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.