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A LEGISLATIVE PROPOSAL TO AMEND THE 

SECURITIES INVESTOR PROTECTION ACT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

NOVEMBER 21, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–53 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

SPENCER BACHUS, Alabama 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RANDY NEUGEBAUER, Texas 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

LYNN A. WESTMORELAND, Georgia 

BILL HUIZENGA, Michigan 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

KEITH ELLISON, Minnesota 

MELVIN L. WATT, North Carolina 

BILL FOSTER, Illinois 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

DANIEL T. KILDEE, Michigan 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

November 21, 2013 ........................................................................................... 1 

Appendix: 

November 21, 2013 ........................................................................................... 35 

WITNESSES 

THURSDAY, NOVEMBER 21, 2013 

Friedman, Neil, a customer of Bernard L. Madoff Investment Securities .......... 18 

Hammerman, Ira D., Executive Vice President and General Counsel, Securities Industry and Financial Markets Association (SIFMA) .............................. 9 

Harbeck, Stephen P., President and CEO, the Securities Investor Protection 

Corporation (SIPC) ............................................................................................... 7 

Kogutt, Angela Shaw, Director and Founder, the Stanford Victims Coalition ... 11 

Shean, Suzanne, a customer of Stanford International Bank ............................. 16 

Stein, Ron, President, the Network for Investor Action and Protection (NIAP) 13 

APPENDIX 

Prepared statements: 

Friedman, Neil ......................................................................................................... 36 

Hammerman, Ira D. ................................................................................................ 39 

Harbeck, Stephen P. ................................................................................................ 50 

Kogutt, Angela Shaw ............................................................................................... 67 

Shean, Suzanne ....................................................................................................... 125 

Stein, Ron ................................................................................................................. 151

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Written statement of the Financial Services Institute .................................. 156 

GAO report entitled, ‘‘Securities Investor Protection, The Regulatory 

Framework Has Minimized SIPC’s Losses,’’ dated September 1992 ........ 163 

Email from Stephen P. Harbeck, dated May 21, 2009 .................................. 171 

Harbeck, Stephen P.: 

Written responses to questions submitted by Representative Hultgren ..... 172 

(1) 

A LEGISLATIVE PROPOSAL TO AMEND THE 

SECURITIES INVESTOR PROTECTION ACT 

Thursday, November 21, 2013 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:30 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Hurt, Neugebauer, 

Huizenga, Mulvaney, Hultgren, Ross; Maloney, Sherman, Perlmutter, Scott, Peters, Watt, and Carney. 

Chairman GARRETT. Good morning, everyone. The Subcommittee 

on Capital Markets and Government Sponsored Enterprises will 

come to order. 

Today’s hearing is entitled, ‘‘A Legislative Proposal to Amend the 

Securities Investor Protection Act.’’ I thank all the members of the 

panel. 

And before we turn to the panel, we will begin with opening 

statements. I recognize myself for 10 minutes. 

Today’s hearing is to further examine legislation introduced by 

myself and also by Ranking Member Maloney, H.R. 3482, the Restoring Main Street Investor Protection and Confidence Act. 

I want to begin by directly recognizing and commending the esteemed gentlelady from New York, my colleague, for all of her hard 

work and dedication to this bill and to this issue as well. It has 

been an honor, and it has been a privilege to work closely with her 

on this very important issue. I also do want to thank the panelists 

for coming, especially our two victims who have felt the full brunt 

of the two largest financial frauds in our Nation’s history. 

I also want to specifically thank all of my fellow members of the 

committee, and the broader Congress as well, who have formally 

cosponsored this legislation that we are discussing today. I think 

right now we are at about one quarter of the committee on the bill. 

I hope that number continues to rise as Members learn more about 

this important subject. 

I also want to express my sincere thanks to Senators David Vitter and Chuck Schumer for introducing companion legislation in 

the U.S. Senate. Hopefully, now, with this bicameral support, it 

will aid us in coming to a more expedited resolution to this problem. 

2 

Now, I want to make it absolutely clear that I am not advocating 

for this legislation because I am trying to score any political points. 

I am supporting this legislation because I have studied the law, reviewed past precedent, and analyzed the original congressional intent. And it is very clear to me that SIPC and the trustees are not 

applying the law as intended by Congress, and they are not adhering to their own past precedent, which has been affirmed by the 

courts. So the purpose of this legislation today is to reaffirm the 

original intent of the law and to correct the misapplication of the 

law by SIPC and the trustees. 

It is not some retroactive change of the law. It is a reaffirmation 

of it. SIPC now argues that it is nothing like FDIC insurance. Yet 

years ago, President Nixon’s original signing statement of SIPA 

stated, ‘‘Just as the Federal Deposit Insurance Corporation protects 

the users of banking services from the danger of bank failures, so 

will the Securities Investor Protection Corporation protect the 

users of investment services from the danger of brokerage firm failure.’’ 

In case that was not convincing enough, I also found this quote 

from Senator Edmund Muskie during the Senate deliberations of 

SIPA legislation. He said, ‘‘Mr. President, since 1934, the United 

States has insured bank deposits under the FDIC and the Federal 

Savings and Loan Corporation. These insurance programs protect 

bank depositors from loss of their savings because of bank failures. 

And the existence of this deposit insurance has become a source of 

confidence in the soundness of our savings institutions. S. 2348, the 

Securities Investor Protection Act of 1970, would accomplish a 

similar purpose for security investors by protecting them from 

losses because of the failure of their brokers.’’ 

If that wasn’t enough, Senator Harrison Williams from New Jersey, then the chairman of the Senate Securities Subcommittee, 

stated the legislation ‘‘would establish a Federal brokers-dealers insurance corporation. Granted, it is not the FDIC, but the FBDIC 

is pretty darn close to it.’’ 

I have a 2009 email from from Mr. Harbeck to congressional 

staff, where in it, he directly compared SIPC to FDIC. I would like 

to later insert that in the record. 

In Mr. Hammerman’s testimony, he suggested SIPC was never 

intended to cover frauds, and said the legislation was ‘‘to introduce 

a new public policy for SIPA and SIPC, namely insuring investors 

against the risk of loss due to securities fraud.’’ 

Yet when going over the reason for the legislation, Senator 

Muskie specifically said, ‘‘There remain some very basic problems 

within certain parts of the securities industry. There are problems 

of obsolete management techniques, careless business practices, inadequate self-regulation, and occasional fraudulent activities. All of 

these account for some part of the industry’s financial difficulties 

today.’’ 

To add further clarification to this topic, the head of the New 

York Stock Exchange, Robert Haack, wrote to the SEC at the time 

to provide their analysis of the potential loss to new SIPC funds. 

The letter states, ‘‘I should make it clear, however, that no one can, 

in our opinion, make a realistic or useful evaluation of the potential 

dollar exposure to SIPC because there is no known way to measure 

3 

the liability which might be faced in the event of a broker-dealer 

failure. The fraud of Allied Crude Vegetable Oil against Ira Haupt, 

for example, caused the loss of $27 million, which in no way could 

be anticipated in advance.’’ 

In 1992, GAO conducted a report on the operations of the program and said, ‘‘Within the last 6 years, 26 of the 39 SIPC liquidations have involved failures due to fraud.’’ They also stated in the 

report, ‘‘In essence, SIPC is a backup line of protection to be called 

upon generally in the event of fraud or breakdown of other regulatory protections.’’ 

With all that, I struggle to see how we are putting a new public 

policy objective of fraud protection on SIPC when the record is this 

long and this clear that protecting investors from fraud was a core 

function of the original statute and has been applied that way 

throughout its existence. 

Again, turning to Mr. Harbeck’s testimony, he suggests that following a final account statement to determine a customer’s net equity somehow legitimizes a Ponzi scheme. SIPC argued for, and the 

Second Circuit Court agreed, to support using the exact same 

methodology in the New York Times securitization Ponzi scheme 

resolution in 2004. That New York Times case is very similar, almost identical, to the Madoff case. You see, time and time again, 

SIPC changes the rules and its story after the fact when it suits 

its own purposes. 

The clear truth and the long and exhaustive record makes it 

clear that SIPC is an insurance program set up by Congress to protect investors and to ensure the appropriate functioning of our Nation’s securities markets, especially in the case of fraud. So, regardless of your views about the original appropriateness of programs 

like these, it is a current duty as elected Representatives to ensure 

the law is followed and administered as originally intended by Congress, and that investors receive the protection they are promised. 

The legislation before us is designed to improve protections of securities investors, particularly the regular retail investor lacking professional expertise in the market. It is the direct outgrowth of a 

stunning regulatory failure to detect and promptly respond to massive frauds and failures of SEC registered broker-dealers, as in the 

Madoff and Stanford cases, or now in the McGinn Smith case, 

which destroyed the principal savings of over 12,000 investors. The 

devastation of these losses has been compounded by the failure of 

SIPC to fulfill its obligation as intended by Congress back in 1970. 

So the provisions are commonsense reform in the bill, specifically 

to do these things: one, remove the inconsistences in the application of SIPC coverage, which have led to greater confusion; two, to 

assure the SIPC protective benefits goes to innocent customers; 

three, limit the exposure of taxpayers by establishing new accountability measures for SIPC’s borrowing authority; four, avoid overtechnical legal interpretation at odds with SIPA’s remedial objectives and the original spirit and intent of the law; five, improve the 

fiduciary character of SIPA’s liquidations; six, strengthen SEC’s 

plenary oversight of SIPA; and finally, direct the SEC and FINRA 

to give high priority to inspection procedures which verify and validate the accuracy and authenticity of information provided by 

broker-dealers to their customers. 

4 

All of these proposed amendments seek to assure that SIPA is 

administered with constant attention to the perspective and the 

reasonable expectations of the broker-dealer customers, those 

whose confidence’s marked participation SIPA is intended to engender and maintain. Now, a point too often overlooked is that SIPA, 

while using many of the established practices of the Bankruptcy 

Code, is unconditionally an amendment to the Federal securities 

law meant to strengthen the efficient operation of the capital markets by maintaining the confidence of the retail user. It is the backbone of the system. Accordingly, the bill seeks for the future administration of SIPA to clarify that securities law primarily shall 

have the operative recognition. 

Now, Mr. Harbeck, your written statement this morning further 

emboldened me in my determination to put SIPC back on the right 

course in carrying out SIPA’s grand objective of deploying its resources to help the financially devastated, innocent and unsophisticated victims of broker-dealers in bankruptcy, including fraud, such 

as those who are with us this morning, rather than lawyering up 

to see how narrowly it can interpret the law’s remedial objectives. 

It is basically your complete confidence in SIPC performing as the 

1970 Congress intended that troubles me. 

I don’t doubt for a second that you believe with genuine conviction that SIPC actions are absolutely correct, not only with SIPA’s 

letter, but the spirit of the law. And I don’t question your integrity 

for a moment. But I am deeply disturbed by your satisfaction with 

SIPC’s performance in these massive fraud cases, which have 

thankfully captured the attention of Congress now with profound 

concern. Our bill seeks to reaffirm the original intent of Congress 

in the enactment of SIPA, to make reforms in its administration 

for the future and, above all else, to change the culture of SIPC to 

one that seeks to fulfill and not hinder SIPA’s remedial purposes. 

I will close by saying I am thankful to a lot of people today. I 

said so at the beginning of my statement. But with all the victims 

and their families still reeling from these frauds, I must say that 

this is not a thankful day. But I will be thankful once SIPC is reformed and the original intent of Congress is reaffirmed. 

With that, I conclude, and I now turn to the cosponsor of this legislation, the gentlelady from New York. 

Mrs. MALONEY. Thank you very much, Mr. Chairman, not only 

for holding this hearing, but for your tireless work on this really 

important bill. We, unfortunately, share the same situation of representing many people who were hurt by these Ponzi schemes. And 

I know how hard that you focused on trying to help them. 

And I welcome all of our panelists, particularly our two victims, 

who will help put a human face on what we are arguing about 

today and debating today. Unfortunately, when Bernie Madoff and 

Allen Stanford’s massive Ponzi schemes came crashing down, they 

exposed several key flaws in the Securities Investor Protection Corporation and how it operates. Our bill attempts to fix these flaws 

and would reaffirm the primary purpose of the Securities Investor 

Protection Act, which is to protect customers of broker-dealers and 

to maintain investor confidence in our securities markets. 

SIPC is supposed to maintain this confidence by winding down 

failed broker-dealers in a fair and equitable manner, which above 

5 

all means protecting innocent customers’ assets. Unfortunately, in 

the Madoff case, SIPC and the trustees have pursued a highly aggressive strategy that in my opinion has unfairly punished some of 

my constituents who are innocent customers, and has almost certainly reduced investor confidence in our securities markets. 

In some cases, former Madoff customers who had withdrawn 

their money many, many years before the firm’s failure learned for 

the first time that their money was being clawed back only when 

the trustees filed a lawsuit against them. This is hardly the way 

to promote confidence in the securities market. And our bill would 

put a stop to these tactics. 

Now, SIPC has argued that these clawbacks are allowed under 

the Federal Bankruptcy Code. But it is important to remember 

that Congress enacted the Securities Investor Protection Act in the 

1970s because the Bankruptcy Code was not very useful for winding down broker-dealers. Congress recognized that broker-dealers, 

like commercial banks, are fundamentally different from regular, 

nonfinancial companies. And just as commercial banks are liquidated by the FDIC, broker-dealers need to be liquidated by SIPC. 

It is important to recognize that broker-dealers are different because they are heavily regulated by the SEC, which examines their 

books and records to make sure that customer money is actually 

there, makes routine on-site inspections, and requires annual audits of the broker-dealer. It is this seal of approval from the government that customers rely on, and which allows investors to place 

their confidence in the country’s securities markets. They can have 

confidence in our securities markets because they have confidence 

in the SEC. Also, because they have confidence that if their brokerdealer fails, they will be protected by SIPC and treated fairly. 

The account statements are also good enough for the government 

to rely on. After all, these customers pay taxes to the IRS on the 

profits that they see on their account statements. Now, SIPC says 

that they can claim a tax deduction on this IRS payment in the 

case of a clawback, but most of these people are retired and don’t 

have the income to have a tax deduction. In addition, customers 

make all of their financial decisions based on the financial statements that they receive from their brokers, which tell them how 

much money is in their account. For SIPC and the trustee to come 

in years later, in some cases 10, 20, 30 years later and say, sorry, 

you actually can’t rely on these financial statements that the government has essentially been signing off on for years, they are 

wrong. SIPC should not be able to claw back money that innocent 

customers had withdrawn years ago. Our bill would prevent these 

unfair clawbacks of money that innocent customers had long ago 

withdrawn. It would, however, still allow clawbacks in cases where 

an investor actually knew about the fraud when they withdrew 

their money. That is the way it should be. Innocent people should 

be protected, while customers who knew about the fraud do not receive the benefit of government protection. 

The time has now come to reform SIPC. And I believe that our 

bill is a good starting point toward a lively debate on this issue. 

I thank the chairman and all of our participants, my colleagues, for 

being here today. And I thank particularly the chairman’s, I would 

6 

say inspiring, leadership on this. He has been very dedicated in 

working on this issue for a long time. 

And I yield to Mr. Sherman for 2 minutes. 

Mr. SHERMAN. I want to thank the Chair and the ranking member for these hearings. They have studied this issue, and know far 

more about it than many of us on the subcommittee. There seems 

to be a general agreement that the limits on SIPC insurance 

should be clear and should be prospective. And the payout from 

any insurance company needs to be limited by the limit of the insurance rather than limited only by our empathy for the insured 

beneficiary. The FDIC faces many of the same issues because the 

limit is per customer, in effect, or per depositor. If Three Brothers 

Moving and Storage Company has a $750,000 deposit at a bank, 

they only have $250,000 of FDIC insurance. If three brothers each 

open up a quarter million dollar account at the same bank, those 

three brothers collectively have $750,000. The account name matters. The entity that is making the investment matters. And 

whether it be a partnership, a trust, or a corporation, we cannot 

allow General Motors to have $100 million of FDIC insurance just 

because General Motors has millions of shareholders. 

We have cases in progress now, and I think they ought to be decided based on what the law was at the relevant time. And I would 

count on judicial and quasi-judicial entities to make that determination without a lot of help from Congress. But that doesn’t 

mean that there won’t be future Madoffs, and future Lehman 

Brothers, and future circumstances for which we can’t do a much 

better job in providing. And I look forward to learning more here, 

even though I will have to leave early because I have another hearing. Thank you. 

Mrs. MALONEY. I now yield 1 minute to Mr. Perlmutter. 

Mr. PERLMUTTER. I thank the ranking member. And I thank the 

chairman for bringing this bill forward. I do think that there are 

some fundamental questions that we can’t forget. The old saying is 

that bad facts make for bad law. And we have to watch out that 

we don’t do something here that is a problem. Because trying to address a Ponzi scheme, which is a sham, a phony deal from the very 

outset, and the numbers are not real, and there is sympathy for the 

people who are drawn into the fraud, obviously. But does the taxpayer in Montana who has nothing do with the folks who were defrauded in Boulder, Colorado, is it their responsibility to cover the 

fraud? Madoff and Stanford bilked thousands of people of a lot of 

money. And it was all a house of cards. And somebody who gets 

into the fraud early gets to benefit from it against the people who 

got in late. And so, these are very different circumstances. 

I appreciate the panelists today and their testimony. I appreciate 

the sponsors for bringing this. But we have to watch this whole 

area very closely. 

With that, I yield back. 

Mrs. MALONEY. I thank the gentleman, and I yield back the balance of my time. 

Chairman GARRETT. The gentlelady yields back. The gentlelady’s 

side went over a little bit. 

7 

Because one of our Members may not be here later, I ask unanimous consent to yield 30 seconds to Mr. Mulvaney, without objection. 

Mr. MULVANEY. I appreciate that, and I thank the chairman and 

the ranking member. 

And I thank the panelists for being here today. 

In the event I am not able to return, I did want to go on record 

on one important thing that affects SIPC. It is a little outside of 

the topic today, but is still very important. I am not sure if folks 

are aware that SIPC, along with groups like the Tobacco Trust 

Fund, FDA user fee accounts, the Public Company Audit Oversight 

Board, the Financial Accounting Standings Board, all of those 

groups had specific user fee funds sequestered. I think it was an 

unintended consequence of the sequester. The sequester was designed to limit the use of general account funds, not user-fee funds. 

What we have is groups that are counting on user fees to operate 

their various institutions that have been sequestered. All the more 

reason not to have voted for the sequester in the first place. 

But in any event, I want to tell SIPC that I am sympathetic, and 

tell the other groups that I am sympathetic. And as we try and figure out a way to work out various fixes to the sequester, I hope 

we focus attention on the fact that user fees were unintentionally 

sequestered as well, and I think that is wrong. Thank you, Mr. 

Chairman. 

Chairman GARRETT. I thank the gentleman. 

With the time for opening statements now expired, we will turn 

to statements from the panel. And again, I wish to say thank you 

to all of the members of the panel who are here today for this very 

important topic. We will run down the aisle as we do. Your complete written statements have been made a part of the record. We 

will now yield to you 5 minutes for a summary of your statements. 

Many of you have never been here before. There are lights in 

front of you to indicate how much time you have. It will be green 

when you start. It will turn yellow when you have one minute left. 

And it will turn red when you are supposed to have concluded. I 

also ask each one of you when you do speak, because I am a little 

hard of hearing up here sometimes, to make sure your microphone 

is turned on, and that your microphone is pulled close to you, like 

Mr. Hammerman is doing right now, good, because it doesn’t pick 

up from a far distance. 

So with that being said, we will start with the president of SIPC, 

Mr. Harbeck. Good morning. You are recognized for 5 minutes. 

STATEMENT OF STEPHEN P. HARBECK, PRESIDENT AND CEO, 

THE SECURITIES INVESTOR PROTECTION CORPORATION 

(SIPC) 

Mr. HARBECK. Good morning, Chairman Garrett, Ranking Member Maloney, and members of the panel. My name is Steve 

Harbeck. I am the president of SIPC. I have been with SIPC for 

38 years, the last 10 of which as president. 

I will dispense with discussing most of the major activities of 

SIPC since the start of the financial crisis because they are listed 

in my written statement. However, I do want to point out one important point, and that is at no point in the financial crisis was it 

8 

more important to improve investor confidence than in September 

of 2008 and the failure of Lehman Brothers. SIPC stepped in to liquidate the brokerage entity in Lehman Brothers and, with the 

trustee in place, transferred 110,000 customer accounts with $92 

billion in them within 10 days. I believe that was absolutely critical 

to investor confidence in what was clearly the most dangerous period of our time since the Depression. 

We are here today to talk about a specific bill and more specifically the performance of SIPC in the Madoff case. I appreciate particularly Congressman Perlmutter, who has a bankruptcy background, indicating how difficult these decisions were. But it is 

SIPC’s belief that to do the greatest good for the greatest number, 

consistent with the law, we have done so. And that we have done 

so consistently with prior precedent. 

What I would like to do is take you through something that 

would occur under the bill if it were passed. And let’s go to the 

Madoff case in particular. If the FBI and the Securities and Exchange Commission and SIPC had arrived in Mr. Madoff’s office 2 

days later than we did, there were $175 million worth of checks on 

Mr. Madoff’s desk that would have gone to innocent customers of 

his choosing. But that would have only left under $200 million for 

the trustee to distribute. 

And further, under the bill, if you strip it from the avoiding powers that are specifically given under the existing statute, specifically given to a trustee, instead of having the $9 billion that he 

now has to distribute, he would have less than $200 million. That 

is an unintended consequence of the activities that this bill would 

sponsor. 

I realize how difficult it is for the victims. But the fact remains 

that this is a zero-sum game. And if one credits Ponzi scheme profits that were generated solely in the mind of Mr. Madoff, and if 

those profits stand on equal footing with the net amounts that people have not received back, that means that dollar for dollar, people 

who receive those amounts as profits—those profits would be taken 

directly from people who did not receive their own money back. 

That is bad policy and bad law. It is not the law and never has 

been. 

In any instance, the first of which was in 1973 in the S.J. Salmon case, and again in the Adler, Coleman case, and yes, even in the 

cases mentioned by the chairman today, the fact is that at no time 

have fictional profits ever been recognized under the Securities Investor Protection Act. That is the policy, the consistent policy that 

was also applied in the Madoff case. 

What we have here is the trustee acting, again, to do the greatest good for the greatest number consistent with the law. I would 

like to turn to Ranking Member Maloney’s mention of the fact that 

the trustee has initiated lawsuits. As soon as he initiated those 

lawsuits, he also initiated what he called a hardship program. Because all a person who has been sued has to show under the scenario that you correctly laid out, that they had used the money 

over time, the trustee did not know that, but if those facts were 

brought to his attention, the lawsuit was summarily dropped. Some 

people have been ill-advised, in my view, by their counsel not to 

enter the hardship program. I believe that people who can demVerDate Nov 24 2008 18:14 May 07, 2014 Jkt 086688 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\86688.TXT TERRI
9 

onstrate the sort of hardship that you rightly empathize with will 

have those lawsuits dismissed. 

But make no mistake, the current statute does allow what are 

called the avoiding powers. And the entire purpose behind those 

avoiding powers is to do equity. The bill strips those away. I would 

be pleased to answer your questions. 

[The prepared statement of Mr. Harbeck can be found on page 

50 of the appendix.] 

Chairman GARRETT. Thank you. 

Mr. Hammerman is now recognized for 5 minutes. 

STATEMENT OF IRA D. HAMMERMAN, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, SECURITIES INDUSTRY AND 

FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. HAMMERMAN. Chairman Garrett, Ranking Member Maloney, 

and members of the subcommittee, I would like to express my 

deepest sympathy for the victims of the Madoff and Stanford 

schemes. I have family and friends whose financial lives were adversely impacted on December 11, 2008. And I know from personal 

interactions the havoc caused to individuals, retirees, and wonderful charities by Madoff and the feeder funds that never even disclosed they were investing in Madoff. So I understand and in fact 

applaud the tenacity being expressed by Chairman Garrett and 

Ranking Member Maloney as they seek to help their constituents 

and the investing public at large. I also commend you for recognizing more generally the need to consider changes to SIPA in 

order to better protect investors and increase investor confidence in 

the financial markets. 

I served on the 2012 task force that undertook a comprehensive 

review of SIPA. And I agree, there are proposals for reform that 

warrant consideration. Any reform proposal should be made with 

an analysis of their costs to SIPC, the members of SIPC, and the 

investing public. This is particularly important with respect to the 

proposed legislation, which would materially expand SIPC’s mandate to provide insurance against the risk of loss due to securities 

fraud and fictitious profits. 

Congress enacted SIPA in 1970 in response to the paperwork crisis of the 1960s, a time when stock certificates routinely went missing, trade processing errors were common, and there were multiple 

failures of brokerage firms. Congress created SIPC to protect the 

custody function that broker-dealers perform. And while it is certainly within the prerogatives of Congress these 44 years later to 

expand SIPA’s scope to provide insurance against losses due to securities fraud and fictitious profits, we believe the costs would be 

extraordinarily high. 

The SIPC Modernization Task Force recommended changes that 

would increase the protection available to customers in at least 3 

important ways: increase the cap on advances from $500,000 to 

$1.3 million; eliminate the lower cap of $250,000 applicable to customer claims for cash versus securities; and make individuals eligible for advances with respect to shares of their pension plans account. These types of changes would appropriately expand SIPA, 

while continuing to reflect its core purpose of protecting investors 

10 

against the loss of cash or securities in the event the brokerage 

firm holding their property becomes insolvent. 

The proposed legislation provides that the assets of a customer 

would be determined on the basis of the last account statement, 

with customer property in liquidation allocated accordingly. We 

have significant concerns with this approach since customer account statements in situations involving fraud reflect fictitious 

transactions and do not truly represent customers’ positions. The 

property held by a Ponzi scheme is simply the pooled investments 

of all the victims of the scheme less the amounts already misappropriated, and making distributions based on anything other than 

the victims’ net investments would be fundamentally unfair. 

The net investment method has been used with respect to fraudulent schemes as far back as the 1920s. It has been applied by several trustees and courts in SIPA liquidations, and we believe it 

should be used to determine net equity for purposes of allocating 

customer property in situations involving fraud. 

The proposed legislation would also add to the customer definition any person whose assets were misappropriated by an affiliate 

of a brokerage firm, whether or not the firm had custody, possession, or control of such assets. Expanding SIPA in this manner 

could ultimately result in significant increases in the costs borne 

by investors, and in some cases result in investors losing access to 

the financial markets altogether. 

Regarding the effective date, we question whether application of 

the draft bill to active liquidation proceedings is even feasible. For 

example, in liquidations in which distributions have already commenced, it is unclear whether customers would be required to return assets to the trustee so that the trustee could redetermine 

claims and allocations. At a minimum, retroactive application of 

the proposed bill would significantly slow down the current SIPA 

proceedings. 

Finally, it is a very unfortunate fact of life that fraud exists and 

that crooks will continue to use the financial system to find victims 

because, to quote notorious bank robber Willie Sutton, that is 

where the money is. Criminals who steal investors’ hard-earned 

money and life savings should be prosecuted and put in jail, but 

using fraudulent account statements to insure all of us against the 

risk of fraud is quite another undertaking, and its ramifications for 

businesses and investors should be carefully analyzed and debated, 

lest we inadvertently let the criminals decide which victims recover 

what amounts. 

Thank you for allowing me the opportunity to testify. I would be 

pleased to answer your questions. 

[The prepared statement of Mr. Hammerman can be found on 

page 39 of the appendix.] 

Chairman GARRETT. Thank you. 

Our next witness is making her way up here, I believe. Take 

your time. 

Welcome. 

And just to recap, since I know you just came in, please make 

sure your microphone is on. You will be recognized for 5 minutes. 

The little lights in front of you are green, yellow, and red, for that 

purpose. Your full written statement will be made a part of the 

11 

record, and we therefore ask all the witnesses to give a summary 

during their 5-minute presentation. So you are now welcome and 

recognized for 5 minutes. 

STATEMENT OF ANGELA SHAW KOGUTT, DIRECTOR AND 

FOUNDER, THE STANFORD VICTIMS COALITION 

Ms. KOGUTT. Thank you, Chairman Garrett. My name is Angela 

Shaw Kogutt, and I am the director and founder of the Stanford 

Victims Coalition, a nonprofit advocacy group for the victims of the 

Stanford Financial Group Ponzi scheme. 

Chairman Garrett, Ranking Member Maloney, thank you for 

holding this hearing today to discuss a much-needed amendment to 

the Securities Investor Protection Act of 1970. I applaud you both 

for your leadership in introducing the Restoring Main Street Investor Protection and Confidence Act, which has given hope to thousands of financially devastated investor victims across the country 

who feel they have been unfairly denied the protection of which the 

SEC has determined they are entitled. I also thank the distinguished members of the subcommittee who have already joined 

H.R. 3482, and I ask those of you here today to consider this important legislation. 

I want to point out right away that I am not the typical face of 

the Stanford victims. I am a second generation victim. Most of the 

victims are senior citizens, and for the past almost 5 years now, I 

have spent a majority of my life serving as their advocate, hoping 

to help them recover some of their losses. I have done this because 

I am younger than they are and because they deserve it. 

Like thousands of other Stanford victims, my life was forever 

changed by the events of February 17, 2009. As we watched the 

news and feared the worst in the immediate aftermath of Madoff’s 

confession, we eventually realized that Allen Stanford had stolen 

what two generations of my family worked 4 generations to build. 

And he did it through Stanford Group Company, a registered 

broker-dealer and member of SIPC. 

The SEC had known for more than a decade that Stanford was 

operating a Ponzi scheme. While Madoff had outsmarted the SEC, 

Stanford hadn’t. And the SEC knew for 12 years that he was using 

the U.S. broker-dealer to steal customer funds intended to purchase CDs from Stanford International Bank. In that timeframe, 

the Stanford Ponzi scheme grew by $5 billion, including the investments of every single U.S. citizen who invested in the CDs. 

My father-in-law is an 87-year-old World War II veteran and a 

first-generation American who, again, like so many Stanford victims, was able to live the American dream, only to have it snatched 

away practically overnight. In 1965, he started a manufacturing 

business with a few thousand dollars borrowed from family members. He and my mother-in-law put in long hours for several years, 

and eventually all three of their sons, including my husband, joined 

the business. The family worked together for more than 3 decades 

to build the business to more than 300 employees and close to $20 

million a year in revenue. At that point, the business had outgrown 

the family, and they made the decision to sell at just the right 

time, before the economic collapse of 2008. 

12 

As soon as the sale of the business closed, our lawyer who handled the transactions suggested we invest with a brokerage firm 

that specialized in managing large accounts. She then recommended what she called a boutique brokerage firm, Stanford 

Group Company, which specialized in high-wealth clients. The family had never heard of Stanford but agreed to a meeting. Other 

firms were also considered, but Stanford really stood out because 

of their enthusiasm, professionalism, their very high public profile, 

the top notch credentials of their advisers, and what we misinterpreted as genuine and sincere interest in our investment goals. 

What we didn’t know is that financial advisers at Stanford Group 

Company were hooked on what they internally called bank crack 

in the highly lucrative commissions and bonuses they received for 

selling the CDs from Stanford International Bank. Also, little did 

we know that none of the financial advisers at Stanford Group 

Company knew what assets were held, if any, in Stanford International Bank’s investment portfolio. 

How someone who has a fiduciary duty to their clients could recommend putting any of their funds in an investment vehicle for 

which they didn’t even know the underlying investments seems extremely questionable, but that was also an inside secret that Stanford paid them enough to overlook. 

Ultimately, a substantial portion of the proceeds of the sale of my 

family’s business was invested with two Stanford Group Company 

financial advisers. At the first meeting, the family explained that 

they were very conservative and risk-averse. One of the advisers, 

Bill Leighton, was an estate planning lawyer. The other, Patrick 

Cruickshank, was a certified financial planner, and NFL, NBA, and 

NHL-approved financial adviser and Series 7 license holder. They 

told us their safest, most conservative investment was their exclusive signature product, the Stanford International Bank CDs for 

accredited investors. We learned at the meeting that the entire 

Stanford financial group of companies, which included Stanford 

Group Company, Stanford International Bank, Stanford Trust 

Company, and more than 100 other Stanford entities all owned by 

Allen Stanford was headquartered and operated out of Houston, 

Texas, and regulated by the SEC and numerous State regulators, 

as the SEC had 33 offices across the country and more than 250 

financial advisers who are still working in the business today with 

no record on their FINRA broker check. 

We were also told that the bank’s portfolio was managed by a 

team of money managers in Memphis, Tennessee, with a company 

called Stanford Capital Management, which was also regulated by 

the SEC. We were told that the international CDs were better than 

investing in a U.S. bank CD because the international CDs were 

securities, and they were backed by SIPC, which was up to 

$500,000, and the FDIC at the time was only $100,000. Many Stanford victims made their decision to make that investment because 

of the securities product versus the bank product. 

It is now almost 5 years later and SIPC has continued to deny 

protection of Stanford Group Company customers by saying we received the securities we purchased through SGC, which simply is 

not true. Our money was stolen. How could we have gotten a security when the owner of the broker-dealer stole our funds? Allen 

13 

Stanford is serving a 110-year jail sentence for stealing our money 

right here in the United States, not for committing an Antiguan 

bank fraud, which has not even been alleged in the country of Antigua. 

In November 2009, the Stanford Victims Coalition formally asked 

the SEC to review the SIPC’s determination about SGC customers’ 

right to protection under SIPA. After more than a year of the SVC 

suffering the burden of proof and producing hundreds of SGC customer documents at a time to the SEC only to have the target 

moved each time and more documents requested, it appeared the 

SEC was obviously avoiding making a determination. The SVC’s 

members then asked our political leaders to urge the SEC to make 

a determination. More than 50 Members of the House and Senate 

signed on to a letter asking the SEC to give the SVC an answer. 

Still, no answer, only repeated promises that a vote would happen 

soon, which I have now learned in SEC language could be months 

or even years, given the way they have handled the Stanford case. 

Finally, when it appeared this game would go on forever, while 

Stanford victims were losing their homes and going without life necessities, Senator David Vitter blocked the nomination of an incoming SEC Commissioner until Stanford victims were given an answer. This was not a political play. Senator Vitter never told the 

SEC how to vote. He just asked them to give the investors an answer, to just take a fair vote and give us an answer. The vote was 

taken, and as the SVC and our counsel had hoped, the SEC determined that SGC customers were entitled to protection under SIPA 

because the SIB CDs were fictitious securities, and SGC customer 

funds intended to purchase the CDs were either acquired by Stanford Group Company to pay the broker-dealer’s expenses or were 

outright stolen by Allen Stanford. 

Chairman GARRETT. I am going to ask you— 

Ms. KOGUTT. In closing, I would just like to say one more thing. 

There are thousands of investors who truly are living in poverty 

right now. This summer, an article came out in the Baton Rouge 

newspaper that a food bank was going under, mainly because of 

the devastation caused by the losses in Baton Rouge of the victims 

of the Stanford financial fraud. They are living on donations from 

charity. 

Chairman GARRETT. Thank you. 

Ms. KOGUTT. Thank you for holding this hearing and for allowing 

me to speak for the victims. 

[The prepared statement of Ms. Kogutt can be found on page 67 

of the appendix.] 

Chairman GARRETT. Thank you. 

Mr. Stein, you are now recognized. 

STATEMENT OF RON STEIN, PRESIDENT, THE NETWORK FOR 

INVESTOR ACTION AND PROTECTION (NIAP) 

Mr. STEIN. Thank you, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee. My name is Ron 

Stein. I am the president of the Network for Investor Action and 

Protection, a national not-for-profit organization dedicated to improving our Nation’s investor protection system. I am also a regVerDate Nov 24 2008 18:14 May 07, 2014 Jkt 086688 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\86688.TXT TERRI
14 

istered investment adviser, a certified financial planner, and a 

member of the financial services industry in good standing. 

Over 1,000 members of our organization were victims of the 

Madoff fraud. I am honored to speak to you today, as others have 

done before me, to give voice to the mostly middle-class investors 

who were devastated by this fraud, and who are being stripped of 

protections from SIPC and the SIPC-appointed trustee. 

Perhaps more, I am here on behalf of small investors, millions 

of small investors who have not yet been victimized, who depend 

on Congress, the regulatory apparatus, and the industry for the 

protection of their life savings should similar financial disaster befall them. 

So where do we stand today, 5 years after, regarding the Madoff 

fraud? Frankly, thousands of lives upended with another thousand 

being sued, story after dismal story of family horrors, depression, 

premature deaths, suicide, loss of medical care, life savings obliterated, gruesome and devastating stories. 

This is not what Congress intended when it first passed SIPA 

law in 1970 amidst the turmoil of hundreds of brokerage insolvencies, recession, massive theft, fraud, and, yes, Ponzi schemes. The 

creation of SIPC, the insurance-like entity, was the cornerstone of 

that legislation and an essential step to providing certainty, confidence, and trust to investors as Congress was ushering them 

away from the certainty of their physical securities to the new, 

more manageable world of the investment statement. It goes way 

beyond a custody function; it goes to ensuring confidence in the investment markets themselves. 

Now, Congressman Garrett quoted President Nixon and several 

others. I would just like to include one additional excerpt from the 

original Nixon testimony on signing SIPA legislation in 1970. He 

said pertaining to the SIPA law, ‘‘It protects the small investor, not 

the large investor, since there is a limit on reimbursable losses. 

And it assures that the widow, the retired couple, the small investor who has invested their life savings in securities will not suffer 

loss because of an operational failure.’’ 

I would like to point out that neither Nixon nor anyone else at 

that time ever said that profits weren’t going to be protected, or 

mentioned the words ‘‘fictitious profits’’ as an exception to this protection. That is revisionist history. 

Following the passage of this legislation in 1970, every brokerage 

firm trumpeted SIPC protection to its customers, and every customer was informed that they are/were protected to the SIPC limit 

based on their account statement values should their broker fail. 

This was part of every broker’s security training, every one. I 

know. There were no asterisks. There were no exceptions. There 

was no hint of being sued. And it was upon these promises that the 

financial services industry was able to gain the trust of the American public and explode in size. 

Now, how do those promises and Congress’ intentions comport 

with the realities today? 

Fact: The majority of Madoff investors will not receive a penny 

of the SIPC advance guaranteed by Congress under SIPA statute 

as a result of the net investment methodology the trustee has chosen to use. 

15 

Fact: Over 1,000 investors acknowledged as being innocent by 

the trustee are being vigorously sued like thieves and criminals, 

many having already lost everything. 

Fact: Institutions and professional investors are receiving over 80 

percent of the recoveries of customer property. Many of these entities that the trustee himself has indicated should have or could 

have known about the fraud. 

Fact: In addition to saving SIPC over $1 billion by the trustee’s 

own calculations, the trustee and his associated consultants have 

similarly been enriched by almost $1 billion, and that number 

could grow, and those are funds which could have gone to those 

who have been devastated and go to needed education to prevent 

further frauds of this nature. 

There is simply no rational way to conceive that this is the outcome that Congress would have preferred were it sitting here 

today. Indeed, this is precisely what Congress would have sought 

to avoid, and clearly in no way would the American public have 

supported a SIPA law in 1970 if this was seen as a possible outcome. 

The implications of this would be disastrous and could be disastrous to all investors today. What investor in their right mind could 

possibly trust that SIPC would be there or, worse, not sue them for 

withdrawing funds from their own accounts? What retirees would 

want to see their protections reduced just when they are drawing 

on their life savings? Once investors realized their protections don’t 

exist, consider the impact on the financial services industry as investors withdraw and move funds from one firm to another. 

Let me be clear. I am deeply, deeply troubled as a financial practitioner about the failures of the regulatory entities that were 

charged with the responsibility to protect or unmask this fraud at 

a much earlier level. But I am also deeply distressed that members 

of my own industry, when they had the knowledge or the thought 

or the concern about a fraud, chose not to come forward. I hope 

that will change as we go forward. 

But I am truly infuriated at SIPC’s lack of response in a human 

way to help protect the investors they were charged with protecting, and that they have thumbed their noses at Congress, refused to go to Congress when they could have to ask for guidance 

in this issue and instead taken it on their own to create the situation we are in today. 

H.R. 3482, the Restoring Main Street Investor Protection and 

Confidence Act is an important step to restoring the most basic 

protections that investors need at this time. I want to thank Congressman Garrett for showing tremendous leadership in this, for 

Congresswoman Maloney and the rest of the committee in sharing 

support, and I truly hope the industry will stand with us in supporting this very important legislation. Thank you very much. 

[The prepared statement of Mr. Stein can be found on page 151 

of the appendix.] 

Chairman GARRETT. Thank you. 

Ms. Shean, welcome, and you are recognized for 5 minutes. 

