 United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT



Argued October 16, 2013                  Decided July 18, 2014

                         No. 12-5286

          SECURITIES AND EXCHANGE COMMISSION,
                       APPELLANT

                               v.

     SECURITIES INVESTOR PROTECTION CORPORATION,
                       APPELLEE


         Appeal from the United States District Court
                 for the District of Columbia
                     (No. 1:11-mc-00678)


     John W. Avery, Deputy Solicitor, Securities and Exchange
Commission, argued the cause for appellant. With him on the
briefs were Michael A. Conley, Deputy General Counsel, Jacob
H. Stillman, Solicitor, Tracey A. Hardin, Assistant General
Counsel, and Michael L. Post, Senior Litigation Counsel.

     Robertson Park, John Heffner, and Mark J. Andrews were
on the brief for amici curiae Stanford Victims Coalition, et al.
in support of petitioner.

    Michael W. McConnell argued the cause for appellee. With
him on the brief were Eugene F. Assaf, Edwin J. U, John C.
O'Quinn, Elizabeth M. Locke, and Josephine Wang.
                                2

    Thomas J. Moloney, David Y. Livshiz, Darryl G. Stein, and
Sarah E. Edwards were on the brief for amicus curiae Securities
Industry and Financial Markets Association in support of
appellee.

     Steven P. Lehotsky, Joshua S. Press, and Noah Levine were
on the brief for amici curiae former SEC officials and professors
of law in support of appellee.

    Steuart Thomsen was on the brief for amicus curiae
Financial Services Institute, Inc. in support of appellee.

    Before: GARLAND, Chief Judge, SRINIVASAN, Circuit
Judge, and SENTELLE, Senior Circuit Judge.

    Opinion for the Court filed by Circuit Judge SRINIVASAN.

     SRINIVASAN, Circuit Judge: When a brokerage firm faces
insolvency, the cash and securities it holds for its customers can
become ensnared in bankruptcy liquidation proceedings or
otherwise be put at risk. Congress established the Securities
Investor Protection Corporation (SIPC) to protect investors’
assets held on deposit by financially distressed brokerage firms.
SIPC can initiate its own liquidation proceedings with the aim
of securing the return of customers’ property held by the
brokerage. SIPC, however, possesses authority to undertake
those protective measures only with respect to member
brokerage firms. Its authority does not extend to non-member
institutions.

     In this case, the Securities and Exchange Commission seeks
a court order compelling SIPC to liquidate a member broker-
dealer, Stanford Group Company (SGC). SGC played an
integral role in a multibillion-dollar financial fraud carried out
through a web of companies. SGC’s financial advisors
                               3

counseled investors to purchase certificates of deposit from an
Antiguan bank that was part of the same corporate family. The
Antiguan bank’s CDs eventually became worthless. The
massive Stanford fraud spawned a variety of legal actions in a
number of arenas, the bulk of which are not at issue here. This
case involves the authority of a specific entity—SIPC—to take
measures within its own statutorily bounded sphere. As to that
issue, because the Antiguan bank, unlike SGC, was not a SIPC
member, SIPC had no ability to initiate measures directly
against the bank to protect the property of investors who
purchased the bank’s CDs.

     The question in this case is whether SIPC can instead be
ordered to proceed against SGC—rather than the Antiguan
bank—to protect the CD investors’ property. It is common
ground that SIPC can be compelled to do so only if those
investors qualify as “customers” of SGC within the meaning of
the governing statute. SIPC concluded that they do not, and the
district court agreed. The court reasoned that the investors
obtained the Antiguan bank’s CDs by depositing funds with the
bank itself, not with SGC, and they thus cannot be considered
customers of the latter. We agree that the CD investors do not
qualify as customers of SGC under the operative statutory
definition. We therefore affirm the denial of the application to
order SIPC to liquidate SGC.

                               I.

                              A.

     In 1970, Congress enacted the Securities Investor
Protection Act (the Act or SIPA) in response to the “failure or
instability of a significant number of brokerage firms.” Sec.
Investor Prot. Corp. v. Barbour, 421 U.S. 412, 415 (1975).
Before the Act, customers of a brokerage firm that fell into
                                4

insolvency often “found their cash and securities on deposit
either dissipated or tied up in lengthy bankruptcy proceedings.”
Id. The Act created SIPC, a nonprofit, private membership
corporation established “for the purpose, inter alia, of providing
financial relief to the customers of failing broker-dealers with
whom they had left cash or securities on deposit.” Id. at 413;
see 15 U.S.C. § 78ccc(a)(1). Congress required most registered
U.S. broker-dealers to become members of SIPC and to pay
assessments used to fund SIPC’s investor protection measures.
See 15 U.S.C. §§ 78ccc(a)(2)(A), 78ddd(c).

