sipc response to the sec's application re: stanford group company liquidation

8/3/2019 SIPC Response to the SEC's Application re: Stanford Group Company Liquidation

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Securities and Exchange Commission,

Applicant,v.

Securities Investor Protection Corporation,

Respondent.

)))))))))))

MISC. NO. 11-MC-678-RLW

[STATUS CONFERENCESCHEDULED FORMARCH 5, 2012]

SECURITIES INVESTOR PROTECTION CORPORATIONS BRIEF IN OPPOSITION

TO SECS 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 OQuinn (D.C. Bar # 485936)Elizabeth M. Locke (D.C. Bar # 976552)

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

KIRKLAND & ELLIS LLP655 Fifteenth Street, N.W., Suite 1200Washington, DC 20005Tel: (202) 879-5000Fax: (202) [email protected]@[email protected]

Josephine Wang (D.C. Bar #279299)General CounselSecurities Investor Protection Corporation805 Fifteenth Street, N.W.Washington, D.C. 20005Tel: (202) [email protected]

February 16, 2012

Case 1:11-mc-00678-RLW Document 23 Filed 02/16/12 Page 1 of 46


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TABLE OF CONTENTS

Page

INTRODUCTION ...........................................................................................................................1BACKGROUND .............................................................................................................................4ARGUMENT ...................................................................................................................................5I. The SECs Application Should Be Denied. .........................................................................5

A. Under Section 78ggg(B), the SEC Has the Burden to Show SIPC HasFailed to Discharge Obligations to Customers of a Member. .......................6

B. Protected Customers Within the Meaning of SIPA Are Only Those WhoHave Cash or Securities in the Custody Of a Member Brokerage Firm. .............91.

To Qualify as a Customer, SIPA Requires an Investor to HaveEntrusted Cash or Securities with a Broker When It Failed. ..................10

2. SIPA Determines Customer Status Based on What a MemberWas Supposed To Be Holding on Deposit at the Time It Failed. ..............11

3. SIPA Does Not Protect Against Investment Fraud. ...................................124. SIPA Does Not Protect The Value of Investments. ...................................12

C. The SEC Has Not Made the Requisite Showing That SIPC Has Failed toDischarge Its Obligations to Customers of a SIPC Member. ......................141. SIBL Was an Offshore BankNot a Registered Broker Dealer. ..............142. Investors Deposited Funds With the Offshore Bank and Clearly

Had the Purpose of Purchasing SIBL CDs. ...............................................163. Investors Received Custody of Their SIBL CDs. ......................................184. Once a Customer Does Not Mean Always a Customer. .....................205. Ponzi Schemes Do Not Alter the Customer Analysis. ...........................20

D. SIPAs Text Demonstrates That Corporate Formalities Matter. ...........................22E. Old Naples and Primeline Are Distinguishable. ....................................................27

II. Limited Discovery Is Necessary and Appropriate Given the SECs Theory. ....................29A. SIPC Seeks Limited and Expedited Discovery. .....................................................29



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B. The Burden on the SEC In Producing This Material Is Minimal. .........................31CONCLUSION ..............................................................................................................................38CERTIFICATE OF SERVICE ......................................................................................................39



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TABLE OF AUTHORITIES

Page

CasesAd 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 Assn 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 Intl 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



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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

Natl Courier Assn 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



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Occidental Petroleum Corp. v. SEC,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



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Rules and Statutes11 U.S.C. 510(b) ........................................................................................................................ 22

15 U.S.C. 78aaa et seq. ....................................................................................................... passim

Other AuthoritiesH. 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

RulesFed. R. Civ. P. 11(b) ..................................................................................................................... 36

Fed. R. Civ. P. 30(b)(6)................................................................................................................. 36



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INTRODUCTION

The SECs 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 arenot 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

SECs Application also should be denied for the straightforward reason that it has failed to

provide competent, admissible evidence establishing that there areany eligible customers of a

member under the facts of the Stanford case. Despite the SECs 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 permitmuch less requirethe 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 SECs liquidate first, ask questions later approach should be rejected.

As an initial matter, the SECs 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 SECs 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 authorizedmuch less requiredto 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 SIPCs determination whether to

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

firmto 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 firmwas holding a persons 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 Stanfords business operated in an

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

partySIPCliable 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 SECs demand for SIPA coverage here.



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

SECs 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 Staffs initial determination that there was no SIPA coverage in the Stanford

case. The SECs 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 SECs Application should be denied as a matter of law for the

reasons stated above, SIPC alternatively requests targetedand expediteddiscovery 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 SECs 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 Hrg



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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 obligationsand 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 SECs Response to Concerns Regarding Robert Allen Stanfords 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. (SeeSEC v. Stanford, No. 09-0298, Compl. 1

(N.D. Tex. Feb. 16, 2009).) At the SECs request, the court appointed a receiver, Ralph S.

