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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
__________________________________________)
Securities and Exchange Commission, )
)Applicant, ) Misc. No. 1:11-MC-00678-RLW)
v. ))
Securities Investor Protection Corporation, ))
Respondent. )__________________________________________)
SECURITIES AND EXCHANGE COMMISSIONS REPLY
MEMORANDUM OF POINTS AND AUTHORITIES IN
FURTHER SUPPORT OF ITS APPLICATION FOR AN ORDER
Matthew T. MartensChief Litigation CounselDavid S. Mendel (D.C. Bar #470796)Assistant Chief Litigation CounselU.S. Securities and ExchangeCommission Enforcement Division100 F Street, NEWashington, DC 20549(202) 551-4481 (Martens)(202) 772-9362 (fax)[email protected]@sec.gov
Of Counsel:Michael A. ConleyDeputy General CounselMichael L. PostSenior Litigation CounselOffice of the General Counsel
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TABLE OF CONTENTS
TABLE OF AUTHORITIES ......................................................................................................... iii
I. INTRODUCTION AND SUMMARY ................................................................................1
II. BACKGROUND .................................................................................................................5
A. SGC Receivership Proceedings ...............................................................................5
B. Commission Determination .....................................................................................5
C. SIPCs Customer Coverage Analysis ...................................................................7
D. This Courts Decision ..............................................................................................7
III. ARGUMENT .......................................................................................................................8
A. Burden of Proof and Standard of Review ................................................................9
1. Customer Status Need Not Be Definitively Determined In
Order To Invoke SIPAs Procedural Protections .........................................9
a. Text of SIPA ..................................................................................10
b. Structure of SIPA ...........................................................................11
2. A Probable Cause Finding That A Covered Customer Exists IsSufficient At This Stage .............................................................................13
a. Probable Cause Is The Appropriate Burden of Proof ....................14
b. Hearsay Evidence Satisfies The Probable Cause Standard ............16
B. The Available Evidentiary Record Establishes Probable Cause To Believe
That Covered SGC Customers Exist ..................................................................17
1. SIPA Customers Include Those Deemed To Have Deposited
Cash With A Broker-Dealer For Purposes of Purchasing Securities .........17
2. The Record Evidence Provides Probable Cause To Believe
That Covered SGC Customers Exist ......................................................19
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C. Procedures And Discovery ....................................................................................22
1. Discovery ...................................................................................................22
2. Summary Procedures .................................................................................25
IV. CONCLUSION ..................................................................................................................25
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TABLE OF AUTHORITIES
CASES
Arizona Pub. Serv. Co. v. EPA, 211 F.3d 1280 (D.C. Cir. 2000) ......................................19
*Bell v. Burson, 402 U.S. 535 (1971) ....................................................................14, 15, 16
In re C.J. Wright & Co., 162 B.R. 597 (Bnkr. M.D. Fla. 1993) ..........................................7
C.I.R v. Shapiro, 424 U.S. 614 (1976) ...............................................................................15
Gerstein v. Pugh, 420 U.S. 103 (1975) ........................................................................14, 15
Janvey v. Alguire, 647 F.3d 585 (5th Cir. 2011)......................................................6, 21, 24
Lucas v. Wisconsin Elec. Power Co., 466 F.2d 638 (7th Cir. 1972) (en banc) ..................15
Mathews v. Eldridge, 424 U.S. 319 (1976) ..................................................................14, 16
New Hampshire Fire Ins. Co. v. Scanlon, 362 U.S. 404 (1960) ..................................17, 25
In re New Times Sec. Serv., Inc., 371 F.3d 68 (2d Cir. 2004) ...........................................19
*In re Old Naples Sec., Inc., 223 F.3d 1296 (11th Cir. 2000) .........7, 17, 18, 19, 20, 21, 24
*In re Primeline Sec. Corp., 295 F.3d 1100 (10th Cir. 2002) .........7, 18, 19, 20, 21, 23, 24
*SEC v. Hughes, 461 F.2d 974 (2d Cir. 1972) ..............................2, 8, 9, 11, 12, 16, 17, 25
SEC v. McCarthy, 322 F.3d 650 (9th Cir. 2003) ...............................................................17
SEC v. Vindman, No. 06civ14233, 2007 WL 1074941 (S.D.N.Y. Apr. 5, 2007) .............17
SIPC v. Barbour, 421 U.S. 412 (1975) ........................................................................13, 16
SIPC v. C.J. Wright, Inc., No. 5:91cv92 (M.D. Fla.) ...........................................2, 8, 11, 12
In re Selheimer & Co., 319 B.R. 395 (Bnkr. E.D.Pa. 2005) ..............................................12
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Sniadach v. Family Fin. Corp. of Bay View, 395 U.S. 337 (1969) ....................................15
United States v. Broadie, 452 F.3d 875 (D.C. Cir. 2005) ..................................................15
United States v. Hubbard, 650 F.2d 293 (D.C. Cir. 1980) ..........................................13, 25
STATUTES
Securities Investor Protection Act of 1970, 15 U.S.C. 78aaa, et seq. (SIPA)
Section 5 [15 U.S.C. 78eee] ....................................................................1, 2, 8, 11, 12
Section 8 [15 U.S.C. 78fff-2] ....................................................................................10
Section 9 [15 U.S.C. 78fff-3] ....................................................................................10
Section 10 [15 U.S.C. 78fff-4] ..................................................................................10
Section 11(b) [15 U.S.C. 78ggg(b)] ..........................................................1, 10, 13, 16
Section 16(2) [15 U.S.C. 78lll(2)] ........................................................3, 5, 17, 21, 23
MISCELLANEOUS
BLACKS LAW DICTIONARY (4th ed. 1968) ........................................................................21
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Applicant Securities and Exchange Commission (SEC) respectfully submits this reply
memorandum in further support of its Application under Section 11(b) of SIPA for an order
requiring the Securities Investor Protection Corporation (SIPC) to apply for a protective decree
from the federal district court for the Northern District of Texas (the Texas federal court)
pursuant to Section 5(a)(3) of SIPA with respect to Stanford Group Company (SGC).
I. INTRODUCTION AND SUMMARYSection 11(b) of SIPA provides that, when SIPC has refused to commit its funds or
otherwise to act for the protection of customers, the SEC can apply to this Court for an order
compelling SIPC to comply with its obligations. This Court has ruled that such an application
should be resolved in a summary proceeding where the Court will decide the merits de novo, and
has directed the parties to, with scalpel-like precision, address in their remaining briefing the
procedures, burdens, and discovery that are necessary and appropriate to resolve the application
here. Opinion at 13. The Commission respectfully submits that no discovery is necessary;
rather, this Court can and should conclude, based on the record evidence, that the SEC has met
its burden of showing that SIPC should be directed to initiate a liquidation proceeding.
