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98–387 PDF 2016

S. HRG. 114–163

OVERSIGHT OF THE SECURITIES INVESTOR

PROTECTION CORPORATION

HEARING

BEFORE THE

SUBCOMMITTEE ON 

SECURITIES, INSURANCE, AND INVESTMENT

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

ON

EXAMINING THE SECURITIES INVESTOR PROTECTION CORPORATION’S 

(SIPC) CONTINUING OVERSIGHT AND PROTECTION OF INVESTORS, 

THE AGENCY’S RESPONSE TO RECENT CLAIMS AND CUSTOMER PROTECTION, AND CONSIDERING THE NEED FOR ANY SPECIFIC SIPC REFORMS TO BE MADE

SEPTEMBER 30, 2015

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.fdsys.gov/


BANKI-41578DSA with DISTILLER
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT

MIKE CRAPO, Idaho, Chairman 

MARK R. WARNER, Virginia, Ranking Democratic Member 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

JERRY MORAN, Kansas 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

ELIZABETH WARREN, Massachusetts 

JOE DONNELLY, Indiana

GREGG RICHARD, Subcommittee Staff Director

MILAN DALAL, Democratic Subcommittee Staff Director

(II)


BANKI-41578DSA with DISTILLER
CONTENTS

WEDNESDAY, SEPTEMBER 30, 2015

Page

Opening statement of Chairman Crapo ................................................................. 1

Opening statements, comments, or prepared statements of: 

Senator Warner ................................................................................................ 1

Senator Vitter ................................................................................................... 2

WITNESSES 

Stephen P. Harbeck, President and CEO, Securities Investor Protection Corporation ................................................................................................................. 3

Prepared statement .......................................................................................... 21

Sigmund S. Wissner-Gross, Esq., Senior Partner, Brown Rudnick LLP ............ 5

Prepared statement .......................................................................................... 40

J.W. Verret, Assistant Professor of Law, George Mason University School 

of Law, and Senior Scholar, Mercatus Center at George Mason University .. 7

Prepared statement .......................................................................................... 69

James W. Giddens, Partner, Hughes Hubbard & Reed LLP, and Trustee, 

SIPA Liquidations of Lehman Brothers Inc. and MF Global Inc. .................... 9

Prepared statement .......................................................................................... 70

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Prepared statement of Richard R. Cheatham ....................................................... 73

Prepared statement of Laurence Kotlikoff ............................................................ 77

(III)


BANKI-41578DSA with DISTILLER

BANKI-41578DSA with DISTILLER
(1)

OVERSIGHT OF THE SECURITIES INVESTOR 

PROTECTION CORPORATION 

WEDNESDAY, SEPTEMBER 30, 2015

U.S. SENATE, SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee convened at 10:16 a.m., in room 538, Dirksen 

Senate Office Building, Hon. Mike Crapo, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. This hearing will come to order. 

I, first of all, want to thank my colleague and Ranking Member 

Senator Warner for his help in working together with us on this 

hearing, and also, I would like to thank Senator Vitter for encouraging our Subcommittee to hold an oversight hearing on the Securities Investor Protection Corporation, known as SIPC, and also 

thank you, Senator Vitter, for your efforts to help the investors. 

SIPC was created by Congress in 1970 to oversee the liquidation 

of member broker-dealers that close when the broker-dealer is 

bankrupt or in financial trouble and customer assets are missing. 

In recent years, SIPC has been the center of attention because of 

the financial trouble and failure of Lehman Brothers, Bernie 

Madoff Investment Securities, MF Global, and Stanford Investment 

Group. Each event has had a lasting effect on investors, the broader sanction, and has highlighted the function of the SIPC. 

Today, we continue that discussion with our expert witnesses. 

Specifically, how is SIPC protecting investors? Specifically, how has 

SIPC responded to recent claims and customer protection? And are 

there any specific SIPC reforms that we should consider or that 

SIPC should consider and why? 

I look forward to the testimony of our witnesses today. I think 

that we have got a very strong panel of strong witnesses who understand this issue well and will give us strong advice. 

And with that, let me turn it to you, Senator Warner, if you have 

any opening statement. 

STATEMENT OF SENATOR MARK R. WARNER 

Senator WARNER. Well, thank you, Mr. Chairman. I want to also 

thank you for holding this hearing and echo what you said about 

Senator Vitter. 


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2

This is an area—we have heard of SIPC. Frankly, unfortunately, 

I think we all kind of heard more about it than we perhaps wanted 

to hear about it and post-Madoff, Stanford, some of the other 

schemes that have taken place, I am curious to learn more about 

the fact that different types of securities, cash, CDs, others, seem 

to have different levels of protection. So, I am anxious to see where 

we might see reforms. 

I do think it is interesting to note that 7 years after the Madoff 

fraud, only 10 percent of investment advisors are examined annually. That, to me, raises some questions about if we are going to 

be prophylactic going forward. Rather than simply trying to make 

sure we rectify things after the fact, we do need some ability to be 

more proactive on the front end. 

So, Mr. Chairman, I have got other comments. I will keep those 

in reserve so that we can move to the witnesses and get to the 

questions. Thank you. 

Senator CRAPO. Thank you, Senator Warner, and I do understand, Senator Vitter, that you would like to make an opening 

statement, as well. 

Senator VITTER. If I could, Mr. Chairman. 

Senator CRAPO. Certainly. 

STATEMENT OF SENATOR DAVID VITTER 

Senator VITTER. Thank you very much. 

First, I would like to make a few items part of the record by 

unanimous consent. The first is a statement from Richard 

Sheedam, an investor who has filed a lawsuit disputing SIPC’s 

statement of facts with the SEC on the Stanford issue. 

And the second is a statement of Dr. Laurence Kotlikoff, who 

was scheduled to testify at a similar hearing on SIPC oversight before this Committee earlier this year, but that was rescheduled, 

and his statement as prepared for delivery. 

Senator CRAPO. Without objection. 

Senator VITTER. Thank you. 

Chairman Crapo and Ranking Member Warner, I want to thank 

both of you for holding this important hearing on SIPC oversight 

today. I can tell you, not enough attention is paid in Congress to 

SIPC and Wall Street has noticed. Wall Street basically runs SIPC 

their way, and I believe investors really need to beware. 

I want to take just a minute before we start to underscore an important point that Dr. Kotlikoff makes in his testimony when he 

says, quote, ‘‘Today, no investor can be confident their assets are 

protected by SIPC as Congress intended when SIPA was enacted,’’ 

and I think that is the bottom line and that should concern all of 

us. I want to associate myself with those remarks. 

I think it is important for investors to notice, because brokerdealers across the country plaster the SIPC logo across their doors 

and their Web sites and all of their literature. Investors are led to 

believe that if the broker-dealer fails, SIPC will be there to help 

them. I can tell you from bitter experience watching the Stanford 

case, trying to help those victims however I can that this is just 

patently false. Congress owes it to investors to act and to change 

this. We need to decide if we are going to restore SIPC to what 


BANKI-41578DSA with DISTILLER
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Congress intended in the 1970s. Otherwise, we just as soon abolish 

it. 

The status quo is a really perverse and rigged system that allows 

Wall Street to suck in innocent investors with these promises that 

someone is looking out for them to ensure that the system is set 

up fairly. But then when push comes to shove, SIPC can easily 

deny those claims for customer protection. Only the lucky few who 

can find their way into a court with the right kind of experience 

in these complex transactions has any hope of relief. Most of the 

victims are forced to return to work with their life savings evaporated. 

Now, Mr. Harbeck in his statement suggests that the Senate 

really needs to act on current SIPC nominees. The first nominee, 

Leslie Bains, is a Managing Director at CITI and used to work at 

Chase Manhattan Bank and HSBC. The second nominee, John 

Mendez, is an equity partner at Latham and Watkins LLP. While 

they may be perfectly nice people, I do not think they bring the 

necessary track record of reform and investor protection to SIPC 

that is desperately needed. If they are confirmed without reforming 

SIPC, Ms. Bains would continue her day job, for instance, at CITI. 

Mr. Mendez would continue to be an equity partner at a firm that 

has grown into a very significant securities litigation practice, including securities class action, shareholder litigation defense, and 

white collar criminal matters. 

I can assure you, those two nominations will not be confirmed 

until there is real reform at SIPC. We all saw the trouble that 

Sharon Bowen had getting confirmed at the CFTC. These nominees, in my opinion, are more of the same. The President needs to 

nominate two individuals with a track record of reform and investor protection, and we need to act on SIPC reform. 

Thank you, Chairman Crapo, for holding this hearing, and to our 

witnesses on the panel for being here. I look forward to our discussion. 

Senator CRAPO. Thank you very much, Senator Vitter. 

Senator Reed, do you care to make an opening statement? 

Senator REED. No. 

Senator CRAPO. All right. Thank you very much. 

With that, then, we will turn to our witnesses. We have with us 

today, as I indicated, four very solid witnesses: Mr. Stephen 

Harbeck, President and CEO of SIPC; Mr. Sigmund Wissner-Gross, 

Counselor-at-Law at Brown Rudnick; Professor J.W. Verret, Assistant Professor of Law at George Mason University Law School; and 

Mr. James Giddens, Partner at Hughes Hubbard and Reed. 

Gentlemen, we will go in the order I have introduced you. You 

have probably already been informed of this. We have a little clock 

that tries to keep you to 5 minutes for your introductory remarks. 

We ask that you try to keep your introductory remarks to 5 minutes and allow us time for questioning. 

With that, let us begin. Mr. Harbeck. 

STATEMENT OF STEPHEN P. HARBECK, PRESIDENT AND CEO, 

SECURITIES INVESTOR PROTECTION CORPORATION 

Mr. HARBECK. Thank you, Mr. Chairman. Chairman Crapo, 

Ranking Member Warner, and Members of the Subcommittee, I


BANKI-41578DSA with DISTILLER
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appreciate the opportunity to testify on the progress of the Securities Investor Protection Corporation since the beginning of the 2008 

financial crisis. The Subcommittee has asked SIPC, how is SIPC 

protecting investors, how SIPC is responding to recent claims and 

customer protection, and if there are any reforms Congress should 

consider. 

The best way to describe how SIPC protects investors, responds 

to claims, and operates the customer protection regime mandated 

by statute is to provide you with an overview of SIPC’s cases in the 

recent history. The narrative which follows, I think, demonstrates 

that SIPC has protected investors as contemplated by the Securities Investor Protection Act, known as SIPA, and I believe the results achieved to date are impressive given the challenges that the 

SIPC has faced. 

Let me turn to Lehman Brothers first. Lehman Brothers is the 

largest bankruptcy of any kind in history. With securities customer 

accounts essentially frozen and substantial customer assets at risk, 

SIPC initiated a customer protection proceeding on September 19, 

2008. In response to the question, how does SIPC protect investors, 

I would note the following. 

That same day, in what was called the most important bankruptcy hearing in history, Bankruptcy Judge Peck approved the 

transfer of 110,000 customer accounts containing $92 billion in assets to solvent brokerage firms. Judge Peck noted that he had 

heard credible evidence that without the ability to transfer those 

accounts under SIPA, securities markets worldwide could cease to 

function. SIPC is proud to have been a major actor in restoring investor confidence in the securities markets at that crucial time. 

The actual transfer of the accounts took place in the ensuing 10 

days. 

Today, all Lehman Brothers customers have received 100 percent 

of the contents of their securities accounts and general creditors 

have received a distribution of 35 percent. In short, the bankruptcy 

processes embedded in the Securities Investor Protection Act have 

worked well in a severe stress case. 

I would now turn to Bernard Madoff. That Ponzi scheme collapsed in December 2008, shortly after the failure of Lehman 

Brothers. SIPC’s intervention resulted in advances to customers in 

the payment of administrative expenses which had results which 

were literally unimaginable at that time in 2008. Every customer 

who has left $975,000 or less with Madoff has received all of his 

or her money back from the trustee. Customers with larger claims 

have received 48 percent of their initial investments, and that 

means that a claimant with a $10 million claim against Bernard 

Madoff’s firm has already received $5.3 million when you take into 

account the addition of a distribution of customer property and advances from SIPC. 

SIPC made the determination that every piece of furniture in 

Madoff was purchased with stolen money, so the liquidation of all 

assets would go into customer property and not for the payment of 

administrative expenses. SIPC picks up all of those administrative 

expenses. 

In addition, substantial painstaking research by the trustee enabled the U.S. Attorney for the Southern District of New York to 


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create a $4 billion forfeiture fund, which has not yet been distributed by the United States Attorney. 

Finally, in terms of the large cases SIPC has had, MF Global has 

had absolutely stunning results. I got a call at 5:20 in the morning 

that customers of MF Global were in need of protection. That was 

the first time SIPC had ever heard of that need. After receiving authority from SIPC’s Chairman within the hour, SIPC mobilized and 

initiated a liquidation proceeding that day. That was the eighth 

largest bankruptcy of any kind in history, larger in terms of assets 

than that of Chrysler. The results are, as I said, stunning. Each 

customer for both securities and commodities have received all of 

their assets, and general creditors have received 95 percent of their 

assets. In short, the process worked and it worked very well. In terms of SIPC’s financial condition, SIPC now has $2.4 billion, 

which is more money than SIPC has had to expend on all liquidations in its 45-year history. We believe we have sufficient assets, 

but we will continue to monitor the issue as to whether our assets 

are sufficient. 

Since December of 2012, SIPC has only had to initiate four new cases. Those new cases have cost SIPC $7 million. I would view 

that as a return to normal, because the large cases that we saw 

were out of the ordinary. 

I do urge the Committee to move on SIPC’s nominees, and we 

can discuss that at a later time. 

There are some reforms that have been suggested by the task 

force. Our Board did consider them. Two of them, we are looking 

for an appropriate legislative vehicle to put in place. They are in 

the nature of technical amendments. Some of the larger suggestions of the task force report were studied and the Board decided 

not to take action with them for larger macroeconomic reasons relating to protection by the FDIC, for example. 

With respect to S. 67, my comments in my written statement 

stand for themselves, but I would be pleased to discuss them with 

you if you wish, and I would appreciate the opportunity to answer 

any of your questions. 

Senator CRAPO. Thank you, Mr. Harbeck. 

Mr. Wissner-Gross. 

STATEMENT OF SIGMUND S. WISSNER-GROSS, ESQ., SENIOR 

PARTNER, BROWN RUDNICK LLP 

Mr. WISSNER-GROSS. Thank you, Mr. Chairman, and thank you 

for the opportunity to speak before this panel. My name is Sigmund Wissner-Gross. I am a senior partner at the law firm of 

Brown Rudnick LLP. I am here not on behalf of the firm, but in 

my individual capacity. 

