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."
Part of the delay stems from the confusion over the eligibility requirements for SIPC coverage. According to SIPC's website, they are obligated to provide up to $500,000 per account for securities. This figure includes a maximum of $100,000 on claims for cash. In addition, recovered funds are used to pay investors whose claims exceed SIPC's protection limit and the SIPC often draws down its reserve to aid investors.
However, Irving Picard, the court-appointed trustee tasked with liquidating Bernard L. Madoff Investment Securities (BLMIS) to compensate victims, has argued the agency is only responsible for the initial investments – minus withdrawals - made by Madoff clients. This interpretation of the reimbursements focuses on "net equity" which limits investors to collecting their net investment rather than the balance of their last fraudulent statement. Indeed, determining the process for repayment has proven to be Picard's toughest and most controversial task.
Many legal and bankruptcy experts agree with Picard's approach to determining reimbursements. They contend it's not realistic to think SIPC or the government should be held accountable for Madoff's made up numbers. And by law, the government cannot be sued for its failure to uncover the largest fraud in history.
Picard has even insisted that those who made withdrawals from their accounts in the 90 days prior to the scandal breaking return the money. In some cases, he has threatened lawsuits against individuals and organizations who may have been made aware of the fraud and cashed out before the scandal broke.
"The bankruptcy laws make it clear that under the circumstances, he can do that with the goal to equitably redistribute money to those who haven't received anything at all,"said Jonathan Lipson, a law professor at Temple University. "For persons sued by Picard it will seem unfair, but I think some judges will be sympathetic to folks who were truly victims and were not tipped off."
Picard's approach to distributing the SIPC insurance has upset many victims. They complain that Picard and SIPC are trying to redefine the reimbursement rules and are not working in the interests of the investors.
"To see them skirt around the law makes me furious," said Cynthia Friedman, a Madoff victim. "They're being vindictive…and I feel deserted by the government."
Lawsuits have been filed against SIPC over how reimbursement should be determined and the courts continue to hear the arguments.
Through a spokesperson, Picard declined comment for this story and SIPC did not respond to an interview request.
To date, Picard has recovered about $1.5 billion from the failed Madoff firm. The monies will be used to repay direct investors – not those who invested through feeder funds – according to their net equity.
Picard has filed numerous lawsuits against the largest feeder funds who directed business to Madoff and who he believes were aware or should have been aware of the scam. Through those cases he's seeking upwards of $11 billion. The monies will be redirected to paying off investors.
He has also created a hardship program to quickly reimburse victims facing serious financial hardships.
But the tension between victims, Picard and SIPC persists and seems to grow more contentious with every decision made.
Days after SEC Chairman Schapiro testified there are not enough funds to repay former Madoff investors, victims received a notice from the court that Picard and his firm submitted their compensation and service charges. The fees include $14,662,319 for Baker & Hostetler LLP and $759,228 for Picard. Legal fees are expected to be paid out of SIPC funds.
Many Madoff investors expressed outrage that SIPC can find the money to pay attorney fees, but not them.
"The issue is not that there isn't enough money," said Richard Friedman, a Madoff investor waiting to be reimbursed. "The issue is SIPC doesn't want to pay Madoff investors what they're due and they're using having no money as an excuse,"
At the hearings, Chairman Schapiro underscored hers and the government's commitment not to turn their backs on the Madoff victims.
"I am committed to working as aggressively as we possibly can with SIPC to take the most expansive possible view of how to repay these claims and to do it in as quick a fashion as they possibly can," the Chairman assured members of Congress.
But for Madoff victims who continue to fight for what they believe is owed to them, the government isn't acting fast enough.
"The SEC is playing games and they're working very slowly in processing the claims," said Friedman. "At this rate it'll take eight years to settle this and that's not acceptable."