SIPA provides both substantive and procedural protections for customers of SIPC-
member firms. Substantively, SIPA requires SIPC to commit funds for those covered customer
claims that the broker-dealer has insufficient securities or cash to satisfy. Procedurally, SIPA
provides for a forum (i.e., a liquidation proceeding) in which those purporting to have covered
customer claims can present those claims for resolution by a trustee with judicial review. It is
beyond dispute that SIPC has refused to take action to invoke SIPAs procedural protections for
those who claim to be covered SGC customers. Accordingly, the SEC has applied to this Court
for an order compelling SIPC to take that action namely, the filing of an application for a
protective decree with the Texas federal court to afford SGC customers SIPAs procedural
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protections. The issue before this Court isnot whether SIPC should be compelled to commit its
funds for customer claims. That issue is to be resolved in any subsequent liquidation proceeding.
The issue for this Court is whether SIPC should be compelled to act for the protection of SGC
customers by invoking SIPAs procedural protections in the form of a liquidation proceeding
claims process.
While SIPC spends much of its brief re-arguing that the SEC needs to prove that SIPC
has refused to commit its funds or otherwise to act for the protection of customers, this Court
has already agreed and ruled that it must decide that issue de novo. The disputed issues which
SIPC largely fails to address are (1) whatburden of proofgoverns the showing the SEC is
required to make, in this summary proceeding, in order to compel SIPC to file an application in
the Texas federal court that, if granted, would afford SGC claimants SIPAs procedural
protections; and (2) whattype of evidence this Court can rely upon in makings its determination.
Though using different terminology, Congress, SIPC, and the courts have each answered
these questions. In SIPA, Congress provided that SIPC could initiate a liquidation proceeding
for the protection of customers based on the mere danger that a broker-dealer will not meet its
obligations to customers. 15 U.S.C. 78eee(a)(3)(A)(A). In SEC v. Hughes, 461 F.2d 974, 982
(2d Cir. 1972), the court held that a liquidation proceeding could be instituted based on a
reasonable showing that a broker-dealer will fail to meet its obligations to customers. In SIPC
v. C.J. Wright, Inc., No. 5:91cv92 (M.D. Fla.), SIPC successfully argued that a protective decree
may issue initiating a liquidation proceeding based on the mere fact that persons who may be
customers of [the broker-dealer] may need the protection provided by SIPA. While each of
these authorities uses different terminology, they all provide that something short of proof by a
preponderance of a customers entitlement to SIPA coverage is sufficient to initiate a liquidation
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proceeding and afford claimants the procedural protections of SIPA.
The Commission submits that aprobable cause standard should be applied here, meaning
that this Court should grant the Commissions Application so long as the Court finds that the
Commission has made a reasonable showing that SIPC has refused to commit its funds or
otherwise to act for the protection of customers. The probable cause standard is well-developed
in the law and is well-recognized as the appropriate burden of proof to apply in determining
whether a trial on the merits should be instituted. It is particularly appropriate in the context of a
summary proceeding that Congress intended for the courts to treat . . . with a high sense of
urgency generally. Opinion at 9 n.5. Indeed, it would make little sense to require the SEC to
prove by a preponderance that customers are covered by SIPA in order to invoke the procedural
protections of SIPA that are designed to provide a forum for customers to establish by that
same standard that very question. Moreover, a probable cause standard is sufficient to protect
the limited interest that SIPC has at stake at this point, namely the interest in not even being
required to undertake the minimal burden of filing an application in the Texas federal court.
The Commission further submits that the record evidence in this case, including reports
by the court-appointed receiver, is sufficient competent evidence for this Court to resolve the
Application. Reviewed denovo, the record evidence in this case establishes probable cause to
believe that there are SGC customers with covered claims, such that those customers should be
afforded the procedural protections of SIPA. SIPA defines a customer as including any
person who has deposited cash with the debtor for the purpose of purchasing securities. 15
U.S.C. 78lll(2)(B)(i). The Old Naples line of cases has held that an investor may be deemed to
have deposited cash with a broker-dealer for the purpose of purchasing securities even if the
investor initially deposited those funds with an entity other than the broker-dealer. The courts
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have further held that, in the case of a Ponzi scheme that utilizes fraudulent securities as its
vehicle of operation, the scheme is insolvent from the outset and thus the relevant measure of an
investors recovery is not the fraudulent security itself, but rather the net amount that the
customer invested in the fraudulent scheme.
Here, reliable evidence has been developed in the course of the ongoing receivership
proceedings in the Texas federal court and elsewhere establishing that SGC, Stanford
International Bank, Ltd. (SIBL), and the other Stanford entities were operated in such a highly-
interconnected manner that deposits of cash with SIBL to purchase fraudulent CDs should be
deemed deposits of cash with SGC. And because the Stanford enterprise operated as a Ponzi
scheme, the relevant measure of recovery for those customers is not the fraudulent CDs
themselves, but rather the net amount of cash invested to purchase those CDs. In light of that
evidence and the case law, there is probable cause to believe that SGC, by failing to repay that
cash to investors, is failing to meet its obligations to customers. In these circumstances, SIPC
should be compelled to act for the protection of those customers by requesting that the Texas
federal court provide the procedural mechanism namely, a liquidation proceeding in which
claimants can litigate their entitlement to coverage as customers under SIPA.
In its opposition brief, SIPC makes essentially three arguments. First, SIPC argues that
the Old Naples line of cases on which the Commission relied in determining that SGC investors
are covered customers was wrongly decided. Opp. Brief at 27 n.12. Second, SIPC argues that
the evidence on which the Commission has based its formal determination and Application
namely, reports by the court-appointed receiver and declarations by the receivers forensic
accountant is not competent, admissible evidence in this proceeding. Id. at 5. Third, SIPC
argues that even if that evidence is considered, it fails to satisfy the Old Naples test. Seeid. at
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27-28. A decision by this Court on these issues does not require any discovery, and each of these
arguments fails as a matter of law.
II. BACKGROUNDA. SGC Receivership Proceedings
On February 16, 2009, the Commission filed a complaint against R. Allen Stanford,
SIBL, SGC, and others alleging violations of the federal securities laws through the operation of
a multi-billion-dollar Ponzi scheme involving the sale of purported SIBL CDs. SIBL was a bank
wholly owned by Stanford and domiciled in Antigua, while SGC was a Houston-based broker-
dealer that was registered with the Commission and a member of SIPC. On the same day that
the SECs complaint was filed, the Texas district court appointed a Receiver to take possession
of the defendants assets and records. Extensive analysis of the Stanford records has been
conducted by and summarized in reports, declarations, and testimony provided by the Receiver
and his forensic accountant in various proceedings.
B. Commission DeterminationOn June 15, 2011, the Commission made a formal determination, based on the facts and
circumstances of this case, that SIPC member Stanford Group Company (SGC) has failed to
meet its obligations to customers. Martens First Decl. Ex. 2, at 1. As the Commission noted,
SIPA defines a customer as including any person who has deposited cash with the debtor for
the purpose of purchasing securities. Id. at 7. Citing the Old Naples line of cases, the
Commission observed that, under certain circumstances, an investor may be deemed to have
deposited cash with a broker-dealer for the purpose of purchasing securitiesand 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. Id. The Commissions determination that investors
who purchased SIBL CDs should be deemed to have deposited cash with SGC was based on
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three key facts reflected in filings by the Receiver:
(1)Stanford structured the various entities in his financial empire, including SGC andSIBL, for the principal, if not sole, purpose of carrying out a single fraudulent Ponzischeme. Id. at 8.1
(2)[T]he funds deposited with SIBL were diverted for Stanfords personal use and usedto pay the expenses of SGC. The primary source of funding for the empire was SIBLCD proceeds. . . . [Stanford] used those funds for the benefit of SGC, by makingcapital contributions, paying SGCs operational expenses, and paying concessionsand bonuses to SGC representatives for selling the CDs. Indeed, SGC could not haveremained operational without the inflow from CD proceeds. Id. at 10.
