Madoff Help News & Assistance

Clearly, the IRS has chosen to offer a mostly beneficial, practical, and also self-serving avenue for Madoff and other Ponzi fraud victims. With their recent “Safe Harbor” revenue and procedure rulings, they’ve made life easier for a fair number of anxious victims. Unfortunately, while many victims will receive some restitution through IRS refunds in addition to SIPC claims, many others will receive little or none at all.

The bottom line – the IRS Safe Harbor ruling offers mild solace, at best. So after all of the congressional speeches and railings, the Madoff victim remains largely, to put it bluntly, shafted. And while the plight of so many Madoff victims remains desperately unimproved, the sudden silence in Congress post-IRS proclamation is deafening.

So assume you’re the “lucky” Madoff investor who only invested $500,000 or less directly into Madoff a few short years ago, took no withdrawals at all, and dutifully paid taxes. You’ll get the full SIPC refund of your principal back (at such time that the Trustee elects to pay the claims), and likely get the taxes you paid to the IRS refunded. You’ll end up recovering maybe 80% of your recent statement value — what you’ve paid in plus your taxes. Thank you IRS. Thank you SIPC.

But what of the rest of the unlucky souls? Let’s begin with poor IRS and qualified plan investors. Ask Henry Backe, of Orthopaedic Specialty Group in Connecticut, whose qualified plan for its employees lost all, and will receive back a measly $500,000 for the single account that the plan had – amounting to crumbs for its loyal employees. Or MB, in her mid 80’s and living in Florida, who lost her entire IRA in which her husband had invested over two decades to prepare her for a safe retirement, and who has taken over $500,000 more than invested in IRA distributions to live on these many years. She gets nothing. Zero. And is left with nothing. How is this fair?

Or how about the foundations that have funding and distribution requirements that get the double whammy of not being able to make distributions and can’t replenish their funds without exceeding funding guidelines?

Or how about the many Madoff investors who has been living off their investment for years, and are now subject to having to return their withdrawals for the last six years via the terrifying “clawback” by the SIPC trustee who feels it his responsibility to get funds back from investors who have taken more money out than put in? This on top of having lost the entirety of their investment — talk about adding insult to injury.

Incidentally, many Madoff investors who have interacted with this site over the last few months and who had not taken money out from their account think it largely immoral that the SIPC trustee would go after those who have taken money out. You read this right – even though it might otherwise benefit them financially, many principled investors see it as just wrong to demand returns of monies from folks who were legitimately taking funds out of their account to cover their living needs and retirement.

Or what of the thousands of indirect investors who made their investments through feeder funds or hedge funds? The feeder fund or hedge fund gets to file the SIPC claim, not them. They’re stuck with the morsels that get passed to them from the entity they invested with, and hoping beyond hope to collect via an additional claim against the feeder fund.

What a mess. Lack of deductibility of IRA and qualified plan losses. SIPC refunds limited to direct investors. Clawback by the SIPC trustee. A SIPC limit established in the ‘70s that’s worth a fraction today of what it used to be worth. An absurd interpretation by the Trustee that “net equity” has got nothing to do with what’s on an investment statement. Charities and foundations crushed. Indirect investors lacking recourse. All just a few of the areas that must be addressed, and dutifully resolved. Yet from Congress, again…. suddenly no sound at all.

Frankly, Madoff victims need to, and surely will press forward with an action plan. They know that Congress’ work is not done, nor is that of federal and state agencies. The SEC and the IRS (the largest beneficiary of Mr. Madoff thus far) and state tax agencies must step up. Guidance must be given, laws must be changed and clarified. And quickly.

So here’s a short punch-list of some of what needs to happen, things we’ve been talking about for some time. Some easier to accomplish, some more challenging:

1. Change SIPA (Securities Investor Protection Act) law to prevent clawback except in certain obvious circumstances. Simply put, it’s immoral. Investors in a regulated investment firm holding registered securities are entitled to what’s reflected in their statements. While at it, make it clear that NY’s and other states’ even less tolerant bankruptcy laws play second-fiddle to the Securities Investor Protection Act as well.

2. Clarify SIPA law so that it’s clear that “net equity” is not the total of money in minus money out – something consistent with bankruptcy law but not registered investment entities – but rather the value of account statements if invested in registered investments, as indicated above.

3. Change SIPA law so that the amount of restitution is not limited to the $500,000 maximum amounts established in 1970 (worth a scant $90,000 and change now), but to a more appropriate amount incorporating cost of living.

4. Change SIPA law to permit pension and other qualified plan participants that participated collectively to be entitled to coverage as if they were individual investors, thereby allowing them to SIPC protection, or provide increased coverage for the entire entity.

5. Change SIPA law to permit indirect investors access to individual SIPC coverage.

6. Clarify/change the IRS code to permit investors to claim actual refunds of taxes paid on Madoff “income” going back indefinitely, or at least 15 years, to permit investors to recoup the higher taxes during the Clinton era as well as providing more opportunity to obtain a larger cash refund now. In other words, the new Safe Harbor procedures, which allow a carry back for five years, and forward for twenty, isn’t enough.

7. Change the IRS code to permit loss deductions for investments with no “tax basis”, such IRA’s and retirement plans. Quickly include indirect investors in feeder funds to enjoy the existing Safe Harbor opportunities with lenient documentation requirements.

8. Change the IRS code to permit refilling of retirement plan accounts and foundations that have endured theft losses by waiving the contribution limits.

Wouldn’t it be easier you say, to simply to reimburse investors for their losses and be done with it? Seems particularly appropriate given that we wouldn’t be having this conversation had government and their agencies been doing their job. Dang, yes. But particularly given the events over the past year regarding our economic debacle, political reality trumps right, just as it does every time. Americans, some will say are having enough of a difficult time swallowing the mistakes of corporate America. Forget about mistakes of their own government. Perhaps still worth pursuing, however.

Meanwhile, kudos to the groups of those defrauded by Madoff for putting the key issues on the table and pressing forward with needed change (see Support Groups to the right). I’m going to spend some time talking about these heroic folk in coming blogs.

Change comes in numbers, and change comes in individual action. Join up with one of the fraud victims’ groups. Don’t let the sound of Congressional silence get you down. Keep the pressure on Congress and the key agencies. Send letters and call. Congress must be reminded that their work is not done, but has just begun. Let SEC Chairperson Mary Schapiro know that the SEC must step up and help as well.

Peace,

Ron Stein