A Split Decision for the SEC on Its SIPC Application

A Split Decision for the SEC on Its SIPC Application

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 broker.

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 protective decree.

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 ordered.

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 developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

For more information about LexisNexis products and solutions connect with us through our corporate site.




  • 02-18-2012

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.