Madoff Investors Sue SIPC = Main St. Sues Wall St.
Posted by Larry Doyle on February 25, 2010 11:35 AM |
I highlighted yesterday the fact that Madoff investors planned to sue SIPC. Further details on this suit are in a press release today. I view this lawsuit as nothing short of Main Street suing Wall Street.
MADOFF VICTIMS SUE SIPC DIRECTORS FOR PERPETRATING MASSIVE INVESTMENT INSURANCE FRAUD AGAINST AMERICAN INVESTORS
Suit charges SIPC fraudulently induced Madoff investors to believe they had up to $500,000 insurance coverage on securities and seeks compensatory and punitive damages
New York, NY – Three New Jersey Madoff investors have sued the directors and key officers of the Securities Investor Protection Corporation (SIPC) for what they allege is a massive investment insurance scam. The class action lawsuit, filed today in New Jersey federal court, accuses the SIPC directors of orchestrating a scheme to fraudulently induce thousands of Madoff victims to invest in a SIPC-insured broker with the deliberate intention of denying SIPC insurance in the event of a loss. The plaintiffs claim that the defendants are personally liable for the damages the plaintiffs and others similarly situated have suffered (complaint attached).
The plaintiffs’ counsel, Helen Davis Chaitman of Becker & Poliakoff LLP and a group of Madoff victims gathered on Thursday at Federal Hall in Lower Manhattan, opposite the New York Stock Exchange, to announce the legal action and call for Congressional reform of the quasi-governmental SIPC agency. Chaitman stressed that SIPC’s actions injure not only Madoff victims but all Americans who have placed their life savings in SEC-regulated broker/dealers based upon the promise of up to $500,000 in SIPC insurance.
“American investors are being manipulated by the very people who are required by law to protect their life savings,” said Helen Davis Chaitman. “SIPC pulled a bait and switch. It promised investors that their investments were insured, but then when it came time to pay up, it changed the rules. The SIPC guarantee on the account statements of American investors is no better than a bottle of snake oil.”
SIPC’s mission, as defined by federal statue, is to insure investors of failed SEC-regulated broker/dealers for up to $500,000 in the case of theft of a customer’s money or securities. For the previous 38 years of SIPC’s history, payments had been calculated using a customer’s final statement from their broker, a method required by the Securities Investor Protection Act’s definition of “net equity.” The lawsuit charges that SIPC directors acted in bad faith and in direct contravention of their statutory duty when they instituted a “net investment” policy in the Madoff case, whereby victims would be compensated only for their net investment over generations of account holders. By changing the basis for eligibility for SIPC insurance, SIPC unilaterally reduced its exposure by at least $800 million.
SIPC took these actions to cover up the fact that, for 19 years, SIPC charged its members – Wall Street firms – a mere $150 per year for SIPC insurance for tens of thousands of investors at each of the major firms. At the time of the Madoff collapse, SIPC was faced with a minimum exposure of $2.5 billion but had only $1.7 billion in assets. Instead of drawing on its $2 billion credit lines and further assessing its members, the suit alleges, SIPC’s directors and officers invented the unprecedented definition of “net equity” in order to avoid these substantial payments.
“Once again, Wall Street is passing the buck onto Main Street,” Chaitman said. “Brokerage firms have enjoyed making billions of dollars off the average American investor, buying and selling other people’s securities. Now the one safety net that investors had has been pulled out from under them because Wall Street doesn’t want to pick up the tab.”
The suit identified each of the SIPC directors as defendants: Armando Bucelo, Jr., Todd S. Farha, Willliam H. Heyman, William S. Jasien, David G. Nason, Mark S. Shelton, David J. Stockton, as well as SIPC’s General Counsel, Josephine Wang and SIPC’s President, Stephen Harbeck.
The plaintiffs in the case representing the investors – Lissa Canavan, Leslie Goldsmith, and Judith Kalman – are Madoff investors who have been denied hundreds of thousands of dollars in SIPC insurance. All the plaintiffs live in New Jersey.
– Canavan held a 20% stake in an LLC that put money in Madoff’s firm. After the firm’s collapse, that stake amounted to $391,920. To date, she has received neither SIPC insurance nor a letter determining her claim.
– Goldsmith was a Madoff investor who filed a claim for $207,003 based on her final statement. Because she had purportedly withdrew $261,003 since 1992, she has received no SIPC insurance.
– Kalman was a Madoff investor who filed for a claim of $731,113. Her claim was allowed in the amount of $133,675 because she or her predecessors had withdrawn $31,000.
The plaintiffs are suing for fraud, bad faith failure to pay insurance, and violation of the New Jersey Consumer Protection act. The suit alleges that the defendants fraudulently induced plaintiffs and others to place their trust in the financial services industry and SIPC. They are asking for damages to be determined at a jury trial.
I believe the $150 SIPC premium was in place for 12 years not the 19 years referenced in this release. That fact has no real bearing on the merits of this suit.
This suit deserves the support of every American investor. I strongly support and endorse it.