United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 16, 2013 Decided July 18, 2014

No. 12-5286

SECURITIES AND EXCHANGE COMMISSION,

APPELLANT

v.

SECURITIES INVESTOR PROTECTION CORPORATION,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:11-mc-00678)

John W. Avery, Deputy Solicitor, Securities and Exchange

Commission, argued the cause for appellant. With him on the

briefs were Michael A. Conley, Deputy General Counsel, Jacob

H. Stillman, Solicitor, Tracey A. Hardin, Assistant General

Counsel, and Michael L. Post, Senior Litigation Counsel. 

Robertson Park, John Heffner, and Mark J. Andrews were

on the brief for amici curiae Stanford Victims Coalition, et al.

in support of petitioner.

Michael W. McConnell argued the cause for appellee. With

him on the brief were Eugene F. Assaf, Edwin J. U, John C.

O'Quinn, Elizabeth M. Locke, and Josephine Wang. 
2

Thomas J. Moloney, David Y. Livshiz, Darryl G. Stein, and

Sarah E. Edwards were on the brief for amicus curiae Securities

Industry and Financial Markets Association in support of

appellee. 

Steven P. Lehotsky, Joshua S. Press, and Noah Levine were

on the brief for amici curiae former SEC officials and professors

of law in support of appellee.

Steuart Thomsen was on the brief for amicus curiae

Financial Services Institute, Inc. in support of appellee. 

Before: GARLAND, Chief Judge, SRINIVASAN, Circuit

Judge, and SENTELLE, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge SRINIVASAN.

SRINIVASAN, Circuit Judge: When a brokerage firm faces

insolvency, the cash and securities it holds for its customers can

become ensnared in bankruptcy liquidation proceedings or

otherwise be put at risk. Congress established the Securities

Investor Protection Corporation (SIPC) to protect investors’

assets held on deposit by financially distressed brokerage firms. 

SIPC can initiate its own liquidation proceedings with the aim

of securing the return of customers’ property held by the

brokerage. SIPC, however, possesses authority to undertake

those protective measures only with respect to member

brokerage firms. Its authority does not extend to non-member

institutions.

In this case, the Securities and Exchange Commission seeks

a court order compelling SIPC to liquidate a member brokerdealer, Stanford Group Company (SGC). SGC played an

integral role in a multibillion-dollar financial fraud carried out

through a web of companies. SGC’s financial advisors
3

counseled investors to purchase certificates of deposit from an

Antiguan bank that was part of the same corporate family. The

Antiguan bank’s CDs eventually became worthless. The

massive Stanford fraud spawned a variety of legal actions in a

number of arenas, the bulk of which are not at issue here. This

case involves the authority of a specific entity—SIPC—to take

measures within its own statutorily bounded sphere. As to that

issue, because the Antiguan bank, unlike SGC, was not a SIPC

member, SIPC had no ability to initiate measures directly

against the bank to protect the property of investors who

purchased the bank’s CDs.

The question in this case is whether SIPC can instead be

ordered to proceed against SGC—rather than the Antiguan

bank—to protect the CD investors’ property. It is common

ground that SIPC can be compelled to do so only if those

investors qualify as “customers” of SGC within the meaning of

the governing statute. SIPC concluded that they do not, and the

district court agreed. The court reasoned that the investors

obtained the Antiguan bank’s CDs by depositing funds with the

bank itself, not with SGC, and they thus cannot be considered

customers of the latter. We agree that the CD investors do not

qualify as customers of SGC under the operative statutory

definition. We therefore affirm the denial of the application to

order SIPC to liquidate SGC.

I.

A.

In 1970, Congress enacted the Securities Investor

Protection Act (the Act or SIPA) in response to the “failure or

instability of a significant number of brokerage firms.” Sec.

Investor Prot. Corp. v. Barbour, 421 U.S. 412, 415 (1975). 

Before the Act, customers of a brokerage firm that fell into
4

insolvency often “found their cash and securities on deposit

either dissipated or tied up in lengthy bankruptcy proceedings.” 

Id. The Act created SIPC, a nonprofit, private membership

corporation established “forthe purpose, inter alia, of providing

financial relief to the customers of failing broker-dealers with

whom they had left cash or securities on deposit.” Id. at 413;

see 15 U.S.C. § 78ccc(a)(1). Congress required most registered

U.S. broker-dealers to become members of SIPC and to pay

assessments used to fund SIPC’s investor protection measures. 

See 15 U.S.C. §§ 78ccc(a)(2)(A), 78ddd(c). 

The Act requires the SEC and various industry selfregulatory organizations to notify SIPC upon learning that a

SIPC-member firm “is in or is approaching financial difficulty.” 