I had the pleasure, at times the interesting experience, of litigating the New Times SIPA proceeding during the period from 

2000 through 2006. Mr. Giddens, who is here, was the trustee in 

that case. What I would like to do is focus my verbal remarks on 

some reforms that I think are needed. I will refer from my witness 

statement for the details of my experience in the New Times case, 

which, I think, illustrates many of the problems with SIPC. 

At the outset, let me say that I wholeheartedly endorse the way 

Senator Vitter has framed this situation. There is a real problem. 


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The average investor has no idea that SIPC is not really the guarantor of its investments. The average investor thinks that the SIPC 

logo on their brokerage statement is akin to an FDIC-insured institution. It is not. 

SIPA is a carefully crafted statute that was created and passed 

in 1970 to address circumstances at the time. There have been a 

host of Ponzi schemes—terrible frauds—Stanford and others beyond Madoff, that really require a fresh look and a need for reform 

and amendment of the statute to more appropriately address the 

varied circumstances that defrauded investors experience. 

My case, New Times, was one, where we can get into it if the 

panel thinks it is appropriate, where all the victims had their 

funds misappropriated. They thought they had purchased either 

mutual fund shares or money market shares, all of which were 

never purchased, and I had to litigate for several years, ultimately 

succeeding, before the bankruptcy, the district court, the Second 

Circuit, to establish that victims who thought they had invested in 

fictitious or non-existent money market shares should have their 

claims treated as claims for securities, which at the time would 

have entitled them to $500,000 of coverage. At the time, a claim 

for cash was only allowed $100,000 of coverage, which, for those 

victims who had invested their life’s savings, meant all the difference between getting some recovery or a significant recovery. 

Let me turn to what I think are some specific reforms that are 

needed. I concur with Mr. Giddens, and I do not want to steal his 

thunder on this, but I concur that SIPC’s maximum coverage 

should be increased from $500,000 to $1.3 million. That is a sound 

recommendation. That reflects the fact that the times are different 

and there should be increased coverage. 

I also concur that there needs to be no distinction between claims 

for cash and claims for securities. That may have been a sensible 

distinction at the time of the passage of SIPA in 1970. I, unfortunately, had to litigate and win on that issue before the Second Circuit. I concur with Mr. Giddens that that distinction is a distinction 

without a difference. Customers who have other claims for cash or 

securities should be entitled to coverage in the maximum amount 

available. 

But, I think more is needed, and I think the S. 67 does identify 

a number of very tangible specific reforms that are warranted. 

First, I think it is clear that the SEC, which has oversight, 

should have more than that. The SEC, clearly, in my view, should 

have the right, as well as SIPC, to apply for a protective decree 

with respect to a SIPA member. That prerogative should not be restricted to SIPC. While I think SIPC has done many great things, 

and Mr. Harbeck has identified some of the more notable achievements, the fact of the matter is that, in my experience, SIPC at 

times has taken a very narrow and unduly restrictive approach toward investor protection. SIPC does have a reputation in the legal 

marketplace as being very litigious, sometimes on an unwarranted 

basis, sometimes to try to establish a point of law when it should 

have exhibited pragmatism and effort to focus more on investor 

protection. I think it would be prudent to allow the SEC, which has 

oversight responsibility, to have the ability to appoint or seek to inVerDate 0ct 09 2002 15:50 Dec 21, 2016 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 S:\DOCS\98387.TXT SHERYL

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tervene in terms of a SIPA proceeding. The Stanford matter, that 

actually would have solved that situation. 

In addition, while I do not concur that trustees should be limited 

to one case, as proposed in S. 67, I think there is a significant issue 

about SIPC using the same trustees time and time again. While I 

respect Hughes Hubbard a great deal as a firm, my experience was 

that, in my litigation with them, they invariably looked to SIPC to 

guide them on particularly significant determinations and approaches and policies in the case, and my sense was that they always acted in tandem, but it was always the trustee acting essentially at the direction of SIPC. I think there needs to be some reform so that the trustee will, in fact, be independent and do the 

right thing. 

Finally, with respect to the investor, I appreciate that there is a 

lively debate about whether the rules proposed in S. 67 in terms 

of net equity statements, of whether that should be a binding approach or another approach should apply. I think that there does 

need to be reform so that customer protection, it is advanced so 

that you do have with these Ponzi schemes a whole variety of ways 

in which customers are defrauded. In my experience, it is often the 

case that the statute does not apply on all foras. So, there needs 

to be a reform to make sure that people who have lost money, were 

innocent victims who, frankly, do not fit within the specific definitions or labels of the SIPA statute, are protected. I think S. 67 is 

an excellent start in that regard. 

Senator CRAPO. Thank you, Mr. Wissner-Gross. 

Professor Verret. 

STATEMENT OF J.W. VERRET, ASSISTANT PROFESSOR OF LAW, 

GEORGE MASON UNIVERSITY SCHOOL OF LAW, AND SENIOR 

SCHOLAR, MERCATUS CENTER AT GEORGE MASON UNIVERSITY 

Mr. VERRET. Chairman Crapo and Ranking Member Warner, I 

appreciate the opportunity to join you today to talk about this important issue. My name is J.W. Verret. As you mentioned, I teach 

at George Mason Law School, corporate and securities and banking 

law. I also serve as a Senior Scholar at the Mercatus Center, and 

until recently, I was Chief Economist and Senior Counsel for Chairman Hensarling at House Financial Services, where I first started 

to spend a significant amount of time on this issue. 

The explosive growth in federally backed loan and guarantee programs has been an appropriate focus of congressional oversight in 

recent years. OMB estimates the Federal Government supports 

over $3 trillion in loans and guarantees. These loans and guarantees are often shrouded by indirect Government support and unreasonable assumptions in Government accounting practices. 

I submit that SIPC’s provision of securities custody insurance 

should be an appropriate part of that conversation. Government officials appoint SIPC Directors and SIPC enjoys access to a $2.5 billion line of credit with the Treasury Department. Some may argue 

that statutory language that SIPC, quote, ‘‘SIPC shall not be an 

agency or establishment of the United States Government’’ suggests otherwise, and we certainly all recall how similar statutory 


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language in the GSEs proved entirely meaningless and nonbinding 

when those entities were placed under Federal conservatorship. 

Today, I will argue that privatization of SIPC’s custodial insurance function is the best solution to protect American taxpayers 

and also is the best solution to insert a level of market discipline 

into SIPC’s risk pricing for coverage. It will add an element of risk 

pricing, I think, under a private scheme. I will identify some unexplored solutions for victims of Ponzi schemes. And though I argue 

that privatization is certainly the first best solution, I am glad to 

constructively engage in this Committee’s examination of additional reforms to SIPC. 

Most broker-dealers and members of national exchanges are required by statute to be members of SIPC, and SIPC is funded by 

assessments on its membership. SIPC thereby enjoys a statutory 

monopoly in the provision of securities custody insurance underneath the ceiling of its coverage. 

Now, some of my fellow panelists may argue that SIPC serves an 

important role as a specialized liquidator or receiver of broker-dealers and in overseeing that process. Now, assuming that argument 

is true for the sake of argument, it remains a tall leap of logic to 

further contend that a Government monopoly in the provision of securities custody insurance is thereby warranted. 

SIPC’s Board is currently composed of both private sector and 

Government members. I submit—I will reiterate that privatization 

of SIPC’s insurance function is the first best solution to the problems posed by the current structure of SIPC, and we might begin 

by lowering the ceiling of that coverage, where I would disagree 

with a couple of my fellow panelists. I find it hard to accept that 

a market failure necessitates a Government monopoly in this 

space, particularly in the current information era, an era very different from the 1970s. In fact, there are underwriters at Lloyd’s 

that will sell excess of SIPC coverage for the portion of that market 

not crowded out by SIPC. 

In the absence of full privatization, the public-private composition of SIPC’s Board should not be viewed as a second-best option. 

It would be better as a second-best option to officially recognize 

SIPC for the Government entity that it is, remove the private sector Board members, establish a similar level of congressional accountability to that required of other Government agencies, impose 

a term limit on its Chief Executive Officer, as is the case among 

SEC Commissioners, and also increase the level of the SEC’s oversight of this entity. 

The controversy and subsequent litigation between the SEC and 

SIPC regarding the Stanford Ponzi scheme and issues with respect 

to the Madoff victim claims also suggest a warning label should be 

provided describing SIPC coverage that, quote, ‘‘SIPC coverage only 

applies under limited circumstances and SIPC reserves the right to 

deny claims despite reasonable expectations of coverage.’’

SIPC won the Stanford litigation because of a regrettable stipulation of fact by the SEC. In the Madoff litigation, SIPC utilized an 

aggressive valuation methodology from among a range of methods 

it had used in prior cases. My impression of both of those cases, 

in my professional opinion as a professor of securities law, is that 

they were close calls that might have come out either way. But it 


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is also, nevertheless, very crystal clear to me that SIPC’s aggressive litigation position was designed to minimize claims to a fund 

unprepared for them, which suggests a clear conflict of interest for 

the receivers, liquidators hired by SIPC and SIPC itself in the administration of this fund. 

I am not here today to relitigate those cases or to endorse particular legislation. I sympathize with the victims. I recognize they 

have been subjected to aggressive posturing by SIPC. But, I worry 

about action that might further entrench SIPC’s monopoly. I would 

suggest instead looking at undistributed funds in the SEC’s Fair 

Funds, undistributed funds that often sits in the CFPB’s settlement awards, or banking settlement agreements with DOJ and 

HUD. There is a significant stash of money this Committee might 

consider to make those victims whole. 

I thank you for the opportunity to testify and I would just reiterate that the design of SIPA in the 1970s may have made sense 

in the 1970s. There were lots of ideas from the 1970s that made 

sense at the time that will not necessarily stand the test of time, 

like bell bottoms and the lava lamp. I think the design of SIPC 

from that era does not stand the test of time and needs to be reconsidered 40 years later. So, I thank you for the chance to testify. 

Senator CRAPO. Thank you, Professor Verret. 

Mr. Giddens. 

STATEMENT OF JAMES W. GIDDENS, PARTNER, HUGHES

HUBBARD & REED LLP, AND TRUSTEE, SIPA LIQUIDATIONS 

OF LEHMAN BROTHERS INC. AND MF GLOBAL INC. 

Mr. GIDDENS. Chairman Crapo, Ranking Member Warner, and 

Members of the Subcommittee, thank you for inviting me to testify. 

My testimony today is based on my experience with SIPA over 

the past 45 years, most recently as trustee for the Lehman and MF 

Global liquidations. In my experience, SIPA has succeeded in protecting customers in these cases, the two largest broker-dealer failures in history and the greatest challenges to the statute. 

In Lehman and MF Global, the 110,000 and 36,000 customers, 

respectively, received 100 percent of their property. The customers 

of these failed entities included mom-and-pop investors, farmers 

and ranchers from all walks of life, from every jurisdiction in the 

country. 

With both Lehman and MF Global, we closely and systematically 

consulted not only with the SEC, but the CFTC, the Federal Reserve, and multiple congressional committees. We have appreciated 

their guidance. In Lehman, I was also grateful to have the support 

of Mr. Wissner-Gross, who publicly supported my and SIPC’s position before the United States Supreme Court, seeking a review of 

a decision of the Second Circuit. 

However, I will say that, as with any statute, especially one implemented decades ago, I believe there is room for modernization 

and improvement. Consistent with my SIPA duty to advance customer protection, I would like to provide three considerations that 

may merit further study and, of course, input from regulators,

industry experts, and the public. A more complete discussion of 

these and 26 other recommendations is included in my written testimony, which incorporates the detailed public submissions of the 


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10

SIPC Modernization Task Force as well as my own Lehman and 

MF Global reports and prior testimony before the Senate Banking 

and other congressional committees. 

First, as proposed by the task force, I strongly support increasing SIPC’s maximum coverage from $500,000 to $1.3 million. That simply corresponds to an increase through inflation from what was 

originally proposed in the 1970s. Future coverage limits should also 

be tied to inflation. This would immediately and significantly increase the protection for customers, especially those who are not 

large or professional investors. 

Second, also in the task force report, I propose eliminating the 

distinction between claims for cash and claims for securities. This 

reform would resolve the potential disparate treatment of customers and increase the amount of customer protection available. 

Finally, I believe consideration should also be given to expanding 

the borrowing and guarantee authority available to SIPC trustees 

and other liquidators. The SIPC fund has met the demands of all 

previous SIPA liquidations. However, the Lehman liquidation, in 

particular, demonstrated that just one failure of a SIPC member 

broker-dealer could require at least a temporary availability of 

much more substantial sums. The ability to quickly and efficiently 

return customer property in the early days of a liquidation would 

be enhanced if the borrowing limit were increased. 

In concluding, I believe that the SIPA statute has succeeded in 

protecting customers of SIPC member brokerage firms. I also believe the shared goal of continuing and strengthening protection of 

investors, particularly nonprofessional investors, can be achieved 

with improvements to the statute and related laws. 

Thank you, Chairman Crapo, Ranking Member Warner, and 

Members of the Subcommittee, for the opportunity to testify before 

you. 

Senator CRAPO. Thank you, Mr. Giddens. 

I will start out with you, Mr. Harbeck, with some questions, and 

my first question relates to basically the appropriate amount for 

the SIPC fund. I think you indicated in your testimony it is currently at $2.4 billion, and I understand that the SIPC Board has 

set a target balance of $2.5 billion, which matches the line of credit 

that SIPC has with the U.S. Treasury. How did you determine that 

$2.5 billion was the appropriate amount, and given some of the 

other testimony that we have heard today, is $2.5 billion the appropriate amount? 

Mr. HARBECK. Mr. Chairman, I can assure you that a subtext in 

every single SIPC Board meeting is whether SIPC has sufficient resources. In 2008, when we had $1.6 billion, we realized when the 

Madoff case fell in December of 2008 that we should turn on the 

assessment spigot. We did so. We have completed all of the functions required in Lehman Brothers and MF Global and Madoff with 

an expenditure of approximately $1.8 billion to date. But, we have 

at the same time increased our resources from the 1.6 that we had 

in 2008 to 2.4. 

I know, based on past experience, that whenever we reach a plateau or a target, the Board of Directors takes a long hard look, and 

since that was 7 years ago when they set that target, that they will 

do so again. 


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We currently have assessments on all SIPC members of onequarter of 1 percent of net operating revenues. That generates approximately $400 million a year. SIPC’s resources currently, the existing $2.4 billion that we have, is sufficient to have satisfied all 

obligations in all cases in our history. With that, we are always 

open to other ways to finance in an emergency or to increase the 

fund if it becomes necessary. 

Senator CRAPO. Well, thank you, Mr. Harbeck. 

