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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

 

)

Securities and Exchange Commission,

)

)

Applicant,

)

MISC. NO. 11-MC-678-RLW

v.

)

)

[STATUS CONFERENCE

Securities Investor Protection Corporation,

)

SCHEDULED FOR

)

MARCH 5, 2012]

Respondent.

)

)

)

SECURITIES INVESTOR PROTECTION CORPORATION’S BRIEF IN OPPOSITION TO SEC’S APPLICATION FOR ORDER UNDER 15 U.S.C. § 78ggg(b)

Eugene F. Assaf, P.C. (D.C. Bar # 449778) Edwin John U (D.C. Bar #464526) John O’Quinn (D.C. Bar # 485936) Elizabeth M. Locke (D.C. Bar # 976552)

Michael W. McConnell (admitted pro hac vice) Susan Marie Davies (admitted pro hac vice)

KIRKLAND & ELLIS LLP 655 Fifteenth Street, N.W., Suite 1200 Washington, DC 20005 Tel: (202) 879-5000 Fax: (202) 879-5200 eugene.assaf@kirkland.com edwin.u@kirkland.com john.oquinn@kirkland.com

February 16, 2012

Josephine Wang (D.C. Bar #279299) General Counsel Securities Investor Protection Corporation 805 Fifteenth Street, N.W. Washington, D.C. 20005 Tel: (202) 371-8300 jwang@sipc.org

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TABLE OF CONTENTS

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Page

INTRODUCTION

1

BACKGROUND

4

ARGUMENT

5

I. The SEC’s Application Should Be Denied

5

A. Under Section 78ggg(B), the SEC Has the Burden to Show SIPC Has Failed to Discharge “Obligations” to “Customers” of a “Member.”

6

B. Protected “Customers” Within the Meaning of SIPA Are Only Those Who Have Cash or Securities in the Custody Of a “Member” Brokerage

9

1. To Qualify as a “Customer,” SIPA Requires an Investor to Have “Entrusted” Cash or Securities with a Broker When It Failed

10

2. SIPA Determines “Customer” Status Based on What a “Member” Was Supposed To Be Holding on Deposit at the Time It Failed

11

3. SIPA Does Not Protect Against Investment Fraud

12

4. SIPA Does Not Protect The Value of Investments

12

C. The SEC Has Not Made the Requisite Showing That SIPC Has Failed to Discharge Its “Obligations” to “Customers” of a SIPC “Member.” 14

 

1. SIBL Was an Offshore Bank—Not a Registered Broker Dealer

14

2. Investors Deposited Funds With the Offshore Bank and Clearly Had the Purpose of Purchasing SIBL

16

3. Investors Received Custody of Their SIBL CDs

18

4. Once a “Customer” Does Not Mean Always a “Customer.”

20

5. Ponzi Schemes Do Not Alter the “Customer”

20

D. SIPA’s Text Demonstrates That Corporate Formalities

22

E. Old Naples and Primeline Are Distinguishable

27

II. Limited Discovery Is Necessary and Appropriate Given the SEC’s Theory

29

A.

SIPC Seeks Limited and Expedited Discovery

29

i

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B.

The Burden on the SEC In Producing This Material Is

31

CONCLUSION

38

CERTIFICATE OF SERVICE

39

ii

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TABLE OF AUTHORITIES

Page 4 of 46

 

Page

Cases

Ad Hoc Metals Coalition v. Whitman,

 

227

F. Supp. 2d 134 (D.D.C. 2002)

34

Anderson v. Liberty Lobby, Inc.,

477

U.S. 242 (1986)

21, 31

Arford v. Miller,

239

B.R. 698 (Bankr. S.D.N.Y. 1999)

10

Cmty. Sav. & Loan Ass’n v. Fed. Home Loan Bank Bd.,

68

F.R.D. 378 (E.D. Wis. 1975)

35

Fund for Animals v. Williams,

391

F. Supp. 2d 191 (D.D.C. 2005)

34

Fundora v. Stanford Int’l Bank Ltd., Claim No. ANUHCV 0126 of 2009 (E. Caribbean Sup. Ct., Antigua & Barbuda, Apr. 17, 2009)

25, 27

Holcomb v. Powell,

433

F.3d 889 (D.C. Cir. 2006)

21, 31

In re Adler, Coleman Clearing Corp.,

216

B.R. 719 (Bankr. S.D.N.Y. 1998)

8

In re Aozora Bank Ltd., No. 11-5683, 2012 WL 28468 (S.D.N.Y. Jan. 4, 2012)

21, 23

In re Atkeison,

446

F. Supp. 844 (M.D. Tenn. 1977)

13, 16

In re Bell & Beckwith,

124

B.R. 35 (Bankr. N.D. Ohio 1990)

11

In re Brentwood Sec., Inc.,

925

F.2d 325 (9th Cir. 1991)

9, 10, 12, 16

In re Brentwood Sec., Inc.,

96

B.R. 1002 (B.A.P. 9th Cir. 1989)

8

In re Carolina First Sec. Grp., Inc.,

173

B.R. 884 (Bankr. M.D.N.C. 1994)

26

iii

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In re First Sec. Grp. of Cal., No. 94-56706, 1996 WL 92115 (9th Cir. Mar. 4, 1996)

26

In re Klein, Maus & Shire, Inc.,

301

B.R. 408 (Bankr. S.D.N.Y. 2003)

9, 12

In re Monitor Single Lift I, Ltd.,

381

B.R. 455 (Bankr. S.D.N.Y. 2008)

27

In re MV Sec., Inc., 48 B.R. 156 (Bankr. S.D.N.Y. 1985)

9

In re New Times Sec. Servs., Inc.,

463

F.3d 125 (2d Cir. 2006)

20, 21, 23

In re Old Naples Sec., Inc.,

223

F.3d 1296 (8th Cir. 2000)

27, 28

In re Omni Mut., Inc.,

193

B.R. 678 (S.D.N.Y. 1996)

9

In re Primeline Sec. Corp.,

295

F.3d 1100 (10th Cir. 2002)

27, 28

In re Stalvey & Assocs., Inc.,

750

F.2d 464 (5th Cir. 1985)

11, 20

In re: Lehman Bros. Inc., No. 08-01420 (Bankr. S.D.N.Y. Oct. 21, 2011)

36

JP Morgan Chase Bank v. Altos Hornos de Mexico, S.A. de C.V.,

412

F.3d 418 (2d Cir. 2005)

26

Kent Cnty., Delaware Levy Court v. EPA,

963

F.2d 391 (D.C. Cir. 1992)

34

Leocal v. Ashcroft,

543

U.S. 1 (2004)

13

Liberty Prop. Trust v. Republic Props. Corp.,

577

F.3d 335 (D.C. Cir. 2009)

24

Nat’l Courier Ass’n v. Bd. of Governors of the Fed. Reserve Sys.,

516

F.2d 1229 (D.C. Cir. 1975)

34

NRDC v. Train,

519

F.2d 287 (D.C. Cir. 1975)

34

iv

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Occidental Petroleum Corp. v. SEC,

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873

F.2d 325 (D.C. Cir. 1989)

35

Pardo v. Wilson Line of Wash., Inc.,

414

F.2d 1145 (D.C. Cir. 1969)

24

Roland v. Green, No. 3:10-cv-00224 (N.D. Tex. Aug. 31, 2011)

34

San Luis Obispo Mothers for Peace v. NRC,

751

F.2d 1287 (D.C. Cir. 1984)

35

SEC v. F. O. Baroff Co., Inc.,

497

F.2d 280 (2d Cir. 1974)

10

SEC v. Howard Lawrence & Co., 1 Bankr. Ct. Dec. (CRR) 577 (S.D.N.Y. 1975)

12

SEC v. Kenneth Bove & Co.,

378

F. Supp. 697 (S.D.N.Y. 1974)

10

SEC v. Packer, Wilbur & Co.,

498

F.2d 978 (2d Cir. 1974)

12

SEC v. S.J. Salmon & Co.,

375

F. Supp. 867 (S.D.N.Y. 1974)

13

SEC v. Sec. Planners Ltd.,

416

F. Supp. 762 (D. Mass. 1976)

11

Seed Co., Ltd. v. Westerman, Civ. A. No. 08-0355, 2012 WL 28521 (D.D.C. Jan. 5, 2012)

31

SIPC v. Barbour,

421

U.S. 412 (1975)

10, 16, 20, 23

SIPC v. Vigman,

803

F.2d 1513 (9th Cir. 1986)

12

United States v. Menasche,

348

U.S. 528 (1955)

13

Valley Fin. Inc. v. United States,

629

F.2d 162 (D.C. Cir. 1980)

24

Victrix Steamship Co., S.A. v. Salen Dry Cargo A.B.,

825

F.2d 709 (2d Cir. 1987)

27

v

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Rules and Statutes

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11

U.S.C. § 510(b)

22

15

U.S.C. § 78aaa et

passim

Other Authorities

H. Minnerop, The Role and Regulation of Clearing Brokers, 48 The Business Lawyer, May 1993

19

H.R. Rep. No. 91-1613, 91st Cong., 2d Sess

17

Rules

Fed. R. Civ. P. 11(b)

36

Fed. R. Civ. P. 30(b)(6)

36

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INTRODUCTION

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The SEC’s Application should be denied as a matter of law because there is no basis for

requiring SIPC to guarantee the value of investments with entities who are not “members” of the

Securities Investor Protection Corporation (“SIPC”)—and a contrary ruling would rewrite what

it means to be an eligible “customer” of a “member” as those terms are defined under the

Securities Investor Protection Act (“SIPA”), 15 U.S.C. § 78aa, et seq.

As a factual matter, the

SEC’s Application also should be denied for the straightforward reason that it has failed to

provide competent, admissible evidence establishing that there are any eligible “customers” of a

“member” under the facts of the Stanford case.

Despite the SEC’s manifest effort to avoid

testing the facts on this score, it is the SEC, not SIPC, that bears the burden of proving its

entitlement to relief under 15 U.S.C. § 78ggg(b), especially when the facts thus far indicate that

SIPA does not even permit—much less require—the initiation of a liquidation for purchasers of

the offshore bank Certificates of Deposit (“CDs”) at issue here. None of the points that the SEC

advances in favor of its position is right on the law, and all of them at least require targeted

discovery to develop a record from which to conduct meaningful judicial review.

Under these

circumstances, the SEC’s “liquidate first, ask questions later” approach should be rejected.

As an initial matter, the SEC’s Application proceeds from an incorrect premise by

ignoring its burden of proof and instead demanding that SIPC “prove the negative” by showing

why a liquidation should not be started. The problem for the SEC, however, is that the statute

vests SIPC with the authority to make the “determination” whether to seek a liquidation under

the facts of each case, and SIPC has explained since 2009 why the statute does not apply under

the facts of the Stanford fraud. As Part I.A of this brief explains, it is the SEC that comes to this

Court demanding the reversal of that outcome by applying for an order under section 78ggg(b),

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and thus the SEC must “demonstrate that it is entitled to such relief.” (Feb. 9, 2012 Mem. Op.

(Dkt. 21) at 11.)

