SIPC To Pay $31M in Sunpoint Claims

Tuesday, June 20th 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — Late last year, Walter Harrison noticed that his broker at Sunpoint Securities Inc. in its Tyler, Texas, branch had become ``a little bit evasive and not his usual ebullient self.''

``I sensed there was something wrong but I couldn't put my finger on it,'' Harrison, 80, of Mineola, Texas, recalled Monday in a telephone interview.

He was ``stunned'' when Sunpoint closed in November, he said.

The insurance fund that protects investors if their brokerage goes bankrupt has paid a record $31 million to restore stocks and cash to some 9,700 investors nationwide who, like Harrison, allegedly were bilked by Sunpoint.

The Securities Investor Protection Corp. on Tuesday was announcing the payment — its biggest since it was created by Congress in 1970 — to make whole the customers of Sunpoint, which is now bankrupt and defunct.

The accounts of the 9,738 Sunpoint customers in 50 states have been transferred to other brokerage firms. SIPC said it acted so quickly that most of the investors did not need to file claim forms, and most accounts were transferred by the end of last year.

Liquidation proceedings for Sunpoint began last November. SIPC was announcing the payment Tuesday, the final day for filing claims.

Harrison, a retired former owner of several laundromats, has recovered nearly all the assets in his account and said he was satisfied with the process.

He didn't take any chances: he had his account transferred to the nearby office of a national investment firm where his 24-year-old grandson, Will, became his new broker.

Only two of the Sunpoint investors expressed any objections to the manner in which their accounts were transferred, according to SIPC.

The action ``illustrates in vivid terms why it is that SIPC is the investor's first line of defense in the event of brokerage bankruptcy,'' said SIPC President Michael Don. ``The cost of $31 million to SIPC reserves meant that nearly 10,000 individuals had their accounts restored ... without regard to whether the authorities will ever recover the stolen funds'' from Sunpoint.

The small brokerage firm, which was based in Longview, Texas, had its assets frozen by a federal court last November after U.S. regulators alleged that some $25 million was stolen from customers.

In a settlement last month with the Securities and Exchange Commission, Sunpoint's former president and chief executive, Van R. Lewis III, agreed to pay a civil fine to be determined later. Lewis neither admitted to nor denied the SEC's allegations that he violated securities laws.

Washington-based SIPC, with some $1.1 billion in reserves and access to credit lines, is an independent corporation that is funded by the securities industry. Roughly 7,500 brokerage firms each currently pay $150 a year regardless of their size.

SIPC's role is similar to the Federal Deposit Insurance Corp., which insures bank deposits, but SIPC doesn't have the same regulatory powers exercised by the FDIC.

Since it was created by federal law 30 years ago, SIPC has paid $354 million to cover claims by some 440,000 investors in 283 brokerage firm failures.

By law, investors who believe they've been defrauded by a brokerage firm can go to an arbitration panel administered by the National Association of Securities Dealers, the industry's self-regulatory group.

If the investor wins and the brokerage firm is bankrupt, SIPC takes responsibility for the claim.

But it only pays claims for fraud involving stolen money or unauthorized trading by brokers in customers' accounts, not other types of abuse such as making false claims about stocks or refusing to sell them for customers.

``Insurance (against) investment fraud does not exist'' in this country, noted Don.

When a brokerage firm fails and is liquidated, the bankruptcy judge appoints a trustee to oversee the process, including determining whether investors' claims of financial losses are legitimate.

The trustee uses the money from SIPC to buy securities to replenish the investors' accounts, then transfers the accounts to new brokerage firms. The trustee also works with SIPC to try to recover stolen assets from bankrupt brokerage firms.

In the Sunpoint case, the $31 million paid by SIPC covered, in addition to the estimated $25 million stolen from customers, administrative and trustee fees.