Thousands of victims of Bernard Madoff's $65 billion Ponzi scheme may not receive all the monies owed to them by the insurance agency created to protect investors against the failure of major brokerage firms, according to a senior government official.
"It shouldn't be such a difficult issue but it is," testified Mary Schapiro, the newly appointed chairman of the Securities and Exchange Commission, at a recent Congressional Hearing. "The tragic truth is there is not enough money available to pay off all the customer claims. "
The customer claims are the responsibility of the Securities Investor Protection Corporation (SIPC), the organization created by Congress in 1970 to be the first line of defense for eligible investors trying to recoup up to $500,000 of lost investments. The SEC has regulatory oversight of the insurance agency and, through the Securities and Investor Protection Act (SIPA), is obligated to ensure that SIPC borrows funds to pay off its obligations.
The congressional hearing, held by the U.S. House Financial Services Committee earlier this month, met to understand the work of the SEC and to re-examine the gaps in existing regulatory structure that led to the Madoff and other financial schemes. Congressmen expressed their frustration over how the SEC could allow the Madoff scandal to happen.
"To have somebody examined eight times by the SEC and other institutions in 16 years and have this not found when people were calling attention to it shows a structural flaw," said Representative Edward Royce (R-CA).
Chairman Schapiro said the Madoff fraud was "one that the agency tragically did not detect, and not a day goes by that we do not regret that."
Seven months after the biggest financial fraud in U.S. history was exposed when Madoff's sons turned him into the FBI, only about 540 of the more than 15,000 Madoff investor claims have received a portion of their SIPC insurance.
"I think it's terrible," said Carol Baer, a Madoff victim still fighting to be reimbursed. "People are already suffering, now we have to suffer through how the payments are being administered through SIPC. "
During the hearing, several congressional leaders recounted stories of financial ruin experienced by Madoff victims and championed their cause against SIPC.
"At a minimum, they deserve the insurance they believe -- and to which the law says -- they are entitled," said Congressman Gary Ackerman (D-NY)
Other rebuked the pace at which SIPC is moving to resolve the financial reimbursements.
"SIPC at last is my impression so far has not been moving very quickly and the trustee has not been moving as quickly as necessary to get these people made whole," said Representative Don Klein (D-Fl).
An attorney for several Madoff victims said he receives numerous calls a day from victims frustrated by how long the reimbursement process is taking.
"It appears the whole situation is stuck in the mud," said Jonathan Landers, a partner at Milberg LLP. "This is a system that relies too much on action at several government levels and it's just not happening."