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Press Release: Madoff Investors Accuse SIPC of Forcing Investors to Bail Out Wall Street

Posted by Larry Doyle on November 14, 2009 2:07 PM |

Having interviewed noted attorney Helen Davis Chaitman on No Quarter Radio’s Sense on Cents with Larry Doyle on November 1st (a recording of that show can be heard here), I am compelled to share this press release. Investors need to fully understand and appreciate the critically important role that SIPC is supposed to fulfill and the fact that it has largely served at the behest of the industry much like its regulatory brethren at FINRA.

LD

MADOFF VICTIMS ACCUSE SIPC OF FORCING INVESTORS TO BAIL OUT WALL STREET

Group of Madoff victims files brief saying Securities Investment Protection Corp. was grossly under funded and is defaulting on its obligations to investors

New York, NY – Lawyers representing victims of Bernie Madoff’s Ponzi scheme filed papers in federal bankruptcy court Friday charging the Securities Investment Protection Commission (SIPC) with attempting to enrich Wall Street at the expense of customers of SEC-regulated broker/dealers. The brief argues that SIPC has withheld insurance money rightfully owed to Madoff investors by using an illegal definition of “net equity,” thereby depriving investors of the $500,000 in SIPC insurance which Wall Street is obligated to pay them.

“Just as American taxpayers were required to bail out Wall Street to the tune of hundreds of billions of dollars after Wall Street recklessly brought the global economy to its knees, so to, Madoff’s destitute customers are being forced to bail out SIPC,” the brief reads.

SIPC, established in 1971 to instill confidence in the capital markets, insures investors up to $500,000 against the dishonesty of an SEC-regulated broker. The investors’ brief  states that SIPC only had assets of $1.7 billion at the time the Madoff fraud was uncovered, but was facing losses of $2.5 billion. It charges that instead of paying all the investors their rightful money and drawing on its $2 billion credit lines, SPIC elected to default on its obligations, re-defining, after the fact, its obligations to investors.

The legal case hinges on the definition of the term “net equity,” defined in SIPA as the balance on the customer’s last statement.  For the first 38 years of its existence, SIPC complied with this definition.  However, faced with the Madoff loss, SIPC now claims for the first time that net equity means “net investment,” or the difference between the total amount invested and the total amount withdrawn, regardless of how many years the account was opened.  The investors are asking the court to compel SIPC to immediately replace securities in each customer’s account up to a value of $500,000.

“Instead of protecting American investors, SIPC is using this as an opportunity to enrich its own members,” said Helen Davis Chaitman of Phillips Nizer LLP, an attorney representing the Madoff Victims. “This is a money grab, pure and simple, and it is not legally supportable.”

SIPC consists of all of the SEC-regulated broker/dealers and was established, by Congress, to assess its members and pay insurance to investors whose money or securities were stolen.  For the entire period from 1996 through 2008, SIPC charged each member firm only a token $150 per year for SIPC insurance.  As a result, SIPC did not have the funds to cover the insured amount of the Madoff loss (up to $500,000 per customer).  Congress had repeatedly warned SIPC that it was under funded, the brief notes, but to no avail. To date, thousands of investors have yet to receive their SIPC insurance, including hundreds involved in this lawsuit.

Not only has SIPC refused to pay 2,335 out of 4,903 active Madoff accounts, the Trustee is seeking to “claw back” from investors the funds they withdrew in excess of their net investment.  The brief filed today asserts that SIPC has no legal authority to reduce customer payments due to alleged preferences or fraudulent conveyances and charges that these actions are “solely to enrich SIPC.”

“Who made them Robin Hood, deciding who will be forced to sell their houses to enrich Wall Street?” said Maureen Ebel, a Madoff investor involved in the lawsuit. “People have already lost everything they had to Wall Street, and now they want to take more. Even after greedy bankers almost destroyed our country, they are still being allowed to play by their own rules.”

  • Bill

    It’s not exactly clear what is going on, but I presume SIPC takes the position that a statement balance in the Madoff case is not necessarily reflective of the loss because it was a Ponzi scheme without any actual investment activity. Thus, an account statement might be inflated with phantom profits that never existed, and the actual loss much lower. This contrasts with a brokerage house failure where a customer actually had an account balance consistent with the statement. Not trying to carry SIPC’s water, but if I understand their position, they shouldn’t be responsible for phantom loss. The issue of the low premiums and the underfunding is another matter and is just reflective of how these “watchdogs” such as SIPC and FINRA are shams.

    • Home

      What I don’t understand is why isn’t ALL the MONEY from ALL Madoff investors being COLLECTED?
      After all if Madoff has stated that he is a LIAR & CHEAT, then ALL INVESTMENTS into the MADOFF PONZI scheme should be CLAWED BACK.
      Then ALL investors will get the $0.40 on the $1.00 of their MADOFF investments.
      Seems like the LAWYERS & LAWMAKERS have DECIDED to change the laws regarding PONZI schemes to put a FAKE TIMELINE in when & thus WHO can get their MONEY back.
      Sad that the USA has turned itself into a CHEAT TO WIN society.

      • Bill

        I guess if somebody was lucky enough to have withdrawn from the scheme at least 90 days before the bankruptcy filing, and was not privy to the fraud, he would be entitled to retain the money he put in, but not phantom profits.

  • I agree we could use more clarity here.

    Since SIPC already agreed to pay $500+ million to investors, it seems the agency has concluded it owes the money up to some amount. The last release I saw said that SIPC acknowledges a number @ $4.5 billion. I don’t understand, then, why they don’t pay up to the limit of their cash reserves right now.

    Plus, there is double standard in the definition of “net equity.” There is no time limit, to my knowledge, how far back the trustee can reach in evaluating whether redemptions exceed hard dollars invested. Clawback laws, however, cap the number of years the trustee can reach back. In the state of NY, for example, clawbacks are limited to six years.

    I believer, therefore, that the trustee and SIPC are overstepping their authority—that they’re legislating here as opposed to adhering to their charter. Not a good thing.

    • Bill

      The so called clawback is fraudulent conveyance law by another name. Every state has a statute of limitations on same. To the extent one got back what one actually put in, that is not a fraudulent conveyance, because there was a bona fide debt there to be satisfied. Any phanton profits would constitute a fraudulent conveyance.

      I can see a difference between clawback and determination of SIPC obligation, in that the former is a recovery through legal action while the latter is payment of what amounts to insurance proceeds or an indemnity against loss. So far as SIPC’s duties and obligations, that should be ascertainable from whatever policy as such or protocol for payment that it issues.






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