Madoff Help News & Assistance

So let’s start getting to the meat of the issue: investor protection. Not just Madoff investors, Stanford investors, Petters investors. All investors.

Which brings us to the issues of insurance, which the Trustee and SIPC spend enormous time asserting is not the case with SIPC protection. Aside from the probable fact that 99 out of 100 investors who have heard the letters “SIPC” before would put the words “SIPC” and “insurance” together, it is, by any definition, insurance. Lousy insurance, to be sure. Misrepresented insurance, certainly. Not insurance of the FDIC variety, okay.

But I’ll go further. Let’s put aside the fact that millions of investors have been led to believe that SIPC is insurance; put aside as it has been asserted in various briefs that government institutions such as the SEC, FINRA – the entity that audits and regulates broker-dealers, court cases, heck, even President Nixon in his short speech when signing the bill into law called, and even continue to call it (though not Nixon) insurance.

For SIPC to continue to assert that it is not insurance is akin to Bernie Madoff now insisting that he ran an honest operation.

Insurance defined: the business of insuring persons or property, b: coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril c: the sum for which something is insured.

So, consider, for the moment, the illogic that SIPC represents – as the Trustee asserts – an “advance against customer property,” and “not insurance.” What investor would feel confidence or a sense of protection in such a scheme where the hope is that SIPC might advance them funds that might be subsequently collected from the bankrupt entity, and not a guarantee that those funds will be paid whether or not they’re collected?

And what about the sham around the terms “theft” and “fraud” that SIPC continues to toss about? The SIPA legislation clearly indicates that investors should be protected when funds are stolen. Funds stolen and used in the manner of a Ponzi fraud – whereby monies stolen from one investor and given to another – are, yes, still stolen. Now SIPC has gone out of its way to claim that investors are not necessarily protected from these sorts of fraud. And if they are covered, what’s covered is not what’s on a falsely concocted investment statement, but rather what an investor put in, however many years ago. (Please see my prior blog on this subject)

The illogic of this borders on stupefying, when one thinks about it. Imagine if every broker contacted his investor client and called them to let them know that despite the $1,200,000 in their account of 30 years, the account is only protected to $500,000. Okay. That aspect is hard to swallow, and frankly, Congress deserves to be slapped for not increasing that amount since 1978.

But get this. What SIPC is saying is that in a theft scheme where very legitimate-looking statements were being made by a broker that was being regularly audited, that investors profits are not protected, rather only the original money you put in. This is the new “net investment method” thinking the Trustee and SIPC are choosing to take. Think about that: any profit any investor has made may not be protected under the new method that SIPC is looking to apply to Madoff victims.

It gets worse: that since they only invested $500,000 in 1978, took out $1,800,000 in dividends since that time, they were not only not protected for a penny, but could conceivably owe $1,300,000 if the firm was involved in fraudulent behavior. What?! Imagine the flight that every long term investor would take from every existing brokerage firm! What kind of confidence would that instill in our capital markets?

So, let’s get back to insurance, which is what SIPC is, and is supposed to be.

In order for insurance to work in the classical sense, however, there have to be three things:

And here, unfortunately for investors, SIPC and investor protection fails on all counts. In fact, SIPC was, and remains severely underfunded. Insufficient premiums (yes, that’s what they’re called) have been paid in. For nearly 20 years, the SIPC fund was essentially capped, despite calls for change from experts, critics, Congress, General Accounting Office, and the Office and others who pointed out the potential calamity here.

Now, unless there is a reserve or insurance fund that is either bottomless, or overly extensive, effective underwriting is critical. In this case, it helps all parties: effective underwriting – meaning careful examination of the activities of all broker-dealers – would help minimize the proliferation of rogue and fraudulent broker-dealers and protect investors, and would also limit the likelihood that the claims would exceed the fund.

The fact is that every successful private insurance program has a strong underwriting program. A successful public insurance program – even FDIC – also has a relatively strong, integrated underwriting program. Unfortunately, SIPC has neither. The underwriting arm of SIPC is FINRA, formerly NASD. Like Moody’s rating services – the rating agency serving several masters during the financial meltdown in 2008 that choose to look aside at the risks of mortgage-backed security pools — there is a lack of accountability if there is a screw-up on the underwriting side. If FINRA misses New Times, or Madoff, or Stanford for that matter, there are no devastating repercussions to those who perpetrated to error, no accountability. This constitutes a “moral hazard”. If folks know they can pump gas without paying for it, they’ll do it.

Then there is the over-riding regulating entity. For the heck of it, we’ll call it the SEC. While this was one of the functions the SEC was appointed in SIPA law, it’s quite clear, given the lack of effective policing of SIPC and of FINRA, and it’s own extraordinary missed opportunities (See Dean Velvel’s DAMAGING EXCERPTS FROM THE SEC INSPECTOR GENERAL’S REPORT ON THE SEC’S MALFEASANCE IN THE MADOFF AFFAIR) to directly blow open the Madoff affair, the SEC is nowhere near being up to the task.

Moe, Larry, & Curly. Now, as industry cultural insiders will tell you, these 3 entities are fiefdoms unto their own. They don’t mix well. They don’t interact well. In fact, there have been numerous suggestions that SIPC pretty much bullies its way with the SEC, and seeing the manner in which Judge Lifland dismantled the SEC attorney on February 2nd, it’s easy to see why. So what investors can look forward to – all investors – is their hard earned assets overseen by the Three Stooges. Or perhaps, Moe, Larry, Curly and Shemp – should one choose to add Congress to the mix.

I’ll wrap it up. Insurance is essentially a method by which groups of individuals or entities share the burden of financial loss by collecting premiums and distributing funds to an insured who has suffered a loss. Now whether or not the payment of a claim – notice the terminology – is an advance against other assets collected and distributed, as long as the payment of that claim is guaranteed – which it purportedly is under SIPC – it is insurance. To paraphrase the recent words of an attorney, You’d have to be crazy not to agree with this. So please, SIPC, cut the caca. If you wish to take the position that ponzi and theft fraud are perils that are either not covered, or covered under different circumstances (i.e. cash in/cash out), fine. Come out with it – state it openly, brazenly. Be manly about it, instead of ducking behind smoke and mirrors, and punishing claimants with never ending lawsuits and further trauma. Stop allowing investors to march with a false sense of security.

But please stop telling investors to believe that a pig is a horse, and ask them to bet their life savings on it.