Janvey (the SEC Receiver), to oversee the liquidation of Stanfords 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 at http://www.stanfordfinancialreceivership.com/documents/SIPC_ltr_with_

exhibits.PDF.)

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

SIPCs analysis at the time. To the contrary, the SECs 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 Counsels 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 Courts February 9, 2012 Order (see Dkt. 22), SIPC respectfully submits this

response to the SECs Application.

ARGUMENT

I. THE SECS 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

showingas 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, 2011Senator D. Vitter Press Release, available at http://www.vitter.senate.gov/public/index.cfm?FuseAction=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. Accordingly, this

Court should deny the SECs Application.

A. Under Section 78ggg(B), the SEC Has the Burden to Show SIPC Has Failedto 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 theprotection of customers of any member of SIPC, the Commission may apply tothe district court of the United States in which the principal office of SIPC islocated for an order requiring SIPC to discharge its obligations under this chapterand for such other relief as the court may deem appropriate to carry out thepurposes 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

SECs 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 SIPCs Board of Directors is comprised of five Senate-confirmed presidential appointees and one representativeeach 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 section78ggg(b) necessarily modifies both a refusal to commit funds and a refusal toactor else the statutes use of the word otherwise would have no meaning indrawing a parallel between the two.

Second, the statute itself discusses the commitment of funds in section 78fff-3, andlikewise refers to Advances for Customers Claims without requiring SIPC to paymonies just on the SECs say-so.

Third, if any refusal to commit funds whatsoever entitled the SEC to relief (an argumentthat not even the SEC makes in its Application), then section 78ggg(b) would have nolimiting effect differentiating it from other provisions of SIPAlike sections 78ccc(e)(3)and 78ggg(c)(1)that allow the SEC to require certain SIPC action such as adopting abylaw or submitting periodic reports. As the Court observed in its February 9, 2012ruling, the distinction makes a difference.

Finally, to initiate a liquidation proceeding under section 78eee(a)(3)(A), SIPA requiresthe 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 protectivedecree if SIPC determines that(A) the member has failed or is in danger offailing to meet its obligations to customers. (emphasis added)), because the verypurpose[] of such a liquidation is to delivercustomer name securities and customerproperty and to satisfy net equity claims ofcustomers, id. 78fff (emphasis added).SIPA does not authorizemuch less obligateSIPC to pay anyone regardless ofwhether 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:

SIPCmay, 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 tocustomers .

Id. 78eee(a)(3)(A) (emphasis added). If the SEC wishes to overturn SIPCs 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 wheneven without the benefit of discovery or other formal

processthe 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 SECs fact-finding

hereabsent 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 arecovered 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 theiraccounts is customer property under SIPA);In re Brentwood Sec., Inc., 96 B.R. 1002, 1006 (B.A.P. 9th Cir.1989) (noting the investors burden of proving that he was a customer . . . with respect to each claim madeand therefore entitled to SIPA protection). The party seeking relief must necessarily already haveand beable to come forward withthe 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 thuseligible for protection may be adjudicated in the liquidation, that adjudication occurs only after SIPC hasdetermined that there are customers in need of, and eligible for, SIPA protection and therefore, grounds existto start a liquidation proceeding. Inevitably, once the proceeding is begun, many ineligible claimants will fileclaims seeking customer status. In that context, the question of customer status will be litigated in theliquidation proceeding. However, that is a very different situation from the one presented herenamely,whether customers exist, in the first instance, whom SIPC can protect under SIPA. The latter question is onethat 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 WhoHave 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 brokerages lockbox function (for example, if a broker is supposed to holding a

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

something in the lockbox qualify as customers under the statute. In particular, the statute

states that a customer:

means any person (including any person with whom the debtor deals as principal or agent) whohas a claim on account of securities received, acquired, or held by the debtor in the ordinarycourse of its business as a broker or dealer from or for the securities accounts of such person forsafekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, ascollateral, 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 HaveEntrusted 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 depositwhen 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 brokers 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 Actthat 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, the possible loss of securities actually entrusted to a debtor forced into

liquidation.). 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 MemberWas 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

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

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 alsoSEC 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. This is so for two separate and

independent reasons.



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3. SIPA Does Not Protect Against Investment Fraud.First, SIPA does not protect against investment loss, fraud, or misrepresentationeven

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 brokers

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 brokers 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)). This is the case no

matter how innocent or duped the investor.