Moreover, the SEC’s Application must be denied on the existing record because the SEC

has not come forward with evidence establishing that there are any eligible “customers” of a

“member” for whom SIPC is even authorized—much less required—to seek a liquidation. As

Parts I.B and I.C explain, both section 78ggg(b) (the provision requiring the SEC to come to this

Court) and section 78eee(a)(3)(A) (the provision guiding SIPC’s “determination” whether to

seek a liquidation) turn on the existence of eligible “customers” of a SIPC “member” brokerage

firm—to support a finding that SIPC has failed to “discharge its obligations” under the statute.

What that means here is that the SEC must show that Stanford Group Company (“SGC”)—a

SIPC-member brokerage firm—was holding a person’s cash or securities as part of a custodial

function, when SGC went into receivership in 2009. The record thus far shows the opposite.

It

is

no

answer for the SEC to

claim that “its theory is different” by pointing to

immaterial facts and then claiming that those facts are undisputed. As Parts I.D and I.E explain,

the problem for the SEC is that its theory overlooks the focus on eligible “customers” of a

“member” that SIPC must find to exist in deciding if a liquidation can be sought. For example,

while the SEC places great emphasis on the fact that Allen Stanford’s business operated in an

interconnected manner, there is no basis for using an alter-ego theory to make an unrelated third

party—SIPC—liable for the obligations of non-members (such as related banks or foreign

investment advisors) in addition to the obligations of member brokerage firms. The SEC itself

has emphasized that it had no authority to regulate Stanford International Bank, Ltd. (“SIBL”) in

Antigua because it was a distinct legal entity from SGC in the U.S., and that distinction confirms

the inconsistency in the SEC’s demand for SIPA coverage here.

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All of this underscores that the parties’ disputes raise intensely factual issues. Even if the

SEC’s Application is to be given further consideration, targeted discovery is the least that due

process requires to test whether there are, in fact, any eligible “customers” of a “member,” where

their CDs were delivered, whether SGC and SIBL were separate or the same, and what facts

supported the SEC Staff’s initial determination that there was no SIPA coverage in the Stanford

case. The SEC’s Application does not resolve any of these factual questions. As discussed in

Part II, nor may the SEC rely upon selective evidence presented in its June 15, 2011 Analysis

and its December 12, 2011 Application, while depriving the parties and the Court of anything

else that bears on whether SIPA applies.

That is not say that the Court has to adjudicate the claims of thousands of individual

investors: the key point here is that the SEC has steadfastly refused to present admissible

evidence that there are any covered “customers” within the specialized definition that SIPA

places on that term. While the SEC’s Application should be denied as a matter of law for the

reasons stated above, SIPC alternatively requests targeted—and expedited—discovery limited to

approximately 5-10 requests for admissions, 5-10 document requests, 5-10 interrogatories, and

focused depositions of the handful of would-be “customers” and examiners the SEC presumably

can proffer in support of its case. The federal court order appointing the SEC Receiver requires

him to “[p]romptly provide the [SEC] and other governmental agencies with all information and

documentation they may seek in connection with its regulatory or investigatory activities”—

underscoring that the SEC readily has the ability to provide this information quickly.

Critically, these are issues for now, not later.

The SEC’s own Inspector General has

noted that liquidations cost literally tens of million of dollars, and the SEC itself conceded during

the January 24, 2012 hearing that liquidations are “very hard … to unwind.” (Jan. 24, 2012 Hr’g

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Tr. (Ex. 1) 8:17-18.) It is neither necessary nor appropriate to send this case to a different court,

especially when section 78ggg(b) requires this Court, and none other, to determine whether SIPC

has failed to “discharge its obligations”—and yet there is no competent, admissible evidence

showing there are any eligible “customers” of a “member” requiring the initiation of a

liquidation in the Stanford case.

BACKGROUND

Beginning as early as 1997, the SEC had every reason to know that Allen Stanford and

his companies were engaged in a Ponzi scheme by selling offshore CDs issued by SIBL in

Antigua.

(Mar.

31,

2010

Report

of

Investigation,

SEC,

Office

of

Inspector

General,

Investigation of the SEC’s Response to Concerns Regarding Robert Allen Stanford’s Alleged

Ponzi Scheme (“Mar. 31, 2010 OIG Report”) (Ex. 2) at 16-17, 149.)

Fourteen years later, on

February 16, 2009, the SEC filed an enforcement action against Stanford and others, charging

the defendants with a “massive, ongoing fraud.” (See SEC v. Stanford, No. 09-0298, Compl. ¶ 1

(N.D. Tex. Feb. 16, 2009).)

At the SEC’s request, the court appointed a receiver, Ralph S.

Janvey (“the SEC Receiver”), to oversee the liquidation of Stanford’s assets.

By that time, the

CDs had lost all or nearly all of their value. (See Aug. 12, 2009 Letter from R. Janvey to SIPC at

1-2,

available

exhibits.PDF.)

at

http://www.stanfordfinancialreceivership.com/documents/SIPC_ltr_with_

On August 12, 2009, the SEC Receiver asked SIPC for its position as to whether SIPA

applied to the Stanford case. (Id.) SIPC responded in writing two days later with a copy to the

SEC staff, explaining that “there is no basis for SIPC to initiate a proceeding under SIPA,”

because the statute does not cover investments with an offshore bank that is not a SIPC-member

firm. (Aug. 14, 2009 Letter from S. Harbeck to R. Janvey (Ex. 3) at 3.) The SEC did not dispute

SIPC’s analysis at the time. To the contrary, the SEC’s own General Counsel at the time agreed

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with the analysis.

(Sept. 16, 2011 Report of Investigation, SEC, Office of Inspector General,

Investigation of Conflict of Interest Arising from Former General Counsel’s Participation in

Madoff-Related Matters (excerpts attached as Ex. 4) at 10, 111-12 & n.95.)

Over two years after commencing the Stanford case, but only one day after a U.S.

Senator threatened to block confirmation of two SEC Commissioners, the SEC asserted for the

first time that investors who had purchased these Antiguan bank CDs were entitled to protection

under the statute. 1

Consistent with the analysis previously provided to the SEC Receiver in

August 2009, the SIPC Board of Directors reaffirmed after careful review in October 2011 that

SIPA did not authorize the initiation of a liquidation under the facts of the Stanford case.

On December 12, 2011, the SEC filed an Application in this Court, demanding an Order

requiring SIPC to initiate a liquidation.

(See Dec. 12, 2011 SEC Application (Dkt. 1) at 1.)

Pursuant to the Court’s February 9, 2012 Order (see Dkt. 22), SIPC respectfully submits this

response to the SEC’s Application.

ARGUMENT

I. THE SEC’S APPLICATION SHOULD BE DENIED.

As this Court observed in its February 9 decision, section 78ggg(b) requires the SEC to

prove that “SIPC has refused to commit its funds or otherwise to act for the protection of

customers of any SIPC member,” such that it can be ordered to “discharge its obligations” under

the statute.

(Feb. 9, 2012 Mem. Op. (Dkt. No. 21) at 11-13.)

The SEC cannot make that

showing—as it must do under section 78ggg(b)—for the simple reason that it has not and cannot

put forward competent, admissible evidence that there are any eligible “customers” of a SIPC

1 (See Exhibit 2 to Dec. 12, 2011 M. Martens Decl. (Dkt. 1-1) (“June 15, 2011 Analysis”) at 1; June 14, 2011 Senator D. Vitter Press Release, available at http://www.vitter.senate.gov/public/index.cfm?Fuse

Action=PressRoom.PressReleases&ContentRecord_id=8f2e65df-802a-23ad-458d-e0eb0391d4ef&Region

_id=&Issue_id= (Vitter to Block SEC Nominees Until Stanford Victims Get Answers).)

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“member” within the specialized meaning that SIPA places on those terms.

Court should deny the SEC’s Application.

Accordingly, this

A. Under Section 78ggg(B), the SEC Has the Burden to Show SIPC Has Failed to Discharge “Obligations” to “Customers” of a “Member.”

As a threshold matter, the plain text of section 78ggg(b) requires the SEC to show that

there are eligible “customers” of a “member of SIPC” under the facts of a given case, and that

SIPC has refused to “discharge its obligations” to them. Section 78ggg(b states in its entirety:

In the event of the refusal of SIPC to commit its funds or otherwise to act for the protection of customers of any member of SIPC, the Commission may apply to the district court of the United States in which the principal office of SIPC is located for an order requiring SIPC to discharge its obligations under this chapter and for such other relief as the court may deem appropriate to carry out the purposes of this chapter.

15 U.S.C. § 78ggg(b).

There can be no doubt that in light of this text, and as the party that

initiated this action and seeks affirmative relief under section 78ggg(b), the SEC bears the

burden of proving that it is entitled to what it demands in this case. Indeed, by its very terms, the

SEC’s Application seeks to compel SIPC to initiate a liquidation even though SIPC itself

(including its presidentially-nominated, Senate-confirmed board) has concluded that the statute

does not even allow a liquidation under the facts of the Stanford case. 2

As the Court correctly

noted in its Memorandum Opinion, nothing in SIPA creates an “obligation” for SIPC to start a

liquidation proceeding simply because the SEC has made a “determination” that one should be

brought. (See Feb. 9, 2012 Mem. Op. (Dkt. 21) at 11 (“This determination must be made by the

Court, not unilaterally by the SEC.”).) Rather, as the Court noted, “[t]he use, plain meaning and

context of ‘apply’ in Section 78ggg(b), in contrast to the use of ‘require’ elsewhere in SIPA,

2 SIPC’s Board of Directors is comprised of five Senate-confirmed presidential appointees and one representative each from Treasury and the Federal Reserve. See 15 U.S.C. § 78ccc(c).

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strongly suggests that Congress intended that the SEC must demonstrate that it is entitled to

relief.” (Id. (emphasis added).)

It is therefore not enough to say that SIPC has refused “to commit funds” in the abstract

without regard to whether there are “customers” of a “member” at issue:

First, the phrase “for the protection of customers of any member of SIPC” in section 78ggg(b) necessarily modifies both a “refusal … to commit funds” and a “refusal … to act”—or else the statute’s use of the word “otherwise” would have no meaning in drawing a parallel between the two.

Second, the statute itself discusses the commitment of funds in section 78fff-3, and likewise refers to “Advances for Customers’ Claims” without requiring SIPC to pay monies just on the SEC’s say-so.

Third, if any refusal to commit funds whatsoever entitled the SEC to relief (an argument that not even the SEC makes in its Application), then section 78ggg(b) would have no limiting effect differentiating it from other provisions of SIPA—like sections 78ccc(e)(3) and 78ggg(c)(1)—that allow the SEC to “require” certain SIPC action such as adopting a bylaw or submitting periodic reports. As the Court observed in its February 9, 2012 ruling, the distinction makes a difference.

Finally, to initiate a liquidation proceeding under section 78eee(a)(3)(A), SIPA requires the existence of eligible “customers” of a SIPC “member,” 15 U.S.C. § 78eee(a)(3)(A) (“SIPC may, upon notice to a member of SIPC, file an application for a protective decree … if SIPC determines that—(A) the member … has failed or is in danger of failing to meet its obligations to customers.” (emphasis added)), because the very “purpose[]” of such a liquidation is to “deliver customer name securities” and “customer property” and to “satisfy net equity claims of customers,” id. § 78fff (emphasis added). SIPA does not authorize—much less obligate—SIPC to pay anyone regardless of whether the statute covers them.

