By Sarah N. Lynch
WASHINGTON (Reuters) - A U.S. senator attacked on Wednesday an industry-backed fund that covers claims for investors of failed brokerages, saying the fund was failing to help people who had been victimized by convicted financier Allen Stanford's $7 billion Ponzi scheme.
Louisiana Senator David Vitter's criticism of Securities Investor Protection Corp (SIPC) came one day after a jury in Texas convicted Stanford of carrying out the elaborate fraud.
Prosecutors had accused Stanford of bilking investors with fraudulent certificates of deposit issued by Stanford International Bank, his offshore bank in Antigua.
SIPC, whose directors are confirmed by the Senate, has argued that it cannot help Stanford's victims because the bogus certificates of deposit involved in the fraud were issued by Stanford's offshore bank and not by Stanford Group Co, the SIPC-member brokerage based in Texas.
In testimony before a House Financial Services panel, Vitter, a Republican, accused SIPC of ignoring investor protection laws that are designed to protect customer accounts when a brokerage fails.
He criticized SIPC for failing to launch a liquidation process to allow Stanford clients to file claims over their losses.
In a brokerage liquidation, a trustee winds down the business, returns securities and other assets to customers and creditors, and often tries to recover additional assets. The goal is to maximize what customers and creditors recover, and distribute assets fairly.
"I do not think SIPC is focused enough on following the law and executing the law," said Vitter, who said he had heard from dozens of Stanford victims in his home state. "It is far too focused on serving the industry and its member companies and looking after their interests."
The U.S. Securities and Exchange Commission last year asked a federal judge in Washington, D.C., to order SIPC to start a liquidation proceeding in Texas so that investors can begin recovering losses.
SIPC has argued that the law does not cover Stanford victims, and that its power is limited to protecting customers against the loss of missing cash or securities in the custody of failing or insolvent member brokerages.
Stanford's offshore bank falls outside its scope, SIPC says.
"The investors in the Stanford case ... knowingly sent their money away from the brokerage firm to an offshore bank," Stephen Harbeck, SIPC's president and chief executive, told lawmakers on Wednesday. "They were specifically told in writing that SIPC does not protect their investments."
Lawyers for the SEC and SIPC argued the issue at a federal court hearing in Washington on Monday before an audience that included Stanford investors from around the country. The court must now rule on the matter.
LAWMAKERS ALSO CRITICAL OF SIPC ROLE IN MADOFF
The fund has also faced congressional scrutiny over its handling of the estimated $64.8 billion Ponzi scheme engineered by Bernard Madoff, whose victims have been eligible to file claims. But the method used by SIPC and Madoff trustee Irving Picard to calculate claims has been opposed by many investors.
Rather than basing the claims on final account statements, which might be fictitious, Picard has used a "net equity" method, the difference between what investors put in and what they withdrew.
Investors are appealing Picard's methodology to the U.S. Supreme Court.
Frustrated U.S. House lawmakers such as New Jersey's Scott Garrett have drafted bills that would allow investors to rely on their account statements.
"The failures of SIPC in regards to the Madoff liquidation are so fundamental relative to the protections SIPC is supposed to provide to investors," Garrett said.
But Harbeck defended the net equity method and said Garrett's proposed changes to the law would be devastating to many investors.
"To base the payment on the last statement is to allow the fraudulent actor ... the final say on who wins and who loses," Harbeck said.
(Reporting By Sarah N. Lynch; Additional reporting by Jonathan Stempel; Editing by Gerald E. McCormick)