In a change of course, the SEC exercised its discretionary authority granted under the Securities Investor Protection Act of 1970 ("SIPA") to hold that investors in Allen Stanford's Stanford Group Company that later was revealed to be a giant Ponzi scheme are entitled to compensation from the Securities Investor Protection Corporation ("SIPC").
While this is a victory for investors in Stanford's alleged scheme, such a ruling should not be interpreted as an across-the-board policy change or additional avenue of compensation for others affected by Ponzi schemes. In Stanford's case, the presence of a Broker-Dealer brought the scheme under the auspices of the SIPC, which, according to its website, operates to compensate investors of failed brokerage firms. Similar to the FDIC's mission in insuring consumer deposit accounts, SIPC aims to allow customers of troubled brokerage firms to recover portions of their losses without being forced to wait during the pendency of legal proceedings.
Should the SIPC follow the SEC's ruling, a trustee would likely be appointed who would function similarly to a court-appointed Receivership. Investors would be able to file Proof of Claim forms, whose merit would then be determined by the trustee. Funds would then be paid out of the SIPC's reserve fund, which is funded entirely by its member securities broker-dealers.
While a promising step for Stanford investors, who have seen the alleged mastermind deny the SEC's claims and seek to take the matter to trial as early as September, the larger effect of the SEC's ruling provides little precedential effect for other similarly-situated Ponzi victims, as the existence of the broker-dealer in Stanford's case has not been widely replicated. The primary vehicle for many other Ponzi schemes has largely been Hedge Funds, which have historically not fallen under the auspices of SIPC.