In

addition,

the

statute

vests

SIPC,

not

the

SEC,

with

the

power

to

make

the

“determination” whether a liquidation proceeding should begin. Section 78eee makes this clear:

SIPC may, upon notice to a member of SIPC, file an application for a protective decree with any court of competent jurisdiction …, if SIPC determines that — (A) the member … has failed or is in danger of failing to meet its obligations to customers ….

Id. § 78eee(a)(3)(A) (emphasis added).

If the SEC wishes to overturn SIPC’s determination, it

must prove that each of the elements of its § 78ggg(b) claim for relief are met. And to do that,

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the SEC logically must show how SIPC has “failed to discharge its obligations” under SIPA by

“refus[ing]

to commit its funds or otherwise to act for the protection of customers of any

member of SIPC.”

Id. § 78ggg(b).

Indeed, it would be particularly inappropriate to require

SIPC to prove the negative as to why a liquidation should not be initiated when the SEC has

control over its “record” and when—even without the benefit of discovery or other formal

process—the facts that SIPC has uncovered show that investors in SIBL CDs do not qualify for

SIPA protection. 3 The SEC, as a regulator, has access to the facts. It must produce the relevant

facts. SIPC has no regulatory authority and thus does not have access to the SEC’s fact-finding

here—absent discovery. See 15 U.S.C. § 78eee(a)(1) (requiring the SEC and any self-regulatory

organization to “immediately notify SIPC” of facts relevant for SIPC to determine whether to

bring a liquidation).

All of this underscores why it is not enough, for example, for the SEC to say there are

“colorable” customer claims that may or may not exist (Dec. 12, 2011 SEC Application (Dkt. 1)

at 1), or that there is a “customer need” to determine whether this is so (Dec. 12, 2011 SEC

Mem. in Supp. of Application (Dkt. 1) at 11). Rather, these are threshold questions that section

3 This is precisely why in the ordinary course the investors themselves bear the burden of proving that they are covered “customers” under SIPA. See, e.g., In re Adler, Coleman Clearing Corp., 216 B.R. 719, 723 (Bankr. S.D.N.Y. 1998) (emphasizing that claimants “must prove that they are ‘customers’ and that the equity in their accounts is ‘customer property’ under SIPA”); In re Brentwood Sec., Inc., 96 B.R. 1002, 1006 (B.A.P. 9th Cir.

with respect to each claim made

and therefore entitled to SIPA protection”). The party seeking relief must necessarily already have—and be

1989) (noting the investor’s “burden of proving that he was a ‘customer’

able to come forward with—the evidentiary basis for its affirmative request for relief.

It should be noted that, although the question whether an investor is a “customer” under SIPA and is thus eligible for protection may be adjudicated in the liquidation, that adjudication occurs only after SIPC has determined that there are “customers” in need of, and eligible for, SIPA protection and therefore, grounds exist to start a liquidation proceeding. Inevitably, once the proceeding is begun, many ineligible claimants will file claims seeking “customer” status. In that context, the question of “customer” status will be litigated in the liquidation proceeding. However, that is a very different situation from the one presented here—namely, whether “customers” exist, in the first instance, whom SIPC can protect under SIPA. The latter question is one that Congress has required this Court to decide under section 78ggg(b).

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78ggg(b) requires this Court to answer, especially when the statute does not authorize a

liquidation where the SEC has failed to identify any eligible “customers” in the Stanford case.

B. Protected “Customers” Within the Meaning of SIPA Are Only Those Who Have Cash or Securities in the Custody Of a “Member” Brokerage Firm.

As an initial matter, SIPA does not define “customers” to include anyone who ever

invested through a “member” brokerage firm, and instead limits that term to those who entrusted

cash or securities with the brokerage at the time it failed.

Put another way, because the statute

protects only a brokerage’s lockbox function (for example, if a broker is supposed to holding a

person’s stock certificates but then runs away), only persons who are supposed to have

something in the lockbox qualify as “customers” under the statute.

states that a “customer”:

In particular, the statute

means any person (including any person with whom the debtor deals as principal or agent) 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) (emphasis added).

A “customer” also includes “any person who has

deposited cash with the debtor for the purpose of purchasing securities.” Id. § 78lll(2)(B). The

“customer” definition was “carefully crafted, precisely delineating the categories of investors it

protects,” In

re

Brentwood

Sec.,

Inc.,

925

F.2d

325, 327

(9th Cir. 1991),

and it must

consequently “be construed narrowly,” In re Omni Mut., Inc., 193 B.R. 678, 680 (S.D.N.Y.

1996); see also In re Klein, Maus & Shire, Inc., 301 B.R. 408, 418 (Bankr. S.D.N.Y. 2003)

(“The courts have consistently taken a restrictive view of the definition of a ‘customer’ under

SIPA and, accordingly, the burden is not easily met.”); In re MV Sec., Inc., 48 B.R. 156, 160

(Bankr. S.D.N.Y. 1985).

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1. To Qualify as a “Customer,” SIPA Requires an Investor to Have “Entrusted” Cash or Securities with a Broker When It Failed.

Courts have repeatedly emphasized that the relevant inquiry is whether a SIPC-member

brokerage was “entrusted” to hold in its custody cash or securities on deposit when it failed. See

SIPC v. Barbour, 421 U.S. 412, 412 (1975). “[T]he term ‘customer’ in the Act is to be read as

embracing only one ‘who has entrusted securities to a broker for some purpose connected with

participation in the securities markets.’”

SEC v. Kenneth Bove & Co., 378 F. Supp. 697, 700

(S.D.N.Y. 1974) (quoting SEC v. F. O. Baroff Co., Inc., 497 F.2d 280, 283 (2d Cir. 1974)); see

also Arford v. Miller, 239 B.R. 698, 701 (Bankr. S.D.N.Y. 1999).

In SEC v. Kenneth Bove &

Co., for example, the court held that several claimants were not SIPA “customers” because they

had delivered their securities to a second firm at their SIPC-member broker’s request.

378

F. Supp. at 699. Although the claimants argued that they had been instructed by their broker to

deposit securities with the second firm, and “that therefore there was ‘constructive delivery’ to

the Debtor,” the court found this irrelevant: “Whether or not any such instructions were given, it

is clear that compliance with such instructions would not result in receipt, acquisition or holding

of the securities by the Debtor in the evident sense required by the Act—that is, an actual

possession.” Id. at 700; see also id. (“Whatever may be the merit of a ‘constructive delivery’

argument in other litigated contexts, it does not meet the sine qua non of the protection of the

Act,

namely,

liquidation.”).

the

possible

loss

of

securities

actually

entrusted

to

a

debtor

forced

into

Similarly, in Brentwood Securities, the court held that claimants were not

“customers” because, although they gave checks to their broker with the intent to purchase

securities, those checks were made out to the issuer. In re Brentwood Sec., 925 F.2d at 327-28.

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2. SIPA Determines “Customer” Status Based on What a “Member” Was Supposed To Be Holding on Deposit at the Time It Failed.

This determination, moreover, must be made at the time the “member” firm is placed

into receivership or becomes insolvent:

it does not include everyone who ever gave cash or

securities to a broker-dealer at some point in the past.

In In re Stalvey & Associates, Inc., for

example, the Fifth Circuit expressly rejected the notion of “once a customer, always a

customer”—concluding that an investor who previously placed securities on deposit with a

broker ceased to be a “customer” under SIPA once he pledged those securities as collateral for a

bank loan, because doing so meant that the broker was no longer supposed to be holding those

securities for the investor’s safekeeping.

750 F.2d 464, 470-72 (5th Cir. 1985).

An investor’s

“customer status in the course of some dealings with a broker will not confer that status upon

other dealings, no matter how intimately related, unless those other dealings also fall within the

ambit of the statute.” Id. at 471; see also SEC v. Sec. Planners Ltd., 416 F. Supp. 762, 765 (D.

Mass. 1976) (“The definition of ‘customer’ … indicates a Congressional purpose to provide

relief similar to a preference only to the clients of the brokerage firm who have entrusted

property to the brokerage firm as of the filing date.” (quotation marks omitted; emphasis

added)); see also In re Bell & Beckwith, 124 B.R. 35, 36 (Bankr. N.D. Ohio 1990). This makes

sense: because SIPA protects only the cash or securities that a brokerage is holding for a person

when it fails, it does not entitle someone who buys and receives stock from a broker in 2006 to

recoup the original purchase price just because the stock becomes worthless in 2009 or the

broker later fails after delivering stock to that person.

independent reasons.

11

This

is

so

for two separate and

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3. SIPA Does Not Protect Against Investment Fraud.

First, SIPA does not protect against investment loss, fraud, or misrepresentation—even

on the part of broker-dealers.

See, e.g., In re Brentwood Sec., 925 F.2d at 330 (“SIPA protects

investors when a broker holding their assets becomes insolvent.

It does not comprehensively

protect investors from the risk that some deals will go bad or that some securities issuers will

behave dishonestly.”); SEC v. Packer, Wilbur & Co., 498 F.2d 978, 983 (2d Cir. 1974) (“SIPA

was not designed to provide full protection to all victims of a brokerage collapse.”).

As courts

interpreting SIPA have consistently made clear, “claims for damages resulting from a broker’s

misrepresentations, fraud or breach of contract are not protected.”

In re Klein, Maus & Shire,

301 B.R. at 421; see also SEC v. Howard Lawrence & Co., 1 Bankr. Ct. Dec. (CRR) 577, 579

(S.D.N.Y. 1975) (“SIPA does not protect customer claims based on fraud or breach of

contract.”). Damages sustained from a broker’s fraud or misrepresentation accordingly give rise

to claims only as a general creditor, not as a SIPA “customer.”

See, e.g., SIPC v. Vigman, 803

F.2d 1513, 1517 n.1 (9th Cir. 1986) (“[I]f a broker used fraudulent means to convince a customer

to purchase a stock and the customer left that stock with the broker …, SIPC would be required

by SIPA only to return the stock to the customer. The customer would retain any securities fraud

claim against the broker for inducing the purchase.” (citations omitted)).

matter how innocent or duped the investor.

This is the case no

4. SIPA Does Not Protect The Value of Investments.

Second, SIPA does not guarantee the value of investments even if they fail; the statute

ensures only the return of customer property held by an insolvent or troubled broker-dealer. The

“purpose[]” of a liquidation proceeding is to distribute “customer property” (i.e., the securities or

cash that is supposed to be in the broker’s custody) and to “satisfy net equity claims of

customers,” which are measured on the date of the “member’s” liquidation or financial failure.

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See 15 U.S.C. §§ 78fff(a)(1)(B); 78lll(4); 78lll(7); 78lll(11).

