Source: Forbes
Imagine you invest with a broker whose front doors, office plaques, coffee mugs, pencils, brochures, stationery, folders, office signage, and emails all proclaim that your investments are insured by SIPC – Wall Street’s so-called “Securities Investor Protection Corporation.”
Your broker tells you the stock market is overvalued. But he has a very safe, moderate-yield investment opportunity that entails purchasing certificates of deposits.
You like and trust your broker, and maybe have a long history with him. And CDs? Well, everyone knows that CDs are very safe. So you agree with your broker—he’s the expert after all. Indeed, since your brokerage firm, Firm X, is managing all your investments and since you just retired, you decide, at your broker’s urging, to put all your money into Firm X’s CDs–even your IRA funds.
The next day, the next month, or maybe the next year your brokerage firm goes under due to fraud. None of the money you spent on Firm X’s CDs, you learn, was actually invested in other securities to produce a return on Firm X’s CD. Instead, your money was stolen. It was used to pay the brokerage Firm X’s bills, including incredibly lavish salaries for its top brass.
You’re totally devastated. All your retirement savings, which you spent your entire working life accumulating, just went up in smoke. But there’s one silver lining – SIPC, with its promise of up to $500,000 of brokerage account protection.
You call up SIPC and request your insurance payment.
One of SIPC’s very high-paid lawyers gets on the phone and says, “We protect the brokerage accounts of securities investors.”
“Right,” you say, “I’m a securities investor. I bought CDs from Firm X and my money was misappropriated.”
SIPC lawyer says, “Sorry, you aren’t a securities investor.”
“What do you mean?” you say. “I bought securities, or tried to, namely certificates of deposit. But, as you know, the money was stolen. It was never invested by Firm X in assets to support the return promised on Firm X’s CDs.”
“Yes,” chuckles the highly compensated SIPC lawyer. “But your CDs were issued by your brokerage firm. A certificate of deposit issued to you by your brokerage firm is not a security. It’s a loan you made to the brokerage firm. You are not an investor through the brokerage firm. You are a lender to the brokerage firm – a partner is another expression — and, therefore, you aren’t going to get a dime from us.”
“Are you crazy?” you scream. “Are you saying I helped steal my own money? I didn’t lend money to my broker and his thieving colleagues. I wasn’t their partner! I bought a security – a debt instrument called a CD. Just wiki the word securities. The first thing it lists as securities are debt instruments.”
“Sorry, different people use different words differently. Firms X’s CDs have Firm X’s name on it. That means you lent money to Firm X.”
“This is totally nuts. A CD is just a different type of fixed-income security. No one told me CDs constitute loans, not securities. CDs are even listed by SIPC as protected securities.”
The SIPC lawyer rejoins: “It’s not our problem that your broker didn’t disclose your loan to Firm X or that he didn’t have you sign the proper document authorizing your purchase of Firm X’s CD or that you signed the right document, but didn’t read or understand the fine print, which should have clarified that the SIPC wasn’t insuring the CD loans.”
Now you’re furious. “But hold on. I didn’t, in any real sense, buy CDs from Firm X. Firm X’s CDs didn’t even exist because the money was stolen. Don’t you get this?”
“Even though your money was stolen before your brokerage Firm X CDs were issued, the fact is that you intended to buy Firm X’s CDs and, therefore, you intended to make a loan to and partner with your brokerage Firm X and, therefore, you aren’t covered by SIPC brokerage insurance.”
“I’m going to sue your company. This is just an insurance scam you’re running!” you shout.
“By law, you can’t sue us. And the Securities and Exchange Commission already sued us for failing to insure people we said we’d insure. And guess what, we beat the SEC! The Circuit Court of Appeals for the District of Columbia just came through for us. Go online and read their ruling. It goes through every point you’re raising.”
“This can’t be!”
“Oh yes! The Courts have even helped us avoid paying insurance claims to most of Madoff’s victims.”
“You scammed the Madoff victims, too?”
“This line is recorded, and I didn’t say that.”
“You realize I have no money and have to buy my medications and pay my mortgage?”
“I’m sorry, but we’re here to protect securities investors – people that invest through, not in their brokerage firms.”
“But I invested through, not in my brokerage firm!”
