Advisers could be tapped as Congress seeks to expand Ponzi victim payouts

One day after a Houston jury convicted R. Allen Stanford of operating a $7 billion Ponzi scheme, federal lawmakers pressed officials of the Securities Investor Protection Corp. to reimburse its victims. The SIPC chief executive, however, told members of the House Capital Markets Subcommittee on Wednesday that federal law requires it to protect investors only against fraud affecting funds under broker-dealer custody. Stephen Harbeck, the SIPC's president and chief executive, said that Mr. Stanford put his investors' money into CDs sponsored by a bank in Antigua, a Caribbean island. The SIPC cannot help them recoup losses from an offshore bank. “That is absolutely not what the law had in mind,” Mr. Harbeck testified. The Securities and Exchange Commission has a different view and is suing SIPC to cover bilked Stanford investors. Meanwhile, three bills have been introduced in Congress that would expand SIPC payouts to fraud victims. One measure, written by Rep. Scott Garrett, R-N.J., the subcommittee's chairman, would prevent SIPC from clawing back funds from investors who unwittingly profited from the $50 billion Bernie Madoff Ponzi scheme. It also would require the organization to rely on customers' brokerage statements to determine what the broker owed them. The challenge is finding the money to help everyone seeking assistance after a rip-off, according to Joseph Borg, director of the Alabama Securities Commission. “I feel sorry for these victims — I really do,” Mr. Borg said in an interview after he testified at the committee hearing. “There's just not enough money to pay everybody what they expected to get.” Currently, the SIPC provides customers of failed brokerages up to $500,000 for missing securities and cash. The SIPC Modernization Task Force has recommended increasing the limit to $1.3 million. Brokers are assessed 0.02% on revenue to fund the SIPC. But if the federal legislation expands SIPC coverage, investment advisers may be tapped for funds, Mr. Borg said. “This Congress isn't going to say, ‘Let's do a bailout and print more money,'” Mr. Borg said. “It's got to come from other segments of the industry. We've already got the broker-dealers. Then you've got to get the mutual funds. You've got to get the investment advisers. If you need more money, you have to supply it.” Mr. Borg emphasized that he has “no clue what Congress' intention is.” But the bills could be combined or new provisions could be added through the legislative process, increasing the possibility that investment advisers would be affected. “It may increase the potential liability of investment advisers who don't do their homework and send [customer money] to a fund like Bernie Madoff,” Mr. Borg said. Advisers also might get pulled into SIPC activity if the organization is required to cover victims of private placements that collapse. For now, that's all speculation. But ideas will continue to be offered for future legislation. For instance, Steven Caruso, a partner at Maddox Hargett & Caruso PC, who represents investors in disputes with brokers, suggested to the House panel that investment advisers and brokers should buy insurance. He said that that makes sense because they are entrusted with billions of dollars in investment funds. “There is no free lunch in this world,” Mr. Caruso said. “When we have a fiduciary who is out there as an investment professional, requiring insurance will go a long way to helping potential [fraud] victims.”