16 

STATEMENT OF SUZANNE SHEAN, A CUSTOMER OF STANFORD 

INTERNATIONAL BANK 

Ms. SHEAN. Thank you. I would like to thank Chairman Scott 

Garrett and Ranking Member Carolyn Maloney for holding this 

hearing today and allowing me to speak about my experience as a 

victim of the Stanford Financial Group Ponzi scheme. I would also 

like to thank you from the bottom of my heart for giving victims 

like me hope for recovering our stolen retirement savings by introducing H.R. 3482. Thank you also to all the subcommittee members 

here who have already joined this desperately needed bill. 

My name is Suzanne Shean, and I am 64 years of age. I live in 

Carriere, Mississippi. Allen Stanford and the SIPC member brokerdealer Stanford Group Company took more than my life savings of 

a quarter million dollars invested just 18 months before the SEC 

took the Stanford group of companies into receivership. He took 

from me what money can’t buy. He took my husband’s life, my soul 

mate, my daughter’s daddy, my grandchildren’s granddad, and the 

life we had together. 

When the news of the Stanford scandal broke, I had just had surgery and was undergoing radiation treatments for breast cancer. 

My sweet husband Michael sheltered me from the news for months 

during my treatments and recovery. Michael had also had cancer, 

colon cancer, and underwent surgery in March of 2008. The doctors 

were able to remove it all, and they said he did not need radiation 

or chemo or any kind of other treatment, but being a victim of a 

Ponzi scheme is like cancer itself. The stress eats away at you. For 

some, that happens slowly. For Michael, it only took 6 months. 

His cancer returned with a vengeance and quickly spread 

throughout his body. The burden of losing our life savings was just 

too much for him, especially when he carried that burden alone for 

so long to protect me while I was sick. 

He died on April 29, 2011, at the age of 66 years old. 

Before Michael died, he worried so much about me and my future 

alone without our savings. My greatest hope was that he would be 

comforted with the knowledge that SIPC would make things right 

for us before he died. That didn’t happen. 

I only saw my husband cry 3 times in our 43 years of marriage. 

Tears of joy at the birth of our daughter in 1969, tears of helplessness when neighbors had to help me pick him up after he fell a few 

weeks before he died, and tears of anguish when he asked me to 

forgive him. He had liquidated our IRA stock market portfolios to 

invest in safer IRA CDs with Stanford International Bank, with 

the Stanford Group Company. He was inconsolable, but it was not 

his fault. The safety net created to protect investors like us had 

failed to do so. 

During our whole lives together, Michael and I worked so hard 

to put money away so we could retire one day and enjoy our golden 

years. For him to die thinking that was all in vain is an abomination of the very soul of our society. 

Discovering that the SEC knew Stanford Group Company was involved in a Ponzi scheme for more than a decade before we invested with them added insult to injury. The double whammy of 

SIPC announcing it had absolved itself from protecting us was just 

inconceivable. 

17 

I am now forced to work two jobs to keep my home. As a working 

widow under 66 years of age, I am not entitled to my husband’s 

Social Security checks because my salary is over $17,000 a year. I 

should be enjoying my grandchildren and the fruits of my labor for 

these past 64 years. Instead, retirement is not an option now that 

our entire IRA is gone. 

What will happen to me when I can no longer work? The 1 percent recovered by the Stanford receiver after almost 5 years will 

just about cover one house note and my trip here today. 

Michael and I were very conservative investors, and we entrusted Stanford Group Company, a registered broker-dealer and 

SIPC member, to invest our IRA funds safely. We were told because we had an IRA that Stanford Trust in Louisiana would hold 

custody of our investments, and we felt comfortable with this investment because every aspect was being managed in the United 

States and regulated by government. 

But what we didn’t know did hurt us. We had no idea that Stanford Trust Company was created by SGC as a way to tap into a 

whole new source of money to feed the Ponzi scheme. Hundreds of 

millions of dollars of innocent investors’ IRA funds were lost. The 

Stanford Trust Company was a subsidiary company of SGC and 

was created as a State-regulated entity solely to evade oversight by 

the Federal Government. The Louisiana Attorney General’s Office 

later explained that SGC employees operated the trust company 

and even served as its board of directors. In short, SGC held custody of our CDs, and our savings never left the United States and 

never went to purchase securities of any kind. 

We were shocked when we found out that SIPC announced we 

didn’t qualify for protection because we weren’t customers of SGC 

because it supposedly didn’t hold custody of the fictitious Stanford 

International Bank CDs. But we had a customer contract with 

SGC, and our account numbers begin with STSGC. What SIPC was 

telling us seemed like hyper-technical legalese designed solely to 

avoid covering our losses, despite other similar SIPC cases in which 

investors were protected. SIPC was behaving as if it was a private 

insurance company with government immunity, and they have gotten away with it so far at the expense of thousands of victims just 

like me. 

Here we are, innocent investors, who used a SIPC member 

broker to purchase securities that come to find out didn’t even 

exist, and SIPC is treating us as their enemy. The CDs were an 

imaginary investment vehicle designed to take money from Stanford’s right hand, Stanford Group Company, and steal it with its 

left hand, Stanford International Bank. In short, we have been victimized again and again, first by the SEC for not stopping Stanford 

Group Company when they were aware of misappropriations of 

customer funds and other fraudulent activities, and then by Allen 

Stanford himself, who stole our money, and then a third time by 

SIPC because they have told us Allen Stanford stole our money the 

wrong way. 

Chairman GARRETT. Ms. Shean, I would ask you to come to a 

conclusion. 

Ms. SHEAN. Okay. I beg you to please close the loopholes in the 

law that SIPC has manipulated in order to protect it. It means MiVerDate Nov 24 2008 18:14 May 07, 2014 Jkt 086688 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\86688.TXT TERRI
18 

chael—I will never have Michael back, but I know his soul will rest 

in peace if he knew I was taken care of. That would mean the 

world to me. I am a survivor. Yesterday was my 5th year anniversary of being cancer free. Please don’t take hope away from me. 

Thank you for your time and your attention. It has been my honor 

to share my story with you today. 

[The prepared statement of Ms. Shean can be found on page 125 

of the appendix.] 

Chairman GARRETT. Thank you, Ms. Shean. 

And finally, Mr. Friedman is recognized for 5 minutes. 

STATEMENT OF NEIL FRIEDMAN, A CUSTOMER OF BERNARD 

L. MADOFF INVESTMENT SECURITIES 

Mr. FRIEDMAN. Thank you, Mr. Chairman, and members of the 

subcommittee, for the opportunity to be here and to tell my story. 

My greatest loss is something that SIPC would never cover, the 

loss of my wife after 53 years of marriage. I am 79 years old. I am 

a veteran of Korea, and I am left with two wonderful children and 

four grandchildren. My daughter has MS. My children relied upon 

me and my account—although it was not large, because I by no 

means was considered rich—to take care of them if they needed it. 

I put in—let me go back to my story on how I got involved, if I 

may, with Madoff. 

A friend of mine in 1962 had a daughter the age of my son who 

played in a playground together. Their father was Bernie Madoff’s 

CPA, Jerry Horowitz, and Jerry and I were strictly friends until I 

went into my own business, which was subsequently in the middle 

of the 1960s, when I opened a life insurance agency, and he became 

my CPA. Jerry had been investing with Madoff well before the 

1980s, and so I felt that his due diligence, with the SEC as a 

backup and SIPC as a last resort would take care that if we lost 

everything, we would at least recover something. I put in my pension plan assets. I even sold Madoff in the early 1980s a retirement 

program and had free access to his office at 1 Wall Street, walked 

around, knew all the employees, and was never aware of anything 

that was not honorable. 

I am a graduate of NYU. I graduated as an accountant, hated 

that as a profession, and ended up in the insurance business, 

which was more personable. I grew moderately, I marketed with 16 

different life insurance companies across the United States, actually specializing in impaired risks as well as competitive products. 

And I was able to amass, I guess, well, the balance was about $2 

million in my retirement program, which my employees had the option of not partaking in, thank God, and my personal savings. 

I am now living on Social Security, with a little money in the 

bank, which primarily was the result of refunds from Internal Revenue for the taxes I paid in my, was forced to pay mandatory at 

70 and a half to withdraw moneys. In essence, that is my story. I 

got a part-time job, maybe 1 day a week or 2 or whatever they 

needed me, and I really have no source of income other than Social 

Security, which is $1,400 a month. I had to put my house in a reverse mortgage just so I could stay there. I would not live with my 

children. And I thank you all for this. 

19 

[The prepared statement of Mr. Friedman can be found on page 

36 of the appendix.] 

Chairman GARRETT. I thank you for your testimony, and I thank 

everyone for the testimony, and so we will go to questioning now. 

I guess I will begin with Mr. Harbeck. Would you agree that when 

SIPA was passed in 1970, the creation of the SIPC fund capitalized 

by industry assessments was the feature given the most attention 

in the Floor discussion in the House and the Senate? 

Mr. HARBECK. I am not sure I understand. 

Chairman GARRETT. In other words, the establishment of the 

fund, the focus was in large part in setting up a fund because it 

provided liquidations at broker-dealer firms with another source of 

relief coming from the assessments. 

Mr. HARBECK. That was absolutely one of the major components 

of the bill, yes, sir. 

Chairman GARRETT. Right. So, by doing that, you are going beyond conventional bankruptcy to try to do what, to mitigate losses, 

correct? 

Mr. HARBECK. That is correct. 

Chairman GARRETT. And so in providing for the supplemental relief to customers of failed broker-dealers, is it correct to say that 

the overarching congressional purpose was to restore and maintain 

the confidence of investors, particularly nonprofessional investors, 

in their continued participation in capital markets for the benefit 

of the economy? 

Mr. HARBECK. That is also correct. 

Chairman GARRETT. Right. So, a couple of points taken from 

that. 

Mr. Stein, what was the number you gave as far as where the 

distribution is at this point as far as between regular just retail investors versus institutional investors? 

Mr. STEIN. Over 80 percent. 

Mr. HARBECK. I would love to address that, if I may. 

Mr. STEIN. Over 80 percent of the funds in terms of dollar 

amount will be going to institutional investors based upon the recovery numbers that the trustee and SIPC have provided. 

Chairman GARRETT. And is it true—overall, have the majority of 

people who have been taken advantage of in the Madoff situation 

received compensation payments or have the majority not received 

payments? 

Mr. STEIN. The majority have—first of all, talking about direct 

investors, if we added indirect investors, the number of those who 

have received relief is fractional, but the majority of investors have 

not received any SIPC protection whatsoever, and significant numbers of those who have received protection have had those protections, those amounts reduced significantly because of the net investment method adopted by the trustee. 

Chairman GARRETT. And I should probably take this moment 

just to be clear here that we are talking about two, I don’t want 

to call it pots of money here, but two avenues of money of relief, 

right? One is advances, correct me if I am wrong on any of this, 

the advances which basically comes from the industry-generated 

fees, right? And the other is the recaptured or recovered money 

20 

when the trustee goes out and re-collects, collects the money from 

the bad actors in this; is that correct? 

Mr. STEIN. Yes. 

Chairman GARRETT. Right. So there are two pots of money here. 

And in the legislation before us, essentially we are talking about 

making sure that—we are really not making any changes with regard to the recovered money? I will go to Mr. Stein for that. 

Mr. STEIN. The trustee is given a significant range of opportunity 

to apply what methodology he feels is most appropriate regarding 

the recoveries of customer property, but regarding SIPC advances 

themselves, this legislation is making clear that the trustee does 

not have the right to change the intent of SIPA law to suit the purposes of the SIPA fund or any other rationalization he can come 

up with to do so. 

Chairman GARRETT. Right. Mr. Hammerman, I do sincerely appreciate your opening comment with regard to your concern for the 

victims and also for your statements and your association to try to 

work with us on this legislation, I do appreciate that. One comment 

that you did make, though—you did say this point, you said that 

fraud is a fact of life, and you said something that has been with 

us always, words to that effect you said. Ponzi schemes, I guess, 

have been with us always. You didn’t say that, but I guess that 

means that you would agree with that in one way, shape or form 

or another, right? 

So if that is the case, then back in 1970 when they created this 

law, and they created the fund, created the whole—and the focus 

was on the SIPC fund, they must have known at that point in time 

that Ponzi schemes existed, but I didn’t see anything in the original law, and I certainly didn’t see anything in the Senate discussions on this where they created a Ponzi exemption. When did that 

come about? 

Mr. HAMMERMAN. Mr. Chairman, there is no Ponzi exemption, as 

you explain. The way I understand it is the way it would work is 

if you as a customer gave, let’s say, $100,000 to a brokerage firm 

with the expectation that the brokerage firm would buy securities 

for you— 

Chairman GARRETT. Right. 

Mr. HAMMERMAN. —in the account, and then that brokerage firm 

turns out to be a Ponzi scheme, for example, then you would be 

covered for that $100,000 of cash that you gave for the purpose of 

buying securities, full stop. 

What would not be covered is, let’s say you gave that $100,000 

and the monthly statement— 

Chairman GARRETT. But that was—I know where you are going 

to go with this, but that was not said in the original law. Isn’t that 

just a creation of later court cases? 

Mr. HAMMERMAN. That is not my understanding, but I am not 

an expert in SIPC and the court cases. 

Chairman GARRETT. Okay. And I am going to be mindful of the 

time because we are coming up on votes, so—I have a whole series 

of other questions, but I will return probably in a second round to 

the gentlelady from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

21 

And I thank all the panelists, and I think the basic question is, 

what does SIPC insure? And going forward, what should it insure 

in the future? How do we make that clear to investors? Because we 

heard from victims that in the case of Stanford, they weren’t insured in anything. 

Is that correct, Ms. Kogutt? SIPC did not insure or give any paybacks at all to the Stanford victims, right? 

Ms. KOGUTT. None whatsoever. 

Mrs. MALONEY. None whatsoever. 

Ms. KOGUTT. We actually haven’t even been able to file claims 

because there is no liquidation, so we have had no right of a judicial review of if our claims are valid or not. 

Mrs. MALONEY. So this is a tremendous problem going forward, 

and in terms of Madoff, were payments done in Madoff or not from 

SIPC? 

Mr. STEIN. Yes. Approximately half of the Madoff direct customers received SIPC compensation. 

Mrs. MALONEY. What, $500,000 for securities, or what compensation did they get? 

Mr. STEIN. Up to $500,000. The average payment is a little less 

than that. But for those who were fortunate enough, and I say that 

very carefully, when they were fortunate enough not to have needed to pull funds out of their plan to live on, they were able to receive SIPC compensation, and that gets to the fundamental problem, and the public policy debacle that SIPC and the trustee are 

representing here. 

Witness, as Exhibit A, what Mr. Friedman has experienced. Here 

is a man who has put his whole life savings into a retirement plan. 

He retires with the intention of being able to live off that savings, 

and because he has withdrawn money to live off those savings, precisely as Congress would have wanted him to do, precisely as he 

needed to do, he is being tortured because those funds are being 

denied him. Any penny he has taken out in his retirement has 

been deducted from the amount of money that he has put in. So 

basically anybody who is utilizing a retirement experience, who has 

been withdrawing funds for the cost of living over any period of 

time, has probably exceeded even the amount of money that they 

have contributed over their lifetime to their savings. We are actually having—we are actually reducing protections for those people 

precisely for whom we should be going out of our way to improve 

protections, and that is an unfortunate consequence. 

Mrs. MALONEY. Also they are saying if it is a Ponzi scheme, you 

are not covered. Obviously, they didn’t know it was a Ponzi scheme; 

the government didn’t know it was a Ponzi scheme. And so, I think 

a crucial issue, and I guess I want to ask Mr. Hammerman, what 

does SIPC cover now, and if you could get it back to us in writing, 

and what do you think it should cover in the future? And obviously, 

the situation of Stanford, of where no determination and an outrageous Ponzi scheme, I would like to know from Mrs. Kogutt in 

writing where you say the SEC knew about this Ponzi scheme for 

12 years, if anyone knew about it and didn’t report it or stop it, 

that is a criminal offense. So, that is a whole other subject. We are 

looking at the SIPC moneys now. So who do you think—what does 

22 

it cover now, and what should it cover? And if you could answer 

some of the salient issues that the victims raised to you today. 

Mr. HAMMERMAN. Ranking Member Maloney, as I tried to explain in answering the chairman’s question, I believe today, SIPC 

would cover an investor who put in, let’s say, $100,000 with a brokerage firm with the expectation that the brokerage firm was going 

to purchase securities, and if that brokerage firm turned out to be 

a Ponzi scheme, that amount of money would be covered and advanced by SIPC. 

When you asked about what it should cover going forward, I 

think that raises an entirely appropriate— 

Mrs. MALONEY. Mr. Hammerman, that is not what she testified 

to. That is not with the Stanford people. They bought securities. 

They bought CDs that apparently the SEC and other people knew 

about, and then they are told that is not applicable. 

Mr. HAMMERMAN. Ranking Member Maloney, I do not profess to 

be an expert or extremely familiar with every underlying fact with 

Stanford. From my limited understanding, the investors invested in 

CDs issued by an Antiguan bank. Now, they may have—that is my 

understanding of what happened, and what foreign— 

Mrs. MALONEY. At the very least, going forward, it should be 

clear— 

Mr. HAMMERMAN. No, going forward— 

Mrs. MALONEY. —any CD from a foreign bank, that nothing from 

a foreign bank is covered because they can’t even get it resolved 

in the foreign bank, they won’t even acknowledge that there was 

a problem. So the main thing is investors have to know what they 

are getting, and they were totally misled. They thought it was insured, that they would have this protection, and going forward, we 

made a mistake, it is in a foreign bank, you are not covered. So, 

I think we have to be clear at the very least going forward that 

people know what their situation is. 

Mr. HAMMERMAN. I agree. I am sorry, Mr. Chairman? 

I was just going to say I agree on a going-forward basis that we 

need to be clear, and there is a public policy issue about insuring 

against all sorts of financial fraud. The FBI estimates $40 billion 

of financial fraud a year. They also estimate $1 billion to $3 billion 

in micro cap securities fraud, and the question is, what are we 

going to be— 

Chairman GARRETT. Thank you. I know there is—but I want to 

get to the gentleman from Virginia. 

Mr. HURT. Thank you, Mr. Chairman. 

I want to first of all thank the chairman for holding this hearing. 

And I want to thank each of you for being here. This is sort of 

rare in Washington, it seems to me, where you have folks who are 

not necessarily represented by moneyed interests here testifying 

before your Congress, a Congress that you own, about how to improve a law that clearly has been implemented in a way that is less 

than perfect. So I want to, as a former prosecutor who has dealt 

with people who have been the victim of theft, outright theft, thank 

you for joining us today. I thank the chairman for spearheading an 

effort to try to improve the way this works. 

I guess I would like to begin with Mr. Harbeck, who it sounds 

like you have been with SIPC for 38 years total. Mr. Stein in his 

23 

opening statement and in his written testimony indicated, and the 

chairman alluded to this, indicated that as a fact that institutions 

and professional investors were receiving over 80 percent of the recoveries in the Madoff case. Over $9 billion has been recovered, and 

that is a striking—I think that is a striking fact as stated. 

Mr. Harbeck, I would like to know if you think that is—first, do 

you agree with that, and second, if that is true, do you think that 

is consistent with what the intent of this law was as passed? 

Mr. HARBECK. Let’s connect the dots. Thank you for the opportunity to do so. 

Mr. HURT. Yes, but please be— 

Mr. HARBECK. The answer, sir, is that if an institution such as 

a pension fund has a claim with Mr. Madoff, and the pension fund 

has a thousand indirect victims of Mr. Madoff, by paying that institution, one gets the money to the indirects. That is precisely how 

the system works. The pension fund had the contract with Mr. 

Madoff. If it had a $10 million pension fund with Mr. Madoff— 

Mr. HURT. Okay. 

Mr. HARBECK. They have already gotten 4.2 back. 

Mr. HURT. Do you believe that has been applied fairly, and is 

that the way the law is intended to work? 

Mr. HARBECK. Yes, sir. 

Mr. HURT. Mr. Stein, do you have a response to that? 

Mr. STEIN. I think the first response is that it doesn’t take into 

consideration the fact that you have 1,000-plus victims who have 

been denied any SIPC protection whatsoever, so let’s just start 

there, that whether or not funds are going to a pension fund is immaterial to the moneys that SIPC should be advancing to those 

small, middle-income investors who invested directly with a regulated registered broker-dealer, as Congress and the financial service industry intended. 

Getting to the issue of a pension fund, a very small percentage 

of the total dollars that have been distributed to the institutional 

investors are going to pension funds, which is not to say that pension funds shouldn’t receive their distribution, but Mr. Harbeck 

uses an example of an entity that is receiving a benefit. And in 

using that particular example, he misleads the committee as to the 

most, what constitutes the majority of the entities that are receiving the funds. And the fact of the matter is that the kinds of funds, 

the kinds of institutions the trustee himself has alleged could have 

known and should have known about this fraud were the ones that 

are receiving most of these funds, and the fact of the matter is that 

over a thousand innocent victims are being sued. 

Mr. HURT. Okay. I hope I have time for one more question. Again 

to Mr. Harbeck, a second fact that is stated in Mr. Stein’s testimony is the fact that in addition to saving SIPC over a billion dollars by the trustee’s own calculations, the trustee and his associated consultants have similarly been enriched by almost $1 billion, 

funds which could have gone instead to the devastated and desperately needed, those who desperately needed it. Is that true? 

Would you agree with that as a fact? And, again, do you believe 

that is consistent with the intent of Congress, and is that fair? 

24 

Mr. HARBECK. The billion dollars in administrative expenses in the Madoff case went to compile the $9 billion fund that the trustee 

has been able to recover. 

Mr. HURT. So you think that is fair? 

Mr. HARBECK. I think that is an extraordinary return, yes, sir. 

Mr. HURT. Mr. Stein? 

Mr. STEIN. That is kind of patently absurd on its face because $7.2 billion or approximately was immediately recovered by the Department of Justice. Early in the trustee’s proceedings, long before 

the number had reached $100 million, another 2.2 was negotiated 

with another estate. So the amount of money the trustee has actually utilized to effectively recover funds has been an enormous 

amount. If you look at the investment quality of the return on investment for the trustee for the majority of that $1 billion in expenditures, a relatively small amount of money has been recovered 

from the large institutional investors. 

Mr. HURT. Okay. Thank you. My time has expired. 

Chairman GARRETT. Thank you. 

The gentleman from Colorado. 

Mr. PERLMUTTER. And I, again, want to thank the Chair and the 

ranking member for tackling what is a very difficult and 

unsatisfying problem because no matter how you push the balloon, 

somebody gets hurt, because this is all a sham, and everybody has 

been robbed from the beginning to the end. Now the way I look at 

it is, there are three pots of money—we talked about two. There 

really are three pots of money. And I am sorry, ma’am, you are Ms. 

Kogutt? How do you say it? 

Ms. KOGUTT. ‘‘Kogutt.’’ 

Mr. PERLMUTTER. ‘‘Kogutt,’’ pardon me. There really are three 

pots of money: You have the insurance fund, and how big are we 

going to make that insurance fund so that we can cover people who 

have been lost, and how many tiers down? Is it the direct investor, 

is it the second direct, indirect investor, third? Then, you have the 

recovery that goes on among the people who have been defrauded. 

So, Ms. Shean, you get, your husband gets in at the end of Stanford, okay? You are helping the guys who got in earlier into the 

fraud than your poor husband and you. You are in 18 months before they close it down, but there were people in 3 years, 4 years, 

5 years; they are the ones getting interest payments off of your 

money. So, that is the second. 

Then, you are trying to figure out how do we resolve it so that 

everybody is treated equally, the early guys get paid, but the late 

guys don’t get paid? They are hurt? 

And then there is the third pot of money, which, Ms. Kogutt, you 

reminded me of, is those people who got you into the deal, okay? 

Whether it was the lawyers or the accountants or the advisers or 

some other company, and then there are all those lawsuits about— 

Ms. KOGUTT. Actually, there are no lawsuits. 

Mr. PERLMUTTER. There certainly are in the Madoff side. 

Ms. KOGUTT. There should be. 

Mr. PERLMUTTER. I don’t know about on the Stanford side, but 

there certainly are on the Madoff side. 

Ms. KOGUTT. There should be on the Stanford. There is a litigation stay that has been in place since February 2009. 

25 

Mr. PERLMUTTER. Here is the question, and I appreciate the 

ranking member and the chairman for tackling this. Do we try to 

even it out? Is equity—everybody was robbed, so everybody is going 

to be treated equally, or do the first people get to make out better 

than the guys who put their money in at the end? That is a policy 

question. For me, I think the equality, everybody being treated 

equally is appropriate. 

You then have the lawsuits against the advisers, and then you 

have the question of how big should we have this insurance fund? 

And will the broker-dealers or the taxpayers add to that insurance 

fund? Because the losses from Madoff and the losses from Stanford 

are so huge, they swamp the fund. It is just gone. It is bankrupt 

because we haven’t made it that big because we hadn’t seen those 

kinds of losses before. And in my previous life as a lawyer, I represented victims of Ponzi schemes. I represented trustees trying to 

collect money for the victims of Ponzi schemes. These are horrible 

situations because everybody is—and I want to use a crass term, 

but I am not going to since I am on the microphone—robbed, and 

I don’t know that there is a good answer. 

Ms. Shean, please? 

Ms. SHEAN. One of the things that confuses me is that we invested in Stanford Trust Company. 

Mr. PERLMUTTER. It is all phony. 

Ms. SHEAN. But Stanford was a member of SIPC. 

Mr. PERLMUTTER. Absolutely, I agree. 

Ms. SHEAN. As an investor, when I purchase an IRA governmentapproved account, or I should say my husband did, and my statements come from Baton Rouge, Louisiana; there is no mention of 

Antigua. I have— 

Mr. PERLMUTTER. I know, but it is snake oil. It is not real. That 

is the problem. And when you told—when you brought up that the 

SEC knew 12 years in advance, okay, that is horrible. And I don’t 

know how we want to try to compensate you for that. That is terrible. 

Ms. SHEAN. So since Stanford was a member of SIPC, what is 

SIPC covering? 

Mr. PERLMUTTER. There ought to be something from the insurance fund available to you, and I don’t know why you are not getting some recovery, but there were so many people making a claim 

against that fund, it is gone. 

Ms. SHEAN. So they were accepting money from a brokerage firm 

that was being run illegally? 

Mr. PERLMUTTER. Correct. 

Ms. KOGUTT. Can I comment on that? 

Mr. PERLMUTTER. Sure. 

Ms. KOGUTT. Part of the provisions of SIPA, 78eee(a)(1), if the 

SEC or any self-regulatory organization is aware of facts which 

lead it to believe that any broker or dealer subject to its regulation 

is in or is approaching financial difficulty, it shall immediately notify SIPC. However, in 1997, the SEC had an item of interest in 

their very first exam— 

Mr. PERLMUTTER. That is a troubling fact, and I am not sure 

what the heck to do with that, because you don’t have to have a 

26 

claim against the United States, I am not sure you could do it, but 

I feel like you have a claim— 

Ms. KOGUTT. There have been lawsuits against the SEC. The one 

that has moved forward the most is the one that has alleged the 

SEC’s violation of SIPA for this particular role because the brokerdealer had a negative 1,400 percent loss year after year, so they 

are at a negative operating loss, and it grew every single year. 

Mr. PERLMUTTER. And, look— 

Ms. KOGUTT. Why didn’t SIPC know that? 

Mr. PERLMUTTER. Your testimony is very compelling, but my 

time has expired. 

Chairman GARRETT. The gentleman’s time has expired. 

Mr. PERLMUTTER. I appreciate you all coming here and sharing 

with us. This is a tough deal, and I appreciate them tackling it. I 

am not sure they have the right answer. 

Chairman GARRETT. I appreciate that the gentleman’s time has 

expired. I also appreciate the fact that the gentleman indicated 

that Ms. Shean probably should receive something from the SIPC 

fund. 

I now recognize Mr. Hultgren. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

I, too, thank you all for being here today. I know this is a very 

difficult thing. 

I would like to focus my questions for on, Mr. Harbeck, if that 

is all right, just for me to help understand a little bit more of some 

of the challenges here. Focusing on the SIPC Modernization Task 

Force report, I know one of the recommendations is to eliminate 

the distinction between claims for cash and claims for securities 

during the resolution of a failed broker-dealer. First, I wondered if 

you can explain why this distinction between cash and securities 

claims may have existed before and, second, why SIPC feels the 

distinction is no longer appropriate or necessary? 

Mr. HARBECK. First of all, that is not SIPC’s position; it is the 

task force’s position. And SIPC will be responding to the task force 

on or before its next February board meeting. What the original 

distinction tied the amount of cash directly to the amount of cash 

available for the FDIC, and rose with that dollar number. But in 

point of fact, sometimes cash gets literally caught in the form of a 

check going to someone when they didn’t really want to leave cash 

with the brokerage firm, it just happened to be caught as cash as 

the brokerage firm failed. The task force looked at that and said 

it might be appropriate to simply abolish the difference. 

Mr. HULTGREN. I wonder if you could explain how fictitious securities are categorized in this process. And as you talk about that, 

are claims for fictitious securities considered cash claims or security claims? I understand there has been some confusion over that 

in the courts, and I wonder what SIPC’s position is on that? 

Mr. HARBECK. There is a split in the circuits on this. The Sixth 

Circuit has taken the position that the only conceivable way to 

measure cash legitimately deposited for the purpose of purchasing 

a security which does not ever exist would be protected as a claim 

for cash. 

The Second Circuit has taken a different view, and protected it 

as a claim for securities. But one important thing with respect to 

27 

any claim for securities is that SIPC, under no circumstances and 

in no case, was ever intended to guarantee the underlying value of 

a security. SIPC was designed to get you your security back. If it 

went up, excellent. If it went down, that is the way the marketplace works. Under no circumstances, regardless of why a security 

moves up or down in value, does SIPC protect the underlying 

value. It simply returns the security to you. 

Mr. HULTGREN. I know another recommendation from the SIPC 

Modernization Task Force report is to increase the maximum level 

of protection from $1.3 million and index it to inflation. If the distinction between cash and security claims is eliminated, effectively 

eliminating any cash maximum, and the level of protection is 

raised to $1.3 million, this means that all cash up to $1.3 million 

would be SIPC-covered. That is over 5 times the level of FDIC coverage. Is that desirable? And how might that affect cash holdings 

in deposit accounts and brokerage accounts? 

Mr. HARBECK. I think there may be unintended consequences to 

the task force’s recommendation. And I am sure that the SIPC 

board will be actively debating that and has begun that debate already. 

Mr. HULTGREN. And that response will be in the next few 

months? 

Mr. HARBECK. It is my understanding that the board intends to 

reply to the task force on or before its February board meeting in 

2014. 

Mr. HULTGREN. One last thing. Appreciating that one of the fundamental principles guiding SIPC is to certainly protect small investors, I wonder how raising the maximum coverage level would 

affect small brokers. Surely you would think this would raise 

broker-dealer assessments. 

Mr. HARBECK. The fact of the matter is that what we will do 

when we reach the target of $2.5 billion, which matches the Federal line of credit that we have against the United States Treasury, 

I am confident that the board will assess whether at that particular point in time—our current assets are $1.9 billion—whether 

a target of $2.5 billion is appropriate or whether it should be increased. I think we will take a hard look at where we stand and 

where our obligations are and what our legal obligations are as to 

whether the assessments should be raised, lowered, or stay the 

same. 

Mr. HULTGREN. Thank you all. My time has almost expired. 

I yield back. Mr. Chairman, thank you so much. 

Chairman GARRETT. Thank you. The gentleman yields back. 

Mr. Carney is recognized. 

Mr. CARNEY. Thank you, Mr. Chairman. 

I would like to thank you and the ranking member for having 

this hearing today, and particularly for your tenacity on behalf of 

your constituents. Knowing how important our constituents are, I 

have great sympathy and appreciation for the work that you are 

doing. I appreciate in particular the victims who have come here 

today. 

For me, I think our role is at some level to establish what the 

facts are and to try to come up with the best public policy, not just 

for these two terrible cases, the Stanford case and the Madoff swinVerDate Nov 24 2008 18:14 May 07, 2014 Jkt 086688 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\86688.TXT TERRI
28 

dle, but also going forward for everything else. So I am going to try 

to I think address most of my questions to Mr. Harbeck and Mr. 

Hammerman. 

First, I want to have some more discussion about the treatment 

of institutional investors versus retail investors. Mr. Stein, I think, 

said that 80 percent of the institutional investors were protected, 

and obviously, a lot of retail investors were not getting assistance. 

Mr. Harbeck, you mentioned the situation with pension funds. 

Mr. Stein seemed to take some exception to that. 

What is it? Is that the full explanation, or what other institutional investors might we be talking about here? 

Mr. HARBECK. The statute makes no distinction between a corporate investor, a large investor, or a small investor. The measurement is how much and, in the Madoff case, how much net did that 

investor put in. 

Mr. CARNEY. So is it the case that the institutional corporate investors put in more money than the retail investors? Is that part 

of the explanation? 

Mr. HARBECK. Whatever the net amount in was for any individual, whether it is a corporation, a hedge fund, or anything else. 

Mr. CARNEY. So it would be your view that in fact SIPC is not 

treating institutional investors any differently than retail investors 

in terms of the methodology that you are using. 

Mr. HARBECK. The methodology is the same for all. 

Mr. CARNEY. So should we look at that methodology if the effect 

is to maybe, this is my word, favor institutional investors over retail investors? Or is there something in the methodology that gives 

preference to institutional investors? 

Mr. HARBECK. It gives no preference to institutional investors. It 

gives preference, on a pro rata basis, to a larger contributor to the 

fund. 

Mr. CARNEY. Which at some level is fair, right? 

Mr. HARBECK. Especially when you consider that the institutional investor, whether it is a hedge fund which has partners, or 

whether it is a pension fund which has pension participants, if that 

institutional investor is an innocent institutional investor, it will 

get a proportional share. 

One thing that I take strenuous exception to is the fact that any 

institution that should have known about this or is alleged to have 

known about this has not shared, nor will it. 

Mr. CARNEY. Quickly, Mr. Stein, you are jumping out of your 

chair to get a point in here. Please feel free. My time is running 

out, but go ahead. 

Mr. STEIN. I get back to the words that Mr. Garrett stated initially when he was referring to the opening comments that President Nixon made. This legislation and the statute was intended— 

its very purpose was to protect the small investor. I don’t know 

how many times that point has to be reiterated for it to sink in to 

SIPC’s conceptual thinking. But that is the essential point. It is understood that professional investors and institutions have the resources and the recourse to be able to protect themselves and their 

investors. 

Mr. CARNEY. Fair enough. So should the methodology then slant 

towards the retail investor? 

29 

Mr. STEIN. I think it is a legitimate question to pose going forward. But I interpreting the law as it is written now, I think first 

of all it is from a public policy point of view, it is essentially we 

protect the smaller investor and the middle-class investor, as it 

was intended in the law. 

Mr. CARNEY. That makes a lot of sense to me. There is something 

to be said for that. But does the kind of the fundamental part of 

the bill going from a calculation of actual net investment to last 

statement method, does that do that? 

Mr. STEIN. Actually, the bill that Congressman Garrett has written gives the trustee the ability to determine what is in the best 

interests when it comes to the recovery of customer property, that 

second pool of money that Congressman Perlmutter was referring 

to. So those moneys that are recovered—we are talking about everybody getting their $500,000—the pool of money that is recovered, the trustee now has the ability to look to the SIPA legislation 

and say, what is the most equitable way to distribute this money? 

Do we give most of it to the small investor? Do we give most of it 

to the large investor? How are we going to split it? 

Mr. CARNEY. That seems to me to be a fundamental question. 

My time has run out. I may have additional time at some point. 

But I appreciate everybody coming in. Again, thank you to the 

chairman and the ranking member for your tenacity on this issue. 

Chairman GARRETT. Thank you. And we are going to stay for 5 

more minutes and then go to vote, or 10 more minutes, to go a second round, without objection. 

So, Mr. Hammerman and Mr. Harbeck, you have heard the testimony or the statements by Ms. Shean and Mr. Friedman as to how 

Mr. Shean invested and how Mr. Friedman invested. Can you tell 

the committee, and I guess all the American public who is watching them as just regular investors going forward, can you tell us 

what exactly did they do as regular investors that was wrong in 

their process of making their investments? 

Mr. HARBECK. Chairman Garrett, these victims did nothing 

wrong, nor has anyone ever said that they did. 

Chairman GARRETT. Okay. 

Mr. Hammerman, as far as the clients or the institutions in your 

association, would you say on their behalf that either one of them 

did something wrong as far as their selection? 

Mr. Friedman told how he went out and knew about it, actually 

went to the company and went through it, which is sort of amazing. That, to me, is due diligence. Do you think they did anything 

wrong? 

Mr. HAMMERMAN. Absolutely not, Mr. Chairman. These are victims of terrible financial crimes. 

Chairman GARRETT. So if America is watching right now, and 

they put themselves in the shoes of Ms. Shean and Mr. Friedman, 

and that those two people did absolutely everything right, and 

looking, they went in and they saw the SIPC logo there, Mr. 

Harbeck, and they saw that there was a guarantee that SIPC 

would protect them, and now America realizes there is no protection, as you were saying before, both of you were saying before, for 

fraud or these Ponzi schemes, what is the answer then for other 

Americans? 

30 

Mr. Hammerman, should there be an addendum, or Mr. Harbeck, 

should there be an addendum on the SIPC logo that when they go 

into Mr. Hammerman’s, any of the firms in his association, should 

there be a bold statement saying that you are protected by SIPC; 

however, if there is fraud by this firm or if there is a Ponzi scheme 

by this firm, you will not be protected? I am willing to do that. Are 

you? 

Mr. HARBECK. Chairman Garrett, SIPC has given $800 million— 

Chairman GARRETT. Answer the question. 

Mr. HARBECK. I am. $800 million to the victims of a Ponzi 

scheme. 

Chairman GARRETT. But you are not to this one. 

Mr. HARBECK. Yes, sir, $800 million. 

Chairman GARRETT. Not to Ms. Shean, you haven’t. Not to Mr. 

Friedman, you haven’t. 

Mr. HARBECK. No. We have not started a liquidation proceeding 

for Stanford because the courts have upheld the position that it is 

inappropriate to start such a case. 

Chairman GARRETT. Ms. Kogutt? 

Ms. KOGUTT. That is under appeal right now with the D.C. Circuit Court. 

Chairman GARRETT. So, in the Madoff situation, then, are you 

willing to say that if they had invested in Madoff, as opposed to 

in Mr. Stanford’s case, you are saying in this case, you are willing 

now to have SIPC advances being made so that they can be guaranteed that those payments will be made? 

Mr. HARBECK. SIPC advanced $800 million to the victims of the 

Madoff Ponzi scheme. 

Chairman GARRETT. In the case where they are in similar situations, where they have withdrawn more than they have invested in 

the fund? 

Mr. HARBECK. If you wish to put an addendum saying SIPC does 

not permit the payment of fraudulent, fictional profits, we would be 

in agreement. Because the courts have consistently— 

Chairman GARRETT. How about this situation, then? Say I put $1,000 into one of Mr. Hammerman’s firms or clients a few years 

ago, and I have been taking out, like Mr. Friedman says, I took out 

enough just to pay my taxes, I took out just to pay my medical bills 

and so on. So after so many years, I have taken out my $1,000. But 

my statement says I still have a thousand or more, right? Under 

your understanding, how much would I get from advances? 

Mr. HARBECK. If the entire—if the entire scheme is a Ponzi 

scheme— 

Chairman GARRETT. Right. 

Mr. HARBECK. —then the answer is— 

Chairman GARRETT. Zero, right? 

Mr. HARBECK. The answer is zero. And the reason the answer is 

zero, sir, is because it would take money away from people who did 

not get their own money. 

Chairman GARRETT. Wait. The time is mine. So what you are advising to do, what I have to do and what they should do in the future, everyone watching this should do in the future, is when you 

go to a broker-dealer and you make an investment, you should 

keep track every day that you take money out of that broker-dealVerDate Nov 24 2008 18:14 May 07, 2014 Jkt 086688 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\86688.TXT TERRI
31 

er—every day you take out money to make a tax payment, every 

day you take your money out to make a payment for your insurance or your health care—keep track so that you say, as soon as 

I get to that limit, in my case my hypothetical, I took out my 

$1,000 original investment, you are telling me at that point my coverage with SIPC ended, so you know what I would do as a prudent 

investor? I would close my account with that dealer, and I would 

walk across the street to another dealer, and at that point, it 

resets. Is that true that it would reset when I walk across the 

street? 

Mr. HARBECK. I think what you— 

Chairman GARRETT. Answer that question, please. Would it 

reset? 