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 brokers custody) and to satisfy net equity claims of

customers, which are measured on the date of the members 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 liquidationnot the

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

investors principal deposit.4 SeeIn 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 customersi.e., customers who have positive net

equitythe 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 investors original purchase price is legally defined as a rescission. Even where fraud isdemonstrated, 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 toDischarge 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 BankNot a Registered Broker Dealer.As an initial matter, the SEC has never alleged that SIBLthe offshore bank that issued

these CDsis 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. Johns, 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

memberits Disclosure Statements to CD investors stated just the opposite:



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(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 athttp://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 SIBLand 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 This, alone, is fatal to the

SECs case.

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 solelyresponsible to you for all amounts due in respect of the CD Deposit. In the event of nonpayment of funds dueand owing under the CD Deposit for any reason, you will have no claim or right against SGCor any otherdealer 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 athttp://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 collapsethe U.S. Receivers 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 firms 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 Hadthe 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 SIBLnot

SGCfor thepurpose of buying offshore SIBL CDs. The SECs own June 15, 2011 Analysis

the analysis that allegedly supports the SECs pursuit of this caseadmits 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 SECs 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 SIBLnot SGCand 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 investors 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 investors 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. Instead, these certificates appear to have been

physically held by the owner of the 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 custodydirectly or indirectlyof 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

emphasizedeven after the failure of SGCthat those CDs are freely available for delivery to

6 For this reason, the SECs inclusion of investor checks made out to Stanford as exhibits to the SECsAnalysis proves nothing. (See Exhibit 2, Attachment 7 to Dec. 12, 2011 M. Martens Decl. (Dkt. 1-1).) Thekey point here is that investors had to acknowledgein order to place their CD ordersthat the money wouldend 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 investors possession).)7 The SEC simply has not demonstrated that any investors

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 butnever 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 tothe appropriate Stanford accountthat is, SIBLto purchase the CDs. (Id. 3.) That SIBL may havethen failed to deliver a CD is immaterial, as SIBLs actions would not implicate SGCs custodial function. Buteven if this Court were to disagree, due process requires that SIPC be afforded some ability to test what theaffiant 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 Hrg 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 Commissions 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).) InIn 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. (quotingIn 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 SECs 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

lawhere 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 Courts analysis, it is a red herring. The question at issue in the Madoffliquidation was how to calculate the amountof a customers net equity claim. A customers net equity islimited 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 customers investment. Therewas never a threshold dispute, however, as to whether individuals who invested through Bernard MadoffSecurities, LLC, which was a SIPC-member firm, were customers under SIPA. Indeed, in Madoff, SIPCacted promptly to fulfill its obligation to commence a liquidation to protect customers. The customer assetswere specifically held at the SIPC-member firm, and for that reason, SIPC immediately commenced acustomer protection proceeding.



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D. SIPAs 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. Johns,

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 SECs 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 Congresss 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 yearsearlier, the SEC emphasized that SGC was distinct from SIBL, and that its authority to audit SGC as aregistered 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 asthe SECs resources are limited by law to overseeing firms within the scope of its regulatory purview, there isno legal basis for requiring SIPC to cover investments withnon-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 SGCrather than SIBLat the time of SGCs 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 SIPAeven if the investor initially deposited

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

SECs 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 Hrg Tr. (Ex. 1) at 14 ([W]e believe that cash can be deemed submitted with a broker if

its 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 recoveryfrom SIPC.



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As set forth above, however, SIPAs unambiguous text does not permit recovery under a

veil-piercing theory. SIPAs 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 SIPAs protection to customers of a member should be followednot disregarded.

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

expressly preclude the SECs 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 rarestcircumstances. 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 thatincluded SIBL CD account balances. (See Exhibit 1 to Dec. 12, 2011 M. Martens Decl. (Dkt. 1-1) at 5-22.)Even setting SIPAs plain text aside, as a factual matter these statements make clear that they were beingprovided for informational purposes only and do not replace actual account information obtained from theissuing financial institutioni.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 SGCor 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 SECs 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, 2007SIBL 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 bycontract));

SIBL maintained a physical presence in Antigua (seeSEC v. Stanford, No. 09-0298,Second Am. Compl. 25 (N.D. Tex. June 19, 2009) (SIB . . . is a private, offshorebank located in Antigua.); SEC v. Stanford, No. 09-0298, Appendix in Support ofthe Receivers Notice of United Kingdom Judgment 97 (N.D. Tex. July 6, 2009)(Its physical headquarters were in Antigua [and] almost all of its employees werelocated in Antigua.)), while SGC was headquartered in Houston, Texas (seeSEC v.Stanford, Second Am. Compl. 14);

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

SIBL did notbecause it was not required toprovide its investors with U.S. taxForm 1099, and SGC likewise did not include SIBL CD income on its Form 1099 forits 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 anAntiguan 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 SIBLs 2006 and 2007 Annual Reports)); and

SIBL is subject to an Antiguan receivershipafter the U.S. SEC Receiver tried butfailed to assert control over SIBL in addition to SGC (see Jan. 6, 2012 Letter fromAntiguan Liquidators to Congress (Ex. 5); Fundora v. Stanford Intl Bank Ltd., ClaimNo. 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 inAntigua 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 berespected, not disregarded. The U.K.