     The Act requires the SEC and various industry self-
regulatory organizations to notify SIPC upon learning that a
SIPC-member firm “is in or is approaching financial difficulty.”
15 U.S.C. § 78eee(a)(1). SIPC may file an action for a
protective decree in federal district court after determining,
among other things, that the member firm “has failed or is in
danger of failing to meet its obligations to customers.” 15
U.S.C. § 78eee(a)(3)(A). If the court grants SIPC’s application,
the court must appoint a trustee and order the proceedings
removed to bankruptcy court. 15 U.S.C. § 78eee(b)(3), (4).
The trustee then oversees the liquidation of the member firm,
returning any customer cash and securities on deposit with the
broker. 15 U.S.C. § 78fff. If the insolvent broker’s funds prove
inadequate to pay all customer claims, SIPC itself must cover
any shortfalls up to statutory limits. 15 U.S.C. § 78fff-3.

     The Act gives the SEC “plenary authority to supervise . . .
SIPC” in its implementation of the statute. Barbour, 421 U.S.
at 417 (internal quotation marks omitted). For instance, the
SEC “may disapprove in whole or in part any bylaw or rule
adopted by the Board of Directors of . . . SIPC, or require the
adoption of any rule it deems appropriate.” Id. (citing 15 U.S.C.
§ 78ccc(e)). The SEC may also “participate in any liquidation
proceeding initiated by . . . SIPC.” Id. Of particular relevance
                                  5

here, if SIPC declines to initiate the liquidation of a member
firm, the SEC can apply to the district court for an order
requiring SIPC to commence liquidation. See 15 U.S.C.
§ 78ggg(b). This case marks the SEC’s first effort to invoke its
authority under § 78ggg(b) to compel SIPC to initiate
liquidation proceedings against a member brokerage.

     For the district court to issue such an order, the SEC must
show that SIPC has failed to “act for the protection” of the
member firm’s “customers.” Id. The statutory term “customer”
encompasses persons for whom the member firm holds
securities or cash on deposit. The Act states that the “term
‘customer’ of a debtor means any person . . . who has a claim on
account of securities received, acquired, or held by the debtor
in the ordinary course of its business as a broker or dealer from
or for the securities accounts of such person for safekeeping,
with a view to sale, to cover consummated sales, pursuant to
purchases, as collateral, security, or for purposes of effecting
transfer.” 15 U.S.C. § 78lll(2)(A). The Act further explains
that the term “customer” includes “any person who has
deposited cash with the debtor for the purpose of purchasing
securities.” 15 U.S.C. § 78lll(2)(B)(i). The Act thereby
includes within the definition of “customer” those persons for
whom the member firm holds cash or securities on deposit for
the customer’s use. Significantly, however, the Act specifically
excludes persons who give cash or securities to the member
firm for the firm’s use as part of the firm’s capital (e.g., as a
loan to the member firm): “The term ‘customer’ does not
include any person, to the extent that . . . such person has a
claim for cash or securities which . . . is part of the capital of the
debtor.” 15 U.S.C. § 78lll(2)(C).
                                6

                                B.

      This case arises out of a massive financial fraud perpetrated
by Robert Allen Stanford. As described by the SEC, Stanford
conducted a “Ponzi scheme,” selling certificates of deposit to
investors but then misappropriating billions of dollars in
deposited funds to repay earlier investors and finance a lavish
lifestyle. See generally Chadbourne & Parke LLP v. Troice,
134 S. Ct. 1058, 1064-65 (2014).

     Stanford employed a complex web of companies he owned
or controlled to carry out the fraudulent enterprise. Two entities
are primarily at issue here: (i) Stanford International Bank, Ltd.
(SIBL), a bank organized under Antiguan law, and (ii) Stanford
Group Company (SGC), a Houston-based broker-dealer
registered with the SEC. SIBL sold certificates of deposit,
“debt assets that promised a fixed rate of return.” Chadbourne,
134 S. Ct. at 1064 (internal quotation marks omitted). SGC
employees actively promoted the SIBL CDs to investors. SGC
was a member of SIPC, while SIBL was not.

     The parties stipulated to certain facts concerning the sales
of SIBL CDs. To purchase a CD, “an investor had to open an
account with SIBL. CD investors wrote checks that were
deposited into SIBL accounts and/or filled out or authorized
wire transfer requests asking that money be wired to SIBL for
the purpose of opening their accounts at SIBL and purchasing
CDs.” J.A. 952. “Most . . . investors either received the
physical CD certificates or had them held by an authorized
designee.” J.A. 953. SGC, for its part, did not itself hold CD
certificates for investors. “To the extent that some SIBL CD
investors did not receive the physical certificates, the SEC is not
relying on that fact to support its claims in this proceeding.” Id.
CD investors “received periodic statements from SIBL
reflecting the balances in their SIBL accounts.” Id.
                                7

     Disclosure statements for SIBL CDs sold in the United
States stated that “SIBL’s products are not subject to the
reporting requirements of any jurisdiction, nor are they covered
by the investor protection or securities insurance laws of any
jurisdiction such as the U.S. Securities Investor Protection
Insurance [sic] Corporation.” Id. A version of the CD
marketing brochure reiterated that the CDs were not covered by
U.S. investor protection laws, and further stated that there was
“no guarantee investors will receive interest distributions or the
return of their principal.” Id. Despite those written warnings,
some investors report being told by SGC representatives that the
SIBL CDs were covered by U.S. investor protection laws,
including the Act.

