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Investors who were deceived into buying nonexisting money market funds can make “claims for securities” through the Securities Investor Protection Corp., a federal appeals court ruled Tuesday. Addressing an issue of first impression, the 2nd U.S. Circuit Court of Appeals said the victimized investors could not be limited to the $100,000 cash advance cap for “claims for cash” in the Securities Investor Protection Act. The ruling in In re: New Times Securities Services Inc. v. Jacobs, 02-6166, addressed what the court characterized as unfair treatment for scores of investors, many of them elderly, who turned to the Securities Investor Protection Corp., after being cheated by William Goren. Goren embezzled more than $32 million in a fraud scheme that earned him 7 1/4 years in prison. The discovery of his fraud led Eastern District of New York Judge Thomas C. Platt to order that New Times Security Services be liquidated under the act and the company’s assets distributed to Goren’s victims. Those victims fell into two categories: those who invested in supposedly safe money market funds and those who invested in mutual funds. In fact, both types were nonexistent. Under the Securities Investor Protection Act, victims may seek compensation from a fund that is fed by fees from broker dealers. Money is disbursed by the corporation or, as in this case, a court-appointed trustee. Trustee James W. Giddens determined that the victims of Goren who had bought the phantom money market funds had submitted “claims for cash,” entitling them to cash advances that were capped at $100,000. Investors in the phantom mutual funds, Giddens ruled, had presented “claims for securities” and were therefore eligible for cash advances as high as $500,000. The money market claimants filed written objections with Judge Platt. He determined that they had, indeed, presented “claims for securities” that would entitle them to the greater cash advance. Platt found that Giddens’ classification wrongly hinged “on the unilateral actions of the fraudfeasor who embezzled his clients’ funds.” The 2nd Circuit was asked to consider the relationship between the Securities Investor Protection Corp., which is a “non-profit, private membership corporation to which most registered brokers and dealers are required to belong” and the Securities and Exchange Commission, which, the U.S. Supreme Court has determined, has “plenary authority” to supervise it. The relationship was important in this case, said Judge Chester J. Straub, because the SEC had offered a different interpretation of the phrase “claim for securities” than that offered by Giddens and the protection agency. Addressing the degree of deference to be afforded the Securities Investor Protection Corp.’s interpretation, Judge Straub said that “while SIPC’s proposed construction of the statute is a relevant part of our analysis — and will certainly inform the level of deference we accord to the SEC’s reading of the statute — it is not an interpretation to which we must necessarily defer.” “We confine our holding to the unique facts of this case where the SEC has offered a competing and more persuasive interpretation of the statute,” Straub said. The statute does not define “claims for cash,” Straub said. He continued: “None of the provisions outlines how the Claimants — who were fraudulently misled to ‘invest’ their money in Goren’s bogus securities — should be treated.” The SEC’s interpretation, he said, “is better tailored to the original aims of SIPA’s drafters” which was to provide a substantial reserve fund to protect customers of broker-dealers and strengthen the financial responsibility of broker-dealers. Moreover, he said, the legislative history supports the SEC’s view that the “dichotomy between ‘claims for cash’ and ‘claims for securities’ in section 9(a)(1) of SIPA … was introduced to ‘distinguish the custodial functions of a broker-dealer with respect to securities from the broker-dealer’s depository-like functions with respect to cash deposits.’” Addressing another issue of first impression, the appeals court determined that the compensation made to the claimants should not include fictitious interest from dividend reinvestments they were ostensibly owed. Judge Rosemary Pooler and Northern District of New York Judge David N. Hurd, sitting by designation, joined in the opinion. James B. Kobak Jr. of Hughes Hubbard & Reed represented the trustee for the Liquidation of New Times Securities Inc. Karen A. Caplan and General Counsel Stephen P. Harbeck appeared for the Securities Investor Protection Corp. Sigmund S. Wissner-Gross and May Orenstein of Heller Horowitz & Feit and Ted A. Berkowitz of Farrel Fritz in Uniondale, N.Y., represented claimants.

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