15 U.S.C. § 78eee(a)(1). SIPC may file an action for a

protective decree in federal district court after determining,

among other things, that the member firm “has failed or is in

danger of failing to meet its obligations to customers.” 15

U.S.C. § 78eee(a)(3)(A). If the court grants SIPC’s application,

the court must appoint a trustee and order the proceedings

removed to bankruptcy court. 15 U.S.C. § 78eee(b)(3), (4). 

The trustee then oversees the liquidation of the member firm,

returning any customer cash and securities on deposit with the

broker. 15 U.S.C. § 78fff. If the insolvent broker’s funds prove

inadequate to pay all customer claims, SIPC itself must cover

any shortfalls up to statutory limits. 15 U.S.C. § 78fff-3.

The Act gives the SEC “plenary authority to supervise . . .

SIPC” in its implementation of the statute. Barbour, 421 U.S.

at 417 (internal quotation marks omitted). For instance, the

SEC “may disapprove in whole or in part any bylaw or rule

adopted by the Board of Directors of . . . SIPC, or require the

adoption of any rule it deems appropriate.” Id. (citing 15 U.S.C.

§ 78ccc(e)). The SEC may also “participate in any liquidation

proceeding initiated by . . . SIPC.” Id. Of particular relevance
5

here, if SIPC declines to initiate the liquidation of a member

firm, the SEC can apply to the district court for an order

requiring SIPC to commence liquidation. See 15 U.S.C.

§ 78ggg(b). This case marks the SEC’s first effort to invoke its

authority under § 78ggg(b) to compel SIPC to initiate

liquidation proceedings against a member brokerage.

For the district court to issue such an order, the SEC must

show that SIPC has failed to “act for the protection” of the

member firm’s “customers.” Id. The statutory term “customer”

encompasses persons for whom the member firm holds

securities or cash on deposit. The Act states that the “term

‘customer’ of a debtor means any person . . . who has a claim on

account of securities received, acquired, or held by the debtor

in the ordinary course of its business as a broker or dealer from

or for the securities accounts of such person for safekeeping,

with a view to sale, to cover consummated sales, pursuant to

purchases, as collateral, security, or for purposes of effecting

transfer.” 15 U.S.C. § 78lll(2)(A). The Act further explains

that the term “customer” includes “any person who has

deposited cash with the debtor for the purpose of purchasing

securities.” 15 U.S.C. § 78lll(2)(B)(i). The Act thereby

includes within the definition of “customer” those persons for

whom the member firm holds cash or securities on deposit for

the customer’s use. Significantly, however, the Act specifically

excludes persons who give cash or securities to the member

firm for the firm’s use as part of the firm’s capital (e.g., as a

loan to the member firm): “The term ‘customer’ does not

include any person, to the extent that . . . such person has a

claim for cash or securities which . . . is part of the capital of the

debtor.” 15 U.S.C. § 78lll(2)(C).
6

B.

This case arises out of a massive financial fraud perpetrated

by Robert Allen Stanford. As described by the SEC, Stanford

conducted a “Ponzi scheme,” selling certificates of deposit to

investors but then misappropriating billions of dollars in

deposited funds to repay earlier investors and finance a lavish

lifestyle. See generally Chadbourne & Parke LLP v. Troice,

134 S. Ct. 1058, 1064-65 (2014).

Stanford employed a complex web of companies he owned

or controlled to carry out the fraudulent enterprise. Two entities

are primarily at issue here: (i) Stanford International Bank, Ltd.

(SIBL), a bank organized under Antiguan law, and (ii) Stanford

Group Company (SGC), a Houston-based broker-dealer

registered with the SEC. SIBL sold certificates of deposit,

“debt assets that promised a fixed rate of return.” Chadbourne,

134 S. Ct. at 1064 (internal quotation marks omitted). SGC

employees actively promoted the SIBL CDs to investors. SGC

was a member of SIPC, while SIBL was not.

The parties stipulated to certain facts concerning the sales

of SIBL CDs. To purchase a CD, “an investor had to open an

account with SIBL. CD investors wrote checks that were

deposited into SIBL accounts and/or filled out or authorized

wire transfer requests asking that money be wired to SIBL for

the purpose of opening their accounts at SIBL and purchasing

CDs.” J.A. 952. “Most . . . investors either received the

physical CD certificates or had them held by an authorized

designee.” J.A. 953. SGC, for its part, did not itself hold CD

certificates for investors. “To the extent that some SIBL CD

investors did not receive the physical certificates, the SEC is not

relying on that fact to support its claims in this proceeding.” Id.

CD investors “received periodic statements from SIBL

reflecting the balances in their SIBL accounts.” Id.
7

Disclosure statements for SIBL CDs sold in the United

States stated that “SIBL’s products are not subject to the

reporting requirements of any jurisdiction, nor are they covered

by the investor protection or securities insurance laws of any

jurisdiction such as the U.S. Securities Investor Protection

Insurance [sic] Corporation.” Id. A version of the CD

marketing brochure reiterated that the CDs were not covered by

U.S. investor protection laws, and further stated that there was

“no guarantee investors will receive interest distributions or the

return of their principal.” Id. Despite those written warnings,

some investors report being told bySGC representatives that the

SIBL CDs were covered by U.S. investor protection laws,

including the Act.