Thus, when “customers” owned

securities entrusted to a SIPC “member,” at most, these “customers” are entitled to the return of

the securities they purchased or the value of those securities at the time of liquidation—not the

hypothetical value of those investments had the investments prospered or even the value of the

investors’ principal deposit. 4 See In re Atkeison, 446 F. Supp. 844, 848 (M.D. Tenn. 1977) (“If

[the certificates] are securities, then she has already received the benefit of her bargain, albeit a

bad one, for she has the securities themselves.”).

This is precisely why SIPA does not require a liquidation when there is no “net equity”

and no “customer” relief is possible.

Section 78eee(a)(3)(A) expressly prohibits SIPC from

filing an application for a protective decree when “the only customers of which are persons

whose claims could not be satisfied [because the investor has zero net equity].”

15 U.S.C. §

78eee(a)(3)(A); see also § 78fff-3(a)(1).

If the SEC were allowed to prevail without first

showing that there are any eligible “customers”—i.e., “customers” who have positive net

equity—the resulting order would require SIPC to initiate a liquidation that the statute expressly

prohibits. Reading section 78ggg(b) in this manner would thus render the prohibition in section

78eee(a)(3)(A) meaningless.

See Leocal v. Ashcroft, 543 U.S. 1, 12 (2004) (“[W]e must give

effect to every word of a statute wherever possible.”); United States v. Menasche, 348 U.S. 528,

538-39 (1955) (“It is our duty to give effect, if possible, to every clause and word of a statute,

rather than to emasculate an entire section.” (internal quotation marks omitted)).

4 The return of an investor’s original purchase price is legally defined as a rescission. Even where fraud is demonstrated, SIPA does not provide for rescission. See SEC v. S.J. Salmon & Co., 375 F. Supp. 867 (S.D.N.Y.

1974).

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C. The SEC Has Not Made the Requisite Showing That SIPC Has Failed to Discharge Its “Obligations” to “Customers” of a SIPC “Member.”

Against this backdrop, the relevant question for the Court to decide is whether SIPC has

failed to discharge “obligations” to “customers” of a “member” under the facts of the Stanford

case.

This is an inherently factual inquiry, and the SEC cannot avoid it by claiming that its

theory is somehow “different” and then framing immaterial issues such as whether Stanford

operated a Ponzi scheme, whether some of the proceeds from the CDs SIBL sold went from

SIBL back to SGC, and whether Stanford entities operated in an “interconnected” manner in

some general way.

Whether or not those issues are disputed, none of them is material to

whether SIPC has failed to act “for the protection of customers” under section 78ggg(b) and

whether there are any eligible “customers” of a “member” here.

The SEC is required to

demonstrate that it is entitled” to the relief it seeks (Feb. 9, 2012 Mem. Op. (Dkt. No. 21) at 11

(emphasis added))—and is not entitled to relief as of right.

1. SIBL Was an Offshore Bank—Not a Registered Broker Dealer.

As an initial matter, the SEC has never alleged that SIBL—the offshore bank that issued

these CDs—is a SIPC “member,” given

that (1)

it is not a broker-dealer, 15 U.S.C.

§

78ccc(a)(2)(A); and (2) its principal business was conducted outside the United States, id. §

78ccc(a)(2)(i)(A). As the SEC has admitted, SIBL is a “private international bank, chartered and

domiciled in St. John’s, Antigua,” (Dec. 12, 2011 SEC Application (Dkt. 1) ¶ 5), which is

currently subject to the jurisdiction of an Antiguan liquidation, (see Jan. 6, 2012 Letter from

Antiguan Liquidators to Congress (Ex. 5) at 3). Moreover, SIBL has never claimed to be a SIPC

“member”—its Disclosure Statements to CD investors stated just the opposite:

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1:11-mc-00678-RLW Document 23 Filed 02/16/12 Page 22 of 46 (Nov. 15, 2007 SIBL CD Disclosure Statement

(Nov. 15, 2007 SIBL CD Disclosure Statement (Ex. 6) at 4; see also Exhibit 128 to Mar. 31,

2010 OIG Report at 4 (“The Disclosure Statement … acknowledge[s] that the investment is not

insured ….”), available at http://www.sec.gov/foia/docs/oig-526-exhibits-95-144.pdf.) The SEC

Receiver himself has confirmed that SIBL is not a SIPC “member.”

(See Aug. 12, 2009 Letter

from

R.

Janvey

to

SIPC

(“SIBL

is

not

a

member

of

SIPC.”),

available

at

http://www.stanfordfinancialreceivership.com/documents/SIPC_ltr_with_exhibits.PDF.)

All of

this is precisely why the SEC does not purport to argue that SIPC should bring a liquidation

proceeding against SIBL—and for good reason.

SIPA does not authorize the liquidation of a

non-member, offshore bank.

See 15 U.S.C. § 78eee(a)(3)(A) (granting SIPC discretion to

commence a liquidation only in the event a “member … has failed or is in danger of failing to

meet its obligations to customers” (emphasis added)). The CDs are obligations of SIBL. They

are expressly not the obligation of the SIPC-member firm or SIPC. 5

SEC’s case.

This, alone, is fatal to the

Indeed, the SEC has recognized that it lacks regulatory authority over SIBL as an

offshore bank. (See Mar. 31, 2010 OIG Report (Ex. 2) at 69, 74, 105, 109; see also Exhibit 78 to

Mar. 31, 2010 OIG Report (Ex. 7) at 2 (“As we understand it, SIB is a bank domiciled in the

5 (See Nov. 15, 2007 SIBL CD Disclosure Statement (Ex. 6) at 17 (“We, [SIBL], not SGC, will be solely responsible to you for all amounts due in respect of the CD Deposit. In the event of nonpayment of funds due and owing under the CD Deposit for any reason, you will have no claim or right against SGC or any other dealer of sales representative.” (emphasis added)).)

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country of Antigua and, therefore, is subject to the banking laws and regulations of that country,

not those of the United States.”).) For example, the SEC noted in a 2004 investigation of SGC

that “[s]ince SIB is located in Antigua,” it was “unable to require SIB to provide or to otherwise

gather the necessary documents” to inspect its financial products. (Exhibit 98 to Mar. 31, 2010

OIG Report at 3, available at http://www.sec.gov/foia/docs/oig-526-exhibits-95-144.pdf.) This

underscores the incompatibility of foreign entities and the SIPA scheme: the SEC cannot

regulate such entities and therefore “immediately notify SIPC” when such entities are in danger,

as the SEC is required to do by statute. 15 U.S.C. § 78eee(a)(1). And because such entities will

be under foreign control upon collapse—the U.S. Receiver’s attempt to assert control of the

SIBL liquidation was rebuffed by the Antiguan Liquidators and the Antiguan courts (see Jan. 6,

2012 Letter from Antiguan Liquidators to Congress)—SIPC will be unable to reimburse its

expenses from the “member” firm’s estate, which, again, is inconsistent with the statutory

scheme. See 15 U.S.C. § 78fff(e) (“All costs and expenses of administration of the estate of the

debtor and of the liquidation proceeding shall be borne by the general estate of the debtor to the

extent it is sufficient therefor….”).

2. Investors Deposited Funds With the Offshore Bank and Clearly Had the Purpose of Purchasing SIBL CDs.

Because the SEC cannot demonstrate that SIBL is a SIPC “member,” it instead insists that

SIPC must institute a liquidation against Stanford Group Company in the U.S.

This approach

fails because the SEC offers no evidence to demonstrate that SGC was entrusted with “custody”

of “customer” cash or securities to hold on deposit at the time it went into receivership (once the

SEC filed its enforcement action against Stanford in February 2009).

See, e.g., Barbour, 421

U.S. at 412; In re Brentwood Sec., Inc., 925 F.2d at 330; In re Atkeison, 446 F. Supp. at 847

(SIPA “is designed to protect customers who ‘have either cash or securities or both in the

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custody of broker-dealer firms.’” (quoting H.R. Rep. No. 91-1613, 91st Cong., 2d Sess.)

(emphasis added)).

The SEC itself has admitted that investors actually deposited funds with SIBL—not

SGC—for the purpose of buying offshore SIBL CDs. The SEC’s own June 15, 2011 Analysis—

the analysis that allegedly supports the SEC’s pursuit of this case—admits that “[t]he evidence

currently available shows that investors with accounts at SGC who purchased SIBL CDs

deposited funds with SIBL” and “clearly had the purpose of purchasing SIBL CDs.” (Exhibit

2 to Dec. 12, 2011 M. Martens Decl. (Dkt. 1-1) at 7 (emphasis added); see

also id.

at

5

(“‘Customer funds intended for the purchase of SIB[L] CDs were deposited into SIB[L]

accounts….’” (quoting Declaration of Karyl Van Tassel (filed July 27, 2009) ¶ 9) (emphasis

added))).)

In this respect, at least, the SEC’s Analysis is consistent with the facts as SIPC

understands them. For example, the materials provided to SIBL CD purchasers made clear that

their payments were to be made to SIBL—not SGC—and that investors would have to open a

separate bank account with SIBL in order to purchase these CDs. (See Nov. 15, 2007 SIBL CD

Disclosure Statement (explaining that payments were to be sent to SIBL in Antigua and that

SIBL would have to open a separate account in the investor’s name); Dec. 2004 SIBL

Subscription Agreement (Ex. 8).)

And investors, in fact, acknowledged that their funds were

being sent to SIBL in Antigua. (See Feb. 19, 2008 Wiring Instructions (Ex. 9) (“Please accept

this letter as my authorization and request to transfer entire balance from my account number …

to my account at Stanford International Bank.” (emphasis added)); May 29, 2007 Wiring

Instructions (Ex. 10) (same); July 20, 2007 Wiring Instructions (Ex. 11) (same); Nov. 8, 2005

Check to SIBL (Ex. 12) (copy of investor’s check sent to SIBL); Aug. 7, 2008 Check to SIBL

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(Ex. 13) (same); Apr. 20, 2009 Confirmation (Ex. 14) (confirmation of SIBL CD investment

issued by SIBL and sent from SIBL in Antigua to U.S. investor).) 6 These facts should come as

no surprise to the SEC:

it observed long ago in a letter to SGC that “SGC does not actually

receive investor money invested in the CDs” and that “investor funds are … directly invested

with SIB[L].” (Exhibit 69 to Mar. 31, 2010 OIG Report (Ex. 15) at 3.)

3. Investors Received Custody of Their SIBL CDs.

The SEC knows that upon sending their funds to SIBL, investors or their designees

received their actual CDs in return.

(See Aug. 12, 2009 Letter from SEC Receiver at 3 (“It

appears that, in general neither SGC, Pershing nor J.P. Morgan maintained custody or possession

of any physical certificates that evidenced CDs.

physically

held

by

the

owner

of

the

Instead, these certificates appear to have been

CD….”),

available

at

http://www.stanford

financialreceivership.com/documents/SIPC_ltr_with_exhibits.PDF.)

Indeed, even the SEC and

its Receiver admit that they cannot claim that SGC had custody—directly or indirectly—of SIBL

CDs.

(See Dec. 19, 2002 Mem. from H. Wright to Office of Compliance Inspections and

Examinations (“Dec. 19, 2002 SEC Report”) (excerpts attached as Ex. 16) at 14-15 (stating that

“[t]he staff also considered questioning whether SGC had indirect custody of its clients’ funds or

securities through their investments in SIB CDs.