(3)Customers interacted with SGC brokers and followed their directions with regard tothe manner in which they invested funds for the purchase of SIBL CDs. Id. at 9.
Accordingly, the Commission concluded that depositing money with SIBL was, for SGC
accountholders, in reality no different than depositing it with SGC. Id. at 9. Because SIBL CD
investors in effect deposited funds with SGC and did so for purposes of purchasing securities,
they fall within SIPAs definition of a customer.
Furthermore, the Commission concluded that these customers were in need of SIPAs
protection because the cash they effectively deposited with SGC had not been returned to them.
SIPA provides that customers are entitled to their net equity position with the brokerage. A
Ponzi scheme is, as a matter of law, insolvent from its inception. Janvey v. Alguire, 647 F.3d
585, 597 (5th Cir. 2011) (internal quotes omitted). Thus, the SGC customers net equity is
based on the net amount that the customers invested to purchase the fraudulent securities, not the
value of the securities themselves. Martens First Decl. Ex. 2, attach. 8. Because SIPC has
refus[ed] . . . to commit its funds to repay these net equity positions to SGCs customers, the
Commission authorized this Application to compel SIPC to act.
1 Shortly after the Commissions determination, the Fifth Circuit held that there is a substantial likelihoodof success on the merits that the Stanford enterprise operated as a Ponzi scheme. Janvey v. Alguire, 647 F.3d 585,597 (5th Cir. 2011). The Fifth Circuit further dismissed as of no moment the argument that SGC should beseparated from SIB[L] for purposes of the Ponzi scheme finding. Id. at 598.
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C. SIPCs Customer Coverage AnalysisFrom early 2009, the SEC was in regular contact with SIPC regarding the SGC matter.
As the SEC received evidence from victims regarding their claims for SIPA coverage, the
Commission promptly forwarded that information to SIPC. SIPC also had access to the public
filings of the Receiver and his forensic accountant in the Texas federal court. Upon information
and belief, SIPC also requested and obtained documentary evidence from the Receiver directly.
In August 2009, SIPC President Stephen Harbeck sent a letter to the Receiver denying
any basis for SIPA coverage. According to Mr. Harbeck, coverage was not appropriate even if
SGC and SIBL are consolidated because, in that instance, the SIBL CDs are, in effect, debts of
SGC, and are part of the capital of SGC, thereby negating customer status.2
Ultimately, the Commission made its June 15th formal determination that a liquidation
proceeding was warranted. While SIPC claims to have conducted a careful review of the
Commissions determination, Opp. Brief at 5, SIPC never communicated to the SEC that it either
lacked sufficient factual information to analyze the Commissions determination or that it
disputed the underlying facts on which the Commission relied. Rather, SIPC has stated that it
disagrees with the Commissions legal analysis.
Martens First
Decl. Ex. 3. Mr. Harbecks letter did not contest the notion that the facts may suggest a
consolidat[ion] of SGC and SIBL for purposes of a SIPA coverage analysis, nor did he invoke
the foreign subsidiary exception to SIPAs definition of a customer. Seeid.
D. This Courts DecisionOn February 9, 2011, this Court issued a decision holding that this matter is properly a
summary proceeding in which the Court will make a de novo determination whether SIPC has
2 Though SIPC has, over the years, regularly invoked this argument, the courts have just as regularly rejectedit. SeeIn re Primeline Sec. Corp., 295 F.3d 1100, 1110 (10th Cir. 2002);In re Old Naples Sec., Inc. , 223 F.3d 1296,1304 & n.18 (11th Cir. 2000);In re C.J. Wright & Co., 162 B.R. 597, 606 (Bnkr. M.D. Fla. 1993). Not surprisingly,then, SIPC now makes only passing reference to that meritless argument. See Opp. Brief at 27.
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refused to commit its funds or otherwise act for the protection of SGC customers. Opinion at 11.
This Court did not determine what burden of proof would be required of the SEC, but instead left
that issue, among others, for further briefing. Id. at 13. This Court emphasized that briefing
regarding the applicable burden of proof should take into consideration the fact that this
proceeding will only determine whether SIPC should be compelled to file an application for a
protective decree in the Texas federal court, leaving for that court to determine whether the
decree should be granted and, ultimately, whether SIPC is liable for any claims. Id.
III. ARGUMENTThe Commission submits that, based on the text and structure of SIPA, the decision in
Hughes, and SIPCs past practice, this Court need determine on a denovo basis only whether
there is probable cause to believe that SIPC has refused to commit its funds or otherwise to act
for the protection of customers. Under SIPA, SIPC may initiate a liquidation proceeding not
only when it is clear that a customer is in need of protection under the Act, but also when there is
a danger of such a need. 15 U.S.C. 78eee(a)(3)(A)(A). The decision inHughes expressly
recognized as much. See 461 F.2d at 982 (SIPC had only to show that there was a danger that
Hughes, Inc. would fail to meet its obligations, not that it had actually done so). This is
confirmed by SIPCs initiation of a liquidation proceeding in the C.J. Wrightmatter based only
on the finding that there may be a customer in need of SIPA protection. What is more, a
definitive determination of customer status at this stage is inconsistent with the structure of
SIPA, which established the liquidation proceeding as the forum in which the customer coverage
determination is finally made after notice to the victims and their opportunity to be heard.
The record evidence in this case satisfies the probable cause standard. TheHughes court
expressly recognized that factual findings by a court-appointed agent in a parallel SEC
enforcement proceeding are sufficient to order the initiation of a liquidation proceeding. See 461
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F.2d at 982-83. Similarly, in this case, the reports, testimony, and declarations by the court-
appointed agent in the Texas federal court receivership, as well as customer declarations and
criminal trial testimony, provide probable cause to believe that investors who purchased SIBL
CDs were customers of SGC and are, given their unpaid net investments in the Ponzi scheme
involving SIPC-member SGC, in need of protection under SIPA. SIPC has obtained factual
materials from the Commission and the Receiver, and SIPC has not requested additional
information from the SEC since June 15. Yet SIPC claims that it was able to careful[ly]
review the SECs determination, implicitly acknowledging that SIPC believes itself to be in
possession of evidence sufficient to address the Commissions claims. That evidence warrants
the initiation of a liquidation proceeding, and yet SIPC has failed to act. Accordingly, this Court
should issue an order directing SIPC to take steps to initiate a liquidation proceeding in the Texas
federal court; the Court should not order the unnecessary discovery process that SIPC requests.
