sec reply memo in support of application for order to sipc to liquidate stanford group company under...

8/3/2019 SEC Reply Memo in Support of Application for Order to SIPC to Liquidate Stanford Group Company under SIPA

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UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

__________________________________________)

Securities and Exchange Commission, )

)Applicant, ) Misc. No. 1:11-MC-00678-RLW)

v. ))

Securities Investor Protection Corporation, ))

Respondent. )__________________________________________)

SECURITIES AND EXCHANGE COMMISSIONS REPLY

MEMORANDUM OF POINTS AND AUTHORITIES IN

FURTHER SUPPORT OF ITS APPLICATION FOR AN ORDER

Matthew T. MartensChief Litigation CounselDavid S. Mendel (D.C. Bar #470796)Assistant Chief Litigation CounselU.S. Securities and ExchangeCommission Enforcement Division100 F Street, NEWashington, DC 20549(202) 551-4481 (Martens)(202) 772-9362 (fax)[email protected]@sec.gov

Of Counsel:Michael A. ConleyDeputy General CounselMichael L. PostSenior Litigation CounselOffice of the General Counsel

Case 1:11-mc-00678-RLW Document 25 Filed 02/23/12 Page 1 of 32
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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TABLE OF CONTENTS

TABLE OF AUTHORITIES ......................................................................................................... iii

I. INTRODUCTION AND SUMMARY ................................................................................1

II. BACKGROUND .................................................................................................................5

A. SGC Receivership Proceedings ...............................................................................5

B. Commission Determination .....................................................................................5

C. SIPCs Customer Coverage Analysis ...................................................................7

D. This Courts Decision ..............................................................................................7

III. ARGUMENT .......................................................................................................................8

A. Burden of Proof and Standard of Review ................................................................9

1. Customer Status Need Not Be Definitively Determined In

Order To Invoke SIPAs Procedural Protections .........................................9

a. Text of SIPA ..................................................................................10

b. Structure of SIPA ...........................................................................11

2. A Probable Cause Finding That A Covered Customer Exists IsSufficient At This Stage .............................................................................13

a. Probable Cause Is The Appropriate Burden of Proof ....................14

b. Hearsay Evidence Satisfies The Probable Cause Standard ............16

B. The Available Evidentiary Record Establishes Probable Cause To Believe

That Covered SGC Customers Exist ..................................................................17

1. SIPA Customers Include Those Deemed To Have Deposited

Cash With A Broker-Dealer For Purposes of Purchasing Securities .........17

2. The Record Evidence Provides Probable Cause To Believe

That Covered SGC Customers Exist ......................................................19



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C. Procedures And Discovery ....................................................................................22

1. Discovery ...................................................................................................22

2. Summary Procedures .................................................................................25

IV. CONCLUSION ..................................................................................................................25



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TABLE OF AUTHORITIES

CASES

Arizona Pub. Serv. Co. v. EPA, 211 F.3d 1280 (D.C. Cir. 2000) ......................................19

*Bell v. Burson, 402 U.S. 535 (1971) ....................................................................14, 15, 16

In re C.J. Wright & Co., 162 B.R. 597 (Bnkr. M.D. Fla. 1993) ..........................................7

C.I.R v. Shapiro, 424 U.S. 614 (1976) ...............................................................................15

Gerstein v. Pugh, 420 U.S. 103 (1975) ........................................................................14, 15

Janvey v. Alguire, 647 F.3d 585 (5th Cir. 2011)......................................................6, 21, 24

Lucas v. Wisconsin Elec. Power Co., 466 F.2d 638 (7th Cir. 1972) (en banc) ..................15

Mathews v. Eldridge, 424 U.S. 319 (1976) ..................................................................14, 16

New Hampshire Fire Ins. Co. v. Scanlon, 362 U.S. 404 (1960) ..................................17, 25

In re New Times Sec. Serv., Inc., 371 F.3d 68 (2d Cir. 2004) ...........................................19

*In re Old Naples Sec., Inc., 223 F.3d 1296 (11th Cir. 2000) .........7, 17, 18, 19, 20, 21, 24

*In re Primeline Sec. Corp., 295 F.3d 1100 (10th Cir. 2002) .........7, 18, 19, 20, 21, 23, 24

*SEC v. Hughes, 461 F.2d 974 (2d Cir. 1972) ..............................2, 8, 9, 11, 12, 16, 17, 25

SEC v. McCarthy, 322 F.3d 650 (9th Cir. 2003) ...............................................................17

SEC v. Vindman, No. 06civ14233, 2007 WL 1074941 (S.D.N.Y. Apr. 5, 2007) .............17

SIPC v. Barbour, 421 U.S. 412 (1975) ........................................................................13, 16

SIPC v. C.J. Wright, Inc., No. 5:91cv92 (M.D. Fla.) ...........................................2, 8, 11, 12

In re Selheimer & Co., 319 B.R. 395 (Bnkr. E.D.Pa. 2005) ..............................................12



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Sniadach v. Family Fin. Corp. of Bay View, 395 U.S. 337 (1969) ....................................15

United States v. Broadie, 452 F.3d 875 (D.C. Cir. 2005) ..................................................15

United States v. Hubbard, 650 F.2d 293 (D.C. Cir. 1980) ..........................................13, 25

STATUTES

Securities Investor Protection Act of 1970, 15 U.S.C. 78aaa, et seq. (SIPA)

Section 5 [15 U.S.C. 78eee] ....................................................................1, 2, 8, 11, 12

Section 8 [15 U.S.C. 78fff-2] ....................................................................................10

Section 9 [15 U.S.C. 78fff-3] ....................................................................................10

Section 10 [15 U.S.C. 78fff-4] ..................................................................................10

Section 11(b) [15 U.S.C. 78ggg(b)] ..........................................................1, 10, 13, 16

Section 16(2) [15 U.S.C. 78lll(2)] ........................................................3, 5, 17, 21, 23

MISCELLANEOUS

BLACKS LAW DICTIONARY (4th ed. 1968) ........................................................................21



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Applicant Securities and Exchange Commission (SEC) respectfully submits this reply

memorandum in further support of its Application under Section 11(b) of SIPA for an order

requiring the Securities Investor Protection Corporation (SIPC) to apply for a protective decree

from the federal district court for the Northern District of Texas (the Texas federal court)

pursuant to Section 5(a)(3) of SIPA with respect to Stanford Group Company (SGC).

I. INTRODUCTION AND SUMMARYSection 11(b) of SIPA provides that, when SIPC has refused to commit its funds or

otherwise to act for the protection of customers, the SEC can apply to this Court for an order

compelling SIPC to comply with its obligations. This Court has ruled that such an application

should be resolved in a summary proceeding where the Court will decide the merits de novo, and

has directed the parties to, with scalpel-like precision, address in their remaining briefing the

procedures, burdens, and discovery that are necessary and appropriate to resolve the application

here. Opinion at 13. The Commission respectfully submits that no discovery is necessary;

rather, this Court can and should conclude, based on the record evidence, that the SEC has met

its burden of showing that SIPC should be directed to initiate a liquidation proceeding.

