In early 1996, Fred Brown, a Wytheville, Va., motorcycle dealer, got a call from a broker with Stratton Oakmont Inc., a securities firm specializing in stocks of tiny "micro-cap" companies.

Brown thought the broker sounded sincere, so he sent "a few thousand dollars." The investment made money, so Brown sent more. By August, he had invested about $150,000 and his account showed a balance of $300,000.

But when Brown tried to get his money out, he recalled yesterday at a press conference here, the broker suddenly became hard to reach. He promised to send a check, but didn't. Then, when Brown returned from leading a motorcycle tour in Costa Rica, he learned that Stratton Oakmont was out of business and his account had been traded down to zero.

So, Brown recalled, he turned to the Securities Investor Protection Corp., which insures investors against losses resulting from the failure of stock brokerages -- only to learn that he had no claim because he hadn't complained in writing within 10 days of the unauthorized trades that wiped out his account.

Brown said he had seen the SIPC logo on Stratton Oakmont materials and "I equated that with the [Federal Deposit Insurance Corp., which insures bank deposits]. I assumed it was something like that."

But as hundreds of investors at Stratton Oakmont -- which was shut down by regulators accusing it of fraud -- and a number of other defunct brokerages are finding out, SIPC coverage is much different from the FDIC's, and critics say it can leave the investor unable to obtain a meaningful recovery.

"The whole notion of SIPC `protection' can be a cruel hoax," said Mark Maddox, president of the Public Investors Arbitration Bar Association, attorneys who represent investors in disputes with brokerages.

The press conference was called to urge congressional hearings on SIPC or possibly a study by Congress's General Accounting Office, Maddox argued that SIPC interprets its charter too narrowly, and that the legislation establishing SIPC needs updating. He pointed to figures in SIPC's 1998 annual report showing that of 3,368 claims filed by Stratton Oakmont investors, SIPC made payments to only nine.

"SIPC is being run like a for-profit insurance company," he said.

SIPC disagrees. Its role, according to SIPC General Counsel Stephen P. Harbeck, is to ensure that a brokerage adequately performs its custodial function. That is, if an investor has securities with a brokerage and the brokerage goes under, SIPC will protect the investor if the securities have been lost or improperly disposed of.

"We do something very, very narrow and I think we do it very well," Harbeck said.

He said SIPC's interpretation of its mandate has been repeatedly upheld by the courts, including a case brought by Maddox.

"What Mr. Maddox is seeking is damages for any sort of fraud performed by a brokerage," Harbeck said, and "what that would do is make SIPC and the taxpayers responsible for any fraud on the marketplace."

Some state regulators would like to see Congress do exactly that. Massachusetts Secretary of State William Francis Galvin this spring urged that SIPC insurance be extended "to cover losses suffered by investors due to fraud and abuse."

"SIPC insurance does not insure investors against losses that are caused by broker misconduct," and although those investors can sue or go to arbitration, often the offending brokerage has little left to pay any judgment the investors win, Galvin said.

SIPC is established by federal statute as a private, nongovernmental nonprofit corporation, supported by payments from brokerages. Based here, it currently has 29 employees. Assets at the end of last year were more than $1 billion.

In Maddox's view, the market has changed so much since SIPC's inception in 1970 that its role need to be reexamined.

Officials of the Securities and Exchange Commission, which regulates the nation's markets, "have been paying attention to what SIPC has been doing" but have no plans to propose changes unless the commission is asked to do so by Congress, a spokesman said.

"People have to realize that the [SIPC statute] was a very narrowly crafted law and it has been interpreted narrowly. If people have the idea of changing the meaning, it would be something for Congress to discuss," the spokesman said.

Meanwhile, Brown said he wishes he had known more about both Stratton Oakmont and SIPC. "The person I would blame [for the losses] would be myself," he said, "but, yes, it would be nice to have gotten more information."

SIPC

Established: 1970

Location: 15th Street NW

Mission: Securities Investor Protection Corp., a nonprofit organization separate from the government, was created to protect customers of brokers and dealers registered with the U.S. Securities and Exchange Commission. It protects against losses caused by financial failure of the broker (but not those caused by change in market values).

Funding: Comes from member brokers and dealers, who should display the SIPC logo (shown above).

How the protection works: If a member fails financially, SIPC may ask a federal court to appoint a trustee to liquidate the firm and protect its customers, or the SIPC may protect the customers itself. Customers of a failed firm receive all securities registered in their names. They also get, on a pro rata basis, all remaining customer cash and securities held by the firm. After this distribution, SIPC's fund can cover the remaining claims of each customer up to a maximum of $500,000 (including up to $100,000 on claims for cash).

For more information: See SIPC's Web site at www.sipc.org.

SOURCE: Securities Investor Protection Corp.