     Stanford’s extensive financial fraud was met with a variety
of legal responses. In 2009, the SEC filed a civil enforcement
action in federal district court against Stanford, SGC, SIBL, and
others. The court appointed a receiver for SGC and other
entities. The receiver determined that SIBL CDs worth
approximately $7.2 billion were outstanding worldwide as of
February 2009. The SEC ultimately prevailed, and the court
imposed a civil penalty of $6 billion. See Chadbourne, 134 S.
Ct. at 1064-65. Stanford himself was convicted in 2012 of
conspiracy, wire fraud, mail fraud, obstruction of justice, and
money laundering. He was sentenced to 110 years of
imprisonment and ordered to forfeit approximately $6 billion.
Id. at 1064, 1070. Antiguan authorities separately initiated
proceedings to liquidate SIBL and process claims against the
bank. SIBL CD investors also brought class action lawsuits
against law firms, investment advisors, and other entities that
allegedly assisted Stanford in perpetrating the fraud. See
Chadbourne, 134 S. Ct. at 1062, 1065 (finding that four such
class action suits were not barred by federal securities statutes
and could proceed).
                                8

                               C.

     This case involves the prospect of a distinct response to the
Stanford fraud: an action by SIPC to liquidate SGC. In August
2009, the court-appointed receiver in the SEC’s civil
enforcement action asked SIPC to determine whether it would
liquidate SGC in order to protect the assets of investors who had
purchased SIBL CDs at the suggestion of SGC employees.
SIPC responded that it found no basis under the Act to initiate
a liquidation of SGC. In SIPC’s view, the CD investors were
not SGC “customers” within the meaning of the Act, a
precondition to liquidation of SGC. SIPC explained that the
Act “protects the ‘custody’ function that brokerage firms
perform for customers.” J.A. 158. Here, SIPC concluded, the
circumstances fell outside the Act’s custody function because
SGC itself never held investors’ cash or securities in connection
with their purchase of the CDs. Rather, “cash for the purpose
of purchasing CDs . . . was sent to SIBL, which is precisely
what the customer intended.” J.A. 160. As for the “physical
CDs,” they presumably “were issued to, and delivered to” the
investors, and SGC did not “maintain[] possession or control of
the CDs.” J.A. 159-60. In short, “SGC is not, nor should it be,
holding anything for . . . a customer.” J.A. 160. “The fact that
the security has gone down in value, even because of a fraud in
which SGC is complicit,” SIPC added, “does not change that
result.” J.A. 160. Because the CD investors failed to qualify as
“customers” of SGC within the meaning of the Act, SIPC
concluded, the investors were ineligible for liquidation
protection.

     Two years later, the SEC reached the opposite conclusion.
In June 2011, the Commission issued a formal analysis stating
that investors who had purchased SIBL CDs at the urging of
SGC employees qualified as SGC “customers” under the Act.
Citing evidence that Stanford had “structured the various
                                  9

entities in his financial empire . . . for the principal, if not sole,
purpose of carrying out a single fraudulent Ponzi scheme,” the
Commission determined that the “separate existence” of SIBL
and SGC “should be disregarded.” J.A. 242. The Commission
also cited evidence that investors might have believed that they
were depositing cash with SGC when they purchased their SIBL
CDs, and that some SIBL CD deposits were diverted to pay
SGC’s expenses. “Based on the totality of the facts and
circumstances,” the SEC concluded, “investors with brokerage
accounts at SGC who purchased SIBL CDs through SGC should
be deemed to have deposited cash with SGC for purposes of
SIPA coverage.” J.A. 244. SIPC remained unpersuaded by the
SEC’s analysis, however, and declined to initiate a liquidation
proceeding.

     The SEC then filed an application with the district court
under 15 U.S.C. § 78ggg(b), seeking an order compelling SIPC
to commence liquidation proceedings for SGC. The court
addressed several preliminary questions in a February 2012
decision. See SEC v. Sec. Investor Prot. Corp., 842 F. Supp. 2d
321 (D.D.C. 2012). The court held that § 78ggg(b) required the
court to evaluate de novo whether there were SGC “customers”
in need of protection, rather than simply accepting the SEC’s
views without judicial review. Id. at 328-29. The court further
held that § 78ggg(b) mandated a “summary proceeding,” not the
“full, formal procedures of the Federal Rules of Civil
Procedure.” Id. at 327. The court ordered supplemental
briefing on the appropriate “procedures, burdens, and
discovery” in the circumstances. Id. at 329.