Mr. HARBECK. I am trying to answer it, sir. 

Chairman GARRETT. Yes or no? 

Mr. HARBECK. The answer to your question is that if you did 

that, you would be protected. But it is not necessary. And it is not 

necessary because— 

Chairman GARRETT. Tell me how else I would be protected for 

that thousand dollars. 

Mr. HARBECK. The answer is, in the history of SIPC— 

Chairman GARRETT. No, tell me how I should be protected. 

Mr. HARBECK. You should be protected by the regulatory system, 

you should be protected by the auditors of the firm. 

Chairman GARRETT. Okay. So you have been there for 38 years. 

You know you are not protected that way. So how am I going to 

be protected? 

Mr. HARBECK. I believe that one of the things that has come out 

of the financial crisis is heightened review by the PCAOB of auditors of— 

Chairman GARRETT. So, we don’t need SIPC any more because 

my protection is not from SIPC at that point; it is from the SEC 

and the other agencies. Is that what you are telling me? 

Mr. HARBECK. Certainly, that is the first line of defense against 

fraud, yes. 

Chairman GARRETT. That is. But I thought SIPC was my second 

line, my final line. You are telling me SIPC is not going to be there 

for me. 

I think that is one of the takeaways from today is that first, you 

are willing to change the SIPC logo to say that there is a caveat 

and that your members will now have a caveat or statement, and 

that should be indicated to them on a regular basis—I think that 

is significant that we are going to have to do that. And second, 

your takeaway is that to be a prudent investor, as Ms. Shean and 

Mr. Friedman should be going forward, is that you should roll your 

money every so often from one broker-dealer to another brokerdealer as soon as you have come to that capstone, because my only 

reliance is on the regulators, and we know how good regulators are, 

and we know, you have just stated, that SIPC will not be there to 

protect me. I think that is a significant takeaway from this hearing. Ms. Kogutt? 

Ms. KOGUTT. That is assuming that the Ponzi scheme has gone 

on long enough for all of the investors to have withdrawn anything. 

32 

In my case, we invested 9 months before the collapse of the Stanford Ponzi scheme. 

But I want to point out that SIPC’s Web site right now says that 

SIPC helps individuals whose money, stocks, and other securities 

are stolen by a broker-dealer or put at risk when a broker fails for 

other reasons. 

But Mr. Harbeck has said SIPC doesn’t cover fraud. How do you 

steal a customer’s funds without defrauding them? Isn’t that burglary? There has to be some level of fraud to steal money. 

Chairman GARRETT. Yes. This issue is so frustrating on so many 

levels. 

Mr. Harbeck, you indicated you have been there for 37 years. 

Can you tell me, prior to this collapse, what was the insurance rate 

that you charged the member firms during that period of time? 

Mr. HARBECK. It has varied dramatically over that 38-year period. 

Chairman GARRETT. Okay. Just prior to the crisis in— 

Mr. HARBECK. Just prior to the crisis, when we had $1.6 billion, 

we felt that was enough. And there was a token assessment of 

$150 per firm. 

Chairman GARRETT. $150. 

Ms. KOGUTT. Stanford paid $1,750 for their protection for their— 

Chairman GARRETT. So Goldman Sachs in New York, what were 

they paying? 

Mr. HARBECK. At the time, they were paying $150 a year. Once 

we turned the assessment spigot back on, they paid tens of millions 

of dollars. 

Chairman GARRETT. Right. Just coincidentally, I am in the mar- ket right now to buy a used truck. It costs $1,500. So I called up 

the insurance agent last night and said, how much does it cost me 

to insure this truck that I bought for $1,500? They said, it is going 

to cost you $1,000 a year to insure that truck. If I have homeowners’ insurance, it is going to cost me about $1,000 on my house. 

If you go to a Sears and you go and you buy a large TV or something like that, when you leave, they try to sell you one of these 

insurance policies, which will cost you $200 or $300. Goldman 

Sachs was paying $150 for basically—for coverage. That doesn’t 

seem irresponsible to you? 

Mr. HARBECK. I will refer to my written statement, where I have 

gone through SIPC’s financial condition, Chairman Garrett. And 

we are currently in a stronger position than we were in 2008. 

Chairman GARRETT. Right. But you were not in a strong enough 

position in 2008 not to have to make these draconian, what appears to be draconian increases, sudden increases, which I can understand completely when I meet with Mr. Hammerman, some of 

your smaller members, and they are saying, hey, I budgeted, or I 

planned, and this is my operating budget, my budget for this much. 

And all of a sudden, wham, I am going to be hit this much. I can 

understand that. If your guys—I am sorry, if your members had 

known back in 1980, it was this much; in 1990, it was this much; 

and in 2000, it is this much, as a business owner, you could probably have planned for that and made for appropriate adjustments 

in your operation, and I can understand that completely. But to go 

from next to nothing, less than it costs to buy insurance on a TV 

33 

at Sears, to go to what some of your members, Mr. Hammerman, 

are going to right now, you can tell us, is this significant to them, 

the changes? The increases that some of your members are going 

to have to— 

Mr. HAMMERMAN. It sounds like, from Mr. Harbeck’s testimony, 

that it is multiples of millions of dollars. 

Chairman GARRETT. Right. And I can understand that is probably unconscionable to your members’ situation, and that they just 

can’t adapt to it. 

That is why, Mr. Harbeck, when you say you have been there for 

years and you have seen this ramping up to this, and the preparation wasn’t made, it goes back to my opening questions. What did 

they do wrong? Nothing. What did the regulators do wrong? A lot. 

What did SIPC do wrong? Apparently not a significant amount 

with regard to preparing the fund and being in preparation for 

cases like this. 

Ms. Shean? 

Ms. SHEAN. Nothing. 

Chairman GARRETT. The committee will stand in recess. Mr. 

Stein, do you— 

Mr. STEIN. Yes, Chairman Garrett, I just wanted to thank you 

very much. I think you have hit a lot of the key points. I think 

there are two things that I would just ask for consideration here. 

I think we are finally getting a chance to shine a light on the 

culture of SIPC. I think it has been largely opaque for probably the 

38 years that Mr. Harbeck has been there. I think the transparency is essential. I think we are getting to see some of the 

warts, but I think we need to dig deeper. I think we need to truly 

see whether SIPC is in fact even worthwhile. Is bad insurance better than no insurance at all? 

The second point, more of an overarching issue, is getting back 

to what the concept was in setting up basic issues of certainty for 

the banking industry and the financial services industry, and that 

means that when people see a bank deposit statement or a bank 

statement or an investment statement, there has to be a certain 

level of certainty in order for those markets to operate with the 

kind of confidence and trust that allows this economy to prosper. 

Once we start chipping away and nuancing at those very, very 

fundamental assumptions, we are threatening great damage to our 

financial and banking systems. 

If we applied the same characteristics that Mr. Harbeck and Mr. 

Hammerman have just been speaking about to the banking industry, to bank statements, to bank depositors, imagine the horrific result that would take place. 

I have to encourage the committee to consider, again, in all these 

decisions what the impacts are going to be to the financial industry 

and the importance of creating certainty and confidence in the markets, particularly now after what we have gone through collectively 

in this country. 

Chairman GARRETT. Thank you. 

Without objection, and it doesn’t look like I am going to have any 

objections, I am going to put into the record: a statement from the 

Financial Services Institute; the GAO report of 1992; and an email 

34 

of May 21, 2009, from Mr. Harbeck relative to the matters that we 

somewhat touched upon during the course of this hearing. 

We are in votes, and I know that the other Members will be leaving town. So I want to take this opportunity to thank each and 

every one of the witnesses who have come here today. I appreciate 

your concern for this issue, and I very much appreciate the testimony. We look forward to any input that any of you have on suggestions as we move forward on this legislation. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And with that, this hearing is adjourned. 

[Whereupon, at 11:24 a.m., the hearing was adjourned.] 

(35) 

A P P E N D I X 

November 21, 2013 

36 


86688.001

Honorable Chairman Garrett 

Mr. Neil Friedman 

2438 Carriage Place 

Palm City, Fl 34990 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

House of Representatives 

November 18, 2013 

Thank you, Mr. Chairman and the Committee for giving me an opportunity to tell you my story as a 

victim of the Madoff fraud. Just to give you some background, I am 79, my wife, who I love and miss 

dearly, passed away in January 2012. I have two children, Rena who lives in New York, and Alan, who 

lives in California, and I'm fortunate to also have four grandchildren. My daughter Rena struggles with 

MS. like the vast majority of the Madoff victims, I was not rich. I worked hard to make a living, save for 

a modest retirement, and then the Madoff tragedy took away our life savings. 

I graduated from New York University many years ago with a Bachelor of Science, and majored in 

Accounting. I began my career as an accountant, and over time moved to Connecticut General, trained 

as a life insurance brokerage representative servicing property and casualty agents, and built up a 

number of agencies. I then moved on to BenefiCial National, another insurance company, set up my own 

agency and helped many clients over the years. Over time, my business evolved to include pension and 

retirement planning services. At age 65, having built up enough savings, I retired and moved to Florida 

with my lovely wife. 

So it happens, when I was living in Far Rockaway in the 1960s, I had a personal friend who was a 

neighbor and a CPA, Jerome Horowitz. He became my business accountant, and much later, when I was 

in the pension and retirement plan business, he introduced me to Madoff to assist with setting up a 

pension plan. This was in the 80's. 

At this time Madoffs firm was at 1 Wall Street, NYC, and I was granted access to all the employees of his 

firm. Although the plan was implemented for the benefit of his employee they were very disappointed 

because the investment was restricted to high quality bonds, and not stocks. This plan was ultimately 

discontinued, but my relationship with Bernard Madoff, and his staff was friendly. With Jerry's success 

in his investment with Madoff, I expressed interest in opening an account. Bernard Madoff's minimum 

new account was in excess of $500,000 (if my memory serves me correctly) but he made an exception 

for me that he would accept whatever I could afford. It should be noted that my accounts were opened 

during the 80's. Assured by Jerry, that if all else fails we have protection up to $500,000 per account 

from SIPe. 
37 


86688.002

I was very aware of Madoffs high level of credibility in the industry. Even though I didn't see myself as 

an expert in the securities industry, my ePA told me that Madoff was being considered for a government 

position. I also knew from social circles that he was considered in the very highest regard, and was 

honorable. I was told that the SEe, when they visited him, were "interviewing for job positions", they 

were so taken with his business and reputation. 

When I set up my 401k retirement plan for my own business, like many people who thought they were 

investing in a properly overseen firm investing in very conservative securities, I put all my retirement 

assets into this account. I also had a personal account, into which I put my other savings, my son's 

wedding funds, college funds for the grandchildren, and funds to help my daughter to cover her very 

high medical expenses and medications when needed. 

We lived very modestly. Over the years, however, I withdrew funds to cover taxes, some living expenses, 

and took the required minimum distributions from the retirement plan. 

Now comes December 8,2008, with Madoff being arrested, and I was wiped out personally and in my 

retirement plan. 

When the news broke, I called Jerry Horowitz only to find him in a state of shock. His one comforting 

comment was that slPe provided security for up to $500,000. 

Since them, I was declared by the slPe Trustee to be a "net winner", primarily because of the IRS 

mandate that required that I withdraw, starting at 70 Y, an amount calculated by use of a mortality table 

times the balance of funds in the Profit Sharing (401K). 

Now I would like to call to your attention the effects that our loss of all our money had in our life. With 

the prospect of losing our home, a friend took over our mortgage and waived charging us interest until 

we sold our house or our death; however, his need for repayment caused me to enter into a reverse 

mortgage and repay all the money (this occurred after my wife's death). 

Existing on only our Social Security, we had to monitor everything. No longer were we able to visit our 

children & grandchildren, carefully spending for food, budgeting for insurance, house repairs, and 

supplemental health & drug insurance. I'm sure I omitted a number of other important things. 

My daughter with multiple sclerosis is now on social security disability. As you can imagine, her stress 

levels have increased tremendously, which is very bad for her condition. 

With the loss of everything and the denial by slPe of our right of benefit, my wife could no longer smile, 

stop worrying, and, apparently, find any reason to continue living. She was deeply depressed. During the 

month of December 2011, she had a fatal accident, and died in January 2012. 

In the year 2000 I weighed in at 232 pounds, I now weigh 150. 

I applied to Publix for a job, and was deemed too qualified. 
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86688.003

My time is now spent as a volunteer at Hospice and visiting with Military Veterans under Hospice Care, 

and presenting them with a Veteran Appreciation Certificate which states "We pay special tribute to 

their military service to America and for advancing the universal hop of freedom and liberty to all". In 

addition to aforementioned Certificate, we present them with a lapel pin - a US Flag & another Flag with 

the words "Honored Veteran". 

I'm also trying to put my photographic skills to good use, making postcards, trying to raise a little extra 

cash so I can visit my children. Without my wife, I am now very much alone. 

I think that the actions of the Madoff Trustee & President of SIPC in changing the 1970 SIPA law, for 

their own benefit, was beyond their legal authority. Nothing can give me back all that I worked so hard 

for and lost, but being denied the insurance protection that SIPC had promised has made our life so 

much harder. I'm pushing on, but years after this tragedy, it really saddens me that no one in Congress 

had yet been able to stop SIPe's illegal actions and force SIPC to do the right thing. 

Mr. Chairman, I thank you for your time and everything you're trying to do to help me and my fellow 

victims who by themselves could never counter the power of SIPC and the SIPC Trustee. 

Sincerely, 

Neil Friedman 
39 


86688.004

TESTIMONY OF IRA D. HAMMERMAN, 

EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, 

SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION 

BEFORE THE 

U.S. HOUSE OF REPRESENTATIVES 

COMMITTEE ON FINANCIAL SERVICES 

CAPITAL MARKETS AND GOVERNMENT SPONSORED 

ENTERPRISES SUBCOMMITTEE 

HEARING ON A LEGISLATIVE PROPOSAL 

TO AMEND THE SECURITIES INVESTOR PROTECTION ACT 

NOVEMBER 21, 2013 

I. Introduction 

Chairman Garrett, Ranking Member Maloney, and members of the 

Subcommittee: 

My name is Ira Hammerman, and I am Executive Vice President and General 

Counsel of the Securities Industry and Financial Markets Association ("SIFMA").l 

Thank you for allowing me the opportunity to testify today. 

I would like to begin by expressing my deepest sympathy for the victims of the 

Madoff and Stanford schemes. I have family and friends whose financial lives were 

forever adversely impacted on December 11, 2008 and for whom life "post-Madoff" is a 

tremendous burden. I know from up close and personal interactions the havoc caused 

to individuals, retirees and wonderful charities by Madoff and the feeder funds that. 

never even disclosed they were investing with Madoff. 

So I understand, and in fact applaud, the tenacity being expressed by Chairman 

Garrett and Ranking Member Maloney as they seek to help their constituents and the 

investing public at large. I also commend Chairman Garrett and Ranking Member 

Maloney for recognizing more generally the need to consider changes to the Securities 

Investor Protection Act ("SIPA") in order to better protect investors and increase investor 

1 SIFMA brings together the shared interests of hundreds of securities firms, banks and asset managers. 

SIFMA's mission is to develop policies and practices that strengthen financial markets and encourage 

capital availability, job creation and economic growth while building trust and confidence in the financial 

industry. SIFMA, with offices in New York and WaShington, D.C., is the U.S. regional member of the 

Global Financial Markets Association. 
40 


86688.005

confidence in the financial markets. I served on the 2012 task force that undertook a 

comprehensive review of SIPA and the operations and policies of the Securities 

Investor Protection Corporation ("SIPC"), and I agree there are proposals for reform that 

warrant consideration. I am sure you are familiar with the recommendations made by 

the SIPC Modernization Task Force (the ''Task Force") to SIPC's Board of Directors, 

and I will address some of the recommendations in my remarks as well. 

However, while I supported the recommendations of the Task Force, I noted at 

the time that they were made without any analysis of their cost to SIPC, the members of 

SIPC or, ultimately, the investing public. This concern is even more pressing with 

respect to the proposed legislation. The draft bill would not make tweaks or 

adjustments to the law that's been on the books nearly 44 years, but rather would 

introduce a new public policy objective for SIPA and SIPC - namely, insuring investors 

against the risk of loss due to securities fraud. It is certainly within the prerogative of 

Congress to enact a bill that would represent such a tremendous departure from the 

legislative intent and historical practice of SIPA and would materially expand SIPC's 

mandate, but we believe the costs would be extraordinarily high. 

We have some specific concerns about the proposed bill that I'd like to share 

with you today. More importantly, we urge Congress to consider the far-reaching 

impact of the proposed bill, and to consider whether the costs of the expanded 

protection that is proposed would be justified by the anticipated increase in investor 

confidence. We believe an analysis of the costs will be critical to ensure that wellintentioned investor protection and modernization measures do not inadvertently 

undercut SIPC's overall effectiveness in protecting investors. 

II. Background of SIPC 

To provide context for my remarks, I believe it is important that we consider the 

background and purpose of SIPA and the creation of SIPC. Following a period of great 

expansion in the 1960s, the period from 1967 to 1970 was one of crisis for the securities 

industry and the investing public. First, there was a so-called paperwork crisis, in which 

brokerage firms failed to upgrade their back-office infrastructures and adequately staff 

their trade processing and record-keeping functions to accommodate the significant 

increases in trading volume. As a result, errors became common, with firms losing 

securities or otherwise failing to complete trades and deliver cash and securities. In 

addition, instances of misconduct, such as thefts of securities, increased. 

Second, the securities industry experienced a business contraction from 1969 to 

1970 that, coupled with financial losses related to the paperwork crisis, led to the failure 

2 
41 


86688.006

or instability of a significant number of brokerage firms. The cash and securities that 

customers had on deposit with failed brokerage firms were missing or tied up in lengthy 

bankruptcy proceedings, and investor confidence was eroding. 

Congress responded in 1970 by enacting SIPA, an act with the stated goal of 

"provid[ing] greater protection for customers of registered brokers and dealers and 

members of national securities exchanges." Securities Investor Protection Act of 1970, 

Pub. L. 91-598, 84 Stat. 1636 (codified at 15 U.S.C. §§ 78aaa et seq.). Congress's 

intent was to prevent the failure of additional brokerage firms, restore investor 

confidence in our markets, and upgrade the financial responsibility requirements for 

registered brokers. S/PC v. Barbour, 421 U.S. 412, 415 (1975). In particular, SIPA was 

designed to create a new form of liquidation proceeding in order to complete the open 

transactions of otherwise solvent firms with firms that have failed and to provide for the 

efficient return of customer property. Id. 

III. Task Force and SIFMA Recommendations for SIPC Modernization 

The SIPC Modernization Task Force recommended a number of important proinvestor changes, including changes that would expand and increase the protection 

available to brokerage firm customers in three important ways. As you know, when a 

brokerage firm is liquidated and the customer property marshaled by the trustee is 

inadequate to return to customers all of the funds and securities they entrusted to the 

custody of the firm, SIPC makes advances to customers from its own funds. Since 

1980, these advances have been capped at $500,000 per customer. The Task Force 

recommended increasing the maximum advance amount from $500,000 to $1.3 million 

to reflect inflation since 1980. The Task Force also recommended eliminating the 

current distinction under SIPA between claims for cash, which are capped at $250,000 

per customer, and claims for securities. Finally, the Task Force recommended a limited 

"pass-through" of SIPC protection to make individual pension plan participants eligible 

for SIPC advances with respect to their shares of the plan's account at a failed broker. 

In addition to these recommendations, SIFMA proposed at the time, and still 

believes, that consistency between the customer protection rule (Rule 15c3-3) of the 

Securities and Exchange Commission (the "SEC") and SIPA would benefit investors. 

The customer protection rule requires each broker to maintain possession or control of 

its customer's fully paid and excess margin securities and deposit into a reserve 

account an amount generally equal to its net monetary obligations to customers or in 

respect of customer securities pOSitions. However, a broker's proprietary account is not 

treated as a customer account for purposes of the customer protection rule, while a 

broker's net equity claim based on its proprietary account is eligible to share in the pro 

rata distribution of custorner property in a SIPC liquidation. As a result, there may be 

3 
42 


86688.007

net equity claims entitled to share in the pro rata distribution of customer property for 

which no assets were set aside. A similar difference exists in the treatment of the firm's 

principal officers and directors, who are non-customers under the customer protection 

rule but eligible for customer status under SIPA. Until SIPA and the customer protection 

rule are harmonized, even a failed broker-dealer that has complied with its regulatory 

obligations will not have sufficient customer property to fully satisfy the net equity claims 

of its customers under SIPA. 

SIFMA also believes that separating customer accounts into classes would 

benefit individual investors. Maintaining a single class of customers - encompassing 

cash account customers, margin account customers, portfolio margin customers and 

securities-based swap customers - may unfairly impose risks of the newer and more 

complex types of accounts and transactions (i.e., portfolio margin and securities-based 

swaps) on the customers who have simpler accounts (i.e., cash accounts). Accordingly, 

SIFMA recommends that consideration be given to dividing customers into separate 

account classes, tailoring customer protection rules to each account class in a way that 

provides for a separate pool of customer property for each class, and, in a liquidation 

proceeding, distributing the customer property for each account class solely to members 

of that class based on net equity in that class. 

With the caveat I noted at the outset that the cost of any changes to SIPA must 

be carefully considered, we continue to believe that the recommendations of the Task 

Force and the additional changes recommended by SIFMA appropriately reflect SIPA's 

purpose of promoting investor confidence in the financial markets by protecting 

investors against the loss of cash or securities in the event the brokerage firm holding 

their property becomes insolvent. 

IV. Net Equity Based on Last Statement and Allocation of Customer Property 

The proposed legislation would amend SIPA to provide that, in determining net 

equity, the assets of a customer reported to that customer as held by a failed brokerage 

firm would be determined based on the information contained in the last statement 

issued by the brokerage firm to the customer and any additional written confirmations 

after the last statement date. However, if the net value of the customer's assets on the 

firm's books and records is greater than the net value as determined using the 

customer's last statement, the proposed legislation would provide that the customer's 

net equity would be determined using the firm's books and records instead of the 

customer's last statement. Customer property in liquidation would be allocated based 

on customers' net equities as determined pursuant to these provisions, unless the 

4 
43 


86688.008

trustee determined that another allocation would be necessary to reach a fair and 

reasonable result. 

It is unclear how these provisions would operate in a situation involving fraud by 

the failed brokerage firm. For example, when a broker..cJealer is operated as a Ponzi 

scheme, the customer account statements will themselves be fraudulent, as it is the 

essence of a Ponzi scheme that the perpetrator report false profits to investors, and 

therefore the account statements will not truly represent positions in the firm's customer 

accounts. 

Instead of relying on fraudulent account statements to determine the net equity of 

the customers of Bernard L. Madoff Investment Securities LLC ("Madoff'), the trustee 

appointed by SIPC to liquidate Madoff used the "net investment" method. Under that 

method, fraudulent customer account statements are disregarded and a customer's net 

equity is determined solely by reference to the amount of money the customer entrusted 

to the Ponzi scheme operator and the amount of money the customer received from the 

Ponzi scheme. The customer's net equity is his net investment in the fraudulent 

scheme - in other words, the excess (if any) of the amount entrusted over the amount 

received. This method has been used with respect to fraudulent schemes outside ofthe 

SIPA context as far back as the 1920s, and has been applied by several trustees and 

courts in SIPA liquidations, including the Madoff liquidation. 

In upholding the use of the net investment method in connection with the Madoff 

liquidation, the U.S. Court of Appeals for the Second Circuit explained that, 

"notwithstanding the [Madoff] customer statements, there were no securities purchased 

and there were no proceeds from the money entrusted to Madoff for the purpose of 

making investments." In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 240 (2d Cir. 

2011). As a result, any "[c]alculations based on made-up values of fictional securities 

would be 'unworkable' and would create 'potential absurdities.''' Id. at 241 (quoting In re 

New Times Sec. Servs., Inc., 371 F.3d 68,88 (2d Cir. 2004)). Moreover, changes to a 

firm's books and records after the last statement date may reflect fictitious transactions 

in antiCipation of the generation of the next month's customer statements. In such a 

situation, basing net equity calculations on the firm's latest fraudulent entries in its 

books and records - as the proposed legislation would do for any customer for whom 

this resulted in a higher net value - would allow "the whim of the defrauder" to "control[] 

the process that is supposed to unwind the fraud." Id. 

When a failed brokerage firm is operated as a Ponzi scheme, SIFMA believes 

that, as a matter of fundamental fairness, the net investment method should be used to 

determine net equity for purposes of allocating customer property held by the failed firm. 

5 
44 


86688.009

The property held by a Ponzi scheme and used to make distributions to the "investors" 

in the scheme is simply the pooled investments of all victims of the scheme (less 

amounts misappropriated by the Ponzi scheme operator), and making distributions 

based on anything other than the victims' net investments would be fundamentally 

unfair. 

We thus respectfully recommend that the proposed provisions relating to net 

equity and altemate allocation methodologies be replaced with a provision that 

specifically provides for the use of the net investment method in situations involving 

fraudulent account statements and brokerage books and records. 

V. Definition of Customer Status 

The proposed legislation would add to the definition of the term "customer" under 

SIPA: (a) any person whose cash or securities were misappropriated by the brokerage 

firm (or by any person who controls, is controlled by, or is under common control with 

the firm, if such person was operating through the firm), regardless of whether the firm 

held or otherwise had custody, posseSSion or control of such cash or securities, and (b) 

any person whom the SEC, in its discretion and without court approval, deems to be a 

customer of the firm. SIFMA disagrees with both of these proposed amendments to the 

"customer" definition. 

A. Persons With Assets Misappropriated by Brokerage Affiliates 

Expanding the definition of the term "customer" under SIPA, as proposed, to 

include any person whose cash or securities were misappropriated by an affiliate of a 

brokerage firm operating through the firm would be inconsistent with SIPA's legislative 

history and purpose and contrary to public policy. 

It is clear from SIPA's legislative history that Congress intended SIPA to remedy 

a specific problem: "provid[ing] financial relief to the customers of failing broker-dealers 

with whom they had left cash or securities on deposit" who "found their cash and 

securities" "tied up in lengthy bankruptcy proceedings: Barbour,421 U.S. at 413, 415. 

Since its enactment in 1970, SIPA has been understood to protect an investor from the 

risk that he will be unable to regain his property from his brokerage firm in the event of 

the firm's insolvency, and customers have been expected to have, at the time of the 

firm's insolvency, cash or securities on deposit or otherwise entrusted with the 

brokerage. 

6 
45 


86688.010

The decisions in In re Old Naples Securities, Inc., 223 F.3d 1296 (11th Cir. 

2000), and In re Primeline Securities Corp., 295 F.3d 1100 (10th Cir. 2002), apply this 

history and practice to the situation of an investor giving money to an agent of a 

brokerage firm who then stole the investor's funds instead of purchasing the securities 

that the investor believed he was purchasing with the funds entrusted to the firm via the 

agent. In those cases, the investors were deemed to be customers because they 

thought their assets were entrusted with the brokerage. ct. In re Bernard L. Madoff Inv. 

Sec. LLC, 708 F.3d 422,428 (2d Cir. 2013) (no "customer" status when the investors 

"could not reasonably have thought" that their funds were deposited with the broker). 

SIPA was never intended to provide broad protection to investors against the risk 

of fraud or investments that turn out to be worthless - situations in which damage would 

have occurred to the investor even if the brokerage firm had remained solvent. The 

proposed expansion of the term "customer" to include any person whose assets were 

misappropriated by an affiliate of a brokerage firm would extend SIPA well beyond its 

core purpose and would have significant public policy implications. Such an expansion 

would have financial costs that could exceed the available SIPC funds and could have a 

detrimental impact on the viability of SIPC and firms across the brokerage industry. 

This could ultimately result in significant increases in the costs borne by investors (and, 

in some cases, result in investors losing access to the financial markets altogether). 

B. Persons Deemed to Be Customers by the SEC 

SIFMA also disagrees with the proposed expansion of the "customer" definition 

to include any person whom the SEC, in its discretion and without court approval, 

deems to be a customer of the failed brokerage firm. SIFMA believes that the authority 

to interpret SIPA and its definition of who is a customer should remain vested with the 

courts. Additionally, SIFMA believes the SEC may not be able to deem persons to be 

customers under SIPA without first providing notice and an opportunity for public 

comment. 

VI. SEC Authority to Require SIPC Action 

SIFMA disagrees with the proposal that the SEC be permitted, without court 

approval, to require SIPC to discharge its obligations under SIPA in the event of SIPC's 

refusal to act. Giving the SEC the authority to require SIPC to commence a liquidation 

proceeding would effectively replace the judgment of SIPC's board of directors - which 

includes among its members a representative of the Department of the Treasury, a 

representative of the Federal Reserve Board, three representatives of different aspects 

of the securities industry, and two members of the general public - with that of the SEC. 

7 
46 


86688.011

In drafting SIPA, Congress considered and rejected this alternative,2 and SIPA's 

apportionment of responsibility reflects Congressional judgment at the time of 

enactment of SIPA that it should be SIPC's independent board of directors - not the 

SEC - that makes the decision whether a liquidation proceeding should commence. 

This legislative judgment is supported by substantial policy considerations. In 

leaving the determination of whether a SIPA liquidation is required to SIPC, an entity 

with its own source of funding, Congress successfully insulated this decision from 

political pressure. The neutrality of the decision is especially important when private 

actors bear the cost of the liquidation decision. By contrast, allowing the SEC to 

substitute its judgment for that of SIPC would leave the decision subject to political 

interference - a situation best avoided. 

VII. Inspection of SIPC Members 

With respect to the proposed provision requiring the SEC to carry out periodic 

inspections of SIPC members, we note that SIPC's members are broker-dealers 

registered with the SEC and members of the Financial Industry Regulatory Authority, 

Inc. ("FINRA"), and thus are subject to inspections and examinations by the SEC and 

FINRA. While we believe broker-dealers are heavily supervised under the current 

regulatory regime, the proposed inspection provision brings to mind the interesting 

question that has been discussed in other contexts regarding registered investment 

advisers ("RIAs"), which are not members of FINRA and are infrequently examined by 

the SEC. RIAs also provide information to customers, and entities in many cases seek 

dual registration as both brokers and RIAs. In fact, both the Madoff and Stanford cases 

involved broker-dealers that were also RIAs. 

VIII. Effective Date 

The proposed legislation provides that its provisions would become effective with 

respect to any liquidation proceeding under SIPA that was in progress as of the date of 

enactment. This would significantly slow down the liquidation proceedings that are 

currently in progress and is simply not feasible. 

2 An early version of SIPA contemplated the SEC Commissioners themselves serving as SIPC's board of 

directors with the power to detemnine when a SIPA liquidation should be commenced. Cf. S. 2348, 91st 

Congo §3(b) (1969), with 15 U.S.C. § 78eee(a)(3)(A). Congress ultimately rejected this alternative at the 

SEC's urging. See Hearings on S. 2348, S. 3988, and S. 3989 Before the Subcomm. on Securities of the 

Comm. on Banking and Currency of the United States Senate, 91st Congo 17 (1970) (statement of Hamer 

H. Budge, Chairman of the SEC) (explaining that the Commissioners should not serve as SIPC's board 

members because of potential conflicts posed between the roles of a SIPC board member and an SEC 

Commissioner). 

8 
47 


86688.012

Once SIPC determines that a member firm has failed or is in danger of failing to 

meet its obligations to customers, SIPC may file an application for a protective decree in 

a court of competent jurisdiction. The insolvent firm may consent to issuance of the 

protective decree or may contest it, in which case the court holds a hearing on the 

application. The court also appoints a trustee for the liquidation of the firm's business 

and attorneys for the trustee, and holds a hearing on their disinterestedness at which 

customers, creditors and stockholders of the insolvent firm may file objections. 

The trustee will publish notice of the liquidation describing the proceedings and 

the procedure for claims and specifying the time period during which investors may 

assert their claims. The trustee will also mail notice to the insolvent firm's customers 

and creditors. The trustee will investigate the conduct, property, liabilities and financial 

condition of the insolvent firm, determine the allowable customer claims, marshal assets 

of the firm, and determine how to allocate customer property. Once the court has 

approved the trustee's determination of customer property and amount and timing of 

distributions, the trustee distributes assets to customers. 

According to SIPC's website, there are currently seven active liquidation cases in 

which the six-month claims filing period is closed.3 These include the Lehman Brothers 

Inc. liquidation, in which the trustee is in the process of completing 100 percent 

distributions on allowed securities customer claims, and the MF Global Inc. liquidation, 

in which the trustee's allocation motion has recently been approved. In addition, SIPC's 

website indicates that there is currently one active liquidation case with an open filing 

period, in which the claim form has already been distributed to customers.4 It is unclear 

how the provisions of the proposed legislation would apply to these liquidations. Among 

other things, with respect to the proceedings in which distributions have already 

commenced, it is unclear whether customers would be required to return assets to the 

trustee so that the trustee could re-determine claims and allocation under the proposed 

legislation. The net effect would be to significantly slow down the progress of the 

proceedings that are currently active, jf it were even feasible to apply the legislation 

retroactively. 

IX. Conclusion 

SIFMA supports the goals evident from the title of the proposed legislation - to 

restore Main Street investor protection and confidence - and, through our membership 

on the SIPC Modernization Task Force, have participated in reviewing SIPC's 

operations and policies and proposing reforms to modernize SIPA and SIPC. We 

3 http://sipc.org/Cases/CasesClosed.aspx (accessed Nov. 19, 2013). 

4 http://sipc.org/Cases/CasesOpen.aspx (accessed Nov. 19,2013). 

9 
48 


86688.013

remain supportive of these goals, but strongly caution against the enactment of 

legislation that would result in an unprecedented expansion of SIPC's coverage without 

careful consideration of the effects of that expansion. 

Losses from securities and commodities frauds in the United States, which 

include, among others, market manipulation, Ponzi and pyramid schemes, and broker 

embezzlement, total in the tens of billions of dollars each year.5 Market manipulation 

schemes alone have been estimated to generate $6 billion in losses each year.6 

These estimated losses vastly exceed the amounts available in SIPC's reserve 

fund, which amounted to $1.6 billion as of December 31, 2012,7 and SIPC would be 

unable to continue operating for long if its purpose were expanded to provide 

compensation for investors with losses from securities fraud. Even if SIPC were to 

borrow in the public debt markets at reasonable terms, as is contemplated in the 

proposed legislation, or to tap its $2.5 billion line of credit with the federal government, 

SIPC would be unable to provide the necessary liquidity if SIPA were expanded to make 

SIPC the insurer against the risk of loss due to securities fraud. 

It is unfortunate that financial frauds like the Madoff and Stanford schemes exist 

and will continue. Crooks will continue to use the financial system to find victims 

because, to quote notorious bank robber Willie Sutton, "that's where the money is." 

Criminals who steal investors' assets through fraudulent securities activities should be 

prosecuted and put in jail, and recoveries for victims of these frauds should be sought 

through the applicable criminal and civil forfeiture statutes. In addition, victims can seek 

to obtain recoveries by bringing claims under the Securities Act of 1933 or the 

Securities Exchange Act of 1934 - additional avenues Congress envisioned defrauded 

investors would take to recoup their investments. 8 

5 See, e.g., FBI Financial Crimes Report to the Public, Fiscal Year 2006, available at 

http://www.fbi.gov/stats-services/publications/fcs_report2006 (accessed Nov. 19, 2013) (estimating losses 

of $40 billion per year from securities and commodities fraud). See a/so 

http://sipc.orglWho/NotFDIC.aspx(accessedNov. 19, 2013) (stating that the Federal Trade Commission, 

Federal Bureau of Investigation, state securities regulators and other experts have estimated that 

investment fraud in the United States ranges from $10 billion to $40 billion per year). 

6 FBI Financial Crimes Report to the Public, Fiscal Year 2006, supra. See a/so 

http://sipc.orglWho/NotFDIC.aspx, supra (estimating investor losses from microcap stock fraud at $1 

billion to $3 billion annually). 

72012 Annual Report at 8, available at http://sipc.org/PortalsIOIPDF/2012AnnuaIReportpdf (accessed 

Nov. 19,2013). 

8 "The Securities Act of 1933 requires that investors have adequate information to exercise sound 

judgment conceming the securities they purchase; and the Securities 0 Exchange Act of 1934 insures 

that they will not be victimized by fraudulent, manipulative, or deceptive selling schemes. But neither 

statute prevents the investor from losing his entire investment if his broker fails because of operational 

and, ultimately, financial difficulties.' See S. Rep. No. 91-1218, at 3 (1970). It was this gap that SIPA and 

SIPC were designed to fill. 

10 
49 


86688.014

But insuring all of us against the risk of fraud is quite another undertaking. As 

noted earlier, SIPC would be unable to provide the necessary liquidity if SIPA were 

amended so that it effectively provided such insurance. This expanded scope of 

coverage would cause SIPC's assessments on its member firms to increase 

astronomically. The cost to brokerage firms would likely be quite high, and could cause 

brokers to go out of business. Moreover, the cost would ultimately be passed on to 

customers and could negatively impact their financial returns and access to the financial 

markets. If such an insurance system is what Congress now desires to achieve, the 

anticipated costs and benefits should be carefully considered, and the ramifications for 

businesses and investors should be carefully analyzed and debated. While it may be 

meritorious to limit risk for investors, it will certainly not be free or without other 

consequences. 

SIFMA looks forward to continuing to work with the Subcommittee on addressing 

these very important issues. 

Thank you again for allowing me the opportunity to testify. I would be pleased to 

answer your questions. 

11 
50 


86688.015

Statement 

Of 

StephenP.I1arbeck 

President and Chief Executive Officer 

To The 

I10use Financial Services Committee 

Subcommittee on Capital Markets & Government Sponsored Enterprises 

November 21, 2013 

Chainnan Garrett, Ranking Member Maloney, and Members of the Subcommittee: 

Thank you for the opportunity to brief you on the progress SIPC has made since the 

beginning of the 2008 financial crisis. I believe the results achieved to date are impressive, given 

the scope of the challenges presented. 

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, under the 

Securities Investor Protection Act ("SIP A"), the United States Bankruptcy Court for the 

Southern District of New York approved the transfer of 110,000 customer accounts containing 

$92 billion in assets to solvent brokerage finns. The actual transfer of those accounts took place 

over the next ten days. 

The 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 requiring assets that should have been segregated for customers, but were not, 

to be deemed segregated. 

Today: All Lehman Brothers customers have been made whole. No SIPC funds were 

required for either the administrative expenses of the case or to supplement account balances. 
51 


86688.016

In short, the bankruptcy processes imbedded in SIP A have worked well under a severe 

stress liquidation case, and should be considered as a viable option to the Dodd-Frank 

"Resolution Authority" where practicable. 

Bernard L. MadoffInvestment Securities LLC 

I first testified before the Committee in January 2009. Since that time, the trustee's 

methodology for determining claims has been approved in all respects by the courts and, in 

accordance with that methodology, the trustee has approved 2,514 claims. A total of 1,267 of 

those c1aims ... the smallest claims in the case .... have been fully satisfied by a combination of 

advances from SIPC and a distribution of funds amassed through litigation, and settlements 

reached, by the trustee. 

Every customer who left $875,000 or less with Madoff has received all of his or her 

money back from the trustee. Customers with larger claims have received 43% of their initial 

investment plus $500,000 from STPC. Thus, a claimant who left $10 million with Madoff has 

already received $4.8 million from the trustee, including SIPC advances. It is important to note 

that no customer funds have been used to pay expenses or the cost of the work that went into 

generating these significant returns. SIPC has paid for all of the administrative costs of the case. 

There are two major additional sources of funds to be distributed. The trustee will be in a 

position to distribute to customers an additional $1.95 billion, currently in his possession, as soon 

as certain legal impediments are resolved. Working in conjunction with the United States 

Attorney for the Southern District of New York, the trustee estimates that yet an additional $2.3 

billion will be returned to customers from the United States Attorney's forfeiture funds. 

Finally, the trustee is engaged in litigation which, if successful, will benefit those who 

have not yet received all of their net deposits 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 additional funds are added to the fund of 

"customer property." 

MF Global Inc. 

A bit of perspective is useful in a discussion of the MF Global case. This is the eighth 

largest bankruptcy in history. $1.6 billion that should have been set aside for commodities 

claimants was not properly segregated. The Commodity Futures Trading Commission has no 

analog to SIPC to protect commodities customers. Because securities customers were at risk, 

2 
52 


86688.017

SIPe was contacted by the SEe before dawn on October 31, 2011, a mere two years ago, and 

initiated a proceeding that same day. The case has not been without controversy. SIPC was 

criticized by some for appointing as trustee James Giddens, who also served as the trustee in the 

Lehman Brothers SIPA proceeding. There were international impediments to recovery of funds. 