“Not according to the DC Circuit. You invested in Firm X’s capital and were their partner. But I doubt you will be legally charged with contributing to the fraud given that you had, I assume, no knowledge of it. Listen, I have to go. I am deeply sympathetic to your plight. Have a good day.”
If you are a victim of Allen Stanford’s Ponzi scheme, this illustrative horror story is all too familiar. Like most of the Madoff victims, the Stanford victims have been twice victimized – first by Allen Stanford and then by SIPC, which has refused to cover a single penny of their losses. If you want to see what these victims are going through, watch this video. The DC Circuit’s decision, referenced above, was handed down on July 18th in the SEC v. SIPC case, which involved the SEC suing SIPC to cover its insurance promises.
As someone with relatives, friends, and colleagues who were hit by the combined Madoff-SIPC scam, I know all too well about Wall Fraud Street’s ability and willingness to victimize financial victims. In the Stanford case, Firm X was some combination of U.S.-based Stanford companies and a shell bank registered in Antiqua. Many Stanford CD investors had no idea that a foreign bank was involved in the CDs they thought they were buying. All of Stanford’s companies operated out of their corporate headquarters in Houston, Texas. Not a single penny was, it appears, ever even wired or transported to Antigua. But SIPC’s immediate argument was that Stanford’s investors had invested with a foreign bank, which wasn’t a SIPC-member.
SIPC’s repeated reference to Antigua gave the public impression that the Stanford victims were a) engaged in a highly risky overseas investment—and maybe even tax evasion, b) that they should have known better, and, c) that they are deserving of no one’s sympathy. Not the case by a mile. Moreover, to bolster its refusal to pay claims, SIPC argued that buying CDs constituted a loan, not an investment.
In its opinion, the DC Circuit seems willing to view Stanford’s Antiguan bank and the U.S.-based Stanford brokerage as one combined entity (after all, the “bank” and the brokerage are in Receivership together in the U.S. and the consolidation theory has served as the basis for five and a half years of litigation in the District Court for the Northern District of Texas and the Fifth Circuit) But the DC Circuit claims that by combining the two entities into one, the CDs constitute loans to the brokerage and the bank, not investments.
The last part of the opinion suggests, upon careful reading, that had the Antiguan bank not included the eight conjoined letters “S-T-A-N-F-O-R-D” in its title, the CDs could well be construed as SIPC-insured securities purchased via the U.S. SIPC-insured Stanford brokerage. Thus, SIPC has managed to prevent thousands of Stanford victims from even having a judicial review of their individual claims—due, it seems, to the use of eight letters in the title of one of Allen Stanford’s over 100 entities. This can hardly represent Congress’ intent when it passed the Security Investors Protection Act.
There are four main conclusions to be drawn from SIPC’s ongoing insurance scam. First, your brokerage account investments aren’t really being insured and SIPC will fight you tooth and nail to avoid paying claims. Second, as I explain in this and other columns posted at www.kotlikoff.net, SIPC is placing brokerage account investors (that’s you and me) at enormous risk above and beyond getting caught up in an investment swindle. This risk entails potentially being sued by SIPC for every dollar you withdraw from your brokerage account over the up to six years preceding the swindle’s discovery (and you’re extra screwed if that discovery doesn’t happen for decades like both the Madoff and Stanford cases). Third, SIPC, in saving its Wall Street members’ money, has made holding a brokerage account far too risky for ordinary Americans.
Ironically, Wall Street has the most to lose, namely its clients, from SIPC’s ongoing victimization of investors. In this regard, let me ask those readers who hold brokerage accounts a question. Do you really want to be the next Stanford or Madoff victim? With a new Ponzi scheme being uncovered every four days, do you really want to invest in a brokerage account that SIPC is “protecting?” Do you really want to spend the proceeds of your brokerage account investments knowing that you can be sued for those funds in the next six years if you withdraw and spend what you take to be the legitimate proceeds of your investment?
The fourth and final point is that the only real way to protect ourselves, including the Stanford and Madoff victims, from SIPC’s ongoing insurance scam is via the bipartisan-supported legislation currently pending in the House and Senate — H.R. 3482 and S. 1725 – the Restoring Main Street Investor Protection and Confidence Act, which would force SIPC to do the job the Securities Investor Protection Act, which established SIPC, intended it to do – actually insure our brokerage accounts – rather than use every trick in the book to avoid paying legitimate claims and further victimizing brokerage account victims.