A. Burden of Proof and Standard of ReviewAs noted above, this Court invited briefing on, among other things, the burden of proof
applicable to this proceeding. Opinion at 13. The Commission submits that, in this proceeding,
it need only establish probable cause to believe that SIPC has failed to commit its funds or
otherwise act for the protection of customers.
1. Customer Status Need Not Be Definitively Determined InOrder To Invoke SIPAs Procedural Protections
The Commission does not disagree in light of this Courts February 9, 2012 opinion
that some determination must be made at this juncture by this Court regarding the presence of
covered SGC customers.3
3 The Commission does not intend to waive its prior argument that its formal determination of customer needis unreviewable in this proceeding.
SIPC errs, however, in its assumption that, in order to invoke the
procedural protections of SIPA, the customer question must be definitively resolved by a
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preponderance of the evidence. The text, structure, and purposes of SIPA, SIPCs past practice
under the Act, and the summary nature of this proceeding, all suggest that something less than a
definitive showing that a customer is entitled to SIPA coverage is sufficient to compel SIPC to
act for the protection of customers.
a. Text of SIPASection 11(b) of SIPA provides that this Court may compel SIPC to file an application
for a protective decree if SIPC has refused to commit its funds or otherwise to act for the
protection of customers. 15 U.S.C. 78ggg(b). As this language suggests, SIPA provides
several types of protection for brokerage customers. A commitment of funds by SIPC for the
payment of customer claims is one such protection that SIPA provides. Id. 78fff-3, 78fff-4.
But SIPA also affords procedural protections in the form of a process, within the context of a
liquidation proceeding, by which customer claims against the estate of a failed broker-dealer can
be resolved when those claims are reasonably in dispute. Seeid. 78fff-2. In other words, a
determination that customers are in need of the various protections that SIPA provides is not the
same as a determination that customers are ultimately entitled to recovery under the Act. Part of
the protection that SIPA provides is a procedure whereby customers may present their claims
for resolution with judicial review thereof.
Obviously, customers are in need of the procedural protections that SIPA provides even if
there is something less than certainty that they are entitled to ultimate recovery on their claims.
SIPA does not authorize SIPC to investigate or inspect broker-dealers, and SIPC has no
subpoena power. At the same time, the courts have recognized that a customers entitlement to
coverage under SIPC can be a fact-intensive inquiry over which reasonable minds can disagree.
The creation of a process by which claims can be submitted to a trustee with judicial review of
the trustees determination is an important protection that SIPA provides for customers in these
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potentially uncertain situations. It would be anomalous to hold that SIPA affords these
procedural protections only in those instances where covered customer status can definitively
be established from the outset.
b. Structure of SIPAThat customers are in need of the procedural protections of SIPA even before their claims
for SIPC coverage are definitively resolved is further confirmed by the structure of SIPA.
First, Section 5(a) of SIPA authorizes SIPC to apply for a protective decree not only
when a broker-dealer has failed to meet its obligations to customers, but also when it is in
danger of doing so. 15 U.S.C. 78eee(a)(3)(A)(A). As the Second Circuit repeatedly
emphasized inHughes, in order for SIPC to file an application for a protective decree it need
only to show that there [is] a danger that [the broker-dealer] would fail to meet its obligations,
not that it had actually done so. 461 F.2d at 982. Thus, at the time SIPC files an application for
a protective decree, it need not definitively demonstrate that there exists a customer for whom
SIPA coverage will be required. The potential or danger that SIPA coverage will be required
is alone sufficient to initiate a liquidation proceeding.
SIPC itself has previously acknowledged as much. In SIPC v. C.J. Wright, Inc., No. 5:91
cv92 (M.D. Fla.), SIPC filed an application to initiate a liquidation proceeding, alleging that
customers are in need of the protection of SIPA because the broker-dealer ha[d] failed to
meet its obligations to persons whomay be customers within the meaning of . . . SIPA.
Martens Second Decl. Ex.1, at 3-4 (emphasis added); seealsoid. at 4 (alleging that there may
be customers of the Defendant broker-dealer in need of the protection provided by SIPA).4
4 Mr. Harbeck was of counsel on this SIPC filing. See Martens Second Decl. Ex.1, at 10, 16.
Emphasizing the uncertainty in that case as to the existence of covered customers, SIPCs brief
in support of its application argued that a protective decree should be entered because persons
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whomay be customers of C.J. Wright . . .may needthe protection provided under SIPA. Id. at
12 (emphasis added). Based on the finding that there are persons whomay be customers of C.J.
Wright . . . in need of the protection afforded by SIPA, the court ordered the initiation of a
liquidation proceeding. Id. at 20 (emphasis added). In other words, SIPC itself, as well as the
C.J. Wrightcourt, recognized that SIPA authorizes the initiation of a liquidation proceeding
notwithstanding the inability at the outset to determine whether there are customers within the
meaning of SIPA, much less determine whether those customers were entitled to coverage of
their claims. SIPC advocated and the C.J. Wrightcourt concluded that even those potential
customers were, at a minimum, in need of the procedural protection that SIPA provides,
namely a forum in which to litigate their customer status.
Second, SIPA provides for judicial review in various forums, which suggests that
differing burdens of proof control in each. Section 5 of SIPA provides that SIPC may file an
application for a protective decree, that such application must generally be heard within three
days of filing, and that the court must forthwith issue the decree if the statutory elements are
met. This expedited process suggests that a reasonable showing of customer need is sufficient
to warrant the entry of a protective decree. SeeHughes, 461 F.3d at 982. Or, as alleged by SIPC
in C.J. Wright, it is sufficient to initiate a liquidation proceeding if there may be a customer in
need of protection under SIPA. By contrast, once a liquidation proceeding is initiated, claimants
bear the burden of proving their covered customers status by a preponderance of evidence. In
re Selheimer & Co., 319 B.R. 395, 404 (Bnkr. E.D.Pa. 2005).
In other words, the reasonable showing necessary to initiate a liquidation proceeding is
something less than the preponderance of the evidence showing necessary to recover under
SIPA. And this is as it should be. It would make little sense to require SIPC, in order merely to
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initiate a liquidation proceeding, to make a definitive showing by a preponderance of the
evidence on an expedited basis that a customer is entitled to coverage under the statute. Rather,
SIPC need only establish that there is a danger of or may be a customer entitled to SIPA
coverage, and that showing is sufficient to establish that those customers are entitled to the
procedural protections that SIPA provides. Similarly, it would make little sense to require the
SEC (which is not a SIPA claimant) definitively to establish by a preponderance of the evidence
that there exists a covered customer in order to compel SIPC to invoke for those customers the
procedural protections of a liquidation proceeding. Certainly, the SEC as SIPCs plenary
supervisor, seeSIPC v. Barbour, 421 U.S. 412, 417 (1975) should not be required to make a
higher showing than the showing SIPC must make as this early stage of the proceedings.
