SEC v. SIPC: The SEC Exerts its Authority over SIPC in a Case of First Impression

In SEC v. SIPC, 2012 WL 403602 (D.D.C. Cir. Feb. 9, 2012), the court granted the Securities and Exchange Commission’s (“SEC”) Ex Parte Motion to Show Cause and denied the Securities Investor Protection Corporation’s (“SIPC”) Motion to Strike the SEC’s motion.  The SEC requested that the court order the SIPC to file an application in Texas federal court to start liquidation proceedings for the Stanford Group Company (“SGC”). 

Congress passed the Securities Investor Protection Act (“SIPA”) with the goal of protecting “customers of failed broker dealers who f[ind] their cash and securities on deposit either dissipated or tied up in lengthy bankruptcy proceedings.”  Congress then created SIPC, a non-profit private corporation, to carry out SIPA’s goal.  Members are broker-dealers registered with the SEC, and they are required to join SIPC.  When a member firm has financial problems, SIPC has the authority to initiate a liquidation proceeding and facilitate in returning customers’ funds.

Robert Stanford (“Stanford”) owned SGC, a broker-dealer registered with the SEC and SIPC member, and the Stanford International Bank, Ltd., (“SIBL”) located in Antigua.  In 2009, Stanford’s companies failed after selling more than $7 billion worth of CDs issued by SIBL and sold by SGC.  According to the SEC, Stanford was operating a fraudulent Ponzi scheme.  Stanford is also facing criminal charges brought by federal prosecutors in Texas. 

SIPC declined to file an application for a protective decree which, if approved by the court, would appoint a trustee to liquidate SGC’s assets in bankruptcy court and allow SGC’s customers to file claims against SGC’s estate in an attempt to recoup their losses.  SIPC contended that SGC’s customers were not covered because “SGC did not perform a custody function for the customers who purchased the SIBL CDs.”  The SEC advised SIPC that “SGC’s customers were in need of the protections of the SIPA and that SIPC should seek to commence a liquidation proceeding.”  SIPC maintained its original position that SGC’s customers were not entitled to protection under SIPA and refused to file an application to commence liquidation proceedings. 

Under SIPA, “[i]n the event of the refusal of SIPC to commit its funds or otherwise to act for the protection of customers of any member of SIPC, the Commission may apply to the district court…for an order requiring SIPC to discharge it obligations…and for such other relief as the court may deem appropriate.”  The court noted this is the first time since SIPA was created 42 years ago that the SEC has sought to exert this authority over SIPC.

The SEC argued that, under SIPA, the term “apply to the district court” meant the SEC need only file an application with the court and a formal complaint and summons were not required.  The SEC also argued that summary proceedings were permitted and the discovery process was not necessary.  SIPC took the position that, under SIPA, plenary proceedings were required, the SEC should file a formal complaint, and the court should allow discovery.  

The court looked to the plain meaning of the statute and held that a formal complaint and summons were not appropriate and summary proceedings were allowed.  The court granted the SEC’s Motion to Show Cause and allowed the parties to determine how to proceed in the case. 

The primary materials for this case may be found on the DU Corporate Governance website

Misty Dalke