Yet, Bankruptcy Judge Martin Glenn recently stated that "At the outset of the case, nobody 

thought that customers would recover everything they lost." 

The results to date: 

All securities customers were satisfied early in the proceeding. 

Having won a case concerning the proper segregation of assets in the Supreme Court of 

the United Kingdom in Lehman Brothers, Mr. Giddens was able to shortcut objections to his 

resolution of a virtually identical issue in MF Global. This was critical to full satisfaction of the 

commodities customers. 

The cost to SIPe is expected to be zero. There will be no need for SIPC funds for either 

securities customer claims satisfaction or administrative expenses. Although SIPe advanced 

$10,000,000 early in the case, that sum has been returned to SIPC. 

The trustee and SIPe litigated a number of issues interpreting SIPA, some of which were 

issues of first impression, and have been uniformly successful. 

Asset recovery efforts on behalf of the general creditors will continue, but costs of 

collection will not be borne by SIPC. 

In short, the process worked, and worked well. 

SIPC's Financial Condition 

In January 2009 a number of 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% of net operating revenues. At the close of this year SIPC will have $1.9 billion. Even 

including all expenses of the financial crisis, this demonstrates that SIPC has the ability to raise 

funds as needed to 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. 

3 
53 


86688.018

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. 

SIPC Cannot Support The Proposed Restoring Main Street Investor Protection and 

Confidence Act 

The "Restoring Main Street Investor Protection and Confidence Act" contains provisions 

that have a number of unintended consequences. SIPC cannot support these proposed 

amendments to SIPA. Some of the problems presented by the proposal include: 

The bilI requires SIPC to accept as accurate a financial statement known to be 

intentionally fraudulent. Under the bill, SIPC must accept whatever statement a thief issues to 

his customers. 

The bilI not only legitimizes Ponzi Schemes, it guarantees that the phony profits 

of a Scheme are backed by federal taxpayer funds. 

The bill makes Ponzi Schemes a better investment than legitimate securities 

markets. 

The bill's limitations on the "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 two days later, the $175,000,000 in checks on his desk 

would have gone to arbitrarily favored clients at the direct expense of similarly situated other 

clients. 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." 

Attached is a graphic presentation demonstrating the inequitable consequences of 

eliminating the avoidance powers. 

The bill provides a complex mechanism for ignoring 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 dclay return of customer property to injured claimants on a timely 

basis. 

4 
54 


86688.019

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 

Hcustomer.'~ 

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 benetits of expertise in the most significant 

cases. SIPC has eight ongoing proceedings. Only one individual serves in more than one case. 

STPC designated five different law firms in the six ongoing New York cases. SIPC matches the 

size and resources of the trustee and the trustee's counsel with the nature and scope of the 

problem. 

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

SIPC cannot support the bill to the extent it would reverse the judicial outcome in 

the Stanford-Antigua Bank Fraud Case. 

As to Stanford, the bill requires SIPC to underwrite, guarantee, and pay the debt 

obligations of a foreign bank in an offshore tax haven. The Antiguan Bank CD purchasers 

knowingly sent their money A WAY 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 this or any other fraud, STPC was not 

designed to refund the original purchase price of any bad investment, even where the investment 

was induced by fraud. 

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

questions the Subcommittee may have. 

742099 

5 

86688.020

Prepared for the House Financial Services Committee 

Capital Markets Subcommittee 

Stephen P. Harbeck 

President and CEO 

The Securities Investor Protection Corporation 

November 21,2013 
56 


86688.021

86688.022

Assume three individuals deposit the same amount, on 

the same day. 

No actual investments are made for the three customer

All three are credited with completely fictitious 

investment returns. 

Just prior to a discovery of the fraud, one customer 

makes a substantial withdrawal of his original 

investment, and some of the fictitious profits. 

The other two customers make no withdrawal. The fraud is exposed. 

86688.023

• Under current law: All three customers receI

identical returns. 

• Under the proposed legislation: 

One customer receives: 

• All of his principal investment. 

• Fictitious profits, in the form of money taken from th

other two customers. 

The other two customers receive: 

• Far less than their original investment. 

86688.024

DATE Customer A Customer B Customer C 

01101110 Deposits $2 Million Deposits $2 Million Deposits $2 Million 

Oli01/12 Receives Statement $4 Million Receives Statement $4 Million Receives Statement $4 M

02/01112 Withdraws $3 Million Withdraws Nothing Withdraws Nothing 

03/01112 Receives Statement $1 Million Receives Statement $4 Million Receives Statement $4 M

04/01112 Ponzi Scheme Exposed and Customers Are Innocent of Knowledge 

Broker's Assets and Other Customer Property Completely Dissipated on Filing Date 
60 


86688.025

86688.026

Hypothetical 1: Assume total of $6 million deposited and nothing available to distribute. 

Results Under Current Law 

Customer A CustomerB CustomerC 

Customer's Net Equity 

After $3 Million 

Withdrawal by "A" 

Is Avoided $2,000,000 $2,000,000 $2,000,000 

Customer Property 

Distributed After 

Avoidance of 

Transfer to"A" $1,000,000 $1,000,000 $1,000,000 

Amount Received From $ 500,000 $ 500,000 $ 500,000 

SIPC Advance 

Total Amount Received 

Based on $2 Million 

Deposit $1,500,000 $] ,500,000 $1,500,000 

86688.027

Hypothetical 1: Assume total of $6 million deposited and nothing available to distribute. Results Under the Restoring Main Street Investor Protection and " 

Customer A CustomerB Customer C 

Amount 

Pre -0- -0-

Amount Received 

From SIPe Advance $ 

Amount Received 

Based on Million 

$3,500,000 $500,000 $500,000 
63 


86688.028
64 


86688.029

86688.030

Hypothetical 2: Assume Subsequent Recovery From Wrongdoer of$1,000,000 

Results Under the "Restoring Main Street Investor Protection and Confidence Act." 

Customer A Customer B CustomerC 

Customer's Net Equity 

Based on Last Statement $1,000,000 $4,000,000 $4,000,000 

Amount Withdrawn 

Pre-Liquidation $3,000,000 -0- -0-

From SIPC $500,000 $500,000 $500,000 

From Wrongdoer $111,111 $444,444 $444,444 

TOTAL AMOUNT 

RECEIVED BASED ON 

$2 MILLION DEPOSIT $3,611,111 $944,444 $944,444 

86688.031

SECURITIES INVESTOR PROTECTION CORPORATION 

805 - 15th ST NW, SUITE 800 

WASHINGTON, DC 20005-2215 

(202) 371-8300 

www.sipc.org 
67 


86688.032

TESTIMONY OF ANGElA SHAW KOGUTT 

DIRECTOR AND FOUNDER 

STANFORD VICTIMS COALITION 

HOUSE FINANCIAL SERVICES SUBCOMMITTEE ON CAPITAL MARKETS 

AND GOVERNMENT SPONSORED ENTERPRISES 

NOVEMBER 21, 2013 

Good morning. My name is Angela Shaw Kogutt, and I am the Director and 

Founder of the Stanford Victims Coalition, a nonprofit advocacy group for the victims of 

the Stanford Financial Group Ponzi scheme. 

Chairman Garret and Ranking Member Maloney, thank you for holding this 

hearing today to discuss a much-needed amendment to the Securities Investor Protection 

Act of 1970 (SIP A). I applaud you both for your leadership in introducing H.R. 3482, the 

"Restoring Main Street Investor Protection and Confidence Act," which has given hope to 

thousands of financially devastated investor victims across the country who feel they've 

been unfairly denied the protection of which the SEC has determined they are entitled. 

Also, thank you to the distinguished Subcommittee Members who have already joined 

H.R. 3482, and to those of you here today to consider this important legislation. 

I want to point out right away that I am not the typical face of Stanford victims. I 

am a second-generation victim. Most of the victims are senior citizens, and for the past 

almost five years now, I have spent a majority of my life serving as their advocate, hoping 

to help recover some of their losses. I've done this because I am younger than they are, 

and because they deserve it. 
68 


86688.033

Like thousands of other Stanford victims, my life was forever changed by the events 

of February 17, 2009. As we watched the news and feared the worst in the immediate 

aftermath ofMadoffs confession, we eventually realized that Allen Stanford had stolen 

what two generations of my family worked four decades to build-and he did it through 

Stanford Group Company (SGC), a registered broker dealer and member of the Securities 

Investor Protection Corporation (SIPC) the SEC had known for more than a decade was 

operating a Ponzi scheme. While Madoff had outsmarted the SEC, Stanford hadn't, and 

the SEC knew for 12 years that he was using his U.S. broker dealer to steal customer funds 

intended to purchase CDs from Stanford International Bank (SIB). In that time frame, the 

Stanford Ponzi scheme grew by more than $5 billion. 

My father-in-law is an 87-year-old World War II veteran and first-generation 

American who, again like so many Stanford victims, was able to live the "American 

Dream," only to have it snatched away practically overnight. In 1965, he started a 

manufacturing business with a few thousand dollars borrowed from family members. He 

and my mother-in-law put in long hours for several years, and eventually all three of their 

sons-including my husband-joined the business. The family worked together for more 

than three decades to build the business to more than 300 employees and close to $20 

million a year in revenue. At that point, the business had outgrm"'ll the family, and they 

made the decision to sell it at just the right time-before the economic collapse in 2008. 

As soon as the sale of the business closed, the lawyer who handled the transaction 

advised us to invest it with a brokerage firm that specialized in managing large accounts. 

She then recommended what she called a "boutique" brokerage firm, Stanford Group 
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86688.034

Company, which specialized in high wealth clients. The family had never heard of 

Stanford, but agreed to have a meeting, which she arranged. But the family didn't just go 

with her recommendation outright. Other firms were also considered, but Stanford really 

stood out because of their enthusiasm, their professionalism, their high public profile, the 

top-notch credentials of their advisors, and what we misinterpreted as genuine and 

sincere interest in our investment goals. What we didn't know is that the Financial 

Advisors at Stanford Group Company were hooked on what they internally called "Bank 

Crack" -the highly lucrative commissions and bonuses they received for selling 

certificates of deposit from Stanford International Bank in Antigua. Also, little did we 

know, none of the Financial Advisors at Stanford Group Company knew what assets were 

held (if any) in Stanford International Bank's investment portfolio. How someone who 

has a fiduciary duty to their clients could recommend putting any of their funds in an 

investment vehicle for which they didn't even know what the underlying investments were 

seems extremely questionable, but that was also an inside secret that Stanford paid them 

enough to overlook. 

Ultimately, a substantial portion of the proceeds from the sale of the family's 

business was entrusted to two Stanford Group Company Financial Advisors, Patrick 

Cruickshank and Bill Leighton. At the very first meeting with Bill and Patrick, the family 

explained they were very conservative and risk averse. Bill, an estate planning lawyer, and 

Patrick, a Certified Financial Planner and NFL, NBA, and NHL approved Financial 

Advisor with a Series 7 license, told us their safest, most conservative investment was 
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their exclusive, signature product-the Stanford International Bank CD program for 

Accredited Investors. 

We learned at that meeting that the entire Stanford Financial Group of Companies, 

which included Stanford Group Company, Stanford International Bank, Stanford Trust 

Company, and more than 100 other Stanford entities all mNned by Allen Stanford--was 

headquartered and operated out of Houston, Texas, and regulated by the SEC and 

numerous state securities regulators as SGC had 33 offices across the country. 

When the family expressed concern about the "international" aspect of the 

investment, we were told that Allen Stanford, a Texan like us, managed all of his 

company's operations from the U.S., and that even the bank's portfolio was managed by 

Stanford Capital Management (SCM) in Memphis, Tennessee. SCM, which was also 

regulated by the SEC, purportedly had a team of expert money managers overseeing the 

purported $8 billion SIB bank portfolio. SCM was also regulated by the SEC, so the 

international CDs started sounding more like domestic securities and not like a risky 

investment. The best part about the international bank CDs, we were told, was that the 

Stanford International Bank CDs were securities backed by SIPC and even Excess SIPC so 

our entire investment would be insured "dollar for dollar," whereas a U.S. bank CD would 

only be protected by FDIC for $100K. The interest rate was only 1.6% higher than a U.S. 

bank CD so this security CD thing sounded pretty safe-especially since it was all 

regulated by the SEC. Plus, the" dollar for dollar" protection meant a lot to us. 

But, as conservative as our family is, we didn't just buy the Stanford hype right 

away, although it was impressive-glossy brochures, beautiful annual reports, slick 
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personalized presentations-all prominently emblazoned with "SIPC Member." We hired 

an attorney to conduct due diligence on Allen Stanford and the Stanford Financial Group 

of Companies. Her report stated she found no red flags-only a handful of disgruntled 

employee lawsuits that had been dismissed. 

Now that our lawyer had given us the go ahead, three separate family members 

signed Customer Agreements with Stanford Group Company and opened SGC brokerage 

accounts for the very purpose of purchasing the CDs. Pershing served as the custodian for 

SGC customer's investments, and SGC had the authority to buy and sell securities in our 

account. We were instructed by SGC on how to fund the brokerage accounts in order for 

SGC to effectuate the transaction to purchase the SIB CDs. On January 31, 2008, three 

members of the family invested a totally of $4.5 million. And just like that, the "American 

Dream" was gone, and the thieves proudly displayed the SIPC logo everywhere we 

looked-because they were required to. 

In the aftermath of the collapse of the Stanford Financial Group, SIPC immediately, 

and admittedly without seeing any documents except the SEC's complaint against 

Stanford, et aI, made an adamant public announcement that Stanford victims did not 

qualify for protection under the Securities Investor Protection Act (SIPA). 

Almost five years later and SIPC has continued denying protection to Stanford 

Group Company customers by saying we received the securities we purchased through 

SGC, which simply isn't true. Our money was stolen. How could we have gotten any 

security when the owner of the broker dealer stole our funds? Allen Stanford is serving a 
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no-year jail sentence for stealing our money right here in the US-not for committing an 

Antiguan bank fraud (which has not been alleged in Antigua). 

In November 2009, the Stanford Victims Coalition formally asked the SEC to 

review SIPC's determination about SGC customers' right to protection under SIPA. After 

more than a year of the SVC suffering the burden of proof and producing hundreds of SGC 

customer documents at a time, only to have the target moved and more documents 

requested, it appeared the SEC was obviously avoiding making a determination. The 

SVC's members then asked our political leaders to urge the SEC to make a determination. 

More than 50 Members of the House and Senate signed on to a letter asking the SEC to 

give the SVC an answer. Still, no answer-only repeated promises that a vote would 

happen "soon," which I've now learned in SEC language could be months or even years 

given the way they've handled the Stanford case. Finally, when it appeared this game 

would go on forever while Stanford victims were losing their homes and going without life 

necessities, Senator Vitter blocked the nomination of an incoming SEC Commissioner 

until Stanford victims were given an answer. Senator Vitter never told the SEC how to 

vote-just to take a fair vote and give the victims an answer. The vote was taken, and as 

the SVC and counsel had hoped, the SEC determined that SGC customers WERE entitled 

to protection under SIPA because the SIB CDs were fictitious securities, and the SGC 

customer funds intended to purchase the CDs were either acquired by Stanford Group 

Company to pay the broker dealer's expenses, or were outright stolen by Allen Stanford 

(see attached affidavit of Karyl Van Tassell). 
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86688.038

Of course SIPC refused to comply with the SEC's recommendation to initiate a 

liquidation of SGC in order to pay net equity claims for SGC customers, and the SEC took 

the unprecedented action to initiate an Enforcement Action against SIPC by asking for a 

court order to compel SIPC to discharge its obligation under SIP A. 

The animosity Stanford victims have seen from SIPC is truly astonishing. SIPC 

President Stephen Harbeck even told a Senate staffer he would resign if SIPC had to pay 

claims to Stanford victims. What kind of investor protection regime is led with that kind 

of mentality? Certainly not one looking out for investors who entrust their savings to a 

SIPC member firm. 

Stanford victims did not simply make a bad investment in a worthless security. We 

didn't even make an investment. We tried, but our money was intercepted before any 

security could be purchased. 

Stanford Group Company customers wired funds to their Pershing accounts, wrote 

checks they handed to their SGC advisor, or rolled their IRA over directly to Stanford 

Group Company. NONE of those funds went to Stanford International Bank in Antigua. 

They went to Allen Stanford's or to the SGC Financial Advisors pockets. No CDs were 

purchased. No CDs even existed. 

What Allen Stanford and the Stanford Financial Group did can only accurately be 

described as an act of financial terrorism. Now SIPC has apparently become an 

accomplice as it has gone out of its way to avoid applying the case law in similar SIPC 
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cases in which the owner of a SIPC-member broker dealer used an affiliate entity to 

launder customer funds in order to steal them. 

SIPC has grossly mislead Congress and the Courts about the REAL facts of this 

case, and even convinced the SEC to agree to stipulations in the District Court that were 

absolutely false (see attached email exchange with SEC Chief Litigator Matt Martens). 

I can say in all sincerity and honesty that Stanford's victims are good, hardworking 

and law-abiding people. They are the kind of people you want as neighbors, friends and 

family. They are middle-class people who were targeted because they had a nest egg. They 

are war veterans, retired teachers, nurses, small business owners, refinery workers-the 

kind of small investors SIP A was enacted to protect 

We did not simply lose our investments with the Stanford Financial Group; our 

investments were stolen. SIPC may not protect fraud, but it is supposed to protect theft. 

No one could imagine the harrowing stories I've heard from Stanford victims all 

over the world. They range from not having money to bury family members to not being 

able to afford life-saving medical treatments. I've watched as so many have died 

impoverished. I have received letters from victims on their death beds pleading with me 

to help their surviving relatives recover their inheritances. I've received phone calls from 

sobbing strangers in foreign countries explaining their hardships in broken English. 

Countless victims have been, and are suicidal. Some have even taken their own lives. 

The impact of this crime is immeasurable, and it is truly a human tragedy as well as 

a financial one. Allen Stanford thrived on cheating the system while preying on the middle 

class, and our financial regulatory structure let him do it. They knew what he was doing. 
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86688.040

FINRA knew Stanford Group Company was in financial difficulty, and SIPC was either 

not notified or just didn't act. 

Chairman Garrett, Ranking Member Malony and the honorable members of the 

subcommittee, thank you for hearing me today. I urge you to pull the reigns in on SIPC. It 

is not above the federal government, yet it is spending its fund litigating against its federal 

oversight authority. The SIPC fund was created by Congress to be used to protect 

investors, not cost our taxpayers an untold amount of money by engaging in time 

consuming litigation while innocent, elderly investors who entrusted their funds to a SIPC 

member are left out here with no safety net and SIPC is acting as our adversary rather 

than our advocate. 

Thank you for your time and your attention. 
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EXHIBITS 
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STANFORD FINANCIAL GROUP PONZI SCHEME 

FACT SHEET 

Stanford Group Company (SGC) was an SEC-registered broker dealer and SIPC member. SGC 

had more than 30 offices throughout the US with more than 250 FINRA-Registered 

Representatives. 

• Stanford International Bank was an offshore bank registered in Antigua. 

" SGC's Registered Reps sold approximately $2 billion worth of fictitious Stanford International 

Bank (SIB) CDs to 5,000 US investors in 46 states. 

" Both SGC and SIB were wholly owned hy Allen Stanford, and operated under the umhrella 

brand of The Stanford Financial Group of Companies, headquarted in Houston, Texas. 

" The SIB CDs were sold to US citizens as securities disclosed to the SEC under a Regulation D 

exemption, which was filed annually with SEC. Although Regulation D requires buyers to be 

"accredited investors," many SGC clients who were sold the fictitious CDs did not meet the 

accreditation requirements. Neither the SEC, nor FINRA have taken enforcement action 

against the SGC Reps who violated this critical requirement under the Regulation D 

exemption. 

" SGC Reps targeted middle-class, retirement-age investors to invest their brokerage account 

holdings, including IRAs and pension plans, in the SIB CDs. 

• For most SGC customers, their SIB CD investments represented their entire life savings. 

Approximately 80% had account balances less than $500K. 

" SGC customer funds intended to purchase the CDs were never sent to SIB. Funds were 

laundered through (primarily US) banks, and used to pay earlier investors, SGC's expenses 

and support Allen Stanford's lavish lifestyle. 

" SGC was financially dependent on referral fees for selling the SIB CDs, and additional 

shareholder capital contributed by Allen Stanford in the form of "loans" from SIB. Both the 

fees and the additional capital-both disclosed on SGC's monthly financial statements filed 

with FINRA-came from the stolen SIB CD funds. 

The SEC's examination of SGC in 1998 specifically noted millions of dollars in SGC capital 

contributions came from misappropriated SIB CD funds belonging to SGC's customers. 

• Stanford Trust Company (STC) in Baton Rouge, La., also wholly owned by Allen Stanford, held 

custody of approximately $400 million of SGC customers' IRAs that were invested in the SIB 

CDs. STC was a subsidiary of SGC-as disclosed in audits filed annually with the SEC. STC's 

operations were governed by a Board of Directors that included SGC employees. 

• Most of the SGC customers who purchased SIB CDs used their brokerage accounts (held for 

SGC by a third party custodial firm) to fund the CD transactions. Others wrote checks made 

out to SGC, Stanford Trust Company, SIB or just "Stanford." 

" The CDs were sold by SGC Registered Reps along with other securities, and ALL products were 

sold as SIPC-insured investments. 

" In November 2009, the Stanford Victims Coalition (SVC) formally asked the SEC to review 

SIPC's determination that SGC customers met the statutory requirements for compensation up 
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86688.043

to $500K under the Securities Investor Protection Act (SIPA). 

• From December 2009-May 2011, the SVC provided the SEC with thousands of SGC customer 

documents in order to prove their right to protection under SIPA. 

• In June 2010, by a vote of thc Commissioners, the SEC determined that SGC should be 

liquidated under SIPA, and authorized the SEC Division of Enforcement to seck a court order 

to compel SIPC if its Board of Directors refused to comply. 

• In November 2011, SIPC took the unprecedented action to defy the SEC's plenary anthority 

over SIPC by refusing to commence a SIPA liquidation of SGC. SIPC launched a PR campaign 

against protecting SGC customers, and hired two outside law firms to defend its actions. 

• In December 2011, the SEC filed an application with the District Court in Washington, D.C. 

seeking an order to compel SIPC to discharge its obligations under SIPA by initiating a 

liquidation of SGC. 

• In the District Court proceedings, the SEC agreed with SIPC on 8 stipulations-at least half of 

which were factually incorrect. 

• In July 2012, the D.C. District Court, citing the erroneous stipulations, denied the SEC's 

application. 

• In August 2012, more than 50 Members of Congress asked the SEC to appeal the District 

Court's decision, which the SEC agreed to. 

• As of June 2013, the SEC vs. SIPC appeal is fully briefed and pending oral arguments in the 

Circuit Court for the District of Columbia. 

" Stanford Group Company (SGC) registered with the SEC in 1996 as both a broker dealer and 

an investment advisor. 

• In its first exam of SGC in 1997, the SEC suspected a Ponzi scheme, and opened a Matter 

Under Inquiry (MU!), which was closed 30 days later after Stanford did not voluntarily submit 

the requested documentation. No further action was taken despite direct knowledge of SGC 

customer funds in jeopardy of being misappropriated or stolen. 

Three more SEC exams were completed between 1998 and 2004. Each coneluded that 

Stanford was in violation of nnmerous securities laws, and that the SIB CDs were likely 

fraudnlent. The size of the fraud, in each instance, was bigger than the SEC's entire budget. No 

action was taken. 

A formal SEC investigation was finally opened in 2005. The investigation took 4 years, during 

which SIB CD sales doubled. More than 85% of all SIB CD sales to US investors occurred from 

2007 through 2009 when the SEC filed a civil lawsuit that took all Stanford entities into 

Receivership on Feb. 16, 2009. 

• The SEC blames the 4-year investigation delay on Stanford's lack of cooperation and Antigua's 

bank secrecy laws. 

• None of the exams or the multi-year investigation of SGC wcre made public. The SEC had 

every reason and resource to stop the Stanford Ponzi scheme, but chose not to for 12 years. 

The longer the SEC took to act, the more legitimacy the SIB CDs had. 

SGC's financial statements filed with the SEC and FINRA showed SGC's dependence on 
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86688.044

revenue from selling SIB bank CDs and large cash contributions from Allen Stanford, which 

were directly traced to loans from SIB. SGC showed an operating loss every year of its 

existence. Without SIB, SGC was insolvent. No protective action was taken . 

.. Dozens of SGC employees came forward to FINRA alleging fraudulent practices at SGC. FINRA 

arbitration favored SGC in every instance. 

,. In 2007, FINRA fined SGC $20,000 for failing to maintain minimum net capital requirements, 

and $10,000 for allegations of distributing "misleading, unfair and unbalanced information" 

about the SIB CDs. 

,. In 2008, FINRA fined SGC $30,000 failing to adequately disclose its research methods used to 

report securities valuations . 

.. Stanford was under investigation by numerous US government agencies for more than 20 

years. The DEA, FBI, US Attorney's Office, IRS Criminal Division, US Customs and the Federal 

Reserve all notified the SEC that Stanford was under investigation starting in 1999. 

,. In 1999, the US Treasury issued an advisory to all banks in the US warning tbem to scrutinize 

transactions to/from Antigua because of Stanford's role as the head of the regulator that 

oversaw his own bank. Thc advisory, lifted in 2011, was only the second of its kind against an 

entire nation. 

"' In 2001, the US Treasury entered into an information sharing agreement with the government 

of Antigua. The agreement gave Treasury access to information from any financial institution 

operating in Antigua if there was a suspected financial crime. During their 4-year 

investigation, the SEC never asked Treasury to help get information about SIB's assets. 

• In 2001, the State of Texas entered into an information sharing agreement with the 

government of Antigua and Barbuda. The agreement allowed for the Texas Banking 

Department to examine the books and records of a financial institution in Antigua with offices 

in Texas. During their 4-year investigation, the SEC never asked the Texas Banking 

Department to help get information about SIB's assets. 

• Leroy King, Director of Antigua's Financial Services Regulatory Authority (FSRC), was 

indicted in .June 2009 for obstruction of the SEC's investigation of Stanford. However, 

starting in 2001, the US State Department provided the FSRC with all of its technology 

equipment. During their 4-year investigation of Stanford, the SEC never asked for the State 

Department's assistance with the uncooperative regulator in Antigua. King has not been 

extradited to the US to face charges. 

• In February 2009, Antiguan government official Dr. Errol Cart was sued in the District Court 

in Dallas, Texas, for the return of more than $1 million fraudulently transferred to him in 

$2SK monthly payments from Stanford. As Antigua's Minister of Finance from 2004-2009, Dr. 

Cort had full authority over and responsibility for the FSRC. Dr. Cort now serves as Antigua's 

Minister of National Sccurity and heads up the Caribbean's security initiative partnership with 

the US-despite his obvious role in the Stanford Ponzi scheme. 

• In February 2009, the Stanford Financial Group (SFG) entities were taken into Receivership 

after the SEC alleged the companies were in engaged in a "massive, ongoing fraud." 

" In June 2009, seven former SFG employees were indicted for their involvement in the 

Stanford Ponzi scheme. 

" In August 2009, former SFG Chief Financial Officer James Davis pleaded guilty to facilitating 

a Ponzi scheme with Allen Stanford. He was sentenced to S years in prison. 

" In February 2012, Allen Stanford was found gllilty by a jury of his peers in Houston, Texas. He 
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was sentenced to 110 years in prison . 

• In September 2012, former SFG Chief Investment Officer Laura Pendergest Holt pleaded 

guilty to obstructing thc SEC's investigation of Stanford in exchange for 20 other felony 

charges being dropped. She was sentenced to 3 years in prison. 

" In February 2013, two former SFG accounting employees were found guilty by a jury of their 

peers in Houston, Texas. They were each sentenced to 20 years in prison. 

" In May 2013, the District Court in Dallas, Texas, ruled in favor of the SEC in its civil lawsuit 

against Stanford, and order to disgorge $6.7 billion. 

" After more than 4 years with no recovery of their losses, in June 2013, the District Court in 

Dallas approved the Receiver's request for a distribution of one cent on the dollar to Stanford's 

victims-for a total of $55 million. The expenses for the Receivership have exceeded $110 

million. 

### 
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86688.046

STANFORD VICTIMS COALITION 

LEGAL PRECEDENTS FOR SIPC COVERAGE FOR SGC CUSTOMERS 

The two primary reasons the SEC and SIPC have given to explain why Stanford Group Company (SGC) has 

not been put in liquidation under the Securities Investor Protection Act (SIP A) are: 

I. SGC was an introducing broker dealer, which did not hold custody of customer funds or securities; and 

2. SIPC does not cover securities that are worthless or have declined in value. 

1. INTRODUCING BROKER DEALER AND CUSTODY STATUS 

Many of SIPC's members are introducing broker dealers and SIPC has compensated customers of introducing 

broker dealers numerous times. Introducing broker dealers are SIPC members, in part, so that customers are 

protected if the broker dealer steals its customers' funds. The SEC and the DO] have accused Allen Stanford of 

stealing customer funds. 

SGC customers deposited funds with SGC (typically through its clearinghouse, Pershing LLC) with the 

legitimate expectation that the funds would be used to purchase Stanford International Bank (SIB) CDs. 

Instead of purchasing SIB CDs, SGC acquired coutrol of its customers' funds and the funds were 

stolen-not by sm, but by SGC, the SIPC member. (see attached for almost identical SIPC cases). 

Additionally, the SVC has provided the SEC with numerous examples of customer documents indicating that 

many SGC customers did not receive their CDs and that the CDs were held at SGC. At least some SGC 

customers received CD statements from SGC with the words "Member FINRAISIPC." The legitimate 

customer expectation for SGC clients is the CDs were purchased by SGC and were in SGC's custody 

protected by SIPe. 

Investors in the US purchased SIB CDs only via SGC. Each SGC customer entered into an "Account 

Application and Agreement," which contains language indicating that customers were entering into an 

Agreement with SGC, member ofNASDIFINRA and SIPC. SGC customers had no legitimate reason to 

believe in any circumstance tbey were not SGC cnstomers and protected by SIPC in the event the CDs 

were stolen or entirely fictitious. 

SGC customers' IRAs converted to the SIB CDs were held in the custody of Stanford Trust Company (STC) 

in Baton Rouge, LA. STC's Board Members were SGC employees who conducted STC's custodial functions. 

TIle Stanford Receiver and SEC Enforcement have said SGC could not have survived financially without the 

sales of the CDs because the SIB CD referral fees accounted for a majority ofSGC's revenues. According to 

the forensic accountant's declaration, these referral fees came directly from embezzled customer deposits. 

SGC registered representatives who marketed and sold CDs to customers received forgivable loans as part of 

their compensation package. Additionally, SGC's registered representatives received commissions on CD 

sales, Performance Appreciation Rights Plan and bonus payments based on CD sales. According to the 

forensic accountant's declaration, the "loans" and other payments were made from embezzled SIB CD funds. 

SGC received substantial capital contributions from Allen Stanford. The forensic accounting declaration states 

these contributions came directly from embezzled customer deposits. 

2. WORTHLESS SECURITIES! "FICTITIOUS SECURITIES" 

SGC customers who purchased CDs are NOT seeking recovery for securities that are now worthless or that 

have lost value. The SIB CDs that were not purchased by SGC for its customers are not worthless 

securities, they are entirely fictitious. Fictitious secnrities have been covered by SIPC in previous cases. 

The SEC and the DOJ have not accused Allen Stanford of simply misappropriating customer funds; the SEC 

and DOJ have accused Allen Stanford ofsteating customers' funds that were intended to purchase SIB CDs. 

The SIB CDs were never real securities, serving as nothing more than as a vehicle to feed the Ponzi scheme. 

According to the forensic acconntant's declaration. SGC cnstomer fnnds intended to purchase SIB CDs 

did not go to sm. 
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LEGAL PRECEDENTS THAT FAVOR SIPC COMPENSATION 

OF STANFORD GROUP COMPANY CUSTOMERS 

There are two Court of Appeals cases that are strongly analogous to the facts in the Stanford case. 

In both cases, the Court ruled in favor of the investors over SIPC. 

I. Customer Status for Introducing Broker-Dealer Clients 

The fact that Stanford Group Company (SGC) was an introducing broker-dealer should not preclude 

coverage ofSGC's customers under the Securities Investor Protection Act of 1970 (SIPA). SGC 

customers are in the same position as customers in In re Old Naples Securities, Inc. The United States 

Court of Appeals for the Eleventh Circuit held in Old Naples that customers of an introducing brokerdealer who thought they were purchasing bonds through the broker-dealer were "customers" of the 

broker-dealer within the meaning of SIP A and entitled to coverage under the statute.l Old Naples 

Securities. Inc. ("Old Naples") was an SEC-registered introducing broker-dealer. i.e .• it did not clear and 

carry its customers securities accounts. Old Naples' owner, James Zimmerman, perpetrated a Ponzi 

scheme through the introducing broker-dealer. The customers believed that Zimmerman used their 

payments to purchase bonds in their names, but amounts received from some customers were used to 

make payments of fictitious interest to other customers who also thought that they had purchased bonds or 

to Zimmerman for his personal use. 2 The customers made payment for the bonds to a non-braker-dealer 

entity that Zimmerman also owned.' The fictitious interest paid to some customers was deposited into the 

customers' accounts at Old Naples' clearing firm! Zimmerman ultimately could not sustain the Ponzi 

scheme, Old Naples collapsed, and SIPC initiated a liquidation of the broker-dealer under SIPA.' 

On appeal to the Eleventh Circuit, SIPC and the trustee argued that the claimants were not customers for 

SIPA purposes because (I) the funds used to pay Zimmerman to purchase the bonds were wired to his 

non-broker-dealer entity, not to Old Naples; (2) the investments were not securities; and (3) the 

investments were poorly documented and paid such high rates of return that they could not be viewed as 

having been sold within Old Naples' "ordinary course ofbusiness.,,6 

The Eleventh Circuit affirmed the district court order allowing the claims of Old Naples' customers in the 

SIPA proceeding.7 First, the court affirmed the bankruptcy court's determination that the customers' had 

deposited cash with the debtor broker-dealer. The court reasoned that whether a claimant deposited cash 

with the debtor "does not n. depend simplv on to whom the claimant handed her cash or made her check 

parable, or even where the funds were initiallr deposited. ,,8 Rather, the issue was one of "'actual receipt. 

acquisition or possession ofthe property ora claimant by the brokerage firm under liquidation. ,,,9 

Specifically, the court concluded that the bankruptcy court's determination that the claimants had no 

reason to know that they were not dealing with Old Naples was not in error. 1O Moreover, the court 

determined that Old Naples acquired control over the claimants' funds because the funds were used by, or 

at least for (through Zimmerman), Old Naples.'l Zimmerman used the claimants' funds to pay Old 

I Old Naples, 223 F.3d at 1303. 

'Id. at130lo 

lid. 

4 fd. at 1300. 

Sid. 

, Id. at 1302. 

lid. at 1305. 

sid. at 1302. 

'Id. quoting SECv. Kenneth Bove & Co., 378 F. Supp. 697, 700 (S.D.N.Y. 1974). 

10 Id. at 1303. 

11ld. 
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Naples' expenses. "{Tlhe funds ofthe individual claimants in this cased were used bv the owner of Old 

Naples Securities (or the benefit of Old Naples Securities.,,12 

II. Claims for Worthless Securities vs. Fictitious Securities 

Of course SIP A does not cover losses to customers due to changes in the market, or loss of value of 

securities. The losses ofSGC customers are not due to loss in value of the Stanford International Bank 

(SIB) CDs. Customer funds were never used to purchase legitimate securities - customer funds were 

used to feed the Stanford Ponzi scheme. The SEC has taken the position in litigation related to the 

Stanford Receivership that an entity that operates as a Ponzi scheme "is. as a matter oflaw. insolvent 

,fi-om its inception.,,13 An insolvent entity cannot issue legitimate securities, however, SGC customers' 

funds did not even go to SIB. The SIB CDs that were not purchased by SGC for its customers are not 

worthless securities, they are entirely fictitious. In the past, the Commission has argued that "g 

customer's legitimate expectations" ought to be protected "regardless of the facl that that the securities 

were fictitious.~~!4 

SGC's customers are in the same position as the customers who were the subject of In re New Times 

Securities Services, Inc. In New Times, William Goren sold fictitious mutual fund shares, as well as 

shares of bona fide mutual funds, to investors via two entities, one a register broker-dealer that was a 

SIPC member, and the other a non-broker-dealer entity.l5 The mutual funds in which investors thought 

they were investing never existed. 16 Although the investors received confll'mations and account 

statements indicating that their payments had been invested in mutual funds, Goren had stolen their 

money. 11 

The SIPA trustee took the position that New Times investors in tictitious securities had claims for cash 

subject to the $100,000 SIPA limit on cash advances. New Times investors whose cash Goren stole, but 

who were misled into believing that he had purchased existing mutual fund shares were treated as having 

claims for securities. IS 

The Second Circuit held that the New Times investors who purchased fictitious securities had "claims for 

securities." In doing so, the court gave deference to the position of the Commission over that ofSIPC. 

The Commission in New Times took the position that the purchasers of the fictitious securities had claims 

for securities because they received confirmations and account statement from the insolvent broker-dealer 

and the customers' legitimate expectations, i.e., that they had purchased securities, should be satisfied. 19 

12 Jd. at 1303, n. 16. 

13 In a brief the SEC filed in one of the Stanford Receivership cases in the Fifth Circuit Court of Appeals, the Commission argued that a Poozi 

scheme is insolvent from its inception, and quoted Warfield v. Byron, 436 F.3d 551, SSg (5th Or. 2006) (citation omitted). Br. of the SEC, 

Amicus Curiae, In Support of Appellees at 14 ,Janvey v. Gaines, etal., 09-10761 {5th Cir. Oct. 8, 2009). 

14 In re New Times Securities Services, Inc., 371 F.3d 68, 76 (2M Cir. 2004). 

15 New Times, 371 F.3d at 71-

16 Id. at 74. 

Did. 

l8 ld. 

19 1d. at 76, 87. 
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86688.049

September 14, 2010 

Mr. Stephen Harbeck 

President and CEO 

Securities Investor Protection Corporation 

805 15th Street, Suite 800 

Washington, D.C., 20005 

Dear Mr. Harbeck, 

I was very surprised to see this statement from you in Kathy Kristofs Los Angeles Times 

column on Sunday: 

"The investors in Stanford Financial Group are holding the 

certificates of deposit in a bank in Antigua in their hands. We do 

not protect fraudulent projections of value. We ensure that 

investors receive the securities that they bought, and they have 

them." 

With all due respect, you are clearly misinformed about the details in this case. Your 

statement is simply inaccurate and it is very difficult to understand how after 18 months of 

ongoing discussions between my organization, the Stanford Victims Coalition (SVC), and 

SEC and SIPC officials regarding the various aspects of the legal arguments we've outlined 

and documented that you can continue to blatantly ignore the facts and rely instead on 

false assumptions to defend SIPe's position in the Stanford case. 

While it is possible some Stanford investors MAY have gotten a piece of paper saying they 

purchased a CD at Stanford International Bank (but no different than the pieces of paper 

Madoff investors received), this is not the case for MOST Stanford International Bank CD 

investors who purchased the securities from a registered representative of Stanford Group 

Company (SGC), an SEC-registered broker dealer and SIPC member. The Stanford 

International Bank CD certificates were. in most cases. in the physical custody of 

Stanford Group Company and thousands ofSGC customers DO NOT hold their 

securities in their hands. 

SGC customers literally did NOT get the securities they purchased, nor do those investors 

even have a piece of paper saying they received their securities. In my own personal 

example, I am MISSING SECURITIES totaling $1.3 million, yet I cannot file a SIPC claim. 

As the SVC, along with dozens of members of Congress, have said, Stanford Group Company 

customers should be extended the same protection as Madoff customers. and be treated 

with the same application of the Securities Investor Protection Act Madoffs customers 
85 


86688.050

have been fortunate enough to have received. The fact some Madoff investors do not 

believe they have been provided adequate coverage seems to be given more attention than 

the fact Stanford Group Company's customers can't even file claims to receive equal 

treatment. 

It is a devastating reality Stanford victims face each day knowing that being a Madoff victim 

is a much better situation to be in than being a Stanford victim. Both groups of investors 

were customers of a SIPC-member broker dealer whose owner has been accused of 

carrying out a Ponzi scheme and stealing customer funds. Both Madoff Securities and 

Stanford Group Company represented to customers to have purchased securities for their 

customers. There are approximately 5,000 investors in each case, yet Madoff investors' 

losses are up to $60 billion and SGC customers lost less than $2 billion. Basic math tells you 

the Stanford investors are much smaller investors and for most SGC customers, their losses 

represent 30-40 years of retirement savings that were entrusted to a SIPC-member 

company to invest. Additionally, SIPC protection would make most SGC victims whole. 

