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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. Martens Chief Litigation Counsel David S. Mendel (D.C. Bar #470796) Assistant Chief Litigation Counsel U.S. Securities and Exchange Commission Enforcement Division 100 F Street, NE Washington, DC 20549 (202) 551-4481 (Martens) (202) 772-9362 (fax) martensm@sec.gov mendeld@sec.gov
Of Counsel: Michael A. Conley Deputy General Counsel Michael L. Post Senior Litigation Counsel Office of the General Counsel

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TABLE OF CONTENTS TABLE OF AUTHORITIES ......................................................................................................... iii I. II. INTRODUCTION AND SUMMARY ................................................................................1 BACKGROUND .................................................................................................................5 A. B. C. D. III. SGC Receivership Proceedings ...............................................................................5 Commission Determination .....................................................................................5 SIPCs Customer Coverage Analysis ...................................................................7 This Courts Decision ..............................................................................................7

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. b. 2. Text of SIPA ..................................................................................10 Structure of SIPA ...........................................................................11

A Probable Cause Finding That A Covered Customer Exists Is Sufficient At This Stage .............................................................................13 a. b. Probable Cause Is The Appropriate Burden of Proof ....................14 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 The Record Evidence Provides Probable Cause To Believe That Covered SGC Customers Exist ......................................................19

2.

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C.

Procedures And Discovery ....................................................................................22 1. 2. Discovery ...................................................................................................22 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 SUMMARY

Section 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 SIPCmember 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 is not 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) what burden of proof governs 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) what type 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 a probable 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 de novo, 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 highlyinterconnected 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. See id. 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. A. 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 brokerdealer 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 Determination On 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 5 BACKGROUND

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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 and SIBL, for the principal, if not sole, purpose of carrying out a single fraudulent Ponzi scheme. Id. at 8. 1 (2) [T]he funds deposited with SIBL were diverted for Stanfords personal use and used to pay the expenses of SGC. The primary source of funding for the empire was SIBL CD proceeds. . . . [Stanford] used those funds for the benefit of SGC, by making capital contributions, paying SGCs operational expenses, and paying concessions and bonuses to SGC representatives for selling the CDs. Indeed, SGC could not have remained operational without the inflow from CD proceeds. Id. at 10. (3) Customers interacted with SGC brokers and followed their directions with regard to the 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.

Shortly after the Commissions determination, the Fifth Circuit held that there is a substantial likelihood of 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 be separated from SIB[L] for purposes of the Ponzi scheme finding. Id. at 598.

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C. SIPCs Customer Coverage Analysis From 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 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. See id. 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. D. This Courts Decision On 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 rejected it. See In 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. ARGUMENT

The 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 de novo 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 in Hughes 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. Wright matter 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. The Hughes 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 8

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

As 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 In Order 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 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
The Commission does not intend to waive its prior argument that its formal determination of customer need is unreviewable in this proceeding.
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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 SIPA Section 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. See id. 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 10

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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 SIPA That 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 in Hughes, 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 who may be customers within the meaning of . . . SIPA. Martens Second Decl. Ex.1, at 3-4 (emphasis added); see also id. at 4 (alleging that there may be customers of the Defendant broker-dealer in need of the protection provided by SIPA). 4 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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Mr. Harbeck was of counsel on this SIPC filing. See Martens Second Decl. Ex.1, at 10, 16.

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who may be customers of C.J. Wright . . . may need the protection provided under SIPA. Id. at 12 (emphasis added). Based on the finding that there are persons who may 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. Wright court, 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. Wright court 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. See Hughes, 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, see SIPC 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 Is Sufficient At This Stage For the reasons set forth above, customers are in need of the procedural protections that 13

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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 Proof The 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. In Bell 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. See id. 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 in Bell is the probable cause standard of proof. See Mathews 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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standard 5 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. See Gerstein, 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, see Bell, 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 of Bell 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 in Bell, 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, 452 F.3d 875, 879 (D.C. Cir. 2005) (We review de novo the district courts determinations of . . . probable cause . . . .).