SIPA provides both substantive and procedural protections for customers of SIPC-

member firms. Substantively, SIPA requires SIPC to commit funds for those covered customer

claims that the broker-dealer has insufficient securities or cash to satisfy. Procedurally, SIPA

provides for a forum (i.e., a liquidation proceeding) in which those purporting to have covered

customer claims can present those claims for resolution by a trustee with judicial review. It is

beyond dispute that SIPC has refused to take action to invoke SIPAs procedural protections for

those who claim to be covered SGC customers. Accordingly, the SEC has applied to this Court

for an order compelling SIPC to take that action namely, the filing of an application for a

protective decree with the Texas federal court to afford SGC customers SIPAs procedural



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protections. The issue before this Court isnot whether SIPC should be compelled to commit its

funds for customer claims. That issue is to be resolved in any subsequent liquidation proceeding.

The issue for this Court is whether SIPC should be compelled to act for the protection of SGC

customers by invoking SIPAs procedural protections in the form of a liquidation proceeding

claims process.

While SIPC spends much of its brief re-arguing that the SEC needs to prove that SIPC

has refused to commit its funds or otherwise to act for the protection of customers, this Court

has already agreed and ruled that it must decide that issue de novo. The disputed issues which

SIPC largely fails to address are (1) whatburden of proofgoverns the showing the SEC is

required to make, in this summary proceeding, in order to compel SIPC to file an application in

the Texas federal court that, if granted, would afford SGC claimants SIPAs procedural

protections; and (2) whattype of evidence this Court can rely upon in makings its determination.

Though using different terminology, Congress, SIPC, and the courts have each answered

these questions. In SIPA, Congress provided that SIPC could initiate a liquidation proceeding

for the protection of customers based on the mere danger that a broker-dealer will not meet its

obligations to customers. 15 U.S.C. 78eee(a)(3)(A)(A). In SEC v. Hughes, 461 F.2d 974, 982

(2d Cir. 1972), the court held that a liquidation proceeding could be instituted based on a

reasonable showing that a broker-dealer will fail to meet its obligations to customers. In SIPC

v. C.J. Wright, Inc., No. 5:91cv92 (M.D. Fla.), SIPC successfully argued that a protective decree

may issue initiating a liquidation proceeding based on the mere fact that persons who may be

customers of [the broker-dealer] may need the protection provided by SIPA. While each of

these authorities uses different terminology, they all provide that something short of proof by a

preponderance of a customers entitlement to SIPA coverage is sufficient to initiate a liquidation



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proceeding and afford claimants the procedural protections of SIPA.

The Commission submits that aprobable cause standard should be applied here, meaning

that this Court should grant the Commissions Application so long as the Court finds that the

Commission has made a reasonable showing that SIPC has refused to commit its funds or

otherwise to act for the protection of customers. The probable cause standard is well-developed

in the law and is well-recognized as the appropriate burden of proof to apply in determining

whether a trial on the merits should be instituted. It is particularly appropriate in the context of a

summary proceeding that Congress intended for the courts to treat . . . with a high sense of

urgency generally. Opinion at 9 n.5. Indeed, it would make little sense to require the SEC to

prove by a preponderance that customers are covered by SIPA in order to invoke the procedural

protections of SIPA that are designed to provide a forum for customers to establish by that

same standard that very question. Moreover, a probable cause standard is sufficient to protect

the limited interest that SIPC has at stake at this point, namely the interest in not even being

required to undertake the minimal burden of filing an application in the Texas federal court.

The Commission further submits that the record evidence in this case, including reports

by the court-appointed receiver, is sufficient competent evidence for this Court to resolve the

Application. Reviewed denovo, the record evidence in this case establishes probable cause to

believe that there are SGC customers with covered claims, such that those customers should be

afforded the procedural protections of SIPA. SIPA defines a customer as including any

person who has deposited cash with the debtor for the purpose of purchasing securities. 15

U.S.C. 78lll(2)(B)(i). The Old Naples line of cases has held that an investor may be deemed to

have deposited cash with a broker-dealer for the purpose of purchasing securities even if the

investor initially deposited those funds with an entity other than the broker-dealer. The courts



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have further held that, in the case of a Ponzi scheme that utilizes fraudulent securities as its

vehicle of operation, the scheme is insolvent from the outset and thus the relevant measure of an

investors recovery is not the fraudulent security itself, but rather the net amount that the

customer invested in the fraudulent scheme.

Here, reliable evidence has been developed in the course of the ongoing receivership

proceedings in the Texas federal court and elsewhere establishing that SGC, Stanford

International Bank, Ltd. (SIBL), and the other Stanford entities were operated in such a highly-

interconnected manner that deposits of cash with SIBL to purchase fraudulent CDs should be

deemed deposits of cash with SGC. And because the Stanford enterprise operated as a Ponzi

scheme, the relevant measure of recovery for those customers is not the fraudulent CDs

themselves, but rather the net amount of cash invested to purchase those CDs. In light of that

evidence and the case law, there is probable cause to believe that SGC, by failing to repay that

cash to investors, is failing to meet its obligations to customers. In these circumstances, SIPC

should be compelled to act for the protection of those customers by requesting that the Texas

federal court provide the procedural mechanism namely, a liquidation proceeding in which

claimants can litigate their entitlement to coverage as customers under SIPA.

In its opposition brief, SIPC makes essentially three arguments. First, SIPC argues that

the Old Naples line of cases on which the Commission relied in determining that SGC investors

are covered customers was wrongly decided. Opp. Brief at 27 n.12. Second, SIPC argues that

the evidence on which the Commission has based its formal determination and Application

namely, reports by the court-appointed receiver and declarations by the receivers forensic

accountant is not competent, admissible evidence in this proceeding. Id. at 5. Third, SIPC

argues that even if that evidence is considered, it fails to satisfy the Old Naples test. Seeid. at



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27-28. A decision by this Court on these issues does not require any discovery, and each of these

arguments fails as a matter of law.

II. BACKGROUNDA. SGC Receivership Proceedings

On February 16, 2009, the Commission filed a complaint against R. Allen Stanford,

SIBL, SGC, and others alleging violations of the federal securities laws through the operation of

a multi-billion-dollar Ponzi scheme involving the sale of purported SIBL CDs. SIBL was a bank

wholly owned by Stanford and domiciled in Antigua, while SGC was a Houston-based broker-

dealer that was registered with the Commission and a member of SIPC. On the same day that

the SECs complaint was filed, the Texas district court appointed a Receiver to take possession

of the defendants assets and records. Extensive analysis of the Stanford records has been

conducted by and summarized in reports, declarations, and testimony provided by the Receiver

and his forensic accountant in various proceedings.