    In a second opinion, the district court denied the SEC’s
application on the merits. See SEC v. Sec. Investor Prot. Corp.,
872 F. Supp. 2d 1 (D.D.C. 2012). The court adopted SIPC’s
view that SIBL CD investors fail to qualify as SGC “customers”
within the meaning of the statute because CD investors never
                               10

directly deposited funds or securities with SGC itself. Id. at 8.
The court distinguished cases in which a broker had
misappropriated funds without completing the promised
securities purchase. Here, by contrast, the court reasoned, the
“SIBL CDs were in fact purchased and did in fact exist for the
SGC clients.” Id. at 11. The court also adopted SIPC’s view
that a preponderance-of-the-evidence standard applies in
§ 78ggg(b) proceedings, id. at 5, but it concluded that the
evidentiary standard ultimately did not matter because the case
turned on “uncontested facts and an interpretation of law,” id.
at 12.

                               II.

      The SEC appeals the denial of its application under
§ 78ggg(b) to order SIPC to commence liquidation of SGC.
That provision comes into play only if SIPC has failed to “act
for the protection of [SGC] customers.” 15 U.S.C. § 78ggg(b)
(emphasis added); see also 15 U.S.C. § 78eee(a)(3)(A)
(authorizing SIPC to file an application to liquidate only if it
determines that the member broker “has failed or is in danger of
failing to meet its obligations to customers” (emphasis added)).
The central issue in this appeal is whether investors who
purchased SIBL CDs at the suggestion of SGC employees
qualify as SGC “customers” under the Act.

     Because the district court rested its decision on uncontested
facts and an interpretation of law, we review that decision de
novo. See In re New Times Sec. Servs., Inc. (New Times I), 371
F.3d 68, 75 (2d Cir. 2004); Gordon v. Holder, 632 F.3d 722,
724 (D.C. Cir. 2011). We do not reach the question of the
appropriate evidentiary burden, as we resolve the case based on
the stipulated facts. We conclude, in agreement with the district
court, that SIBL CD investors are not SGC “customers” within
the meaning of the Act.
                               11

                               A.

     The “principal purpose of SIPA is to protect investors
against financial losses arising from the insolvency of their
brokers.” In re New Times Sec. Servs., Inc. (New Times II), 463
F.3d 125, 127 (2d Cir. 2006) (internal quotation marks omitted).
Before SIPA, when a brokerage firm failed, customer funds and
securities held on deposit with the brokerage often became
depleted or enmeshed in bankruptcy proceedings. See Barbour,
421 U.S. at 415. The Act addresses that issue by protecting the
custody function of brokers, i.e., by “protect[ing] customer
interests in securities and cash left with broker-dealers.” Louis
Loss & Joel Seligman, Securities Regulation § 8.B.5.A, at 3290
(3d ed. 2003) (citing legislative history). SIPA thus aims “to
protect securities investors against losses resulting from the
failure of an insolvent or otherwise failed broker-dealer to
properly perform its role as the custodian of customer cash and
securities.” 1 Collier on Bankruptcy ¶ 12.01, at 12-4 (16th ed.
2014).

     The Act generally affords no protection against other types
of losses, such as those stemming from a decline in investment
value. That is so even if a broker fraudulently induced the
losing investment in the first place. Consequently, “if a broker
used fraudulent means to convince a customer to purchase a
stock and the customer left that stock with the broker, who
subsequently became insolvent, SIPC would be required by
SIPA only to return the stock to the customer.” Sec. Investor
Prot. Corp. v. Vigman, 803 F.2d 1513, 1517 n.1 (9th Cir. 1986).
In that fashion, the statute “‘works to expose the customer to the
same risks and rewards that would be enjoyed had there been no
liquidation.’” New Times II, 463 F.3d at 128 (quoting 6 Collier
on Bankruptcy ¶ 741.06[6] (15th ed. rev.)). Investors who
suffer losses in investment value resulting from fraud may have
claims under other provisions of the securities laws. See
                                 12

Vigman, 803 F.2d at 1517 n.1. SIPA, however, is centrally
addressed to a broker’s custody function.

     SIPA’s definition of “customer” embodies the Act’s focus
on a broker’s role as custodian of its customers’ property. SIPA
defines “customer” as

     any person . . . who has a claim on account of
     securities received, acquired, or held by the debtor in
     the ordinary course of its business as a broker or
     dealer from or for the securities accounts of such
     person for safekeeping, with a view to sale, to cover
     consummated sales, pursuant to purchases, as
     collateral, security, or for purposes of effecting
     transfer.