For Mr. Wissner-Gross and Mr. Giddens, I appreciate your perspectives on how SIPC responded to the claims because of the financial trouble and failure of Lehman Brothers, Madoff, MF Global, Stanford, and New Times. What are the main take-aways about 

how SIPC responds to claims when a member firm fails because of 

fraud as opposed to other financial reasons? 

Mr. WISSNER-GROSS. If I could address that first, I do think, 

again, I think SIPC has done a fine job in many proceedings, but 

the ones that Mr. Harbeck has identified are three of the 328 SIPA 

proceedings that it has handled since 1970, and my experience is 

primarily focused on New Times, so let me address that. 

I found that I actually had to fight at every step of the way to 

secure coverage in that case. It was not an atypical fraud claim. 

The Ponzi operator, a guy named Mr. Goren, had put several hundred elderly investors into a program where he basically embezzled 

their funds, gave them brokerage statements that confirmed that 

they had purchased mutual funds and money market shares, but 

had not, in fact, done that. 

My recollection is initially that SIPC refused to acknowledge customer status for any of them. So, my first job was I had to fight 

both to try to get the SEC as well as the bankruptcy judge involved 

to be supportive of the fact that there should be customer claim or 

customer status acknowledged. We ultimately, between the judge 

and SEC, I think, twisted SIPC’s arm to—through Mr. Giddens, 

the trustee—to acknowledge that status. 

Having accomplished that, then every individual customer had to 

fight, in my view, with the SIPC trustee to acknowledge and determine the fact of whether they had invested funds, the amount of 

funds invested, and it was a very arduous process. We represented 

quite a number of those defrauded investors who were innocent beyond belief, and they included Holocaust survivors, retirees, and so 

forth, not atypical of defrauded investors in these schemes. Looking 

back on it, I would have preferred that there be more of a presumption of a desire to protect them in the first instance rather than 

to have those investors be put through the grill in terms of establishing coverage. 

I highlighted one particular investor in my remarks, where a woman named Mary Lee Stafford, who lost—who invested $75,000 

and had it embezzled as a result of a purchase of money market 

shares that were never purchased. Single mother, cancer victim. 

This was all the money she had, and SIPC and the trustee denied 

coverage. I fought it. The bankruptcy judge agreed with them. I appealed it to the district court. I got it reversed. And they should 

have, frankly, said, fine, let her get her money. It was $69,000 out 

of pocket. That was all of her life’s savings. Instead, they appealed 

it to the Second Circuit, which was their prerogative, and they 


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were successful, and in the end, she did not get anything in terms 

of coverage. 

To me, frankly, that was a shame, because I think this was in 

the gray area of coverage. She clearly could have been acknowledged as a claimant. I would like to see those kinds of things not 

happen in the future. 

Senator CRAPO. Thank you. 

And, Mr. Giddens, my time has run out, but if you could briefly 

respond, I would appreciate that. 

Mr. GIDDENS. Yes. I have a different take on New Times. In New 

Times, there were about 1,000 securities customers. Ninety-ninepoint-nine percent of all those customers received all that they 

claimed on their claim forms and they were paid. SIPC advanced 

millions of dollars. There were only, I think, two claimants in the 

entire case who exceeded the limits of SIPC participation. And I 

am sympathetic to anyone who loses money in a Ponzi scheme and 

the like, but one of the difficulties here was—and it was a complicated case—that there was also a parallel SEC receivership 

going on with respect—at the same time as the SIPC proceedings. 

And from the 1970s on, one of the principles established in the 

SIPA statute was, from the beginning, that if you loaned money to 

the broker-dealer, that if you were a subordinated lender or otherwise a lender or had promissory notes, you were treated as a lender as opposed to a securities customer who deposited cash in securities. 

In the New Times case, the malefactor in that case persuaded 

many of the individuals—fraudulently—to purchase promissory 

notes from him individually, and these were not customer transactions. In that case, we also, to assist investors, did a substantive 

consolidation of certain entities because under bankruptcy principles, there was so much interrelationship of transactions and the 

like. 

So, overall, my view is, yes, there always—in any SIPC case, you 

have to apply the statute, and yes, based on precedence and the 

like, I think we applied the law correctly and I think the overall 

result was that virtually 99 percent of all those claimants received 

all that they claimed in New Times. 

Senator CRAPO. Thank you very much. 

Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman, and 

gentlemen, thank you all for your testimony. 

Mr. Harbeck, it strikes me that they call you at 5:20 in the

morning after the other folks have failed, i.e., after regulators, and 

others who were supposed to be governing the conduct of these 

broker-dealers, failed. So, your role cannot be isolated from the operations of the SEC and other agencies. So, to what extent do you 

have any sort of insight into the broker-dealer activities that 

might—or any influence over their behaviors that might give you 

the tools to prevent rather than just respond to these crises? 

Mr. HARBECK. By design, SIPC is not a regulator. The regulatory 

regime in the United States has a Federal regulator, state regulators, self regulators, and Congress when it established SIPC 

made sure that we were not another regulator. 


BANKI-41578DSA with DISTILLER
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That said, we work very, very closely with the SEC. The MF 

Global case did, in fact, come up suddenly, but we work hand-inglove with the SEC. Even throughout the recent past when the Securities and Exchange Commission was litigating with SIPC, the 

relationship on the staff was professional and I can tell you that 

right now, the relationship between the SEC and SIPC is at a high 

point. Chairman Mary Jo White has met with our Board of Directors. She is the first SEC Chairperson to do so. We hope to have 

other members of the Commission meet with us and meet with our 

Board of Directors to share common concerns. We work hand-inglove with the SEC. That is the answer to it. 

Senator REED. Do you think the SEC has the resources or the 

capacity to thoroughly inspect broker-dealers? As Senator Warner 

mentioned in his opening remarks, we are still at a very low rate 

of inspections on a regular basis of broker-dealers. 

Mr. HARBECK. Well, I believe Senator Warner mentioned investment advisors, which are not covered by SIPC. 

Senator REED. Right. 

Mr. HARBECK. But, frequently, the investment advisors custody 

their securities at SIPC members. In fact, that is what they are 

supposed to do. I think it would be an excellent idea to increase 

the resources available for inspecting those because that is a possible way to stop fraud ab initio.

Senator REED. Mr. Giddens, you have been a trustee in several 

cases, and in your testimony, you suggest that more pre-liquidation 

disaster planning could be helpful. Could you elaborate on that? 

Mr. GIDDENS. Yes. The Lehman case was done on a very ad hoc

basis and under extraordinary circumstances, and there was not 

sufficient time to involve SIPC or perhaps the SEC and the like in 

the process. A great deal of the activity was dictated by the Treasury Department and the Federal Reserve, all attempting to avert 

a worldwide financial crisis. There was not sufficient time or planning to fully understand the implications of the transfers and the 

like. 

Contrary to the public assumption, Barclays did not acquire all 

the securities accounts of Lehman. They left behind accounts—they 

could pick and choose assets. They did not assume all the liabilities. That is not to criticize those who structured that deal. It 

was—Barclays at the time was the only prospective bidder. But, essentially, it took years to unravel the intricacies and complications 

of Lehman through 76 proceedings around the world. 

There is an attempt by requiring large firms to prepare so-called 

living wills to more systematically sort of determine where assets 

are, how assets will be obtained, and the like. As I say, in Lehman, 

just by way of example, the British Prime Minister claimed that $8 

billion was improperly taken from the U.K. and transferred back 

to the United States. So, that turned out not to be correct and they 

later dropped that sort of thing, but there was such confusion and 

misunderstanding about how the system operated, so that 

preplanning involving those who would be involved in a liquidation 

is very, very important. 

It is also very important to identify the categories of all the 

claimants, not just securities claimants, but unsecured creditors 


BANKI-41578DSA with DISTILLER
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and the like. That would help enormously in any liquidation if you 

really had a clearer picture of what you are trying to achieve. 

Senator REED. Thank you very much. 

Thank you, Mr. Chairman. 

Senator CRAPO. Thank you, Senator Reed. 

I am going to just ask one more quick question before I turn both 

the gavel and the time over to Senator Vitter, and that is for Professor Verret, I am interested in your argument about privatization. Could you just briefly tell me how you envision that would 

work? 

Mr. VERRET. Sure. I think that, you know, first, I think there 

would be a substantial transition period, recognizing the fact that 

members have been assessed for the fund that is currently there 

with the expectation of coverage. So, you would have to work 

through some transition issues. I think you would begin by lowering the ceiling of coverage. But, I think part of the benefit you 

would get there is for whatever is not crowded out by SIPC coverage, I think you would see private sector operators doing riskbased premiums, risk-based pricing. That would go along with 

some of the issues we have talked about today. 

I mean, I would expect that a private-based provider would set 

your risk-based premium based on the adequacy of your resolution 

planning, your living will. I think that one of the problems with the 

current structure is that not only is there a Government subsidy 

through the Treasury’s lending to all firms provided with coverage, 

but there is internal subsidization. The best actors subsidize the 

worst actors with an assessment that is homogenous, you know, homogenous assessment. So, I think that, for instance, publicly traded broker-dealers that have Section 404 internal controls are a very 

different situation from nonpublic broker-dealers, and so you would 

expect the premium to be very different there. 

So, in short, to answer your question, I think there would be a 

transition, but I think—and I think you would probably begin by 

lowering the ceiling of coverage. But I think that you would see 

some risk-based pricing, some market discipline inserted into that 

process. That would be very helpful with a lot of the issues we have 

been describing. 

Senator CRAPO. Well, thank you very much, and as you can see, 

it is a busy morning and I, too, am going to be called away to another obligation. But, I know this is a critical issue to Senator 

Vitter, and at this point, I am going to turn both the gavel and the 

time over to you, Senator Vitter. Thank you. 

Senator VITTER. [Presiding.] Thank you, Senator Crapo. Thanks 

for calling and sharing this hearing. Thanks to all of you for being 

here. 

Mr. Wissner-Gross, I want to step back and sort of start with the 

big picture in terms of some of the comments you suggested. Under 

the current system, we have SIPC, we have this SIPC ‘‘Good 

Housekeeping Seal’’ logo, correct? 

Mr. WISSNER-GROSS. Yes. 

Senator VITTER. And that is very widely used by SIPC members. 

I mean, they put it on all of their Web sites——

Mr. WISSNER-GROSS. On every statement. 


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Senator VITTER. Yes, every statement, every Web site, every 

piece of literature, every entry door, basically, because it is that 

sort of ‘‘Good Housekeeping Seal’’ logo similar to FDIC, would you 

agree with that? 

Mr. WISSNER-GROSS. Yes, Senator. 

Senator VITTER. And yet the reality is, say, compared to FDIC, 

it is fundamentally different and it is fundamentally less protection, would you also agree with that? 

Mr. WISSNER-GROSS. Yes, Senator. 

Senator VITTER. So, it seems to me the big picture is that the average customer is sort of actively being misled, as given this ‘‘Good 

Housekeeping Seal,’’ member firms are actively using that for their 

benefit in the market, and it is not there when customers need it 

in many cases. In fact, it is most uncertain, it seems to me—correct 

me if you think this is wrong—but it is most uncertain in many 

outright cases of fraud versus simply failure, and it seems to me 

that is particularly ironic, would you agree with that? 

Mr. WISSNER-GROSS. Well, I am not sure I am going to go all the 

way with you on that comment. I do think that fraudsters will typically use the SIPC logo as a means of trying to lull their investors 

into thinking that it has SIPC protection. I do not know whether 

I am prepared to go with you all the way to say it is being used 

by the well-established brokerage firms to somehow facilitate a 

fraud. But I do concur——

Senator VITTER. No, no, I did not say that or did not mean to 

suggest that. What I am saying is, when push comes to shove, 

often, the victims who have most difficulty being made whole are 

victims of outright fraud versus other cases——

Mr. WISSNER-GROSS. That is——

Senator VITTER.——of market failure. 

Mr. WISSNER-GROSS. That is correct. 

Senator VITTER. And it seems to me that is particularly ironic 

that it is least certain in many cases of outright fraud versus market failure. 

Mr. WISSNER-GROSS. I will agree with you. 

Senator VITTER. That is all I was trying to say. 

Now, it seems to me we should recognize this fundamental disconnect and correct it in some way, either make that ‘‘Good Housekeeping Seal’’ what it purports to be, or take it off everybody’s 

doors and stop the complete misrepresentation. 

Mr. WISSNER-GROSS. Well, I will agree that if it is going to be 

there, there should be an appropriate disclaimer——

Senator VITTER. Right. 

Mr. WISSNER-GROSS.——so that people understand what is at 

issue. But, I think, more to the point, as I said in my opening remarks, I concur that you have properly framed the issue and I 

think the proposed legislation identifies several ways in which we 

can hopefully begin to rectify the problem. 

Senator VITTER. Correct. Is not one of the big differences—I keep 

using this analogy with FDIC because I think that is how consumers read that ‘‘Good Housekeeping Seal’’—is not one big difference that SIPC has industry members who are clearly active, ongoing industry members who have vested interests in SIPC members and private sector industry partners? 


BANKI-41578DSA with DISTILLER
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Mr. WISSNER-GROSS. I will agree with you there, as well. 

Senator VITTER. Do you think that poses a potential conflict? 

Mr. WISSNER-GROSS. Yes, Senator. I think—and there are various ways in which that could be addressed, particularly if you 

have a board that is truly independent. 

Senator VITTER. Correct. Do you have any particular thoughts 

about the best way to erase that potential conflict? 

Mr. WISSNER-GROSS. Well, the same broker-dealers are regulated 

by the SEC, and typically when there is fraud, it is identified by 

the SEC. I do not have specific recommendations, but I think that 

you have correctly framed the problem. I think there has to be a 

better path to ensuring that SIPC, true to its mandate, is truly 

independent, truly looking out for the best interest of investors, 

and truly able to protect those interests. 

Senator VITTER. And would one partial or whole solution be giving SEC more outright authority over SIPC——

Mr. WISSNER-GROSS. Yes. I——

Senator VITTER.——in certain cases, including fraud? 

Mr. WISSNER-GROSS. I 100 percent agree with you, and in fact, 

I endorse the proposal allowing the SEC to be able to initiate SIPA 

proceedings. And, clearly, they have already a statutory right of 

oversight. I think it would be in the best interest of everybody to 

have the SEC, which can shut down firms after identifying fraud, 

also being much more intimately involved with the day-to-day operations and enforcement of those situations. 

Senator VITTER. Right. Mr. Harbeck, obviously, I am very concerned about the Stanford case. I represent a lot of Stanford investors. To date, how many of those Stanford investors have gotten 

any recovery from SIPC? 

Mr. HARBECK. None, sir, as a result of the case of SEC v. 

SIPC——

Senator VITTER. OK. 

Mr. HARBECK.——where the court stated that the Stanford victims did not fall under the statutory program that we administer. 

