(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Defrauded Investors Had SIPA Claim for Securities

A district court properly found that investors victimized by an embezzler who believed they had contributed to non-existent mutual funds had a claim for securities rather than cash under the Securities Investor Protection Act. The 2nd Circuit Court of Appeals found that the investors were entitled to the higher SIPA advance for securities claims, as the statutory interpretation by the SEC was accorded greater deference than the view of the SIPC.

The investors were individuals and entities that were fraudulently induced by a broker to purchase shares in bogus mutual funds offered by his investment companies. After the scheme was exposed, the U.S. District Court for the Eastern District of New York ordered that the assets of the companies be liquidated pursuant to the Securities Investor Protection Act.

Initially, the SIPA trustee concluded that the claimants were eligible to receive cash advances from the Securities Investor Protection Corporation, but determined that the investors had claims for cash subject to a $100,000 reimbursement limit under SIPA. The trustee found that the fact that the supposed mutual funds never existed precluded claims for securities. The district court rejected this conclusion, however, and found that claims were for securities rather than cash, which have a reimbursement limit of $500,000.

The SEC claimed that the court should take an expansive definition of the concept of a claim for securities, while the SIPC asserted that the trustee had reached the correct result. The 2nd Circuit panel found the SEC's argument that a broad reading of the statute was supported by the legislative history of the SIPA and would further the congressional objective of investor protection to be persuasive.

The court also found that the SEC's interpretation was entitled to greater deference than that of the SIPC. According to the court, " we agree with the SEC that whatever SIPC's expertise in overseeing SIPA liquidations, Congress did not intend for the Commission's interpretations of SIPA to be overruled by deference to the entity that was made subject to the Commission'oversight."

In re New Times Securities Services, Inc. (2ndCir) is reported at ¶92,838 .