15 U.S.C. § 78lll(2)(A). The Act further provides that a
“customer” includes “any person who has deposited cash with
the debtor for the purpose of purchasing securities.” 15 U.S.C.
§ 78lll(2)(B)(i). The “‘critical aspect of the “customer”
definition is the entrustment of cash or securities to the broker-
dealer for the purposes of trading securities.’” In re Bernard L.
Madoff Inv. Sec. LLC, 654 F.3d 229, 236 (2d Cir. 2011)
(emphasis omitted) (quoting Appleton v. First Nat’l Bank of
Ohio, 62 F.3d 791, 801 (6th Cir. 1995)); see In re Brentwood
Sec., Inc., 925 F.2d 325, 327 (9th Cir. 1991) (“[The ‘customer’]
definition embodies a common-sense concept: An investor is
entitled to compensation from the SIPC only if he has entrusted
cash or securities to a broker-dealer who becomes insolvent.”).
To come within the fold of SIPA’s protections, an investor thus
ordinarily must demonstrate both that the broker “actually . . .
received, acquired or held the claimant’s property, and that the
transaction giving rise to the claim . . . contain[ed] the indicia of
a fiduciary relationship” between the investor and the broker. 1
Collier on Bankruptcy ¶ 12.12[2], at 12-50. An investor’s
                                13

“customer” status is evaluated on an asset-by-asset basis and
may change over time. See New Times II, 463 F.3d at 130.

     Here, insofar as the analysis focuses on the entity that in
fact held custody over the property of the SIBL CD investors,
the investors fail to qualify as “customers” of SGC under the
statutory definition. That is because SGC never “received,
acquired, or held” the investors’ cash or securities. 15 U.S.C.
§ 78lll(2)(A); see 15 U.S.C. § 78lll(2)(B)(i). With regard to the
investors’ cash, it is undisputed that investors at no time
deposited funds with SGC to purchase the SIBL CDs. The
funds instead went to SIBL. Under the stipulated facts,
investors either “wrote checks that were deposited into SIBL
accounts and/or filled out or authorized wire transfer requests
asking that money be wired to SIBL for the purpose of opening
their accounts at SIBL and purchasing CDs.” J.A. 952. With
respect to the investors’ securities, the SEC makes no contention
that SGC held the CD certificates for investors. Rather, the
stipulated facts provide that most “investors either received the
physical CD certificates or had them held by an authorized
designee.” J.A. 953. And “[t]o the extent that some SIBL CD
investors did not receive the physical certificates, the SEC is not
relying on that fact to support its claims in this proceeding.” Id.
Because SGC had no custody over the investors’ cash or
securities, the investors do not qualify as SGC “customers”
under the ordinary operation of the statutory definition.

                                B.

     The Commission’s principal response is that we should
disregard the legal separateness of SGC and SIBL and treat them
as a combined entity. According to the Commission, the
companies operated in a highly interconnected fashion in
furtherance of the fraudulent Ponzi scheme, eschewing corporate
formalities. As a result, the Commission contends, investors
                              14

who deposited funds with SIBL for the purchase of CDs in
effect deposited funds with SGC. In the Commission’s view,
the investors thus qualify as “customers” of a SIPC-member
firm for purposes of triggering the Act’s protections. We
conclude, however, that even if SGC and SIBL were treated as
a combined entity, investors still would not qualify as
“customers” of a SIPC-member firm.

     The Commission grounds its argument for disregarding the
corporate separateness of SIBL and SGC in the doctrine of
“substantive consolidation,” an equitable doctrine typically
applied in bankruptcy proceedings. “In general, substantive
consolidation results in the combination of the assets of [two]
debtors into a single pool from which the claims of creditors of
both debtors are satisfied ratably.” 2 Collier on Bankruptcy
¶ 105.09[3], at 105-110–11; see In re Auto-Train Corp., 810
F.2d 270, 276 (D.C. Cir. 1987). Courts have employed a
“variety” of tests when assessing whether to grant substantive
consolidation. 2 Collier on Bankruptcy ¶ 105.09[2][a], at 105-
96; e.g., In re Owens Corning, 419 F.3d 195, 210-11 (3d Cir.
2005). With regard to the Stanford companies, the court
overseeing the receivership in connection with the SEC’s civil
enforcement action concluded that substantive consolidation was
warranted.

      The doctrine of substantive consolidation has been applied
in SIPA liquidations. In New Times I, for instance, the
bankruptcy court substantively consolidated a SIPC-member
broker undergoing liquidation with a related, non-broker entity.
371 F.3d at 73. The assets of the related entity were brought
into the SIPC member’s liquidation estate, enlarging the
available pool for customer recovery. Id. Investors with cash
on deposit with the non-broker entity were treated as
“customers” in the liquidation, even though the member broker
itself never held those investors’ funds. Id. Here, the SEC
                                 15

contends, substantive consolidation of SIBL and SGC would
similarly mean that investors who deposited funds with a non-
SIPC member (SIBL) would be treated as “customers” of a
SIPC member (SGC) for purposes of invoking the Act’s
protections.