Senator VITTER. OK. So, I just want to make clear, we are talking about these other cases, 99 percent, great majority, blah, blah, 

blah. Stanford, just factual basis—I want to be clear—everybody 

has been shut out of recovery. 

Mr. HARBECK. That is correct. 

Senator VITTER. OK. 

Mr. HARBECK. SIPC——

Senator VITTER. Now, let us walk through SIPC’s arguments for 

that, because as I have followed them, they are changing. At the 

district court—let me just ask you if you can put in layman’s terms, 

not hyper-technical terms, but in layman’s terms, the grounds for 

SIPC not standing behind those investors. 

Mr. HARBECK. Senator, as you know, the Securities Investor Protection Act is a complex statute. But if you would try to reduce it 

to one sentence in terms of what is protected and what is not protected, that sentence would be as follows: SIPC protects the custody function that brokerage firms perform for their customers and 

only the custody function. And in the Stanford case, it was our consistent view for the 2 years prior to that lawsuit that all of the customers that the SEC knew of had their certificates of deposit, or 


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they were in the custody of another entity that had their certificates of deposit, or they were book entry. SIPC——

Senator VITTER. You are basically talking about Antiguan CDs? 

Mr. HARBECK. That is correct. 

Senator VITTER. OK. 

Mr. HARBECK. All money went directly to the Stanford International Bank of Antigua, or a bank account owned by the Stanford 

International Bank of Antigua. The SIPC member brokerage firm 

was not holding any assets, nor was it supposed to be, for those 

customers. 

Senator VITTER. Now, Mr. Harbeck, that is the argument that 

you all made in district court. You changed the argument when it 

got to appeal. I will get to that in a minute. But, let us start with 

the district court. Is it not correct that those customers were issued 

these Antiguan CDs and there was never money in that Antiguan 

bank backing them up? That was a complete fraud. 

Mr. HARBECK. There was absolute fraud ab initio. However——

Senator VITTER. Was there money in the Antiguan bank backing 

up those CDs? 

Mr. HARBECK. There is some. There is an independent entity or 

receiver in the Stanford—in Antigua that is in charge of restoring 

those customers to the extent he can. 

Senator VITTER. I do not know what that means. Was there 

money in that Antiguan bank backing up those CDs or not? 

Mr. HARBECK. Senator, we do not have investigatory authority. 

Certainly, we do not have it overseas. 

Senator VITTER. There has been forensic accounting that has 

shown that there was no money in that Antiguan bank backing up 

the CDs. Do you agree with that, because that is the record? 

Mr. HARBECK. I do not believe it is the record in the case that 

we litigated. I will assume it is true. 

Senator VITTER. You will assume it is true? 

Mr. HARBECK. For purposes of discussion, of course. 

Senator VITTER. So, in the district court, the argument is, well, 

this was an investment in a foreign bank that is not covered under 

the SIPC law, under SIPA, but the money never reached the foreign bank. The CDs were issued. There was no cash backing them 

up. You do not think that is a problem with your argument? 

Mr. HARBECK. No, I do not, because I—I do not agree with you 

in this regard. As far as I know and as far as the SEC stated, all 

monies either went to the Stanford International Bank or went to 

a bank account under its control. 

Senator VITTER. Well, you are talking about an SEC statement 

of facts submitted to the district court that was incorrect, that is 

contrary to the forensic accounting. Are you aware of that? 

Mr. HARBECK. I am aware that someone has submitted an affidavit saying the money did not go to Antigua. The SEC, when we 

asked them about that, did say that the money went to an American bank account owned by the Stanford International Bank of 

Antigua. 

Senator VITTER. An American bank account? 

Mr. HARBECK. Correct. 


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Senator VITTER. OK. So, Mr. Harbeck, I think you are aware of 

what I just laid out, because when the case went to circuit court, 

you all changed your argument completely. 

Mr. HARBECK. That is not correct, sir. 

Senator VITTER. Well, in the circuit court, your primary argument was that somehow this was a loan from the customers to the 

broker-dealers and there is a specific exclusion to cover that. Was 

that not a significant argument——

Mr. HARBECK. That was——

Senator VITTER.——that SIPC made in——

Mr. HARBECK. That was a secondary argument that we made in 

both courts, sir. 

Senator VITTER. And when these customers were buying CDs, 

you think they were loaning the broker-dealers money or investing 

in the broker-dealers? 

Mr. HARBECK. That is not what the court said. The court said 

that——

Senator VITTER. I am asking what you said in terms of that particular argument. You made that argument. So, do you think it was 

a fair characterization in making that argument that in buying 

CDs, these customers were loaning the broker-dealers money? 

Mr. HARBECK. The SEC argued that if you substantively consolidated these entities, then a SIPC member firm was holding assets 

for the debtor. Substantive consolidation never took place, number 

one. But what the court said is that if it did, then people would 

be—instead of lending money to the Stanford International Bank, 

which is what a CD is, it would be lending money to the brokerage 

firm and that is not protected by statute. 

Senator VITTER. Right, except they had a CD and they never 

agreed to lend money to the brokerage firm. The brokerage firm 

stole the money, kept the money. That is cash. That is covered 

under SIPA. Cash is covered under SIPA. CD is covered under 

SIPA. And yet you all concocted this ridiculous theory that, no, it 

was not a CD, even though the customer had a CD piece of paper. 

It was not cash, even though that is what the broker-dealer stole 

and diverted. It was somehow a loan to the broker-dealer, which 

obviously the customer never agreed to. I mean, do you not——

Mr. HARBECK. Senator, your statement does not comport with 

the stipulated facts. 

Senator VITTER. Well, the stipulated facts were wrong and have 

been disproved by the forensic accountant. 

Mr. HARBECK. I disagree. 

Senator VITTER. OK. Well, I think the broader point here is that 

I do not think an entity like FDIC would have spent tens of millions of dollars to do back-somersaults to make those sorts of arguments. I think only an entity dominated by industry members 

would have done those back-somersaults and spent tens of millions 

of dollars in legal fees to make those sorts of arguments. I guess 

that is my broader point. 

Let me go to Mr. Giddens, and I have another concern about the 

trustee relationship. And, Mr. Giddens, I acknowledge you are a 

very competent person in the roles you have played and I do not 

question your competence or your integrity. I do question the conflict of interest between people who are named over and over and 


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over as trustees, make a lot of money doing it, and that person’s 

role protecting the investors, and I think that is a built-in and serious conflict, that practice. 

So, with that in mind, let me ask you, how many times have you 

and your firm—or your firm—acted as SIPC matter trustee? 

Mr. GIDDENS. I believe in five or six cases out of the 300 cases 

over 45 years. 

Senator VITTER. So, five or six cases? 

Mr. GIDDENS. Yes. 

Senator VITTER. And roughly how much money do you think you 

and your firm have made doing that? 

Mr. GIDDENS. I do not, off the top of my head, know. What I 

would say is, one, I have never applied for compensation for myself 

as trustee in a personal capacity. The law firm, of which I am a 

partner, has to apply to the bankruptcy court for compensation. 

That compensation is on notice to all creditors, and after a hearing, 

the compensation has to be approved by a bankruptcy court and a 

bankruptcy judge. The cumulative amount of compensation, I do 

not know. In terms of the——

Senator VITTER. Can you give us a sense of proportion, a ballpark figure? 

Mr. GIDDENS. I really——

Senator VITTER. Was it over a million dollars in each case? 

Mr. GIDDENS. No. It was less than a million in some cases and 

over several million dollars in other cases. Again, the compensation 

is governed by Bankruptcy Code requirements, where the compensation should be based on results achieved. There is also a public interest discount. 

In terms of—if I may just comment on—I think you raise a legitimate question. On the conflict of interest, I would point out that, 

for example, in Lehman and MF Global, we have had adversary 

proceedings against principal firms on Wall Street, major, major 

issues involving billions of dollars in firms such as JP Morgan, 

Goldman Sachs, Morgan Stanley, and the like. So, it is not correct 

that there is a bias toward large Wall Street institutions. They 

equally have disputes with SIPC and the SEC about what is covered, for example, repo transactions and things of that sort. 

Senator VITTER. Well, just to clarify, I was not talking about a 

bias there. I was talking about a bias of the trustee toward 

SIPC——

Mr. GIDDENS. Well——

Senator VITTER.——because SIPC hires a trustee, in some cases, 

over and over. That is a major book of business. That is a major 

source of compensation for the firm. So, that is the bias I was talking about. 

Just to give you an example, you were not named trustee in 

Stanford. If you were, and if you had decided matters in terms of 

customer status and compensation contrary to the way SIPC has 

fought—SIPC has fought the SEC, SIPC has gone to court, SIPC 

has gone to circuit court, SIPC has spent tens of millions of dollars 

on this—do you think you would be a prime candidate to be hired 

as a trustee the next time? 

Mr. GIDDENS. Umm—I am not sure I fully understand the question. If the——


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Senator VITTER. Let me restate it. 

Mr. GIDDENS. If you are saying, hypothetically——

Senator VITTER. If you were the trustee in Stanford, and if you 

had disagreed with SIPC on this fundamental question of customer 

status and right to recovery——

Mr. GIDDENS. Well——

Senator VITTER.——which SIPC has fought tooth and nail to an 

extraordinary extent—SEC told them to act otherwise. SIPC fought 

the SEC. SIPC went to court. SIPC went to circuit court. SIPC 

spent millions of dollars fighting this, which obviously come out of 

the assets of the fraudster. Do you think, if you had fundamentally 

disagreed with SIPC on that, do you think you would be a prime 

candidate to be named a trustee in the next big SIPC case? 

Mr. GIDDENS. The answer is, I do not know. The answer is, if I—

the confusing part is to be appointed a trustee or being suggested 

as a trustee by SIPC to the district court, which has to appoint you, 

that would mean that SIPC had started a SIPC liquidation of Stanford. And if I were the trustee, I would look at the statute. That 

would be my job. Obviously, I would discuss it with SIPC, the SEC, 

and others involved and try to reach a fair decision. I am sympathetic to any group of people who are defrauded, and I think 

whether it is a SIPC trustee or an independent trustee, you ought 

to use all your resources to try to find ways for recovery. There are 

other avenues, maybe not successful, other than simply relying on 

the SIPC fund. 

Senator VITTER. Right. Well, we can just disagree about this. I 

will answer my own question. I think it is obvious that you would 

not be on the short list by SIPC the next time, and that is the conflict I am talking about, similar to the conflict in terms of industry 

members of SIPC. 

Let me end on that note. First of all, thank you all very much 

for your testimony and your participation. I think this has been an 

important and productive discussion. 

I am determined that this discussion moves to action in terms of 

appropriate reform, and I am equally determined that there will be 

no confirmation of outstanding proposed SIPC members unless and 

until that reform happens. So, I look forward to all of that. 

Thank you very much. The hearing is adjourned. 

[Whereupon, at 11:20 a.m., the hearing was adjourned.] 

[Prepared statements and additional material supplied for the 

record follow:]


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PREPARED STATEMENT OF STEPHEN P. HARBECK

PRESIDENT AND CEO

SECURITIES INVESTOR PROTECTION CORPORATION

SEPTEMBER 30, 2015

Chairman Crapo, Ranking Member Warner, and Members of the Subcommittee: 

Thank you for the opportunity to brief you on the progress the Securities Investor 

Protection Corporation (SIPC) has made since the beginning of the 2008 financial 

crisis. 

The Subcommittee has asked how SIPC is protecting investors, how SIPC is responding to recent claims and customer protection, and if there are any reforms 

Congress should consider. The best way to describe how SIPC protects investors, responds to claims, and operates the customer protection regime mandated by statute 

is to provide you with an overview of SIPC’s performance since the beginning of the 

2008 financial crisis, which includes the most significant cases in SIPC’s history. Potential reforms will be addressed at the end of this statement. The narrative which 

follows demonstrates that SIPC has protected investors as contemplated by the Securities Investor Protection Act (SIPA). I believe the results achieved to date are impressive, given the scope of the challenges presented. 

How is SIPC protecting investors and how has it responded to recent claims 

and customer protection? 

Lehman Brothers Inc. 

Lehman Brothers is the largest bankruptcy proceeding of any kind in history. 

With securities customers’ accounts essentially frozen and substantial customer assets at risk, SIPC initiated a customer protection proceeding on September 19, 2008. 

That same day, in what has been called the most important bankruptcy hearing in 

history, Bankruptcy Judge James Peck approved the transfer of 110,000 customer 

accounts containing $92 billion in assets to solvent brokerage firms. Judge Peck 

noted that he had heard credible evidence that without the ability to transfer those 

accounts under SIPA, securities markets worldwide could cease to function. SIPC 

is proud to have been a major actor in restoring investor confidence in the securities 

markets at that time. The actual transfer of those accounts took place over the next 

10 days. 

The SIPA trustee proceeded to close the complex, worldwide business operations 

of Lehman. Among the highlights of that work was a victory for investors in the 

Supreme Court of the United Kingdom that resulted in additional assets being set 

aside for customers. 

Today: All Lehman Brothers customers have received a 100 percent distribution, 

and general unsecured creditors in that case have already received 35 percent of 

their claims. 

In short, the bankruptcy processes imbedded in SIPA have worked well in a

severe stress case. 

Bernard L. Madoff Investment Securities LLC 

Bernard Madoff’s Ponzi Scheme collapsed in December 2008. SIPC’s intervention 

resulted in advances to customers and the payment of administrative expenses with 

results that were unimaginable at the time. 

Every customer who left $975,000 or less with Madoff has received all of his, her, 

or its money back from the trustee. Customers with larger claims have received 

48.08 percent of their initial investment, meaning that a claimant who left $10 million with Madoff has already received $5.3 million from the trustee, including SIPC 

advances. Further, SIPC took the position that every single asset of the Madoff firm 

was purchased with stolen money, so all recoveries, of any nature, should go into 

the ‘‘fund of customer property.’’ SIPC thus pays every cent of the administrative 

expenses in that case. 

In addition, based substantially upon painstaking research by the trustee’s staff 

and paid for by SIPC, the United States Attorney for the Southern District of New 

York has amassed a sizable sum which comprises a forfeiture fund. Distribution of 

that fund, which is in excess of $4 billion, has not yet begun. 

The SIPA trustee is engaged in extensive litigation which, if successful, will benefit those who have not yet received all of their net funds invested with Madoff. 

In summary, the trustee has maximized the returns to victims given the tools 

available to him. He has worked in cooperation with regulatory and criminal authorities, and will continue to do so. There will be additional distributions as more 

funds are added to the fund of ‘‘customer property.’’


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MF Global Inc. 

On October 31, 2011, the SEC notified me at 5:20 in the morning that the customers of MF Global were in need of the protections of the SIPA statute. After receiving authority from SIPC’s Chairman within the hour, the SIPC staff mobilized 

and initiated a liquidation proceeding for that firm that afternoon. This is the 

eighth largest bankruptcy in history. 

