SIPC and the Madoff Victims

Joe Nocera’s column in last Saturday’s New York Times about the victims of the Madoff fraud has been weighing on my mind. Nocera passionately defends Irving Picard, the trustee of the Madoff bankruptcy, for refusing to accept the Madoff statements at face value and seeking to claw back any monies that were in excess of what investors put in. The Securities Investor Protection Corp. will only reimburse Madoff investors for up to $500,000, regardless if the money they invested is well in excess of what they took out.

Nocera posits that Picard “almost certainly is not” misreading the law, but in focusing on the legal issue, he can’t see the forest from the trees. Nocera would serve his readers considerably better by asking this question: “Why is SIPC coverage a mere $500,000?”

As I’ve noted before, the SIPC $100,000 maximum limit for stolen cash and $500,000 for stolen securities was set in the 1970s, when investor balances were considerably lower than today. The agency is funded by Wall Street, so it’s hardly a surprise that the powerful brokerage house lobby has been successful in keeping the archaic limits in place. Despite the slew of Ponzi schemes that have surfaced in the past year, there has been nary a peep on Capital Hill to raise SIPC’s insurance maximums to realistic levels.

An investor who has a good reason to believe that his investment returns are bona fide should be made whole if it turns out he or she was a victim of a scam. Ponzi schemes cannot be facilitated without the support or complicity of established banks and brokerage firms. These firms must be held accountable for their duplicitous activities and there is no better way to do that than requiring them to make investors who have been scammed completely whole. If SIPC had to cover all real and fictitious investment losses, Wall Street would be more aggressive policing itself and ferreting out fraudsters like Bernie Madoff.

Indeed, the time has come to require that any manager or firm who accepts investments, including hedge funds, contribute to an insurance fund that would make investors whole in the event of wrongdoing. If such a rule were in place, people who invested with Bernie Madoff through so-called feeder funds would also be eligible for SIPC reimbursement. Sadly, the only potential source of recourse for these investors is to sue the feeder funds, a long and costly process.

Wall Street firms had no shame taking taxpayer money to avert their near financial implosion, which was induced by their own recklessness and wrongdoing. Innocent investors without question are entitled to an industry-funded bailout.

Comments

[Graham and ...:]

Those numbers need to be escalated for intervening inflation. Maybe coverage of $400,000 in cash, and $2 million in securities.

Jul 15 11:03 AM

[OnWallStree...:]

Inflation adjusted from the $500,000 1978 coverage would amount, today, to $1.69 million.

Jul 15 02:24 PM

[RT90012:]

2 issues here: #1 Were account held with Madoff SIPC insured? Is that reflected on client statements?
#2 The SIPC insures for stolen securities and cash. In a fraud, nothing is stolen since the investments (and their "gains") were never made in the first place.

Jul 15 05:56 PM

[OnWallStree...:]

As created by Congress through the SIPA ACT of 1970, SIPC’s mission is to provide adequate insurance to investors in the form of cash or securities. It further provides for refunds in the event of fraud, with the money to be disbursed to victims in a timely manner. Maintaining appropriate balances to ensure all investors can be adequately protected is required through the appropriate levying and collection of fees from all private sector broker dealer members.

There has been a distinct failure to increase the maximum refund amount since 1978 when it was increased from $50,000 to $500,000 per account, that was 1,000% in eight years. That $500,000 adjusted for inflation, today, would be approximately $1.69 million in current dollars. The SIPA also provides for oversight by the Securities and Exchange Commission, which has been largely silent in the wake of the discovery of this fraud.

