Stanford Investors, Unlike Madoffâ€™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.
â€œThe CDs were sold by a SIPC-insured organization,â€™â€™ Kaltman said, referring to Stanford Group Co., the Antigua-based bankâ€™s sister firm. â€œAt 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.â€
Kaltman was wrong, unfortunately for him and other investors who lost $7 billion in the alleged Ponzi scheme involving Stanford CDs. The federal corporation wonâ€™t help any of them as it has some victims of swindler Bernard Madoff, SIPCâ€™s president notified Stanfordâ€™s court-appointed receiver.
â€œThereâ€™s an inordinately fine line being drawn here,â€™â€™ Kaltman, 63, of Reno, Nevada, said of SIPCâ€™s decision to treat the two groups viewed by the government as Ponzi scheme victims differently. â€œItâ€™s worse than a slap in the face. If I was allowed to use four-letter words, I would.â€
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 doesnâ€™t extend to investors whoâ€™ve got their certificates, even if the securities have been rendered worthless by fraudulent conduct, he said.
Fall in Value
â€œThe fact that they went down in value is of no consequence,â€ Harbeck said Aug. 26. â€œThe investors have custody of those CDs.â€
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, wasnâ€™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 Groupâ€™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 lawyersâ€™ scheduling conflicts.
â€œWith Madoff, the money was entrusted to him, and he just spent it,â€™â€™ Stephen Malouf, a Dallas lawyer who represents more than 600 Stanford investors, said in an interview. â€œThere was an extra step at Stanford, the purchase of the CDs, which are still there. SIPC doesnâ€™t cover securities that are purchased but then decline in value.â€
SIPCâ€™s position is in keeping with its traditional stance on investment losses, no matter how disappointed the agencyâ€™s decision leaves Stanford investors, a legal scholar said.
â€œSIPC has never undertaken to reimburse investors when worthless securities are sold to them,â€ said David B. Ruder, a former chairman of the U.S. Securities and Exchange Commission who teaches at Chicagoâ€™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.
â€œI just wanted to find somewhere with a decent return, where my money would be safe,â€ Smith said. He never made more than 1 or 2 percent above the going rate for CDs, he said.
He and friends investigated Stanford and its investment strategy before turning over their money, he said in a phone interview.
â€œThese friends were doctors, lawyers, really smart people, who did their due diligence, too,â€ said Smith, 53, a retired refinery technician and homebuilder. â€œWe trusted that they werenâ€™t lying to us. I talked to these Stanford people over and over again, and they reassured me there was insuranceâ€ coverage on the Antiguan CDs.
Smith said he doesnâ€™t understand why SIPC views Stanford and Madoff investors differently.
â€œI bought from an American broker at an American brokerage house that I thought was just like Merrill Lynch or any other brokerage,â€ Smith said. â€œBut it turns out we didnâ€™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.â€
Missing or Worthless
Some investorsâ€™ lawyers complain SIPC is splitting hairs by limiting coverage to securities that are â€œmissingâ€ instead of rendered worthless by fraud.
â€œItâ€™s a distinction without a difference,â€™â€™ Houston lawyer Michael Stanley said of SIPCâ€™s interpretation.
â€œThe Madoff clientsâ€™ securities were never there, so SIPC covers that loss and has been paying like slot machines,â€ Stanley, who represents Stanford investors, said in an interview. â€œBut SIPC doesnâ€™t pay if the underlying securities are there but the value has dropped, even if it dropped because of hanky panky. If youâ€™ve got the certificate, SIPC says it is not paying.â€
Stanford receiver Ralph Janvey asked SIPC last month if investorsâ€™ losses on the Antiguan CDs could be partially covered.
â€œUnfortunately, the answer is no,â€ Janvey said in a statement posted on his Web site. Janveyâ€™s spokeswoman Nancy Sims said he wonâ€™t take further action on the matter because he â€œdoesnâ€™t believe thereâ€™s an appeal process available to him.â€
Canâ€™t Sue SIPC
Malouf, who represents mostly Latin American investors, said he explored suing SIPC for failing to provide the same coverage for Stanfordâ€™s investors it is for Madoffâ€™s. He found a Supreme Court ruling bars suits against the agency, he said.
â€œThere is no private remedy to compel SIPC coverage,â€ Malouf said. â€œCongress could do it, and the SEC could do it. But theyâ€™re getting away with it until somebody raises hell about it.â€
Malouf said the SEC, which gives SIPC its marching orders, treats Stanfordâ€™s 130 business entities as a single commercial enterprise when it comes to the fraud litigation and the receiverâ€™s sale of Stanfordâ€™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 doesnâ€™t qualify.
â€œThe SEC canâ€™t have it both ways,â€ Malouf said. â€œTheyâ€™re taking my clientsâ€™ money and using it to pay non-bank debts. If it is all one company, then there couldnâ€™t have been any CDs purchased from a separate independent bank.â€
If the SEC believes that â€œall the Stanford universe is one consolidated entity,â€ Malouf said, then Stanfordâ€™s Antiguan certificates of deposit â€œare exactly what SIPC covers, fraud.â€™â€™
SEC spokesman Kevin Callahan declined to comment when asked to clarify the agencyâ€™s position on whether Stanfordâ€™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 email@example.com; Andrew M. Harris in Chicago at firstname.lastname@example.org.
Last Updated: September 4, 2009 13:15 EDT