The results in the MF Global case are stunning. All securities and commodities 

customers have been paid in full. Last week, the trustee commenced the final distribution to general creditors, who will receive 95 cents on the dollar. Bankruptcy 

Judge Martin Glenn recently stated that ‘‘At the outset of the case, nobody thought 

that customers would recover everything they lost.’’

The trustee and SIPC litigated a number of issues interpreting SIPA, some of 

which were issues of first impression, and have been uniformly successful. 

In short, the process worked, and worked well. 

SIPC’s Financial Condition 

In January 2009 some Members of the Committee expressed concern about the 

financial condition of SIPC. I am pleased to report that SIPC has performed all of 

its statutory duties during the financial crisis, and that it continues to be in sound 

financial condition. In December 2008, the SIPC Fund stood at $1.7 billion. Immediately upon the commencement of the Madoff case, the SIPC Board prudently increased the assessments on SIPC member firms to .0025 percent of net operating 

revenues. At the close of 2014 SIPC had $2.152 billion. Even including all expenses 

of the financial crisis, this demonstrates that SIPC has the ability to raise funds 

as needed to protect customers and meet its statutory obligations. The SIPC Board 

has currently set a ‘‘target’’ balance for the SIPC Fund at $2.5 billion, which 

matches the increased line of credit SIPC has with the United States Treasury. 

New Cases 

Since December 2012, SIPC has initiated four customer protection proceedings, 

each of which is very modest in size. SIPC was able to serve as trustee in three 

of the cases, and use the statutory ‘‘direct payment procedure’’ in the fourth case. 

This has had the effect of expediting claims determination and satisfaction, in order 

to return customer assets as promptly as possible. Indeed two of those cases have 

already been brought to a conclusion. To put these cases in perspective with the 

cases discussed above, the combined cost to SIPC of protecting customers and administrative expenses in these four proceedings is approximately $7 million. 

Are there specific SIPC reforms that SIPC and Congress should consider 

and why? 

Action on SIPC Nominees: 

The Committee can assure that SIPC is in a position to be a rapid response team 

by moving the nomination of SIPC’s directors. 

I noted above that SIPC was able to initiate a customer protection proceeding for 

MF Global in a matter of hours. SIPC, by Bylaw, has delegated the authority to initiate a customer protection proceeding to the Chair. For more than a year, SIPC 

has been without a Chair, or a Vice Chair to serve as Acting Chair. That means 

that today SIPC might not be as nimble as it was on October 31, 2011, when I contacted SIPC’s then Chairman for authority to protect investors in the MF Global 

case. With no Chair or Vice Chair, should that same urgent situation arise today 

I would have to call a meeting of the entire Board, on literally no notice. 

Thus, I urge the Committee to move the nomination of SIPC’s vacant director positions forward. 

The SIPC Task Force, Rulemaking, and Legislation 

In February 2010, SIPC’s Board created a SIPC Modernization Task Force to formulate possible improvements to SIPA. In February 2012, the Task Force made a 

number of recommendations, five of which would require legislative change, and one 

of which required a rule change. (Nine recommendations, which could be implemented as a matter of policy, have been adopted.) 

The SEC, working with SIPC, did institute a rule change requiring the independent auditors of SIPC member brokerage firms to file copies of their Audit Reports with SIPC. This program is part of an ‘‘early warning system’’ that gives SIPC 

the opportunity for informed discussion with regulators and self-regulators, who are 

responsible for notifying SIPC concerning brokerage firms that may pose a risk to 

investors. 

After extended discussion the Board determined not to propose legislation that 

would increase the maximum level of protection, and eliminate the distinction in the 


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levels of protection for cash and securities. Among the reasons for the Board’s decision was that such legislation would create disparate levels of protection offered by 

the FDIC and SIPC which could cause disruption and confusion, and also create inappropriate incentives to move funds from banks to brokerage firms. The Board also 

determined not to expand protection to participants in pension funds on a pass 

through basis. 

The Task Force also suggested legislation setting a minimum assessment on SIPC members of the greater of $1,000 or 0.02 percent of members’ gross revenues from 

the securities business. Further, the Task Force suggested legislation authorizing 

the use of the ‘‘Direct Payment Procedure’’ where customer claims aggregate less 

than $5 million. The Board discussed these proposals but deferred formally recommending a separate bill on these more minor matters until an appropriate opportunity arises. 

Restoring Main Street Investor Protection and Confidence Act 

While the letter inviting me to this hearing did not ask me to address the Restoring Main Street Investor Protection and Confidence Act, S. 67, that proposed legislation is relevant in the overall context of this hearing. Accordingly, Attachments A 

and B provide an analysis of that proposal. 

I hope this summary has been helpful to the Subcommittee. I would be pleased 

to answer any questions the Subcommittee may have. 

Attachment A 

Concerns Respecting The Proposed Restoring Main Street Investor Protection and Confidence Act (S. 67) 

The ‘‘Restoring Main Street Investor Protection and Confidence Act’’ contains provisions that have a number of what appear to be unintended consequences. Some 

of the concerns presented by the proposal include:

• The bill requires SIPC to accept as accurate financial statements known to be 

intentionally fraudulent. Under the bill, SIPC must accept whatever statement 

a thief issues to his customers.

• The bill legitimizes Ponzi Schemes by guaranteeing that the Scheme’s non-existent trades at backdated stock prices giving rise to phony profits are backed by 

Federal taxpayer funds.

• The bill makes Ponzi Schemes a better investment than legitimate securities 

market trades by, among other things, eliminating market risk.

• The bill’s limitations on the Bankruptcy Code’s ‘‘avoidance powers’’ in a SIPA 

case result in demonstrably inequitable distributions of ‘‘customer property.’’ 

For example, had Mr. Madoff’s fraud been detected and closed a mere 2 days 

later, the $175,000,000 in checks on his desk would have gone to arbitrarily favored clients at the direct expense of other clients to whom the funds actually 

belonged. This was more than half of the liquid assets the firm had when it 

failed. Further, as the United States Court of Appeals for the Second Circuit 

correctly noted, ‘‘any dollar paid to reimburse a fictitious profit is a dollar no 

longer available to pay claims for money actually invested.’’

• The bill provides a complex mechanism for honoring a fraudulent final account 

statement in the interest of equity. In reality, this is an invitation to extended 

litigation by various claimants with disparate, conflicting and competing interests in a finite corpus of customer property. This will delay the timely return 

of customer property to injured victims.

• The bill gives unprecedented and unlimited power to the SEC to compel the expenditure of both private and public funds. That power includes the authority 

to require SIPC to initiate the liquidation of any brokerage firm or other institution regardless of whether statutory criteria are met.

• The bill gives the SEC unlimited authority to change the definition of the term 

‘‘customer.’’

• The bill renders the SEC’s authority unreviewable by the judiciary.

• The bill operates retroactively. It would throw the Madoff case, and the remarkable results achieved to date, into chaos and uncertainty.

• The bill forbids using a trustee on two SIPA cases simultaneously. This eliminates efficiencies and denies customers the benefits of expertise in the most significant cases. SIPC has six ongoing proceedings. Only one individual serves in 

more than one case. SIPC matches the size and resources of the trustee and 

the trustee’s counsel with the nature and scope of the problem.


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• The bill makes it impossible to determine future costs and risk. 

The bill would reverse the judicial outcome in the Stanford-Antigua Bank 

Fraud Case. 

SIPC declined to initiate a customer protection proceeding for the Stanford Financial Group in connection with the Stanford-Antigua Bank Fraud. For the first time 

in SIPC’s history, the SEC sued SIPC to compel SIPC to begin a proceeding. The 

District Court and Court of Appeals examined the circumstances and considered the 

legal issues in the case and determined that the victims of the Stanford Antigua 

Bank Fraud were not ‘‘customers’’ that SIPA was designed to protect. 

The Restoring Main Street Investor Protection and Confidence Act, S. 67, would 

require SIPC to underwrite, guarantee, and pay the debt obligations, represented 

by Certificates of Deposit of the Stanford International Bank, a foreign bank in an 

offshore tax haven. The Antiguan Bank CD purchasers knowingly sent their money 

away from a SIPC member to an Antiguan Bank where, in the words of the SEC, 

the claimants received ‘‘high rates of return on CDs that greatly exceeded those offered by commercial banks in the United States.’’

While SIPC has sympathy for the victims of the Stanford and any other fraud, 

SIPC was not designed to refund the original purchase price of a bad investment, 

even where the investment was induced by fraud.


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* The ideas presented in this document do not represent official positions of the Mercatus Center or George Mason University. 1See, e.g., Federal Accounting Standards Advisory Board, ‘‘Memorandum: Public Hearing on 

Reporting Entity,’’ August 20, 2013, http://www.fasab.gov/pdffiles/tab-a2laugust-2013.pdf. 2Securities Investor Protection Act of 1970, 15 U.S.C. § 78ccc. 3TIAA–CREF, ‘‘SIPC and Excess of SIPC Asset Protection Guide,’’ 2015, https://www.tiaacref.org/public/pdf/forms/SIPClReferencel GuidelFINAL.pdf.

PREPARED STATEMENT OF J.W. VERRET

ASSISTANT PROFESSOR OF LAW, GEORGE MASON SCHOOL OF LAW

SENIOR SCHOLAR, MERCATUS CENTER AT GEORGE MASON UNIVERSITY *

SEPTEMBER 30, 2015

Chairman Crapo, Ranking Member Warner, and Members of the Subcommittee, 

I appreciate the opportunity to testify today on your Subcommittee’s oversight of the 

Securities Investor Protection Corporation. 

My name is J.W. Verret. I am an assistant professor of law at George Mason University Law School, where I teach corporate, securities, and banking law. I serve 

as a senior scholar at the Mercatus Center at George Mason University, and until 

recently I was Chief Economist and Senior Counsel at the House Committee on Financial Services. 

The explosive growth in federally backed loan and guaranty programs has been 

an appropriate focus of congressional oversight in recent years. The Office of Management and Budget (OMB) estimates the Federal Government supports over $3 

trillion in loans and guarantees. Those loans and guarantees are often shrouded by 

indirect Government support and unreasonable assumptions in Government accounting practices.1

I submit that the Securities Investor Protection Corporation’s (SIPC) provision of 

securities custody insurance should be an appropriate part of that conversation. 

Government officials appoint SIPC directors and SIPC enjoys access to a $2.5 billion 

line of credit with the Department of the Treasury. Some may argue that statutory 

language that ‘‘SIPC shall not be an agency or establishment of the United States 

Government’’ suggests otherwise.2 We all recall how similar statutory language governing the Government-Sponsored Enterprises proved meaningless when those companies were placed in Federal conservatorship. 

Today I will argue that privatization of SIPC is the best solution to protect American taxpayers, I will identify unexplored solutions for victims of Ponzi schemes. 

Though I argue privatization is the first best solution, I am glad to constructively 

engage in this Subcommittee’s discussion about additional SIPC reforms. 

REFORMING THE GOVERNMENT MONOPOLY 

Most broker-dealers and members of national exchanges are required by statute 

to be members of SIPC, and SIPC is funded by assessments on its membership. 

SIPC thereby enjoys a statutory monopoly over the provision of securities custody 

insurance beneath the ceiling of its coverage. 

Some of my fellow panelists may argue that SIPC serves an important role as a 

specialized liquidator of broker-dealers. Assuming that argument is true, it remains 

a tall leap of logic to further contend that a Government monopoly in the provision 

of securities custody insurance is thereby warranted. 

SIPC’s board is currently composed of private sector and Government members. 

I submit that privatization of SIPC’s insurance function is the first best solution to 

the problems presented by the current structure of the SIPC. We might begin by 

lowering the ceiling of coverage. 

I find it hard to accept that a market failure necessitates a Government monopoly 

in this space. In fact, there are underwriters at Lloyd’s that sell ‘‘excess of SIPC’’ 

coverage for the portion of this market not crowded out by SIPC.3

In the absence of full privatization, the public-private composition of SIPC’s board 

should not be viewed as a second best option, It would be better to officially recognize SIPC for the Government entity that it is, remove the private-sector board 

members, establish a similar level of congressional accountability for SIPC to that 

required of other Government agencies, and impose a term limit on its CEO. 

THE PROBLEM OF PONZI SCHEME VICTIMS 

The controversy and subsequent litigation between the SEC and SIPC with respect to the Allen Stanford Ponzi scheme, and issues with respect to Bernie Madoff 

victim claims, also suggest that a warning label should be provided as part of the 

legend describing SIPC coverage. This label would warn customers, ‘‘SIPC coverage 

only applies under limited circumstances, and SIPC reserves the right to deny 


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claims despite reasonable expectations of coverage.’’ SIPC won the Stanford litigation as a result of regrettable stipulations of fact by the SEC. In the related Madoff 

litigation, SIPC utilized an aggressive valuation methodology from among a range 

of methods used in prior cases. 

My impression of both cases was that they were close calls that might have come 

out either way. It is nevertheless also clear to me that SIPC’s aggressive litigation 

position was designed to minimize claims to a fund that was unprepared for those 

claims, which suggests a clear conflict of interest for the receivers hired by SIPC 

and for SIPC itself. 

I am not here today to re-litigate those cases or to endorse legislation that might 

ultimately result in new assessments by SIPC. I sympathize with the victims, and 

I recognize they have been subjected to unusually aggressive legal posturing by 

SIPC, but I worry about action that might only further entrench SIPC’s insurance 

monopoly. 

I would suggest instead that this Subcommittee consider whether undistributed 

funds in the SEC’s Fair Funds program or in the Consumer Financial Protection 

Bureau’s settlement awards would better serve the purpose of making these victims 

whole. 

I thank you for the opportunity to testify, and I look forward to answering your 

questions. 

PREPARED STATEMENT OF JAMES W. GIDDENS

PARTNER, HUGHES HUBBARD & REED LLP, AND TRUSTEE, SIPA LIQUIDATIONS OF

LEHMAN BROTHERS INC. AND MF GLOBAL INC.

SEPTEMBER 30, 2015

Chairman Crapo, Ranking Member Warner, and Members of the Subcommittee: 

Thank you for inviting me to testify. My name is James Giddens, and I chair the 

Corporate Reorganization and Bankruptcy Group at Hughes Hubbard & Reed LLP. 

I have worked on issues related to the Securities Investor Protection Act (SIPA) for 

more than 45 years, most recently as the Trustee for the liquidations of Lehman 

Brothers Inc. and MF Global Inc.—the two largest liquidations under SIPA and two 

of the largest bankruptcies of any kind in history. 