Third, the fact that Congress explicitly provided for this proceeding to be summary in
nature suggests that a lesser burden of proof applies. As this Court held, the congressional intent
in enacting Section 11(b) was not to mandate a lengthy, full-blown plenary proceeding at this
stage. Opinion at 9. This is especially the case when, as this Court noted, the Texas federal
court will determine whether the decree should be granted, and, if granted, whether SIPC is
liable for any claims. Id. at 13. The only question at issue in this summary proceeding is
whether the evidence is sufficient to compel SIPC to take the initial step of filing an application
for a protective decree to be ruled upon by the Texas federal court. In this context, the summary
proceeding should be just that a prompt and simple proceeding, Opinion at 10 (quoting
United States v. Hubbard, 650 F.2d 293, 310 n.66 (D.C. Cir. 1980)), that does something less
than definitively resolve the entitlement of customers to coverage on their claims.
2. A Probable Cause Finding That A Covered Customer Exists IsSufficient At This Stage
For the reasons set forth above, customers are in need of the procedural protections that
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SIPA provides even if there is something less than a preponderance of evidence that they are
entitled to recovery on their claims. A probable cause standard is the appropriate burden of
proof to apply in determining whether customers are in need of SIPAs procedural protections,
and that burden of proof can be satisfied by hearsay evidence.
a. Probable Cause Is The Appropriate Burden of ProofThe Supreme Court has long held, in both the civil and criminal contexts, that probable
cause is an appropriate standard to apply in those hearings that impose lesser burdens on a party
pending a definitive resolution of the merits of the underlying claim against that party. InBell v.
Burson, 402 U.S. 535 (1971), the Supreme Court evaluated Georgias scheme providing for the
suspension, in an administrative proceeding, of the license of any driver involved in an accident
resulting in injury to another unless the driver established that he had insurance or posted a bond
sufficient to cover the injuries caused in the accident. Id. at 538. The Supreme Court held that
suspension of the drivers license in the administrative proceeding required proof to a
reasonable possibility that the driver would be found liable on the merits in a subsequent
lawsuit. Seeid. at 542. The Court emphasized that, in the license revocation hearing, the
inquiry into fault need not take the form of a full adjudication of the question of liability as that
adjudication can only be made in litigation between the parties involved in the accident. Id. at
540. The Supreme Court has since explained that the reasonable possibility standard
articulated inBell is the probable cause standard of proof. SeeMathews v. Eldridge, 424 U.S.
319, 334 (1976). Similarly, the Supreme Court has held that a criminal defendant may be
detained pending trial on the merits based on a probable cause finding by a judicial officer. See
Gerstein v. Pugh, 420 U.S. 103, 120 (1975). This lesser standard of proof is justified . . . by the
lesser consequences of a probable cause determination. Id. at 121. In short, a probable cause
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standard5 has been deemed appropriate in an initial proceeding, whether civil or criminal, that
imposes limited burdens on a party pending a final resolution of the merits of a controversy.6
In this case, the SECs Application seeks to impose on SIPC the minimal burden of filing
an application for a protective decree in the Texas federal court. This Courts determination will
not resolve SIPCs liability on any SGC customer claims. This lesser consequence of the
Courts determination here justifies a lower standard of proof. SeeGerstein, 420 U.S. at 121.
Furthermore, it would be unworkable to require a full adjudication in this proceeding of SIPCs
liability on any SGC customer claims, as that adjudication can only be made in litigation
between the parties to the claims, seeBell, 402 U.S. at 540, namely the SGC claimants and the
trustee. The claims at issue are those of the SGC investors, not the SEC, and those claimants are
not parties to this proceeding. Indeed, SIPC expressly acknowledges that in the ordinary course
the investors themselves bear the burden of proving that they are covered customers under
SIPA. Opp. Brief at 8 n.3. As a result, the holding ofBell suggests that the SEC should not be
compelled to establish more than probable cause that a covered customer is present here.
Consistent with the decision inBell, the Second Circuit invoked a probable cause-type
standard in evaluating a SIPC application to initiate a liquidation proceeding. In SEC v. Hughes,
supra, the court was called upon to determine whether SIPC had made a showing sufficient to
initiate a liquidation proceeding. The court held that a liquidation proceeding could begin
5 A probable cause burden of proof is consistent with de novo review. See United States v. Broadie, 452F.3d 875, 879 (D.C. Cir. 2005) (We review denovo the district courts determinations of . . . probable cause . . . .).
6 See also C.I.R. v. Shapiro, 424 U.S. 614, 629 (1976) ([P]ending final adjudication of the rights of theparties, the Due Process Clause requires that the party whose property is taken be given an opportunity for somekind of predeprivation . . . hearing at which some showing of the probable validity of the deprivation must bemade); Sniadach v. Family Fin. Corp. of Bay View, 395 U.S. 337 (1969) (Harlan, J., concurring) (explaining thatdue process can be satisfied by a prejudgment hearing aimed at establishing the validity, or at least probablevalidity, of the underlying claims against the alleged debtor);Lucas v. Wisconsin Elec. Power Co., 466 F.2d 638,650-51 (7th Cir. 1972) (enbanc) (Stevens, J.) (holding that, for a hearing that is only a preliminary and tentativedetermination of the ultimate rights of the parties, due process is satisfied by showing that there is a reasonablepossibility of judgments in the amounts claimed).
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because more than a reasonable showing of customer need had been made. 461 F.2d at 982.
The reasonable showing burden of proof employed by the court inHughes resembles the
reasonable possibility standard inBell, which the Supreme Court later explained is a probable
cause standard of proof. Mathews, 424 U.S. at 334.
If, as inHughes, an application by SIPC would be granted when there is probable cause
to believe that a covered customer exists, then SIPCs failure in that circumstance to make the
application is necessarily a failure to act for the protection of customers.7
b. Hearsay Evidence Satisfies The Probable Cause Standard
Section 11(b)
authorizes the SEC to move this Court to compel SIPC to file that application, and proof that
SIPC had failed to act for the protection of customers should likewise require proof only of the
probable cause necessary to grant SIPCs application.
Throughout its brief SIPC repeatedly asserts that competent, admissible evidence is
needed at this point. Opp. Brief at 1, 3, 4, 5, 22-23, 29. What SIPC means by this is not entirely
clear, but given SIPCs proposed discovery the implication seems to be that this Court can
only make factual determinations based on evidence that has been tested through something akin
to full-blown civil litigation. That argument cannot be reconciled with the manner in which
summary proceedings are typically conducted, or with the Second Circuits decision inHughes
holding that a SIPA application can be resolved based on hearsay evidence.
InHughes, the district court granted SIPCs application for a protective decree. The
broker-dealer appealed, challenging the sufficiency of the evidence on which the district court
based its customer need determination. The Second Circuit easily dismissed this argument,
holding that the reports of court-appointed agents, including a receiver, provided a sufficient
7 This is not to suggest that SIPC must intervene in every instance in which there is probable cause to believethat a broker-dealer will fail or is failing to meet its obligations to customers. SeeSIPC v. Barbour, 421 U.S. at 421.But the SEC is authorized to compel SIPC to intervene in such circumstances under Section 11(b) of SIPA.
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evidentiary basis on which to make the customer need determination. See 461 F.2d at 982. This
is consistent with how summary proceedings are conducted. New Hampshire Fire Ins. Co. v.