Stanford’s extensive financial fraud was met with a variety

of legal responses. In 2009, the SEC filed a civil enforcement

action in federal district court against Stanford, SGC, SIBL, and

others. The court appointed a receiver for SGC and other

entities. The receiver determined that SIBL CDs worth

approximately $7.2 billion were outstanding worldwide as of

February 2009. The SEC ultimately prevailed, and the court

imposed a civil penalty of $6 billion. See Chadbourne, 134 S.

Ct. at 1064-65. Stanford himself was convicted in 2012 of

conspiracy, wire fraud, mail fraud, obstruction of justice, and

money laundering. He was sentenced to 110 years of

imprisonment and ordered to forfeit approximately $6 billion. 

Id. at 1064, 1070. Antiguan authorities separately initiated

proceedings to liquidate SIBL and process claims against the

bank. SIBL CD investors also brought class action lawsuits

against law firms, investment advisors, and other entities that

allegedly assisted Stanford in perpetrating the fraud. See

Chadbourne, 134 S. Ct. at 1062, 1065 (finding that four such

class action suits were not barred by federal securities statutes

and could proceed). 
8

C.

This case involves the prospect of a distinct response to the

Stanford fraud: an action by SIPC to liquidate SGC. In August

2009, the court-appointed receiver in the SEC’s civil

enforcement action asked SIPC to determine whether it would

liquidate SGC in orderto protect the assets of investors who had

purchased SIBL CDs at the suggestion of SGC employees. 

SIPC responded that it found no basis under the Act to initiate

a liquidation of SGC. In SIPC’s view, the CD investors were

not SGC “customers” within the meaning of the Act, a

precondition to liquidation of SGC. SIPC explained that the

Act “protects the ‘custody’ function that brokerage firms

perform for customers.” J.A. 158. Here, SIPC concluded, the

circumstances fell outside the Act’s custody function because

SGC itself never held investors’ cash or securities in connection

with their purchase of the CDs. Rather, “cash for the purpose

of purchasing CDs . . . was sent to SIBL, which is precisely

what the customer intended.” J.A. 160. As for the “physical

CDs,” they presumably “were issued to, and delivered to” the

investors, and SGC did not “maintain[] possession or control of

the CDs.” J.A. 159-60. In short, “SGC is not, nor should it be,

holding anything for . . . a customer.” J.A. 160. “The fact that

the security has gone down in value, even because of a fraud in

which SGC is complicit,” SIPC added, “does not change that

result.” J.A. 160. Because the CD investors failed to qualify as

“customers” of SGC within the meaning of the Act, SIPC

concluded, the investors were ineligible for liquidation

protection.

Two years later, the SEC reached the opposite conclusion. 

In June 2011, the Commission issued a formal analysis stating

that investors who had purchased SIBL CDs at the urging of

SGC employees qualified as SGC “customers” under the Act. 

Citing evidence that Stanford had “structured the various
9

entities in his financial empire . . . for the principal, if not sole,

purpose of carrying out a single fraudulent Ponzi scheme,” the

Commission determined that the “separate existence” of SIBL

and SGC “should be disregarded.” J.A. 242. The Commission

also cited evidence that investors might have believed that they

were depositing cash with SGC when they purchased their SIBL

CDs, and that some SIBL CD deposits were diverted to pay

SGC’s expenses. “Based on the totality of the facts and

circumstances,” the SEC concluded, “investors with brokerage

accounts at SGC who purchased SIBLCDs through SGC should

be deemed to have deposited cash with SGC for purposes of

SIPA coverage.” J.A. 244. SIPC remained unpersuaded by the

SEC’s analysis, however, and declined to initiate a liquidation

proceeding.

The SEC then filed an application with the district court

under 15 U.S.C. § 78ggg(b), seeking an order compelling SIPC

to commence liquidation proceedings for SGC. The court

addressed several preliminary questions in a February 2012

decision. See SEC v. Sec. Investor Prot. Corp., 842 F. Supp. 2d

321 (D.D.C. 2012). The court held that § 78ggg(b) required the

court to evaluate de novo whether there were SGC “customers”

in need of protection, rather than simply accepting the SEC’s

views without judicial review. Id. at 328-29. The court further

held that § 78ggg(b) mandated a “summaryproceeding,” not the

“full, formal procedures of the Federal Rules of Civil

Procedure.” Id. at 327. The court ordered supplemental

briefing on the appropriate “procedures, burdens, and

discovery” in the circumstances. Id. at 329.