High Court of Justice heldafter an examination of the evidencethat 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 Receivers 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 SECs 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 SIPCas a third partycan 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 alsoIn

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 Antiguanliquidation proceedings. Such an order would violate the principles of comity normally afforded to foreignbankruptcy 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 creditorclaims that are the subject of a foreign bankruptcy proceeding.... In such cases, deference to the foreign court isappropriate so long as the foreign proceedings are procedurally fair and ... do not contravene the laws or publicpolicy 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 Naplesand PrimelineAre 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 Courtare

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 brokerages 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 pendingforeign insolvency proceeding, concerns of comity must be taken into account and deference must be given tothe foreign proceedings.). And as a practical matter, it is not obvious that the Antiguan Receiver or anAntiguan Court would surrender SIBL assets held in Antigua. SeeFundora v. Stanford Intl Bank Ltd., ClaimNo. 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 SIPAs plain text

limiting customer status to someone who has a claim on account of securities received, acquired, or held bythe debtor, 15 U.S.C. 78lll(2)(A), or who has deposited cash with the debtor for the purpose of purchasingsecurities, id. 78lll(2)(B)(i). Instead, these cases erroneously hold that it does not matter whether a claimantdeposited cash or securities with the debtor at all. Old Naples, 223 F.3d at 1302 (Whether a claimantdeposited cash with the debtor, however, does not depend simply on to whom the claimant handed her cashor 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 madetheir checks payable.). With all due respect, this analysis stretches SIPAs text beyond recognition. It is forCongressnot the courtsto determine whether SIPAs 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:

SIBLs offering documentation warned investors that there was no SIPC coverage forthese CDs.

In order to purchase these CDs, investors had to open bank accounts with SIBLtheoffshore bank in Antigua.



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SGCthe SIPC member brokerage firmdid not and does not have custody of theCDs, because they were delivered to investors or their designees.

The CDs were sold to accredited investors (and thus were exempt from SECregistration 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 exceedthe scope of what the statute permits.

II. LIMITED DISCOVERY IS NECESSARY AND APPROPRIATE GIVEN THESECS 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 thatif the Court concludes that the SEC Application does not fail as a

legal matterlimited 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 appropriateso 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 initiationof a liquidation under section 78eee(a)(3)(A) both require customers, SIPCseeks targeted discovery to test the SECs assertion that there are eligiblecustomers in this case. This would include evidence about when the SECs



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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 orother documents they received in the course of purchasing the CDs; and whatstatements they received after purchasing the CDs.

Certificates of Deposit. Because customer status exists only if a SIPCmember firm was supposed to be holding an investors cash or securities whenthe brokerage failed, SIPC seeks targeted discovery showing where the CDspurchased by the SECs proffered customers were sent, where they are locatednow, and what evidence the SEC has to show that the CDs were on deposit withSGC when it went into receivership in 2009.

Corporate Structure. Because SIPA does not confer customer status based ontransactions with different subsidiaries or affiliates, see supra Part I.D, andbecause the SEC itself claims that SGC and SIBL should be deemed one andthe same, SIPC seeks targeted discovery to test the SECs contention that SIBLand SGCs corporate forms should be disregarded, including: observance of

corporate formalities; shared management, officers, and employees; sharedlocations of physical offices; and common or separate book-keeping.

The Underlying Evidentiary RecordIncluding Any Evidence the SEC HasUncovered That Undermines the Case for SIPA Protection. Finally, SIPC seeksthe complete record considered by, or available to, the SEC and its Staff inevaluating whether SIPA applies to the Stanford caseincluding exculpatoryfacts that rebut the existence of protection, not simply the supporting facts that theSEC 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 Hrg 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, SIPCs counsel met with the SECs counsel in an initial effort to craft a discovery planpursuant to the Courts February 9, 2012 Order. As these conversations continue, SIPC will refine the scope ofthese requests, particularly if the parties are able to come to an agreement about the nature and extent ofdiscovery 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, SIPCs requested customer-

discovery and CD discovery would focus on those proffered investors.

The SEC may not avoid discovery hereand seek what amounts to summary

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

t

sipc response to the sec's application re: stanford group company liquidation

Documents