However, based upon existing no action

guidance, it did not appear that the Examination Staff could claim SGC had such custody.”

(emphasis added)).)

For example, while Stanford Trust Company (which was also not a SIPC

“member”) may have held CDs for those who had IRAs, the U.S. Receiver himself has

emphasized—even after the failure of SGC—that those CDs are freely available for delivery to

6 For this reason, the SEC’s inclusion of investor checks made out to “Stanford” as exhibits to the SEC’s “Analysis” proves nothing. (See Exhibit 2, Attachment 7 to Dec. 12, 2011 M. Martens Decl. (Dkt. 1-1).) The key point here is that investors had to acknowledge—in order to place their CD orders—that the money would end up with an offshore bank, pursuant to disclosures stating there would be no SIPA protection.

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other IRA custodians as investors see fit: this is not a situation in which the CDs have

disappeared. (See June 5, 2009 Stanford Financial Group Receivership, Procedures for Transfer

of Certain Stanford Trust Company Customer Accounts (“Receiver Q&A”) (Ex. 17) at 26

(noting that if investors “transfer [their] STC account to a successor trustee or other financial

institution,” they “will receive a copy of the document evidencing the transfer of [their] SIB[L]

CD and its related claim”).)

Other investors have acknowledged that they received their SIBL

CDs. (See, e.g., May 23, 2010 Letter from SIBL CD investor to SEC (Ex. 18) (attaching copy of

SIBL CD in investor’s possession).) 7 The SEC simply has not demonstrated that any investor’s

cash or securities were on deposit with SGC as part of a custodial lockbox function at the time it

went into receivership. Indeed, it should be noted that SGC had no custodial lockbox function.

The firm was both a registered investment advisor (i.e., not a SIPC “member” because

investment advisors are not SIPC “members”) and a securities broker.

In its

capacity as a

brokerage, it was only an “introducing” broker-dealer, meaning that it introduced clients to other

carrying brokerage or “clearing” firms that actually held customers’ cash and securities. See H.

Minnerop, The Role and Regulation of Clearing Brokers, 48 The Business Lawyer, May 1993, at

841-43. In this case, SGC introduced business to Pershing, the carrying or clearing firm. As an

introducing broker, SGC was not authorized, nor was its function, to hold customer cash or

securities. Upon information and belief, Pershing, the clearing firm, held no Antiguan Bank CDs

for any SIBL CD purchaser.

7 The SEC includes an affidavit from an alleged SGC client, Sally Matthews, who states that she ordered but “never received” a SIBL CD. (Exhibit 2, Attachment 5 to Dec. 12, 2011 M. Martens Decl. (Dkt. 1-1) ¶¶ 1-9.) This affidavit proves nothing for the simple reason that Matthews admits to wiring money not to SGC, but to “the appropriate Stanford account”—that is, SIBL—“to purchase the CDs.” (Id. ¶ 3.) That SIBL may have then failed to deliver a CD is immaterial, as SIBL’s actions would not implicate SGC’s custodial function. But even if this Court were to disagree, due process requires that SIPC be afforded some ability to test what the affiant says through discovery. See infra Part II.

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4. Once a “Customer” Does Not Mean Always a “Customer.”

It is no answer for the SEC to say that cash at some point may have passed through the

hands of the SGC en route to SIBL.

(See Jan. 24, 2012 Hr’g Tr. (Ex. 1) at 14 (“[T]he statute

provides that one is a customer if one has submitted cash to a broker for purposes of purchasing

securities; and we believe, as set forth in the Commission’s analysis, that that is the situation

presented here….”).) Because the statute is limited to protecting cash or securities that remained

entrusted with a brokerage under its custodial function, cash previously sent does not confer

“customer” status if the cash has already been used to purchase securities that have already been

delivered: there is nothing “left” on “deposit” for SIPC to protect.

Barbour, 421 U.S. at 413

(observing that SIPC “was established by Congress as a nonprofit membership corporation for

the purpose, inter alia, of providing financial relief to the customers of failing broker-dealers

with whom they had left cash or securities on deposit” (emphasis added)); In re Stalvey &

Assocs., Inc., 750 F.2d at 471 (rejecting the notion of “once a customer, always a customer”); In

re New Times Securities Services, Inc., 463 F.3d 125, 130 (2d Cir. 2006) (holding that account-

holders became lenders by swapping cash and securities in their brokerage accounts for notes

issued by the debtor, and thus were not “customers”).

5. Ponzi Schemes Do Not Alter the “Customer” Analysis.

Nor can the SEC circumvent this principle by arguing that money indirectly made its way

back to a SIPC-member firm or that Allen Stanford operated a Ponzi scheme. (See, e.g., Exhibit

1 to Dec. 12, 2011 M. Martens Decl. (Dkt. 1-1) at 4 (Sept. 2, 2008 Letter providing “notification

of affiliate referral fees” from SIBL to SGC).) In In re Aozora Bank Ltd., for example, investors

in feeder funds that in turn invested in Madoff Securities (a SIPC “member”) asserted that they

qualified as SIPC “customers,” arguing that the feeder funds and Madoff Securities were highly

interconnected such that funds placed with the former should be deemed equivalent to funds

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placed with the latter.

No. 11-5683, 2012 WL 28468, *at 1 (S.D.N.Y. Jan. 4, 2012) (appeal

pending).

The court rejected this theory, emphasizing that “the existence of an agency or

conspiratorial relationship between the Feeder Funds and [Madoff Securities] did not create any

property interest for the appellants in the assets the Feeder Funds placed with [Madoff

Securities].” Id. at *10. The claimants had entrusted money with the feeder funds that were not

SIPC “members,” and the fact that the funds used those monies to invest with Madoff Securities

was insufficient:

SIPA simply ‘does not protect against all cases of alleged dishonesty and

fraud.’” Id. (quoting In re New Times Sec. Servs., Inc., 463 F.3d at 130); see also In re Aozora

Bank Ltd., 2012 WL 28468, at *5.

And in any event, the SEC knew for at least fourteen years

that Stanford was likely operating a Ponzi scheme. (See Mar. 31, 2010 OIG Report at 149 (“The

OIG investigation found that the SEC’s Fort Worth office was aware since 1997 that Robert

Allen Stanford was likely operating a Ponzi scheme.”).) If the existence of a Ponzi scheme were

a dispositive fact, then the SEC would have had a statutory duty to “immediately notify” SIPC of

the Stanford fraud years ago. See 15 U.S.C. § 78eee(a)(1). 8 That the SEC is highlighting these

immaterial facts, of course, does not demonstrate that it is entitled to relief under section

78ggg(b).

See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986) (“[T]he substantive

law”—here section 78ggg(b)—“will identify which facts are material.”); see also Holcomb v.

Powell, 433 F.3d 889, 895 (D.C. Cir. 2006).

8 To the extent that the SEC points to the Madoff liquidation as support for its claim that the existence of a Ponzi schemes is somehow material to the Court’s analysis, it is a red herring. The question at issue in the Madoff liquidation was how to calculate the amount of a customer’s “net equity” claim. A customer’s “net equity” is limited to the value of the securities or cash on deposit at the time of liquidation, 15 U.S.C. § 78lll(11) —which, in a Ponzi situation, is something substantially less than the anticipated value of a customer’s investment. There was never a threshold dispute, however, as to whether individuals who invested through Bernard Madoff Securities, LLC, which was a SIPC-member firm, were “customers” under SIPA. Indeed, in Madoff, SIPC acted promptly to fulfill its obligation to commence a liquidation to protect “customers.” The “customer” assets were specifically held at the SIPC-member firm, and for that reason, SIPC immediately commenced a “customer” protection proceeding.

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D. SIPA’s Text Demonstrates That Corporate Formalities Matter.

SIPA itself recognizes the principle that corporate forms matter, by limiting “customer”

status to those whose cash or securities are in the custody of a broker-dealer and excluding

transactions even with entities that concededly are related.

For example, the definition of

“customer” expressly excludes any person whose claim “arises out of transactions with a foreign

subsidiary of a member of SIPC,” 15 U.S.C. § 78lll(2)(C)(i).

It also excludes claims that, “by

operation of law … [are] subordinated to the claims of any or all creditors of the debtor,” id. §

78lll(2)(C)(ii)—where the Bankruptcy Code provides that “claim[s] arising from rescission of a

purchase or sale of a security of … an affiliate of the debtor … shall be subordinated to all

claims or interests that are senior to or equal the claim or interest represented by such security.”

11 U.S.C. § 510(b) (emphasis added).

(See also Exhibit 69 to Mar. 31, 2010 OIG Report (Ex.

15) at 3 (recognizing that CDs were “issued by an affiliated bank domiciled in St. John’s,

Antigua”).) The key point here is that corporate forms matter, especially when not even the SEC

disputes that SIBL issued these offshore bank CDs and was a separate entity organized in

Antigua under Antiguan law and regulated by Antiguan authorities. 9 As the SEC’s own June 15,

2011 Analysis admits, “[t]he evidence currently … shows that investors with accounts at SGC

who purchased SIBL CDs deposited funds with SIBL for the purpose of purchasing securities.”

(Exhibit 2 to Dec. 12, 2011 M. Martens Decl. (Dkt. 1-1) at 7; see also id. at 5.)

Indeed, drawing a clear line based on custody of cash or securities is wholly consistent

with Congress’s very purposes in creating SIPC. Because the SEC has not presented competent,

9 The SEC itself has relied on this distinction. In explaining why it did not investigate the Stanford fraud years earlier, the SEC emphasized that SGC was distinct from SIBL, and that its authority to audit SGC as a registered broker-dealer did not give it authority to audit SIBL as an offshore Antiguan bank. (See Mar. 31, 2010 OIG Report (Ex. 2) at 69, 86-87.) There is no basis for the SEC to take a contrary position here: just as the SEC’s resources are limited by law to overseeing firms within the scope of its regulatory purview, there is no legal basis for requiring SIPC to cover investments with non-SIPC-member firms.

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admissible evidence to show that there are any “customers” whose cash or securities were

supposed to be in the custody of SGC—rather than SIBL—at the time of SGC’s receivership,

any liquidation would not “accomplish the completion of open transactions” or “the speedy

return of … customer property” under SIPA. Barbour, 421 U.S. at 416; see also In re Aozora

Bank Ltd., 2012 WL 28468, at *10 (denying “customer” protection based on an alleged

conspiratorial relationship between feeder funds and “member” broker because “SIPA simply

‘does not protect against all cases of alleged dishonesty and fraud’” (quoting In re New Times

Sec. Servs., Inc., 463 F.3d at 130)).

Because the SEC knows that it has no factual basis upon which to pursue a claim that

SGC maintained custody of investors’ cash or SIBL CDs at the time of its receivership, the SEC

predicates its claim for relief under section 78ggg(b) on the theory that investments with SIBL

and investments with SGC should be “deemed” one and the same.