In a second opinion, the district court denied the SEC’s

application on the merits. See SEC v. Sec. Investor Prot. Corp.,

872 F. Supp. 2d 1 (D.D.C. 2012). The court adopted SIPC’s

view that SIBLCD investors fail to qualify as SGC “customers”

within the meaning of the statute because CD investors never
10

directly deposited funds or securities with SGC itself. Id. at 8. 

The court distinguished cases in which a broker had

misappropriated funds without completing the promised

securities purchase. Here, by contrast, the court reasoned, the

“SIBL CDs were in fact purchased and did in fact exist for the

SGC clients.” Id. at 11. The court also adopted SIPC’s view

that a preponderance-of-the-evidence standard applies in

§ 78ggg(b) proceedings, id. at 5, but it concluded that the

evidentiary standard ultimately did not matter because the case

turned on “uncontested facts and an interpretation of law,” id.

at 12.

II.

The SEC appeals the denial of its application under

§ 78ggg(b) to order SIPC to commence liquidation of SGC. 

That provision comes into play only if SIPC has failed to “act

for the protection of [SGC] customers.” 15 U.S.C. § 78ggg(b)

(emphasis added); see also 15 U.S.C. § 78eee(a)(3)(A)

(authorizing SIPC to file an application to liquidate only if it

determines that the member broker “has failed or is in danger of

failing to meet its obligations to customers” (emphasis added)). 

The central issue in this appeal is whether investors who

purchased SIBL CDs at the suggestion of SGC employees

qualify as SGC “customers” under the Act.

Because the district court rested its decision on uncontested

facts and an interpretation of law, we review that decision de

novo. See In re New Times Sec. Servs., Inc. (New Times I), 371

F.3d 68, 75 (2d Cir. 2004); Gordon v. Holder, 632 F.3d 722,

724 (D.C. Cir. 2011). We do not reach the question of the

appropriate evidentiary burden, as we resolve the case based on

the stipulated facts. We conclude, in agreement with the district

court, that SIBL CD investors are not SGC “customers” within

the meaning of the Act.
11

A.

The “principal purpose of SIPA is to protect investors

against financial losses arising from the insolvency of their

brokers.” In re New Times Sec. Servs., Inc. (New Times II), 463

F.3d 125, 127 (2d Cir. 2006) (internal quotation marks omitted). 

Before SIPA, when a brokerage firm failed, customer funds and

securities held on deposit with the brokerage often became

depleted or enmeshed in bankruptcy proceedings. See Barbour,

421 U.S. at 415. The Act addresses that issue by protecting the

custody function of brokers, i.e., by “protect[ing] customer

interests in securities and cash left with broker-dealers.” Louis

Loss & Joel Seligman, Securities Regulation § 8.B.5.A, at 3290

(3d ed. 2003) (citing legislative history). SIPA thus aims “to

protect securities investors against losses resulting from the

failure of an insolvent or otherwise failed broker-dealer to

properly perform its role as the custodian of customer cash and

securities.” 1 Collier on Bankruptcy ¶ 12.01, at 12-4 (16th ed.

2014).

The Act generally affords no protection against other types

of losses, such as those stemming from a decline in investment

value. That is so even if a broker fraudulently induced the

losing investment in the first place. Consequently, “if a broker

used fraudulent means to convince a customer to purchase a

stock and the customer left that stock with the broker, who

subsequently became insolvent, SIPC would be required by

SIPA only to return the stock to the customer.” Sec. Investor

Prot. Corp. v. Vigman, 803 F.2d 1513, 1517 n.1 (9th Cir. 1986). 

In that fashion, the statute “‘works to expose the customer to the

same risks and rewards that would be enjoyed had there been no

liquidation.’” New Times II, 463 F.3d at 128 (quoting 6 Collier

on Bankruptcy ¶ 741.06[6] (15th ed. rev.)). Investors who

suffer losses in investment value resulting from fraud may have

claims under other provisions of the securities laws. See
12

Vigman, 803 F.2d at 1517 n.1. SIPA, however, is centrally

addressed to a broker’s custody function.

SIPA’s definition of “customer” embodies the Act’s focus

on a broker’s role as custodian of its customers’ property. SIPA

defines “customer” as

any person . . . who has a claim on account of

securities received, acquired, or held by the debtor in

the ordinary course of its business as a broker or

dealer from or for the securities accounts of such

person for safekeeping, with a view to sale, to cover

consummated sales, pursuant to purchases, as

collateral, security, or for purposes of effecting

transfer.

15 U.S.C. § 78lll(2)(A). The Act further provides that a

“customer” includes “any person who has deposited cash with

the debtor for the purpose of purchasing securities.” 15 U.S.C.

§ 78lll(2)(B)(i). The “‘critical aspect of the “customer”

definition is the entrustment of cash or securities to the brokerdealer for the purposes of trading securities.’” In re Bernard L.