Like most Americans who utilize the services ofSIPe's members and rely on their expertise 

and the protection of the SEC and SIPC, these are not savvy investors who understand the 

difference between an "introducing broker dealer" and a "custodial broker dealer." All that 

was represented to investors on everything from business cards and signage to 

promotional footballs and water bottles (and everything in between) was "SIPC Member." 

There were NQ disclaimers. Those came only AFTER our funds were stolen by a broker 

dealer. The question of who held custody of securities that never existed is not at all a fair 

way to determine coverage. The fact SGC DID hold physical custody of a substantial 

number of customers' securities has been glossed over entirely, and I'm sure your response 

will be something along the lines of "SIPC can return those securities to you, but they have 

no value. SIPC does not cover loss of value or worthless securities." Mr. Harbeck, the CDs 

have no value because the owner of the broker dealer stole the funds, not because we 

purchased securities that did not retain their value, or even securities that never had value. 

Our funds were STOLEN and there were no securities, as the SEC Director of 

Enforcement has stated. The SEC has even cited case law in the receivership proceeding 

saying "A Ponzi scheme is insolvent from inception." How could an insolvent criminal 

enterprise issue securities? 

The SEC and the DO) have accused the owner of a SIPC-member of stealing customer funds. 

The SEC has determined the CDs were in fact securities. Customer funds intended to 

purchase Stanford International Bank CDs never made it to Stanford International 

Bank, and according to forensic accounting reports, were instead laundered through a 

series of Stanford Financial Group controlled bank accounts in the U.S. to ultimately payout 

redemptions to earlier investors and pay for the expenses of the broker dealer. This is a 

very straightforward case and the SEC and slPe have made it very complicated by 

taking a hyper-technical interpretation of the SIPA statute and overlooking the basic 

facts of our case, which is truly no different than that of Madoff investors. A SIPC-member 

sold us securities that did not exist. That same SIPe member provided its customers with 

statements displaying the "Member SIPC"logo on them. The legitimate customer 

expectation is that the CDs are covered by SIPe. 
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86688.051

Adding insult to injury, and protecting the SEC and SIPC rather than investors, we have no 

private right of action when it comes to disagreements about SIPC coverage and whether or 

not claims can be filed. It is simply up to the SEC and SIPC to enforce the law and if an 

investor disagrees too bad, there's no right to an opinion review by an objective third 

party. The only judge we get are your organization and the SEC, and the fact there are 

previous cases in which SIPC has extended coverage to investors in similar situations 

seems to be irrelevant. It is painfully clear the legal documents provided to your office at 

the expense of tens of thousands of dollars paid for by the defrauded investors have not 

even been reviewed or considered and it is simply astonishing our right to SIPC has never 

been given serious consideration. Instead, false assumptions are determining the 

future of 5,000 middle-class American investors who were not protected before a 

SIPC member stole their savings and most certainly are not getting fair treatment in 

the aftermath ofthat crime. 

At a time when it is more important than ever for investors to be reassured of their 

protection when it comes to investing their hard-earned life savings, the Securities Investor 

PROTECTION Corporation, should be acting as an ADVOCATE for investors rather than as 

an ADVERSARY Not even realizing the most fundamental of facts in our case is definitely 

not in the realm of advocating for our protection. In fact, SIPC seems to have gone out of its 

way to take an adversarial - and at times condescending - approach in denying coverage for 

SGC customers. My hope is that the much needed SIPA reform measures will create an 

organization like SIPC that truly protects investors rather than itself and the industry it 

represents. No victims should ever have to go through what Stanford victims have had 

to endure in this case. 

I would be more than happy to discuss this matter with you personally and look forward to 

your response. 

Sincerely, 

Angela Shaw 

Director and Founder 

Stanford Victims Coalition 

Cc: Securities & Exchange Commission Chairman Mary Schapiro 

SEC Division of Markets & Trading 

House Financial Services Committee 

Senate Banking Committee 

Government Accountability Office 
87 


86688.052

STAN 

December 2, 2011 

Ira Hammerman, Esq. 

General Counsel 

Securities Industry and Financial Markets Association 

1101 New York Ave NW # 800 

Washington D.C., DC 20005-4279 

COALIT 

Re: SIFMA's August 2011 Memo to the SIPC Board of Directors 

Mr. Hammerman, 

As the Director and Founder of the Stanford Victims Coalition, a member of the 

District Court-appointed Stanford Investors Committee, and more generally as an investor, 

I am astounded by the Securities Industry and Financial Markets Association's (SIFMA) 

oppositional response to the Securities and Exchange Commission's (SEC) recommendation 

to the Securities Investor Protection Corporation (SIPC) to liquidate Stanford Group 

Company (SGC) and satisfy customer claims for net investments in Stanford International 

Bank (SIB) certificates of deposit. 

Your August 17, 2011 memo to the SIPC Board of Directors clearly demonstrates 

SIFMA's inherent conflict of interest in protecting the industry it represents over the 

investing public. Apart from the complete misinformation used as the basis ofSIFMA's 

recommendation the SIPC Board "reject" the SEC's analysis regarding the status of SGC 

customers under the Securities Investor Protection Act (SIPA), SIFMA fails to acknowledge 

any "legitimate expectations" of the investors who relied on the SIPC logo and the 

"professionals" in the industry SIFMA represents} 

While SIFMA publicly claims to support fostering "an environment of trust and 

confidence in the financial markets," your memo exposes SIFMA's true intention-to 

prevent an increase in fee assessments on SIPC member companies. In essence, SIFMA 

opposes real investor protection, and would rather give investors the false sense of 

confidence conveyed by the use of the SIPC logo. 

Simply put, when an investor who is sold securities by a Registered Representative 

of a SIPC Member (like SGC) cannot rely on SIPC to uphold its statutory requirements 

under the SIPA, any use of the SIPC logo is misleading and the only confidence an investor 

might have is false confidence. SIFMA should be ashamed of its lobbying position to 

perpetuate investor deception. 

1 In New Times Securities, the Second Circuit gave deference to the SEC's position that a customer's "legitimate 

expectations," based on written confirmations of transactions, ought to be protected 
88 


86688.053

Your memo makes numerous references to the SEC's "unprecedentedly broad" 

interpretation of SIPA's "narrow mandate" and "limited purpose," but the reality is the SIPA 

has always protected customers whose funds were stolen by a SIPC member. It is only in 

the aftermath of regulatory failure to protect investors from insolvent broker dealers like 

Madoff and SGC that SIFMA and SIPC have decided to defend a much more "limited" 

perspective of the SIPA. 

I would like to address some of the specific points made in your memo, and the 

position SIFMA has taken that protecting SGC customers contravenes "public policy" and 

the legislative intent of SIP A. 

SIFMA does not have oversight authority over SIPC 

Congress did not give SIFMA legislative authority over SIPC; Congress granted that 

power to the SEC. It is not SIFMA's position to interpret the statute and make 

recommendations to SIPC. Congress put SIPC's direction in the hands of a publicly chosen 

board of directors-not SIPC's and SIFMA's member firms. 

It is manifestly contrary to the public policy of the United States for a private, selfinterested organization to undermine the government's legislative authority or intervene 

in their administration of a law. SIPA was enacted to protect customers of registered 

broker dealers, and more than 100 members of Congress have weighed in on this issue 

over the past 33 months-all seeking for their constituents the mandated protections SIPA 

was created to provide. 

SIFMA's erroneous analysis ofthe SEC's recommendation 

SIFMA's memo states, "Crucially, unlike the situation in the cases relied upon in the 

SEC Analysis, including the liquidation of Bernard L. Madoff Investment Securities LLC, the 

purchasers of SIBL CDs actually purchased the very security they sought to acquire." That 

statement could not be more inaccurate. 

The SIB CDs did not exist as anything more than a vehicle to steal customer funds. 

By all definitions, the SIB CDs were never legitimate securities, and customer funds never 

went to SIB in Antigua.2 SGC customers had the legitimate expectation they were 

purchasing actual securities and instead, as the SEC and DOJ have alleged, their funds were 

stolen in a Ponzi scheme. SGC management, including Chief Financial Officer James Davis, 

were fully aware of the misappropriation of customer funds and that the CDs were entirely 

2 The February 15, 2011 Declaration of Karyl Van Tassel, forensic accountant for the Stanford Receiver, states 

customer's funds intended to purchase the SIB CDs were misappropriated to pay: (i) previous customers; (ii) 

the expenses ofSGC, including the salaries and commissions of its registered representatives; and (iii) Allen 

Stanford, the sole owner ofSGC. According to Van Tassell, a majority ofSGC's revenue came from the SIB CD 

funds acquired by the broker dealer after its registered reps sold the securities. 
89 


86688.054

fictitious, yet enticed its Registered Representatives to sell the SIB CDs in order to fund 

SGC's operations and pay previous customers.3 

The SEC has alleged in its civil suit against Stanford, et aI, the Stanford Financial 

Group of Companies operated a "massive Ponzi scheme." Additionally, the SEC has taken 

the position in litigation related to the Stanford Receivership that an entity that operates as 

a Ponzi scheme "is, as a matter of law, insolvent from its inception."4 An insolvent entity 

cannot issue real securities and the SIPA has previously been used to protect investors 

"regardless of the fact that that the securities were fictitious."s 

SGC customers do not have "ordinary losses" 

There is nothing "ordinary" about SGC customers' losses. SGC was an insolvent 

broker dealer and SIPC member that misappropriated customers' funds for more than a 

decade. SGC sold its customers fictitious securities, then acquired its customers' funds to 

pay for commissions and bonuses for the Registered Representatives who sold the CDs; 

SGC's marketing and advertising; professional endorsements for SGC; and generally all of 

the expenses of the SIPC member.6 

In Old Naples Securities, the court reasoned that whether a claimant deposited cash 

with the debtor "does not ... depend simply on to whom the claimant handed her cash or 

made her check payable, or even where the funds were initially deposited:'? Rather, the 

issue was one of '''actual receipt, acquisition or possession of the property of a claimant by 

the brokerage firm under Iiquidation."'B 

SGC customers did not simply make a bad investment; a SIPC member stole our 

funds. We understand that SIPC was not created to protect investors from worthless 

securities or securities that decline in value; however, the SIB CDs have no value because 

the funds were stolen in a Ponzi scheme. 

The SIB CDs did not exist and cannot be replaced. When missing securities cannot be 

replaced by SIPC, a customer is entitled to compensation of their net equity investments. 

3 Stanford Group Company's Chief Financial Officer James Davis pleaded guilty to criminal charges in August 

2009. 

4 In a brief the SEC filed in one of the Stanford Receivership cases in the Fifth Circuit Court of Appeals, the 

Commission argued that a Ponzi scheme is insolvent from its inception, and quoted Warfield v. Byron, 436 

F.3d 551, 558 (5th Cir. 2006) (citation omitted). Br. of the SEC, Amicus Curiae, In Support of Appellees at 14, 

Janvey v. Gaines, etal., 09-10761 (5th Cir. Oct 8, 2009). 

SIn re New Times Securities Services, lnc., 371 F.3d 68, 76 (2nd Cir. 2004) 

6 The Feb. 15, 2011 Declaration of Karyl Van Tassel, forensic accountant for the Stanford Receiver, states SGC 

customers' funds intended to purchase the SIB CDs were misappropriated to pay: (i) previous customers; [ii] 

the expenses ofSGC, including the salaries and commissions of its registered representatives; and (iii) SGC's 

owner, Allen Stanford. According to Van Tassell, a majority of SGC's revenue came from the SIB CD funds. 

7 [d. at 1302. 

• ld. quoting SEC v. Kenneth Bove & Co., 378 F. Supp. 697, 700 (S.D.N.Y. 1974). 
90 


86688.055

SGC customers did not bypass the brokerage 

SIFMA's memo states, "However, there are also facts that provide strong arguments 

against extending the Old Naples Securities precedent to the SIBL CD investors. Most 

significantly, unlike the customers in Old Naples Securities and Primeline Securities, 

investors in SIBL CDs sent their funds directly to the issuer of the securities they intended 

to purchase ..... These investors transferred funds to SIBL for the purchase of SIBL CDs, and 

SIBL CDs were in fact purchased with those funds." 

This is absolutely false. SGC directed all transfers to SIB accounts. 

Most, if not all, of the SGC customers who purchased SIB CDs conducted traditional 

brokerage business with SGC through its third-party clearing firm, Pershing LLC.9 The CDs 

were typically transacted through the customer's SGC brokerage account at Pershing. 

Some SGC customers rolled over IRAs from other accounts, and distribution checks were 

made out to Stanford Group Company or Stanford Trust Company, a Louisiana trust 

company managed by a Board of Directors comprised of SGC employees. Other customers 

wrote checks directly to Stanford Group Company, Stanford, or Stanford International 

Bank; however, customers did l1Q1; send those checks directly to SIB. The checks were taken 

by SGC representatives, deposited in U.S. bank accounts and the funds never left the U.S.10 

Customer checks made out to SIB were initially deposited into an account in the 

name of SIB, but then transferred to an account in the name of the Stanford Financial Group 

("SFG"), the parent company for all Stanford entities-including SIB and SGc.ll Once in the 

SFG accounts, the funds were then dispersed to the various Stanford entities as neededincluding, primarily, SGC.12 

SGC customers did not interface with SIB staff in any way, shape or form. If an SGC 

customer contacted SIB, they were instructed to contact their SGC Representative. If a 

customer wanted to renew or redeem their CDs, it was handled by the SGC Registered 

Representative, and redemption funds were typically directed back into the customers 

brokerage account held at Pershing. If a customer wanted change their address with SIB, 

SGC reps also handled all of the paperwork. For all intents and purposes, we were 

customers of SGC and had no interaction whatsoever with SIB. 

9 Pershing is a defendant in a class-action lawsuit for its role in transferring more than $500 million from SGC 

brokerage accounts to Toronto Dominion Bank to purportedly fund SIB CDs. On Dec. 12,2008, the day Madoff 

confessed to operating a Ponzi scheme, Pershing told SGC it could no longer wire funds to purchase SIB CDs 

until SIB could produce an independent audit Pershing Chairman Richard Brueckner currently serves on 

SIFMA's Board of Directors. 

to SGC did not send customer checks to SIB. SIB in Antigua did not accept or hold customer funds. It did not 

have a vault. or even a safe. If checks did arrive at SIB in Antigua, they were sentto Houston forthe SFG 

accounting staff to deposit in U.S. bank accounts. 

11 All of the bank accounts were controlled by SGC CFO James Davis and/or Allen Stanford, SGC Chairman. 

12 Declaration of Karyl Van Tassel 
91 


86688.056

SIPC membership should be limited 

SGC customers in 46 states across the country relied on the assurances represented 

by the SIPC logo, as well as the fiduciary duties of some of the most experienced advisors in 

the industry. Many of those advisors are currently members of SIPC and SIFMA and they 

will be greatly affected by the outcome of this case as their customers face significant losses 

that will be arbitrated by FINRA or litigated in court. 

If SIP A's scope is so limited that it does not protect customers of introducing broker 

dealers whose funds are stolen, then those firms should not be members of SIPe. 

Anything else is pure misrepresentation to investors. 

Sincerely, 

Angela Shaw 

Director and Founder 

Stanford Victims Coalition 

Cc: SEC Chairman Mary Schapiro 

SEC Commissioner Luis Aguilar 

SEC Commissioner Daniel Gallagher 

SEC Commissioner Troy Paredes 

SEC Commission Elisse Walter 

SIPC Chairman Orlan Johnson 

SIPC Board of Directors 

SIPC Modernization Task Force 

Enclosure: Declaration of Karyl Van Tassel 
92 


86688.057

1 

2 

3 

Q And then ve:r:y 

collapsed? 

A 

Page 51 

thereafter, the Ponzi scheme 

got in there and found some records, 

4 that makes a lot of difference. 

5 Right. So do you think kind of looking back that 

6 if perhaps some of the investigative st<l!PS that were taken ';in 

7 the 1at$ 2000", wel:Ce taken years earlier and then a oomplaint'-

8 broughtllcignifioant.ly "'ilu;<lier, that that might have a'otedto --;-

9 uncover the l?on2:i s'oheme before it grew to the point it grew?,·,: 

10 A Oh, I'm sure if we had been able -- I don't know 

11 about investigative steps. It's always been -- you know:. for, 

12 

13 

14 

15 

16 

17 

years I said the only way you're going to get this done is to 

get subpoena power and SUbpoena records. I,f we go, into, 

court and they fight; a SUbpoena and we lose, well, we've done 

everything we can do. But we ought to do that. 

1996, it would have ~aved a lot of the growth of the Ponzi 

18 scheme? 

19 I would think so. It obvious for years that it 

20 was a i?onzi scheme. You never knew where the 1I,onoy was 

21 

22 

23 

24 

25 

goiJ,lg. Nobody where the' money 

personth:at knew where the money 

9,oing. The only 

going was Allen,$tanford 

or people that were in cahoots with him. 

I want to clear on your reference 

getting subpoena power and what it is you were advocating 
93 


86688.058

Excerpt from 2002 SEC Exam Report 

Stanford Group Company 

Findings were not disclosed to the public. 

An additional $5 billion went to Stanford International Bank, 

including 95% of all US Investment. 

OClE assigned SGC an "adviser ranking" of "182". Based upon the results of 

this examination, the FWDO.has assigned a "risk of "1," the highest risk rating 

possible, primarily due to SGC's sales of the CDs. 
94 


86688.059

IN THE UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF TEXAS 

DALLAS DIVISION 

IN RE: STANFORD INTERNATIONAL BANK, LTD 

Debtor in a Foreign Proceeding. 

Ciyil Action No. 3:09-CV-0721-N 

EXCERPTS FROM ORDER ISSUED BY JUDGE DAVID GODBEY 

ON JULY 30, 2012 

The Receiver contends that because SIB was but one of many entities in Stanford's elaborate 

Ponzi scheme, the Court's COMI analysis should center on the aggregated Stanford Entities. 

As the SEC expands, SIB was window dressing, part of an effort to mask from United 

States regulatory scrutiny the massive securities fraud Stanford and others orchestrated from 

the United States. The law does not give effect to legal trappings that are designed 

for a frauduleut purpose, and, therefore, Stanford's operations should be 

viewed in their entirety. 

It is axiomatic that a corporation is a legal entity existing separate and apart from the persons 

composing it and entities related to it. However, courts equally accept that they 

should disregard the corporate form where that form was the means to a 

subversive end. 

Indeed, it would be irrational to hold that a parent and a subsidiary have been refused for 

purposes of in personam jurisdiction, but remain separate for purposes of subject matter 

jurisdiction . 

... it would defy logic and run afoul of equity to treat a fictitious corporation as a 

real entity ... 

Proliferating corporate fictions ... would also protect sinister characters such as Ponzi 

schemers who may target offshore jurisdictions to run their fraudulent empires. Thus, the 

Court holds that corporate disregard doctrines apply ... 

Not aggregating the entities, in this instance, would perpetuate an injustice. 

However, the Court is fairly certain that Chapter 15 is also meant to apply to real 

entities and not fictitious entities. It would be absurd to implement a law that 
95 


86688.060

would encourage U.S. courts to cooperate with foreign proceedings directed at 

fanciful organizations. The Court will not engage in semantics that obfuscate the 

purpose of the statute. 

First, the Court takes judicial notice that on March 6, 2012, a jury in Houston, Texas 

convicted Stanford offour counts of wire fraud, one count of conspiracy to commit wire and 

mail fraud, five counts of mail fraud, one count of conspiracy to obstruct an SEC proceeding, 

one count of obstruction of an SEC proceeding, and one count of conspiracy to commit money 

laundering, all related to his Ponzi scheme. 

The evidence demonstrates that SIB was nothing like a typical commercial bank. 

Further, this Court has previously recognized that Stanford and his affiliates operated as one 

and there is substantial evidence in the record in this action to support that finding. 

("The evidence further demonstrates that the Ponzi scheme was comprised of over 100 

interrelated entities whose primary, if uot exclusive, source of funding was derived from SIB 

CDs .... ") 

SIB had been insolvent since at least 1999 and remained in business by operating as a Ponzi 

scheme. 

SIB relied on the proceeds from the sale of new CDs to make purported interest and principal 

payments to existing CD investors. 

Stanford was the sole owner, directly or indirectly, of more than 130 separate Stanford 

Entities, including SIB, in more than 14 countries. The Stanford Entities comprised a single 

financial services network referred to as SFG. 

Funds from the Stanford Entities, consisting primarily of CD proceeds almost 

exclusively comprised Stanford's reported income from at least 1999 onward. 

Stanford controlled the Stanford Entities v.ith substantial assistance from James Da\is, Chief 

Financial Officer ("CFO") of Stanford Financial Group Company ("SFGC"') and SIB, and Laura 

Pendergest-Holt, ChiefInvestment Officer ("CIO") of SFGC. 

The e,idence demonstrates that Stanford, Davis, and Pendergest-Holt provided 

misinformation regarding SIB's investment strategy, earnings, and safety to financial advisors 

at various Stanford Entities, who then used it to induce customers to purchase CDs . 

.. .in many instances Stanford and others doctored SIB's paperwork to look reassuringly like 

the paperwork of a real financial institution, the reality is that SIB did not observe 

corporate formalities in all respects. 

For example, the SIB CD proceeds did more than just keep the bank afloat. 

Stanford Entities and Stanford himself received large disbursements of the 

proceeds. 
96 


86688.061

Joint Liquidators Marcus Wide: "As our investigations have continucd and wc've 

tracked the flow of funds and we've looked at how money was removed from 

control of the depositor, if you like, it became clear to me that the funds were 

being stripped out of SIB, partly through those contracts that were spoken about 

earlier and partly by simply removing them, putting them into other Stanford 

entities and then onward .. for the benefit of either Mr. Stanford or other persons 

unknown ... From our view, it looked like the bank's money was being stolen rather 

than the bank was running a Ponzi itself.. .. " 

"the evidence demonstrates that employees of other Stanford Entities largely 

ran SIB, as its employees had no authority to make any significant managerial 

decisions and no access to SIB's records .• ". 

To put it shortly: 

(1) as a Ponzi scheme, all assets and liabilities are difficult to segregate and ascertain, 

(2) the absence of consolidated financial statements matters not because Stanford and/or his 

associates doctored the financial statements, 

(3) it makes economic sense to consolidate the entities, 

(4) commingling of funds among the Stanford Entities was the norm, 

(5) Stanford directly or indirectly owned all subsidiary as department or division of parent; 

directors or officers of subsidiary do not act in interests of subsidiary, but take directions 

from parent; formal legal requirements of the subsidiary as a separate and independent 

corporation are not observed; the transfer of assets without formal observance of corporate 

formalities;" and noting the different substantive consolidation tests). 

(6) SIB "loaned" Stanford $1.8 billion without a guaranty, 

(7) Stanford and his associates transferred asscts among the Stanford Entities in 

disregard of corporate formalities ... 

On balance, the evidence overwhelmingly supports substantive consolidation 

were it to apply. 

Courts have found the requisite level of entwinement where "the debtor corporations were 

operated as a single unit with little or no attention paid to the formalities usually observed in 

independent corporations, ... the officers and directors of all, so far as ascertainable, were 

substantially the same and acted as figureheads for [the owner], ... funds were shifted back 

and forth between the corporations in an extremely complex pattern and in effect pooled 

together, loans were made back and forth, borrowings made by some to pay obligations of 

others, freights due some pledged or used to pay liabilities and expenses of others, and 

withdrawals and payments made from and to corporate accounts by [the owner] personally 

not sufficiently recorded on the books." This is clearly analogous to the facts here. 
97 


86688.062

'The Receiver has shown that Stanford operated the entire network of Stanford 

Entities as an integrated unit in order to perpetrate a massive worldwide frand. 

Each Stanford Entity either participated in the scheme, derived benefit from the 

scheme, or lent the appearance of legitimacy to the entirety of Stanford's 

fraudulent enterprise. To these findings would form over 

to n<'rnett'ate 

Thus, because SIB did not observe corporate formalities and because all the Stanford entities 

were "operated as one for purposes of perpetrating a fraud on investors," the Court pierces 

SIB's corporate veil and aggregates the Stanford Entities, 

... Congress cannot have intended to grant formal recognition to letterbox 

companies merely because the schemers were adept at pulling the wool over 

investors, creditors, and regulators' eyes. Surely, it is against U.S. public policy 

to reward such gamesmanship and manipulation. 

Most of the Stanford Entities' revenue came from selling CDs, CD sales largely bypassed 

Antigua, as depositors wishing to deposit funds were usually introduced to SIB 

through their financial advisors, who maintained primary if not sole contact 

with the depositor ... 

U.S. investors eXlcltlsi'llelv nl"F''''''''''''~U 

All financial advisors, regardless oflocation, would send client applications 

and requisite paperwork to Antigua, and SIB would then deposit the funds into U.S., 

Canadian, and English banks .... 

Those who wished to pay via check provided checks to their financial advisors at a 

non- Antiguan location. Financial advisors would send the checks to SIB in Antigua, and, 

after endorsing them, SIB would send the checks to Houston, Texas for deposit in Canada or 

the United Kingdom. After deposit, Davis would then disburse the funds among the 

Stanford Entities. 

amount, than broker dealers in any other other 

magnitude of the as.a generator ofeD 

he vvith VanTassel's testiulony 

financial ad ... isors at SGC in United States were re!'p()ns.iblle 

CD sales in :w(8). 

According to the Receiver, U.S. residents hold more CDs, in terms of number and dollar 

amount, than the residents of any other country in the world, including Antigua. (the United 

States comprised 7,072 clients, which accounted for 25.26% of clients, and $2,660,676,142 in 

deposit amount, which accounted for 37% of dollar amounts). 
98 


86688.063

Stanford employees managed and directed the CD enterprise from the United 

States with no meaningful input from Antigua. Although SIB, the issuing bank, was 

chartered and registered in Antigua, Stanford and Davis controlled it with assistance from 

Pendergest-Holt from various places 'within the United States. And Da"is facilitated 

several millions of dollars in transfers of CD proceeds among the Stanford 

Entities. 

SIB employees were paid with funds administered from Houston. CFO Davis and 

President Rodriguez-Tolentino were paid by other Stanford Entities in the 

United States investment accounts. 

Stanford and his associates in the United States generated and maintained SIB's 

financial information. Stanford, Davis, Pendergest-Holt, and other U.S. residents 

disseminated false information regarding SIB's financial strength, profitability, capitalization, 

investment strategy, investment allocation, value of its investment portfolio, and other 

matters to financial advisors around the world for use in inducing potential im'estors to 

purchase CDs. 

Additionally, extensive SIB client records exist in the United States, and records regarding 

SIB's investments and cash balances were kept outside of Antigua, predominantly generated 

(i.e., fancifully created) and maintained in the United States by Stanford and Davis. 

All of these assets were purportedly directed and managed from the United States. And, as 

stated above, Stanford and his associates doctored most, if not all, of the numbers. 

SIB employees performed limited administrative, bookkeeping, and operating functions in 

Antigua, these functions were heavily dependent upon Stanford's global hnman resources, 

accounting, and information technology ("IT") groups 

Stanford Entity employees in the United States wrote SIB's purported internal audit reports .. 

Stanford Entity employees in the United States fulfilled most ofits 

core operational needs. 

Stanford and his associates similarly managed and controlled other Stanford Entities from 

the United States. 

SGC solicited or intended to solicit CD purchasers in all fifty U.S. states, and it made 

regulatory filings with state securities regulatory agencies in the United States. 

Even the Antiguan government stated that Stanford ran SIB from HOllston, Texas - referring 

to Antigua as a mere transit point. 

Most CD purchasers never saw or interacted with Antiguan employees ... 

Investors instead dealt only with their financial advisors 

1'hese financial aldviSOJfS were es!.erIU~uI:y the face 

investors, CD in'"e~itnleIltll[lal[la:girlg, 
99 


86688.064

brokerage aCCOllntsc. The financial advisors disseminated reports prepared by Stanford, 

Davis, Pendergest-Holt, and others, which portrayed a global group of companies under the 

name SFG, headquartered in the United States. SIB's marketing materials, in fact, advertised 

that it was able to pay higher interest, in part, because of "synergies" and cost savings that 

resulted from it being part of SFG and because of a globally diversified investment strategy. 

In summary: 

(1) SIB, the Bank of Antigua, and STCL were only nominally headquartered in Antigua, and 

SIB's major activities, CD sales and investment of funds, took place outside of Antigua; a 

substantial number of the other aggregated Stanford Entities were headquartered outside of 

Antigua; 

(2) Stanford, Davis, Pendergest-Holt, and others who actually managed the Stanford Entities 

did so largely from the United States; 

(3) Stanford Entities and banks outside of Antigua primarily held the Stanford Entities' 

primary assets; 

(4) the vast majority of the Stanford Entities' investor-victims and creditors reside outside of 

Antigua; 

(5) although the Court does not here decide that U.S. law applies to all disputes, this Court is 

the jurisdictional locus of the entire Stanford Entities enterprise and estate, see Receivership 

Order; and 

(6) the Stanford Entities' nerve center (center of direction, control, and coordination) is in the 

United States. 
100 


86688.065

STANFORD INTERNATIONAL BANK 

STATISTICS FOR STANFORD GROUP COMPANY CUSTOMERS 

21,434 customers held ~L2 billion in Stanford International Bank CDs 

• 7,814 Stanford Group Company customers held $3.5 billion in SIB CDs 

6,143 with CD balances at or below $500K 

1,671 with CD balances over $500K 

13,620 non-Stanford Group Company customers held $3,7 billion in SIB CDs 

11,904 with CD balances at or below $500K 

1,716 with CD balances over $500K 

1,671 $2.5 billion 21% Not Known 

STANFORD GROUP COMPANY CUSTOMER DATA 

7,814 SGC customers held $3.5 billion in SIB CDs 

37 % of all SIB CD holders by number of SIB depositors, or 49% by deposit volume 

6,143 of these customers have CD balances at or below $500K with an aggregate total of 

$956.6 million. 

-79% of SGC customers made fi:om 

1,671 SGC customers with CD balances 0[$2.5 billion had individual balances in excess of 

$500K. 

-Capping the loss of each of these customers at $500K would result in potential SIPC coverage 

0[$835.5 million. 

-Losses for this group of investors is over $1.66 billion 

Total SIPC coverage for SGC Customers would be $1.8 billion ($835 mil. + 

$956.6 mil.) 
101 


86688.066

GROUP COMPANY 

Suite 

964-8300 

File No. 8··48611 eRD 

Examination No 06-0-97-037 

r:;.):.!::<::llT Iy_~~IJMMl1.RX 

Rule 17a-4Failure to 

Rule IOb-5 Possible misrepresentation and 

of customer funds. 

("Stanford 

NASD been 

1995. The firm is also a 

no. 801-50374). Stanford 

Stanford ("Stanford" who also owns 

'1'1010 such companies include Stanford 

an offshore bank located in St. John' s, 

Stanford Financial ("SFG") 

Stanford is not in the 

and is not registered as 

president and one of six 

Stanford Group operates 

to Rule 15c3-3 and is 

000. As of July 31, 

,027 with excess net 

totaled $532,485. 

a member of the 

the Commission 

registered 'investment 

is owned by Allen 

firm's 

conducts a general securities business through 

programs 

'The Master Fund Program 

accounts for those c] ients 

managers 

with Bea,r Stearns 
102 


86688.067

The FWDO conducted a surveillance 

in August 1997. 

Three 

practices. 

We conducted an 

chief e~ecutive officer, 

furnished them the 

receipt of acknowledgement 

FINDINGS 

is 

all deposits 

SIB promotes 

brochure regarding t.he 

Fle~CD Account, states 

invested in 

13. 

of Stanford 

in 

sales 

A 

the 

are 
103 


86688.068

investing in products with higher risks than are indicated in its 

brochures and other written advertisements. 

Because SIS is a foreign entity, we were' unable to gain 

access to SIB's records. 

Item of Interest .:. Addition to Capital 

Du'ring 1996, Stanford made a cash contribution of $19,000,000 

to Stanford Group. We are concerned that the cash contribution 

may have come from funds invested by customers at SIB. We noted 

that SIB had loaned Stanford $13,582,579. In addition, we noted 

that SF(; had borrowed $5,447,204 frOm SIB for a total receivable 

at, SIB of $19,029,783 directly and indirectly from Stanford. We 

contacted the general' counsel for the' Stanford companies regarding 

our concerns. The general counsel stated that' the cash 

contribution came from personal funds and not from the above 

loan'S; however, it seemS at least questionable whether Stanford 

has access to $19,000,000 in personal funds. 

Maintenance of Books and Records - Rule 17a-4 

Stanford Group failed to maintain books and records as 

they relate to the offer and sale of SIB products. Lena Stinson 

("Stinson"), senior vice, president and administrative officer, 

stated that the firm only refers clients to SIB and receives a 

referral fee. Stinson stated that the client is the customer of 

SIB and not Stanford Group. From our discussions with Stinson, 

the'RR informs the client of the SIB products (usually the FlexCD) 

and prepares an application which is sent to SIB for their 

approval. Once' approved, the client sends the funds direct ly to 

SIB who then confirms the deposit. Stinson stated that, once the 

application is sent" the RR is no longer involved (other than 

receiving a referral fee) and all paperwork is maintained by SIB. 

It appears that the RR is recommending a particular product of 

SIB's and therefore should have a basis for making that 

recommendation (i.e., a new account form containing, among other 

things, financial information and :i,nvestment objectives). In 

addition, since the RR i,s recommending the purchase of a product, 

an order ticket, confirmation, and' purchase and sales blotter 

should be maintained. 

OTHER ITEMS REVIEWED 

Customer Account Review 

We reviewed the activity in 35 customer accounts for 

suitability, churning, and profit and loss'- Our review noted no discrepancies. 

3 
104 


86688.069

Chinese Wall Procedures 

We examined the adequacy of the firm's Chinese Wall and 

overall supervisory procedures to prevent and detect insider 

trading by accounts of the firm, employees and customers. The 

firm's procedures appear to be reasonably designed to prevent such 

misuse given the nature of the firm's business. 

Currency and Foreign Transactions 

Prior to our examination, we accessed the IRS CTR 

database and found no reports on file for the firm. Our on-site 

review ,of the firm's bank statements, bank reconciliations, 

deposit slips and checks received and deli,vered blotter from 

February 1997 through July 1997 disclosed no currency 

transactions. We found no foreign accounts involving the 

receipt/delivery of securities or currency from/to foreign 

locations. 

RECOMMENDATION 

We will send a deficiency letter to the firm citing their 

faiiure to maintain adequate books and records. ' 

We will provide a copy of our report to the FWDO Division of 

Enforcement for their review and disposition. 
105 


86688.070

March 21, 2011 

Mr. Ira Hammerman 

General Counsel 

Securities Industry and Financial Markets Association 

1101 New York Ave NW # 800 

Washington D.C., DC 20005-4279 

Mr. Hammerman, 

I am the Director and Founder of the Stanford Victims Coalition ("SVC"), an 

advocacy group representing the 20,000 victims of the Stanford Financial 

Group ("SFG") Ponzi scheme. I also serve as one of seven members on 

the District Court-appointed Stanford Investors Committee. 

I would like to bring to your attention to some critical misinformation about 

the circumstances related to the customers of Stanford Group Company 

("SGC") and their status for protection under the Securities Investor 

Protection Act ("SIPA"). This misinformation has been widely perpetuated by 

the Securities Investor Protection Corporation ("SIPC") and the SEC. 

Your testimony before the House Financial Services Committee last fall 

indicated the facts in the Stanford case were not fully disclosed to you. SGC 

customers did not incur losses on their investments, but rather losses of 

their investments. As the SEC has argued in its civil suit against Stanford, et 

ai, the Stanford International Bank ("SIB") certificates of deposit were never 

legitimate securities and were merely a vehicle to steal investor 

funds. Historically, the Commission has argued that "a customer's legitimate 

expectations," ought to be protected "regardless of the fact that that the 

securities were fictitious." (In re New Times Securities Services, Inc., 371 

F.3d 68, 76 (2nd Cir. 2004)). 

As you know, SIPC has come under great scrutiny in the aftermath of the 

Madoff and Stanford Ponzi schemes, and investor confidence has suffered 

tremendously. As a result, SIPC has shifted into self-preservation 

mode rather than advocating for the investors whose savings were stolen by 

SIPC members. As a member of the SIPC Modernization Task Force as well 

as the General Counsel for the Securities Industry and Financial Markets 

Association ("SIFMA"), your knowledge of investors' legitimate expectations 

when dealing with a SIPC member is of the utmost importance. I hope you 

will objectively consider the information presented here. 

Background 
106 


86688.071

SFG was an international criminal enterprise made up of more than 130 

commonly owned and controlled companies that included SGC, a dualregistered Broker Dealer and Investment Advisor based in Houston, 

Texas, and Stanford International Bank ("SIB"), an offshore bank in 

Antigua. In February 2009, the SEC filed a civil lawsuit alleging Allen 

Stanford, as the owner of the SFG companies, and James Davis, as the Chief 

Financial Officer for the SFG companies, along with other SFG employees 

(but no SIB employees), facilitated a $7.2 billion Ponzi scheme. 

Approximately 7,800 of the 20,000 investors affected by the SFG Ponzi 

scheme were SGC customers. Most, if not all, of these customers conducted 

traditional brokerage business with SGC through its third-party clearing firm, 

Pershing LLC. In the ordinary course of business, SGC Registered 

Representatives marketed and sold approximately $3.5 billion in 

fictitious SIB certificates of deposit (of $7.2 billion total). The CDs were 

sold as fully disclosed under a Regulation D SEC filing and were 

typically transacted through the customer's SGC brokerage account at 

Pershing. The brokerage funds allocated to the SIB CDs constituted a 

majority, if not all, of the SGC customers' savings, and the assurances 

offered by the SIPC logo were used as a sales tactic to create a false sense 

of confidence in the CDs. In fact, many of the SGC Registered 

Representatives convinced their clients the SIB CDs offered greater 

protection than an FDIC-backed bank CD because FDIC insurance only 

protected up to $100,000 in deposits in a US bank CD (the limit at the time), 

but SIPC covered up to $500,000 of the SIB CD securities. It is important to 

note the former SGC Representatives have not been accused by the SEC or 

FINRA of misrepresentation of this assurance, which was made in marketing 

materials, in written communications between SGC Representatives and 

their clients and generally in all interaction the investor had with SGC (the 

SIPC logo appeared on everything from promotional pens, water bottles, 

signage, customer documents, etc.) 

FTI consulting, the forensic accounting firm chosen by the SEC to work with 

the Stanford Receiver, has reported that SGC's customer funds intended to 

purchase the SIB CDs did not go to SIB to purchase the securities. 

As outlined in the attached declaration of senior FTI partner Karyl Van 

Tassel, SGC customer's funds intended to purchase the CD securities were 

misappropriated to (i) pay previous customers; (ii) Allen Stanford's lavish 

lifestyle; (iii) the expenses of SGC, including the exorbitant compensation of 

Registered Representatives who sold the fictitious securities as well as 

referral fees to the broker dealer, which constituted a majority of SGC's 

revenue. 
107 


86688.072

By all definitions, the SIB CDs were never legitimate and served as nothing 

more than as a vehicle to lure customers to feed the Ponzi scheme. SGC 

customers had the legitimate expectation they were purchasing actual 

securities and instead, as the SEC and DOJ have alleged, their funds were 

stolen in a Ponzi scheme. In denying protection under the SIPA, SIPC has 

taken the position that SGC customers purchased securities that declined in 

value or were worthless. Completely contradicting that argument, the SEC 

has taken the position in litigation related to the Stanford receivership that 

an entity that operates as a Ponzi scheme "is, as a matter of law, insolvent 

from its inception." An insolvent entity cannot issue real securities and 

as such, the SIB CDs are not simply worthless securities, they are entirely 

fictitious. The SIPA has been used to protect customers of introducing broker 

dealers who were sold fictitious securities in previous cases. I'm sure you 

will agree that if customers of introducing broker dealers are not truly 

protected by SIPC in situations like the SGC customers find themselves in, 

those broker dealers should not be members of SIPC as the false confidence 

the SIPC logo provides investors is nothing short of misleading. 

Similar to the pOints made in your Congressional testimony, the SEC has 

pOinted out two of the risks facing customers of broker dealers: "the risk 

that the security purchased will be a bad investment and the risk that the 

broker-dealer will not execute the order, convert the customer's funds and 

become insolvent, leaving the customer with no cash or securities. SIPA was 

intended to protect customers against the latter risk, not the former, which 

is borne by the investor. " (8r. of the SEC, Amicus Curiae, In Partial Support 

of Appellants in re: New Times Securities, Inc., 02-6166 (2nd Cir. June 20, 

2003)). SGC customers who were sold SIB CDs fall into the latter category 

and SIPC would make almost 80% of these investors whole. 

