872 F. Supp. 2d 1
D.D.C.2012Background
- SEC seeks to compel SIPC to commence a SIPA liquidation for Stanford Group Company customers; SGC was SIPC member, SIBL was not; investors purchased SIBL CDs via SGC as introducing broker with funds directed to SIBL; SGC did not physically possess investors’ funds; SEC argues broader SIPA ‘customer’ concept based on entrustment and control; court must determine burden of proof, due process, and whether SEC meets it; court ultimately denies the application for failure to prove SIPC refused to protect customers by a preponderance of the evidence.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standard of proof for SEC to compel SIPC | SEC: probable cause suffices | SIPC: preponderance of evidence required | Preponderance of evidence required |
| Whether purchasers of SIBL CDs are SIPA customers of SGC | SEC favors broad ‘customer’ definition, citing Old Naples and Primeline | SIPC favors narrow, possession-based interpretation | Investors were not customers under SIPA |
| Entrustment of funds to the SIPC member | Entrustment occurred via control and mixing funds | No direct possession; deposits did not pass to SGC | No entrustment under the statute as written |
| Treating SIPA as an amendment to the 1934 Act; deference to SEC interpretations | SEC interpretation should be given Chevron-like deference | SEC interpretation not entitled to deference; longstanding SEC view favors narrow reading | SEC interpretation not entitled to deference; narrow construction applied |
Key Cases Cited
- Brentwood Sec., Inc. v. Securities & Exch. Comm., 925 F.2d 325 (9th Cir. 1991) (customer status requires entrustment of funds to broker-dealer)
- Old Naples Securities, Inc. v. SIPC, 223 F.3d 1296 (11th Cir. 2000) (contractual control and agency impact customer status)
- Primeline Sec. Corp. v. SIPC, 295 F.3d 1100 (10th Cir. 2002) (introducing broker vs. clearing broker; deposits and authority matter)
- Securities & Exchange Comm’n v. Savoy Industries, Inc., 587 F.2d 1149 (D.C. Cir. 1978) (preponderance standard for injunctions under 21(e))
- Securities & Exchange Comm’n v. Savoy Indus., Inc., 665 F.2d 1310 (D.C. Cir. 1981) (reiterates Section 21(e) authority and standard)
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) (describes customer-entrustment concept under SIPA)