South-Western Legal Studies in Business

Loans to Brokerage Houses Not Covered by Federal Insurance
Description

Appeals court held that investors who lent money to a Ponzi scheme run by the manager of a brokerage houses could not recover for their losses as they were lenders to the houses, not customers, under the Securities Investor Protection Act.

Topic Securities Law
Key Words

Securities, Investors, Ponzi Scheme, SIPC

C A S E   S U M M A R Y
Facts

Two brokerage houses went bankrupt. The houses were Ponzi schemes that collapsed. Some investors claimed they were due recovery from the Securities Investor Protection Corporation (SIPC), a public company that covers certain losses for investors. The bankruptcy trustee held that no recovery was due as the investors had liquidated their accounts and loaned their proceeds to Goren, who ran the scheme and his brokerage houses. As such, they were lenders, not customers of the brokerage houses. That decision was appealed and the trial court reversed, holding that the SIPC should cover the losses. The SIPC appealed.

Decision

Reversed and remanded. The claimants had originally deposited funds for the purchase of securities, but when they liquidated the funds and loaned them to the broker, they were no longer customers protected by the SIPC. The loan transaction was unrelated to trading in securities, so it is not covered. Such loans are not covered by the Securities Investor Protection Act.

Citation

In re: New Times Securities Services, 463 F.3d 125 (2nd Cir., 2006)

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