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Support H.R. 757 for Real Investor Protection

Posted by Larry Doyle on March 5, 2012 8:47 AM |

All too often I have heard over the last few years from investors violated by the Wall Street-Washington incestuous process and feeling totally disenfranchised as a result. Why have investors gotten trampled?

Great question and worthy of widespread debate and discussion. In an attempt to narrow our focus today, let’s zero in on the Securities Investor Protection Corporation, the organization designed to:

restoring funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. The Securities Investor Protection Corporation was not chartered by Congress to combat fraud.

From where does SIPC raise its funds in order to offer this protection to investors? 

The banks and broker-dealers in the industry pay an annual premium (effectively an insurance premium) in order that SIPC may fulfill its obligations.

Why are we discussing SIPC today? Recall that post Bernie Madoff, the SIPC fund was depleted. Recall also that for approximately 13 years those paying into SIPC were charged an annual premium of $150 in order to put the SIPC stamp of protection on their brokerage statements.

Did you just spill your coffee and think I must have mistyped that figure. I didn’t. I highlighted that ridiculous figure in November 2009 when I wrote, Wall Street Scams Main Street: SIPC Investor Insurance  for $150 Premium:

How much had SIPC chosen to assess its member firms since 1996 up until April 1, 2009? Are you sitting down?

As Ms. Chaitman informed us last evening, SIPC assessed its member firms $150 annually since 1996. That’s right. Every SIPC member has been able to send out brokerage statements with the SIPC stamp of approval for a mere $150 annual premium. Yes, Goldman Sachs and every other SIPC member firm has paid a whopping $150 to buy the SIPC stamp of approval on their brokerage statements. SIPC’s Annual Report provides a full history of these premiums:

History of Member Assessments*
1971: ½ of 1% plus an initial assessment of 1⁄8 of 1% of
1969 revenues ($150 minimum).
1972–1977: ½ of 1%.
January 1–June 30, 1978: ¼ of 1%.
July 1–December 31, 1978: None.
1979–1982: $25 annual assessment.
1983–March 31, 1986: ¼ of 1% effective May 1, 1983 ($25 minimum).
1986–1988: $100 annual assessment.
1989–1990: 3⁄16 of 1% ($150 minimum).
1991: .065% of members’ net operating revenues ($150 minimum).
1992: .057% of members’ net operating revenues ($150 minimum).
1993: .054% of members’ net operating revenues ($150 minimum).
1994: .073% of members’ net operating revenues ($150 minimum).
1995: .095% of members’ net operating revenues ($150 minimum).
1996–2008: $150 annual assessment.!!! (LD’s emphasis)

As a result of this travesty and SIPC’s insufficient funds in dealing with the Madoff fiasco, SIPC appealed to the courts and won to effectively change the rules of the game midstream in how customers were treated. Those customer statements which Madoff investors received and which had the SIPC stamp attached (and which were good enough for the IRS) were rendered worth less than the paper on which they were written.

Feeling exposed yet? Fortunately, there is one member of Congress who appreciates the injustice of this all and has proposed H.R. 757 to address this travesty. Representative Scott Garrett (R-NJ) recently released the following statement:

“When investors see the Securities Investor Protection Corporation (SIPC) seal of approval, they should have the utmost confidence in the account statements they receive. I do not believe these ordinary investors, who knew nothing about the fraud being perpetrated by Bernie Madoff, should be held to a higher standard than the federal government. After all, it was the Securities and Exchange Commission (SEC) that missed the Madoff fraud in the first place. Furthermore, the Internal Revenue Service (IRS) was happy to rely on these same statements to collect taxes from the reported profits.

“My bill clarifies that for the purposes of SIPC protection, customers of registered brokers are legally entitled to rely on their customer statements as evidence of what their broker owes them. Indeed, in a world where customers do not hold physical securities, it could not be any other way.

“I introduced this legislation because I am increasingly concerned that the Trustee in the Madoff case is ignoring the law and failing to provide prompt assistance to those who have been thrust into financial chaos. He is taking positions on a wide range of issues that are contrary to SIPA, the Bankruptcy Code, and federal and state laws that are intended to protect investors against bad acts on the part of their brokers.

Think back to the fact that the each firm paid an annual premium of $150 to fund SIPC. That grotesque figure speaks volumes as to how the industry viewed its customers. 

Who is on the subcommittee addressing H.R. 757 this week?