I welcome the opportunity to bring this experience and perspective to discuss how 

SIPA and the Securities Investor Protection Corporation (SIPC) have handled the 

most complex broker-dealer failures, as well as to submit for consideration areas for 

improvement in the statute and related laws and regulations. 

Lehman Brothers Inc. SIPA Liquidation 

Two weeks ago marked the seventh anniversary of Lehman’s collapse. Thus far, 

Lehman’s broker-dealer customers and creditors have received $114 billion in distributions. This represents the largest distribution across the worldwide Lehman insolvency proceedings. Importantly, more than 110,000 retail customers, including 

mom-and-pop investors from all walks of life and from all across the country, received 100 percent of their property within days of the bankruptcy due to the unique 

account transfer process under SIPA. 

This swift return of customer property was critical to restoring stability to the financial system during a time of great doubt and avoiding the potential for further 

financial collapse. The return of customer property could not have happened without 

SIPA’s account transfer provisions and the ability of the transfers to be backstopped 

by the SIPC fund. Indeed, it took hundreds of professionals working hand-in-hand 

with regulators to accomplish this extraordinary task and nearly 2 years to completely reconcile transferred accounts. A claims process for these accounts—the result in any other kind of bankruptcy proceeding—would have taken years longer. 

At a recent court hearing, the Honorable Shelley Chapman, United States Bankruptcy Judge for the Southern District of New York, called the distributions ‘‘an incredibly extraordinary accomplishment in this case.’’ I, and, more importantly the 

customers and creditors who had their funds restored, agree. 

MF Global Inc. SIPA Liquidation 

When MF Global collapsed on Halloween of 2011 with revelations of more than 

$1.6 billion of missing commodity customer property, a near full return of property 

to customers and creditors was doubtful. My counsel and I testified about the MF 

Global case before the full Senate Banking Committee, the Senate Agriculture Committee, the House Agriculture Committee, and the House Financial Services Committee. I am grateful for the support of all of these Committees as we worked under 


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SIPA to recover funds for customers and creditors, and together we achieved a favorable outcome for customers. 

The efforts to recover property around the globe required scores of professionals, 

the invaluable assistance of U.S. regulators, and cooperation from foreign insolvency 

administrators. In conjunction with the painstaking resolution of complex claims 

and the approval of innovative motions by the United States Bankruptcy Court, 

36,000 securities and commodities customers, many of whom were farmers and 

ranchers, received 100 percent distributions on their claims. 

Secured creditors also received 100 percent distributions on their claims, and a 

final 95 percent distribution to non-affiliated unsecured creditors is now in the process of being completed—all within less than 4 years from the commencement of the 

proceeding. 

Distributions to customers in these two liquidations far exceeded initial expectations and demonstrate the flexibility and effectiveness of SIPA in complex, large 

broker-dealer failures. 

Considerations 

While SIPA has proven to be a successful mechanism for liquidating broker-dealers and is indeed viewed as a model for the prompt return of customer property in 

different jurisdictions around the world, there is room for modernization and improvement. 

The considerations that follow stem from my and my counsel’s experience in Lehman, MF Global and several other liquidations and from my involvement, along 

with investor advocates, regulatory specialists and academic experts, in a Task 

Force that issued recommendations for modernizing SIPA. 

Specifically, the SIPC Modernization Task Force report included 15 recommendations on how to amend and improve SIPA. In addition, my own investigation reports 

in the Lehman and MF Global liquidations included eight and six recommendations 

respectively on improvements to SIPA and related laws and regulations. 

I incorporate these three extensive, public documents into my testimony today, 

and I urge the Subcommittee to consider all 29 of the reform proposals in detail. 

Among the recommendations in these reports, I would like to highlight the following 

eight potential reforms for your consideration in particular: 

Task Force Recommendations

1) Increase Maximum Coverage to $1.3 million

Increasing SIPC’s maximum coverage from $500,000 to $1.3 million, and tying future coverage limits to inflation, would reflect a significant increase in protection 

for customers and is consistent with the level of protection that is necessary to protect nonprofessional investors.

2) Eliminate the Distinction in the Levels of Protection for Cash and Securities

Eliminating the distinction between claims for cash and claims for securities resolves potential disparate treatment of customers and increases the amount of protection available to customers of broker-dealers. Currently, the level of protection 

per customer is capped at $500,000, up to $250,000 of which may be in satisfaction 

of a customer’s cash claim. This distinction leads to arbitrary resolution of claims 

between customers, may no longer reflect the way that cash and securities are held 

at broker-dealers, and has created confusion over the way that claims based on fictitious securities are treated.

3) International Cooperation

The collapse of MF Global and Lehman revealed significant gaps between protections afforded customers in U.S. and foreign countries, such as the United Kingdom, 

arising largely from differences in insolvency laws and the absence of clear legal 

precedent. Though there may not be a one-size-fits-all solution for these issues, customers would benefit from greater harmonization of rules governing the segregation 

of customer funds and treatment of omnibus accounts. 

Lehman Investigation Report Recommendations

4) Pre-Planning

More pre-liquidation disaster planning, both on an individual broker-dealer and 

industry-wide basis, including a broker-dealer’s ‘‘living will’’ and emergency plan, 

should alleviate the type of information gap that I and my staff confronted in the 

Lehman liquidation. Such pre-planning would indicate the categories of customer 

accounts and associated assets that would need to be protected and set forth how 

possible scenarios would be dealt with, ranging from complete liquidation of all cusVerDate 0ct 09 2002 15:50 Dec 21, 2016 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6621 S:\DOCS\98387.TXT SHERYL

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tomer accounts to total or partial account transfer solutions, with details of key 

operational steps and the core assets that would have to remain to assure effective 

liquidation of customer accounts.

5) Increase in SIPC Borrowing Authority

In addition to increasing SIPC’s maximum coverage as noted above, consideration 

should also be given to expanding the borrowing and guarantee authority available 

to SIPC trustees or other liquidators and to permitting more flexibility for use of 

those funds. While the previously existing SIPC fund had more than sufficed to 

meet the demands of all previous SIPA liquidations, the Lehman and Madoff liquidations in particular demonstrate that the failure of a single major SIPC member 

broker-dealer could require at least the temporary availability of much more substantial sums to support the quick and efficient return of customer property.

6) Earlier Involvement of a Customer Representative

A party with potential responsibility for customers interests—whether SIPC, a putative trustee, a regulator, or a combination of all of these—should be involved in 

the negotiations related to the sale of a failed broker-dealer. Parties representing 

customer interests should, with better planning and access to information, bargain 

against a clear baseline of what needs to be transferred and avoid subsequent uncertainty and surprises. 

As experienced in the Lehman case, the seller’s immediate focus is likely to be 

its own post-transaction survival; the purchaser’s is with the customers and assets 

it is taking on, not those it is leaving behind. 

MF Global Inc. Investigation Report and Prior Senate Banking Committee 

Testimony Recommendations 

7) Strict Liability for Senior Officers and Directors

Because regulations require futures commission merchants (FCMs) to segregate 

customer funds at all times, it may be appropriate to impose civil fines in the event 

of a regulatory shortfall on the officers and directors who are responsible for signing 

the firm’s financial statements. Where there is a shortfall in customer funds, Congress should consider making the officers and directors of the company accountable 

and personally and civilly liable for their certifications without any requirement of 

proving intent and without permitting them to defend on the basis that they delegated these essential duties and responsibilities to others.

8) Commodities Customer Protection Fund

The liquidation of MF Global would have played out differently had there been 

even a modest protection fund for commodities customers—that is, a separate and 

distinct analog to SIPA in the FCM arena that learns from and builds on SIPA’s 

record of success. A fund limited to protecting these smaller accounts—representing 

many farmers and ranchers—could be of relatively modest size, but would suffice 

to make these customers whole very quickly even in a case with a shortfall the size 

of MF Global’s. With such a fund in existence, three-quarters of MF Global’s commodities customers could have been made whole within days of the bankruptcy filing. 

Conclusion 

Since 1970, the SIPA statute has succeeded in protecting customers of SIPC-member brokerage firms, and I believe strongly that the statute has met its policy goals. 

In particular, the Lehman and MF Global liquidations are an indication that SIPA, 

SIPC, and the concept of the liquidation trustee work to protect customers and return assets to them as quickly as possible in a manner that is fair and consistent 

with the law. With consideration given to modernizing elements of the statute and 

related laws and regulations, I believe the shared goal of continuing and strengthening protection of investors, particularly nonprofessional investors, can be 

achieved. 

Thank you Chairman Crapo, Ranking Member Warner, and other Members of the 

Subcommittee for the opportunity to testify before you and to submit this testimony 

for the full record of the hearing.


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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

PREPARED STATEMENT OF RICHARD R. CHEATHAM

SEPTEMBER 30, 2015

I’m a 72-year-old lawyer in Atlanta, officially retired at 1/1/2015 but still actively 

consulting with those who became responsible for my former clients. I obtained my 

undergraduate degree from the University of Virginia and my law degree from Harvard. I was fully active for slightly more than 45 years in a large firm practice representing primarily commercial banking institutions in corporate and regulatory 

matters. 

I am also a slightly embarrassed victim of the Allen Stanford Ponzi scheme. I 

have a good excuse. My broker had and used discretionary authority. Prior to having a heart attack in 2007 I managed my own investments. Like many lawyers, I 

clearly see all risks and cannot bring myself to invest in anything not guaranteed 

by the full faith and credit of the U.S. Government. After the heart attack, realizing 

I might actually be required to retire, I gave discretionary authority to a contemporary of mine who I trusted. He later retired and left his clients in the care of his 

two sons. Against my better judgment, I kept my account with the sons, principally 

because I had a son just starting out and empathy kept me from communicating 

or acting on a lack of confidence in youth and inexperience. Subsequently, exercising 

their discretionary authority, without any action or instruction by me, the sons sold 

$300,000 of my securities held by the Stanford SIPC insured firm and caused the 

proceeds to be transferred to the Stanford Ponzi scheme. 

Before the SEC sued SIPC I had not paid much attention to the possibility of 

SIPC coverage. I was attempting to recover my losses from my individual brokers’ 

insurance policies, an attempt so far frustrated by an injunction issued at the SEC’s 

request in the Texas Receivership proceeding. I was vaguely aware that the SEC 

had initially taken the position that SIPC did not cover the Stanford victims, but 

I had not attempted to look at the coverage issue myself. 

However, shortly after the SEC filed suit, I looked at some documents in the case 

to get a feel for what was going on. I don’t recall exactly what I looked at, the complaint and answer or documents associated with some motion, but those documents 

made it apparent that SIPC was attempting to defend by creating a largely fictional 

factual scenario in which the Stanford scheme could be characterized as an investment gone bad rather than an intentional theft. SIPC also asserted, in an effort to 

avoid the SIPA ‘‘customer’’ definition, that the Stanford victims had dealt directly 

with the Antiguan bank and that no funds or custody securities held by the SIPC 

member were involved. That fictional scenario characterized the subject investment 

as a CD in an offshore bank. According to that scenario Stanford securities brokers 

‘‘counseled investors to purchase certificates of deposit from an Antiguan bank . . . 

[and t]he Antiguan bank’s CDs eventually became worthless.’’

The real facts are that the Antiguan bank was just the cover story for a massive 

Ponzi scheme theft. The CD’s did not ‘‘become’’ worthless. The principal shareholder 

of the SIPC insured brokerage firm was using the funds generated by his firm’s brokers (compensated by above market commissions) for personal purposes and to cover 

his prior thefts. Legally, that knowledge was imputable to the brokers who executed 

the thefts. The CDs were worthless and fictional from the get-go, just like Bernie 

Madoff’s fake statements depicting fictional investments in his Ponzi scheme whose 

victims were protected by SIPC. 

To avoid the SIPA ‘‘customer’’ definition, SIPC’s creative ‘‘facts’’ assumed that 

each purchaser of the ‘‘CDs’’ opened an account with the offshore bank and sent a 

separate check or wire transfer directly to that bank and received a CD in return. 

The suggestion being that the transaction was wholly apart from and independent 

of the victim’s relationship with the insured brokerage firm. That was certainly not 

true in my case. I had my ‘‘self-directed IRA’’ at Stanford. It was moved there from 

Morgan Keegan when my brokers changed firms. The Stanford brokerage firm was 

the fiduciary custodian of my securities and funds. As with any IRA I had no direct 

control over the funds and could not write a check or direct a wire transfer from 

my account with the SIPC insured firm. Without any action on my part, my Stanford brokers caused the sale of $300,000 in my securities held by Stanford and ‘‘invested’’ the proceeds in the fake ‘‘Stanford CDs.’’ In other words Stanford, the SIPC 

member, sold my custody securities and gave the proceeds to Alan Stanford for his 

personal use. Those facts support undeniable coverage by SIPC. 

After looking at SEC/SIPC the case documents, I called Matthew Martens who 

was listed in the pleadings as the SEC’s lead counsel. The purpose of the call was 

to describe my fact situation to make the SEC aware that SIPC’s version of the facts 

was simply not true, at least for a substantial number of victims. The SEC only gets 


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one shot to force SIPC to cover claims against an insured defunct broker. If the facts 

support the claim of any customer for SIPC insurance, the SEC can force a SIPC 

receivership and let each individual customer make his/her claim. I wanted to make 

sure that the SEC knew that there were Stanford victims who did not fit within 

SIPC’s hypothetical scenario. To my surprise Martens answered the call. I told him 

who I am and fully described the facts surrounding my becoming a Stanford victim. 

I told him I thought my facts and those of other IRA beneficiaries were ‘‘perfect’’ 

to demonstrate that funds and/or custody securities had been delivered to the SIPC 

member contrary to SIPC’s theory of the case. He sounded appreciative and gave 

me the impression he was taking down my contact information. He assured me that 

I would receive a call from SEC staff. 

I never received a call from SEC staff. That didn’t bother me. I had just wanted 

to make sure the SEC was aware of fact patterns like mine to prevent its falling 

for the SIPC story line. I was sure that many, if not most, other victims had fact 

patterns more like mine than like SIPC’s hypothetical. 

Months later when I read the District Court’s decision I was dumbfounded by the 

description of the fact stipulation that the SEC had agreed to in the case. The stipulation simply mimicked SIPC’s creative hypothetical. Because of my conversation 

with Marten’s I knew that the SEC was fully aware that the facts it stipulated simply were not true for all, perhaps most, of the Stanford victims, that the actual facts 

surrounding my ‘‘investment,’’ and I assumed many others, were inconsistent with 

the factual assumptions included in the District Court’s analysis. As a lawyer I understood that the SEC/SIPC fact stipulation, if it became ‘‘final’’ in the District 

Court case, would be dispositive on the issue of SIPC insurance for all the Stanford 

victims. Stanford victims could not sue SIPC directly, only the SEC could enforce 

their congressionally created rights. Also, under the universally recognized principle 

of res judicata, the SEC only gets ‘‘one bite at the apple.’’ It has the right to bring 

one lawsuit to force SIPC to live up to its statutory obligations. The facts established in that lawsuit are binding on everyone forever. The SEC cannot bring a second suit hoping to prove a different set of facts supporting its claim. 