Madoff Inv. Sec. LLC, 654 F.3d 229, 236 (2d Cir. 2011)

(emphasis omitted) (quoting Appleton v. First Nat’l Bank of

Ohio, 62 F.3d 791, 801 (6th Cir. 1995)); see In re Brentwood

Sec., Inc., 925 F.2d 325, 327 (9th Cir. 1991) (“[The ‘customer’]

definition embodies a common-sense concept: An investor is

entitled to compensation from the SIPC only if he has entrusted

cash or securities to a broker-dealer who becomes insolvent.”). 

To come within the fold of SIPA’s protections, an investor thus

ordinarily must demonstrate both that the broker “actually . . .

received, acquired or held the claimant’s property, and that the

transaction giving rise to the claim . . . contain[ed] the indicia of

a fiduciary relationship” between the investor and the broker. 1

Collier on Bankruptcy ¶ 12.12[2], at 12-50. An investor’s
13

“customer” status is evaluated on an asset-by-asset basis and

may change over time. See New Times II, 463 F.3d at 130.

Here, insofar as the analysis focuses on the entity that in

fact held custody over the property of the SIBL CD investors,

the investors fail to qualify as “customers” of SGC under the

statutory definition. That is because SGC never “received,

acquired, or held” the investors’ cash or securities. 15 U.S.C.

§ 78lll(2)(A); see 15 U.S.C. § 78lll(2)(B)(i). With regard to the

investors’ cash, it is undisputed that investors at no time

deposited funds with SGC to purchase the SIBL CDs. The

funds instead went to SIBL. Under the stipulated facts,

investors either “wrote checks that were deposited into SIBL

accounts and/or filled out or authorized wire transfer requests

asking that money be wired to SIBL for the purpose of opening

their accounts at SIBL and purchasing CDs.” J.A. 952. With

respect to the investors’ securities, the SEC makes no contention

that SGC held the CD certificates for investors. Rather, the

stipulated facts provide that most “investors either received the

physical CD certificates or had them held by an authorized

designee.” J.A. 953. And “[t]o the extent that some SIBL CD

investors did not receive the physical certificates, the SEC is not

relying on that fact to support its claims in this proceeding.” Id.

Because SGC had no custody over the investors’ cash or

securities, the investors do not qualify as SGC “customers”

under the ordinary operation of the statutory definition.

B.

The Commission’s principal response is that we should

disregard the legal separateness of SGC and SIBLand treat them

as a combined entity. According to the Commission, the

companies operated in a highly interconnected fashion in

furtherance of the fraudulent Ponzi scheme, eschewing corporate

formalities. As a result, the Commission contends, investors
14

who deposited funds with SIBL for the purchase of CDs in

effect deposited funds with SGC. In the Commission’s view,

the investors thus qualify as “customers” of a SIPC-member

firm for purposes of triggering the Act’s protections. We

conclude, however, that even if SGC and SIBL were treated as

a combined entity, investors still would not qualify as

“customers” of a SIPC-member firm.

The Commission grounds its argument for disregarding the

corporate separateness of SIBL and SGC in the doctrine of

“substantive consolidation,” an equitable doctrine typically

applied in bankruptcy proceedings. “In general, substantive

consolidation results in the combination of the assets of [two]

debtors into a single pool from which the claims of creditors of

both debtors are satisfied ratably.” 2 Collier on Bankruptcy

¶ 105.09[3], at 105-110–11; see In re Auto-Train Corp., 810

F.2d 270, 276 (D.C. Cir. 1987). Courts have employed a

“variety” of tests when assessing whether to grant substantive

consolidation. 2 Collier on Bankruptcy ¶ 105.09[2][a], at 105-

96; e.g., In re Owens Corning, 419 F.3d 195, 210-11 (3d Cir.

2005). With regard to the Stanford companies, the court

overseeing the receivership in connection with the SEC’s civil

enforcement action concluded that substantive consolidationwas

warranted.

The doctrine of substantive consolidation has been applied

in SIPA liquidations. In New Times I, for instance, the

bankruptcy court substantively consolidated a SIPC-member

broker undergoing liquidation with a related, non-broker entity. 

371 F.3d at 73. The assets of the related entity were brought

into the SIPC member’s liquidation estate, enlarging the

available pool for customer recovery. Id. Investors with cash

on deposit with the non-broker entity were treated as

“customers” in the liquidation, even though the member broker

itself never held those investors’ funds. Id. Here, the SEC
15

contends, substantive consolidation of SIBL and SGC would

similarly mean that investors who deposited funds with a nonSIPC member (SIBL) would be treated as “customers” of a

SIPC member (SGC) for purposes of invoking the Act’s

protections.