 Subcommittee Email Addresses

Jim Himes (202) 225-5541
Stephen Lynch (202) 225-8273
Kevin McCarthy (202) 225-2915
Ed Perlmutter (202) 225-2645
Jim Renacci (202) 225 3876
Ed Royce (202) 225-4111
Nydia Velazquez (202) 225-2361
Luis Gutierrez (202) 225-8203
Ruben Hinojosa (202) 225-2531
Patrick McHenry (202) 225-2576
Steve Stivers (202) 225-2015
Mel Watt (202) 225-1510
Gary Ackerman (202) 225-2601
Joe Baca (202) 225-6161
Michele Bachmann (202) 225-2331
Spencer Bachus (202) 225-4921
Judy Biggert (202) 225-3515
John Campbell (202) 225-5611
Francisco Canseco (202) 225-4511
Shelley Moore Capito (202) 225-2711
Michael Capuano (202) 225-5111
John Carney (202) 225-3731
André Carson (202) 225-4165
Wm. Clay (202) 225-2406
Emanuel Cleaver (202) 225-4535
Robert Dold (202) 225-4835
Joe Donnelly (202) 225-3915
Sean Duffy (202) 225-3365
Keith Ellison (202) 225-4755
Michael Fitzpatrick (202) 225-4276
Scott Garrett (202) 225-4465
Al Green (202) 225-7508
Michael Grimm (202) 225 3371
Nan Hayworth (202) 225-5441
Jeb Hensarling (202) 225-3484
Bill Huizenga (202) 225-4401
Robert Hurt (202) 225-4711
Walter B. Jones (202) 225-3415
Pete King (202) 225-7896
Frank Lucas (202) 225-5565
Blaine Luetkemeyer (202) 225- 2956
Carolyn Maloney (202) 225-7944
Donald Manzullo (202) 225-5676
Kenny Marchant (202) 225-6605
Carolyn McCarthy (202) 225-
Thaddeus McCotter (202) 225-8171
Gregory W. Meeks (202) 225-3461
Brad Miller (202) 225-3032
Gary Miller (202) 225-3201
Gwen Moore (202) 225-4572
Randy Neugebauer (202) 225-4005
Ron Paul (202) 225-2831
Steve Pearce (202) 225-2365
Gary Peters (202) 225-5802
Bill Posey (202) 225-3671
David Schweikert (202) 225-2190
David Scott (202) 225-2939
Brad Sherman (202) 225-5911
Maxine Waters (202) 225-2201
Lynn A. Westmoreland (202) 225-5901

If your representative is on this committee as mine is, please call or email your representative and ask — no rather tell — him/her to support this bill.

Isn’t it time to  subscribe to all my work via e-mailRSS feed, on Twitter or Facebook?

Do your friends, family, and colleagues a favor and get them to do the same. Thanks!!

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

Larry Doyle

  • Indirect Madoff Investor

    This article is accurate as far as it goes — specifically, that the big brokerage houses have literally gotten away with murder for years by paying a pittance in fees to SIPC for “insurance” on their multi-billion dollar accounts. It is also correct that Ms Chaitman and other Direct investors have been fierce advocates for SIPC to remunerate (only) the Direct Investors in Madoff on their last statement rather than using the Trustee’s formula of net equity (cash in – cash out), and that HR757 would help them recover billions lost to the fraud.

    However, the article (and Ms Chaitman and the other Direct investors) conveniently and consistently ignore the plight of almost 11,000 Indirect Investors, people who invested in trusted hedge funds or feeder funds, which in turn invested in BLMIS. For the most part we had never heard of Madoff until the day we learned he had stolen our life savings, and have now come to learn that SIPC and the MAdoff Trustee don’t consider us “Customers” under SIPA and therefore we aren’t entitled to one red cent of relief under SIPA. Yet our money was stolen just as surely as the Direct investors’ was. This is the real scandal of this whole debacle. We need support for (at a minimum, and a somewhat modified version of) HR 1987, which at least proposes to reimburse Indirect Investors something.

    The so-called SIPC Modernization Task Force, whose recommendations were released recently, had a rare opportunity to rectify all of the above-described injustices. But instead, it chose the “business-as-usual” path of appeasing the industry while providing SIPC relief to only one group of Indirect investors, those in qualified ERISA plans. It left the rest of the Indirect Investors — whose retirement funds were also lost to Madoff — once again out in the cold. This result was fore-ordained, since not a single voice for the Indirect investors was allowed to sit on the Task Force or to be on the panel at this week’s Capital Markets Hearing on its recommendations. The SIPC Task Force’s recommendations should be shelved entirely as a sham and a farce.

    All of the proposed Ponzi Bills have died or languished in Congress. What is needed now, instead of a fragmented and divisive series of band-aids, is a consolidated and strengthened version of both pending bills, with appropriate safeguards and equitable relief for ALL victims of the Madoff fraud.

    • jewdocrat

      I have a question to the indirect investor. What is the law? Does it say that people who did not invest directly with mr. Madoff should be treated the same? I was always under the impression that Hedge Funds were NOT regulated, at all. Is this what you are talking about? You make it sound like the “direct investors” are evil and not interested in the other investors. Why would you make such an allegation?

  • Bill

    LD, I have endeavoured in the past to determine just what SIPC protection provides, to the extent it does, as is case with brokerage accounts generally. Near as I can tell, from what I recall, what you actually own in your account is a pro rata claim to the available account assets if the house goes bust. For instance, if your account is valued at $1 million, and the total pot of accounts held by the house is supposedly $1 billion, then you have a .1 % claim on the pot. If the pot is only $800 million, i. e. $200 mil short, then your account is short by $200K, and SIPC will pay you that. If the house pot is short $600 mil, then you are short $600K, and you only get $500K from SIPC. Many if not most of these houses also have supplemental insurance, but from I could tell, the worth of that is pretty questionable, given that in some cases the coverage is provided by some captive insurance company owned by the house. Even beyond that, you have to wonder at the ability of an insurer to come through in event of a general collapse.

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