After I read the decision, I called one of the law firms representing large groups 

of Stanford victims in various class actions to encourage it to intervene in the District Court case before it became final in order to contest the fact stipulation. Otherwise all Stanford victims would be bound by the stipulation in any efforts to recover 

their losses from SIPC insurance. The law firm, which wasn’t involved in SIPC coverage issues, didn’t seem interested. Thus, I reluctantly filed an intervention myself, 

reciting my facts and demonstrating why I believed the District Court would reach 

a different decision on ‘‘real facts’’ as opposed to the stipulated facts. 

I didn’t have much hope that my intervention would accomplish anything. Judges 

are understandably disinclined to question the competence or good faith of Federal 

administrative agencies. Nevertheless, the issue was critical to SIPC coverage for 

the Stanford victims. I had to try to do whatever I could. In my intervention petition 

I described my facts and made what I thought was a compelling case for a result 

different from the one Judge Wilkins reached on the stipulated facts. 

In its response to my intervention, the SEC did not really argue that I was wrong 

on the merits. It essentially conceded that my facts were materially different from 

the stipulated facts and, by implication, that my facts might result in a different 

outcome. The SEC then cynically assured the District Judge that it would review 

my facts and, if warranted, commence a new action against SIPC to force a receivership with SIPC coverage. To me that response was an intentional misrepresentation 

by the SEC to the District Court. The SEC had known my facts for months. It did 

not need to investigate those facts. They were not that complicated. In addition, 

bringing a later action in an effort to prevail against SIPC on a different set of facts 

was precluded by res judicata.

In my reply to the SEC’s opposition to my motion to intervene I pointed out that 

the SEC had known my facts for months and that a later action based on different 

facts would be precluded. However, Judge Wilkins never read my reply. I filed my 

reply late on Friday before Labor Day weekend. The Judge issued an order denying 

my intervention on Tuesday after the Monday holiday. As a pro se litigant I had 

to file a paper response, rather than an electronic one which would have been available to the Judge over the weekend. The Judge couldn’t have seen my reply until 

that Tuesday. It’s not realistic to assume that the judge read and considered my 

reply and then wrote and entered on the same day an order that never mentions 

my reply. He had obviously already written the decision and was just waiting for 

the time for my reply to expire before entering it. 

I don’t blame Judge Wilkins. Then, if I were a judge and the SEC assured me 

that it would protect an intervener’s interests, I would have denied the intervention. 

Interveners are often ‘‘nut cases.’’ That’s especially true in cases where a


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Government agency charged with protecting a group of citizens is acting within its 

expertise and someone mere citizen wants to add in his two cents. The District 

Judge undoubtedly believed that the SEC would and could do what it said. 

It was obvious that I couldn’t get the District Judge’s attention in the face of unprincipled SEC opposition. I had 30 days before the decision denying my intervention became final. My only chance was to see if I could get the SEC to correct its 

false assertions. Accordingly, on September 11, 2012, I sent an email to the SEC’s 

David Mendel with a copy to Matthew Martens, as follows:

I was not surprised that Judge Wilkins did not read my reply brief after 

both the SEC and SIPC opposed the motion.

As I told you before, I still can’t figure out where the SEC is coming from 

in this proceeding.

I didn’t know this when I filed my motion, but the Receiver’s Web site indicates that there were more than 1,400 Stanford Trust Company victims of 

the Ponzi scheme. Given the way the scheme operated, each of those victims had his/er IRA with SGC. While I recognize that the IRA relationship 

with an introducing broker is somewhat ambiguous, there is little doubt 

that SGC had control over those IRA funds sufficient to meet the ‘‘entrusting’’ test applied by Judge Wilkins. Contrary to paragraph 3 of your stipulation, none of those victims opened an account with SIBL and none of those 

victims wrote a check or wired funds to SIBL. In each case SGC, on its own, 

transferred money from the victim’s IRA with either Pershing or J.P. Morgan and had funds wired from the custody broker to a third party bank (the 

bank recipients varied I am told). Where the funds went from there, I can 

only guess, but SGC certainly knew and I’ll bet any amount that they 

ended up in the Ponzi scheme.

I don’t think the SEC can sue SIPC again based on a different set of facts, 

though I’m certainly open to listening to your contrary theory if you have 

one. I suspect your suggestion to the contrary convinced Judge Wilkins to 

deny my motion without even reading my reply. If I appeal Judge Wilkins’ 

order denying my motion, the Court of Appeals may overrule Judge Wilkins’ denial, but the odds are against it. The Court of Appeals might, however, be influenced by the undisputed record that my facts are true and 

leave open my claims (but perhaps not others who didn’t intervene). I don’t 

see much hope for the 1,399 other IRA victims unless the SEC moves now 

to reconsider the denial of my motion and blows the fact stipulation.

There is some chance that the SEC can get a reversal of Judge Wilkins’ ‘entrusting’ analysis, though I am doubtful in the DC Circuit. As I said in my 

reply, I agree with your conclusions. However, to me the ‘entrusting’ issue 

is a slippery slope. It sounds reasonably convincing on the stipulated facts, 

but not at all on the IRA facts. If you start your analysis with the IRA 

facts, you realize that your analysis on the stipulated facts is wrong. The 

SEC/SIPC fact stipulation starts at the bottom of the slippery slope and 

hopes that the judge will slide up.

The SEC can minimize its exposure here by moving that Judge Wilkins reconsider his denial of my motion and essentially reopening the case. If the 

trial court record closes as it is there are very serious publicity and pending 

litigation risks for the SEC that you can imagine as well as I can. I’m not 

going away and this issue is not going away. I am prepared to take the 

issue as far as I can. $300,000 is a lot of money to me, and I don’t have 

time to earn it back. I’m almost 70 and have time on my hands. I’m not 

a part of any Stanford victims group and really don’t have any sympathy 

with such heavy-handedness. I don’t even know (or want to know) any Louisiana Republicans. I’m not a mindless crusader. I am a pragmatic lawyer 

who prefers solutions that are in everyone’s best interest. But, if that is 

unachievable, I can be a pig-headed lawyer who doesn’t tire easily.

I’m on your side and, consistent with protecting the IRA victims, will do 

anything to advance our common cause.

Mendel and Martens did not reply. Not easily put off, I followed up with an email 

on September 21, 2012, as follows:

It has been well over a week since I sent you the email below. Yet, I have 

no response. Rule imposed time limits on motions to reconsider Judge Wilkins’ September 4 order denying my motion to intervene are running. My 

patience is not limited solely by my psyche.


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I’ve reached out to you a couple of times in an effort to commence a dialogue about ways we might achieve common goals without acrimony. I recognize that my motion to intervene could be interpreted as critical of your 

competence and/or good faith. My initial assumption has been that your 

agreement to the fact stipulation was an innocent mistake. I know you are 

both very busy. We all make mistakes, particularly in matters that are low 

on our priority lists.

Because the SEC initially decided not to bring this action, it has been asserted that the SEC only did so in response to political pressure. In that 

context, I can understand the SEC’s possible ambivalence about the outcome. Politicians will claim credit if the suit is successful, and if you lose, 

the SEC’s initial reluctance will appear more credible. I am sure that ambivalence impacts the SEC’s priorities and your consequent attention to this 

litigation.

I understand your reluctance to begin a dialogue. If I were you, I would prefer that I just fade away. But, I won’t. There is a possibility that no one 

will notice anything I file with the courts and that you will not be embarrassed by it. Given the emails I’ve received from Stanford victims I’ve never 

heard of, I doubt that. I do not intend to file anything embarrassing to you 

unless you force my hand.

At page 5 of your memorandum in opposition to my motion to intervene, 

you made the following statement:

‘None of this is to say that there is no opportunity for Mr. Cheatham’s situation to be addressed under SIPA. Consistent with SIPA, the Commission 

will consider Mr. Cheatham’s factual situation, investigate his claims as 

necessary, and, if the Commission deems it appropriate, refer the facts to 

SIPC for appropriate action, including potentially a liquidation proceeding.’

That statement, based on my understanding of the law, is materially misleading in that it fails to disclose that even if the SEC took the action specified, unless the SEC prevails in this action based on the stipulated facts, 

SIPC could (and undoubtedly would) summarily deny any recommendation 

with respect to my claim by the SEC. If so, the SEC could not sue SIPC 

to overturn that summary denial. SIPC’s success in this action would preclude any subsequent action by the SEC to seek the same remedy under 

principles of res judicata without regard to any differences between my 

facts and the SEC/SIPC stipulated facts.

Based on the foregoing misleading representation by the United States of 

America Government agency with principal responsibility for the protection 

of investors and the assurance of securities market integrity, I would have 

done exactly what Judge Wilkins did and denied my motion to intervene. 

I have asked you to provide me with whatever support you have that demonstrates the truth of your statement. You have not.

In my view, if your statement about your future ability to protect my interests and those of others similarly situated is not supportable, you are legally required to so inform Judge Wilkins.

Again I received no response. Undaunted, I sent another email to Mendel and 

Martens, this time simply directing them to the page at the DC Bar’s Web site setting out its ethics rule 3.3:

Rule 3.3—Candor to Tribunal

(a) A lawyer shall not knowingly:

(1) Make a false statement of fact or law to a tribunal or fail to correct a false 

statement of material fact or law previously made to the tribunal by the 

lawyer, unless correction would require disclosure of information that is 

prohibited by Rule

1.6; [3] Legal argument based on a knowingly false representation of law constitutes dishonesty toward the tribunal. A lawyer is not required to make 

a disinterested exposition of the law, but must recognize the existence of 

pertinent legal authorities. Furthermore, as stated in subparagraph (a)(3), 

an advocate has a duty to disclose directly adverse authority in the controlling jurisdiction that has not been disclosed by the opposing party and 

that is dispositive of a question at issue. The underlying concept is that 

legal argument is a discussion seeking to determine the legal premises 

properly applicable to the case.


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Finally, a response from Martens:

We received your emails of September 11, September 21, and October 1, 

2012. While we are aware of your disagreement with our litigating positions, we stand by the briefs filed and the stipulations entered into by the 

SEC in the SIPC matter. The stipulations are a fair representation of the 

facts as we understand them. We do not think that your particular circumstances, as described in your communications with us and in your District Court filings, change our analysis of the proper litigation posture for 

this case. And, for the reasons stated in our response to your motion to intervene, we do not think you met the appropriate standard for intervention 

in the District Court.

That said, SEC staff are gathering relevant records that pertain to you so 

that a determination can be made as to whether to refer your set of facts 

to SIPC for appropriate action. We are unaware of conclusive authority (nor 

have you cited any such authority, even in your Reply brief) that would 

foreclose the SEC from seeking additional action from SIPC with regard to 

holders of SIBL CDs on a materially different set of facts. If there is a res judicata defense that might be lodged against such a second effort, we do 

not think that we misled the Court in any way with respect to the potential 

existence of such a defense.

We understand your frustration with the outcome in the District Court. 

However, we disagree with your suggestions that I or other SEC attorneys 

have not met our professional responsibilities in this matter.

Another lie: ‘‘The stipulations are a fair representation of the facts as we understand them.’’ The statement that there is no ‘‘conclusive authority’’ that res judicata

would bar a subsequent action is a bit more subtle. It is possible that the U.S. Supreme Court could hold that the SEC’s action against SIPC is an exception to the 

time honored principle of res judicata, but the odds against that are more than a 

million to one. I am not aware of any exception to the principles of candor that excuses probable lies that are not ‘‘conclusively’’ false. Finally, the SEC was not ‘‘gathering relevant records’’ that pertained to me. I had many of those records and was 

never asked for them by the SEC. 

I was virtually certain that the Court of Appeals would affirm Judge Wilkins’ decision based on the SEC/SIPC fact stipulation. It was obvious to me that the SEC 

legal staff had been totally captured by the securities industry. It did not surprise 

me that Martens soon left the SEC to join WilmerHale where he represents the industry. He probably made more than my $300,000 in his first 3 months, but it will 

be a long time before he earns more than was lost by the other 1,399 Stanford IRA 

customers he shafted. 

PREPARED STATEMENT OF LAURENCE KOTLIKOFF

SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS FIELD HEARING

BATON ROUGE, LOUISIANA

AUGUST 3, 2015

Mr. Chairman, I deeply appreciate your invitation to participate in this hearing 

of the Senate Committee on Banking and Urban Affairs to review the performance 

of the Securities Investor Protection Corporation (SIPC) following the failure of 

Stanford Group Company (SGC), the SIPC member broker-dealer, which played a 

strategically important role in Allen Stanford’s massive fraud by which he stole the 

investment deposits of some 8,000 customers for his private, personal use. 

Like most Americans who place funds with a federally registered brokerage firm 

for investment in national and international equity and debt securities, I had paid 

little attention to the performance of SIPC in its administration of the Securities 

Investor Protection Act of 1970 (SIPA), assuming the advertised protection of up to 

$500,000 per account would be readily available should the failure of your broker 

occur. However, the failure of Bernard Madoff’s firm following his confession of 

Ponzi fraud—in which I personally know victims who suffered serious financial loss, 

with no help from SIPC—opened my eyes to the unsettling and shameful reality of 

SIPC’s quick recourse to self-preservation mode. 

If there were any lingering doubts as to self preservation being SIPC’s prime motivation for its decisionmaking, they should be put to rest by its obstinate refusal 

to initiate a liquidation in the Stanford Financial Group fraud—capped by its arrogant judicial challenge to the directive from its plenary oversight authority, the Securities and Exchange Commission (SEC). 


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Certainly many of your colleagues, with constituencies untouched by either of 

these massive Ponzi frauds, simply have not acquainted themselves with the extent 

of SIPC’s departure from the congressionally intended objectives of SIPA in 1970. 

That legislation was the product of earnest cooperation and constructive negotiation 

between the securities industry’s leadership and the Congress with the active participation of the Nixon Administration’s Treasury Department and the SEC. The 

statute was enacted in response to a rash of broker-dealer failures in order to boost 

investor confidence. 

Today, no investor can be confident their assets are protected by SIPC as Congress intended when SIPA was enacted. 

Senator Vitter, I commend you for holding this field hearing to build a record to 

educate your colleagues. I also commend the esteemed Chairman of the Senate 

Banking Committee, Senator Richard Shelby, for authorizing you to do so. It is vitally important for the national public to understand how SIPC’s flawed administration of SIPA has denied the customer-victims of Allen Stanford’s fraud the protection from total financial loss they have rightfully expected. As you well know, the 

personal suffering of your own constituents is a direct consequence of SIPC’s narrow, hyper-technical perspective of its mission under SIPA’s remedial provisions. 