(See Exhibit 2 to Dec. 12,

2011 M. Martens Decl. (Dkt. 1-1) at 7 (“[U]nder certain circumstances, an investor may be

deemed to have deposited cash with a broker-dealer for the purposes of purchasing securities—

and thus be a ‘customer’ under Section 16(2) of SIPA—even if the investor initially deposited

those funds with an entity other than the broker-dealer.” (emphasis added)).) According to the

SEC’s theory, SIBL and SGC (and other Stanford entities) were so “interconnected” that “the

separate existence of [every Stanford entity] should be disregarded.” (Id. at 8; see also Jan. 24,

2012 Hr’g Tr. (Ex. 1) at 14 (“[W]e believe … that cash can be deemed submitted with a broker if

it’s submitted to an interrelated party, as occurred here.”).) In other words, the SEC purports to

assert a veil-piercing theory to permit investors who purchased CDs from an offshore bank and

do not have cash or securities on deposit with a SIPC “member” to seek recovery from SIPC.

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As set forth above, however, SIPA’s unambiguous text does not permit recovery under a

veil-piercing theory. SIPA’s text excludes as “customers” investors who conducted transactions

with a “foreign subsidiary” of the debtor. See 15 U.S.C. § 78lll(2)(C). And Congress’ intent to

limit SIPA’s protection to “customers” of a “member” should be followed—not “disregarded.”

(See Exhibit 2 to Dec. 12, 2011 M. Martens Decl. (Dkt. 1-1) at 8.) 10 Even if SIPA’s text did not

expressly preclude the SEC’s veil piercing theory, whether SIBL and SGC were alter egos is an

intensely factual question that cannot be answered with generalizations such as saying that they

operated in an “interconnected” manner. See Liberty Prop. Trust v. Republic Props. Corp., 577

F.3d 335, 340 n.2 (D.C. Cir. 2009) (reversing grant of motion to dismiss because “[i]t was

inappropriate, on a motion to dismiss, for the district court to disregard the corporate form

without a factual determination that each corporation was ‘simply the alter ego of its owners’”

(quoting Valley Fin. Inc. v. United States, 629 F.2d 162, 172 (D.C. Cir. 1980)); see also Valley

Fin., 629 F.2d at 172 (explaining that alter ego analysis is “a fact issue” and is “based largely on

a reading of the particular factual circumstances”). Courts will disregard corporate forms only in

the rarest circumstances. See, e.g., Pardo v. Wilson Line of Wash., Inc., 414 F.2d 1145, 1149-50

(D.C. Cir. 1969) (“Piercing a corporate veil is a task which a court undertakes reluctantly….”).

And piercing the corporate veil is particularly inappropriate here because the investors were

explicitly told that the SIPC-member firm was not responsible for principal and interest on the

CDs. (See Nov. 15, 2007 SIBL CD Disclosure Statement (Ex. 6) at 17 (“We, [SIBL], not SGC,

will be solely responsible to you for all amounts due in respect of the CD Deposit. In the event

10 Accordingly, it is irrelevant as a legal matter that SGC may have issued consolidated investor statements that included SIBL CD account balances. (See Exhibit 1 to Dec. 12, 2011 M. Martens Decl. (Dkt. 1-1) at 5-22.) Even setting SIPA’s plain text aside, as a factual matter these statements make clear that they were being provided for “informational purposes only” and do not replace actual account information obtained from the “issuing financial institution”—i.e., SIBL. (Id. at 22.)

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of nonpayment of funds due and owing under the CD Deposit for any reason, you will have no

claim or right against SGC or any other dealer of sales representative.” (emphasis added)).)

Indeed, it would be particularly inappropriate to disregard corporate forms where, as

here, the facts reveal a foreign company with its own employees, auditors, and physical presence

registered under foreign law and regulated by foreign authorities, and now in liquidation under

foreign control. The SEC’s bare allegation that SGC and SIBL should be treated as one and the

same is belied by evidence that SGC and SIBL were, in fact, separate entities:

SIBL had its own Board of Directors and its own management (see Nov. 15, 2007 SIBL Disclosure Statement at 14-15; see also June 10, 1998 Letter from Jack Ballard to SEC (Ex. 19) at 1 (noting relationship between SGC and SIBL was governed by contract));

SIBL maintained a physical presence in Antigua (see SEC v. Stanford, No. 09-0298,

is a private, offshore

bank located in Antigua.”); SEC v. Stanford, No. 09-0298, Appendix in Support of the Receiver’s Notice of United Kingdom Judgment ¶ 97 (N.D. Tex. July 6, 2009) (“Its physical headquarters were in Antigua [and] almost all of its employees were located in Antigua.”)), while SGC was headquartered in Houston, Texas (see SEC v. Stanford, Second Am. Compl. ¶ 14);

Second Am. Compl. ¶ 25 (N.D. Tex. June 19, 2009) (“SIB

SIBL was licensed under Antigua law (see Nov. 15, 2007 SIBL Disclosure Statement at 2);

SIBL did not—because it was not required to—provide its investors with U.S. tax Form 1099, and SGC likewise did not include SIBL CD income on its Form 1099 for its investors (see June 15, 2009 Decl. of IRS Agent D. Reeves (Ex. 20) at 6);

SIBL compiled its own financial statements, which were independently audited by an Antiguan auditor (see Nov. 15, 2007 SIBL Disclosure Statement (Ex. 6) at 12);

SIBL issued its own annual reports (see SEC v. Stanford, Second Am. Compl. ¶ 35 (referencing SIBL’s 2006 and 2007 Annual Reports)); and

SIBL is subject to an Antiguan receivership—after the U.S. SEC Receiver tried but failed to assert control over SIBL in addition to SGC (see Jan. 6, 2012 Letter from

Antiguan Liquidators to Congress (Ex. 5); Fundora v. Stanford Int’l Bank Ltd., Claim No. ANUHCV 0126 of 2009, at *10-*11 (E. Caribbean Sup. Ct., Antigua & Barbuda,

has no legal entitlement to standing in

Apr. 17, 2009) (Ex. 21) (“The U.S. receiver Antigua and Barbuda.”)).

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In fact, courts that have examined the relationship between SIBL and SGC have concluded that

the corporate distinction between SGC and SIBL should be respected, not disregarded. The U.K.

High Court of Justice held—after an examination of the evidence—that “SIB[L] was not merely

a ‘letterbox company.’

Its physical headquarters were in Antigua; almost all of its employees

were located in Antigua; its contracts both with investors and financial advisers were governed

by the laws of Antigua; and its marketing material gave prominence to its presence in Antigua.”

(SEC v. Stanford, No. 09-0298, Appendix In Support of the Receiver’s Notice of United

Kingdom Judgment ¶ 97 (N.D. Tex. July 6, 2009).)

And while equitable considerations may favor disregarding those forms when a parent

ought to be liable for the debts of a subsidiary, the SEC’s Application offers no law, no facts, and

no argument to support using an alter-ego theory to create obligations on an unrelated third party

such as SIPC.

This is not a situation in which a parent is held responsible for the acts of a

subsidiary, for example, but instead about whether SIPC—as a third party—can suddenly

become responsible for both “member” and non-member firms. See In re First Sec. Grp. of Cal.,

No. 94-56706, 1996 WL 92115, at *2

(9th Cir. Mar. 4, 1996) (holding that the “district court

erroneously applied the alter ego doctrine to shift liability to an innocent third party”); see also In

re Carolina First Sec. Grp., Inc., 173 B.R. 884, 889 n.7 (Bankr. M.D.N.C. 1994) (noting that a

claimant would not necessarily be a “customer” under SIPA even if it assumed two entities were

alter egos and one of those two entities was a broker-dealer because “[r]elief under the SIPA is

predicated on a specific transaction, not the prior relationship between the parties involved”). 11

11 In any event, a U.S. court order piercing the veil against SIBL would likely be unenforceable in Antiguan liquidation proceedings. Such an order would violate the principles of comity normally afforded to foreign

bankruptcy proceedings. See JP Morgan Chase Bank v. Altos Hornos de Mexico, S.A. de C.V., 412 F.3d 418, 424 (2d Cir. 2005) (“We have repeatedly held that U.S. courts should ordinarily decline to adjudicate creditor

claims that are the subject of a foreign bankruptcy proceeding

do not contravene the laws or public

appropriate so long as the foreign proceedings are procedurally fair and

In such cases, deference to the foreign court is

policy of the United States.”); Victrix Steamship Co., S.A. v. Salen Dry Cargo A.B., 825 F.2d 709, 713 (2d Cir.

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E. Old Naples and Primeline Are Distinguishable.

The two cases upon which the SEC primarily relies to support its veil-piercing theory, In

re Old Naples Securities, Inc., 223 F.3d 1296 (8th Cir. 2000), and In re Primeline Securities

Corp.,

295

F.3d

1100

(10th

Cir.

2002)—which

are

not

binding

on

this

Court—are

distinguishable on both the law and the facts. (See Exhibit 2 to Dec. 12, 2011 M. Martens Decl.

(Dkt. 1-1) at 7-12.) Neither of these cases supports the wholesale expansion of SIPC protection

to investments made with a non-SIPC-member entity where:

(1) the investments were made

with a foreign subsidiary or affiliate of a SIPC “member”; (2) the investors had reason to know

that, even though they were introduced to an investment product by a SIPC “member,” they were

depositing money for and purchasing from a different entity; and (3) the investors actually

received the very securities they agreed to purchase. 12

First, neither Old Naples nor Primeline involved a scenario where, as here, investors

were purchasing securities from a foreign subsidiary or affiliate of the debtor.

Indeed, Old

Naples expressly recognized that SIPA would not provide protection where, as here, “claims

[are] based on transactions with foreign subsidiaries of any SIPC member brokerage” or “claims

[are] for cash or securities that form a part of the brokerage’s capital.” Old Naples, 223 F.3d at

1987); In re Monitor Single Lift I, Ltd., 381 B.R. 455, 465 (Bankr. S.D.N.Y. 2008) (“Where there is a pending foreign insolvency proceeding, concerns of comity must be taken into account and deference must be given to the foreign proceedings.”). And as a practical matter, it is not obvious that the Antiguan Receiver or an Antiguan Court would surrender SIBL assets held in Antigua. See Fundora v. Stanford Int’l Bank Ltd., Claim No. ANUHCV 0126 of 2009, at *10-*11 (E. Caribbean Sup. Ct., Antigua & Barbuda, Apr. 17, 2009) (Ex. 21)

(“The U.S. receiver

has no legal entitlement to standing in Antigua and Barbuda.”).

12 Not only are these cases distinguishable, they were also wrongly decided. Both disregard SIPA’s plain text limiting “customer” status to someone who “has a claim on account of securities received, acquired, or held by the debtor,” 15 U.S.C. § 78lll(2)(A), or who “has deposited cash with the debtor for the purpose of purchasing securities,” id. § 78lll(2)(B)(i). Instead, these cases erroneously hold that it does not matter whether a claimant deposited cash or securities with the debtor at all. Old Naples, 223 F.3d at 1302 (“Whether a claimant ‘deposited cash with the debtor,’ however, 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.”); Primeline, 295 F.3d at 1107 (“Whether a claimant deposited funds ‘with the debtor’ does not depend simply on to whom claimants made their checks payable.”). With all due respect, this analysis stretches SIPA’s text beyond recognition. It is for Congress—not the courts—to determine whether SIPA’s protections should extend to non-SIPC-member firms.