Even if we were to consolidate, however, SIBL CD

investors would not be “customers” of a SIPC-member entity

under the statutory definition. The Act specifically excludes

from “customer” status “any person, to the extent that . . . such

person has a claim for cash or securities which by contract,

agreement, or understanding, or by operation of law, is part of

the capital of the debtor.” 15 U.S.C. § 78lll(2)(C), (C)(ii)

(emphasis added). We, like other courts, understand that

provision to establish that “a claimant cannot qualify for

customer status under SIPA to the extent that he or she is a

lender rather than an investor.” 1 Collier on Bankruptcy ¶

12.12[4][a], at 12-56 (collecting cases). As the Eleventh Circuit

has explained, “[c]ash that is simply lent to the brokerage cannot

form the basis of a SIPA customer claim because the statute’s

definition of ‘customer’ excludes individuals whose claims are

for ‘cash . . . which . . . is part of the capital of the debtor.’” In

re Old Naples Sec., Inc., 223 F.3d 1296, 1304 n.18 (11th Cir.

2000) (ellipses in original) (quoting 15 U.S.C. § 78lll(2)(B)

(2000), now codified at 15 U.S.C. § 78lll(2)(C)(ii) (2012)). In

other words, “individuals must have a fiduciary relationship,

rather than a creditor-debtor arrangement, with their brokerage

to state a claim under SIPA.” Id.; accord In re Primeline Sec.

Corp., 295 F.3d 1100, 1110 (10th Cir. 2002). The upshot is that

a “person is excluded from eligibility for customer protection to

the extent that person invests in the SIPA debtor by making a

loan to the debtor, rather than investing through the SIPA debtor

in the securities market as part of the debtor’s ordinary course of

business as a broker-dealer.” 1 Collier on Bankruptcy

¶ 12.12[4][a], at 12-56–57 (emphasis added).
16

Here, investors who purchased SIBL CDs lent funds to

SIBL that became part of SIBL’s capital: Those investors gave

cash to SIBL in exchange for a promise to be repaid with a fixed

rate of return. See Chadbourne, 134 S. Ct. at 1064 (SIBL CDs

“were debt assets that promised a fixed rate of return”) (internal

quotation marks omitted). The investors invested “in,” not

“through,” SIBL. 1 Collier on Bankruptcy ¶ 12.12[4][a], at

12-56. The basic nature of those investors’ relationship with the

recipient of their cash would not change if the recipient were

deemed to be a consolidated entity rather than SIBL alone. 

Under a consolidated view, investors who purchased SIBL CDs

lent money to the consolidated SIBL/SGC entity, forming a

“creditor-debtor arrangement.” Old Naples, 223 F.3d at 1304

n.18. The CD proceeds thus became part of the consolidated

entity’s “capital,” triggering the statutory exclusion from

“customer” status for lenders. 15 U.S.C. § 78lll(2)(C)(ii).

The circumstances are directly analogous to those in New

Times II. In that case, SIPC had liquidated a member brokerage

firm, New Times Securities Services, Inc. (New Times), whose

principal had defrauded investors. See New Times II, 463 F.3d

at 126-27; New Times I, 371 F.3d at 71-72. A related, nonSIPC-member entity, New Age Financial Services, Inc. (New

Age), was brought into the liquidation through substantive

consolidation. See New Times I, 371 F.3d at 73. The issue in

New Times II was whether individuals who had been defrauded

into investing in “promissory notes” issued by New Times and

New Age could recover as “customers” in the liquidation. See

New Times II, 463 F.3d at 126-27. The Second Circuit held that

they could not. Id. at 127-30. The court explained that the Act’s

“customer” definition “distinguishes between (i) claimants

(protected as customers) who are engaged through brokers in

trading activities in the securities markets and (ii) those

(unprotected) claimants who are relying on the ability of a

business enterprise to repay a loan.” Id. at 128 (citing 15 U.S.C.
17

§ 78lll(2)(C)(ii)). The New Times and New Age promissory

notes were “just the type of debt instruments whose possession

brings claimants within the category of unprotected lenders,”

even under a consolidated view. Id. at 129. Here, the SIBLCDs

likewise are “just the type of debt instruments whose possession

brings claimants within the category of unprotected lenders.” 

Id. Section 78lll(2)(C)(ii) therefore excludes SIBL CD holders

from “customer” status, even assuming SGC and SIBL should

be substantively consolidated.

The SEC does not dispute that funds loaned to an entity

generally become part of the entity’s “capital” within the

meaning of § 78lll(2)(C)(ii). The SEC instead contends that the

§ 78lll(2)(C)(ii) exclusion is “inapplicable where, as here, the

claimants did not intend to loan money to the broker-dealer.”

Pet’r’s Br. 49-50 n.20. According to the SEC, because investors

intended to loan money to SIBL—not SGC—the CD proceeds

could not become part of SGC’s “capital” even if they became

part of SIBL’s. But if SGC and SIBLare consolidated, investors

did intend to loan money to the consolidated entity. That

intention puts this case in alignment with New Times II.

