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Securities regulators are due to appear in court Tuesday to argue that thousands of victims of the alleged Ponzi scheme of Allen Stanford should be allowed to file claims for compensation with a brokerage industry-backed protection fund.
The Securities Investor Protection Corp, which took charge of liquidation proceedings for the MF Global failure and the Ponzi scheme of Bernard Madoff, has claimed that the 40-year-old Securities Investor Protection statute does not apply in the case of Stanford.
The unprecedented legal showdown between the U.S. Securities and Exchange Commission and the SIPC could have sweeping consequences as to how investors will be compensated in case their brokerage firm fails.
In 2009, Stanford, 61, was arrested over charges that he operated a $7.2 billion Ponzi scheme, which is linked to certificates of deposit which have been issued by his Antigua-based bank.
The hearing in the U.S. District Court for the District of Columbia on Tuesday will come only a day after the criminal trial of Stanford starts in another federal court in Texas.
The SEC in December has asked the District of Columbia court to confirm its authority to order SIPC to assist the victims of Stanford after negotiations failed between the two entities. It is still not clear how soon could Judge Robert Wilkins issue a ruling.
The SIPC is asserting its decision of not intervening on behalf of the investors of Stanford and has launched a website explaining its position.
It contends that it is limited by existing laws to protecting clients against loss of missing securities or cash in the custody of insolvent or failing SIPC-member brokerage firms.
Although the Texas-based brokerage firm of Stanford was a member of the SIPC, its offshore bank was not.