The SVC's Request for a Liquidation of SGC Under SIPA 

In November 2009, the SVC formally asked the SEC to order a liquidation of 

SGC under SIPA (see attached) and has provided hundreds of customer 

documents to the SEC Division of Trading and Markets over the last 16 

months. The SEC has yet to make a determination regarding this request, 

which more than 100 members of Congress have supported (see attached). 

In a meeting convened last week by Senate Banking Committee Ranking 

Member Richard Shelby, SEC Chairman Mary Schapiro committed to making 

a formal decision on this matter within a few weeks. 

Investor confidence and investor protection are two very important goals of 

SIPA and SIFMA and I'm sure you'll agree that when an investor cannot rely 

on SIPC protection when their funds are stolen by a SIPC member, any 

confidence an investor may have is false confidence. I hope this information 

changes the opinion you expressed in your Congressional testimony, as well 
108 


86688.073

as SIFMA's lobbying position. Many of SIPC's and SIFMA's current members 

are greatly affected by the outcome of this case as their customers 

face significant losses that will arbitrated by FINRA or litigated in court. 

Please feel free to contact me if you would like any additional information. I 

would be more than happy to discuss this matter with you, or any other 

member of the SIPC Modernization Task Force as the Stanford case is not 

nearly as simple as it has been written off to be and the manner in which 

investors were victimized in this crime should be considered in any 

legislative recommendations related to investor protection. 

Sincerely, 

Angela Shaw 

Director and Founder 

Stanford Victims Coalition 

972-672-1512 

cc: SIPC Board 

SIPC Modernization Task Force Members 

Hear the victims tell their stories at 

www.stanfordvictimscoalition.blogspot.com . 
109 


86688.074

1982-1987 

STANFORD FINANCIAL GROUP 

REGULATORY NEGLIGENCE TIMELINE 

~ord files for business and personal bankruptcy in Texas. The Court discharges him from 

$13.6 million in obligations. l 

Allen Stanford opens Guardian International Bank Ltd. in Montserrat. Stanford also opens Guardian 

International Investment Services 2

, an investment firm in Miami that targets Latin American 

customers and offers a certificate of deposit product yielding 10.75%, doubling the then current rate of 

return.3 

1989-1991 

~epartment of Banking warns Stanford about operating a foreign bank representative office 

in Texas "without authority under either slate orfederallaws." The U.S. Treasury Office of 

International Banking and the Office ofthe Comptroller of the Currency are copied on the warning 

letter to Stanford.4 

As a result of investigations by banking regulators in Texas, Florida and California5

, the U,S. 

Treasury's Office of the Comptroller of the Currency issues a Banking Circular regarding Stanford's 

unauthorized banking activities in the United States. 

The Texas Department of Bal1king orders Guardian International Bank Ltd. to immediately cease its 

Texas operations or ··the T exa..') Attorney General will be requested to promptly/ile charges against the 

bank, its board of directors and its management for apparent willful and continuing violations of the 

Texas Banking Code:,6 

The Police Department in Mexia, Texas investigates Stanford for allegations of drug trafficking, 

The FBI opens an extensive investigation along with the UK's Scotland Yard to uncover Stanford's 

money laundering activities. FBI agent Ross Gaffney, who headed the U.S. task force set up to 

investigate the suspicious explosion of offshore banks in Montserrat, said, "We had hard inte11igence 

about what he was doing and we began to develop it.,,7 

Due to investigation reports from the FBI and Scotland Yard, the government of Montserrat decides 

that Stanford no longer meets bank ownership requirements on their island and the license for 

Guardian International Bank is revoked.s 

Stanford purchases a commercial bank charter for the Bank of Antigua and relocates his offshore 

banking headquarters to Antigua. Stanford International Bank (SIB) is chartered as an offshore bank 

1 Unites Stales Bankruptcy Court Dockets Numbers 6-82~OO061 and 00263 

2 FJorida Department of State Registration Number 183381, July 20,1987 

J BusinessWeek, Feb. 24, 2009, "Did Court Ruling Prolong Stanford Prober' 

4 Letter from Texas Banking Department, Dec. 19, 1990 5 United Stales Treasury, Office of the Comptroilerofthe Currency BC 171 

6 Letter from Texas Banking Department, Jan. 8, 1991 ; The fndependent. Feb. 22, 2009, "Secret World of Allen Stanford:' 

8 Government of Montserrat, Letter from Financial Secretary John George, November 1990 

© Copyright, 2013, Stanford Victims Coalition 

Page 1 of 12 
110 


86688.075

under the laws of Antigua and Barbuda' 

1992-1996 

Stanford Group Company (SGC) is incorporated in the state of Texas. SGC registers with the SEC as 

both a broker dealer and an investment advisor and begins operations in Houston, Texas, and Baton 

Rouge, Louisiana. 10 

The Texas State Securities Board conducts its first examination ofSGC. The case is referred to the 

SEC. 

Stanford is accused of money laundering. Case is settled out of court. 11 

Faced with international scrutiny for its extensive money laundering activities, Allen Stanford and the 

government of Antigua and Barbuda propose the Money Laundering Prevention Act of 1996. Stanford 

is represented by Dr. Errol Cort, an Antiguan lawyer, and the Miami~based law finn. Greenberg 

Traurig. U 

1997-1998 

The SEC Fort Worth Regional Office (FWRO) conducts its first broker dealer examination ofSGC 

and concludes "possib1e Ponzi." The exam report includes an "Item of Interest" that questions a $19 

million ca,h contribution to SGC from Allen Stanford while SIB loaned $I3.5 million to Allen 

Stanford and $5.5 million to the Stanford Financial Group (SFG, the parent company of all Stanford 

entities) - for a total of$19 million directly and indirectly from SIB loans. The exam report states that 

68% ofSGCs revenue comes from referral fees for SIB CD sales (in addition to the cash 

contributions from Allen Stanford directly). The exam findings are referred to SEC Enforcement, 

which opens a Matter Under Inquiry (MUI). The MUI is closed 3 months later after Stanford did not 

voluntarily provide documents requested by the SEC in its deficiency letter sent in response to the 

1997 broker dealer exam.lJ 

The Fort Worth SEC conducts an investment advisor examination of sac. The findings are similar to 

the 1997 broker dealer exam, and the exam findings are reported to SEC Enforcement. 14 

With the help of Dr. Errol Cort as local counsel in Antigua and Greenberg Traurig in the U.S., 

Stanford and the government of Antigua and Barbuda create a task force to rewrite Antigua's offshore 

banking laws. The task force is funded by Allen Stanford, and includes former U.S. Customs 

investigator Patrick O'Brien; former U.S. Attorney's Office lawyers working for Greenberg Traurig; 3 

BDO Seidman partners; and Tom Cash, a representative of Kroll & Associates and the former head of 

the DEA's operations in Florida and the Caribbean. 

Under the new offshore banking regulations written by the Stanford-funded task force, the 

International Financial Services Regulatory Authority (IFSRA) is established as the government of 

Antigua and Barbuda's offshore banking regulator. Allen Stanford is appointed as president of 

9 BusinessWeek, Feb. 24, 2009, "Did Court Ruling Pro!ong Stanford Probe?" 

10 Securities and Exchange Commission File Numbers 8-48611 and 801-50374 

II Latin American Herald Tribune, Feb. 27, 2009, ·'The Sir Allen Stanford Story·' 

12 Government of Antigua and Barbuda, Money Laundering Prevention Act of 1996 I, Securities and Exchange Commission Office of the Inspector Genera! Report on Investigation 526, March 31. 20 I 0 14 Ibid 

Page 2 of 12 

© Copyright. 2013, Stanford Victims Coalition 
111 


86688.076

IFSRA, and, as a result. is responsible for regulating his own bank. 15 

The FBI, U.S. Attorney's Office, DEA, IRS Criminal Division and Customs Services each individually 

request the SEC's records on Stanford. The requests cite ongoing investigations into criminal activity 16 

In a letter to the U.S. Ambassador to Barbados, Allen Stanford's counsel at Greenberg Traurig states 

that he has been investigated by numerous U.S. agencies over the years. and none had found evidence 

of wrongdoing. 17 

Stanford becomes largest private employer in Antigua. 

The State of Florida Department of Banking and Finance approves establishment of Stanford 

Fiduciary Investor Services (SFIS), a Trust Representative Office (TRO) for Antigua-based Stanford 

Trust Company LTD. SFIS markets and sells SIB CDs to foreign investors through the Miami-based, 

state-regulated entity. IS 

1999 

"St;Jord's legal counsel, Dr. Errol Cort, becomes the government of Antigua and Barbuda's Attorney 

GeneraL19 

In only the second warning of its kind, the U.S. Treasury's Financial Crimes Enforcement Network 

(FINCEN) issues an advisory to U.S. banks to scrutinize all financial transactions routed into or out of 

Antigua for evidence of money laundering. The warning is a result of the U.S. government's concern 

about Allen Stanford's role in Antigua as the head of the IFSRA, the regulatory body overseeing 

Stanford International Bank. The warning states: "The operation o.f Antigua' offthore jinancial sector 

has heen a concern of re&7Ulators and enforcement qfjicials in the United States, the United Kingdom, 

and other nations for some time. 20 

In a letter to Antiguan Prime Minister Lester Bird, U.S. Treasury Undersecretary for Enforcement 

James E. Johnson, writes. "It is clear that the Government of Antigua and Barbuda has. in effect, 

turned mvay from its partnership with the United States Government in combating money laundering 

and otherfinancial crimes.,,21 

The U.S. State Department places Antigua on its money laundering watch list. Jonathan Winer, thenhead of the State Department's Bureau for International Narcotics and Law Enforcement Affairs, says 

Antigua is "one of the most attractive financial centers in the Caribbean for money launderers." In a 

Senate testimony. Winer said, "Antigua has long been one of the worst regulated offshore centers in 

the world." 

Retired DEA agent Mike Vigil, who was then the Chief of International Operations in the Caribbean, 

said island banks "have always been a focal point for laundering illicit drug proceeds and Antigua has 

always a primary center of money laundering operations for many significant drug traffickers."n 

15 Government of Antigua and Barbuda, International Business Corporations Act 

16 Securities and Exchange Commission Officc of the Inspector General Report on Investigation 526, March 31, 2010 

17 New York Times, Feb, 20, 2009 '·Fraud Case Shakes a llillionaire's Caribbean Realm,'" 

18 Memorandum of Agreement, State of Florida and Stanford Trust Company LTD, December 14,1998 

19 Government of Antigua and Barbuda \\'ebsite 

21} United States Department of Treasury Financial Crimes Enforcement Network Advisory, April 1999, 

21 Wall Street Journal, April 27, 1999, "US Antigua Dual on Money Laundering· High Hying Houston Financial is Caught 

in the Middle." 

22 New York Times, Feb. 20. 20()9 "Fraud Case Shakes a Billionaire's Caribbean Realm," 

Page 3 of 12 

© Copyright 2()13, Stanford Victims Coalition 
112 


86688.077

Texas securities regulators find evidence of money laundering involving Stanford. The case is referred 

to the FBI and the SEC, because it involves offshore banks, where Texas has no jurisdiction. Texas 

securities commissioner Denise Voigt-Crawford later tells the state legislative committee: "Why it 

took 10 vears for the feds to move on it, I cannot answer. H She added: "We worked with the FBl and 

th~ S~C:~nd basically gave them the case. We told them what we'd seen and they were going to run 

\\llth 11."-

After evidence surfaces that former Mexican drug lord, Amado Carillo Fuentes, had used SIB to hide 

or launder money, Stanford voluntarily makes out a cashier's check for $3.1 million. and gives it to the 

lJ.S. DEA. No further investigation is pursued by the DEA,24 

20(H 

Stanford tiles an SEC regulation D disclosure for selling Stanford International Bank certificates of 

deposit to U.S. citizens through Stanford Group Company.25 

The U.S. Treasury enters into an information sharing agreement with the government of Antigua and 

Barbuda that "will provide.fiw the exchange (~liJ?f<mnation on tax malters hetween the United Slates 

and Antigua and Barbuda:' The agreement is signed hy Trea'mry Secretary Paul O'Neill and Antiguan 

Prime Minister Lester Bird.16 

The first Stanford employee comes forward to FINRA (then NASD) alleging Stanlord Group 

Company is engaged in fraudulent business practices in violation of the Securities Acts of 1933 and 

1934. Arbitration claim is resolved in favor ofStanford.27 

After previous run-ins with the Texas Department of Banking. the state of Texas initiates a partnership 

with the government of Antigua and Barbuda to provide "coordinated comprehensive supervision." 

According to Texao:; Banking Commissioner Randal! S. James. the partnership a landmark 

in cooperation 

government. It underscores 

institutions ·with offices in 

achieved." The agreement, \vhich is signed by Prime Minister 

Secretary of State Henry Cuellar. specifies the state of Texa<; can examine a financial institution in 

Anti gua' s jurisdiction .. 28 

Page 4ort2 

t; Copyright 2013. Stanfbrd Victims Coalition 
113 


86688.078

2002 

An accountant in Mexico sends the SEC a letter pointing out numerous red flags regarding the 

Stanford International Bank certificates of deposit. including inexplicable high rates of return, a lack 

of detailed infonnation about the perfonnance of the CDs and the fact a small, Antiguan firm handles 

Stanford International Bank's audits. The letter ends with a plea that the SEC "make sure that many 

investors do not get cheated. These investors arc simple people of Mexico and maybe many other 

places and have their faith in the United States financial system. ,,29 

The Fort Worth SEC opens its third examination of Stanford Group Company_ The exam report cites 

SGC's misrepresentation of the safety ofSlB CDs and the lack of sufficient documentation to conduct 

adequate due diligence to verify/validate the substantial returns SIB claimed. The exam report is 

referred to Enforcement, but no investigation is opened.'w 

A second Stanford employee comes forward in case with FINRA (then NASD) alleging fraudulent 

business practices in violation of the Securities Acts of 1933 and 1934. Arbitration claim is resolved 

in favor ofStanford.31 

2003 

The SEC receives a whistleblower report from a Stanford insider saying: 

"STANFORD FINANCIAL IS THE SUBJECT OF A LINGERING 

CORPORATE FRAUD SCANDAL PERPETUATED AS A MASSIVE PONZI 

SCHEME THAT WILL DESTROY THE LIFE SAVINGS OF MANY, 

DAMAGE THE REPUTATION OF ALL ASSOCIATED PARTIES, RIDICULE 

SECURITIES AND BANKING AUTHORITIES, AND SHAME THE UNITED 

STATES OF AMERICA." 

The insider c1aims the fraud has gone on for 17 years and that no legitimate audit has questioned why 

CDs were invested in "primarily in high risk securities," which are ··not congruent with the nature of 

safe CD investments promised to clients." The alert says the CDs are marketed and sold as safe. but in 

reality, investor proceeds are being directed into speculative investments like stocks, options, futures, 

currencies, real.estate. an~ unsecUf:d loans .. The report goc.s on to say, "Overl~oki'?1~ these issues and 

not thoroughly InvesttgatIng them IS becoming an accomplice to any wrongdoing .. ~ 

A North Carolina attorney contacts Congressman Bob Etheridge about allegations of Stanford's 

violations of the Foreign Corrupt Practices Act and "widespread reports that certain Antigua 

government officials are soliciting and accepting large sums of money in bribery payments from a 

Texas businessman named R. Allen Stanford in order to allow Mr. Stanford to obtain and retain 

business in Antigua on behalf of Stanford Financial Group of HOllston, Texas." Twelve other 

Congressmen are copied on the letter. 33 

2') Complaint to Securities and Exchange Commission. October 28. 2002. 

30 Securities and J\xchange Commission Ollice orthe JnspeetorGencral Report on Investigation 526, March 31, 2010 

1\ FINRA Case #01-00687 

12 Complaint to Securities and Exchange Commission. September 1,2003 

.lJ Leiter to US Congressman Uob Etheridge, December 10, 2003 

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Ten more Stanford employees file individual cases with FINRA (then NASD) alleging wrongful 

dismissal and fraudulent business practices in violation of the Securities Acts of 1933 and 1934. 

Arbitration claims are resolved in favor ofStanford.34 

Key whistleblower Leyla Basagoitia (now Wydler) comes forward to SEC and FINRA (then NASD) 

with details of an alleged Ponzi scheme to defraud clients. Defendant refused to sel! CD products and 

was fired from Sta.nford's Houst~n ~ffice .. Wrongful.dismi~sal suit fi_;;d against Stanford and case is 

eventually settled In FfNRA arbitratIon v{lth no warnmg to JOvestors. 

2004 

North Carolina Congressman Bob Etheridge contacts U.S. Attorney General John Ashcroft about 

"specific concerns" of Stanford's alleged violations of the Foreign Corrupt Practices Act?' 

U.S. Assistant Attorney General Christopher Wray contacts North Carolina attorney and Congressman 

Etheridge saying the Department of Justice "will take appropriate investigative steps" regarding 

allegations of Stanford's violation of the Foreign Corrupt Practices Act.)7 

Four more Stanford employees file individual cases with FfNRA (then NASD) alleging fraudulent 

business practices in violation of the Securities Acts of 1933 and 1934. Arbitration claims are 

resolved in favor of Stanford. 311 

$3.086 BiJ. 

2005 

Two investors file a lawsuit in a Florida District Court accusing Stanford of aiding and abetting Pouzi 

scheme.:39 

The SEC conducts its fourth exam of Stanford Group Company and a referral is made to Enforcement. 

\vhich opens an "informal inquiry" and conducts a survey ofSGC clients who purchased SIB CDs. A 

questionnaire is sent on May 26. asking for responses by June 8 - indicating a sense of urgency. The 

4-page questionnaire a.sks for detailed information about the investors' SGC financial advisor and the 

marketing and sales of the SlB CDs. Among many other questions, investors arc asked if were told 

the CDs had insurance and if they recorded any conversations they had with their advisor. 40 

Five more Stanford employees file individual FfNRA (then NASD) complaints alleging wrongful 

dismissal and fraudulent business practices in violation of the Securities Acts of 1933 and 1934. 

J4 FINRA Arbitration & Mediation Database 

15 FINRA Case #03-02025 

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Arbitration claims are resolved in favor ofStanford.~l 

2006 

SEC Enforcement stafTin Fort Worth 

to voluntarily submit SIB CD investor 

formal investigation of SGC and asks the broker dealer 

A lawsuit alleging a Ponzi scheme is filed by former employee Lmvrcnce J. De Maria under the 

Florida Private Whistleblower Act. De Maria alleges Stanford is "operating a Ponzi scheme or 

pyramid schemc" by using money from the offshore hank "to finance its growing brokerage business." 

The suit also alleges that Stanford is paying off Antiguan regulators and US government oflicials to 

keep money laundering legislation from being passed. ~,~ The complaint is referred to the SEC by 

OSHA." 

Four more Stanford employees file FINRA (then NASD) complaints alleging wrongful dismissal and 

fraudulent business practices in violation of the Securities Acts of 1933 and 1934. Arbitration claims 

are resolved in favor of Stanford:15 

2007 

SGC employees in good standing, Mark Tidwell and Charles Rav .. l, resign and file a lawsuit alleging 

SGC requires employees 10 cngage in "illegal and unethical methods to market and sell its financial 

products to the public." The lawsuit also accuses SGC returns, tying to investors and 

destroying critical documents for an ongoing SEC inquiry. The outlines glaring violations of U.s. 

Jaws and regutations.~6 

FINRA fines Stanford Group Company $20.000 for failure to maintain minimum net capital 

requirements.·I

? 

FINRA fines Stanford Group Company $10.000 for allegations of distributing 

unbalanced inf(l!l11ation" about its Stanford International Bank Certificates of Deposit. 

unfair and 

Four more Stanford employees file F1NRA complaints alleging wrongful dismissal and fraudulent 

business practices in violation of the Securities Acts of 1933 and 1934. Arbitration claims arc 

~I FlNRA Arhitratillo & Mediation Datahase 

Rcport on [l1\cstigatiotL July 2009 

48 FINRA Rcgulatory Event Dockct Numhcr 20()500220370] 

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resolved in favor of Stanford:19 

2008 

In January 2008. international clearinghouse Pershing, LLC becomes worried of Stanford's business 

operations. Pershing continues to wire CD funds from the U.S. to international financial institutions 

until December 12, 2008. the same day Bernard Madoff confesses to operating a $50+ billion POl1zi 

scheme. Pershing alerts SOC that it \vil! no longer wire SGC brokerage account customer funds to 

another Stanford entity in order to purchase Stanford International Bank CDs because Pershing cannot 

verify SIB is not involved in fraud of some nature. Pershing wired $5 J 7 million in 1.635 transfers 

from 1.200 US accounts from 2006-2008. ~o 

FINRA fines Stanford Group Company $30.000 for allegations offailing to adequately disclose its 

research methods used to report ccrtain securities valuations.5! 

Former executives Tidwell and RawJ file appeal of 2007 FINRA arbitration. \"hich ruled in favor of 

Stanford Group Company. The appeal outlines specifics illegal marketing and sales tactics involving 

Stanford International Bank CDs. The plaintiffs allege SGC Financial Advisors were prohibited from 

filing mandatory security fonns for clients transferring IRA accounts to SIB CDs and notifying clients 

of the civil and criminal penalties associated with the failure to do SO.52 

Due to evidence uncovered in Tidv..rell and Raw! case, the SEC's Fort Worth Regional Office 

refocuses Enforcement personnel on the Stanford investigation opened in 2005.5~ 

U.S. President George W. Bush endorses the Stanford Financial Group on White Ilouse 

The letter, which is sent to all SIB clients, states, "To protecl theirfii/ure we"-n",,,,' alIa 

it is important/()r individuals 10 gin! carefiil l/toujZhl 

and wealth 111[J1W,!,mlent servi,:'es, 

Four more Stanford employees me F1NRA complaints alleging wrongful dismissal and fraudulent 

business practices in violation of the Securities Acts of 1933 and 1934. Arbitration claims are 

resolved in favor of Stanford. 55 

Stanford International Bank's December 2008 newsletter tells investors the hank had "no direct or 

indirect exposure" 10 Madoffinvcstments. securitized or the subprime mortgage meltdown and that is 

in position to "wel! exceed Basel II capital requirements as we continue to grow in to 2009.,,56 Later. 

·1~ Fi]\;RA Arbitration & Mediation Dataha;;e ;c, 

rC:\llS 

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the SEC reports SIB has been exposed to Madoff losses. 57 Newsletter also says the bank provides 

insurance coverage through Lloyd's, Bankers Blanket Bond. Directors and Officers Liability, 

Professional Liability (errors and omissions) and Excess FDIC. Stanford International Bank is 

reported to be "strong, safe and fiscally sound.,,58 

2009 

The Stanford Financial Group of Companies has over 125 entities with offices in more than 100 

locations globally. primarily in the southeastern U.S. and Latin America. 

In the wake of widespread criticism of the SEC's failure to catch Bernard Madot''j-1s $50 billion Ponzi 

scheme, SEC files civil charges against Stanford group of companies and its top three executives, 

alleging "massive ongoing fraud" involving Stanford International Bank certificates of deposit. 

Thousands of customer brokerage accounts held at Pershing for customers of Stanford Group 

Company are frozen, leaving investors without access to non-SIB funds. 59 

The SEC files a civil lawsuit against Allen Stanford, ct ai, and asks the Northern District Court of 

Texas to appoint Ralph Janvey as Receiver for all Stanford entities. The Court's order states that all 

Stanford-owned assets around the globe are sul:~.iect to an asset freeze. However, intemational assets 

are compromised when local governments in Antigua, Venezuela and Panama seize banks in their 

countries and assume all assets - obliterating hundreds of millions of dollars in Stanford investor 

assets. The U.S, government does nothing to work with the foreign governments to protect foreign 

57 Securities and Exchange Commission Complaint to US District Court Northern District of Texas, Dallas Division. 

Complaint #LR20901. Feb. 16,2009. 

58 Stanford International Bank-Antig.ua Investor Newsletter. December lOOS 

<~ Securities and Exchange Commission Complaint to US District Court. Northern District ofTcxas. Dallas Division, 

Complaint #LR20901. Feb. 16.2009. 

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assets belonging to Stanford investors.60 

The government of Antigua and Barbuda does not acknowledge [he U.S. Court's authority over 

Stanford International Bank-Antigua and appoints UK-based Yantis PLe as receiver.b

! Dual 

receiverships result in a multi-year international turf war fighting for control of Stanford's foreign 

assets. 

U.s. Congressman Oennis Kucinich, Chairman of the Subcommittee for Domestic Policy Reform, 

publicly asks SEC Chairman Mary Schapiro to disclose documents related to SEC "stand down" 

order.(';' 

U.S. Receiver hnvey closes over 30 Stanford Group offices throughout the U.S .. eliminating 

approximately 1.000 jobs. 

Former Stanford Group Company Financial Advisors retain FINRA licenses and resume employment 

at other U.S. brokerage firms. FJNRA records for individual brokers do not involvement 

of selling alleged fraudulent securities used to carry out a $7 billion Ponzi scheme. 

The IRS files a motion in the Northern District Court seeking Receivership a,,>sets to pay 

Allen Stanford's personal income tax debt of$227 million. 

SEC Inspector General H. David Kotz publishes: an audit report stating the 

with the requirements of the Regulation D exemptions:' or does "substuntive,!" 

than 20.000 Form it receilvs annua/Zl', which in 200{?, 

offerings (?fS609 .. The report identifies 

and illegal acts regarding the Regulation D exempfions. 

Receiver Ralph Janvey files for professional fees and expenses in excess of$40 million for the first 3 

months of the Receivership. 

Receiver Ralph 1anvey attempts to clawhack $925 million from investors who received principal or 

interest for SIB CD investments. 

Stanford Group Company brokerage account customers are denied coverage under the Securities 

Investor Protection Act (SIPA) despite a legal precedent for coverage of fictitious securities in other 

similar cases. In denying coverage, Securities Investor Protection Corporation (SIPC) president says 

the SIB CDs were not fictitious securities.66 

2009 $7.2 Bi!. 

17.2009. "Stanf(wd BjllV~ CIiellts in Latin Amcrkan Seck Fund,,:' 

Barbuda, Claim #ANUnCV20009JOI 10. Feb. 26, 

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2010 

The SEC Office of the Inspector General (OIG) releases a report on investigation revealing that the 

SEC knew for 12 years that Stanford was operating a lraud before the SEC took any action." 

Forty-five Members of the 111 Ih Congress write to SEC Chainnan Mary Schapiro addressing the DIG 

report findings and questioning the SEC's interpretation of the Securities Investor Protection Act 

(SIPA) that would provide up to $SOOK ofSGC customers' losses through the Securities Investor 

Protection Corporation (SIPC). The letter points out, "The SEC's primary junction is to protect 

investors. and it would appear that the SEC Enforcement Director and other staff members al the 

SEC's Fort Worth office committed impermissible acts of discretion that needlessly prolonged the 

extend and severity of the fraud ... .It would seem illogical and contrary to the spirit ofSlFA to tell 

sec customers their fund, were stolen by the owner (?f the broker dealer. yet the manner in which the 

theft occurred precludes the customers from receiving their due relief.,·68 

Approximately 6,000 hours are billed against the Stanford estate for work done for the U.S. 

government's prosecution of Allen Stanford, et al. 

Dozens of fonner Stanford Group Company Financial Advisors who misrepresented the safety of 

Stanford International Bank CDs continue to work in the securities industry without any disclosure to 

future investors. Additionally, the former· compliance officer, accounting personnel and attorneys for 

various Stanford entities heavily involved in the fraud remain free of any civil or criminal actions. 

20ll 

Alien Stanford is deemed incompetent to stand trial indefinitely and is ordered to a rehabilitation 

facility for treatment for an addiction to prescription anxiety medication he has been given only since 

he was incarcerated.69 

More than 60 members of the 112'" Congress write to SEC Chainnan Mary Schapiro urging the 

Commission to order SIPC to provide compensation for up to $500K in losses for SGC customers. 

The Jetter states, "It has been more than two years since thousands of Americans lost their savings in 

the Stanford Ponzi scheme .... These Americans relied on the SEC to uphold its federal mandate to 

protect investors and the SEC failed in the regard. .,70 

By a vote of the Commissioners, the SEC detennines that Stanford Group Company customers are 

entitled to protection under the Securities Investor Protection Act (SIPA). The SEC asks the Securities 

Investor Protection Corporation (SIPe) to initiate a liquidation proceeding of Stanford Group 

Company. 

SIPC refuses to comply with the SEC's directive, and the SEC files an unprecedented Enforcement 

Action against SIPe for failure to comply with the SIPA. 

2012 

The District Court for the District of Columbia denies the SEC's request for a court order to force 

SIPe to discharge its obligations under SIPA. The SEC appeals the District Court's decision. 

67 Securities and Exchange Commission Office of the Inspector General Report on Investigation 526, March 31, 2010 

68 Congressional letter to SEC Chainnan Mary Schapiro, May 6. 2010 

MOrder for Psychiatric Evaluation. United States of America v. Robert Allen Stanford. US District Court. Southern District 

of Texas, Houston Division, Case #H~09~342. Jan. 26, 2011. 

70 Congressional letter to SEC Chainnan Mary Schapiro, March 16, 2011 

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2013 

The SEC appeals the District Court's decision siding with SIPe. 

The Stanford Receiver makes the first distribution to Stanford victims: one penny on the dollar for a 

total 0[$55 million. The Receiver spent $115 million to recover $55 million for the victims. 

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FAILURE TO ACT 

The Securities Investor Protection Act of 1970 Section z8eee(a)(l ): 

"If the [SEC] or any self-regulatory organization is aware of 

facts which lead it to believe that any broker or dealer 

subject to its regulation is in or is approaching financial 

difficulty, it shall immediately notify SIPC. " 

Why wasn't SIPC ever notified of Stanford Group Company's financial 

difficulty? 

As an SEC-registered broker dealer, Stanford Group Company (SGC) was required to file 

monthly financial reports with the SEC. The purpose of filing the monthly financial 

statements is to demonstrate a brokerage firm's financial stability so that investor funds are 

not at risk of being misappropriated. 

There are numerous examples of SGC's financial difficulty from its inception. If the required 

financial reports filed with the SEC were even superficially reviewed, the substantial cash 

infusions of millions of dollars from Allen Stanford; the firm's dependence on referral fees 

from an affiliate entity not subject to any U.S. regulation; and millions of dollars in intracompany loans should have indicated significant fraudulent activity- including 

misappropriation of customer funds. Because of the SEC's failure to follow its 

mandate under the Securities Investor Protection Act 78eee(a)(1), the Stanford 

Financial Group Ponzi scheme grew by $7 billion from 1996 to 2009. 

A very blatant example of SGC customers' funds being misappropriated was cited as an "Item 

ofInterest" in the SEC's 1997 examination report, which questioned a $19 million cash 

contribution to SGC from Allen Stanford in 1996 while Stanford International Bank (SIB) in 

that same year loaned $13.5 million to Allen Stanford and $5.5 million to the Stanford 

Financial Group-for a total of $19 million coming directly and indirectly to SGC from SIB 

customer funds. Since SGC's customers were being sold the SIB CDs, the misappropriated 

funds were indistinguishable from belonging to SGC or SIB customers. 

Item of Interest ~ Addition to Capital 

stated funds and not from the 

least questionable whethor 

000 in personal fund •• 
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The same 

SIB CD sales 

SEC exam 

top of the 

states that 68% of SGC's revenue from referral fees for 

million contribntion). 

In addition to c35h contribntions from Allen Stanford and referral fees from 

SIB CD sales, financials with the SEC reported a operating loss that 

indicated the broker dealer was in dire financial difficulty the revenue from 

of the fictitious SIB CDs. As the SEC itself alleged in civil complaint against 

SGC could not have stood on its own without the SIB CD funds, which were used to 

broker dealer and further its expansion in the US rather than to purchase 

the theft of SGC customer's funds would 

investors. Instead, SGC was allowed to 

to US investors starting in 2001 

Dmwn'";~ab'l" $2.2 

not follow the law. 

Even More Reason to Scrutinize SGC's Financial Statements 

,ji"+,,"h;,,,n ('()n~in("rirl" the 

""n.fA'C~D~''''+ Dhision to the 

Examination team's 

It wasn't until 

with its first examination in 1997. 

conclusion - Enforcement even 

investigation that eventually led to the 

and more apparent. 

exams coming to the same 

ofSGC. the 

more 

The monthly financial statements filed with the SEC after formal im7esitig,lticm 

reported ev~n more cash contributions from Allen Stanford, more loans 

increased referral fees from SIB, and mounting annnal operating losses. Sj;m:lli~~~ 

According to a forensic '",,'mm';nn 

Receiver, customer funds for new 

other sm customers. The report also that customer 

CDs didn't go to SIB-making impossible for the 

redlempti,ons for 

lJU1CCllase SIB 
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Instead SIPC that broker dealer's customer funds 

were in jeopardy as financials m<lIcatE'u an increasingly dire financial situation, the SEC 

did nothing during this critical time frame take 2 more years to complete 

n",pc"o~",m that should have place a full decade the influx of US investment 

A broker dealer in severe financial difficulty comhined with the SEC's suspicion that Stanford 

opieratinlg a Ponzi scheme should have clearly indicated some effort to investors 

under S IPA so that remedial SIPC could be not 

investors, the SEC, in registered dealer, 

Accumulated Deficit December 

Accumulated Deficit December 2002: 

Accumulated Defidt December 31, 2003: 

Accumulated Deficit December a1, 2004: 85,950,128; 

Accumulated Deficit December 

year also the year the SEC 

suit) 

Accumulated Deficit December 

830% increase over year jn',eE:tl~:atllon 

Accumulated Deficit December 

1,300% increase over year Ul '","'''';.dUoVll 

increase O\'e1' previous 

to the February 2009 civil 

increase over prior year and 

increase over prior and 
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Q: rilles apply 

Yes. CHc;nts who 

reference Rule 

referred to the bank 

advisor 

investors, tlle minimum 

cou!d not deposit ftmds 

Express Account 

accounts except that 

to and from 

the context of {IS clIstomeB purchasillg tiles!: fypes of 

"<ll:Cl\et!l!ea 'W""~lUl~," which is Ii 

the 

lllll!I1i:'Ol<lte transfers 
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86688.096

TESTIMONY OF SUZANNE SHEAN 

HOUSE FINANCIAL SERVICES SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES HEARING: 

"A LEGISLATIVE PROPOSAL TO AMEND THE SECURITIES INVESTOR 

PROTECTION ACT" 

NOVEMBER 21, 2013 

I would like to thank Chairman Scott Garrett and Ranking Member Carolyn Maloney for 

holding this hearing today and allowing me to speak about my experience as a victim of 

the Stanford Financial Group Ponzi scheme. I would also like to thank you from the 

bottom of my heart for giving victims like me hope for recovering our stolen retirement 

savings by introducing "The Restoring Main Street Investor Protection and Confidence 

Act." Thank you also to all of the subcommittee members here who have already joined 

this desperately needed bill. 

My name is Suzanne Shean, and I am 64 years of age. I live in Carriere, Mississippi. 

Allen Stanford and the SIPC-member broker dealer Stanford Group Company took 

more than my life savings of $250,000 invested just 18 months before the SEC took the 

Stanford Group of Companies into Receivership in February 2009. He took from me 

what money can't buy. He took my husband's life, my soul mate, my daughter's 

"Daddy," my grandchildren's "Grandad," and the life we had together. 

When the news of the Stanford scandal broke, I had just had surgery and was 

undergoing radiation treatments for breast cancer. My sweet husband, Michael, 

sheltered me from the news for months until I was better. 

Michael had also had cancer-colon cancer-and underwent surgery in March 2008. 

The doctor said they were able to remove all of the cancer and there was no need for 

chemo or radiation. 

But being a victim of a Ponzi scheme is like cancer itself. The stress eats away at you. For 

some, that happens slowly. For Michael, it only took about six months. 

His cancer returned with a vengeance and quickly spread throughout his body. The 

burden oflosing our life savings was too much for him, especially when he carried that 

burden alone for so long to protect me while I was sick. He died on April 29, 2011, at the 

age of 66. 

1 
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Before Michael died, he worried so much about me and my future alone without our 

savings. My greatest hope was that he would be comforted with the knowledge that SIPC 

would make things right for us before he died. That didn't happen, and that devastation 

still weighs heavily on my heart. 

I only saw my husband cry three times in our 43 years together-tears of joy at the birth 

of our daughter in 1969; tears of helplessness when neighbors had to help me pick him 

up after he fell a few weeks before he died; and tears of anguish when he asked me to 

forgive him for liquidating our IRA stock market portfolios to invest in "safer" IRA CDs 

from Stanford International Bank with Stanford Group Company (SGC.) He was 

inconsolable, but it was not HIS fault the safety net created to protect investors like us 

had failed to do so. 

Our whole lives together, Michael and I worked so hard to put money away so we could 

retire one day, and enjoy our "Golden Years." For him to die thinking that it was all in 

vain is an abomination of the very soul of our society. 

We were U.S. taxpayers, and we trusted the government to do its part to keep our money 

safe. Discovering that the SEC knew Stanford Group Company was involved in a Ponzi 

scheme for more than a decade before we invested with them added insult to injury. The 

double-whammy of SIPC announcing it had absolved itself of protecting us was just 

inconceivable. 

I am now forced to work two jobs to keep my home. As a working widow under 66 years 

of age, I am not entitled to my husband's Social Security checks because my salary 

exceeds $17,000 a year. I should be enjoying my grandchildren and the fruits of my 

labor from these past 64 years. Instead, retirement is not an option now that that our 

entire IRA is gone. What will happen to me when I can no longer work? The one 

percent recovered by the Stanford Receiver after almost five years will just about cover a 

house note and my trip here to DC .... but that is another scandal we aren't here to 

discuss today ... 

Michael and I were very conservative investors, and we entrusted Stanford Group 

Company, or "SGC," a registered broker dealer and SIPC member, to invest our IRA 

funds safely. The Stanford International Bank CDs were sold by SGC as "Reg. D 

Securities" and were supposed to only be offered to "accredited investors." Like so many 

other Stanford victims, we did not meet the "accredited investor" criteria-but we didn't 

know anything about these requirements at the time. Nonetheless, our IRA was rolled 

over to Stanford Trust Company in Baton Rouge, Louisiana, in order for SGC to 

"purchase" the Stanford International Bank CDs they told were the "safest investment 

possible" for our lRAs. We were told because we had an IRA, that Stanford Trust in 

Louisiana would hold custody of our investments. We felt comfortable with this 

2 
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86688.098

investment because every aspect it was being managed in the U.S. and regulated by our 

government. 

But what we didn't know DID hurt us. We had no idea that Stanford Trust Company was 

created by SGC as a way to tap into a whole new source of money to feed the Ponzi 

scheme-hundreds of millions of dollars of innocent investors' IRA funds. The Stanford 

Trust Company was a subsidiary company of the brokerage firm, and was created as a 

state-regulated entity solely to evade oversight by the federal government. The 

Louisiana Attorney General's office later explained that SGC employees operated the 

Trust Company, and even served as its Board of Directors (see attached affidavit of 

Scott Bailey). In short, SGC held custody of our CDs, and our savings never left the U.S., 

and never went to purchase securities of any kind. 

We were shocked when we found out that SIPC announced we didn't qualify for 

protection because we weren't "customers" of SGC because it supposedly didn't hold 

custody of the fictitious Stanford International Bank CDs. But we had a customer 

contract with SGC, not Stanford International Bank in Antigua. We didn't send our 

money to Antigua like SIPC has told Congress, the Courts and the public. We also never 

dealt with a single employee of Stanford International Bank. We received monthly 

statements from Stanford Trust Company, operated and governed by SGC employees in 

Baton Rouge, Louisiana, and our account numbers, STSGC-40917 and STSGC-40912 

even indicated we were SGC customers. The custodian of our IRAs was-for all intents 

and purposes-Stanford Group Company. 

What SIPC was telling us seemed like hyper-technical legalese designed solely to avoid 

covering our losses despite other similar SIPC cases in which investors were protected. 

SIPC has behaved as if it is a private insurance company with government immunityand they've gotten away with it so far-at the expense of thousands of victims just like 

me. 