That intention also sets this case materially apart from the

decisions on which the SEC relies, Primeline, 295 F.3d 1100,

Old Naples, 223 F.3d 1296, and In re C.J. Wright & Co. Inc.,

162 B.R. 597 (Bankr. M.D. Fla. 1993). In each of those cases,

the investors had no intention to loan their funds to any affiliated

entity that might be considered consolidated with the SIPCmember firm. Instead, the individuals sought to invest cash to

obtain debt instruments issued by an unrelated third party. See

Primeline, 295 F.3d at 1104, 1110; Old Naples, 223 F.3d at

1300-01, 1304-05; C.J. Wright, 162 B.R. at 606. The investors

sought to invest “through” the consolidated entity, not “in” the

consolidated entity. 1 Collier on Bankruptcy ¶ 12.12[4][a], at

12-56. The investors’ funds therefore could not be considered
18

“part of the capital” of any consolidated entity for purposes of

§ 78lll(2)(C)(ii): The consolidated entity would hold the funds,

in a strictly custodial capacity, for investment in a security

issued by a third party. The opposite is true here: The

consolidated entity—SIBL and SGC—held the funds in a

non-custodial capacity, i.e., as part of its capital.

Indeed, the § 78lll(2)(C)(ii) exclusion specifically

encompasses deposits that become “part of the capital” of a

SIPC-member firm “by operation of law.” It is undisputed that

SIBLCD proceeds were “part of the capital” of SIBL. Under the

SEC’s view, those proceeds effectivelyalso became part of SGC

under the legal doctrine of substantive consolidation. But if so,

the “capital” of SIBL would become “part of the capital” of

SGC “by operation of law,” placing the CD proceeds squarely

within the ambit of § 78lll(2)(C)(ii). Because we believe the

SEC’s contrary understanding of the Act’s definition of

“customer” cannot be squared with the § 78lll(2)(C)(ii)

exclusion, we need not address whether, as the SEC contends,

its formal analysis letter should be accorded Chevron deference.

The SEC makes one additional argument in contending that

the § 78lll(2)(C)(ii) exclusion should not apply here. The

agency asserts—for the first time in its reply brief, and with no

further elaboration—that “funds given to a consolidated entity

in exchange for SIBL CDs should not become part of that

entity’s capital because the SIBLCDs were merely participatory

interests in a Ponzi scheme.” Pet’r’s Reply Br. 16. The SEC

made no such contention in its formal analysis letter, and we

therefore need not consider whetherthe argument would amount

to a reasonable construction of the statute for Chevron purposes. 

Considering the argument without any overlay of deference, we

find it unpersuasive. The SEC offers no explanation why

investment proceeds that would otherwise become part of the

issuing entity’s “capital” lose that characteristic if the
19

investment is induced by fraud as part of a Ponzi scheme. Nor

are we aware of any legal support for that proposition. To the

contrary, any such conclusion would be inconsistent with New

Times II. There, the Second Circuit held that purchasers of

promissory notes from a consolidated entity were “unprotected

lenders” to the entity—rather than “customers” of the

entity—even though the investment was “fraudulentlyinduced.”

463 F.3d at 129; see id. at 126 (investors were “issued

fraudulent promissory notes”). There is no reason to reach a

different conclusion here.

C.

The SEC raises a fallback argument in the event we reject

its effort to treat SGC and SIBL as one consolidated entity. 

According to the SEC, regardless of whether the companies are

consolidated, investors who gave cash to SIBL for CDs should

be deemed to have deposited cash with SGC under the approach

set forth in Old Naples and Primeline. Those decisions,

however, do not support concluding that the CD investors may

be considered “customers” of SGC. The decisions instead

reinforce our conclusion that the capital exclusion in

§ 78lll(2)(C)(ii) precludes finding the Act’s “customer”

definition satisfied here.

In Old Naples, the Eleventh Circuit considered another

financial fraud involving both a SIPC-member broker and a nonSIPC-member entity. 223 F.3d at 1299-1300. Investors

received instructions to send money to both entities with the

understanding that the broker would then purchase bonds in the

investors’ names. Id. at 1301. Instead of buying the bonds, the

owner of the entities misappropriated investor funds for his

personal use and for payment of the brokerage firm’s expenses. 

Id. at 1300. The Eleventh Circuit held that investors who had

sent money to the non-SIPC-member entity could recover in the
20

liquidation as “customers” even though theyhad never deposited

funds with the SIPC-member broker itself. Id. at 1302-06. The

court found that customer status “does not . . . depend simply on

to whom the claimant handed her cash or made her check

payable.” Id. at 1302. Instead, “[i]f an investor intended to have

the brokerage purchase securities on her behalf and reasonably

followed the broker’s instructions regarding payment, she can be

considered a ‘customer’ under SIPA if the brokerage or its

agents then misappropriate the funds.” Id. at 1303. Investors

who had sent funds to the non-SIPC-member entity qualified as

“customers” under the Act because they “had no reason to know

that they were not dealing with” the SIPC-member broker and

because the broker had “acquired control over all of” the

deposited funds. Id. at 1303-04 (internal quotation marks

omitted).