As for SIPC's legal obligation** to pay the last Madoff statement balance, that's a function of the law, as written, interpreted, and as actually practiced as per "reasonable expectations," wherein it is a bulwark to hold up the integrity of the marketplace FOR ALL ... and a “business trade” since 1970 when the SIPA was passed, wherein the investor permits his securities to be placed in "Street Name," and the broker dealer gets to trade it, hypothecate it, and earn money off of it for its own account and now as an asset of the broker dealer – with earnings totaling assuredly in the 100’s of $billions for the broker dealers since 1970 -- all in exchange for SIPC coverage that INCLUDES reimbursement for "reasonable expectations" as per documented statements sent to the customers. The fact that SIPC has ALWAYS been substantially underfunded to pay their contingent liabilities reminds one of another entity, a private one, in the same predicament, to the tune of an estimated $441 billion in default swaps written, AIG. Saying that, where was the SEC’s SIPC oversight … or rubber stamp?


**Excerpt from NY TIMES (July 7, 2009)

“Mr. Picard’s “money-in/money-out” interpretation of “net equity” (the amount of the allowable claim by a Madoff victim) is contrary to SIPA, contradicts 39 years of SIPC’s prior positions, and is unsupported by any legal precedent. Even a cursory review of SIPA’s legislative history, referenced in our papers, would have confirmed that Congress specifically intended that SIPA cover broker-dealer customers with “net equity” claims based on securities that were never purchased (just like in the Madoff accounts). Both the Senate and House reports on the 1978 amendments clearly reflect that a customer’s “net equity” claim is not dependent on the broker-dealer actually purchasing the security:

“Under present law, because securities belonging to customers may have been lost, improperly hypothecated, misappropriated, never purchased or even stolen, it is not always possible to provide to customers that which they expect to receive, that is, securities which they maintained in their brokerage account. … By seeking to make customer accounts whole and returning them to customers in the form they existed on the filing date, the amendments … would satisfy the customers’ legitimate expectations…”

S. Rep. No. 95-763, at 2 (1978)

“A customer generally expects to receive what he believes is in his account at the time the stockbroker ceases business. But because securities may have been lost, improperly hypothecated, misappropriated, never purchased, or even stolen, this is not always possible. Accordingly, [when this is not possible, customers] will receive cash based on the market value as of the filing date.”

H.R. Rep. No. 95-746, at 21.

Now that Madoff’s victims seek the very protection offered by SIPC, the Trustee is seeking to change the definition and application of the statute. This is an approach that contradicts SIPC’s own Rules, which state that a Claimant’s “legitimate expectations” are based upon the written confirmations sent by the broker-dealer to the customer. There is no ambiguity on this Rule, or the application of the statute. SIPC’s general counsel, Josephine Wang, confirmed this approach on December 16, 2008, just five days after the Madoff scandal broke. And, in fact, SIPC’s president, Stephen Harbeck, assured a federal bankruptcy court, in another massive Ponzi scheme, that customers would receive securities up to $500,000, including appreciation, even if the securities at issue were never purchased.

SIPC is a non-government membership group, which essentially acts as the insurance body for the brokerage industry. Formed in 1970, it is funded by members of the broker/dealer industry (Madoff was a member). Virtually all broker/dealers who are registered with the SEC are also members of SIPC and each pays membership dues. These dues are collected in a reserve fund, which is utilized to cover lost assets when a brokerage firm fails.

The SIPC website proclaims that “SIPC’s reserve funds will be used, if necessary, to purchase replacement securities (such as stocks) in the open market [or advance cash]. . . [even if] the securities may have increased in value.” In this instance, it is “necessary” to advance funds in the amount of up to $500,000 per victim, because as Mr. Picard has stated, the Madoff estate’s assets will not be sufficient to cover all creditor claims.



On Jul 15 05:56 PM RT90012 wrote:

> 2 issues here: #1 Were account held with Madoff SIPC insured? Is
> that reflected on client statements?
> #2 The SIPC insures for stolen securities and cash. In a fraud, nothing
> is stolen since the investments (and their "gains") were never made
> in the first place.

Jul 15 06:16 PM

[Cynthia:]

Preparations for Madoff Auction Underway: www.newsinferno.com/ar...

Jul 27 02:56 PM