Scanlon, 362 U.S. 404, 406 n.4 (1960) (summary proceedings are generally upon affidavits);
SEC v. McCarthy, 322 F.3d 650, 655 (9th Cir. 2003) (same); SEC v. Vindman, No. 06civ14233,
2007 WL 1074941, at *1 (S.D.N.Y. Apr. 5, 2007) (same). It is also consistent with how
probable cause determinations are made, namely on hearsay and written testimony. Gerstein,
420 U.S. at 120. And it is particularly appropriate given SIPAs provision for prompt action on
the SECs Application.
B.
The Available Evidentiary Record Establishes Probable Cause ToBelieve That Covered SGC Customers Exist
Applying the probable cause standard to the record evidence before this Court, the
Commission submits that there is probable cause to find that there are SGC customers in need
of the procedural protections of a SIPA liquidation proceeding.8
1. SIPA Customers Include Those Deemed To Have DepositedCash With A Broker-Dealer For Purposes of Purchasing
Securities
Accordingly, this Court should
grant the SECs Application and order SIPC to file an application with the Texas federal court
for a protective decree under SIPA.
As noted earlier, SIPA defines a customer as including any person who has deposited
cash with the debtor for the purpose of purchasing securities. 15 U.S.C. 78lll(2)(B)(i). Two
circuit court decisions to interpret this definition have both held that its application does not
depend simply on the identity of the entity with which funds are deposited.
InIn re Old Naples Securities, Inc., 223 F.3d 1296 (11th Cir. 2000), an introducing
brokerage firm (Old Naples Securities) was owned and operated by James Zimmerman, who also
8 Even were a preponderance of evidence standard applied, the Commissions Application should be granted.
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owned and operated Old Naples Financial Services, a separate company that was not a
securities brokerage. Id. at 1299-1300. Zimmerman ran a Ponzi scheme by using his brokerage
to solicit client investments, which were then used to pay the expenses of Old Naples Securities
as well as Zimmermans personal expenses. Id. at 1300. The Eleventh Circuit declared that
Congress passed SIPA in 1970 for just this situation. Id. Applying the customer definition
relied upon by the SEC here, the court explained that the relevant question is whether there was
actual receipt, acquisition or possession of the property of a claimant by the brokerage firm.
Id. at 1302. The court answered that question in the affirmative because the investments were
offered by an employee of Old Naples Securities, at least one investor made his check payable to
Old Naples Securities, investor payments to Old Naples Financial Services were made at the
brokers direction, and investors received a letter from Old Naples Securities regarding their
investment. Id. at 1301. The court also noted the ample evidence . . . of checks, drawn from
the [Old Naples Financial Services] account to which [investors] wired their funds, issued to Old
Naples Securities and also to cover the brokerages obligations. Id. at 1303-04.
Similarly, inIn re Primeline Securities Corp., 295 F.3d 1100 (10th Cir. 2002), a broker at
an introducing brokerage firm operated a Ponzi scheme by soliciting client funds for investment
opportunities and corporate debentures. Id. at 1103-04. Clients made their checks payable to
corporations created by the broker, and [n]one of the funds were deposited with the [introducing
brokerage firm] or its clearing broker. Id. at 1104. Rather, the funds were diverted for the
brokers personal use. Id. Nevertheless, the court concluded that the investors were covered
customers of the brokerage because the clients met with the broker at the brokerage firms
offices, received a business card reflecting the brokers position at the firm, completed new
account forms with the firm, followed the brokers instructions with regard to the delivery of
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their funds for investment, and received fraudulent statements on firm letterhead. Id. at 1107-08.
Given these facts, the court held that even those clients who actually received fraudulent
Debenture Certificates were covered customers under SIPA. Id. at 1109.
In sum, Old Naples and Primeline expressly reject the notion that the customer
determination requires that cash be deposited directly with the broker-dealer. While SIPC
attempts to distinguish those cases, Opp. Brief at 27-28, it ultimately argues in a footnote that
those cases were wrongly decided, id. at 27 n.12. But the Commissions formal determination
that those cases rightly interpret SIPA is entitled to Chevron-style deference. SeeArizona Pub.
Serv. Co. v. EPA, 211 F.3d 1280 (D.C. Cir. 2000).
9
2. The Record Evidence Provides Probable Cause To Believe ThatCovered SGC Customers Exist
The evidentiary record here including materials on which the Texas federal court based
rulings that were affirmed by the Fifth Circuit demonstrate the following material facts:
SGC was a broker-dealer registered with the Commission and a SIPC member.Martens First Decl. Ex. 1, Ex. 2, attach. 4, at 3, Ex. 3; Martens Third Decl. Ex. 8.
SGC and SIBL were each wholly owned (indirectly) and controlled by R. AllenStanford. Martens Third Decl. Ex. 5, at 2.
Stanford Financial Group was a brand name under which SGC, SIBL, and otherentities operated to lend credibility to SIBL. Martens Third Decl. Ex. 1, at 36, Ex. 3,at 7, 17, 19, Ex. 4; Martens First Decl. Ex 2, attach. 5, at 4, 5, 6, Ex. 3.
Domestic clients purchasing SIBL CDs dealt substantially, if not exclusively, withSGC brokers. Martens Third Decl. Ex. 1, at 33-34, Ex. 2, attach. 5, at 5, Ex. 3, at 18, 19; Martens First Decl. Ex. 1, at 2.
Some SGC account holders received consolidated statements from SGC regardingtheir SIBL CD investments. Martens First Decl. Ex. 1, at 2; Martens Third Decl. Ex.9 SIPC has argued that the Commissions interpretation of SIPAs customer definition is not entitled toChevron deference. See SIPC Reply Brief (Dkt. No. 12), at 5 (citingIn re New Times Sec. Serv., Inc., 371 F.3d 68,80-82 (2d Cir. 2004)). That courts refusal to afford deference to the SECs position, however, was due largely tothe fact that the the position taken by the SEC in its brief is one that it has not previously articulated in any formprior to the filing of a court-invited amicus brief in that case. SeeNew Times, 371 F.3d at 81. Here, by contrast, theSECs position was articulated in a formal written determination made prior to the initiation of this litigation.
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4, Ex. 5, at 6, 8.
SGC clients took direction from SGC brokers with regard to the transmission of theirfunds for the purchase of SIBL CDs. Martens Third Decl. Ex. 3, at 10-12, 14,15;Martens First Decl. Ex. 2, attach. 5, at 3, Ex. 3.
Regardless of the entity to which an investors funds were directed, the funds wereultimately routed to bank accounts in Houston, from which funds were diverted to thevarious Stanford entities, including SGC. Martens Third Decl. Ex. 1, at 7, 29-32, Ex.3, at 22, Ex. 6, at 3148-49, 3161, 3164; Martens First Decl. Ex. 2, attach. 2, at 6-9,Ex. 2, attach. 4, at 50-54.
SIBL employees in Antigua, including even its president, had essentially no controlover the proceeds of CD sales or the banks financial reporting. Indeed, SIBLspresident was not even on the banks payroll. Martens Third Decl. Ex. 1, at 6, 9, 14,16-17, 19, 25-28.