      Even if we were to consolidate, however, SIBL CD
investors would not be “customers” of a SIPC-member entity
under the statutory definition. The Act specifically excludes
from “customer” status “any person, to the extent that . . . such
person has a claim for cash or securities which by contract,
agreement, or understanding, or by operation of law, is part of
the capital of the debtor.” 15 U.S.C. § 78lll(2)(C), (C)(ii)
(emphasis added). We, like other courts, understand that
provision to establish that “a claimant cannot qualify for
customer status under SIPA to the extent that he or she is a
lender rather than an investor.” 1 Collier on Bankruptcy ¶
12.12[4][a], at 12-56 (collecting cases). As the Eleventh Circuit
has explained, “[c]ash that is simply lent to the brokerage cannot
form the basis of a SIPA customer claim because the statute’s
definition of ‘customer’ excludes individuals whose claims are
for ‘cash . . . which . . . is part of the capital of the debtor.’” In
re Old Naples Sec., Inc., 223 F.3d 1296, 1304 n.18 (11th Cir.
2000) (ellipses in original) (quoting 15 U.S.C. § 78lll(2)(B)
(2000), now codified at 15 U.S.C. § 78lll(2)(C)(ii) (2012)). In
other words, “individuals must have a fiduciary relationship,
rather than a creditor-debtor arrangement, with their brokerage
to state a claim under SIPA.” Id.; accord In re Primeline Sec.
Corp., 295 F.3d 1100, 1110 (10th Cir. 2002). The upshot is that
a “person is excluded from eligibility for customer protection to
the extent that person invests in the SIPA debtor by making a
loan to the debtor, rather than investing through the SIPA debtor
in the securities market as part of the debtor’s ordinary course of
business as a broker-dealer.” 1 Collier on Bankruptcy
¶ 12.12[4][a], at 12-56–57 (emphasis added).
                               16

      Here, investors who purchased SIBL CDs lent funds to
SIBL that became part of SIBL’s capital: Those investors gave
cash to SIBL in exchange for a promise to be repaid with a fixed
rate of return. See Chadbourne, 134 S. Ct. at 1064 (SIBL CDs
“were debt assets that promised a fixed rate of return”) (internal
quotation marks omitted). The investors invested “in,” not
“through,” SIBL. 1 Collier on Bankruptcy ¶ 12.12[4][a], at
12-56. The basic nature of those investors’ relationship with the
recipient of their cash would not change if the recipient were
deemed to be a consolidated entity rather than SIBL alone.
Under a consolidated view, investors who purchased SIBL CDs
lent money to the consolidated SIBL/SGC entity, forming a
“creditor-debtor arrangement.” Old Naples, 223 F.3d at 1304
n.18. The CD proceeds thus became part of the consolidated
entity’s “capital,” triggering the statutory exclusion from
“customer” status for lenders. 15 U.S.C. § 78lll(2)(C)(ii).

      The circumstances are directly analogous to those in New
Times II. In that case, SIPC had liquidated a member brokerage
firm, New Times Securities Services, Inc. (New Times), whose
principal had defrauded investors. See New Times II, 463 F.3d
at 126-27; New Times I, 371 F.3d at 71-72. A related, non-
SIPC-member entity, New Age Financial Services, Inc. (New
Age), was brought into the liquidation through substantive
consolidation. See New Times I, 371 F.3d at 73. The issue in
New Times II was whether individuals who had been defrauded
into investing in “promissory notes” issued by New Times and
New Age could recover as “customers” in the liquidation. See
New Times II, 463 F.3d at 126-27. The Second Circuit held that
they could not. Id. at 127-30. The court explained that the Act’s
“customer” definition “distinguishes between (i) claimants
(protected as customers) who are engaged through brokers in
trading activities in the securities markets and (ii) those
(unprotected) claimants who are relying on the ability of a
business enterprise to repay a loan.” Id. at 128 (citing 15 U.S.C.
                                17

§ 78lll(2)(C)(ii)). The New Times and New Age promissory
notes were “just the type of debt instruments whose possession
brings claimants within the category of unprotected lenders,”
even under a consolidated view. Id. at 129. Here, the SIBL CDs
likewise are “just the type of debt instruments whose possession
brings claimants within the category of unprotected lenders.”
Id. Section 78lll(2)(C)(ii) therefore excludes SIBL CD holders
from “customer” status, even assuming SGC and SIBL should
be substantively consolidated.

      The SEC does not dispute that funds loaned to an entity
generally become part of the entity’s “capital” within the
meaning of § 78lll(2)(C)(ii). The SEC instead contends that the
§ 78lll(2)(C)(ii) exclusion is “inapplicable where, as here, the
claimants did not intend to loan money to the broker-dealer.”
Pet’r’s Br. 49-50 n.20. According to the SEC, because investors
intended to loan money to SIBL—not SGC—the CD proceeds
could not become part of SGC’s “capital” even if they became
part of SIBL’s. But if SGC and SIBL are consolidated, investors
did intend to loan money to the consolidated entity. That
intention puts this case in alignment with New Times II.

