Washington The Securities Investor Protection Corp, an industry fund that covers losses from brokerage firm failures, bears no responsibility to compensate victims of R. Allen Stanford’s $7 billion (Dh25.7 billion) fraud, a federal judge ruled.

US District Judge Robert Wilkins in Washington on Wednesday said the Securities and Exchange Commission failed to show the 7,000 clients who invested in the Ponzi scheme met the definition of “customer” under the Securities Investor Protection Act, which set up the non-profit fund run by the brokerage industry.

“The court is truly sympathetic to the plight of the SGC clients who purchased the SIBL CDs and now find themselves searching desperately for relief,” Wilkins said, referring to the Stanford Group Co and Stanford International Bank Ltd.

He declined to order a liquidation proceeding in federal court in Texas, where the unwinding of Stanford’s firm is taking place.

The ruling, a defeat for the SEC, spares the fund from demands that would have drained its resources and added what the head of SIPC told lawmakers would be a “new and radically different level of protection” than the organisation was designed accommodate.

‘No joy’

“I take no joy in this, but it’s the right decision,” Stephen Harbeck, the fund’s president, said in a telephone interview. “We struggled with the fact of saying no, but we don’t underwrite bad investments.”

The SEC told SIPC on June 15, 2001, to start a process that could grant as much as $500,000 for each Stanford client — the same maximum amount it offers in other cases.

After SIPC balked, the SEC sued the congressionally chartered group for the first time.

A federal jury in Houston convicted Stanford on March 8 on 13 of 14 charges brought in connection with the Ponzi scheme, including four counts of wire fraud and five of mail fraud. He was sentenced on June 14 to 110 years in prison.

John Nester, an SEC spokesman, said the agency is reviewing the ruling and declined to comment on whether it will seek an appeal.

“Our hands are tied and we’re at the mercy of the SEC again,” said Angela Shaw, a former Stanford investor who said she and her husband lost $2 million.

“It’s really quite a surprise and I hope the SEC goes to bat for us again and appeals it. We have no private right of actions under SIPA.”

Ponzi scheme

SIPC argued in court that there was no basis for requiring it to guarantee investments at an entity that isn’t a member, such as Antigua-based Stanford International Bank. The organisation also said it doesn’t guarantee an investment’s value, protect against fraud or cover investments with offshore banks.

SIPC covers the damages of individual investors who lose money or securities held by insolvent or failing member brokerage firms. It agreed to pay victims of Bernard Madoff’s multi-billion-dollar Ponzi scheme and investors who may have lost money in the October collapse of commodities broker MF Global Holdings Ltd.

Harbeck said that SIPC didn’t get involved in the Stanford losses because investors received actual CDs after the brokerage passed their money to a bank.

What happened after that isn’t under SIPC’s purview because the Stanford account holders have possession of their securities, he said.

‘Offshore bank’

The Securities Investor Protection Act “does not even permit, much less require, the initiation of a liquidation for purchasers of the offshore bank certificates of deposit at issue here,” SIPC said in a court filing.

The SEC eventually decided that there was no true separation between Stanford’s bank and the brokerage firm. Customers who made investments with the bank were effectively depositing money with the brokerage and should get SIPC coverage, the SEC said.

SIPC hasn’t previously drawn from its $2.5 billion Treasury line of credit, Sharon Y. Bowen, SIPC’s acting chairman, told lawmakers.

SIPC now has $1.5 billion in its fund, after paying about $800 million to victims in the Madoff fraud and more than $300 million in legal fees in that case, Harbeck said told a House subcommittee on March 7. He estimated that Madoff fees will eventually reach about $1 billion.

Investors and their advocates in Congress say SIPC is deliberately taking a narrow view of the law to protect brokers from higher assessments.