It is also vitally important that the public and your colleagues in Congress have 

a clear understanding of SIPC’s misguided conduct and likewise the remarkably erroneous judicial decisions that have affirmed SIPC’s actions—or in the Stanford 

case—glaring inaction. 

It is absolutely beyond dispute that the preeminent congressional objective in the 

passage of SIPA was to bring stability to the national securities markets through 

the restoration—and then maintenance—of the general public’s confidence in participating as investors in equity and debt securities. Maintaining that public confidence is even more important in 2015 than it was 1970 because of the exponential 

growth of the rank and file investors who participate in the securities market as 

a means of building a secure financial future. 

It should be duly noted that SIPA was enacted as an amendment to the Federal 

securities laws and not as an amendment to the Federal Bankruptcy Act. Not only 

did SIPA establish a special liquidation process for failed SEC-registered and regulated broker dealer firms, but it included special provisions not available in a traditional bankruptcy liquidation administered under the U.S. Bankruptcy Code. These 

provisions were specially designed to maintain public confidence in securities investment and, thereby, stabilize the structure of our capital markets by giving priority 

to broker-dealer customer claims over all other unsecured creditors in the liquidation process. 

The three most unique and critical features of SIPA that differentiate a SIPC-administered liquidation from a traditional bankruptcy proceeding are:

(1) The SIPC Fund, capitalized by annual assessments of the securities firms, 

which provides a resource for mitigating losses not recoverable from the debtor’s estate up to a cap of $500,000 per customer account;

(2) ‘‘Customer property,’’ a privileged division of the debtor’s estate, with 

prioritized claims allocations placing the brokerage firm’s customers ahead of all 

other unsecured creditors; and

(3) Repeated directives throughout the statute for promptness in actions for processing customer claims, due to the significant disruption to the financial affairs of 

individual customers.

For SIPA to fulfill its priority objective of maintaining public confidence in our 

securities markets, it is essential for SIPC and the Federal courts to be attentive 

to giving effect to these special features that are provided for in the unique liquidation proceedings administered under SIPA. Conflating SIPA’s unique provisions, 

which are utterly separate from those of a traditional bankruptcy proceeding, is contrary to the very spirit in which SIPA was enacted. 

Yet that is exactly what SIPC has done, and it has done so in the name of selfpreservation—at the expense of innocent brokerage customers who entrust their 

savings to a SIPC-member firm. 

SIPC’s principal, self-serving misapplication of SIPA in the Stanford case was 

most evident in its abuse of discretion in its interpretation of the term ‘‘customer.’’ 

SIPC chose to dance on the head of a pin by advancing legal arguments that gave 

credibility to a fraudulent shell company organized under the laws of Antigua and 

Barbuda, Stanford International Bank (SIB), rather than accepting the factual finding of U.S. Federal courts that landed Allen Stanford in prison with a 110-year sentence and a $6 billion forfeiture fine. 


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By not recognizing the Stanford fraud as a closely controlled, unified scheme in 

which SGC served as the engine of a massive scheme created solely to misappropriate customer funds, SIPC was able to argue that the SIB CD investors were not 

SGC customers. SIPC, in its self-preservation mode, shockingly made legal arguments in direct conflict with the factual findings in numerous judicial proceedings 

in the District Court for the Northern District of Texas, and affirmed by the Fifth 

Circuit Court of Appeals. 

Instead of accepting the findings of the other Courts, SIPC argued the legitimacy 

of SIB, and insisted it was a completely separate entity from the SIPC-member, 

SGC. By making this argument, SIPC had found its loophole to deny protection to 

investors whose funds were stolen by the owner of one of its member firms. SIPC 

determined those investors were SGC clients, but not its ‘‘customers’’ under SIPA, 

which SIPC astonishingly deemed a ‘‘statutory term of art’’ Congress used when enacting SIPC’s singular guiding statute—SIPA. The SEC, in the true spirit of SIPA, 

disagreed. 

Allen Stanford owned and controlled the Stanford Financial Group of Companies, 

which included numerous corporate entities, including SGC and SIB. The U.S. 

Courts all the way up to the Supreme Court had already determined and/or acknowledged that ALL of Stanford entities operated as one unified, fraudulent enterprise operating out of Houston, Texas. SIPC disagreed. 

While the District Court overseeing the Receivership proceedings of the Stanford 

entities determined that corporate disregard doctrine applied to SIB because, ‘‘It 

would defy logic and run afoul of equity to treat a fictitious corporation as a real 

entity.’’ But SIPC was not looking to see the logic. 

The Receivership Court stated, ‘‘This Court will not engage in semantics that obfuscate the purpose of the statute’’ (in this instance, the Chapter 15 provision under 

the U.S. Bankruptcy Code). SIPC deemed itself a higher authority than the Receivership Court, and chose to engage in semantics in order to obfuscate the purpose 

of its guiding statute. 

The Receivership Court determined that ‘‘not aggregating the entities . . . would 

perpetuate an injustice.’’ SIPC chose to perpetuate an injustice. 

SIPC found none of the factual findings in dozens of civil litigation proceedings 

related to the liquidation of the Stanford estate to be persuasive. Instead, SIPC refused to accept the holistic view of Stanford’s fraudulent enterprise and remained 

adamant in its refusal to initiate a liquidation of SGC, the broker-dealer entity, with 

which all U.S. purchasers of the SIB CDs were obligated to sign customer agreements. 

Faced with an implacably negative SIPC, customers of a failed broker-dealer such 

as SGC have only one avenue of recourse to have their cause reviewed by a Federal 

court—and that is to petition the SEC. The Stanford Victims Coalition (SVC), to its 

great credit, refused to surrender to SIPC’s arrogant obstinacy to recognize the facts 

in the Stanford case. The SVC generated thousands of pages of documentary evidence of the pivotal role played by the SIPC-member broker-dealer in the conduct 

of the fraud. With strong support from more than 100 Members of Congress, led by 

you, Senator Vitter, and Senator Cassidy, the SEC agreed with the view of Federal 

District Court that the Stanford fraud had to be viewed as a singular entity that 

acted through its most logical and obvious pubic interface—SGC, the SIPC-member 

broker dealer. By obliging prospective investors to register as customers of SGC, 

Stanford was assured that a sales force of FINRA Registered Representatives who 

would have direct access to wield their sales magic (and of course to be compensated 

generously from the customers’ deposited funds). 

Using its express authority under SIPA, which gives unquestioned vitality to 

SEC’s role as plenary oversight authority over SIPC, the SEC Commissioners voted 

to direct SIPC to initiate a SIPA liquidation of SGC. After months of fruitless discussion with SIPC and its appointed Board, the SEC turned again to the statute 

and applied to the Federal District Court in the District of Columbia for an order 

in support of its directive for SIPC to initiate a liquidation of SGC. This marked 

the first time in the 44 years of SIPA’s history that the SEC had felt compelled to 

exercise this extraordinary power in its oversight authority. 

The next chapter of this inconceivable saga should surely infuriate a preponderant 

majority in the Congress, and awaken all to their sworn obligation to ensure that 

the intent of the Congress—most particularly in remedial statutes such as SIPA—

is faithfully fulfilled by those charged with administrative responsibility. In an act 

of indescribable arrogance and disobedience, SIPC refused to comply with the SEC’s 

directive and formally contested the SEC’s application for an order enforcing its directive to SIPC. The SEC had no choice but to invoke its legislative authority to 

initiate an enforcement action against SIPC by filing a lawsuit for its blatant failure 

to discharge its obligations under SIPA. 


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Regrettably, SIPC’s insolent and irresponsible performance in this case has been 

eclipsed by decisions of both the District Court and the Circuit Court of Appeals for 

the District of Columbia upholding SIPC’s legal challenge and denying the SEC’s 

application for a Court order to enforce its directive to SIPC. The two Courts take 

different interpretive reasoning to reach the same indefensible conclusion. What 

their decisions have in common, other than outcome, is the application of SIPC-manipulated interpretations of SIPA that are completely devoid of logic and commonsense. Both decisions benefited from an inexplicable trial-level error by SEC counsel, 

by entering into a stipulation of facts, which erroneously asserted that SGC customers had direct contact with SIB and made their payments directly to SIB. The 

reality is that the contact was exclusively with SGC, and payments were executed 

on SGC’s instruction. 

It is vitally important for the Congress to understand the faulty interpretive reasoning of each Courts—particularly so because the Circuit Court’s decision is now 

the current controlling case law concerning the extent of the authority granted by 

the Congress to the SEC in the oversight of SIPC’s operations. Beginning with the 

District Court, it devoted most of its interpretative efforts to a determination of the 

standard of proof, which the SEC must meet to obtain the Court order enforcing 

its directive to SIPC. Since the SEC’s request was unprecedented, there was no 

guiding case law, and SIPC used that reality to its advantage. Was the standard 

to be based on ‘‘probable cause,’’ the standard applicable to SIPC applications to initiate SIPA liquidation? No, the Court decided that ‘‘due process’’ required a sterner 

burden, namely, ‘‘a preponderance of the evidence.’’ It reached that conclusion by 

reasoning that since SIPC is a private entity funded by private firms, it should be 

accorded the same ‘‘due process’’ applicable to other private parties within the SEC’s 

regulatory ambit—for example, a securities firm facing an enforcement action for alleged violation of the Federal securities laws. Even one trained in the ‘‘dismal 

science’’ rather than the law might conclude that the Court’s reasoning doesn’t pass 

the ‘‘apples and oranges’’ test. But that tortured reasoning, coupled with the SEC’s 

stipulation blunder, was enough for the District Court to deny the SEC’s application 

and effectively neuter the SEC’s directive to its subsidiary agency. 

The SEC took the matter to the Circuit Court of Appeals. Certainly this Court 

would see the folly of the District Court’s analysis. And it did, but it also conjured 

a folly of its own. It didn’t bother with the ‘‘standard of proof’’ issue. Moreover, it 

seemed to embrace the unified enterprise view that within Stanford’s controlled empire, all of its parts were essentially interchangeable. But what appeared to be an 

enlightened view suddenly darkened when the Court embraced an equitable theory 

of consolidation by which a customer’s legal relationship with the SIB as a CD holder is transferred to the broker-dealer, SGC. This finding opened the door for SIPC’s 

back-up legal argument. 

SIPC argued that ‘‘if’’ equitable consolidation was considered by the Court, the 

fact the CDs were ‘‘debt instruments’’—as many securities are—the CD investor was 

‘‘lending’’ money to the SIB; and therefore a claim with SIB for debt owed to its customers would be equivalent to a claim for SGC’s debt—triggering a rarely used customer exclusion provision under SIPA which restricts claims that are for the for the 

overhead of the broker dealer. This exclusion was created in an amendment to SIPA 

to address claims for creditors who intentionally loaned funds to a brokerage firm 

that then became insolvent. Basically, the amendment to create this particular customer exclusion was to maintain the priority status a SIPA liquidation affords to 

investors who purchase securities from a brokerage firm over creditors who became 

a part owner of the firm—in other words, to protect those who invested WITH a 

brokerage firm, rather than IN a brokerage firm. By the way, SIPC advanced this 

same legal argument in at least three other very similar cases, which three different 

Circuit Courts deemed an invalid argument because—just like in the SIB CD purchasers—the customer’s expectation was they were purchasing securities, not lending their money to their broker. Buttressing that argument three different times in 

three different cases didn’t stop SIPC from making a last-ditch attempt to shun its 

obligation to protect investors. Such legal jabberwocky is adored by SIPC and its 

hired counsel, who make millions of dollars in profit in order to further SIPC selfpreservation culture. Customer perspective and reasonable expectations be damned, 

it is what works for SIPC that counts. 

At the end of all the excuses, which did pan out for SIPC merely because it outlawyered the SEC, SIPC protection for securities investors cannot possibly deliver 

the confidence-building benefits contemplated by the Congress because investors are 

subject to highly technical rules and exclusions never intended when SIPA was enacted. Such an approach destroys the remedial purposes of the statute. 


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Additionally, Congress never intended to give legislative deference to a non-Government authority over the SEC. The result is SIPC operating above the law without regard for the intent of the remedial statute that created the organization. 

Senator Vitter, I like to believe that our elected representatives much prefer commonsense over arcane legal theories. If I’m correct, then you and your colleagues 

will conclude that a Congress which, in drafting the SIPA, made repeated calls for 

prompt action would not give the SEC the express authority to direct SIPC to initiate a liquidation—then turn on a dime to give SIPC the right to challenge that 

directive. Such an inconsistency is sharply at odds with the intent for SIPA liquidations to proceed with promptness in order to protect investors and facilitate investor 

confidence. Moreover, it is highly destructive of the SEC’s legal authority as plenary 

overseer of SIPC. 

In conclusion, I’d like to express my strong support for S. 67: The Restoring Main 

Street Investor Protection and Confidence Act of 2015, which you have introduced 

in the Senate as a companion to the legislation authored in the House of Representatives by Congressman Garrett and Congresswoman Maloney, the Chairman and 

Ranking Member of the House Subcommittee on Capital Markets and Government 

Sponsored Enterprises. Passage of this legislation is urgently needed in order for investors across this country to be protected not only from thieves like Stanford and 

Madoff, but also from SIPC. Until Congress acts to restore the confidence building 

purposes of SIPA and to rectify the deeply flawed decision of the Second Circuit in 

the Madoff case and the equally problematic decision of the DC Circuit Court of Appeals in the Stanford case. Until then, the rank and file investor must be made 

aware of their own Government’s lack of authority to force SIPC to protect their 

missing assets if their brokerage firm becomes insolvent. These investors must also 

keep in mind what level of protection covers his or her account if their brokerage 

firm fails and SIPC and its Trustee are permitted to value their Net Equity after 

the fact by using an absurd cash-in minus cash-out methodology Madoff customers 

have been stuck with. 

Regrettably, until your legislation is enacted, that is the very real uncertain state 

of affairs confronting American investors. I earnestly hope that you and Chairman 

Shelby and your original co-sponsor from the 113th Congress, Senator Schumer will 

begin serious discussions among yourselves and with the co-sponsors of the House 

companion legislation, H.R. 1982, aimed at moving the legislation. It is my sincere 

belief that SIPC’s misguided administration of SIPA and the Circuit Courts of Appeals’ decisions affirming SIPC’s actions pose a very real threat to U.S. investors. 

And the victims of the Madoff and Stanford frauds, numbering a total of over 10,000 

innocent account holders including thousands of your own constituents here in Louisiana—most of whom are at, or near, retirement—have suffered for 6 years waiting 

for a just resolution of their victimization by SIPC. Please awaken your colleagues 

to their plight. Thank you again for this public hearing.


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