B. Commission DeterminationOn June 15, 2011, the Commission made a formal determination, based on the facts and

circumstances of this case, that SIPC member Stanford Group Company (SGC) has failed to

meet its obligations to customers. Martens First Decl. Ex. 2, at 1. As the Commission noted,

SIPA defines a customer as including any person who has deposited cash with the debtor for

the purpose of purchasing securities. Id. at 7. Citing the Old Naples line of cases, the

Commission observed that, under certain circumstances, an investor may be deemed to have

deposited cash with a broker-dealer for the purpose of purchasing securitiesand thus be a

customer under Section 16(2) of SIPAeven if the investor initially deposited those funds

with an entity other than the broker-dealer. Id. The Commissions determination that investors

who purchased SIBL CDs should be deemed to have deposited cash with SGC was based on



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three key facts reflected in filings by the Receiver:

(1)Stanford structured the various entities in his financial empire, including SGC andSIBL, for the principal, if not sole, purpose of carrying out a single fraudulent Ponzischeme. Id. at 8.1

(2)[T]he funds deposited with SIBL were diverted for Stanfords personal use and usedto pay the expenses of SGC. The primary source of funding for the empire was SIBLCD proceeds. . . . [Stanford] used those funds for the benefit of SGC, by makingcapital contributions, paying SGCs operational expenses, and paying concessionsand bonuses to SGC representatives for selling the CDs. Indeed, SGC could not haveremained operational without the inflow from CD proceeds. Id. at 10.

(3)Customers interacted with SGC brokers and followed their directions with regard tothe manner in which they invested funds for the purchase of SIBL CDs. Id. at 9.

Accordingly, the Commission concluded that depositing money with SIBL was, for SGC

accountholders, in reality no different than depositing it with SGC. Id. at 9. Because SIBL CD

investors in effect deposited funds with SGC and did so for purposes of purchasing securities,

they fall within SIPAs definition of a customer.

Furthermore, the Commission concluded that these customers were in need of SIPAs

protection because the cash they effectively deposited with SGC had not been returned to them.

SIPA provides that customers are entitled to their net equity position with the brokerage. A

Ponzi scheme is, as a matter of law, insolvent from its inception. Janvey v. Alguire, 647 F.3d

585, 597 (5th Cir. 2011) (internal quotes omitted). Thus, the SGC customers net equity is

based on the net amount that the customers invested to purchase the fraudulent securities, not the

value of the securities themselves. Martens First Decl. Ex. 2, attach. 8. Because SIPC has

refus[ed] . . . to commit its funds to repay these net equity positions to SGCs customers, the

Commission authorized this Application to compel SIPC to act.

1 Shortly after the Commissions determination, the Fifth Circuit held that there is a substantial likelihoodof success on the merits that the Stanford enterprise operated as a Ponzi scheme. Janvey v. Alguire, 647 F.3d 585,597 (5th Cir. 2011). The Fifth Circuit further dismissed as of no moment the argument that SGC should beseparated from SIB[L] for purposes of the Ponzi scheme finding. Id. at 598.



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C. SIPCs Customer Coverage AnalysisFrom early 2009, the SEC was in regular contact with SIPC regarding the SGC matter.

As the SEC received evidence from victims regarding their claims for SIPA coverage, the

Commission promptly forwarded that information to SIPC. SIPC also had access to the public

filings of the Receiver and his forensic accountant in the Texas federal court. Upon information

and belief, SIPC also requested and obtained documentary evidence from the Receiver directly.

In August 2009, SIPC President Stephen Harbeck sent a letter to the Receiver denying

any basis for SIPA coverage. According to Mr. Harbeck, coverage was not appropriate even if

SGC and SIBL are consolidated because, in that instance, the SIBL CDs are, in effect, debts of

SGC, and are part of the capital of SGC, thereby negating customer status.2

Ultimately, the Commission made its June 15th formal determination that a liquidation

proceeding was warranted. While SIPC claims to have conducted a careful review of the

Commissions determination, Opp. Brief at 5, SIPC never communicated to the SEC that it either

lacked sufficient factual information to analyze the Commissions determination or that it

disputed the underlying facts on which the Commission relied. Rather, SIPC has stated that it

disagrees with the Commissions legal analysis.

Martens First

Decl. Ex. 3. Mr. Harbecks letter did not contest the notion that the facts may suggest a

consolidat[ion] of SGC and SIBL for purposes of a SIPA coverage analysis, nor did he invoke

the foreign subsidiary exception to SIPAs definition of a customer. Seeid.

D. This Courts DecisionOn February 9, 2011, this Court issued a decision holding that this matter is properly a

summary proceeding in which the Court will make a de novo determination whether SIPC has

2 Though SIPC has, over the years, regularly invoked this argument, the courts have just as regularly rejectedit. SeeIn re Primeline Sec. Corp., 295 F.3d 1100, 1110 (10th Cir. 2002);In re Old Naples Sec., Inc. , 223 F.3d 1296,1304 & n.18 (11th Cir. 2000);In re C.J. Wright & Co., 162 B.R. 597, 606 (Bnkr. M.D. Fla. 1993). Not surprisingly,then, SIPC now makes only passing reference to that meritless argument. See Opp. Brief at 27.



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refused to commit its funds or otherwise act for the protection of SGC customers. Opinion at 11.

This Court did not determine what burden of proof would be required of the SEC, but instead left

that issue, among others, for further briefing. Id. at 13. This Court emphasized that briefing

regarding the applicable burden of proof should take into consideration the fact that this

proceeding will only determine whether SIPC should be compelled to file an application for a

protective decree in the Texas federal court, leaving for that court to determine whether the

decree should be granted and, ultimately, whether SIPC is liable for any claims. Id.

III. ARGUMENTThe Commission submits that, based on the text and structure of SIPA, the decision in

Hughes, and SIPCs past practice, this Court need determine on a denovo basis only whether

there is probable cause to believe that SIPC has refused to commit its funds or otherwise to act

for the protection of customers. Under SIPA, SIPC may initiate a liquidation proceeding not

only when it is clear that a customer is in need of protection under the Act, but also when there is

a danger of such a need. 15 U.S.C. 78eee(a)(3)(A)(A). The decision inHughes expressly

recognized as much. See 461 F.2d at 982 (SIPC had only to show that there was a danger that

Hughes, Inc. would fail to meet its obligations, not that it had actually done so). This is

confirmed by SIPCs initiation of a liquidation proceeding in the C.J. Wrightmatter based only

on the finding that there may be a customer in need of SIPA protection. What is more, a

definitive determination of customer status at this stage is inconsistent with the structure of

SIPA, which established the liquidation proceeding as the forum in which the customer coverage

determination is finally made after notice to the victims and their opportunity to be heard.

The record evidence in this case satisfies the probable cause standard. TheHughes court

expressly recognized that factual findings by a court-appointed agent in a parallel SEC

enforcement proceeding are sufficient to order the initiation of a liquidation proceeding. See 461



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F.2d at 982-83. Similarly, in this case, the reports, testimony, and declarations by the court-

appointed agent in the Texas federal court receivership, as well as customer declarations and

criminal trial testimony, provide probable cause to believe that investors who purchased SIBL

CDs were customers of SGC and are, given their unpaid net investments in the Ponzi scheme

involving SIPC-member SGC, in need of protection under SIPA. SIPC has obtained factual

materials from the Commission and the Receiver, and SIPC has not requested additional

information from the SEC since June 15. Yet SIPC claims that it was able to careful[ly]

review the SECs determination, implicitly acknowledging that SIPC believes itself to be in

possession of evidence sufficient to address the Commissions claims. That evidence warrants

the initiation of a liquidation proceeding, and yet SIPC has failed to act. Accordingly, this Court

should issue an order directing SIPC to take steps to initiate a liquidation proceeding in the Texas

federal court; the Court should not order the unnecessary discovery process that SIPC requests.