      That intention also sets this case materially apart from the
decisions on which the SEC relies, Primeline, 295 F.3d 1100,
Old Naples, 223 F.3d 1296, and In re C.J. Wright & Co. Inc.,
162 B.R. 597 (Bankr. M.D. Fla. 1993). In each of those cases,
the investors had no intention to loan their funds to any affiliated
entity that might be considered consolidated with the SIPC-
member firm. Instead, the individuals sought to invest cash to
obtain debt instruments issued by an unrelated third party. See
Primeline, 295 F.3d at 1104, 1110; Old Naples, 223 F.3d at
1300-01, 1304-05; C.J. Wright, 162 B.R. at 606. The investors
sought to invest “through” the consolidated entity, not “in” the
consolidated entity. 1 Collier on Bankruptcy ¶ 12.12[4][a], at
12-56. The investors’ funds therefore could not be considered
                               18

“part of the capital” of any consolidated entity for purposes of
§ 78lll(2)(C)(ii): The consolidated entity would hold the funds,
in a strictly custodial capacity, for investment in a security
issued by a third party. The opposite is true here: The
consolidated entity—SIBL and SGC—held the funds in a
non-custodial capacity, i.e., as part of its capital.

      Indeed, the § 78lll(2)(C)(ii) exclusion specifically
encompasses deposits that become “part of the capital” of a
SIPC-member firm “by operation of law.” It is undisputed that
SIBL CD proceeds were “part of the capital” of SIBL. Under the
SEC’s view, those proceeds effectively also became part of SGC
under the legal doctrine of substantive consolidation. But if so,
the “capital” of SIBL would become “part of the capital” of
SGC “by operation of law,” placing the CD proceeds squarely
within the ambit of § 78lll(2)(C)(ii). Because we believe the
SEC’s contrary understanding of the Act’s definition of
“customer” cannot be squared with the § 78lll(2)(C)(ii)
exclusion, we need not address whether, as the SEC contends,
its formal analysis letter should be accorded Chevron deference.

      The SEC makes one additional argument in contending that
the § 78lll(2)(C)(ii) exclusion should not apply here. The
agency asserts—for the first time in its reply brief, and with no
further elaboration—that “funds given to a consolidated entity
in exchange for SIBL CDs should not become part of that
entity’s capital because the SIBL CDs were merely participatory
interests in a Ponzi scheme.” Pet’r’s Reply Br. 16. The SEC
made no such contention in its formal analysis letter, and we
therefore need not consider whether the argument would amount
to a reasonable construction of the statute for Chevron purposes.
Considering the argument without any overlay of deference, we
find it unpersuasive. The SEC offers no explanation why
investment proceeds that would otherwise become part of the
issuing entity’s “capital” lose that characteristic if the
                              19

investment is induced by fraud as part of a Ponzi scheme. Nor
are we aware of any legal support for that proposition. To the
contrary, any such conclusion would be inconsistent with New
Times II. There, the Second Circuit held that purchasers of
promissory notes from a consolidated entity were “unprotected
lenders” to the entity—rather than “customers” of the
entity—even though the investment was “fraudulently induced.”
463 F.3d at 129; see id. at 126 (investors were “issued
fraudulent promissory notes”). There is no reason to reach a
different conclusion here.

                              C.

      The SEC raises a fallback argument in the event we reject
its effort to treat SGC and SIBL as one consolidated entity.
According to the SEC, regardless of whether the companies are
consolidated, investors who gave cash to SIBL for CDs should
be deemed to have deposited cash with SGC under the approach
set forth in Old Naples and Primeline. Those decisions,
however, do not support concluding that the CD investors may
be considered “customers” of SGC. The decisions instead
reinforce our conclusion that the capital exclusion in
§ 78lll(2)(C)(ii) precludes finding the Act’s “customer”
definition satisfied here.

      In Old Naples, the Eleventh Circuit considered another
financial fraud involving both a SIPC-member broker and a non-
SIPC-member entity. 223 F.3d at 1299-1300. Investors
received instructions to send money to both entities with the
understanding that the broker would then purchase bonds in the
investors’ names. Id. at 1301. Instead of buying the bonds, the
owner of the entities misappropriated investor funds for his
personal use and for payment of the brokerage firm’s expenses.
Id. at 1300. The Eleventh Circuit held that investors who had
sent money to the non-SIPC-member entity could recover in the
                                20

liquidation as “customers” even though they had never deposited
funds with the SIPC-member broker itself. Id. at 1302-06. The
court found that customer status “does not . . . depend simply on
to whom the claimant handed her cash or made her check
payable.” Id. at 1302. Instead, “[i]f an investor intended to have
the brokerage purchase securities on her behalf and reasonably
followed the broker’s instructions regarding payment, she can be
considered a ‘customer’ under SIPA if the brokerage or its
agents then misappropriate the funds.” Id. at 1303. Investors
who had sent funds to the non-SIPC-member entity qualified as
“customers” under the Act because they “had no reason to know
that they were not dealing with” the SIPC-member broker and
because the broker had “acquired control over all of” the
deposited funds. Id. at 1303-04 (internal quotation marks
omitted).

