Senator Vitter Pushes SIPC to Reimburse Victims of Stanford Ponzi Scheme (with McDonnell Comment)

Senator David Vitter (R-LA) published an open letter to Sharon Bowen, CFTC nominee and acting Chair of the Securities Investor Protection Corporation ("SIPC"), regarding her involvement in SIPC's decision not to hold another vote on whether to extend the SIPC's funds to compensate investors who lost money in the Stanford Ponzi scheme. In his March 28 letter, Senator Vitter outlined a series of questions to Bowen involving her decision not to take a new vote on the issue. The questions included the following:

• "Are you aware of the [SIPC] Board of Directors' mandate under [SIPA] to represent the public's interest in guiding SIPC's operations, and are you aware of why that mandate was created?
• "Did you receive guidance by SIPC or SIFMA employees or any other industry organization in any way during the SIPC Board's discussions about whether or not SIPC was required to comply with the SEC's directive?
• "Has SIPC received any outside funding for its legal defense in the SEC vs. SIPC case?
• "How did you determine that it was [in] the public's interest for SIPC not to comply with the SEC's directive, especially given that the SEC has plenary authority over SIPC and millions of dollars in taxpayer funds would be used to carry out the SEC's enforcement action against SIPC?"

Senator Vitter requested that Ms. Bowen respond to his letter by Friday, April 4, 2014.

McDonnell Comment: On several previous occasions, Senator Vitter has called on the SIPC to use its trust fund to compensate investors who lost money in the Stanford Ponzi scheme. Previously, Senator Vitter placed holds on the appointment of two SEC Commissioners, calling on the SEC to intervene.In response to the Senator, the SEC brought suit against SIPC, seeking to compel it to commence a case under the Securities Investor Protection Act ("SIPA") (i.e., the SEC vs. SIPC case referenced in Vitter's letter). That lawsuit was dealt a setback when the U.S. District Court for the District of Columbia ruled in favor of SIPC, stating that "this Court has a duty to apply the SIPA statute as written by Congress, and, as other courts have done, this Court also has a duty to construe narrowly the 'customer' definition of the statute." That decision has been appealed to the Circuit Court.Senator Vitter also introduced legislation, S. 1725 ("Restoring Main Street Investor Protection and Confidence Act"), that would give the SEC the right to commence SIPA cases without SIPC's consent, and would define "customer" to include "any other person that the [SEC], in its discretion and without any need for court approval, deems a customer of the debtor."Senator Vitter's proposed legislation would give the SEC material discretion over the conduct of SIPA cases, including the ability to commence SIPA cases without the SIPC's consent and to expand the definition of "customer." The concern is that the SEC might deplete the SIPC's funds by paying out money for losses not intended to be covered by SIPA. If the SIPC is to reimburse customers for frauds that are unrelated to custody-related losses, it is hard to know where the stopping point would be on the SIPC's obligations. There is a risk that the SIPC Fund could not be sustained if it had to pay out to cover every fraudulent sale of securities by any broker-dealer.

See: S. 1725; SEC v. SIPC District Court Decision; Senator Vitter's Letter to Ms. Bowen. Related news: House Financial Services Committee Holds Hearing on Amending Securities Investor Protection Act (with Delta Strategy Group Summary) (with Lofchie Comment) (November 22, 2013); SEC v. SIPC on the Definition of "Customer" (with Lofchie Comment) (April 22, 2013); SEC Approves Rule Amendment Relating to Close-out of Options in a Broker-Dealer Liquidation(January 10, 2014).