A. Burden of Proof and Standard of ReviewAs noted above, this Court invited briefing on, among other things, the burden of proof

applicable to this proceeding. Opinion at 13. The Commission submits that, in this proceeding,

it need only establish probable cause to believe that SIPC has failed to commit its funds or

otherwise act for the protection of customers.

1. Customer Status Need Not Be Definitively Determined InOrder To Invoke SIPAs Procedural Protections

The Commission does not disagree in light of this Courts February 9, 2012 opinion

that some determination must be made at this juncture by this Court regarding the presence of

covered SGC customers.3

3 The Commission does not intend to waive its prior argument that its formal determination of customer needis unreviewable in this proceeding.

SIPC errs, however, in its assumption that, in order to invoke the

procedural protections of SIPA, the customer question must be definitively resolved by a



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preponderance of the evidence. The text, structure, and purposes of SIPA, SIPCs past practice

under the Act, and the summary nature of this proceeding, all suggest that something less than a

definitive showing that a customer is entitled to SIPA coverage is sufficient to compel SIPC to

act for the protection of customers.

a. Text of SIPASection 11(b) of SIPA provides that this Court may compel SIPC to file an application

for a protective decree if SIPC has refused to commit its funds or otherwise to act for the

protection of customers. 15 U.S.C. 78ggg(b). As this language suggests, SIPA provides

several types of protection for brokerage customers. A commitment of funds by SIPC for the

payment of customer claims is one such protection that SIPA provides. Id. 78fff-3, 78fff-4.

But SIPA also affords procedural protections in the form of a process, within the context of a

liquidation proceeding, by which customer claims against the estate of a failed broker-dealer can

be resolved when those claims are reasonably in dispute. Seeid. 78fff-2. In other words, a

determination that customers are in need of the various protections that SIPA provides is not the

same as a determination that customers are ultimately entitled to recovery under the Act. Part of

the protection that SIPA provides is a procedure whereby customers may present their claims

for resolution with judicial review thereof.

Obviously, customers are in need of the procedural protections that SIPA provides even if

there is something less than certainty that they are entitled to ultimate recovery on their claims.

SIPA does not authorize SIPC to investigate or inspect broker-dealers, and SIPC has no

subpoena power. At the same time, the courts have recognized that a customers entitlement to

coverage under SIPC can be a fact-intensive inquiry over which reasonable minds can disagree.

The creation of a process by which claims can be submitted to a trustee with judicial review of

the trustees determination is an important protection that SIPA provides for customers in these



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potentially uncertain situations. It would be anomalous to hold that SIPA affords these

procedural protections only in those instances where covered customer status can definitively

be established from the outset.

b. Structure of SIPAThat customers are in need of the procedural protections of SIPA even before their claims

for SIPC coverage are definitively resolved is further confirmed by the structure of SIPA.

First, Section 5(a) of SIPA authorizes SIPC to apply for a protective decree not only

when a broker-dealer has failed to meet its obligations to customers, but also when it is in

danger of doing so. 15 U.S.C. 78eee(a)(3)(A)(A). As the Second Circuit repeatedly

emphasized inHughes, in order for SIPC to file an application for a protective decree it need

only to show that there [is] a danger that [the broker-dealer] would fail to meet its obligations,

not that it had actually done so. 461 F.2d at 982. Thus, at the time SIPC files an application for

a protective decree, it need not definitively demonstrate that there exists a customer for whom

SIPA coverage will be required. The potential or danger that SIPA coverage will be required

is alone sufficient to initiate a liquidation proceeding.

SIPC itself has previously acknowledged as much. In SIPC v. C.J. Wright, Inc., No. 5:91

cv92 (M.D. Fla.), SIPC filed an application to initiate a liquidation proceeding, alleging that

customers are in need of the protection of SIPA because the broker-dealer ha[d] failed to

meet its obligations to persons whomay be customers within the meaning of . . . SIPA.

Martens Second Decl. Ex.1, at 3-4 (emphasis added); seealsoid. at 4 (alleging that there may

be customers of the Defendant broker-dealer in need of the protection provided by SIPA).4

4 Mr. Harbeck was of counsel on this SIPC filing. See Martens Second Decl. Ex.1, at 10, 16.

Emphasizing the uncertainty in that case as to the existence of covered customers, SIPCs brief

in support of its application argued that a protective decree should be entered because persons



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whomay be customers of C.J. Wright . . .may needthe protection provided under SIPA. Id. at

12 (emphasis added). Based on the finding that there are persons whomay be customers of C.J.

Wright . . . in need of the protection afforded by SIPA, the court ordered the initiation of a

liquidation proceeding. Id. at 20 (emphasis added). In other words, SIPC itself, as well as the

C.J. Wrightcourt, recognized that SIPA authorizes the initiation of a liquidation proceeding

notwithstanding the inability at the outset to determine whether there are customers within the

meaning of SIPA, much less determine whether those customers were entitled to coverage of

their claims. SIPC advocated and the C.J. Wrightcourt concluded that even those potential

customers were, at a minimum, in need of the procedural protection that SIPA provides,

namely a forum in which to litigate their customer status.

Second, SIPA provides for judicial review in various forums, which suggests that

differing burdens of proof control in each. Section 5 of SIPA provides that SIPC may file an

application for a protective decree, that such application must generally be heard within three

days of filing, and that the court must forthwith issue the decree if the statutory elements are

met. This expedited process suggests that a reasonable showing of customer need is sufficient

to warrant the entry of a protective decree. SeeHughes, 461 F.3d at 982. Or, as alleged by SIPC

in C.J. Wright, it is sufficient to initiate a liquidation proceeding if there may be a customer in

need of protection under SIPA. By contrast, once a liquidation proceeding is initiated, claimants

bear the burden of proving their covered customers status by a preponderance of evidence. In

re Selheimer & Co., 319 B.R. 395, 404 (Bnkr. E.D.Pa. 2005).

In other words, the reasonable showing necessary to initiate a liquidation proceeding is

something less than the preponderance of the evidence showing necessary to recover under

SIPA. And this is as it should be. It would make little sense to require SIPC, in order merely to



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initiate a liquidation proceeding, to make a definitive showing by a preponderance of the

evidence on an expedited basis that a customer is entitled to coverage under the statute. Rather,

SIPC need only establish that there is a danger of or may be a customer entitled to SIPA

coverage, and that showing is sufficient to establish that those customers are entitled to the

procedural protections that SIPA provides. Similarly, it would make little sense to require the

SEC (which is not a SIPA claimant) definitively to establish by a preponderance of the evidence

that there exists a covered customer in order to compel SIPC to invoke for those customers the

procedural protections of a liquidation proceeding. Certainly, the SEC as SIPCs plenary

supervisor, seeSIPC v. Barbour, 421 U.S. 412, 417 (1975) should not be required to make a

higher showing than the showing SIPC must make as this early stage of the proceedings.