The Stanford enterprise, which included SIBL and SGC, operated as a unified Ponzischeme. Martens Third Decl. Ex. 1, at 5-6, Ex. 2, at 8, Ex. 5, at 5; Martens FirstDecl. Ex. 2, attach. 2, at 5-7, 13, Ex. 2, attach. 4, at 12, 14; seealsoJanvey, 647F.3d at 597-98.
During the five-year period 2004 through 2008, approximately $628M in investorfunds were directed through SIBL accounts and back to SGC. Martens Third Decl.Ex. 2, at 26-28.
These facts, which have not been disputed by SIPC in any of its filings, are similar to those in
Old Naples and Primeline and provide probable cause to believe that at least some SGC clients
are covered customers under SIPA.
SIPC contends that, in order to prevail under the Old Naples and Primeline decisions, the
SEC must make a showing sufficient to pierce the corporate veil. See Opp. Brief at 23-26. This
argument misreads those cases. As the Old Naples decision expressly stated, a court neednot
find that the companies are in effect a single entity if customer funds in fact made their way to
the broker-dealer. 223 F.3d at 1304 n.16. There is simply no basis for SIPC to dispute that this
is precisely what occurred here. Martens Third Decl. Ex. 1, at 31-32, Ex. 2, at 26-28.
SIPC also submits various evidentiary materials that it contends bear on the application
of the Old Naples test, including documentation regarding SIBLs board of directors,
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management, physical presence in Antigua, licensure under Antiguan law, and its compilation of
corporate financial reports. See Opp. Brief at 25. This evidence is irrelevant to the analysis
under the Old Naples line of cases. Indeed, this type of evidence was not even cited in those
decisions. That said, the Commission does not object to SIPCs submission of those materials
for consideration by this Court in ruling on the Commissions Application.
SIPC also suggests that covered customers are not present here because SIBL was a
foreign subsidiary of SGC. Opp. Brief at 27-28 (citing 15 U.S.C. 78lll(2)(C)). This
argument is plainly without merit. A subsidiary is a corporation in which another corporation
owns at least a majority of the shares. Blacks Law Dictionary 1596 (4th ed. 1968). The record
evidence clearly establishes that SIBL was (indirectly) owned by R. Allen Stanford and its shares
were not owned in whole or in part by SGC. Martens Third Decl. Ex. 5, at 2. Accordingly, the
foreign subsidiary exclusion from the customer definition is inapplicable.
SIPC also argues that the existence of a Ponzi scheme does not alter the customer
analysis. Opp. Brief at 20. This argument, however, is inconsistent with SIPCs arguments in
the Madoff litigation. A Ponzi scheme is, as a matter of law, insolvent from its inception.
Janvey, 647 F.3d at 597. Accordingly, a victim of a Ponzi scheme perpetrated by a brokerage
firm is entitled to recovery of his net cash investment in the Ponzi scheme; the physical
certificates are disregarded because the brokerage was insolvent at the moment cash was
deposited. SeePrimeline, 295 F.3d at 1109 (finding SIPA coverage for a Ponzi scheme victim
despite receipt of a debenture certificate). Indeed, SIPCs trustee argued this very point in the
Madoff litigation. See Martens First Decl. Ex. 2, attach. 8. 10
10 SIPC contends that it needs discovery to make several additional factual showings that it believes bear onthe Old Naples analysis. See Opp. Brief at 28-29. But SIPC has already submitted evidentiary material on thoseissues. Seeid. at 15, 17-18.
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C. Procedures And DiscoveryThis Court ordered the parties to propose, with scalpel-like precision, the procedures
and discovery that are necessary and appropriate in this proceeding. Opinion at 13. SIPC has
essentially disregarded that directive and has, in effect, re-proposed full-blown discovery. See
Opp. Brief at 29-37. Not only is this approach inappropriate in a summary proceeding under
Section 11(b) of SIPA generally, but it is especially unnecessary here given that, upon
information and belief, SIPC has interacted with the Receiver for months and obtained
documentation from the Receiver upon request. Because SIPC appears unwilling to narrow its
discovery requests to relevant factual issues seriously in dispute, SIPCs discovery requests
should be denied and the Court should proceed to a resolution of the merits of this matter.
1. DiscoverySIPC claims to seek four targeted and limited categories of discovery, Opp. Brief at
29-30, that would require approximately 5-10 requests for admissions, 5-10 documents
requests, 5-10 interrogatories, and focused depositions of the handful of would-be customers
and examiners, id. at 3. As an initial matter, the mere number of interrogatories, documents
requests, and requests for admission tells the Court (and the SEC) nothing about the breadth of
the discovery SIPC proposes. Even five document requests could call for the production of
millions of pages of material, and even a small number of interrogatories and requests for
admission could require the review of millions of pages of documents to provide adequate
responses. Indeed, it is telling that, while claiming to seek discovery that is neither onerous . . .
nor time-consuming, Opp. Brief at 35, SIPC chose not to reveal the substance of its proposed
discovery requests. Instead, SIPC provided a list of four categories of discovery that it would
seek. A review of these categories demonstrates that, in fact, SIPC seeks wide-ranging discovery
of irrelevant materials. These discovery requests should accordingly be denied.
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First, SIPC seeks discovery to test the SECs assertion that there are eligible customers
in this case. Opp. Brief at 29. Since the ultimate issue in this matter is the presence of covered
customers, proposing as its first category of discovery evidence bearing on the customer
question is no limitation at all on discovery. Rather, it is an invitation to engage in protracted
litigation in this proceeding of the customer question, contrary to this Courts ruling that this is
not intended to be a lengthy, full-blown plenary proceeding. Opinion at 9.
Second, SIPC seeks discovery regarding where the CDs purchased by the SECs
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. Opp.
Brief at 30. Discovery on these questions is entirely irrelevant, as the SEC has never argued that
customers are in need of protection because of a failure to receive the physical CD documents.
One statutory definition of a customer is someone with a claim based on securities . . . held
by the broker-dealer for the customers account, 15 U.S.C. 78lll(2)(A), but that isnot the
customer definition on which the Commission is relying here. The Commission is relying on
the statutory customer definition that includes any person who has deposited cash with the
debtor for the purpose of purchasing securities. Id. 78lll(2)(B)(i). This definition simply does
not depend on the receipt or location of the physical CDs. SeePrimeline, 295 F.3d at 1109
(finding a covered customer despite receipt of fraudulent Debenture Certificates).
Third, SIPC seeks discovery regarding the corporate structure of SGC and SIBL,
including evidence of such things as the observance of corporate formalities; shared
management, officers, and employees; shared locations of physical offices; and common or
separate book-keeping. Opp. Brief at 30. As an initial matter, SIPC places no time limit on this
discovery request. In any event, this discovery is entirely unnecessary for four reasons. First,
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the evidence is irrelevant, as neither Old Naples or Primeline in any way relied on veil-piercing
concepts or the corporate structure of the broker-dealer and its affiliated entities. Indeed, the Old
Naples case expressly rejected the argument that such a showing was necessary; it was sufficient
that client funds were funneled back from an affiliated entity to the broker-dealer. See 223 F.3d
at 1304 n.16. Second, SIPC has submitted substantial evidence on this very question, and the
SEC does not object to the consideration of that evidence. Seesupra at 20-21. Third, the free
flow of funds between the Stanford-related entities is addressed extensively in the recent sworn
testimony of the Receivers forensic accountant. Seesupra at 20. Fourth, SIPC has yet to
dispute the evidence on which the Commission relies. Nor could it, as the Fifth Circuit has held
that there is a substantial likelihood of success on the merits that the Stanford enterprise
operated as a Ponzi scheme, and deemed of no moment the argument that SGC should be
separated from SIB[L]. Janvey, 647 F.3d at 597, 598.
