In yet another disappointing ruling for the victims of Allen Stanford’s $7 billion Ponzi scheme, a federal district judge for the District of Columbia Tuesday rejected a request for an industry-backed fund to start a process for compensation. U.S. District Court Judge Robert Wilkins said the Securities and Exchange Commission had failed to meet its burden in proving that the victims of the Ponzi scheme constitute the type of victims eligible for compensation by the Securities Investor Protection Corp.

For the first time in its 42-year history, the Securities and Exchange Commission has gone to court to force the SIPC to start liquidation proceedings for the victims; losses in Louisiana alone are estimated at $1 billion. Stanford last month was sentenced to 110 years in federal prison for his crimes.

The SEC has 60 days to appeal, and U.S. Sen. David Vitter, a tireless advocate for the victims, is urging it to do just that. “This is horribly disappointing news, especially since it’s crystal clear that Allen Stanford flagrantly defrauded so many investor victims,” Vitter said in an announcement earlier today. “I will be encouraging Securities and Exchange Commission Chair Mary Schapiro to explore every possible appeal option. The Stanford Ponzi scheme victims should be first in line for protection, not last in line way behind SIPC’s Wall Street members.”

SIPC has compensated victims in other high-profile liquidations, including Bernard Madoff’s Ponzi scheme, but has maintained all along that Stanford’s offshore bank fell outside the scope of its authority. The industry-backed fund claims that the law limits it to protecting customers against the loss of missing cash or securities in the custody of failing or insolvent SIPC-member brokerage firms, Reuters reports.
While Stanford’s Texas-based brokerage Stanford Group Company was a SIPC member, its offshore bank was not. And in any case, SIPC said it was not chartered by Congress to combat fraud or guarantee an investment’s value.

Allen Stanford was sentenced in June to 110 years in prison for bilking investors with fraudulent certificates of deposit issued by Stanford International Bank, his bank in Antigua.

Since 2009 when Stanford was first arrested and charged, victims of the fraud have been fighting for SIPC to start a liquidation proceeding in the hope of getting back at least some of the funds they lost.
The Wall Street Journal reported that Stephen Harbeck, the chief executive of SIPC, said his agency believes the court reached the correct decision but stressed it opposed paying Stanford victims only “reluctantly after great deliberation.”
“The statute that we operate under simply doesn’t cover these victims,” he said. “It was never designed to replace value lost for fraud,” but instead to ensure custody of customer funds, he said.

At a congressional hearing earlier this year, Mr. Harbeck said SIPC had privately offered to commit its funds to pay Stanford victims, as part of its negotiations with the SEC. Mr. Harbeck declined to say Tuesday if that offer was still on the table.
Read the WSJ story here.

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