R. Allen Stanford's investors didn't lose their money the right way.

That's the securities industry's quixotic stance on whether to grant insurance coverage for U.S. investors who claim they were fleeced by Stanford's brokerage business.

For almost three years, investors caught in the collapse of what regulators say was a $7 billion Ponzi scheme have awaited a decision by the Securities Investor Protection Corp. During that time, the Securities Industry and Financial Markets Association, which represents about 650 brokers nationwide, has been urging SIPC not to pay.

SIPC is an insurance fund backed by member brokerages, and while it isn't designed to cover investment losses, it is supposed to pay if a brokerage collapses from alleged fraud.

Yet the association has steadfastly opposed any payment for Stanford investors. When the Securities and Exchange Commission - after taking more than two years to make a decision - told SIPC this summer to pay up, association general counsel Ira Hammerman wrote to SIPC's board insisting that the SEC was wrong, in part because Stanford's investors shouldn't legally be considered customers.

Stanford brokers urged investors to buy certificates of deposit sold through Stanford's bank in Antigua, but in most cases, investors' money was sent directly to the bank, rather than being held by the brokerage. That, Hammerman argued, means that while investors were brokerage clients, they weren't customers under the narrow definition of the law that created SIPC.

If that sounds bizarre, think how it sounds to the 7,800 of Stanford's 20,000 investors who fall into this category.

The money that investors sent to the bank wasn't used to buy the CDs. Some of it was sent back to the brokerage to help pay compensation and referral fees for the brokers that Stanford was wooing away from other firms in hopes of drawing their clients into the alleged scheme, the SEC found.

At a snail's pace

Despite the SEC's instruction, SIPC dragged its feet. Its board dawdled for three months before even considering the issue, and even then it failed to make a decision. That was in late September.

Although the SEC has the authority to sue SIPC to force it to comply, it hasn't done so yet. Recently, 18 members of Congress - including Rep. John Culberson and Rep. Michael McCaul, both Republicans who represent the Houston area - sent SIPC's chairman a letter threatening congressional hearings if the board doesn't decide by Dec. 15.

That, by the way, is less than a week before Stanford himself is to appear before a federal judge to determine if he's competent to stand trial in January.

Meanwhile, Sen. David Vitter, R-La., has been working with SIPC and the SEC to resolve the coverage issue. His press secretary, Luke Bolar, said Friday that SIPC is expected to make a settlement offer to the SEC this week.

Vitter, however, doesn't know what the offer will entail or how it might affect Stanford investors.

Making a mockery of it

While SIPC was never designed to be a blanket insurance policy against fraud, the handling of coverage in the Stanford case has made a mockery of the entire process. After all, SIPC paid investors for losses in Bernard Madoff's fraud case, and it has rushed in to assume losses in the bankruptcy of the commodities firm MF Global.

As Hammerman himself noted last year, the law's "fundamental purpose is to promote investor confidence in the U.S. capital markets by protecting customers against the loss of cash or securities resulting from the failure of the broker-dealer holding such property."

The industry's legal hair-splitting doesn't instill much confidence in the investing public.

While it is true Stanford's brokerage wasn't actually holding clients' funds or securities when it failed, it appears its brokers used the Antiguan bank like a bagman, a way to keep their fingerprints off their clients' money.

Many have now gone on to work at other SIPC-insured brokerages, which continue to operate under the illusion of investor protection.

How's that for inspiring confidence?

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com. His blog is at http://blogs.chron.com/lorensteffy. Follow him on his Facebook fan page and on Twitter at twitter.com/lsteffy.