As covered by Ponzitracker in an earlier post, the Securities and Exchange Commission recently recommended that investors defrauded by R. Allen Stanford's multi-billion dollar Ponzi scheme were entitled to receive compensation from the Securities Investor Protection Corporation ("SIPC"). SIPC was established to compensate investors of failed broker-dealers, and is funded entirely by its member organizations. Investors who fall under the protection of SIPC are entitled to compensation for up to $500,000 of brokerage losses.
While SIPC had originally issued its opinion that Stanford's investors were not entitled to SIPC's protections, this opinion was made informally. The SEC issued its recommendation on June 15, threatening to take legal action against SIPC if its recommendation is not heeded. In response, SIPC recently announced that it was reviewing the SEC's decision, and would announce its decision on or around September 15th.
SIPC has recently come under fire for its handling of several cases, including claims it was slow to pay out to Madoff victims and the decision to exclude Stanford investors. Often analogized to the Federal Deposit Insurance Corp. ("FDIC"), which covers deposit holders at failed banking institutions, SIPC was created in 1970 to provide similar protection to clients of failed broker-dealers. In addition, criticism has increased that the $500,000 limit for payout to customers of failed brokerages, in place since the organization was established in 1970, should be increased. However, such an increase can only be achieved through Congressional amendment of SIPC's enacting legislation.