See also C.I.R. v. Shapiro, 424 U.S. 614, 629 (1976) ([P]ending final adjudication of the rights of the parties, the Due Process Clause requires that the party whose property is taken be given an opportunity for some kind of predeprivation . . . hearing at which some showing of the probable validity of the deprivation must be made); Sniadach v. Family Fin. Corp. of Bay View, 395 U.S. 337 (1969) (Harlan, J., concurring) (explaining that due process can be satisfied by a prejudgment hearing aimed at establishing the validity, or at least probable validity, of the underlying claims against the alleged debtor); Lucas v. Wisconsin Elec. Power Co., 466 F.2d 638, 650-51 (7th Cir. 1972) (en banc) (Stevens, J.) (holding that, for a hearing that is only a preliminary and tentative determination of the ultimate rights of the parties, due process is satisfied by showing that there is a reasonable possibility 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 in Hughes resembles the reasonable possibility standard in Bell, which the Supreme Court later explained is a probable cause standard of proof. Mathews, 424 U.S. at 334. If, as in Hughes, 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 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. b. Hearsay Evidence Satisfies The Probable Cause Standard 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 in Hughes holding that a SIPA application can be resolved based on hearsay evidence. In Hughes, 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 believe that a broker-dealer will fail or is failing to meet its obligations to customers. See SIPC 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 To Believe 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 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. 1. SIPA Customers Include Those Deemed To Have Deposited Cash With A Broker-Dealer For Purposes of Purchasing Securities 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. In In 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

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, in In 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. See Arizona Pub. Serv. Co. v. EPA, 211 F.3d 1280 (D.C. Cir. 2000). 9 2. The Record Evidence Provides Probable Cause To Believe That Covered 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. Allen Stanford. Martens Third Decl. Ex. 5, at 2. Stanford Financial Group was a brand name under which SGC, SIBL, and other entities 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, with SGC 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 regarding their SIBL CD investments. Martens First Decl. Ex. 1, at 2; Martens Third Decl. Ex.

SIPC has argued that the Commissions interpretation of SIPAs customer definition is not entitled to Chevron deference. See SIPC Reply Brief (Dkt. No. 12), at 5 (citing In 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 to the fact that the the position taken by the SEC in its brief is one that it has not previously articulated in any form prior to the filing of a court-invited amicus brief in that case. See New Times, 371 F.3d at 81. Here, by contrast, the SECs 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 their funds 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 were ultimately routed to bank accounts in Houston, from which funds were diverted to the various 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 control over the proceeds of CD sales or the banks financial reporting. Indeed, SIBLs president 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 Ponzi scheme. Martens Third Decl. Ex. 1, at 5-6, Ex. 2, at 8, Ex. 5, at 5; Martens First Decl. Ex. 2, attach. 2, at 5-7, 13, Ex. 2, attach. 4, at 12, 14; see also Janvey, 647 F.3d at 597-98. During the five-year period 2004 through 2008, approximately $628M in investor funds 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 need not 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, 20

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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. See Primeline, 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

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

10

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C.

Procedures And Discovery

This 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. Discovery SIPC 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. 22

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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 is not 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. See Primeline, 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. See supra 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. See supra 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. De novo 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 Procedures Finally, this Court directed briefing on the procedures that should apply in this summary proceeding. Opp. Brief at 10. 11 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: First, the Court should determine the burden of proof (probable cause vs. preponderance of the evidence) that governs this summary proceeding. Second, this matter should presumptively proceed upon affidavits and similar written submissions. See Scanlon, 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 additional evidentiary material they wish the Court to consider in ruling on the Application. Fourth, if after reviewing the written submissions the Court deems further briefing or an evidentiary hearing necessary to a ruling on the Application, the Court can order such 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 in Hughes upon SIPCs application for a protective decree. See 461 F.2d at 981. IV. CONCLUSION

For 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. February 23, 2012

Respectfully submitted, /s/ Matthew T. Martens Matthew T. Martens Chief Litigation Counsel David S. Mendel (D.C. Bar #470796) Assistant Chief Litigation Counsel U.S. Securities and Exchange Commission Enforcement Division 100 F Street, NE Washington, DC 20549 (202) 551-4481 (Martens) (202) 772-9362 (fax) martensm@sec.gov mendeld@sec.gov

Of Counsel: Michael A. Conley Deputy General Counsel, Office of the General Counsel Michael L. Post Senior Litigation Counsel, Office of the General Counsel

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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. (Eugene.assaf@kirkland.com) Edwin John U (Eu@kirkland.com) John OQuinn (John.oquinn@kirkland.com) Kirkland & Ellis LLP 655 Fifteenth Street, N.W. Washington, D.C. 20005 Telephone: (202) 879-5000 /s/ Matthew T. Martens Matthew T. Martens

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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA __________________________________________ ) ) Applicant, ) ) v. ) ) Securities Investor Protection Corporation, ) ) Respondent. ) __________________________________________) Securities and Exchange Commission,

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

THIRD DECLARATION OF MATTHEW T. MARTENS PURSUANT 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 and Exchange 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.

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2.

Attached as Exhibit 1 are true and correct copies of the Direct Testimony of Karyl Van Tassel, filed on December 5, 2011, in In re Stanford Intl Bank, Ltd., Case No. 3:09-cv00721-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, in Ralph 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 testimony by 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.

/s/ Matthew T. Martens Matthew T. Martens

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