Third, the fact that Congress explicitly provided for this proceeding to be summary in

nature suggests that a lesser burden of proof applies. As this Court held, the congressional intent

in enacting Section 11(b) was not to mandate a lengthy, full-blown plenary proceeding at this

stage. Opinion at 9. This is especially the case when, as this Court noted, the Texas federal

court will determine whether the decree should be granted, and, if granted, whether SIPC is

liable for any claims. Id. at 13. The only question at issue in this summary proceeding is

whether the evidence is sufficient to compel SIPC to take the initial step of filing an application

for a protective decree to be ruled upon by the Texas federal court. In this context, the summary

proceeding should be just that a prompt and simple proceeding, Opinion at 10 (quoting

United States v. Hubbard, 650 F.2d 293, 310 n.66 (D.C. Cir. 1980)), that does something less

than definitively resolve the entitlement of customers to coverage on their claims.

2. A Probable Cause Finding That A Covered Customer Exists IsSufficient At This Stage

For the reasons set forth above, customers are in need of the procedural protections that



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SIPA provides even if there is something less than a preponderance of evidence that they are

entitled to recovery on their claims. A probable cause standard is the appropriate burden of

proof to apply in determining whether customers are in need of SIPAs procedural protections,

and that burden of proof can be satisfied by hearsay evidence.

a. Probable Cause Is The Appropriate Burden of ProofThe Supreme Court has long held, in both the civil and criminal contexts, that probable

cause is an appropriate standard to apply in those hearings that impose lesser burdens on a party

pending a definitive resolution of the merits of the underlying claim against that party. InBell v.

Burson, 402 U.S. 535 (1971), the Supreme Court evaluated Georgias scheme providing for the

suspension, in an administrative proceeding, of the license of any driver involved in an accident

resulting in injury to another unless the driver established that he had insurance or posted a bond

sufficient to cover the injuries caused in the accident. Id. at 538. The Supreme Court held that

suspension of the drivers license in the administrative proceeding required proof to a

reasonable possibility that the driver would be found liable on the merits in a subsequent

lawsuit. Seeid. at 542. The Court emphasized that, in the license revocation hearing, the

inquiry into fault need not take the form of a full adjudication of the question of liability as that

adjudication can only be made in litigation between the parties involved in the accident. Id. at

540. The Supreme Court has since explained that the reasonable possibility standard

articulated inBell is the probable cause standard of proof. SeeMathews v. Eldridge, 424 U.S.

319, 334 (1976). Similarly, the Supreme Court has held that a criminal defendant may be

detained pending trial on the merits based on a probable cause finding by a judicial officer. See

Gerstein v. Pugh, 420 U.S. 103, 120 (1975). This lesser standard of proof is justified . . . by the

lesser consequences of a probable cause determination. Id. at 121. In short, a probable cause



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standard5 has been deemed appropriate in an initial proceeding, whether civil or criminal, that

imposes limited burdens on a party pending a final resolution of the merits of a controversy.6

In this case, the SECs Application seeks to impose on SIPC the minimal burden of filing

an application for a protective decree in the Texas federal court. This Courts determination will

not resolve SIPCs liability on any SGC customer claims. This lesser consequence of the

Courts determination here justifies a lower standard of proof. SeeGerstein, 420 U.S. at 121.

Furthermore, it would be unworkable to require a full adjudication in this proceeding of SIPCs

liability on any SGC customer claims, as that adjudication can only be made in litigation

between the parties to the claims, seeBell, 402 U.S. at 540, namely the SGC claimants and the

trustee. The claims at issue are those of the SGC investors, not the SEC, and those claimants are

not parties to this proceeding. Indeed, SIPC expressly acknowledges that in the ordinary course

the investors themselves bear the burden of proving that they are covered customers under

SIPA. Opp. Brief at 8 n.3. As a result, the holding ofBell suggests that the SEC should not be

compelled to establish more than probable cause that a covered customer is present here.

Consistent with the decision inBell, the Second Circuit invoked a probable cause-type

standard in evaluating a SIPC application to initiate a liquidation proceeding. In SEC v. Hughes,

supra, the court was called upon to determine whether SIPC had made a showing sufficient to

initiate a liquidation proceeding. The court held that a liquidation proceeding could begin

5 A probable cause burden of proof is consistent with de novo review. See United States v. Broadie, 452F.3d 875, 879 (D.C. Cir. 2005) (We review denovo the district courts determinations of . . . probable cause . . . .).

6 See also C.I.R. v. Shapiro, 424 U.S. 614, 629 (1976) ([P]ending final adjudication of the rights of theparties, the Due Process Clause requires that the party whose property is taken be given an opportunity for somekind of predeprivation . . . hearing at which some showing of the probable validity of the deprivation must bemade); Sniadach v. Family Fin. Corp. of Bay View, 395 U.S. 337 (1969) (Harlan, J., concurring) (explaining thatdue process can be satisfied by a prejudgment hearing aimed at establishing the validity, or at least probablevalidity, of the underlying claims against the alleged debtor);Lucas v. Wisconsin Elec. Power Co., 466 F.2d 638,650-51 (7th Cir. 1972) (enbanc) (Stevens, J.) (holding that, for a hearing that is only a preliminary and tentativedetermination of the ultimate rights of the parties, due process is satisfied by showing that there is a reasonablepossibility of judgments in the amounts claimed).



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because more than a reasonable showing of customer need had been made. 461 F.2d at 982.

The reasonable showing burden of proof employed by the court inHughes resembles the

reasonable possibility standard inBell, which the Supreme Court later explained is a probable

cause standard of proof. Mathews, 424 U.S. at 334.

If, as inHughes, an application by SIPC would be granted when there is probable cause

to believe that a covered customer exists, then SIPCs failure in that circumstance to make the

application is necessarily a failure to act for the protection of customers.7

b. Hearsay Evidence Satisfies The Probable Cause Standard

Section 11(b)

authorizes the SEC to move this Court to compel SIPC to file that application, and proof that

SIPC had failed to act for the protection of customers should likewise require proof only of the

probable cause necessary to grant SIPCs application.

Throughout its brief SIPC repeatedly asserts that competent, admissible evidence is

needed at this point. Opp. Brief at 1, 3, 4, 5, 22-23, 29. What SIPC means by this is not entirely

clear, but given SIPCs proposed discovery the implication seems to be that this Court can

only make factual determinations based on evidence that has been tested through something akin

to full-blown civil litigation. That argument cannot be reconciled with the manner in which

summary proceedings are typically conducted, or with the Second Circuits decision inHughes

holding that a SIPA application can be resolved based on hearsay evidence.

InHughes, the district court granted SIPCs application for a protective decree. The

broker-dealer appealed, challenging the sufficiency of the evidence on which the district court

based its customer need determination. The Second Circuit easily dismissed this argument,

holding that the reports of court-appointed agents, including a receiver, provided a sufficient

7 This is not to suggest that SIPC must intervene in every instance in which there is probable cause to believethat a broker-dealer will fail or is failing to meet its obligations to customers. SeeSIPC v. Barbour, 421 U.S. at 421.But the SEC is authorized to compel SIPC to intervene in such circumstances under Section 11(b) of SIPA.



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evidentiary basis on which to make the customer need determination. See 461 F.2d at 982. This

is consistent with how summary proceedings are conducted. New Hampshire Fire Ins. Co. v.