      The Tenth Circuit’s decision in Primeline is to the same
effect. There, an employee of a SIPC-member firm operated a
Ponzi scheme involving the sale to investors of “debentures in
fictitious corporations.” 295 F.3d at 1104 (internal quotation
marks omitted). At the employee’s direction, investors made
out checks to third-party accounts—not to the brokerage firm
itself—from which the employee misappropriated investor
funds. Id. Citing Old Naples, the Tenth Circuit reiterated the
principle that, “[i]f a claimant intended to have the brokerage
purchase securities on the claimant’s behalf and reasonably
followed the broker’s instructions regarding payment, the
claimant is a ‘customer’ under SIPA even if the brokerage or its
agents misappropriate the funds.” Id. at 1107. The court
affirmed the bankruptcy court’s finding that investors had
“reasonably thought” that the employee was “acting as an agent
of [the broker] when he directed them to make out their checks
to one of his third-party companies.” Id. (internal quotation
marks omitted). As a result, the court held, those investors were
entitled to recover as “customers” in the liquidation. Id. at 1109.
                                21

      Here, the SEC points to facts that “could have led SGC
account holders who purchased SIBL CDs through SGC to
believe they were depositing cash with SGC for the purpose of
purchasing the CDs,” J.A. 243—even though, pursuant to the
stipulated facts, those investors in fact sent their funds directly
to SIBL. The SEC notes that certain SIBL CD investors “had
accounts at SGC, dealt solely with SGC representatives, and
paid for their CDs in accordance with SGC’s instructions.”
Pet’r’s Br. 52. The SEC highlights investor affidavits reporting
that SGC employees blurred the lines between SGC and SIBL,
“frequently refer[ring] simply to ‘Stanford’ without clearly
distinguishing between” the two entities. J.A. 243. In addition,
the SEC observes, certain customers “made checks for the
purchase of the CDs payable to ‘Stanford,’” possibly indicating
“investor confusion regarding the entity with which they were
depositing money.” J.A. 244. Those considerations, in the
SEC’s view, bring this case within the fold of Old Naples and
Primeline for investors who intended to deposit funds with SGC
and reasonably believed they were doing so. As in those cases,
the SEC contends, the fact that the CD investors in fact
deposited cash with SIBL should not stand in the way of
deeming them to have deposited cash with SGC for purposes of
treating them as protected “customers.” SIPC disagrees,
contending, for example, that investors could not reasonably
have believed they were depositing funds with SGC in light of
CD disclosure statements clearly stating that the CDs were
issued by a non-SIPC member.

     We need not resolve that disagreement. Even if certain
SIBL CD investors reasonably believed that they had deposited
cash with SGC, Old Naples and Primeline still would fail to
support concluding that those investors qualify as “customers”
under the Act’s definition. The SEC’s argument disregards a
subsequent inquiry undertaken in both Old Naples and
Primeline: whether the investors intended to deposit their funds
                                22

as a loan so as to trigger the § 78lll(2)(C)(ii) exclusion for funds
that become part of the recipient’s “capital.” In Old Naples,
SIPC argued that the investors failed to qualify as “customers”
because they intended to give a loan to the recipient rather than
to deposit cash for investment on their behalf. See 223 F.3d at
1304. The court rejected that argument, holding that the
investors intended the broker to use the funds to invest in bonds
issued by a third party. Id. at 1304-05. In Primeline, similarly,
SIPC argued that the investors “were lenders rather than
investors” and thus fell outside the “customer” definition by
virtue of the § 78lll(2)(C)(ii) exclusion. 295 F.3d at 1110. The
court disagreed, affirming the bankruptcy court’s finding that
the investors “intended to invest, not loan, the funds each
entrusted to [the broker].” Id.

     This case stands on a markedly different footing. Here, as
explained, the investors who purchased SIBL CDs acted as
lenders. Even assuming those investors reasonably believed
SIBL and SGC were part of a unified Stanford entity, they
deposited their cash with that entity as lenders: in exchange for
a promise of repayment in the form of a CD. Their funds thus
became part of the Stanford entity’s “capital” for purposes of the
§ 78lll(2)(C)(ii) exclusion. Accordingly, even if we adhere to
the approach set forth in Old Naples and Primeline—as the SEC
requests we do—that approach compels concluding that the
investors in SIBL CDs fail to qualify as “customers” under the
Act.

                            * * * * *

     In declining to grant the SEC’s requested relief, the district
court expressed that it was “truly sympathetic to the plight of the
SGC clients who purchased the SIBL CDs and now find
themselves searching desperately for relief.” 872 F. Supp. 2d at
12. We fully agree. But we also agree with the district court’s
                               23

conclusion that SIBL CD investors were not SGC “customers”
under the Act. We therefore affirm the district court’s denial of
the SEC’s application for an order compelling SIPC to
commence liquidation of SGC.

                                                    So ordered.
