The SEC partially prevailed in a proceeding brought
against the Securities Investor Protection Corporation or SIPC. The Court
agreed with the Commission that the appropriate manner in which to seek an
order compelling SIPC to file an application for a protective decree is by a
summary application rather than a civil complaint. At the same time the Court
rejected the Commission's contention that its determination on the question of SIPC
fulfilling its duties is conclusive and not subject to judicial review. SEC
v. Securities Investor Protection Corporation, Case No. 11-mc-678 (D.D.C.).
The case is one of first impression according to the Court.
The SEC's application stems from the collapse in 2009 of
a group of companies controlled by Robert Allen Stanford. Stanford
International Bank, Ltd. is reputed to have sold more than $7 billion worth of
certificates of deposit. Those instruments were marketed by the Stanford Group
Company or SGC, a now defunct broker dealer which was registered with the
Commission. The SEC eventually brought an enforcement action against Mr.
Stanford, claiming that he misappropriated much of the investor money. Criminal
charges were also brought. Mr. Stanford is currently on trial in the criminal
case. A receiver has been appointed to oversee the assets of SGC which had
about 32,000 active accounts for which that company served as the introducing
SIPC declined to file an application with the Court for a
protective decree for the SGC customers, concluding that they were not covered
because Stanford Group Company did not perform a custody function for the
customers. SIPC claims that the SEC agreed with its conclusion until June 2011
when it changed course, allegedly at the behest of a U.S. Senator. Despite the
Commission's change of position, SIPC continued to refuse to petition for a
Subsequently, the SEC filed an Application for an order
directing SIPC to file a petition. In filing is application "the SEC contends
that its 'preliminary determination that SGC has failed or in danger of failing
to meet its obligations to customers is not subject to judicial review by this
Court,'" quoting the SEC papers. SIPC responded by claiming that the Federal
Rules of Civil Procedure apply and that the Commission is therefore required to
file a complaint and proceed through discovery.
The Court concluded that the SEC correctly filed its
application. Here the governing statute, 15 U.S.C. Section 78ggg(b), provides
that "the Commission may apply to the district court . . .for an order
requiring SIPC to discharge its obligations . . ." (emphasis original). In view
of the plain language of the statute the Court concluded that it is appropriate
for the SEC to commence this proceeding by filing an application, rather than a
civil complaint. This procedure, which is summary in nature, is consistent with
the statutory intent of proceeding quickly on these matters since the focus is
to aid and protect customers. Although this is a summary proceeding, the Court
concluded that it still has discretion to apply some if not all of the Federal
Rules of Civil Procedure. Accordingly, additional briefing on this issue was
Finally, the Court rejected as "untenable" the SEC's
contention that its preliminary determination regarding SGC is not subject to
judicial review. Again the plain language of the statute governs. In this
regard it provides that in "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 its obligations . . . " The statute thus makes it
clear that relieve is available to the SEC on application. That relief however
is contingent on an affirmative determination that SIPC has failed to carry out
its duties. That determination is to be made by the Court, not the SEC
according to the ruling.
For more cutting edge commentary on
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The SEC (and, more importantly David Vitter) got their butts whipped. They should have known better than to try the "My way or the Highway" approach with a judge.
Not only did the judge reject their original premise (that the SEC is above the courts) but now they have to defend an incredibly weak case in front of a judge they've already antagonized.