stanford, pleaded not guilty and is in jail awaiting trial on charges he misled investors about the safety of their investments and took more than $1 billion for his personal use. U.S. District Judge David Hittner in Houston canceled a Sept. 10 trial-date conference because of lawyers’ scheduling conflicts.

Madoff, Stanford

“With Madoff, the money was entrusted to him, and he just spent it,’’ Stephen Malouf, a Dallas lawyer who represents more than 600 Stanford investors, said in an interview. “There was an extra step at Stanford, the purchase of the CDs, which are still there. SIPC doesn’t cover securities that are purchased but then decline in value.”

SIPC’s position is in keeping with its traditional stance on investment losses, no matter how disappointed the agency’s decision leaves Stanford investors, a legal scholar said.

“SIPC has never undertaken to reimburse investors when worthless securities are sold to them,” said David B. Ruder, a former chairman of the U.S. Securities and Exchange Commission who teaches at Chicago’s Northwestern University law school.

Blaine Smith of Baton Rouge, Louisiana, who saw his $1.5 million Stanford nest egg dwindle to $206, thought he had done proper due diligence before he invested 30 years of savings with a Stanford broker he knew from church.

“I just wanted to find somewhere with a decent return, where my money would be safe,” Smith said. He never made more than 1 or 2 percent above the going rate for CDs, he said.

Smart People

He and friends investigated Stanford and its investment strategy before turning over their money, he said in a phone interview.

“These friends were doctors, lawyers, really smart people, who did their due diligence, too,” said Smith, 53, a retired refinery technician and homebuilder. “We trusted that they weren’t lying to us. I talked to these Stanford people over and over again, and they reassured me there was insurance” coverage on the Antiguan CDs.

Smith said he doesn’t understand why SIPC views Stanford and Madoff investors differently.

“I bought from an American broker at an American brokerage house that I thought was just like Merrill Lynch or any other brokerage,” Smith said. “But it turns out we didn’t buy anything. Our money was just cash that passed through the brokerage and the bank, and then Stanford spent it, just like Madoff did.”

Missing or Worthless

Some investors’ lawyers complain SIPC is splitting hairs by limiting coverage to securities that are “missing” instead of rendered worthless by fraud.

“It’s a distinction without a difference,’’ Houston lawyer Michael Stanley said of SIPC’s interpretation.

“The Madoff clients’ securities were never there, so SIPC covers that loss and has been paying like slot machines,” Stanley, who represents Stanford investors, said in an interview. “But SIPC doesn’t pay if the underlying securities are there but the value has dropped, even if it dropped because of hanky panky. If you’ve got the certificate, SIPC says it is not paying.”

Stanford receiver Ralph Janvey asked SIPC last month if investors’ losses on the Antiguan CDs could be partially covered.

“Unfortunately, the answer is no,” Janvey said in a statement posted on his Web site. Janvey’s spokeswoman Nancy Sims said he won’t take further action on the matter because he “doesn’t believe there’s an appeal process available to him.”

Can’t Sue SIPC

Malouf, who represents mostly Latin American investors, said he explored suing SIPC for failing to provide the same coverage for Stanford’s investors it is for Madoff’s. He found a Supreme Court ruling bars suits against the agency, he said.

“There is no private remedy to compel SIPC coverage,” Malouf said. “Congress could do it, and the SEC could do it. But they’re getting away with it until somebody raises hell about it.”

Malouf said the SEC, which gives SIPC its marching orders, treats Stanford’s 130 business entities as a single commercial enterprise when it comes to the fraud litigation and the receiver’s sale of Stanford’s assets to repay claims against the estate.

In contrast, he said, the SEC and SIPC take the opposite view when it comes to SIPC insurance, viewing the Antiguan bank as a separate entity that doesn’t qualify.

Both Ways

“The SEC can’t have it both ways,” Malouf said. “They’re taking my clients’ money and using it to pay non-bank debts. If it is all one company, then there couldn’t have been any CDs purchased from a separate independent bank.”

If the SEC believes that “all the Stanford universe is one consolidated entity,” Malouf said, then Stanford’s Antiguan certificates of deposit “are exactly what SIPC covers, fraud.’’

SEC spokesman Kevin Callahan declined to comment when asked to clarify the agency’s position on whether Stanford’s businesses should be treated as a consolidated entity.

The SEC case is Securities and Exchange Commission v. Stanford International Bank Ltd., 3:09-cv-00298, U.S. District Court, Northern District of Texas (Dallas). The criminal case is U.S. v. Stanford, 4:09-cr-00342, U.S. District Court, Southern District of Texas (Houston).

To contact the reporters on this story: Laurel Brubaker Calkins in Houston at; Andrew M. Harris in Chicago at

Last Updated: September 4, 2009 13:15 EDT
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