Scanlon, 362 U.S. 404, 406 n.4 (1960) (summary proceedings are generally upon affidavits);

SEC v. McCarthy, 322 F.3d 650, 655 (9th Cir. 2003) (same); SEC v. Vindman, No. 06civ14233,

2007 WL 1074941, at *1 (S.D.N.Y. Apr. 5, 2007) (same). It is also consistent with how

probable cause determinations are made, namely on hearsay and written testimony. Gerstein,

420 U.S. at 120. And it is particularly appropriate given SIPAs provision for prompt action on

the SECs Application.

B.

The Available Evidentiary Record Establishes Probable Cause ToBelieve That Covered SGC Customers Exist

Applying the probable cause standard to the record evidence before this Court, the

Commission submits that there is probable cause to find that there are SGC customers in need

of the procedural protections of a SIPA liquidation proceeding.8

1. SIPA Customers Include Those Deemed To Have DepositedCash With A Broker-Dealer For Purposes of Purchasing

Securities

Accordingly, this Court should

grant the SECs Application and order SIPC to file an application with the Texas federal court

for a protective decree under SIPA.

As noted earlier, SIPA defines a customer as including any person who has deposited

cash with the debtor for the purpose of purchasing securities. 15 U.S.C. 78lll(2)(B)(i). Two

circuit court decisions to interpret this definition have both held that its application does not

depend simply on the identity of the entity with which funds are deposited.

InIn re Old Naples Securities, Inc., 223 F.3d 1296 (11th Cir. 2000), an introducing

brokerage firm (Old Naples Securities) was owned and operated by James Zimmerman, who also

8 Even were a preponderance of evidence standard applied, the Commissions Application should be granted.



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owned and operated Old Naples Financial Services, a separate company that was not a

securities brokerage. Id. at 1299-1300. Zimmerman ran a Ponzi scheme by using his brokerage

to solicit client investments, which were then used to pay the expenses of Old Naples Securities

as well as Zimmermans personal expenses. Id. at 1300. The Eleventh Circuit declared that

Congress passed SIPA in 1970 for just this situation. Id. Applying the customer definition

relied upon by the SEC here, the court explained that the relevant question is whether there was

actual receipt, acquisition or possession of the property of a claimant by the brokerage firm.

Id. at 1302. The court answered that question in the affirmative because the investments were

offered by an employee of Old Naples Securities, at least one investor made his check payable to

Old Naples Securities, investor payments to Old Naples Financial Services were made at the

brokers direction, and investors received a letter from Old Naples Securities regarding their

investment. Id. at 1301. The court also noted the ample evidence . . . of checks, drawn from

the [Old Naples Financial Services] account to which [investors] wired their funds, issued to Old

Naples Securities and also to cover the brokerages obligations. Id. at 1303-04.

Similarly, inIn re Primeline Securities Corp., 295 F.3d 1100 (10th Cir. 2002), a broker at

an introducing brokerage firm operated a Ponzi scheme by soliciting client funds for investment

opportunities and corporate debentures. Id. at 1103-04. Clients made their checks payable to

corporations created by the broker, and [n]one of the funds were deposited with the [introducing

brokerage firm] or its clearing broker. Id. at 1104. Rather, the funds were diverted for the

brokers personal use. Id. Nevertheless, the court concluded that the investors were covered

customers of the brokerage because the clients met with the broker at the brokerage firms

offices, received a business card reflecting the brokers position at the firm, completed new

account forms with the firm, followed the brokers instructions with regard to the delivery of



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their funds for investment, and received fraudulent statements on firm letterhead. Id. at 1107-08.

Given these facts, the court held that even those clients who actually received fraudulent

Debenture Certificates were covered customers under SIPA. Id. at 1109.

In sum, Old Naples and Primeline expressly reject the notion that the customer

determination requires that cash be deposited directly with the broker-dealer. While SIPC

attempts to distinguish those cases, Opp. Brief at 27-28, it ultimately argues in a footnote that

those cases were wrongly decided, id. at 27 n.12. But the Commissions formal determination

that those cases rightly interpret SIPA is entitled to Chevron-style deference. SeeArizona Pub.

Serv. Co. v. EPA, 211 F.3d 1280 (D.C. Cir. 2000).

9

2. The Record Evidence Provides Probable Cause To Believe ThatCovered SGC Customers Exist

The evidentiary record here including materials on which the Texas federal court based

rulings that were affirmed by the Fifth Circuit demonstrate the following material facts:

SGC was a broker-dealer registered with the Commission and a SIPC member.Martens First Decl. Ex. 1, Ex. 2, attach. 4, at 3, Ex. 3; Martens Third Decl. Ex. 8.

SGC and SIBL were each wholly owned (indirectly) and controlled by R. AllenStanford. Martens Third Decl. Ex. 5, at 2.

Stanford Financial Group was a brand name under which SGC, SIBL, and otherentities operated to lend credibility to SIBL. Martens Third Decl. Ex. 1, at 36, Ex. 3,at 7, 17, 19, Ex. 4; Martens First Decl. Ex 2, attach. 5, at 4, 5, 6, Ex. 3.

Domestic clients purchasing SIBL CDs dealt substantially, if not exclusively, withSGC brokers. Martens Third Decl. Ex. 1, at 33-34, Ex. 2, attach. 5, at 5, Ex. 3, at 18, 19; Martens First Decl. Ex. 1, at 2.

Some SGC account holders received consolidated statements from SGC regardingtheir SIBL CD investments. Martens First Decl. Ex. 1, at 2; Martens Third Decl. Ex.9 SIPC has argued that the Commissions interpretation of SIPAs customer definition is not entitled toChevron deference. See SIPC Reply Brief (Dkt. No. 12), at 5 (citingIn re New Times Sec. Serv., Inc., 371 F.3d 68,80-82 (2d Cir. 2004)). That courts refusal to afford deference to the SECs position, however, was due largely tothe fact that the the position taken by the SEC in its brief is one that it has not previously articulated in any formprior to the filing of a court-invited amicus brief in that case. SeeNew Times, 371 F.3d at 81. Here, by contrast, theSECs position was articulated in a formal written determination made prior to the initiation of this litigation.



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4, Ex. 5, at 6, 8.

SGC clients took direction from SGC brokers with regard to the transmission of theirfunds for the purchase of SIBL CDs. Martens Third Decl. Ex. 3, at 10-12, 14,15;Martens First Decl. Ex. 2, attach. 5, at 3, Ex. 3.

Regardless of the entity to which an investors funds were directed, the funds wereultimately routed to bank accounts in Houston, from which funds were diverted to thevarious Stanford entities, including SGC. Martens Third Decl. Ex. 1, at 7, 29-32, Ex.3, at 22, Ex. 6, at 3148-49, 3161, 3164; Martens First Decl. Ex. 2, attach. 2, at 6-9,Ex. 2, attach. 4, at 50-54.

SIBL employees in Antigua, including even its president, had essentially no controlover the proceeds of CD sales or the banks financial reporting. Indeed, SIBLspresident was not even on the banks payroll. Martens Third Decl. Ex. 1, at 6, 9, 14,16-17, 19, 25-28.

The Stanford enterprise, which included SIBL and SGC, operated as a unified Ponzischeme. Martens Third Decl. Ex. 1, at 5-6, Ex. 2, at 8, Ex. 5, at 5; Martens FirstDecl. Ex. 2, attach. 2, at 5-7, 13, Ex. 2, attach. 4, at 12, 14; seealsoJanvey, 647F.3d at 597-98.