Fourth, SIPA seeks the complete record considered by,or available to, the SEC and its
staff in evaluating whether SIPA applies to the Stanford case. Opp. Brief at 30 (emphasis
added). At the same time, SIPC argues that all evidence possessed by the Receiver is under the
SECs control given the terms of the Texas federal courts order appointing the Receiver. Id. at
31-32. In effect, then, SIPC is demanding access to the entire Stanford documentary record.
This amounts to approximately 38 million pages of paper in the possession of the Receiver (not
including 2,200 servers, hard drives, laptop computers, desktop computers, PDAs, etc.), and
approximately 123 million pages of electronic discovery in the possession of the SEC. This is
not targeted or limited discovery at all. And it is difficult to understand how discovery of
this breadth could be necessary and appropriate in this proceeding. Denovo review does not
turn on the reasonableness of the Commissions decision in light of the evidence before it, but
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rather is based on the record evidence before this Court. Furthermore, evidence that the SEC
may have reviewed in evaluating other customer definitions not ultimately relied upon is
irrelevant to this Courts review of the sole customer definition at issue here.
2. Summary ProceduresFinally, this Court directed briefing on the procedures that should apply in this summary
proceeding. Opp. Brief at 10.11
First, the Court should determine the burden of proof (probable cause vs.preponderance of the evidence) that governs this summary proceeding.
The Commission respectfully submits that, in light of the
circumstances of this case and the Courts directive that a summary proceeding be prompt and
simple, Opinion at 10, the Court should proceed in the following manner:
Second, this matter should presumptively proceed upon affidavits and similar writtensubmissions. SeeScanlon, 362 U.S. at 406 n.4;Hughes, 461 F.2d at 981.
Third, the Court should allow the parties until March 12 to submit any additionalevidentiary material they wish the Court to consider in ruling on the Application.
Fourth, if after reviewing the written submissions the Court deems further briefing oran evidentiary hearing necessary to a ruling on the Application, the Court can ordersuch briefing or schedule an evidentiary hearing to which the parties can subpoena
witnesses. Otherwise, the Court can simply hold oral argument on the Application.At this early stage, procedural due process does not require that [SIPCs] interests be explored
in a full-scale evidentiary hearing. Hubbard, 650 F.2d at 310 n.66. The above-proposed
procedures would provide SIPC with a greater opportunity to be heard than that afforded the
broker-dealer inHughes upon SIPCs application for a protective decree. See 461 F.2d at 981.
IV. CONCLUSIONFor the foregoing reasons, the Court should order SIPC to file an application for a
protective decree in the Texas federal court under Section 5(a)(3) of SIPA.
11 SIPC appears not to have briefed the issue of what procedures should apply in this summary proceeding.
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Dated: Washington, D.C. Respectfully submitted,February 23, 2012
/s/ Matthew T. Martens
Matthew T. MartensChief Litigation Counsel
David S. Mendel (D.C. Bar #470796)Assistant Chief Litigation CounselU.S. Securities and ExchangeCommission Enforcement Division100 F Street, NEWashington, DC 20549(202) 551-4481 (Martens)(202) 772-9362 (fax)[email protected]@sec.gov
Of Counsel:Michael A. ConleyDeputy General Counsel, Office of the General Counsel
Michael L. PostSenior Litigation Counsel, Office of the General Counsel
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CERTIFICATE OF SERVICE
I hereby certify that on this 23rd day of February, 2012, I caused service of the foregoing
SECURITIES AND EXCHANGE COMMISSIONS REPLY MEMORANDUM OF POINTS
AND AUTHORITIES IN FURTHER SUPPORT OF ITS APPLICATION by ECF on the
following:
Eugene F. Assaf, P.C. ([email protected])Edwin John U ([email protected])John OQuinn ([email protected])Kirkland & Ellis LLP655 Fifteenth Street, N.W.Washington, D.C. 20005
Telephone: (202) 879-5000
/s/ Matthew T. Martens
Matthew T. Martens
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1
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
__________________________________________
Securities and Exchange Commission, )
)Applicant, )
)
v. ) Misc. No: 1:11-mc-00678-RLW)
Securities Investor Protection Corporation, )
)Respondent. )
__________________________________________)
THIRD DECLARATION OF MATTHEW T. MARTENSPURSUANT TO 28 U.S.C. 1746
I, Matthew T. Martens, declare as follows:
1. I am the Chief Litigation Counsel with the Division of Enforcement of the Securities andExchange Commission (SEC or Commission) in Washington, D.C., and I am counsel
to the Commission in this proceeding. I have personal knowledge of the facts presented
in this declaration based upon my review of documents attached hereto and referenced
herein and my role as counsel in this proceeding, including information provided to me
by other Commission staff whom I supervise in connection with this matter. This
declaration supplements my previous declarations submitted on December 12, 2011, and
January 3, 2012, in this matter.
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2. Attached as Exhibit 1 are true and correct copies of the Direct Testimony of Karyl VanTassel, filed on December 5, 2011, inIn re Stanford Intl Bank, Ltd., Case No. 3:09-cv-
00721-N (N.D. Tex) [Docket entry #115-1], and Exhibit KVT-9 to that testimony
[Docket entry 115-4].
3. Attached as Exhibit 2 are true and correct copies of the Declaration of Karyl Van Tassel,filed on May 24, 2010, inRalph S. Janvey, In His Capacity As Court-Appointed Receiver
for the Stanford International Bank, Ltd. v. Alguire, Case No. 3:09-cv-00724-N (N.D.
Tex.) [Docket entry #444-2], and exhibit KVT-4 to that declaration [Docket entry
#444-3].
4. Attached as Exhibit 3 is a true and correct copy of the Affidavit of Michael A. Kogutt,dated June 28, 2010.
5. Attached as Exhibit 4 are true and correct copies of the Affidavit of Michael A. Kogutt,dated February 22, 2012, and Exhibits A through J to that declaration, except that certain
redactions have been made to protect confidentiality.
6. Attached as Exhibit 5 is a true and correct copy of the Declaration of Karyl Van Tassel,dated February 23, 2012.
7. Attached as Exhibit 6 is a true and correct copy of excerpts of the transcript of testimonyby James Davis in United States v. Robert Allen Stanford, Case No. 09-CR-342 (S.D.
Tex.), delivered on February 2, 3, and 6, 2012. Portions of the excerpts have been
highlighted using the Highlight Text Tool in Adobe Acrobat.
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I declare under penalty of perjury that the foregoing is true and correct.
Executed on the 23rd day of February 2012.
/s/ Matthew T. Martens
Matthew T. Martens
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