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SIPC Expected to Announce Record Pay of $31 Million

6/20/2000

Wall Street Journal

The Securities Investor Protection Corp. is expected to announce Tuesday that it paid a record $31 million to customers of Sunpoint Securities Inc., a defunct brokerage firm formerly in Longview, Texas, to restore cash and securities that allegedly were stolen from about 9,800 investors.

The payout comes at a time when some securities lawyers are questioning whether SIPC is doing enough to protect investors. SIPC pays as much as $500,000 to investors who can demonstrate they never received the securities they were due because of a broker’s insolvency. But payments cover only losses related to theft and proven unauthorized trading. Incidents of fraud, churning or manipulation of stock prices don’t qualify.

“SIPC doesn’t pay for the typical boiler-room fraud,” said attorney Robert Uhl of Beverly Hills, Calif., who represents investors in arbitration cases against brokers. “I don’t care how you defraud someone. Once you figure out intent, the question is whether there’s enough money.”

Last year, SIPC paid investors $44.5 million, including the $31 million to Sunpoint customers, compared with $18 million during 1998. Each brokerage firm contributes $150 annually to the fund, which has about $1.1 billion in reserves. In the Sunpoint case, the Securities and Exchange Commission alleged in a complaint in November that Van R. Lewis III, Sunpoint’s founder and president, and Mary Ellen Wilder, its chief financial officer, were “looting” customers’ accounts. The funds allegedly were used to meet the firm’s net capital requirements and for Mr. Lewis’s personal benefit.

In May, Mr. Lewis reached a settlement with the SEC in which he didn’t admit to or deny the allegations but consented to refrain from violating U.S. securities laws. He also agreed to “pay disgorgement and civil penalties as a result of the alleged activities,” the SEC said. Efforts to reach attorneys for Mr. Lewis and Ms. Wilder were unsuccessful.

SIPC stepped in shortly after the alleged theft was discovered last year, and it arranged for Sunpoint’s accounts to be transferred to two other brokerage firms, SIPC general counsel Steve Harbeck said. Missing shares of money-market mutual funds were replaced in December. SIPC said it is announcing the payout Tuesday because it is the last day for claims to be filed.

“Substantially, all the investors have been made whole,” said Robert Richardson, the trustee handling Sunpoint’s liquidation. He added that the SIPC fund was an essential part of that process.

SIPC was created in 1970, when Congress was concerned about the financial health of the brokerage industry. But given the sweeping changes that have reshaped the securities industry during the past three decades, some regulators believe SIPC deserves another look.

“It’s appropriate to take a fresh look at SIPC’s mandate and determine whether it’s still working and how well it serves investors,” Indiana Securities Commissioner Brad Skolnik said. But he added, “This is a very complicated issue and the potential exists for unintended consequences.” If SIPC’s protections are too broad, for instance, investors might not closely monitor their brokers’ actions.

Mr. Skolnik worries that novice investors may rely too much on the fact that their broker is SIPC-insured. “I fear that there may be misperception among some customers that they are entitled to a higher level of protection,” he said.

SIPC President Michael Don said, “There may be in some areas” room to broaden or expand the law governing SIPC’s activities, but “that would have to be carefully thought out and considered.”


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