During the five-year period 2004 through 2008, approximately $628M in investorfunds were directed through SIBL accounts and back to SGC. Martens Third Decl.Ex. 2, at 26-28.

These facts, which have not been disputed by SIPC in any of its filings, are similar to those in

Old Naples and Primeline and provide probable cause to believe that at least some SGC clients

are covered customers under SIPA.

SIPC contends that, in order to prevail under the Old Naples and Primeline decisions, the

SEC must make a showing sufficient to pierce the corporate veil. See Opp. Brief at 23-26. This

argument misreads those cases. As the Old Naples decision expressly stated, a court neednot

find that the companies are in effect a single entity if customer funds in fact made their way to

the broker-dealer. 223 F.3d at 1304 n.16. There is simply no basis for SIPC to dispute that this

is precisely what occurred here. Martens Third Decl. Ex. 1, at 31-32, Ex. 2, at 26-28.

SIPC also submits various evidentiary materials that it contends bear on the application

of the Old Naples test, including documentation regarding SIBLs board of directors,



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management, physical presence in Antigua, licensure under Antiguan law, and its compilation of

corporate financial reports. See Opp. Brief at 25. This evidence is irrelevant to the analysis

under the Old Naples line of cases. Indeed, this type of evidence was not even cited in those

decisions. That said, the Commission does not object to SIPCs submission of those materials

for consideration by this Court in ruling on the Commissions Application.

SIPC also suggests that covered customers are not present here because SIBL was a

foreign subsidiary of SGC. Opp. Brief at 27-28 (citing 15 U.S.C. 78lll(2)(C)). This

argument is plainly without merit. A subsidiary is a corporation in which another corporation

owns at least a majority of the shares. Blacks Law Dictionary 1596 (4th ed. 1968). The record

evidence clearly establishes that SIBL was (indirectly) owned by R. Allen Stanford and its shares

were not owned in whole or in part by SGC. Martens Third Decl. Ex. 5, at 2. Accordingly, the

foreign subsidiary exclusion from the customer definition is inapplicable.

SIPC also argues that the existence of a Ponzi scheme does not alter the customer

analysis. Opp. Brief at 20. This argument, however, is inconsistent with SIPCs arguments in

the Madoff litigation. A Ponzi scheme is, as a matter of law, insolvent from its inception.

Janvey, 647 F.3d at 597. Accordingly, a victim of a Ponzi scheme perpetrated by a brokerage

firm is entitled to recovery of his net cash investment in the Ponzi scheme; the physical

certificates are disregarded because the brokerage was insolvent at the moment cash was

deposited. SeePrimeline, 295 F.3d at 1109 (finding SIPA coverage for a Ponzi scheme victim

despite receipt of a debenture certificate). Indeed, SIPCs trustee argued this very point in the

Madoff litigation. See Martens First Decl. Ex. 2, attach. 8. 10

10 SIPC contends that it needs discovery to make several additional factual showings that it believes bear onthe Old Naples analysis. See Opp. Brief at 28-29. But SIPC has already submitted evidentiary material on thoseissues. Seeid. at 15, 17-18.



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C. Procedures And DiscoveryThis Court ordered the parties to propose, with scalpel-like precision, the procedures

and discovery that are necessary and appropriate in this proceeding. Opinion at 13. SIPC has

essentially disregarded that directive and has, in effect, re-proposed full-blown discovery. See

Opp. Brief at 29-37. Not only is this approach inappropriate in a summary proceeding under

Section 11(b) of SIPA generally, but it is especially unnecessary here given that, upon

information and belief, SIPC has interacted with the Receiver for months and obtained

documentation from the Receiver upon request. Because SIPC appears unwilling to narrow its

discovery requests to relevant factual issues seriously in dispute, SIPCs discovery requests

should be denied and the Court should proceed to a resolution of the merits of this matter.

1. DiscoverySIPC claims to seek four targeted and limited categories of discovery, Opp. Brief at

29-30, that would require approximately 5-10 requests for admissions, 5-10 documents

requests, 5-10 interrogatories, and focused depositions of the handful of would-be customers

and examiners, id. at 3. As an initial matter, the mere number of interrogatories, documents

requests, and requests for admission tells the Court (and the SEC) nothing about the breadth of

the discovery SIPC proposes. Even five document requests could call for the production of

millions of pages of material, and even a small number of interrogatories and requests for

admission could require the review of millions of pages of documents to provide adequate

responses. Indeed, it is telling that, while claiming to seek discovery that is neither onerous . . .

nor time-consuming, Opp. Brief at 35, SIPC chose not to reveal the substance of its proposed

discovery requests. Instead, SIPC provided a list of four categories of discovery that it would

seek. A review of these categories demonstrates that, in fact, SIPC seeks wide-ranging discovery

of irrelevant materials. These discovery requests should accordingly be denied.



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First, SIPC seeks discovery to test the SECs assertion that there are eligible customers

in this case. Opp. Brief at 29. Since the ultimate issue in this matter is the presence of covered

customers, proposing as its first category of discovery evidence bearing on the customer

question is no limitation at all on discovery. Rather, it is an invitation to engage in protracted

litigation in this proceeding of the customer question, contrary to this Courts ruling that this is

not intended to be a lengthy, full-blown plenary proceeding. Opinion at 9.

Second, SIPC seeks discovery regarding where the CDs purchased by the SECs

proffered customers were sent, where they are located now, and what evidence the SEC has to

show that the CDs were on deposit with SGC when it went into receivership in 2009. Opp.

Brief at 30. Discovery on these questions is entirely irrelevant, as the SEC has never argued that

customers are in need of protection because of a failure to receive the physical CD documents.

One statutory definition of a customer is someone with a claim based on securities . . . held

by the broker-dealer for the customers account, 15 U.S.C. 78lll(2)(A), but that isnot the

customer definition on which the Commission is relying here. The Commission is relying on

the statutory customer definition that includes any person who has deposited cash with the

debtor for the purpose of purchasing securities. Id. 78lll(2)(B)(i). This definition simply does

not depend on the receipt or location of the physical CDs. SeePrimeline, 295 F.3d at 1109

(finding a covered customer despite receipt of fraudulent Debenture Certificates).

Third, SIPC seeks discovery regarding the corporate structure of SGC and SIBL,

including evidence of such things as the observance of corporate formalities; shared

management, officers, and employees; shared locations of physical offices; and common or

separate book-keeping. Opp. Brief at 30. As an initial matter, SIPC places no time limit on this

discovery request. In any event, this discovery is entirely unnecessary for four reasons. First,



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the evidence is irrelevant, as neither Old Naples or Primeline in any way relied on veil-piercing

concepts or the corporate structure of the broker-dealer and its affiliated entities. Indeed, the Old

Naples case expressly rejected the argument that such a showing was necessary; it was sufficient

that client funds were funneled back from an affiliated entity to the broker-dealer. See 223 F.3d

at 1304 n.16. Second, SIPC has submitted substantial evidence on this very question, and the

SEC does not object to the consideration of that evidence. Seesupra at 20-21. Third, the free

flow of funds between the Stanford-related entities is addressed extensively in the recent sworn

testimony of the Receivers forensic accountant. Seesupra at 20. Fourth, SIPC has yet to

dispute the evidence on which the Commission relies. Nor could it, as the Fifth Circuit has held

that there is a substantial likelihood of success on the merits that the Stanford enterprise

operated as a Ponzi scheme, and deemed of no moment the argument that SGC should be

separated from SIB[L]. Janvey, 647 F.3d at 597, 598.

