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Stanford's Ponzi victims cannot file compensation claims -U.S. court

By Sarah N. Lynch

WASHINGTON (Reuters) - A U.S. appeals court dealt a blow to the victims of financier Allen Stanford's Ponzi scheme on Friday, ruling that they were not eligible under federal law to file claims seeking compensation for their losses.

The decision by the U.S. Court of Appeals for the District of Columbia Circuit also marks a major loss for the Securities and Exchange Commission.

The SEC was seeking to overturn a lower court's decision from 2012, in which a federal judge rejected a request by the agency to force the Securities Investor Protection Corp (SIPC) to start court proceedings for the fraud victims, some of whom lost millions of dollars.

"In declining to grant the SEC's requested relief, the district court expressed that it was 'truly sympathetic to the plight' of the victims," wrote Judge Sri Srinivasan in the unanimous opinion.

"We fully agree. But we also agree with the district court's conclusion ...," Srinivasan wrote.

SEC spokesman John Nester said the agency was reviewing the decision.

The agency has 45 days to decide whether to appeal it, either by seeking a re-hearing before the appeals court or by filing a petition with the U.S. Supreme Court.

Allen Stanford was convicted of fraud and sentenced in June 2012 to 110 years in prison for bilking investors with fraudulent certificates of deposit issued by Stanford International Bank, his bank in Antigua. Angela Shaw Kogutt, the founder of the Stanford Victims Coalition, told Reuters Friday that the victims were not giving up.

"We will continue to pursue all options available to the victims," she said, adding that her group is weighing legal action against SIPC, and will pressure the SEC to continue fighting.

The case marks the first time that the SEC, which oversees the SIPC, has filed a lawsuit against the nonprofit corporation to try and force it to start a court liquidation proceeding.

The SIPC, created by Congress, administers an industry-backed fund that is used to help compensate investors if their brokerage collapses.

In a brokerage liquidation, a trustee winds down the business and returns securities and other assets to customers and creditors.

Over the years, SIPC has handled high-profile liquidations, including Bernard Madoff's Ponzi scheme.

But in the case of the Stanford victims, SIPC has said these investors did not qualify as "customers" under the law.

The law, SIPC argued, limits it to protecting customers against the loss of missing cash or securities in the custody of failing or insolvent SIPC-member brokerage firms.

While Stanford's Texas-based brokerage Stanford Group Company was a SIPC member, its offshore bank was not. SIPC also said it was not chartered by Congress to combat fraud or guarantee an investment's value.

In a statement, SIPC President Stephen Harbeck said he appreciated "the considerable time" the court devoted to the case, and said SIPC has the "deepest sympathy" for the victims.

Louisiana Republican Senator David Vitter said Friday he will urge SEC to appeal, and called again on President Barack Obama to nominate fresh faces to serve on the SIPC board.

"The previous chairs of the board were only interested in protecting Wall Street," he said.

(Editing by Susan Heavey, Bernadette Baum and Bernard Orr)

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