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Stanford-Antigua-SEC Lawsuit

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Stanford-Antigua-SEC Lawsuit

Message from the Acting Chair

Sharon Y. Bowen
April 2013

In 2012, SIPC continued to make meaningful progress on a number of significant customer protection proceedings and other issues.

Lehman Brothers Inc.

The liquidation of Lehman Brothers Inc. (LBI) commenced in September, 2008. To date the Trustee has administered more than $117 billion, making LBI the largest stock broker liquidation in history.

In late 2012, the Trustee negotiated agreements in principle with the Lehman Holding Company entity, and its affiliates, to resolve more than $70 billion of disputed claims between the estates. The Trustee also negotiated an agreement in principle with Lehman’s major European affiliate to resolve approximately $38 billion in claims between the two estates. These landmark agreements are subject to final documentation and approval by the United States Bankruptcy Court, and the Trustee’s agreement with the European affiliate is also subject to an order of the English High Court. The Trustee also successfully negotiated agreements in principle with other overseas affiliates to resolve claims totaling more than $7 billion.

Perhaps the best summary of progress to date in the Lehman matter comes from Bankruptcy Judge James M. Peck, who presides over the insolvency proceedings of the Lehman entities. He stated that “[t]his largest ever unplanned bankruptcy that started in chaos, accelerated the financial crisis and eroded confidence in the global financial system also has yielded the most overwhelming outpouring of creditor consensus in the history of insolvency law.”

Bernard L. Madoff Investment Securities LLC

At the outset of the Madoff liquidation, the Trustee, in conjunction with SIPC, determined that the Securities Investor Protection Act (“SIPA”) required that each customer’s “net equity” be based upon the actual net investment made by that customer. This was consistent with SIPA and all relevant prior precedents. Thus, each customer’s net equity was calculated based upon actual “money in minus money out.” The Trustee’s methodology was challenged by claimants seeking to measure “net equity” based upon the last monthly statements Mr. Madoff generated, which were based on transactions that never occurred and at prices that were fictitious. The methodology used by the Trustee was upheld by the United States Court of Appeals for the Second Circuit, and, in 2012, the United States Supreme Court declined to review the matter.

Also in 2012 the Trustee made a Second Interim Distribution of “customer property,” and distributed $3.6 billion to Madoff customers. The Trustee still holds more than $4 billion in reserve to account for litigation challenges to a number of issues. Coupled with an earlier distribution made in 2011, at the close of this year customers with allowed claims had received approximately 38% of their allowed claims, in addition to an advance from SIPC of up to $500,000 per customer. We look forward to additional distributions, as the Trustee’s collection efforts continue in 2013.

MF Global Inc.

During 2012 the Trustee for MF Global Inc. made continued progress in returning substantial assets to both securities customers and commodities customers. The Trustee has also reached an agreement with MF Global UK Ltd. which resolves all disputes between the two entities and will result in additional funds for distribution in the United States.

Stanford Group Company

The Securities and Exchange Commission (“SEC”) initiated a receivership proceeding for Stanford Group Company (“SGC”) in early 2009 in federal district court in Texas. On December 12, 2011 the SEC initiated an action in the United States District Court for the District of Columbia to compel SIPC to initiate a customer protection proceeding for SGC. Although sympathetic to the investors’ significant losses, SIPC, after careful analysis, concluded that there was no basis under SIPA to do so. On July 3, 2012 the District Court issued a Memorandum Opinion and Order holding that on the uncontested facts the SEC had failed to prove that SIPC had “refused to commit its funds or otherwise to act for the protection of customers of any member of SIPC.” The SEC has filed an appeal.

New Case

SIPC initiated one new customer protection proceeding in 2012. The modest size of the firm made it possible for SIPC to serve as the Trustee for the liquidation of Hudson Valley Capital Management. Notice of the initiation of the case has been mailed to known customers and published in a number of newspapers. The claims process has begun.

SIPC Modernization Task Force Report

The Board continues to analyze, including through the application of empirical techniques and collection of data, several legislative proposals made by the SIPC Modernization Task Force. The results of this analysis will inform the Board as it develops a position on these recommendations.