Regulators were scheduled to discuss the issue last weekend at a meeting of the North American Securities Administrators Association in Avon, Colo. Also weighing in is a group of 350 lawyers — members of the Public Investors Arbitration Bar Association — whose clients are bilked investors. They’re miffed that their bigger brethren are raking in the bucks as trustees appointed by a government body to dole out settlements in fraud suits.
Along with Massachusetts and Nevada, the lawyers, whose group is based in Norman, Okla., is trying to persuade Congress to investigate whether the Securities Investor Protection Corp., a non-profit created by Congress in the late 1960s to recover investors’ assets after their brokerage goes bankrupt, is doing its job.
SIPC “should be called the Securities Investor Persecution Corp.,” says Mark Maddox, president of PIABA and a partner in Indianapolis law firm Maddox Koeller Hargett & Caruso. He charges that the government corporation operates “like a big insurance company wanting to pay out as few claims as possible.”
As evidence, Mr. Maddox points to its payments of about $400,000 to only nine investors out of more than 3,000 who applied for reimbursement when broker Stratton Oakmont of Lake Success, N.Y., was shut down by regulators in 1996 for fraudulent securities activities. The firm is now being liquidated.
Yet published reports that SIPC does not deny claim it has paid some $2.8 million in fees and another $300,000 in expenses to Well Gotshal & Manges LLP, the NewYork law firm in which Stratton Oakmont trustee Harvey Miller is a partner.
Mr. Maddox’ group says the corporation, which controlled assets totaling nearly $1.2 billion at the end of last year, is “interpreting the law far too narrowly with the goal of not paying claims. I think that they’ve created some internal rules that were never intended by Congress,” rules which make it too difficult for most investors to be able to win restitution of their funds.
But the corporation’s general counsel, Stephen Harbeck, insists it has never failed to pay a documented claim, reimbursing 426,500 people since its inception. “We built up our fund in excess of $1.2 billion to make sure we could perform our narrow mission under virtually all circumstances,” he says. As a result, SIPC has been able to reduce the fees it charges the 7,500 brokerage firms it covers to a mere $150 a year, regardless of their size.
“We believe we do have an investor protection mission and that we perform that mission,” Mr. Harbeck says. “The costs of the kind of program suggested (to cover losses from fraud) would be incalculable,” he adds, and would result in a more complex, less clearly defined mission.
CASE FOR THE DEFENSE
He also defends payments to Well Gotshal & Manges, saying that Stratton Oakmont trustee Harvey Miller is an acknowledged expert in brokerage firm insolvency. Money paid to the law firm has allowed Mr. Miller to sue the former principals of the brokerage to recover money improperly transferred out of the company Mr. Harbeck says.
“If Mr. Miller is successful in that, he will be able to make all general creditors whole.”
Mr. Miller says the litigation was time consuming and costly. “It’s all subject to approval by the court after review by SIPC.”
As for the investor-oriented bar group, this is its first foray into a public policy lobbying campaign. Started nine years ago, it has one employee, an executive director, and is funded by less than $100,000 in dues and fees from its annual meeting. The group wants Congress to investigate SIPC to determine if the recovery corporation is correctly fulfilling its legal mission, and to consider enlarging its responsibilities to cover more claims.
Several state officials agree with the bar group. In April Massachusetts Secretary of State William Galvin and his Nevada counterpart, Dean Heller, asked the Senate Banking Committee to draft legislation that would increase coverage to investors for losses from fraud or uncollectable judgments.
“The problem we now have is it’s very misleading,” Mr. Galvin says. As the number of small investors bilked in microcap stock fraud cases is on the rise, “brokerage firms highlight their SIPC coverage on decals, but what you find is the real coverage is limited to very narrow situations.”
Indiana securities commissioner Bradley Skolnik adds that “Many people may believe that SIPC provides a higher level of protection for investors than it actually does. It’s time to take a fresh look at what SIPC should and should not do.”
And Alabama Securities Commission Director Joseph Borg argues that when the recovery organization was formed in 1970 most investors ”were more sophisticated than today’s folks. Now that you have one out of three Americans investing, I think they expect it to be more like the (Federal Deposit Insurance Corp., which insures bank deposits to $100,000).”
Congress has so far shown little interest in the issue, however, and George Kramer, vice president and associate general counsel of the Securities Industry Association in Washington, says that covering fraud losses is “one of the worst ideas I’ve heard in a long time. It would enormously increase the payments into the funds that firms would have to make, which would be a tremendous increase in the cost of capital.”
Beyond that, he adds, “There’s the potential this opens for frivolous litigation. It’s going to create a tremendous incentive to recharacterize routine securities transactions as fraudulent in order to tap into SIPC.”
Mark Sargent, dean of the Villanova University School of Law in Philadelphia, agrees. “The attitude of many is that I lost money therefore, I was defrauded. There’s a chance that this would become almost a guarantee fund against investment loss, and we saw what happened with that in the S&Ls in the ’80s,” when savings account holders were paid above-market returns that taxpayers insured when many institutions became insolvent.