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Madoff Ruling: More Reason Not to Trust Wall Street or Washington

Posted by Larry Doyle on March 1, 2010 1:03 PM |

On the heels of my commentary this morning addressing why Harry Markopolos feels America’s citizens should not trust the government, we receive more fuel for the fire.

The timing of this release is truly uncanny:


Judge rules SIPC does not have to insure every account up to $500,000, shifts burden of Madoff losses to American taxpayer.

New York, NY – A federal bankruptcy Judge ruled Monday that the Securities Investor Protection Corporation (SIPC) can avoid its statutory obligation to replace up to $500,000 in securities of thousands of Madoff victims in a decision that dramatically reduces protections against fraud for every American investor, according to lawyers and investment experts. Judge Burton Lifland found that SIPC can ignore 40 years of legal precedent stating that SIPC must determine reimbursements based on an investor’s final statement, essentially letting Wall Street off the hook at the expense of Main Street investors and taxpayers.

“Unless and until this decision is reversed, no American who invests in the stock market with the hope of retiring on his savings, has any protection against a dishonest broker,” said Helen Davis Chaitman, Esq., attorney for hundreds of Madoff victims. “If we learned anything in the last two years, it was that Wall Street will manipulate the law to enrich itself at the expense of every honest, hard-working American taxpayer. Now we know that no American can rely on SIPC insurance.”

Briefs filed by numerous firms representing investors demonstrate that Judge Lifland’s decision departed from 38 years of SIPC’s practice, its regulations, and court decisions upholding the principle that, when an SEC-regulated broker/dealer defrauds a customer, the customer’s account is insured for up to $500,000 based upon the customer’s last statement. Judge Lifland held that, where a customer is the victim of a Ponzi scheme, the insurance can instead be based on the customer’s net investment over the life of the account (the amount deposited minus the amount withdrawn). Thus, all investors now have no insurance for the appreciation in the investment, even if the investment spanned a 30-year period, Chaitman warned.

“This is no different than a court-sanctioned breach by the FDIC of its insurance obligations to bank depositors. Imagine if bank depositors were told by the FDIC that they are insured only for the amount they invested and not for any of the interest they allowed to accumulate in their accounts over a period of 20-30 years,” Chaitman said. “Now it is up to Congress to rectify the law, or abandon the concept of investor protection.”

Tuesday’s decision also allows SIPC, which is made up of Wall Street investment firms, to transfer the burden of Madoff losses to the American taxpayer. Although SIPC is required under law to insure up to $500,000 of each investor’s account, Judge Lifland’s decision allows SIPC to escape liability to the vast majority of Madoff victims, who will then have a theft loss under the Internal Revenue Code. This theft loss entitles them to a tax credit, forcing the IRS to refund $166,500 for every $500,000 that SIPC refuses to pay.

“SIPC, as the representative of Wall Street, has avoided its obligation to pay SIPC insurance and instead shifted the payments to the U.S. Treasury – the pockets of the American people,” Chaitman said. “Judge Lifland’s decision today is another example of Wall Street manipulating the law to enrich itself at the expense of Main Street, even though it is one of SIPC’s own members who stole the investors’ money.”

SIPA was enacted in 1970 in order to instill public confidence in the capital markets by insuring customer investments in the event that a broker is dishonest and either steals the securities or never purchases them. Wall Street supported the enactment of SIPA, even though it was required to fund the insurance, because it would profit by being allowed to hold investors’ securities in “street name” (in the broker’s own name). SIPC insurance was intended to give investors protection against a broker who stole or never bought their street name securities. Holding securities in street name gave Wall Street a new source of billions of dollars of income because brokerage firms could use “street name” securities as their own property, even though they are holding them “in trust” for their customers. In 1978, the level of insurance was increased to $500,000 per customer account.

Although SIPC has the authority to assess member firms ¼ of 1% of operating revenues, for the 19 years ending in 2008, Wall Street firms paid a mere $150 per year for SIPC insurance, even large houses like Goldman Sachs and Merrill Lynch. Congress repeatedly warned SIPC that it was grossly under-funded, but SIPC ignored those warnings and did nothing to increase its revenue. As a result, SIPC had assets of $1.7 billion when Madoff collapsed, but was faced with an exposure substantially higher. In order to avoid assessing its members (Wall Street) for the 19 years of practically free insurance, SIPC decided to default on its obligations, leaving investors and taxpayers holding the bag.

“The only way an investor can be protected against the fraud of his broker is for the investor to insist on having his securities registered in his own name. If an investor allows the broker to hold the securities in “street name” (that is, in the broker’s name), then the investor is gambling on the honesty of his broker,” Chaitman said.

Why did Judge Lifland rule in this manner?

I have no doubt that it was purely based upon the total dollar figures involved. This ruling also sets a precedent for future limited investor protection provided by SIPC against every other Ponzi scheme perpetrated on Wall Street.

This ruling truly increases the risks on Wall Street dramatically.

Wall Street owns Washington. This ruling is indicative that when the chips are down, Wall Street also owns and screws Main Street.

Navigate accordingly.


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