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1306 (citing 15 U.S.C. § 78lll(2)(A) & (B)).

Second, both cases involved factual scenarios in

which “investor[s] intended to have the brokerage purchase securities on [their] behalf” and

“believed that [they] [were] sending money to the brokerage.”

Old Naples, 223 F.3d at 1303;

Primeline, 295 F.3d at 1107 (noting that “claimant[s] intended to have the brokerage purchase

securities on the claimant[s’] behalf”). Both decisions recognized that, as here, “claimants who

invest directly in a third-party company are not protected by SIPA, even if their broker

suggested the investment.” Primeline, 295 F.3d at 1107 (citing Old Naples, 223 F.3d at 1302).

Finally, none of the investors in either of the two cases actually received the securities they

agreed to purchase, whereas here the SEC cannot deny that SIBL CDs were delivered to

investors or their designees and were not left in the custody of SGC.

Primeline, 295 F.3d at

1107; Old Naples, 223 F.3d at 1305 (noting the “ample evidence that the claimants believe [the

broker-dealer] would buy the bonds in their names and for their individual accounts”).

In any event, both Old Naples and Primeline recognized that these inquiries require a

specific factual showing under SIPA, which the SEC has yet to make. See Old Naples, 223 F.3d

at 1301 (concluding that SIPC coverage first required bankruptcy court to find, inter alia, that

“neither [investor] had any reason to know that they were not dealing directly with the debtor

brokerage when they wired funds to [a non-debtor entity]” and that the “transactions had the

characteristics, at least from the claimants’ perspective, of a typical fiduciary relationship

between a broker and client”). Importantly, SIPC believes the facts will show (and the SEC will

not be able to dispute) that:

SIBL’s offering documentation warned investors that there was no SIPC coverage for these CDs.

In order to purchase these CDs, investors had to open bank accounts with SIBL—the offshore bank in Antigua.

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SGC—the SIPC member brokerage firm—did not and does not have custody of the CDs, because they were delivered to investors or their designees.

The CDs were sold to accredited investors (and thus were exempt from SEC registration requirements) with returns that would not be reported to the IRS.

At bottom, even if SIPA were to permit the SEC to assert a veil-piercing claim in this

case under these facts, it must first demonstrate the factual basis for each aspect of that claim

such that there truly are “customers” in need of protection as that term is defined under the Act.

(See Feb. 9, 2012 Mem. Op. (Dkt. 21) at 11 (“Congress intended that the SEC must ask this

Court for relief and demonstrate that it is entitled to such relief.”).)

A contrary ruling would

require SIPC to seek a liquidation even if there are no “customers” of a “member” under the

facts of the Stanford case, and thus exceed the scope of what the statute permits.

II. LIMITED DISCOVERY IS NECESSARY AND APPROPRIATE GIVEN THE SEC’S THEORY.

In its February 9, 2012 Memorandum Opinion, the Court directed the parties to submit

briefing on the procedures and discovery that are necessary and appropriate in this case.

SIPC

respectfully submits that—if the Court concludes that the SEC Application does not fail as a

legal matter—limited and expedited discovery is required because there are disputed factual

issues.

A. SIPC Seeks Limited and Expedited Discovery.

Because the SEC has yet to demonstrate through competent, admissible evidence the

predicate facts that are required to trigger the availability of relief under section 78ggg(b), SIPC

submits that discovery is both necessary and appropriate—so that the right result can be reached,

and so that there is a real “record” from which to conduct meaningful judicial review.

Customers. Because an SEC proceeding under section 78ggg(b) and the initiation of a liquidation under section 78eee(a)(3)(A) both require “customers,” SIPC seeks targeted discovery to test the SEC’s assertion that there are eligible “customers” in this case. This would include evidence about when the SEC’s

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proffered “customers” purchased their SIBL CDs; how they purchased them (i.e., who sold the CD to them and where they sent their money); what disclosures or other documents they received in the course of purchasing the CDs; and what statements they received after purchasing the CDs.

Certificates of Deposit. Because “customer” status exists only if a SIPC “member” firm was supposed to be holding an investor’s cash or securities when the brokerage failed, SIPC seeks targeted discovery showing where the CDs purchased by the SEC’s proffered “customers” were sent, where they are located now, and what evidence the SEC has to show that the CDs were on deposit with SGC when it went into receivership in 2009.

Corporate Structure. Because SIPA does not confer “customer” status based on transactions with different subsidiaries or affiliates, see supra Part I.D, and because the SEC itself claims that SGC and SIBL should be “deemed” one and the same, SIPC seeks targeted discovery to test the SEC’s contention that SIBL and SGC’s corporate forms should be disregarded, including: observance of corporate formalities; shared management, officers, and employees; shared locations of physical offices; and common or separate book-keeping.

The Underlying Evidentiary Record—Including Any Evidence the SEC Has Uncovered That Undermines the Case for SIPA Protection. Finally, SIPC seeks the complete record considered by, or available to, the SEC and its Staff in evaluating whether SIPA applies to the Stanford case—including exculpatory facts that rebut the existence of protection, not simply the supporting facts that the SEC selectively cites in its June 15, 2011 Analysis. 13

This is not to say that SIPC seeks discovery about each and every alleged “customer”

in order to test thousands of different alleged claims.

Far from it.

SIPC does not seek

discovery with respect to each and every person who invested in a SIBL CD, nor does SIPC seek

discovery regarding every person the SEC contends to be entitled to SIPA protection. (See Jan.

24, 2012 Hr’g Tr. (Ex. 1) at 76:7-19.)

The key point here is that SEC has failed to show that

there are any “customers” under the facts of the Stanford case; it has failed to show that SIBL

and SGC operated as a single enterprise such that the Court should ignore their corporate forms;

and it has failed to produce any potentially exculpatory documents it may have omitted from its

13 On February 13, 2012, SIPC’s counsel met with the SEC’s counsel in an initial effort to craft a discovery plan pursuant to the Court’s February 9, 2012 Order. As these conversations continue, SIPC will refine the scope of these requests, particularly if the parties are able to come to an agreement about the nature and extent of discovery appropriate for this case.

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June 15, 2011 Analysis.

For example, if the SEC claims that it has identified a dozen or so

representative “customers” sufficient to justify a liquidation, SIPC’s requested customer-

discovery and CD discovery would focus on those proffered investors.

The

SEC

may

not

avoid

discovery

here—and

seek

what

amounts

to

summary

judgment—by simply pointing to immaterial facts and claiming that they are undisputed (i.e.,

that Stanford was operating a Ponzi scheme, that SGC and SIBL operated in a “highly

interconnected” fashion, and that some funds used to purchase SIBL CDs may have made their

way back to SGC).

See Holcomb v. Powell, 433 F.3d at 895 (“[F]actual disputes that are

‘irrelevant or unnecessary’ do not affect the summary judgment determination.”) (citation

omitted). Summary judgment is appropriate, of course, only where there are no material facts in

dispute.

Liberty Lobby, Inc., 477 U.S. at 248.

Moreover, when a non-moving party does not

have access to material facts, a court likewise should not grant a motion for summary judgment,

but instead permit time for the party to conduct discovery.

See, e.g., Seed Co.,

Ltd.

v.

Westerman, Civ. A. No. 08-0355, 2012 WL 28521, at *4 (D.D.C. Jan. 5, 2012).

B. The Burden on the SEC In Producing This Material Is Minimal.

Lest there be any doubt, the material facts are unquestionably in the SEC’s control.

Before 2011, the SEC did not think SIPA supported a liquidation, because otherwise the SEC

would have breached its statutory duty to “immediately notify” SIPC upon becoming aware that

SIPC protection is warranted in any given situation.

See 15 U.S.C. § 78eee(a)(1).

To the

contrary, the SEC’s own General Counsel agreed with SIPC that there was no protection under

the facts of the Stanford case, and the facts behind the Staff’s earlier conclusions are plainly

relevant to whether SIPA does or does not authorize a liquidation as the SEC contends.

(See

SEC’s Jan. 3, 2012 Reply Br. (Dkt. 16) at 6 n.5 (claiming that SEC had “ongoing investigation

that included SGC’s activities and continued through early 2011 to receive relevant information

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from victims of the Stanford fraud”).)

Taking the

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SEC

at

its

word,

if

it

took years of

investigation for the SEC to become “aware of facts” supporting its conclusion that SIPA does

apply, see id., then surely the SEC is in possession of the facts.

Moreover, it is clear that the SEC has sought and gained access to the evidence gathered

by its Receiver in the Northern District of Texas.

Despite the SEC’s contention during the

January 24, 2012 hearing that obtaining the facts would require burdensome third-party

discovery from the Receiver (see Jan. 24, 2012 Hr’g Tr. (Ex. 1) at 76:23-24 (SEC’s Counsel:

“And let’s be clear, it is third party discovery.”)), the federal court order appointing the Receiver

requires him to “[p]romptly provide the [SEC] and other governmental agencies with all

information and documentation they may seek in connection with its regulatory or investigatory

activities.”

(See SEC v. Stanford, No. 09-0298, Am. Order Appointing Receiver ¶ 5(k) (N.D.

Tex. Mar. 12, 2009) (Ex. 22).) The SEC has also been able to use compulsory court process to

investigate any and all aspects of the Stanford situation.

(See id. ¶ 15(c) (“The [SEC] and

Receiver may obtain, by presentation of this Order, documents, books, records, accounts,

deposits, or other information within the custody or control of any person or entity sufficient to

identify accounts, properties, liabilities, causes of action, or employees of the Receivership

Estate.”).) Further, the SEC Receiver has reported on numerous occasions that it has coordinated

directly with the SEC in developing evidence to support the Stanford enforcement action.

(See

SEC v. Stanford, No. 09-0298, Receiver’s Consolidated Reply to Objs. To Mot. for Approval of

Interim Fee Application and Procedures for Future Compensation at 20-21 (N.D. Tex. June 19,

2009) (noting that “the SEC was in almost daily contact with the Receiver and was frequently

present in the Stanford offices where the work was being performed” and that “the SEC itself

was the source of the requests for much of the work done”); see also SEC v. Stanford, No. 09-

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0298, Receiver’s Mot. for Approval of Interim Fee Application and Procedures for Future

Compensation of Fees and Expenses and Brief in Support at 8 (N.D. Tex. May 15, 2009) (“[T]he

Receiver has expended substantial time and effort to comply with requests for information and

assistance from various federal law enforcement and other government agencies, including the

SEC….”); SEC v. Stanford, Civ. No. 09-0298, Receiver’s Mot. for Approval of Second Interim

Fee Application at 6, 18, 28 (N.D. Tex. Aug. 4, 2009) (detailing that SEC has made numerous

requests for information and documents); SEC v. Stanford, Civ. No. 09-0298, Receiver’s Mot.

for Approval of Third Interim Fee Application at 28 (N.D. Tex. Oct. 2, 2009) (same).)

The SEC also has access to other government files as well. (See Jan. 6, 2012 Letter from

Antiguan Liquidators to Congress (Ex. 5) (explaining that “[w]e have provided documents to the

DoJ to assist them in the prosecution of Mr. Stanford and will continue to assist them where we

can”).)

