The Securities and Exchange Commission must ring the alarm bells when it comes to brokerage shenanigans, a federal judge ruled yesterday.
In a ruling that has widespread implications for investors seeking to hold the watchdog accountable, Miami federal judge Robert Scola said yesterday that the SEC had a “duty to report” R. Allen Stanford’s Ponzi scheme to the Securities Investor Protection Corp. as soon as the agency became aware of the scheme.
SIPC is a quasi-governmental organization that is tasked with taking control of failed or financially troubled brokerage firms.
Stanford was arrested in 2009 for bilking investors out of $7 billion over two decades. In June, the once high-flying Texas tycoon was sentenced to 110 years in prison.
In a lawsuit filed last year, a group of burned Stanford investors argued that the SEC knew about his fraud dating back as early as 1997. The group contends that the SEC should have alerted SIPC to Stanford’s fraud sooner, thereby limiting their losses.
The SEC countered that it didn’t know of the fraud as early as the plaintiff’s claim — and even if it did, it has discretion over when to report frauds to SIPC.
Scola’s ruling took issue with the latter part of that argument, saying that if the SEC did know, then it was required by law to alert SIPC.
“The duty to report, following the finding of financial difficulty, does not involve any element of judgment or choice,” Scola said.
Whether the SEC knew of Stanford’s fraud as early as the plantiffs’ allege still needs to be hammered out in court.