Fourth, SIPA seeks the complete record considered by,or available to, the SEC and its

staff in evaluating whether SIPA applies to the Stanford case. Opp. Brief at 30 (emphasis

added). At the same time, SIPC argues that all evidence possessed by the Receiver is under the

SECs control given the terms of the Texas federal courts order appointing the Receiver. Id. at

31-32. In effect, then, SIPC is demanding access to the entire Stanford documentary record.

This amounts to approximately 38 million pages of paper in the possession of the Receiver (not

including 2,200 servers, hard drives, laptop computers, desktop computers, PDAs, etc.), and

approximately 123 million pages of electronic discovery in the possession of the SEC. This is

not targeted or limited discovery at all. And it is difficult to understand how discovery of

this breadth could be necessary and appropriate in this proceeding. Denovo review does not

turn on the reasonableness of the Commissions decision in light of the evidence before it, but



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rather is based on the record evidence before this Court. Furthermore, evidence that the SEC

may have reviewed in evaluating other customer definitions not ultimately relied upon is

irrelevant to this Courts review of the sole customer definition at issue here.

2. Summary ProceduresFinally, this Court directed briefing on the procedures that should apply in this summary

proceeding. Opp. Brief at 10.11

First, the Court should determine the burden of proof (probable cause vs.preponderance of the evidence) that governs this summary proceeding.

The Commission respectfully submits that, in light of the

circumstances of this case and the Courts directive that a summary proceeding be prompt and

simple, Opinion at 10, the Court should proceed in the following manner:

Second, this matter should presumptively proceed upon affidavits and similar writtensubmissions. SeeScanlon, 362 U.S. at 406 n.4;Hughes, 461 F.2d at 981.

Third, the Court should allow the parties until March 12 to submit any additionalevidentiary material they wish the Court to consider in ruling on the Application.

Fourth, if after reviewing the written submissions the Court deems further briefing oran evidentiary hearing necessary to a ruling on the Application, the Court can ordersuch briefing or schedule an evidentiary hearing to which the parties can subpoena

witnesses. Otherwise, the Court can simply hold oral argument on the Application.At this early stage, procedural due process does not require that [SIPCs] interests be explored

in a full-scale evidentiary hearing. Hubbard, 650 F.2d at 310 n.66. The above-proposed

procedures would provide SIPC with a greater opportunity to be heard than that afforded the

broker-dealer inHughes upon SIPCs application for a protective decree. See 461 F.2d at 981.

IV. CONCLUSIONFor the foregoing reasons, the Court should order SIPC to file an application for a

protective decree in the Texas federal court under Section 5(a)(3) of SIPA.

11 SIPC appears not to have briefed the issue of what procedures should apply in this summary proceeding.



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Dated: Washington, D.C. Respectfully submitted,February 23, 2012

/s/ Matthew T. Martens

Matthew T. MartensChief Litigation Counsel

David S. Mendel (D.C. Bar #470796)Assistant Chief Litigation CounselU.S. Securities and ExchangeCommission Enforcement Division100 F Street, NEWashington, DC 20549(202) 551-4481 (Martens)(202) 772-9362 (fax)[email protected]@sec.gov

Of Counsel:Michael A. ConleyDeputy General Counsel, Office of the General Counsel

Michael L. PostSenior Litigation Counsel, Office of the General Counsel

mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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CERTIFICATE OF SERVICE

I hereby certify that on this 23rd day of February, 2012, I caused service of the foregoing

SECURITIES AND EXCHANGE COMMISSIONS REPLY MEMORANDUM OF POINTS

AND AUTHORITIES IN FURTHER SUPPORT OF ITS APPLICATION by ECF on the

following:

Eugene F. Assaf, P.C. ([email protected])Edwin John U ([email protected])John OQuinn ([email protected])Kirkland & Ellis LLP655 Fifteenth Street, N.W.Washington, D.C. 20005

Telephone: (202) 879-5000


Matthew T. Martens

mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

__________________________________________

Securities and Exchange Commission, )

)Applicant, )

)

v. ) Misc. No: 1:11-mc-00678-RLW)

Securities Investor Protection Corporation, )

)Respondent. )

__________________________________________)

THIRD DECLARATION OF MATTHEW T. MARTENSPURSUANT TO 28 U.S.C. 1746

I, Matthew T. Martens, declare as follows:

1. I am the Chief Litigation Counsel with the Division of Enforcement of the Securities andExchange Commission (SEC or Commission) in Washington, D.C., and I am counsel

to the Commission in this proceeding. I have personal knowledge of the facts presented

in this declaration based upon my review of documents attached hereto and referenced

herein and my role as counsel in this proceeding, including information provided to me

by other Commission staff whom I supervise in connection with this matter. This

declaration supplements my previous declarations submitted on December 12, 2011, and

January 3, 2012, in this matter.

Case 1:11-mc-00678-RLW Document 25-1 Filed 02/23/12 Page 1 of 3


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2. Attached as Exhibit 1 are true and correct copies of the Direct Testimony of Karyl VanTassel, filed on December 5, 2011, inIn re Stanford Intl Bank, Ltd., Case No. 3:09-cv-

00721-N (N.D. Tex) [Docket entry #115-1], and Exhibit KVT-9 to that testimony

[Docket entry 115-4].

3. Attached as Exhibit 2 are true and correct copies of the Declaration of Karyl Van Tassel,filed on May 24, 2010, inRalph S. Janvey, In His Capacity As Court-Appointed Receiver

for the Stanford International Bank, Ltd. v. Alguire, Case No. 3:09-cv-00724-N (N.D.

Tex.) [Docket entry #444-2], and exhibit KVT-4 to that declaration [Docket entry

#444-3].

4. Attached as Exhibit 3 is a true and correct copy of the Affidavit of Michael A. Kogutt,dated June 28, 2010.

5. Attached as Exhibit 4 are true and correct copies of the Affidavit of Michael A. Kogutt,dated February 22, 2012, and Exhibits A through J to that declaration, except that certain

redactions have been made to protect confidentiality.

6. Attached as Exhibit 5 is a true and correct copy of the Declaration of Karyl Van Tassel,dated February 23, 2012.

7. Attached as Exhibit 6 is a true and correct copy of excerpts of the transcript of testimonyby James Davis in United States v. Robert Allen Stanford, Case No. 09-CR-342 (S.D.

Tex.), delivered on February 2, 3, and 6, 2012. Portions of the excerpts have been

highlighted using the Highlight Text Tool in Adobe Acrobat.



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I declare under penalty of perjury that the foregoing is true and correct.

Executed on the 23rd day of February 2012.


Matthew T. Martens



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sec reply memo in support of application for order to sipc to liquidate stanford group company under...

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