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Interesting Article: Investor protection agency protects scam artists
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Interesting Article: Investor protection agency protects scam artists

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Interesting Article: Investor protection agency protects scam artists

By Ron Stein
HUNTINGTON, N.Y. (MarketWatch) ó The Securities Investor Protection Corp., or SIPC, would have brokerage customers believe that they are protected from securities theft and fraud. The SIPC logo, always posted on brokerage walls and stamped on brokerage statements, is supposed to be a reassuring reminder to customers that they are covered in the event of brokerage theft.

But SIPCís history and recent behavior suggests that SIPC isnít particularly concerned about investors. If brokerage customers think they are covered, they are sadly mistaken.

Fortunately for the investing public, the authorities are beginning to take notice. The recent lawsuit by the Securities and Exchange Commission filed against SIPC over its decision to deny compensation to the victims of the Stanford fraud is a rare, strong signal by the SEC that it may finally be getting serious about protecting investors. Stanford victims invested in certificates of deposit that turned out to be part of a Ponzi scheme.

Despite the SECís urging and even under threat of a lawsuit, SIPC maintained its position that it would not provide protection for Stanford victims because the Stanford unit that managed the CDs was an offshore subsidiary. The SEC argued that Stanford was invoking a technicality, and that Stanford victims are exactly the type of investors SIPC was established to protect. SIPC stuck to its position, and the SEC filed the unprecedented lawsuit.

On Feb. 9, the court handed the SEC an early victory by ruling that there will not be a full-fledged jury hearing in the case, which SIPC wanted. Instead, the court will make a summary ruling.

The SECís allegations encompass longstanding criticisms of SIPC: that it clings to the letter of the law to reject investor claims, instead of embracing the spirit of the law that created it as an investor protection agency and using discretion to determine coverage. SIPCís critics say that SIPC takes the short view in only protecting a small segment of brokerage failure victims instead of the long view that would result in greater confidence among investors in their brokerages.

The victims of the Stanford fraud, as well as Bernie Madoff and MF Global ó all SIPC member brokerages ó are finding that SIPC denies coverage to the majority of victims. SIPC has been able to get away with it because the SEC has shown no inclination to assert its authority on an organization that it supposedly oversees. Until this lawsuit.

Certainly, the SEC has an interest in strong arming SIPC to do the right thing ó the SEC has committed enough acts of incompetency that it needs a forceful back-end protection mechanism to help soften the blows of its own investigative and enforcement shortcomings. And that type of protection is exactly what Congress intended when it created SIPC in the Securities Investment Protection Act more than 40 years ago.


Why does SIPC fight so hard against providing the protection it was created to provide? Out of misguided loyalty to its brokerage members rather than the customers it is supposed to advocate for, it is loathe to raise dues on its membership.

It is a short-sighted position of economic convenience that has saved the broker-dealer industry billions in SIPC fees in the short-term, but has the devastating effect of eroding investor confidence over the long-term.

A SIPC spokeswoman did not return a call seeking comment.

As a consequence of its failure to raise fees on the membership, its reserve is dangerously low compared to its exposure. SIPC does, however, have plenty of access to capital. Meanwhile, the same membership it is protecting now was underpaying for years ó a mere $150 per broker in annual dues for most of the 1990s and 2000s. SIPC also has a line of credit, $2 billion, with the United States Treasury. It has the ability to raise the money, but it doesnít.

Aside from its brokerage members, SIPC is clearly loyal and generous to the small group of securities bankruptcy trustees it continues to hire over and over again at handsome compensation levels. So far, total fees paid to trustees, attorneys and consultants on the Lehman Brothers and Madoff liquidations are just shy of $1 billion ($544 million for Lehman, $404 million for Madoff). It is anticipated that fees on MF Global will be similarly stunning ó about $25 million per quarter for the next year.

SIPC trustees bill by the hour, so what motivation do they have to quickly wind down a liquidation? What oversight and controls exist to keep their costs down? For James Giddens, the Lehman and MF Global trustee, and Irving Picard, the trustee on the Madoff case, their appointment meant an instant cottage industry, a steady and never-ending source of revenue for their for-profit law firms. The conflict is glaring, but has never been addressed.

Rather than consider stronger reforms that would both clarify and expand protections for investors, SIPC has chosen to stonewall, litigate and mislead. SIPCís expenditure of $1 billion on just two cases, not a dime of which went to customers, should tell investors everything they need to know: SIPC will sell out innocent investors to protect itself and its brokerage members.

But the SECís lawsuit sends a clear message: SIPC exists to provide a safety net for victims of securities theft and fraud, and itís time to deliver on that promise.

Ron Stein, CFP, is the president of the Network for Investor Action and Protection , a non-profit group advocating for better investor protections and regulatory reform.

Investor protection agency protects scam artists - Outside the Box - MarketWatch

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