When the SEC Commissioners finally voted to overturn SIPC's position about our status 

as "customers," SIPC launched an all-out war against us with an anti-Stanford victim PR 

campaign, labeling us as "foreign bank clients" as if we had sought out a tax haven to 

hide our IRAs. They even launched a new website called The Stanford Antiguan Bank 

Fraud, loaded with misleading information and the words "foreign," "offshore," and 

"Antigua" multiple times on every page--somewhat like the SIPC logo was slapped on 

everything in SGC's offices and the all of Stanford's marketing materials. It was so 

surreal to see this entity created by Congress to protect investors going to such extreme 

lengths to invalidate the SEC's analysis as they prepared for a protracted legal battle that 

has lasted more than two years now. The expense of their litigation against the SEC has 

probably cost SIPC millions of dollars when those funds should be going to protect 

investors-not fight the federal government. 

3 
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86688.099

Here we are--innocent investors who used a SIPC-member broker to purchase securities 

that, come to find out, didn't even exist, and SIPC is treating us as their enemy! The CDs 

were an imaginary investment vehicle designed to take money from Stanford's right 

hand-Stanford Group Company-and steal it with his left-Stanford International 

Bank. In short, we have been victimized again-first by the SEC for not stopping 

Stanford Group Company when they were aware of misappropriation of customer funds 

and other fraudulent activity; then by Allen Stanford himself, who stole our savings; and 

then a third time by SIPC-because they have told us Allen Stanford stole our money 

"the wrong way. " 

Chairman Garrett, Ranking Member Maloney and the honorable members of the 

subcommittee, I beg you to please close these loopholes in the law that SIPC has 

manipulated in order to protect its member firms rather than investors. People like me 

desperately need the provisions of H.R. 3482 to protect us so we can have our lives back. 

I will never be able to have my Michael back, but I know his soul would rest in peace if 

he knew I was taken care of. That means the world to me, and I want that for him as 

much as I do for myself. 

Thank you for your time and your attention. It has been my honor to share my story 

here today. 

4 
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86688.100

EXHIBITS 
130 


86688.101

AFFIDAVIT OF SCOTT BAILEY 

STATE OF LOUISIANA 

OFFICE OF THE ATTORNEY GENERAL 

1. Stanford Trust Company (STC) was a Louisiana chartered financial 

institution which offered trust services to the customers of Stanford Group 

Company (SGC), a SEC-registered broker dealer. Both SGC and STC were 

subsidiaries of Stanford Group Holdings, Inc., which was wholly-owned by 

R. Allen Stanford. 

2. Stanford Group Company has reported in its financial audits filed with 

the SEC that Stanford Trust Company was a wholly-owned subsidiary of 

SGC, a registered broker dealer and member of the National Association of 

Securities Dealers (NASD) and the Securities Investor Protection 

Corporation (SIPC). 

3. The Board of Directors for Stanford Trust Company was comprised 

of employees of Stanford Group Company who supervised - and had a 

financial interest in - the sale of Stanford International Bank CDs. One 

SGC executive served in two capacities - as a Financial Advisor for SGC 

and as the Certified Public Accountant for STC. 

4. As members of the Stanford Trust Company Board of Directors, Stanford 

Group Company employees directed the operations of STC. Interviews 

with former SGC and STC employees clearly establish the protective walls 

that should have been in place to separate the functions of STC from the 

potential conflicts of interest of SGC did not exist. When the need arose, 

SGC employees would use the STC fax machines to avoid the scrutiny of 

regulatory compliance in accomplishing transactions that may have been 

prohibited or disclose conflicts of interest. 

5. Stanford Trust Company's primary function for Stanford Group Company 

was to serve as the custodian for Individual Retirement Accounts (IRAs) for 

SGC customers who purchased Stanford International Bank (SIB) 

Certificates of Deposit. 

6. Most, if not all, Stanford Group Company customers in the United 

States who purchased Stanford International Bank CDs with their IRA 

funds had their lRAs in the custody of Stanford Trust Company. 

7. When the Stanford Financial Group of Companies collapsed in February 

2009, Stanford Trust Company had custody of approximately $400 million 

of Stanford International Bank CDs held in lRAs owned by Stanford Group 

Company customers. 
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86688.102

8. Stanford Group Company customers deposited funds directly with 

Stanford Trust Company for the purchase of Stanford International Bank 

CDs. This was done in a variety of ways depending on the customer's 

situation. Some SGC customers rolled over existing IRA funds directly to 

STC. Others wrote checks directly to SGC, STC, or even to STC's bank, 

Hancock Bank, to purchase SIB CDs to be held in their IRA accounts. 

Similarly, wire transactions were directed to STC's account at Hancock 

Bank for the purchase of SIB CDs. 

9. Stanford Trust Company held physical custody of Stanford International 

Bank CDs, in the form of the paper certificate, at STC for Stanford Group 

Company customers. 

10. Stanford Group Company customers who held Stanford International 

Bank CDs in custody at Stanford Trust Company received statements from 

STC reflecting their SIB CD balance. These customers routinely did not 

receive statements from SIB. 

11. Stanford Trust Company account numbers started with "STSGC" 

indicating at a minimum that the IRA accounts were still Stanford Group 

Company accounts and STC was simply performing an administrative 

function at SGC's direction. 

12. Stanford Group Company customers with funds held in IRAs at Stanford 

Trust Company maintained their relationships with their SGC Financial 

Advisors as the primary point of contact for all of their SGC investments, 

including their Stanford International Bank CDs. 

13. Stanford Group Company Financial Advisors (FAs) continued to oversee 

their customers' accounts at Stanford Trust Company. If funds were to be 

added or withdrawn, SGC FAs facilitated those transactions. 

14. Some Stanford Group Company customers with IRA funds held at 

Stanford Trust Company were unaware Stanford International Bank was 

an offshore bank chartered and regulated in Antigua, and believed that 

they were purchasing CDs from a subsidiary of Stanford Group Company 

that was operated in, regulated by, and insured by the U.S. government. 

15. At least some of Stanford Group Company customers with IRA funds 

allocated to the Stanford International Bank CD's were not Accredited 

Investors as defined by the Securities and Exchange Commission and 

required for the solicitation and purchase of Regulation D securities like 

the SIB CDs. 
132 


86688.103

16. Virtually all Stanford Group Company customers were told the Stanford 

International Bank CD's were covered by SIPC insurance. 

17. The lack of protective fire walls and conflicts of interest between Stanford 

Group Company and Stanford Trust Company is most evident in the 

complete lack of portfolio diversification. Most Stanford Group Company 

customers were advised by their SGC Financial Advisor to allocate a 

disproportionate majority of their retirement funds to the Stanford 

International Bank CDs, and in some cases the Financial Advisors made 

disproportionate purchases of Stanford International Bank CD's in trust 

accounts without the knowledge of the account holder. 

18. A review of Stanford Group Company and Stanford Trust Company 

records in the possession of the court appointed receiver indicated a 

significant number if not most of the SGC customer records for Stanford 

International Bank CD holders are missing. A further review revealed that 

some Louisiana SGC customer files related to the purchase of SIB CD's 

were found in boxes next to a shredder ready to be destroyed with other 

miscellaneous items and trash. Absent any explanation, missing SGC 

customer documents along with SIC CD records obviously ready to be 

shredded are a strong indication that someone was taking steps to destroy 

records and evidence that may be used in civil or criminal proceedings. 

S~n'ture eM .&v"o= 

Printed Name: S~d1\- J3A.{ty 

Date: 1 ~ do ~ de I 0 

Sworn and subscribed before me this ~ay of ::Ill I Ia-~ 2010 A.D. 

My Commission Expires: _-'"'''---'---'-'--''-'''';-_-'''''''-''--'''--.L.l-L _____ _ 

86688.104

SUZANNE T SHEAN 

NOTICE OF DETERMINATION EXHIBIT 

PURSUANT TO 

RECORDS 

A V AILABLE TO 

THE 

RECEIVERSHIP, 

THE NET LOSS FOR THE PAYEE(S) 

EQUALS THE 

ALLOWED CLAIM AMOUNT, RATHER 

THAN THE TOTAL 

CLAIMED 
134 


86688.105

STANFORD TRUST 

~ COMPANY 

January 1, 2009-Marcl> 31, 2009 

ThisPeriO<i 1111119 to 3131109 

Beginning Market Value $73,236.91 $73,236.97 

Additions $0,00 $0,00 

Distributions $0,00 $0,00 

FeeslExpensesfTaxes SO,OO SO,OO 

Income SO,OO $0,00 

Capital Gain Distributions $0,00 $0,00 

Non Cash Asset Changes $0,00 $0,00 

Asset Transfers $0,00 $0,00 

Change in Market Value 

Ending Market Value $90.21 $90,27 

Asset Allocatitm Summary 

Investment Objective: Self Directed 

JissetClass Balance 

100% Cash & Equivalents $90.27 

Total Assets Value $90.21 

Suzanne T. Shean IRA· Account II STSGcIIIIIIIiI Page j 014 
135 


86688.106

STC CUSTODIAN FEO SUZANNB F SHEAN IRA 

Deposit Allocation 

E3 Fi:red CD USAI 100.00% 

WallS 

Total Depo..o;;it$ 

Statement as of 

December 31, 200B 

Deposit Currency 

IT2l USD 10J.OO% 

Accounts Included in this Statement 

Account No, 

US DOLLAR 

Princip<ll 

Balance 

Interest Endin{; 

Balance Balance 

0.00 0.00 

Interest Interest Mdlurity 

This Period 11\is Year Date 

0,00 0.00 

• 9,127.$9 73,146.70 !J04.51 5,739_,15 May 15, 2012 

0.00 

_________ 6_4,~O_19_.0_1 _________ ~ __________ ~ ________________________ ~ ______ ~~~ __ 

Act.:!. Total 64,019.01 9,127.69 73,146.70 50451 5,739,45 

Total Combined Ac('onnt Balances Expressed in US Dollars 

64,019.01 9,127.69 73,146.70 504,51 5,739.45 

Page 1 of2 
136 


86688.107

Accounts Details 

Express Account Currency; USD Rate: 0.000% 

Account No: _ 

Value Date Descriptio" Transaction Amt Principal Interest Balance 

Dec 1,2008 BEGINNING BAlANCE 0.00 0.00 0.00 0.00 

Dsc31,20oa INTEREST EARNED 0.00 0.00 0.00 0.00 

O&c31,2008 ENDING BALANCE 0.00 0.00 0.00 0.00 

Fixed CD USAI Currency: USD Rate: 8.150% Term; 60 Month(s) 

Account No: _ 

Value Date Description Transaction Amt PrincipaJ Interest Balance 

Dee 1.2008 BEGINNING BAlANCE 0.00 64,019.01 8.623.18 72,642.19 

Dec 31,2008 INTEREST EARNED 0.00 0.00 504.51 73,146.70 

Dec 31. 2008 ENDING BALANCE 0.00 64,019.01 9.127.69 73,146.70 

Page 2 of2 
137 


86688.108

2007 IRA CONTRIBUTION INFORMATION - FORM 5498 

OMS No. 1S4S"()747 [ 

TRUSTEE'S OR ISSUER'S name, street address. city. state, and ZIP code 

STANFORD TRUST COMPANY 

445 NORTH BOULEVARD STE. 820 

BATON ROUGE, LA 70802 

TRUSTEE'S OR ISSUER'S Federal identification number: 

COPY B 

FOR PARTICIPANT. 

1 iRA contributions (other than amounts in boxes 2-4. and 8-10) 

2 Rollover contributions 

3 , Roth !RA conversion amount 

-4 ! Recharacteri2ed contributions 

5 Fair market value of account 

6 Life Insurance cost included in box 1 

7 Check for IRA X 5EP 

SIMPlE Roth IRA 

SEP contributions 

SIMPLE contributions 

10 Roth IRA contributions 

11 Check if RMO for 2008 

THIS INFORMATION IS BEING FURNISHED 

TO THE INTERNAL REVENUE SERVICE. 

CORRECTED (If Checked) 

Account Numb0t 

STSGC_ 

Security II 

67 495.9B 
138 


86688.109

JSA 

2007 IRA CONTRIBUTION INFORMATION -FORM 5498 

OMS No. 1545-0747 I 1 CORRECTED HfChecked) 

TRUSTEE'S OR lSSUER'S name, street address, city, state, and ZIP code 

STANFORD TRUST COMPANY 

445 NORTH BOULEVARD STE _ 820 

BATON ROUGE, LA 70802 

COpy C 

FOR TRUSTEE OR ISSUER. 

IRA contributions (other than amounts in boxes 2~4, and 8·10) 

Rollover contributions 

3 Roth IRA conversion amount 

Recharacterized c.ontributions 

Fair market value of account 

Ufe insurance cost included in box 1 

Check for IRA I X I SEP I SIMPLE Roth IRA 

SEP contributions 

SIMPLE contributions 

10 Roth IRA contributions 

11 Check if RMO for 2008 

Accourrt Number 

S7SGC_ 

PARTIC1PANT'S Social Security /I 

67 495.98 

1F9c-A3 ~.ooo 
139 


86688.110

Por Questions Contact: 

John 8uzzell 

(225) 381-0550 

Your Statement of Value and Activtty has been 

designed to keep you up-to-date on the activity 

in your account. 

It provides you wrth an easy-to-read summary 01 

your account balance and history of your 

transactions during the past time period. 

Aprilt, 2iXJ7 - June 30, 2007 

Suzanne T. Shean IRA 

Account # STSGCa. 

Beginning Market Value 

Additions 

Distributions 

Income 

Fees 

Changes 

Value 

Ending Market Value 

Investment 

This Period 

$0.00 

64,019.01 

0.00 

36.33 

0.00 

0.00 

675.31 

$64,730.65 

100% Stanford Intl8k CD 8.150% 5115112 

0% Prime Obligation Fund 

For an explanation of terms used, please refer to the "About Your Investor Account Statement" section, 

Year 10 Dale 

$000 

64,019.01 

0.00 

36.33 

0.00 

0.00 

675.31 

$64,730.65 

Market Vs/ue 

64,694.32 

36.33 

Page 1 
140 


86688.111

Investment 

Stanford Inti Bk CD 8.150% 5/15112 

Prime Obligation Fund 

Da,. AclMly Description 

04127107 Sold Prime ObUgation Fund 

04127107 Purchased Prima Obligation Fund 

05111107 Received IRA Transfer 

05111107 Purchased Prime Obligation Fund 

05115107 Sold Prime Obligation Fund 

05/16/07 purchased Stanford Iml Bk CD 8.160% 5115112 

06/01107 Received Dividend Prime Obligation Fund 

Dividend from 5111/07 to 5115107 

06104107 Purchased Prime Obligation Fund 

Suzanne T. Sheen IRA • Account /I STSGC" 

Statement Period: April 1 , 2007 to June 30, 2007 

Shares Share 

Pries ($) 

100.000 64,694.32 

36.330 1.00 

Price ($) 

1.000 1.000 

1.000 1.000 

64.019.010 1.000 

64,019.010 1.000 

100.000 64.019.010 

36.330 1.000 

Maricel Value 

64,694.32 

36.33 

Amount 

$1.00 

·1.00 

64,019.01 

-64,019.01 

64,019.01 

·64,019.01 

36.33 

-36.33 

Page 3 
141 


86688.112

May 11. 2007 

11 •• 1 •• 1.1.1 ••• 1 •• 11.1 ... 1 •• 11 •• 1 •• 1 •• 11 •••• 1111 .... 1.1 •• 1 •• 11 '13lON21SOO18270J * 423-417 

••• SUZANNE T. SHEAN 

CGM IRA CUSTODIAN 

IMPORTANT NOTICE ,UNDS MONEY TRA'ISFE'i CO;HiRMATiON 

PLEASE REtAIN FOR YOUR RECORDS. 

MICHAEL I FlYNN 

Financial Advisor 

504-585-3914 

WNW.smrthbarney.com 

ACCOUNT NUMBER •••••• 

As you have instructed. we have completed a Federal Fund Money Transfer in the amount of $64.019.01 

To: HANCOCK BANK OF LOUISIANA 

For the benefit of: ••••• STANFORD TRUST COMPANY CliENT DDA 

For the further benefit of: STSGC_ STANFORD TRUST CO. C F FBO 

The transfer agent has confirmed that this transfer was executed as a Federal Funds transaction with paid ref 

number ......... .

This transfer was made from your Smith Barney account referenced above. 

If any of the above information is not in accordance with your instructions, or any of the information is incorrect, 

please contact your Branch Manager immediately at 504-585-3900_ 

We appreciate your business. 

INVESTMENT AND INSURANCE PRODUC'!S: 

NOT FDIC INSURED' NO BANK GUARANTEE' NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY' NOT A BANK DEPOSIT' MAY lOSE VALUE 

909 POYDRAS ST_. STE 1600 lL&E TOWER. NEW ORLEANS, LA 70112 

Src;urilics urt vJftred throllgh Smith BarnO', a division aNd servia mark oj Citigrollp Global A1artcts Inc., mtmm SIPC Citigrollp Globall\1arids Inc. mid Gtibank an afflliattd clltllpaniti unJu the common cOtltroi of Citigroup Inc 

86688.113

MICHAEL C SHEAN 

NOTICE OF DETERMINATION EXHIBIT 

PURSUANT TO 

RECORDS 

A V AILABLL TO 

THE 

RECEIVERSHIP, 

TIlE NET LOSS FOR THE PAl 

EQUALS 

ALLOWED CLAIM 

AMOUNT, RAlllER 

THAN THE TO rAL 

CLAIMED 
143 


86688.114

o 

STANFORD TRUST COMPANY 445 North Blvd, Suile 820 

BUlon Rougc~ LA 7U802 

Market·VsJue Ret;oncHJatfon 

Beginning Market Value 

Additions 

Distributions 

FeeslExpensesiT axes 

Income 

Capital Gain Distributions 

Non Cash Asset Changes 

Asset Transfers 

Change in Market Value 

Ending Market Value 

Investment Objective: Self Directed 

Michael C, Shean IRA· AccQunl # STSG~ 

January 1, 2009 - March 31, 2009 

This Period 

$145,139.86 

$0,00 

$0,00 

$0,00 

$0,10 

$0,00 

$0,00 

$0,00 

-$144,728.23 

$411.73 

Asset Class 

111109 to 3131109 

$145,139,86 

$0,00 

$0,00 

$0,00 

$0,10 

$0,00 

$0,00 

$0,00 

-$144,728.23 

$411.73 

100% Cash & Equivalents 

100% Total Assets Value 

Pagel 014 

Balance 

$411,73 

$411.73 
144 


86688.115

STC CUSTODIAN FEO MICHAEL C SHEAN IRA 

Dcposit Allocation 

m!i!ill Fixed CD USAI 100.00"-< 

Statement QS of 

December 31, 2008 

Deposit Currency 

I::Eil USD 100.00% 

Accounts Included in this Statement 

Principal Interest Endin~ 

Account No. Balance Balance Balance 

us DOLLAR 

• 0.00 0.00 0.00 

127.003.00 17,635.?3 144.728.23 

Acrt. Total 127,093.00 17.635.23 144,728.23 

Total Combined Account Balances Expressed. in US Dollars 

127.093.00 17.635.23 144.728.23 

r,~r;:enWlg(>.l< iUld SumroUI'}' ('iff' ... xpr~ in Ul1!ll'~ Stoll(';\< Do!kus (US;)). 

1'''.~'<ml.I~t$ k",s !hJl'1. D.75~ or (wpr"lllil!J>! >Ire 11(>{ d~$rl"1<Jd In the eh4tlS, 

lnterest Interest Maturity 

llli.<;Period This Year Date 

0.00 0.00 

998.22 11,356JW May 30, 2012 

998.22 11,356.04 

998.22 11.356.04 

Page 1 of2 
145 


86688.116

ACC01UltS Details 

Express Account Currency: USD Rate: 0.000% 

Account No: _ 

ValucD.HC Description Transaction Amt Principal Interest Balance 

Dec 1,2008 BEGINNING BAlANCE 0.00 0.00 0.00 0.00 

Dec 31, 2008 INTEREST EARNED OJlO 0.00 0.00 0,00 

Dec 31 ,2008 ENDING BALANCE 0.00 0.00 0.00 0.00 

Fixed CD USAI Currency: USD Rate: 8.150% Term: 60 Month(s) 

Account No: _ 

Vdlue Dab..>' Description Transaction Amt Principal Interest Balance 

De-c 1,2008 BEGINNING BALANCE 0.00 127,093.00 16,637.01 143,730.01 

Dec 31, 2008 INT~R~ST EARNED 0.00 0.00 998.22 144,72823 

Dec 31, 2008 ENDING BALANCE 0.00 121,OS3.00 17,635.23 144,72823 

Page 2 0[2 
146 


86688.117

2001 IRA CONTRIBUTION INFORMATION· FORM 5498 

OMS No. 1545..0747 [ CORRECTED (If Checked) 

TRUSTEE'S OR ISSUER'S name, street address. city. state, and ZIP code 

STANFORD TRUST COMPANY 

44 5 NORTH BOULEVARD STE. 82 0 

BATON ROUGE, LA 10802 

TRUSTEE'S OR (SWER'S federal identification number. 

COPY B 

FOR PARTICIPANT. 

IRA contributions (otherthan amounts in boxes 2-4, and 8·10) 

Rojjover contributions 

3 Roth IRA conversion amount 

4 Recharacterized contributions 

5 Fair market value of account 

6 Ute insurance cost included In box 1 

7 Check for IRA X SEP 

SIMPLE Roth IRA 

8 SEP contributions 

9 SIMPLE contributions 

10 Roth IRA contributions 

11 Check jf RMD for 2008 

Account Number 

STSGC_ 

PARTICIPANT'S Soc;iat Security # 

133.716.90 

THIS INFORMATION IS BEING FURNISHED 

TO THE INTERNAL REVENUE SERVICE. 

TEP926Zll}21J'32lJo!6 
147 


86688.118

2007 IRA CONTRIBUTION INFORMATION· FORM 5498 

OMS No. 154'5--0147 [ 

TRUSTEE'S OR ISSUER'S name, street address. city, state, and ZIP code 

STANFORD TRUST COMPANY 

445 NORTH BOULEVARD STE. 820 

BATON ROUGE, LA 70802 

TRUSTEE'S OR ISSUER'S Federal id~ntifica1ion number: 

1 CORRECTED {If Checked} 

PARTICIPANT'S Social Security # 

COPY C 

FOR TRUSTEE OR ISSUER. 

IRA COntributions (other than amounts in ooxes 2~4, and 8·10) 

Rollover contributions 

Roth fRA conversion amount 

Aecharacterized contributions 

Fair market value of account 133 776.90 

6 Life insurance oost included in box 1 

7 Check for IRA X SEP 

SIMPLE Roth IRA 

SEP contributions 

SIMPLE contributions 

10 Roth IRA contributions 

11 Check if RMO for 2008 
148 


86688.119

For Questions Contact; John Buzzell 

(225) 381-0550 

Your Statement 01 Value and Activity has been 

designed to keep you up-lo-date on the acliv~y 

in your account. 

It provides you w~h an easy-to-reed summary 01 

your account balance and history of your 

transactions during the past time period. 

Apri/1, 2007 - June 30, 2007 

Michael C. Shean IRA 

Account II STSG~ 

Q1Q046701 MS0300A T:i!001S33MVi-7738245910 

1 .. 11.1.1 ... 1 •• 1 .. 1.1.11 .. 1 ... 11 ... 1 .. 11.1 .. 1 ... 1.1.1 .. 1.1.1.1 

Beginning Market Value 

Additions 

Distributions 

Income 

Fees 

Non-Cash Asset Changes 

Change in Marke! Value 

Ending Market Value 

Investment 

ThlsPenod 

SO.OO 

127,093.00 

0.00 

343.16 

0.00 

0.00 

911.25 

$128,347.41 

100% Stanford Inti Bk CD 8.150% 5/30112 

0% Prime Obligation Fund 

For an explanation of terms used, please refer to the "About Your Investor Account Statement" section. 

YeartoOate 

$0.00 

127,093.00 

0.00 

343.16 

0.00 

0.00 

911.25 

$128,347.41 

Ma,*"tVaJ"" 

. $1Zi,34VI1 

128,004.25 

343.16 

Page 1 
149 


86688.120

May 11, 2007 

11"1"1,1,1,,,1,,11,1,,,1,,11,,1,,1,,11,,,,1111,,,,1,1,,1,,11 

'1310021500182.801' 423-4}7 

,.. MICHAEL C. SHEAN 

CGM IRA CUSTODIAN 

IMPORTANT NOTICE FU"DS MONEY TRANSfER CONFIRMATION 

PLEASE RETAIN FOR YOUR RECORDS. 

MICHAEL I FLYNN 

Financial Advisor 

504-585-3914 

www.smithbarney.com 

ACCOUNT NUMBER 11111. 

As you have instructed, we have completed a Federal Fund Money Transfer in lhe amount of $127,093.00 

To: HANCOCK BANK OF LOUISIANA 

For the benefit of: ••••• STANFORD TRUST CO. CLIENT DDA 

For the further benefit of: STSG~TANFORD TRUST CO. C F FBO 

The tran.sf.e.r iag.eilln.l .hiias.ciio."illfi.rm.e.d.that this transfer was executed as a Federal Funds transaction with paid ref 

number. 

This transfer was made from your Smith Barney account referenced above. 

If any of the above information is not in accordance with your instructions, or any of the information is incorrect. 

please contact your Branch Manager immediately at 504-585-3900. 

We appreciate your business. 

INV£SIMEMT AND INSURANCE PRDOIltTS: HOT FDIC INSURED' NO BANK GUARANTEE' HOT INSURED BY ANY fEDERAl GOVERNMENT AGENCY' HOT A BANK DEPOSIT' MAY LOSE VAlUE 

909 POYDRAS ST .• STE 1600 LL&£ TOWER. NEW ORLEANS. LA 70112 

Securities are o1fmd througb Smith BarKey, a divi5iol1 and $twice mark oj Citi!Jroup Global.Mar/ms Il1e., member SIPC CitJgr{IUp Global Markets 11tc, 

mtd emban/t: are affiliated ccmparties fln.kr tht common control oj Citigrollp Inc. 
150 


86688.090
151 


86688.091

Network/or Investor 

Action and Protection 

Testimony November 22, 2013 

Ron Stein, CFP 

Network for Investor Action and Protection 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

Chairman Garrett, Ranking Member Maloney and Members of the Subcommittee, my 

name is Ron Stein, and I am the President of the Network for Investor Action and 

Protection ("NIAP") -- a national not for profit organization comprised of small investors 

dedicated to improving our Nation's investor protection regime. I am also a Registered 

Investment Advisor, Certified Financial Planner, and a member of the financial services 

community in good standing. Over 1000 members of our organization were victims of 

the Madoff fraud. 

I am honored to speak to you today, nearly five years after the collapse of the Madoff 

brokerage firm, to give voice to the small and mostly middle-class investors who were 

devastated by this fraud and who, despite reasonable expectations, received little or no 

protection from the SIPC and the SIPC-appointed Trustee. What I have to say has been 

said by many others in front of this Committee in the past. Perhaps more, I'm here on 

behalf of millions of small investors who have not been victimized, who depend on 

Congress, the regulatory apparatus and the industry for the protections of their life 

savings should similar financial disaster befall them. 

Where do we stand? Thousands of lives upended, with another thousand being sued; 

story after dismal story of family horrors depression, premature deaths, suicide, loss 

of medical care, life savings obliterated. Gruesome stories. Devastating stories. 

This was not what Congress intended when it first passed SIPA legislation in 1970, 

amidst the turmoil of hundreds of brokerage insolvencies, a devastating paper crunch 

crisis, recession, massive theft fraud, and yes, Ponzi schemes. The creation of SIPC, the 

insurance-like entity, was the cornerstone of that legislation, and an essential step to 

providing confidence and trust to investors as Congress was ushering them away from 

the certainty of their physical securities to the new, more manageable world of the 

investment statement. 

www.investoraction.org 

P.O Box 2159 Halesite NY 11743 Phone (800) 323-9250 Fax (631) 421-5701 
152 


86688.092

On signing the SIPA legislation that created SIPC in December 1970, President Nixon 

said: 

Richard Nixon: I AM SIGNING today the Securities Investor Protection Act of 1970. This 

legislation establishes the Securities Investor Protection Corporation (SIPC), a private 

nonprofit corporation, which will insure the securities and cash left with brokerage firms 

by investors against loss from financial difficulties or failure of such firms. 

I urged the formation of a corporation to afford protection to small investors 

Just 05 the Federal Deposit Insurance Corporation protects the user of banking services 

from. the danger of bank failure, so will the Securities Investor Protection Corporation 

protect the user of investment services from the danger of brokerage firm failure. 

This act protects the customer, not the broker, since only the customer is paid in the 

event of firm failure. It does not cover the equity fisk that is always present in stock 

market investment, but it. will assure the investor that the solvency of the individual firm 

with which he deals will not be cause for concern. It protects the small investor, not the 

large investor, since there is a limit on reimbursable losses. And it assures that the 

widow, the retired couple, the small investor who have investe.d their life savings in 

securities will not suffer 1055 because of an operating failure in the mechanisms of the 

marketplace. 

SIPC was a central leg in the investor protection stool. It was the protector of last resort 

should all other regulatory components fail, as they have here. 

SIPC's obligation and the commitment Congress made to the public in passing SIPA law 

filtered down to the investor customer. Every financial professional, every broker, every 

brokerage firm, has extended to every client the promise of SIPC protection. From JP 

Morgan Chase, Citigroup, Goldman, Merrill, to BLMIS and Stanford, every customer was 

informed that they were/are protected to the SIPC limit based on their account 

statements should their broker fail. This was part of every broker's securities training. 

No asterisks. No exceptions. And no reference to what fine print may have been 

recently, discreetly inserted in certain SIPC materials. Significantly upon these promises, 

the financial services industry was able to gain the trust of the American public and 

explode in size. 

How do these promises and Congress' intentions comport with the facts of the Madoff 

insolvency? 

2 
153 


86688.093

FACT: the majority of investors in the regulated broker-dealer will not receive a penny of 

the SIPC advance guaranteed by Congress under the SIPA statute as a result of a 

methodology which minimizes SIPe's outlays, and more still have seen their SIPC 

payments markedly reduced. 

FACT: after having their protections stripped away by the Trustee, over 1000 investors, 

acknowledged as being innocent, are being vigorously sued, like thieves and criminals, 

many having already lost everything. 

FACT: institutions and professional investors are receiving over 80% of the recoveries of 

customer property (over $9 billion has been recovered) - many of these entities that the 

Trustee himself has indicated should have or could have known about the fraud. 

FACT: in addition to saving SIPC over $1 billion by the Trustee's own calculations, the 

Trustee and his associated consultants have similarly been enriched by almost $1 billion, 

funds which could have gone instead to those devastated and to desperately needed 

education to help reduce the likelihood of future fraud. 

There is no rational way to conceive that this result - where over half the investor 

victims are left unprotected, and 1000 sued - is the outcome that Congress would have 

preferred were it sitting here today. Indeed, this is precisely what Congress would have 

dreaded and was seeking to prevent. Clearly, in no way would the American public have 

supported SIPA law in 1970 if this was seen as a possible outcome. 

The excruciating absurdity of SIPe's handling of this debacle, and the Stanford one, after 

failure upon failure of the regulatory powers to quickly identify and dismantle these 

frauds before they reached these magnitudes makes this situation all the more surreal 

and horrifying. 

The implications, however, are potentially devastating to all investors and the financial 

markets. SIPC and the Trustee have effectively destroyed for all investors the sanctity of 

their investment statements - the one and only item every investor has to demonstrate 

their ownership of a security. By their actions, they have said that the Trustee can 

choose to void from any protection any of the interest or growth of their investment at 

a broker-dealer. That the Trustee, at his whim, can deduct funds withdrawn to pay 

necessary living expenses in retirement, for taxes, or medical costs from any amounts 

ordinarily eligible for protection. Or worse, sue, without consequence, a retiree for 

innocently withdrawing funds from their accounts for the mere purposes of "living". 

3 
154 


86688.094

Instead of enhancing safety and protection, encouraging saving for retirement in 

registered broker-dealers, SIPC, in complete defiance of Congressional intent has said 

that when it suits their purposes, "investor be damned". In this new SIPC-world, what 

investor in their right mind might could possibly trust that SIPC would be there to 

protect them, or worse, not sue them? What are the public policy implications of 

investors seeing their protection reduced during their non-working retirement years just 

when they're drawing on their life's savings, ironically when they are least capable of 

reinventing themselves and re-enter the workforce should disaster strike. 

In this new SIPC world, every investor who is living on investment income might be welladvised to participate in an extreme version of musical chairs by pulling their assets 

from their existing brokerage firm where their SIPC "net equity" protection may have 

been reduced by any withdrawals, and move them to another firm where their new "net 

equity" will be reset to the amount they are depositing at the new firm. 

Speaking as a financial professional for 27 years, I'm troubled and deeply embarrassed 

that the NASD-FINRA and SEC failed on so many occasions to identify this fraud and 

others. I'm embarrassed and saddened that investment professionals in firms in my 

industry who had reason to believe that a fraud was taking place, chose instead to keep 

quiet and the industry has failed to make a well-publicized statement about the moral 

responsibility we each have to speaking up. 

But I am especially troubled, and infuriated -- as are many of my fellow financial 

practitioners -- that SIPC has refused to honor their very purpose: to protect investors, 

and instead done everything in their power to circumvent those responsibilities. Indeed, 

they refused to go to Congress preemptively regarding this issue (nor over New Times, 

Old Naples and other cases with similar issues over the years), asserted the falsehood 

that SIPC advances would reduce payments to other investors, and audaciously 

trumpeted ludicrous scenarios through the halls of Congress to cloak their behaviors. 

They have thumbed their noses at Congress and the American public. Unfortunately, 

SIPC seems to have a history of doing whatever they can to thwart investors when there 

is sufficient vagary in the SIPA law or rules to do so and like bullies, done so with relative 

impunity. Finally, under the spotlight, the dangers their actions pose to our financial 

system by undermining investor protection, and the opaque culture from which these 

attitudes evolve may become more visible for Congress and policy-makers to observe 

Fortunately, the solution to this horror is simple and here before us. HR 3482 - The 

Restoring Main Street Investor Protection Act of 2013 -- is an important step to 

restoring the most basic protections intended by Congress in 1970 and in subsequent 

4 
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legislation. It affirms the validity and certainty of the investment statement much as a 

bank customer's statement would. It prevents the clawback of innocent investors in a 

failed brokerage. It prevents a Trustee from becoming a go-to profit machine operating 

under SIPe's will. It insists that the SEC does, in fact, have the plenary authority over 

SIPC it is supposed to have. 

This bill's assurances should be welcome news for all investors. But no assurances can 

be readily embraced without keeping to past promises. It can't return all the funds 

stolen, but in providing relief for victims of Madoff, Stanford, McGinn-Smith and other 

brokerage failures, this legislation makes evident Congress' intention of enhancing 

protections for all brokerage customers, putting Main Street first, and rebuilding 

confidence in the financial markets. I would hope the investment professionals and the 

financial services industry would see the benefit of standing with their customers in 

supporting this legislation, that the SIPC insurance protection they purchase for their 

clients is meaningful, and not worthless paper. 

We don't know when the next great fraud or failure will take place, and we should 

undertake every reasonable measure to minimize that likelihood. There is much more to 

do, and I would be pleased to help the Committee with those at another time. The first 

step, however, is passing HR3482, and sticking to the promise we make every day to 

millions of small investors who depend on their brokerage firm, investment advisors, 

and investor protection regime for their life's savings. 

My deepest thanks to you, Mr. Chairman, for your willingness to have me testify and 

your leadership regarding this extremely important work; and my sincere thanks as well 

to all your colleagues - including Congresswoman Maloney, and all the other sponsors 

of this legislation - who are undertaking to improve protections for all investors at this 

most basic, yet critical level. 

Ron Stein, CFP 

President 

Network for Investor Action and Protection 

5 
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STATEMENT FOR THE RECORD 

On 

The U.S. House Committee on Financial Services, 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

"A Legislative Proposal to Amend the Securities Investor Protection Act" 

November 21, 2013 
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86688.122

Statement of the Financial Services Institute 

To the Subcommittee on Capital Markets and Government Sponsored Enterprises 

For Oversight Hearing on 

A Legislative Proposal 10 Amend the Securities Investor Protection Act 

Summary 

The Financial Services Institute (FSI) has been advocating for Main Street American investors, 

along with the independent financial services firms and financial advisors that serve them, for 

nearly a decade and has the utmost sympathy for the victims of the Madoff and Stanford Ponzi 

schemes. Any criminal who takes advantoge of investors deserves retribution, and the victims 

deserve restitution. 

We oppose the Restoring Main Street Investor Protection and Confidence Act (H.R. 3482) 

because of the detrimental unintended consequences hard-working Americans may face as a 

result of this legislation. The costs incurred by financial services firms as a result of this legislation 

will ultimately be passed down to innocent Main Street investors, making saving for retirement, 

paying for their children's education, and taking care of aging parents even more difficult. The 

proposed legislation would expand SIPC's role beyond what was initially intended and would 

result in a disproportional negative impact on Independent Broker-Dealer firms and their 

employees who had no part of either of these Ponzi schemes. 

While we cannot support the bill in its current form, we look forward to working with Congress as 

it takes up the important issue of SIPC reform. 

Introduction 

The Financial Services Institute (FSI) was founded in 2004 with a dear vision and mission: to ensure 

that all individuals have access to competent and affordable financial advice, products and 

services delivered by a growing network of independent financial advisors and independent 

financial services firms. FSl's members comprise independent broker-dealers (IBDs) and their 

independent contractor registered representatives. FSI has over 100 broker-dealer member 

firms with more than 138,000 affiliated registered representatives who serve more than 14 

million American households. FSI also has more than 35,000 independent financial adviser 

members. 

We are very sympathetic to the victims of the Madoff and Stanford Ponzi scheme. However, we 

oppose the Restoring Main Street Investor Protection and Confidence Act (H.R. 3482) because, in 

its effort to compensate the victims of these crimes, it creates negative unintended consequences 

for the owners, employees, and financial advisors of the IBDs we represent, which will in turn 

impact Main Street investors. 

FSI's members provide affordable financial services to Main Street, middle-class Americans and 

their ability to do so is threatened by the bill's effort to expand the Securities Investor Protection 
158 


86688.123

Act (SIPA) to cover the victims of recent and future Ponzi schemes. Since its enactment in 1970, 

SIPA has been understood to protect investors against the loss of their funds and most types of 

securities in the event of the failure of their broker-dealer. It was not intended and has not been 

understood to provide protection against the fraudulent creation and marketing of securities. 1 

All registered broker-dealer firms are required by SIPA to be members of SIPC and each SIPC 

member firm is required to contribute SIPC assessments in an amount that is a function of two 

variables: (i) the level of the broker-dealer's net operating revenues, and Iii) the total payments 

that SIPC has been required to make to all investors nationwide whose property was lost due to 

the failure of their broker-dealer. 

As SIPA has been applied for decades, the assessments levied on registered broker-dealer 

members of SIPC were bearable, and the system worked well, providing limited relief to the 

customers of bankrupt brokers. However, in recent years, the negative financial and investing 

climate has exacerbated the drain on SIPC's resources and, consequently, slPe assessments on all 

registered broker-dealers, including FSl's member firms, have grown substantially. In its current 

form, H.R. 3482 would compound these challenges by introducing a revolutionary expansion of 

SIPA, driving up SIPC assessments that would have a devastating impact on independent brokerdealers and financial advisors and have detrimental unintended consequences for Main Street 

investors. 

SIPC Coverage Was Never Intended to Pay Customers Fraudulent Returns 

SIPA was passed in 1970 to address concerns with the substantial contraction that hit the securities 

industry in 1969 to 1970. Following a great expansion during the 1960's, the contraction led to 

brokerage firms engaging in voluntary liquidations, mergers, receiverships, and bankruptcies. 

Sometimes the cash and securities that customers had deposited with these firms would be tied up 

in lengthy bankruptcy hearings, and Congress sought to address mounting customer losses and the 

erosion of investor confidence. SIP A created a new form of liquidation proceeding for brokerage 

firms that would quickly return customer property and address situations where a solvent firm had 

an open transaction with a firm that had failed. 2 

The proposed legislation expands SIPC's role in the financial system beyond its intended purpose, 

its capabilities and its appropriate role, particularly given the power and responsibilities of other 

agencies such as the SEC. The SEC's civil enforcement authority is aimed at punishing wrong-doers 

and making investors whole while SIPC's role is to provide short-term stability in the event of the 

foilure of a broker-dealer. To use the SIPC fund to pay investors fraudulent returns is to broaden 

it beyond its original regulatory scope, which was to insure investment assets were available in 

the event a firm failed. SIPC and the SIPC fund were intended to provide investors the assurance 

1 SIPC's website reflects the societal understanding that its function does not include providing general protection 

against investment fraud: 

"Insurance" for investment fraud does not exist in the U.S. The Federal Trade Commission, Federal Bureau of 

Investigation, stote securities regulators and other experts have estimated that investment fraud in the U.S. 

ranges from $10·$40 billion a year ... With a reserve of slightly more than $1 billion, SIPC could not keep 

its doors open for long if its purpose was to compensate all victims in the event of loss due to investment 

fraud. 

http,i!www.sipc.org(Who(NotFDIC.aspx (lost accessed November 18,2013). The current version of H.R. 3482 

would put SIPC on track to do exactly that. 