Finally, the SEC has received voluminous material from victims’ groups such as the

“Stanford Victims Coalition” (“SVC”).

(See May 19, 2010 Letter from SEC to SVC Counsel

(Ex. 23) (“We appreciate receiving the information you have provided to date, which we have

reviewed.

In addition, we have reviewed documents sent to us by other SGC customers and

certain other SGC records.”); id. (requesting additional information “to be sure that our analysis

is fully informed,” including “account statements (from … SIBL, and/or SGC), cancelled checks

for the purchase of the CDs, account opening documents, and CD purchase documents,” as well

as “any correspondence between the [investor] and SGC or SIBL relating to the CDs, and any

other materials [that] might assist us in reviewing the facts of the case”).)

While the SEC has claimed that its June 15, 2011 Analysis constitutes a “formal”

determination that there are SIPA “customers” (Jan. 3, 2012 SEC Reply Br. (Dkt. 16) at 17 n.19),

the key point here is that neither SIPC nor the Court should be limited to the selective citation of

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facts used to support that analysis, without also reviewing other facts that the SEC considered or

had available to it, but left out of its papers. Such materials were plainly before the SEC. The

SEC Receiver has emphasized in court-ordered reports that he has provided voluminous

information to the government, including the SEC. In addition, the SEC has not included in the

“record” material documents from its own investigations of SGC.

See Roland v. Green, No.

3:10-cv-00224, slip op. at 19 (N.D. Tex. Aug. 31, 2011) (noting that the SEC reviewed a sample

of 52 SGC client files).

This conflicts with the hornbook requirement that an “agency may not

skew the record in its favor by excluding pertinent but unfavorable information.”

Fund for

Animals v. Williams, 391 F. Supp. 2d 191, 197 (D.D.C. 2005).

“Nor may the agency exclude

information on the grounds that it did not ‘rely’ on the excluded information in its final

decision.” Id. (quoting Ad Hoc Metals Coalition v. Whitman, 227 F. Supp. 2d 134, 139 (D.D.C.

2002)). At a bare minimum, SIPC is entitled to all information that “might have influenced the

agency’s decision,” not merely those on which the agency relied in its final decision. See Nat’l

Courier Ass’n v. Bd. of Governors of the Fed. Reserve Sys., 516 F.2d 1229, 1241 (D.C. Cir.

1975).

Even in the context of reviewing an agency’s decision, the D.C. Circuit itself has

concluded that a party adverse to the agency is entitled to at least some discovery to test the

contours of the agency’s purported “record.” See NRDC v. Train, 519 F.2d 287, 292 (D.C. Cir.

1975) (“[T]he plaintiffs are entitled to an opportunity to determine, by limited discovery,

whether any other documents which are properly part of the administrative record have been

withheld.”). SIPC is therefore entitled to substantive discovery when the record before the SEC

is shown to be incomplete. See Kent Cnty., Delaware Levy Court v. EPA, 963 F.2d 391, 395-96

(D.C. Cir. 1992) (supplementation of administrative record proper where agency “excluded from

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the record evidence adverse to its position” (quoting San Luis Obispo Mothers for Peace v. NRC,

751 F.2d 1287, 1327 (D.C. Cir. 1984))).

produce

all

information

it

considered

This Court accordingly should compel the SEC to

or

had

available

to

it—including

exculpatory

information—bearing on whether SIPA applies to the Stanford case. See Occidental Petroleum

Corp. v. SEC, 873 F.2d 325, 338-39, 342 (D.C. Cir. 1989). 14

Given that the SEC itself

recognized in 2002 that “it did not appear that the Examination Staff could claim SGC had such

custody” of SIBL CDs (Dec. 19, 2002 SEC Report (Ex. 16) at 14-15), and that its own General

Counsel agreed with SIPC before 2011 that the statute did not apply to Stanford’s investors, the

SEC is plainly in possession of such evidence. Indeed, those admissions are directly relevant to

whether there are any eligible “customers” of a “member.”

The fact that the SEC tellingly

omitted these points from its June 15, 2011 Analysis is all the more reason why discovery should

be had.

At bottom, balancing the burdens of discovery on the SEC and the attendant harms SIPC

would face it if were forced to commence a liquidation when there are no eligible “customers” of

a SIPC “member” clearly weighs in SIPC’s favor. The discovery SIPC seeks is neither onerous

for the SEC nor time-consuming: especially if the SEC follows an open-file policy, as one would

expect if this case were as clear-cut as its Application tries to suggest.

SIPC submits that such

discovery may include as few as five interrogatories, five requests for production, and five

requests for admission served on the SEC and its Receiver, as well as depositions of the handful

of alleged “customers” whom the SEC proffers in support of why a liquidation should be

14 Courts have noted, moreover, that full and complete discovery is particularly appropriate where, as here, an agency has changed its position without explanation. See, e.g., Cmty. Sav. & Loan Ass’n v. Fed. Home Loan Bank Bd., 68 F.R.D. 378, 382 (E.D. Wis. 1975) (“In a case like the present, where the agency has completely changed its position on an application within a relatively short period of time, public confidence in the soundness of the decision-making process will be promoted by allowing plaintiffs to see the information they request.”).

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commenced. Discovery into the corporate structure of SGC versus SIBL likewise could proceed

in an expedited manner, for example through an SEC examiner or other witness akin to a

corporate representative under Rule 30(b)(6), who could identify what facts the SEC does or

does not have in its possession.

Assuming that the SEC did, in fact, gather facts to make its

referral determination (and to comply with Rule 11(b)), the burden of turning those facts over to

SIPC is minimal—and it pales in comparison to the prejudice that SIPC will suffer if it is

improperly forced to initiate a liquidation proceeding.

There is no doubt about just how expensive—in terms of party resources, judicial

resources, and sheer dollars—the administrative costs of a liquidation proceeding will be.

The

Lehman Brothers liquidation, for instance, has incurred $642 million solely in administrative

fees, and it has been going on for more than three years even though SIPC promptly started the

process the day after the Lehman bankruptcy proceeding began.

(See In re Lehman Bros. Inc.,

No. 08-01420, Trustee’s Sixth Interim Report for the Period Apr. 23, 2011 Through October 21,

2011 ¶ 197 (Bankr. S.D.N.Y. Oct. 21, 2011).) Administrative costs for the Madoff liquidation

exceeded $3.2 million over the first fifteen days after a trustee was appointed, and they exceeded

$8 million in the first two-and-a-half months after the trustee was appointed in the Lehman

liquidation.

(See 2008 SIPC Annual Report at 26-27, available at http://www.sipc.org/pdf/

SIPC%20Annual%20Report%202008%20FINAL.pdf.)

From December 2008 to September

2010—a mere 21 months—administrative costs were $102 million.

(See Mar. 30, 2011 SEC

Report of Office of Inspector General Oversight of SIPC at 22, available at http://www.sec-

oig.gov/Reports/AuditsInspections/2011/495.pdf.)

This $102 million is “a mere fraction” of

what will eventually be spent, and it will not be recouped from the estate. (Id.)

Indeed, these

administrative fees may well jeopardize the very solvency of the SIPC Fund itself.

(Id. at 23

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(“Because the outcome of the Lehman liquidation is uncertain and SIPC is advancing its own

funds to pay the administrative expenses for the Madoff liquidation, the possibility exists that

SIPC could deplete its $2.5 billion fund.”).)

All of this underscores that starting a liquidation is a precipitous step, confirming why

these are questions to be addressed here rather than deferring them to another court in a

proceeding which the SEC itself admits would be “very hard … to unwind.” (See Jan. 24, 2012

Hr’g Tr. at 8:17-18.) Once a liquidation is started, anyone can file an informal claim which SIPC

must then litigate before the trustee and then in the courts, even if the process ultimately

establishes that a person does not qualify as an eligible “customer” of a “member” as the statute

defines them. 15 U.S.C. § 78fff-2(a). And in every liquidation, where there is no general estate,

SIPC is obligated to pay for professional fees (including for a trustee, counsel and claims review

and forensic accounting consultants), mailings, publications, preparation and filing of taxes for

the debtor, computer and data system rentals, equipment leases and rent and utilities for office

space.

(See, e.g., May 31, 2009 Madoff Form 17 (Ex. 24) (itemizing SIPC’s administrative

costs).) For the liquidation of North American Clearing, Inc., where there were only 1700 claims

filed compared with potentially 21,500 disputed Stanford claims, (see Dec. 12, 2011 SEC Mem.

in Supp. of Application (Dkt. No. 1) at 7 n.6), administrative fees exceeded $2.8 million after

only five months, and $8.7 million after 18 months, (see 2008 SIPC Annual Report at 26-27,

available

2009

SIPC

at

http://www.sipc.org/pdf/SIPC%20Annual%20Report%202008%20FINAL.pdf;

Annual

Report

at

28-29,

available

at

http://www.sipc.org/pdf/2009%20

Annual%20Report.pdf). To permit the SEC to force SIPC to initiate a liquidation—and to incur

the massive costs associated with such a liquidation—without providing even targeted, expedited

discovery as described above would deprive judicial review of any serious meaning.

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CONCLUSION

Page 45 of 46

For the foregoing reasons, the Court should deny the SEC’s Application.

Dated: February 16, 2012

Respectfully submitted,

/s/ Eugene F. Assaf

Eugene F. Assaf, P.C. (D.C. Bar # 449778) Edwin John U (D.C. Bar #464526) John O’Quinn (D.C. Bar # 485936) Elizabeth M. Locke (D.C. Bar # 976552)

Michael W. McConnell (admitted pro hac vice) Susan Marie Davies (admitted pro hac vice)

KIRKLAND & ELLIS LLP

655 Fifteenth Street, N.W., Suite 1200

Washington, DC 20005 Tel: (202) 879-5000 Fax: (202) 879-5200 eugene.assaf@kirkland.com edwin.u@kirkland.com

john.oquinn@kirkland.com

Josephine Wang (D.C. Bar #279299) General Counsel

Securities Investor Protection Corporation

805 Fifteenth Street, N.W.

Washington, D.C. 20005 Tel: (202) 371-8300 Fax: (202) 371-6728 jwang@sipc.org

Attorneys for Securities Investor Protection Corporation

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CERTIFICATE OF SERVICE

I hereby certify that on the 16th day of February, 2012, I served the Securities Investor

Protection Corporation’s Opposition to the SEC’s Application For Order Under 15 U.S.C.

Section 78ggg(b) via ECF to the following:

Matthew T. Martens (martensm@sec.gov) David S. Mendel (mendeld@sec.gov) Securities and Exchange Commission 100 F Street NE Washington, DC 20549

202-551-4481

/s/ Eugene F. Assaf

Eugene F. Assaf, P.C. Edwin John U John O’Quinn Elizabeth M. Locke KIRKLAND & ELLIS LLP 655 Fifteenth Street, N.W. Washington, D.C. 20005 Telephone: (202) 879-5000 Facsimile: (202) 879-5200 eugene.assaf@kirkland.com edwin.u@kirkland.com john.oquinn@kirkland.com

Counsel for Defendant Securities Investor Protection Corporation