SIPC tells congress Madoff victims claims exceed agency's funds
The Securities Investor Protection Corp. said in a letter to a congressional subcommittee that claims by victims of Bernard Madoff's Ponzi scheme far exceed the funds available to the agency to reimburse them.
As of Aug. 1, the SIPC had a total fund of $1.2 billion and access to as much as an additional $2.5 billion in loans from the U.S. Securities and Exchange Commission, SIPC President Stephen Harbeck said in a Sept. 7 letter to the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.
Claims by Madoff victims total $57.2 billion based on false account statements issued by Madoff's firm in November 2008, the month before his arrest, according to the SIPC letter. Victims lost $17.3 billion when calculated as the difference between money invested and money withdrawn from Madoff's firm.
The SIPC, which is required to pay victims a maximum of $500,000 for most claims, has allocated $888 million to pay claims based on lost principal. If forced to pay based on the account statements, the SIPC would have to pay an additional $1.1 billion, it said in the letter.
The letter, which was produced in connection with a subcommittee hearing on Sept. 23, responds to questions contained in an Aug. 20 letter by the Democratic chairman and ranking Republican on the subcommittee.
According to the letter, Madoff made 90,000 payouts to investors, totaling $18.5 billion, that were in excess of the money they invested. Irving Picard, a trustee appointed to oversee the bankruptcy of Madoff's firm, has filed 19 claims in U.S. bankruptcy court seeking to recover $15 billion from clients who got overpayments, according to the SIPC letter.
Madoff Victims
Madoff victims have tried, unsuccessfully so far, to force the SIPC to pay based on their fictitious account balances. The SIPC, supported by trustee Picard and U.S. Bankruptcy Judge Burton Lifland in Manhattan, has said it's required only to pay based on cash invested minus withdrawals.
Representatives Paul Kanjorski and Scott Garrett, a Pennsylvania Democrat and New Jersey Republican, respectively, have pushed the SIPC to consider other methods of repaying investor claims. The two, who serve as the top members of the House Financial Services Subcommittee on Capital Markets, held a hearing Sept. 23 on the "limitations of the Securities Investor Protection Act" that established SIPC.
"While SIPC's actions may follow the letter of the law, many would argue that SIPC has ignored the spirit of the law," Kanjroski said at the Washington hearing. He added that lawmakers need to "consider the best way to change the tone at SIPC and refocus this body on maintaining confidence in the financial system and promoting investor protection."
Litwin Lawsuit
Yesterday, the Litwin Foundation, a Madoff investor, sued the SEC for "negligence" in failing to uncover the Ponzi scheme. The New Hyde Park, New York-based foundation seeks to recover at least $19 million and other unspecified damages against the agency for failing to prevent losses at Madoff's investment firm.
The government's "sovereign immunity" from lawsuits should be waived under a law that allows cases to be brought against the U.S. if its workers were negligent, the foundation said in the complaint. The organization was established in 1989 and contributes to nonprofits that include Lincoln Center for the Performing Arts and the Brooklyn Botanical Garden.
The SEC "had countless opportunities to stop the Ponzi scheme Madoff operated over 16 years and botched all of them," the foundation said in the complaint.
SEC Investigations
The plaintiffs said that during a period of 16 years, the SEC investigated Madoff on multiple occasions and failed to expose the fraud.
John Heine, a spokesman for the SEC, declined to comment on the lawsuit.
Several pieces of legislation have been introduced in the U.S. Congress aimed at relieving losses to Madoff's investors. Representative Bill Pascrell, a New Jersey Democrat, has introduced a bill that would allow Madoff investors to recoup some of the losses through the U.S. tax system. Senator Charles E. Schumer, a New York Democrat, has introduced similar legislation in the Senate.
"It would seem to me that one major and fundamental reform would be for them, through the actions of the trustee that has been appointed, to see themselves as an advocate rather than an adversary against innocent defrauded investors," said Garrett, who is co-sponsoring the Pascrell bill. Investors, Garrett added, need to "feel as though they are being assisted by the SIPC process, rather than hunted down and accused of some kind of wrongdoing."
Madoff Liquidation
Madoff, 72, is serving a 150-year prison term after pleading guilty last year to masterminding the largest Ponzi scheme in history. The liquidation of New York-based Bernard L. Madoff Investment Securities LLC is the biggest such case undertaken by SIPC, according to court records.
The bankruptcy case is: Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The Litwin case is The Litwin Foundation v. United States of America, 10-CV-7367, U.S. District Court, Southern District of New York (Manhattan).