2 See ~~"Y:~.J!2.f9..Yrts.g~vj£.~§"L9.~"Q!:l.tlU!}..Clnkru.pmLBankruptcyBosics !SIPA.aspx. 
159 


86688.124

that the failure of a firm would have a limited impact on the value of their investments. 

Additionally, the SIPC fund allowed many smaller broker-dealers to enter the business, as 

customers did not need to become an expert on the financial risks to the broker-dealer firm and 

could instead focus on making prudent and informed investment decisions. 

The legislation as proposed would have numerous detrimental unintended consequences. First and 

foremost, Section 2(a) provides that a customer's net equity would be determined using the last 

account statement received by the customer. This would expand SIPC coverage beyond the 

actual investment of principal to cover sham investment returns. This could incentivize fraudsters 

who know their Ponzi scheme is unraveling to create final statements reflecting returns that 

maximize SIPC coverage. Furthermore, the fraud exceptions contained in the proposed 

legislation eliminate coverage for victims who knew of the fraud. This exception would have the 

unintended consequence of discouraging customers who are receiving unrealistic returns from 

questioning the validity of the investment so as to remain unaware of the fraud, thus preserving 

their SIPC coverage. 

IBDs were not Part of the Problem and are Disproportionately Impacted by Increased Assessments 

It is clear that independent broker-dealer (IBD) firms were not part of the problems that created 

the most recent financial crisis. In fact, neither Madoff nor Stanford were registered with IBD 

firms. Yet, these same firms are disproportionately bearing the burden of the failures that 

resulted in the crisis through the imposition of significant and unanticipated increases in SIPC 

assessments. The failure of Lehman Brothers and others have placed an enormous burden on IBD 

firms. Prior to 2009, SIPC assessments were at the very minimum, $150 per year. In fact, this 

had been the practice for so long that our members had developed a reasonable expectation 

that the cost would remain at that level for the foreseeable future. 

Since 2009, SIPC assessments have increased exponentially and without warning causing a 

significant blow to IBDs, making already difficult economic circumstances even more challenging. 

We include below three examples to illustrate the level of assessments borne by a typical small, 

mid-size and large independent broker-dealer from 2008 through 2012. 

• A small FSI member firm located in the Southeastern United States, with approximately 

$27.3 million in revenues in 2012, had the following SIPC assessments from 2008 to 

2012: 

o 2008 - $150 

o 2009 - $12,050 - an increase of 7,933.3% from the prior year 

o 2010 - $22,417 - an increase of 86% from the prior year 

o 2011 - $34,891 an increase of 55.7% from the prior year 

o 2012 - $38,488 - an increase of 10.3% from the prior year 

• A mid-size FSI member firm in located in the Southeastern United States, with revenues of 

$98.9 million in 2012, had the following SIPC assessments from 2008 to 2012: 

o 2008 - $150 

a 2009 - $63,615 - an increase of 42,310% from the prior year 

o 2010- $98,295 - an increase of 54.5% from the prior year 

a 2011 - $113,366 - an increase of 15.3% from the prior year 

a 201 2 - $118,831 - an increase of 4.8% from the prior year 

• A large FSI member firm in the Northeastern United States with approximately $711 

million in revenue in 2011, had the following SIPC assessments from 2008 to 2011: 

a 2008 - $150 
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86688.125

o 2009 - $486,714 - an increase of 324,376% from the prior year 

o 2010 - $795,174 - an increase of 63.4% from the prior year 

o 201 1 - $835,763 - an increase of 5.1 % from the prior year 

o 2012 - $995,606 - an increase of 19% from the prior year 

Profit margins for IBD firms are low, at least in part, because the vast majority of these firms' 

revenues are in the form of commission and fee payments which pass through the broker-dealer to 

the financial advisor in compensation for the advice, products and services the financial advisor 

provides to investors. From 2006 to 2012, the average annual profit margin for IBD firms was 

2.0%. slPe assessments are likely to remain high for the foreseeable future, especially with 

recent developments involving a court battle between the SEe and slPe to determine coverage 

for victims of the Stanford Ponzi scheme and the failure of MF Global currently progressing 

through slPe liquidation. 

These assessments are having a disparate impact on small IBD firms which do not have the 

resources to absorb the large and unexpected increase in fees. Furthermore, many IBD firms 

operate as dual registrants conducting both investment advisory and securities brokerage 

operations under a single corporate entity. Small firms are organized in this manner to reduce 

costs and simplify their business operations, which allows them to service Main Street investors. 

This structure results in additional complications due to the fact that when investment advisory 

services are segregated into a separate corporate entity they are excluded from slPe 

assessments, but are included when they occur under the same corporate entity as the brokerage 

services. IBD firms should not be penalized simply for choosing a more efficient business structure 

that helps lower their costs. 

Another reason IBD firms are shouldering a disproportionate share of the burden is that IBD firms 

present a significantly lower risk of causing slPe payouts because they operate as introducing 

brokers. As such, they are prohibited from obtaining custody of investor funds and securities, and 

therefore receive no cash or securities from investors other than for transmittal purposes. Instead, 

checks are made payable directly to the product sponsor and accounts are held, and securities 

transactions are processed, through clearing firms. The risk to investors is significantly less in this 

model and, thus, the risk of an adverse event requiring slPe liquidation is also lower. 

In addition, the vast majority of IBD firms do not sell proprietary securities or insurance products. 

Those IBD firms who do engage in proprietary product sales are usually subsidiaries of large, 

heavily regulated insurance companies and typically do not offer their financial advisors 

preferential compensation far the sale of those products. Proprietary products are often the 

vehicle through which those who perpetrate financial fraud, like R. Allen Stanford, gain access to 

investor funds. Even if slPe were interpreted to cover losses due to the Stanford fraud, the 

structure of the typical IBD firm lowers the risk of these types of slPe payouts. 

Effects of Increased slPe Assessments on Main Street Investors 

The results of excessively high slPe assessments will continue to be predictable - the failure of 

small IBD firms. In 2008, there were mare than 5,000 broker-dealer firms. In 201 3 that number 

has fallen to fewer than 4,200, with approximately 175 broker-dealer firms failing in 2009 

alone, the first year of the increased assessments. 

The most significant impact that the loss of IBD firms will have is decreased access to financial 

advice, services and products for Main Street investors seeking to save for retirement and their 
161 


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children's education. Small ISD firms and the independent financial advisers associated with them 

typically provide financial services and products to middle-class investors that are not served by 

larger firms. These investors need access to quality financial advice, products and service every 

bit as much as wealthier investors. However, many of these investors are unable to access these 

products and services through large wire house firms, which often find servicing smaller accounts 

unprofitable. Without the small ISD firms and their associated independent financial advisors 

providing local access to financial advice, less affluent investors will be left to their own devices to 

achieve their financial goals. 

In addition to the impact on access to affordable advice for Main Street investors, the failure of 

small IBD firms will have a significant impact on innovation within the securities industry. Smaller 

IBD firms are a significant source of industry innovation. With profit margins generally very slim, 

small ISD firms have incentives to consistently develop new methods of efficiently and effectively 

meeting their regulatory obligations, while at the same time providing the financial advice and 

services that Main Street Americans need and demand. These innovations often are adopted by 

others in the industry and become industry best practices. The excessively high SIPC assessments 

will lead to not only failures of smalllBD firms, but also to reduced investment in new resources 

and innovation - including the hiring and training of new employees, acquisition of new 

equipment, and development of software - among remaining IBD firms. 

The Restoring Main Street Investor Protection and Confidence Act would further exacerbate these 

problems by insuring the continuation of heightened SIPC assessments for years to come. In 

addition, the bill introduces a moral hazard into the SIPC system by creating perverse incentives 

for investors to take risks on schemes that sound too good to be true. 

A Better Approach 

FSI believes that true SIPC modernization is necessary. However, SIPC will not be improved by 

expanding coverage to the victims of fraud. SIPC modernization requires a system that provides 

speedy recovery in a smooth and orderly process to securities investors whose broker-dealer has 

failed. This process should emphasize returning funds to investors, rather than unjustly enriching 

trustees and attorneys. In order to be equitable, such a system should impose the greatest cost 

for maintaining the system on those that present the greatest risk. This system must also provide 

broker-dealers with greater predictability so that they can budget appropriately for the costs. 

The system must avoid imposing a disproportionate impact on IBD or other small firms. Finally, 

clear and consistent application of SIPA, enhanced investor disclosures concerning the role of SIPC 

and even a name change, intended to avoid subconscious associations with FDIC insurance, would 

help alleviate investor confusion concerning the fund's purpose. FSI stands ready to work with 

Congress to develop a SIPC reform bill that achieves these important goals. 

We thank the Subcommittee for holding this hearing and for the work it is doing to address these 

issues. Please contact David T. Bellaire, Esq., FSl's General Counsel & Director of Government 

Affairs at 202 803-6061 or david.bellaire@financialservices.org if you would like more 

information on the Financial Services Institute and our position on this important issue. 
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Backgraund on FSI and the Independent Broker-Dealer Community 

The IBD community has been on important and active port of the lives of American investors for more than 

30 years. The IBD business model focuses on comprehensive financial planning services and unbiased 

investment advice. IBD firms also share a number of other similar business characteristics. They generally 

clear their securities business on a fully disclosed basis; primarily engage in the sale of packaged 

produ~ts, such as mutual funds and variable insurance products; take a comprehensive approach to their 

clients' financial goals and objectives; and provide investment advisory services through either affiliated 

registered investment adviser firms or such firms owned by their registered representatives. Due to their 

unique business model, IBDs and their affiliated financial advisors are especially well positioned to provide 

middle-class Americans with the financial advice, products, and services necessary to achieve their financial 

goals and objectives. 

In the U.S., approximately 201,000 financial advisors - or 64% percent of all practicing registered 

representatives - operate as self-employed independent contractors, rather than employees of their 

affiliated broker-dealer firm.3 These financial advisors provide comprehensive and affordable financial 

services that help millions of individuals, families, small businesses, associations, organizations, and 

retirement pions with financial education, planning, implementation, and investment monitoring. Clients of 

independent financial advisors are typically "main street America" - it is, in foct, almost port of the 

"charter" of the independent channel. The core market for advisors affiliated with IBDs is clients who have 

tens and hundreds of thousands, as opposed to millions, of dollars to invest. Independent financial advisors 

ore entrepreneurial business owners who typically have strong ties, visibility, and individual name 

recognition within their communities and client base. Most of their new clients come through referrals from 

existing clients or other centers of influence. 4 Independent financial advisors get to know their clients 

personally and provide them investment advice in face-to-face meetings. Due to their close ties to the 

communities in which they operate their small businesses, we believe these financial advisors have a strong 

incentive to make the achievement of their clients' investment objectives their primary goal. 

FSI is the advocacy organization for ISDs and independent financial advisors. Member firms formed FSI to 

improve their compliance efforts and promote the IBD business model. FSI is committed to preserving the 

valuable role that ISDs and independent advisors play in helping Americans plan for and achieve their 

financial goals. Our mission is to insure our members operate in a regulatory environment that is fair and 

balanced. FSl's advocacy efforts on behalf of our members include industry surveys, research, and 

outreach to legislators, regulators, and policymakers. We also provide our members with an appropriate 

forum to share best practices in an effort to improve their compliance, operations, and marketing efforts. 

3 Cerulli Associates at http://www.cerulli.com!. 

4 These "centers of influence" may include lawyers, accountants, human resources managers, or other trusted advisors. 
163 


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GAO 

September l!J!J2 

GAOIGGD-92-109 

United States Gelwral A(,connting Office _ _ __ _ 

Report to Congressional Requesters 

SECURITIES 

INVESTOR 

PROTECTION 

The Regulatory 

Framework Has 

Minimized SIPC's 

Losses 
164 


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GAO United State. General AeeollDtinc OftIee 

WublnltOn, D.C. ZOIfS 

General Government DIvIsion 

B-248162 

September 28, 1992 

The Honorable Donald W. Riegle, Jr. 

Chalnnan, Conunlttee on Banking, 

Housing. and Urban Malts 

United States Senate 

The Honorable Jolm D. Dlngell 

Chairman, Subconunlttee on Oversight 

and Investigations 

Conunlttee on Energy and Commerce 

House of Representatives 

ThIs report responds to your requests that we review the operations and solvency of the 

Securities Investor Protection Corporation (SIPC). It discusses how the regulators' success in 

protecting customers depends upon the quality of regulatory oversight of the securities 

industry. We also provide recommendations to improve Securities and Exchange Conunlssion 

(SEC) and SIPC disclosures to customers and SEC'S oversight ofslPC's operations. 

We will send copies of this report to the Chalnnan, SlPC; the Chairman, SEC; appropriate 

congressional conunlttees and subconunlttees; and other interested parties. We will also make 

copies available to others upon request. 

ThIs report was prepared under the direction of Craig A Simmons, Director, Financial 

institutions and Markets Issues, who may be reached on (202) 275-8678 if there are any 

questions concerning the contents of this report. Other ml\ior contributors to this report are 

listed in appendix IV. 

Richard L. Fogel 

Assistant Comptroller General 
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86688.130

Executive Summary 

Purpose 

Background 

Congress created the Securities Investor ProtectiDn CorpDratiDn (SIPC) in 

1970 after a large number Df customers IDst mDney when they were unable 

to Dbtain possessiDn Df their cash and securities from failed 

broker-dealers. SIPC was established to promDte public cDnfidence in the 

natiDn's securities markets by guaranteeing the return Df property to small 

investors if securities firms fail Dr gD Dut Dfbusiness. SlPC is a 

member-financed, private nDnproflt CDrporatiDn with statutory authority 

to borrow up to $1 billion from the U.S. Treasury. 

This report responds to requests by the Senate Banking Committee and 

the House Energy and Commerce Subcommittee on Oversight and 

Investigations that GAO report on several issues, including (1) the exposure 

and adequacy of the SlPC fund, (2) the effectiveness of SIPC'S liquidation 

oversight efforis, and (3) the disclosure of SIPC protections to customers. 

The law that created SIPC also required the Securities and Exchange 

Commission (SEC) to strengthen customer protection and increase investor 

confidence in the securities markets by Increasing the financial 

responsibility of broker -dealers. Pursuant to tilts mandate, SEC developed a 

framework for customer protection based on two key rules: (1) the 

customer protection rule and (2) the net capital rule. These rules 

respectively require broker-dealers that carry customer accounts to (1) 

keep customer cash and securities separate from those of the company 

itself and (2) maintain sufficient liquid assets to protect customer interests 

if the fum ceases dDing business. In essence, SlPC is a back-up line Df 

protection to be called upDn generally in the event Df fraud Dr breakdDwn 

Df the Dther regulatory protectiDns. 

Except for certain specialized broker-dealers, all securities broker-dealers 

registered with SEC are required to be members of SIPC. Other types of 

fmancilll firms that are invDlved in the purchase Dr sale Df securities 

prDducts, such as Qpen-end investment cDmpanies and certain types of 

investment advisory fIrmS, are not permitted to be SlPC members. As of 

December 31, 1991, SIPC had 8,153 members. Of tilts number, only 954 are 

authDrized to receive and hDld customer prDperty. The rest either trade 

'exclusively for their Dwn acCDunts Dr act as agents in the purchase Dr sale 

Df securities to the public. SEC and SIPC Dfficials estimate that over $1 

trilliDn Df customer property Is held by SlPC members. 

SIPC Is nDt designed to keep securities firms frDm failing Dr, as in the case 

of deposit insurance for banks, to shield customers from changes in the 

Pagel GAOIGGD-92-109 Seemitie. Invutor Proteetion 
166 


86688.131

Results in Brief 

hec:atlwS1IIIUIW'J" 

market value of their investment. Rather, SIPC has the limited purpose of 

ensuring that when securities firms fall or otherwise go out of business, 

customers will receive the cash and securities they own up to the SIPC 

llmIts of $500,000 per customer, of which $100,000 may be used to satisfy 

cJajms for cash. Thus, the risks to the taxpayer inherent In SIPC are less 

than those associated with the deposit Insurance system. 

SEC and self-regulatory organizations, such as the New York Stock 

Exchange, are responsible for enforcing the net capital and customer 

protection rules. However, if a firm is in danger of failing and customer 

accounts are at risk, SIPC may Initiate liquidation proceedings. SEC and 

industry participants do not expect that SIPC'S back-up role In liquidating 

firms should be needed very often, which both reduces SIPC'S exposure to 

loss and minimizes potential adverse market impacts. SIPC liquldation 

proceedings can be quite complex, and it can take weeks or longer before 

customers receive the bulk of their property. 

In the 20 years since its inception, SIPC has been called on to liquldate 228 

firms, most of which have involved fewer than 1,000 customers. The 

revenues available to the SIPC fund have been sufficient to meet all 

liquidation and administrative expenses, which totaled $236 million. As of 

December 31, 1991, the accrued balance of the fund stood at $653 million, 

the highest level ever. After conducting a review of its funding needs, SIPC 

adopted a policy to increase its reserves to $1 billion by 1997. SIPC and SEC 

officials believe that reserves of thts level, augmented by bank lines of 

credit of $1 billion and also by a $1 billion line of credit at the U.s. 

Treasury, will be more than sufficient to fulfill its back-up role in 

protecting against the loss of customer property. 

The regulatory framework within which SIPC operates has thus far been 

successful in protecting customers while at the same time llmIting SIPC'S 

losses. However, complacency regarding SIPC'S continuing ability to be 

successful is not warranted because securities markets have grown more 

complex and the SIPC liquidation of a large firm could be very disruptive to 

the fmancial system. The central conclusion of thts report-that SlPC'S 

funding requirements and market stability depend on the quality of 

regulatory oversight of the industry-underscores the need for SEC and 

self-regulatory organizations to be diligent In their oversight of the 

industry and their enforcement of the net capital and customer protection 

rules. 

Page 3 
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GAO's Analysis 

Strong Enforcement Is the 

Key to Continued Success 

in Protecting Customers 

No objective basis exists for setting the right level for SIPC reserves, but 

GAO beUeves that efforts to plan for the SIPC fund's future needs by 

increasing SIPC'S reserves represent a responsible approach to dealing with 

the fund's potential exposure. However, in view of the industry's dynamic 

nature, SIPC and SEC must make periodic assessments of the fund to acijust 

funding plans to changing SIPC needs. In particular, measures to strengthen 

the fund must be taken immediately It there Is evidence thst the customer 

protection and net capital rules are losing effectiveness. 

While SIPC generally has received favorable comments from securities 

regulators and industry officials on its handling of past Uquidstlons, it 

could do more to prepare for the potential Uquidatlon of a large firm. SIPC'S 

readiness to respond quickly by having the information and automated 

systems necessary to carry out a Uquidstlon is important for the timely 

settlement of customer claims. The impaci upon pubUc confidence in the 

securities markets may be important in the Uquidstlon of a large firm with 

thousands of customers. 

SIPC and SEC could provide the public with more complete information 

about the nature of SIPC coverage. Certsln sEC-registered firms thst are not 

SIPC members, including some investment advisers, may aci as 

intermediaries in the purchase and sale of securities to the pubUc and have 

temporary access to customer funds. These firms are not required to 

disclose the fact that they are not SIPC members, even though their 

customers are subject to the rtsks of loss and misappropriation of their 

funds and seCurities. Better disclosure is needed so that customers can 

make informed investment decisions. 

To date, SIPC'S role in providing back-up protection for customers' cash 

and securities has worked weU. The securities industry has faced many 

difficult challenges since SIPC'S inception, such as truijor volatility in the 

stock markets and numerous broker-dealer failures (including two of the 

largest securities firms within the past 3 years). Since 1971, more than 

20,000 broker-dealers have failed or ceased operations, but SIPC has 

initiated Uquidstlon proceedings for only 228-about I percent-of these 

firms. (See p. 22.) 

Page. 
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SIPC Has Addressed Its 

Funding Needs 

Improve SIPC Pr~paration 

for Liquidating a Large 

Finn 

Most ftrms Involved in SIPC liquidations failed due to fraudulent activities. 

Within the last 6 years, 26 of 39 SIPC liquidations have Involved failures due 

to fraud by finns that were acting as Intennediaries between customers 

and !Inns authorized to hold customer accounts. Most finns that cease 

operations do not require a SIPC IIquldation because they do not carry 

customer accounts, customer accounts are fully protected, or they and/or 

the regulators have made alternative arrangements to protect the 

customer accounts. (See pp. 29-31.) 

In the future, SIPC losses can remain modest if SEC and self-regulatory 

orgsnizatlons continue to successfully oversee the securities Industry. But 

complacency Is not warranted, and securities markets could be 

slgnlficantiy disrupted if the enforcement of the net capital and customer 

protection rules proved Insufficient to prevent a SlPC liquidation of a large 

securities tirm. In that Instance, customers of the firm could experience 

delays In obtalnlng access to their funds. In addition, the development of 

new products and the increasing risks associated with the activities of 

many of the larger securities finns pose special challenges to the 

regulators. (See pp. 36-39.) 

There Is no scientific basis for determining what SIPC'S level of funding 

should be because the greatest risk the fund faces-a breakdown of the 

effectiveness of the net capital and customer protection rules-cannot be 

foreseen. However, given the growing complexity and riskiness of 

securities markets, GAO believes that SIPC officials have acted responsibly 

In adopting a financial plan that would Increase fund reserves to $1 billion 

by 1997. While GAO cannot conclude that this level of funding will be 

adequate, $1 billion should be more than sufficient to deal with cases of 

fraud at smaller firms, and it probably can finance the liquidation of one of 

the largest securities finns. The $1 billion fund may not, however, be 

suftlcient to finance worst-case sitoatlons such as massive fraud at a major 

firm or the unlikely simultaneous failures of several of the largest 

broker-dealers. Periodic SlPC and SEC assessments musl account for factors 

such as the size of the largest broker-dealer and any signs that regulatory 

enforcement of the net capiial or customer protection rules has 

deteriorated. (See pp. 4046.) 

SIPC liquidations may Involve delays and can expose customers to declines 

In the market value of their securities. To minimize delays, In the early 

19808 a SlPC task force and SEC recommended that SlPC prepare for 

PlieS GAOIGGD-92·109 SeearltlealDvestor Proteet1oa 
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86688.134

Improve Disclosure to 

Customers 

potential liquidations of large firms. However, SlPC continues to make only 

limited preparations for the potentiailiquidations of large troubled firms. 

SlPC believes it is unlikely it will ever be called on to liquidate a large finn 

and cites Its record of success as demonstrating its ability to liquidate any 

finn. (See pp. 54-57.) 

GAO has no reason to question the way SlPC has conducted liquidations. 

However, those liquidations have all been of relatively small firms. GAO is 

concerned that lack of preparation and planning may limit SIPC'S ability to 

ensure the prompt retorn of customer property in the event it was called 

on to liquidate a large, complex ftrm. SIPC couid have been better prepared 

to conduct the liquidation of a large finn that couid have become a 

liquidation in 1989. In addition, SlPC has not analyzed automation options 

and may be limited in its ability to ensure that the trustee of a major 

liquidation wouid be able to acquire a timely and cost-effective automation 

system. Working with SEC, SlPC should improve its capabilities in these 

areas. (See pp. 57-61.) 

SIPC-member broker-dealers are required to display a SlPC symbol to notify 

their customers that they are SIPC members. They are also encouraged to 

provide customers with a brochure that explains SIPC protection. GAO 

believes that this brochure could be modified to clarify areas of confusion 

that have been raised by customers-for example, that customers of firms 

that fall or go out of business have only 6 months to fIle a claim. (See pp. 

65-67.) 

However, the greatest opportunity for customer confusion arises from 

sEC-registered firms that act as intermediaries in the purchase and sale of 

securities products to customers. These firms include some sIPC-exempt 

broker-dealers and certain types of investment advisory finns. These firms 

may have temporary access to customer property but are not required to 

disclose that they are not SlPC members. Some customers have purchased 

securities from nonmember intermediaries that were atliIiated or 

associated with SlPC firms and were not protected by SlPC when the 

intermediarY finn failed. Customers of these intermediary firms risk loss 

of their property by fraud and mismanagement. GAO believes that 

customers should receive information on the SIPC sIatus of SEc-registered 

intermediarY fmns that have access to customer funds and securities so 

that they can make informed investment decisions. (See pp. 67-72.) 

p .... 
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86688.135

Recommendations 

Agency Comments 

_8.....,. 

The chalnnen of SIPC and SEC should periodically review the adequacy oC 

SIPC'S funding arrangements (see p. 53). The chairmen should also work 

with seIf-regulatory organizations to improve SIPC'S access to the 

Information and automated systems necessary to carry out a liquidation of 

a large finn on as timely a basis as possible. In addition, the SEC Chairman 

should periodically review SlPC operations to ensure that SIPC liquidations 

are timely and cost effective (see p. 62). 

FInally, the chairmen of SlPC and SEC, within their respective jurisdictions, 

should review and, as necessary, improve disclosure Information and 

regulations to ensure that customers are adequately informed about the 

SIPC status of sEc-registered financial fInns that serve as iiltermediaries iii 

customer purchases of securities and have access to customer property 

(seep. 72). 

SEC and SIPC provided written comments on a draft of this report (see apps. 

II and II1). SEC and SIPC agreed with GAO'S assessment of the condition of 

the SIPC fund and with GAO'S recommendation for periodic evaluation oC 

the fund's adequacy. SEC also agreed with GAO'S recommendations to 

improve its oversight of SlPC'S operations and to consider some expansion 

of SEC disclosure regulations. SlPC agreed with GAO'S recommendation to 

improve SIPC disclosures to customers. SEC and SIPC did not believe that 

problems exist iii obtaiiliilg information or acquiring automated liquidation 

systems, but they agreed to review their policies and consider GAO'S 

recommendations in these areas. 

P .. e7 
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86688.136

Russell. Chris 

From: 

Sent: 

To: 

Cc: 

Subject: 

ladies and Gentlemen: 

Stephen P. Harbeck <sharbeck@sipc.org> 

Thursday, May 21,200911:31 AM 

Dean_Shahinian@banking.senate.gov; Hester_Peirce@banking.senate.gov; 

Kara_Stein@reedsenate.gov; William_Henderson@bunning.senate.gov; Roberson, Peter; 

Edgar, Kevin; Harper, Todd; Russell, Chris; sylvis.stanojev@mail.house.gov 

Josephine Wang; Collins, John 

Proposed Amendments to the Securities Investor Protection Act 

On May 8. 2009, I forwarded suggested amendments to the Securities Investor Protection Act ("SIPA") to your 

attention. Prominent among those suggested amendments is a provision which would reestablish parity of cash 

protection for brokerage firm customers with the protection afforded to bank depositors by the Federal Deposit Insurance 

Corporation ("FDIC"). 

I understand that the Helping Families Save Their Homes Act has extended FDIC protection of bank depOSits of 

up to $250,000 until 2013. 

I respectfully request that customers of SIPC member brokerage firms be given the same level of protection 

available to bank depositors, and urge the immediate consideration of the suggested amendments to SIPA. 

Should you have any questions, please feel free to contact me at sharbeck@sipc.org. or Josephine Wang, SIPC's 

General Counsel, at jwanq@sipc.orq, or at the telephone number below. 

Very truly yours, 

Stephen P. Harbeck 

Stephen P. Harbeck 

President and CEO 

Securities Investor Protection Corporation 

805 15th St NW 

Suite-SOD 

Washington DC 20005 

202371-8300 
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86688.137

ANSWERS OF STEPHEN P. HARBECK, PRESIDENT, 

SECURITIES INVESTOR PROTECTION CORPORATION ("SIPC"), 

TO QUESTIONS FOR THE RECORD BY THE HONORABLE 

RANDY HULTGREN, IN CONNECTION WITH THE 

NOVEMBER 21,2013, OVERSIGHT HEARING OF SIPC, BEFORE 

THE HOUSE COMMITTEE ON FINANCIAL SERVICES 

This is in response to the additional questions submitted on December 4, 2013 by 

Representative Randy Hultgren to Stephen P. Harbeck, President of the Securities Investor 

Protection Corporation, for the record of the November 21,2013 SIPC Oversight Hearing. 

Background Information 

Representative Hultgren's questions involve amendments to Securities and Exchange 

Commission ("SEC" or "Commission") Rule 17a-5(d)(6), 17 C.F.R. §240.17a-5(d)(6) (BrokerDealer Reports, Exchange Act Release No. 34-70073, 78 Fed. Reg. 51910 (Aug. 21, 2013)). 

Before its amendment in 2013, Rule 17a-5(d)(6) required the annual audit report prepared for a 

broker-dealer by an independent public accountant to be filed with the SEC, and a copy of the 

report to be provided to each self-regulatory organization ("SRO") of which the broker-dealer 

was a member. As amended. the Rule requires SIPC member broker-dealers to file copies of 

their annual reports with SIPC. 

For more than sixty years, under SEC Rule 17a-5. the Commission has required securities 

broker-dealers to report on their financial condition and to have the reports audited by 

independent certified or public accountants. The accountant's representations as to the audit 

ensure the safeguarding of customers' securities and over the years, have provided the 

Commission and SROs with an early warning that the assets of customers may be at risk due to 

the financial condition of a brokerage firm. 

In 1970, the protection of customers was strengthened by Congress's enactment of the 

Securities Investor Protection Act ("SIPA"). In addition to providing for a specialized form of 
173 


86688.138

liquidation proceeding, SIPA required the SEC to identify and eliminate unsafe and unsound 

practices of broker-dealers. From the latter requirement, there followed two measures to upgrade 

broker-dealers' financial responsibility requirements: (I) a tightening of the Commission's net 

capital requirements; and (2) the adoption by the Commission of a customer reserve requirement. 

The certified audit of a broker-dealer ensures, as a primary purpose, compliance with 

these upgraded financial responsibility requirements. The audit report includes detailed 

information regarding net capital and customer reserve compliance. Under SIPA, the 

Commission and the SROs must notify SIPC of any member broker-dealer's failure to comply 

with the requirements. A failure to comply by a member may be grounds for a liquidation. 

Thus, the Commission's requirements serve to minimize the misuse or loss of customer assets 

and reduce the likelihood of the liquidation of a firm under SIP A -- an outcome that the Supreme 

Court has stated should be a "last resort." 

Questions and Answers 

1. Regarding the Securities and Exchange Commission's (SEC) final rule (Release No. 34-

70073; File No. S7-23-11) adopted in July, has the Securities Investor Protection Corporation's 

(SIPC) ability to assess the financial health of a broker dealer been restricted by having to 

request the annual report from the SEC? Under the new rule, how will the annual reports 

received directly from broker dealers by SIPC be reviewed? 

SIPC is not a government agency and it has no authority to investigate or to regulate its 

member broker-dealers. Whether customer assets are properly segregated by broker-dealers is 

monitored by the Commission and the SROs of which the broker-dealer is a member. The 

annual audited financial report prepared by an independent public accountant helps to ensure that 

broker-dealers meet the financial responsibility requirements cstablished by the Commission for 

2 
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86688.139

safeguarding customer assets. A proper audit report enables early detection that a firm is in 

financial trouble and customer assets are at risk. SIPC funds and, ultimately, taxpayer funds 

which may be drawn upon should the SIPC Fund become inadequate, would be compromised if 

a liquidation proceeding becomes necessary because an auditor has failed to perform properly his 

functions. Filing a copy of the audit report with SIPC offers an extra layer of protection for 

investors and a safety net for SIPC and the U. S. taxpayer against otherwise avoidable 

expenditures of their funds. 

SIPC will review an audit report to determine whether the independent public accountant 

has concluded that its report was unqualified, qualified, or adverse. In the event of a qualified or 

adverse audit report, SIPC will notify the Commission and the appropriate SRO, and request 

investigation of the broker-dealer if an investigation has not already been initiated. 

2. What steps has the SIPC made to process and evaluate the annual reports of member brokerdealers that will be delivered to the SIPC when the new rule takes effect? Has the SIPC had to 

redirect resources? Will there be demands for additional resources? 

Upon receipt of an audit report, SIPC's membership staff will log receipt of the audit 

report into SIPC's database. The report will be provided to SIPC's operations staff, who will 

review each audit report to determine whether the report was unqualified, qualified, or adverse. 

Any qualified or adverse audit report will be reported to SIPC's Vice President-Finance, and 

SIPC's Vice President-Operations. In the event of a qualified or adverse audit report, SIPC's 

Vice President-Finance will notify the Commission and the appropriate SRO, and request 

investigation of the broker-dealer if an investigation has not already been initiated. 

SIPC has not had to redirect any resources as a result of the rule amendment, and does 

not anticipate any demands for additional resources. 

3 
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86688.140

3. If the SIPC is concerned with the financial health of a member, what powers does the SIPC 

have to further investigate the member firm? 

SIPC is not a regulatory organization, and it does not have the power to investigate its 

member broker-dealers. Rather, pursuant to provisions of SIP A, SIPC relies upon the 

Commission and the SROs to investigate the firms, and, where appropriate, to notify SIPC if a 

firm is in or is approaching financial difficulty. 

4. Has the SIPC historically monitored individualjirm fitness? What corrective powers does 

SIPC have to improve the.jinancial health of a member? 

SIPC is not a regulatory organization, and it does not monitor the financial fitness of its 

member firms. Should SIPC nevertheless become aware that a firm may be in financial trouble, 

it refers the matter to the appropriate regulatory or self-regulatory authority for investigation. 

5. Did the SIPC ask the SEC for expanded lawsuit ability? Why did the SIPC not approach 

Congress requesting expanded authority? Did the SIPC or the SEC determine that the SEC had 

the authority to expand the SIPe's ability to sue through regulation? May we have a copy of 

that determination? 

Negligence or other misconduct by the independent public accountant in the performance 

of the audit and in the preparation of the audit report facilitates and deepens the loss suffered by 

investors at the hand of unscrupulous broker-dealers. SIPC ultimately bears the cost of such 

negligence, and in fewer than a dozen cases over more than forty years, has had to sue to recover 

its losses. SIPC has the power to bring such actions pursuant to 15 U.S.C. section 78ccc(b)(l) 

and, thus, has not asked Congress for any expanded statutory authority. 

Prior to amendment of the Rule, SIPC relied, based upon the filing of the audit reports 

with the Commission and SROs. on the information contained in the reports. In spite of that 

4 
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86688.141

reliance, some, but not all, courts held such reliance to be insufficient for standing purposes. 

This enabled independent public accountants to avoid, merely on procedural grounds, any 

liability for grossly negligent conduct in performing the audit requirements. The amended Rule 

clarifies, rather than expands, SIPC's reliance on the work performed by the auditor. 

The Commission's authority to amend the Rule is set forth in Exchange Act Release No. 

34-70073. See Broker-Dealer Reports, 78 Fed. Reg. 51910, 51988 (Aug. 21, 2013). SIPC does 

not know whether the requested "determination" exists but if it does, SIPC does not have a copy. 

6. Did the SIPC or the SEC perform a cost-benefit analysis on the impact of these expanded 

authorities? May we have a copy of that analysis? 

SIPC did not perform a cost-benefit analysis. The Commission estimated, as part of its 

rulemaking process, that compliance by a broker-dealer with the amendment would require the 

cost of time necessary to copy and mail the report, and the cost of postage. The Commission 

further estimated that based on its experience, the preparation of a copy of the report and mailing 

to SIPC would be performed by a Financial Reporting Manager at an annual cost of $154.50. 

Finally, the Commission estimated that the broker-dealer would incur annual postage costs of 

$12.05. See Broker-Dealer Reports, 78 Fed. Reg. 51910, 51978 n. 819 (Aug. 21, 2013). 

7. Since the member assessment was raised in 2009, the SIPC has required broker-dealers to 

submit supplemental reports. What evidence led the SIPC 10 conclude that such information was 

inadequate 10 assess the financial health of broker-dealers? What additional information is 

provided in these reports? What is the additional cost of these supplemental reports for brokerdealers? 

When the SIPC assessment is other than a minimum assessment under SIPA, a brokerdealer must include with the audit report a supplemental report that is covered by the opinion of 

5 
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86688.142

an independent public accountant on the status of the broker-dealer's membership in SIPC. See 

17 C.F.R. 240.l7a-5(e)(4). This requirement was instituted in 1972, by amendment to SEC Rule 

17a-5, to ensure that member broker-dealers correctly calculate their SIPC assessment. The 

assessment represents a percentage of gross revenues minus various deductions. See Report of 

Securities Investor Protection Corporation Assessments, 37 Fed. Reg. 18909 (Sept. 16, 1972); 

see also Broker-Dealer Reports, 78 Fed. Reg. 51910, 51,927 (Aug. 21, 2013) (general discussion 

of the history of SEC Rule l7a-5(e)(4). The need for the 1972 amendment grew out of 

discrepancies identified between information supplied to SIPC and information supplied to the 

SEC on which calculation of assessments was based. See Report of Securities Investor 

Protection Corporation Assessments, 37 Fed. Reg. 18909 (Sept. 16, 1972). 

The supplemental report is unrelated to the recent amendment to Rule 17a-5(d)(6). The 

supplemental report regarding the SIPC assessment does not provide information regarding the 

financial health of a broker-dealer. It merely provides information covering the SIPC annual 

general assessment reconciliation, or exclusion from membership. 

SIPC does not have information regarding the cost of preparing the supplemental report. 

8. Does the SIPC's demand for more information through supplemental reports reflect on the 

comprehensiveness of the annual reports that the SIPC and SEC have previously required? 

How? 

As indicated above, the supplemental report regarding the SIPC assessment does not 

provide information regarding the financial health of a broker-dealer. It merely provides 

information covering the SIPC annual general assessment reconciliation, or exclusion from 

membership. It includes an opinion of the independent public accountant on the status of the 

broker-dealer's membership in SIPC. 

6 
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86688.143

The 2013 amendment to Rule 17a-5(d)(6) simply requires that SIPC be an added 

recipient of the annual audit report that a broker-dealer already files with the Commission and its 

SRO(s). There is no additional information required to be produced by a broker-dealer. 

9. If the new rule makes it easier for the SIPC to sue for administrative expenses, please identifY 

the different categories of administrative expense. Are there typical or average outlays for these 

different categories when administering a failed broker-dealer? 

SIPA liquidation proceedings typically are required because of the misappropriation of 

investors' securities and cash. Negligence or other misconduct by the independent public 

accountant in performing the audit requirements and failing properly to detect and warn of a 

broker-dealer's violations of financial responsibility rules could permit an unscrupulous brokerdealer to continue a scheme to misappropriate customer's securities and funds, and exacerbate 

the harm suffered by investors. 

SIPC ultimately bears the cost of such negligence when it advances funds, in accordance 

with SIP A, to pay claims of customers who have suffered losses. SIPC advances for losses to 

customers typically range from about $2 million to $10 million, though occasionally can be 

much more significant. 

10. Under what circumstances would the SIPC seek reimbursement from accountingfirms? 

Were an independent public accountant to be negligent or engage in misconduct in the 

performance of the audit requirements of a broker-dealer, SIPe could be adversely affected by 

having to expend funds to protect investors. Since the enactment of SIP A more than forty years 

ago, 328 broker-dealers have been the subject of SIP A liquidation proceedings for the protection 

of investors. In those 328 proceedings, SIPe has sucd public accountants to recover losses in 

fewer than a dozen cases. 

7 
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86688.144

ll. Does the SIPC expect that filing annual reports with the SIPC will raise costs for accounting 

firms or broker-dealers? Will these costs be internalized or passed through to their clients? 

The amendment to Rule 17a-5(d)(6) merely provides that SIPC is to be an added 

recipient of the annual audit report that a broker-dealer must file with the Commission and its 

SRO(s). There is no additional information required to be produced by a broker-dealer, or the 

independent public accountant. The Commission estimates that compliance by a broker-dealer 

with the amendment would require the cost of time necessary to copy and mail the report, and 

the cost of postage. As previously noted, the Commission estimates that based on its experience, 

the preparation of a copy of the report, and mailing to SIPC, would be performed by a Financial 

Reporting Manager at an annual cost of $154.50. The Commission further estimates that the 

broker-dealer would incur annual postage costs of $12.05. SIPC does not know how the added 

costs would be absorbed, but if providing to SIPe a copy of the annual report causes accountants 

to be more careful in their audits, that is a salutary consequence for investors. 

o 

8