The Tenth Circuit’s decision in Primeline is to the same

effect. There, an employee of a SIPC-member firm operated a

Ponzi scheme involving the sale to investors of “debentures in

fictitious corporations.” 295 F.3d at 1104 (internal quotation

marks omitted). At the employee’s direction, investors made

out checks to third-party accounts—not to the brokerage firm

itself—from which the employee misappropriated investor

funds. Id. Citing Old Naples, the Tenth Circuit reiterated the

principle that, “[i]f a claimant intended to have the brokerage

purchase securities on the claimant’s behalf and reasonably

followed the broker’s instructions regarding payment, the

claimant is a ‘customer’ under SIPA even if the brokerage or its

agents misappropriate the funds.” Id. at 1107. The court

affirmed the bankruptcy court’s finding that investors had

“reasonably thought” that the employee was “acting as an agent

of [the broker] when he directed them to make out their checks

to one of his third-party companies.” Id. (internal quotation

marks omitted). As a result, the court held, those investors were

entitled to recover as “customers” in the liquidation. Id. at 1109.
21

Here, the SEC points to facts that “could have led SGC

account holders who purchased SIBL CDs through SGC to

believe they were depositing cash with SGC for the purpose of

purchasing the CDs,” J.A. 243—even though, pursuant to the

stipulated facts, those investors in fact sent their funds directly

to SIBL. The SEC notes that certain SIBL CD investors “had

accounts at SGC, dealt solely with SGC representatives, and

paid for their CDs in accordance with SGC’s instructions.”

Pet’r’s Br. 52. The SEC highlights investor affidavits reporting

that SGC employees blurred the lines between SGC and SIBL,

“frequently refer[ring] simply to ‘Stanford’ without clearly

distinguishing between” the two entities. J.A. 243. In addition,

the SEC observes, certain customers “made checks for the

purchase of the CDs payable to ‘Stanford,’” possibly indicating

“investor confusion regarding the entity with which they were

depositing money.” J.A. 244. Those considerations, in the

SEC’s view, bring this case within the fold of Old Naples and

Primeline for investors who intended to deposit funds with SGC

and reasonably believed they were doing so. As in those cases,

the SEC contends, the fact that the CD investors in fact

deposited cash with SIBL should not stand in the way of

deeming them to have deposited cash with SGC for purposes of

treating them as protected “customers.” SIPC disagrees,

contending, for example, that investors could not reasonably

have believed they were depositing funds with SGC in light of

CD disclosure statements clearly stating that the CDs were

issued by a non-SIPC member.

We need not resolve that disagreement. Even if certain

SIBL CD investors reasonably believed that they had deposited

cash with SGC, Old Naples and Primeline still would fail to

support concluding that those investors qualify as “customers”

under the Act’s definition. The SEC’s argument disregards a

subsequent inquiry undertaken in both Old Naples and

Primeline: whether the investors intended to deposit their funds
22

as a loan so as to trigger the § 78lll(2)(C)(ii) exclusion for funds

that become part of the recipient’s “capital.” In Old Naples,

SIPC argued that the investors failed to qualify as “customers”

because they intended to give a loan to the recipient rather than

to deposit cash for investment on their behalf. See 223 F.3d at

1304. The court rejected that argument, holding that the

investors intended the broker to use the funds to invest in bonds

issued by a third party. Id. at 1304-05. In Primeline, similarly,

SIPC argued that the investors “were lenders rather than

investors” and thus fell outside the “customer” definition by

virtue of the § 78lll(2)(C)(ii) exclusion. 295 F.3d at 1110. The

court disagreed, affirming the bankruptcy court’s finding that

the investors “intended to invest, not loan, the funds each

entrusted to [the broker].” Id.

This case stands on a markedly different footing. Here, as

explained, the investors who purchased SIBL CDs acted as

lenders. Even assuming those investors reasonably believed

SIBL and SGC were part of a unified Stanford entity, they

deposited their cash with that entity as lenders: in exchange for

a promise of repayment in the form of a CD. Their funds thus

became part of the Stanford entity’s “capital” for purposes of the

§ 78lll(2)(C)(ii) exclusion. Accordingly, even if we adhere to

the approach set forth in Old Naples and Primeline—as the SEC

requests we do—that approach compels concluding that the

investors in SIBL CDs fail to qualify as “customers” under the

Act.

* * * * *

In declining to grant the SEC’s requested relief, the district

court expressed that it was “truly sympathetic to the plight of the

SGC clients who purchased the SIBL CDs and now find

themselves searching desperately for relief.” 872 F. Supp. 2d at

12. We fully agree. But we also agree with the district court’s
23

conclusion that SIBL CD investors were not SGC “customers”

under the Act. We therefore affirm the district court’s denial of

the SEC’s application for an order compelling SIPC to

commence liquidation of SGC.

 So ordered.