Seven Years and Counting – Madoff Victims still wait

Written on December 11, 2015 – 8:37 pm | by ibkent


No, it is NOT a Merry Christmas – not for thousands of Madoff Investors.

Today is December 11.  The date doesn’t mean much to most people.  On this date 7 years ago, the lives of tens of thousands of people were disrupted as that creep Bernard L. Madoff confessed to the FBI that he head been running a massive ponzi scheme — the longest in history. Dreams were smashed, legacies disappeared, charities were forced to close. Money that many WW2 and Korean War vets had worked so hard to earn – gone in an instant. There was not a region of the country that was uneffected.

In the weeks that followed, hopes were raised and dashed as the President of SIPC – the Securities Investor Protection Corporation as well as the SIPC’s General Counsel, Josephine Wang first publicly announced that if a Madoff investor could show a valid statement then said investor would receive the coverage promised under the Securities Investor Protection Act — up to $500,000 in cash.  In testimony before Congress, SIPC’s President, Stephen Harbeck testified before a House Financial Services Committee Hearing on January 5, 2009, that “SIPC was indeed investor protection (except for market risk)” and agreed it performed an insurance like function.” If so, it is the largest insurance fraud in the history of mankind.

SIPC is the Securities Investor Protection Corporation, created by the Securities Investor Protection Act of 1970 – a law that was enacted at Wall Street’s behest to help minimize they’re growing expenses in managing stock certificates.  In return for an investor not receiving actual certificates, their accounts were to be insured by this new quasi-governmental organization — to be funded 100% by Wall Street.  There is not one tax dollar at risk. Every Wall Street/broker firm is required to contribute. For the 18 years prior to the largest investor fraud in US history each Wall Street firm contributed $150 per year. That’s right. One Hundred Fifty Dollars.  Not per investor, not per account, not per month — PER YEAR.  Not surprisingly, SIPC was grossly underfunded and did nothing for years as Congress and the General Accounting Office implored them to increase the assessment. (Within months of the discover of the Madoff crime it was raised to a percentage of assets, as the original law intended.

Enter Federal Bankruptcy Court Judge Burton Lifland (since deceased) who appoints  career Bankruptcy Trustee, Irving Picard (for whom this was the 7th) to manage the Madoff fraud. At this point Picard has joined the law firm of Baker & Hostetler whose managing director was David Sheehan (who has since left the firm).  Together, this “mighty duo” engaged in what had long been a SIPC practice – to figure out ways their client, the SIPC – whose purpose is to protect investors – could minimize its payouts.  Gretchen Morgenson wrote an article, in the New York Times 15 years ago, and it’s as true today as it was then.   Realizing that there was not enough money to make the payouts required, they engaged in a campaign to make make victims turn on one another. There were the “net winners’ – people like my 90 year old parents who used the many as many did, to live in.  With no value given for interest, they, over the course of nearly 20 years, took out more than they put it.  (They were sued by the Trustee for the excess money under bankruptcy clawback regulations).  That put them at odds with so-called “net losers,” those who never took anything out and whine about net winners wanting insurance payouts.  Finally, there are the indirect investors – they number in the tens of thousands and  many did not even know they had money with Madoff through mutual funds, funds of funds, pensions, etc.

Despite the headline making press releases – it’s more like Bah! Humbug for thousands of Madoff victims rather than Merry Christmas or Happy Hannukkah.  The trustee had engaged in a rather successful campaign to segment investors — the net “winners” – those who had the audacity to live on what they thought was interest on the accounts such that over the span of 20+ years, they’d taken out more than they invested. (Remember, these are senior citizens who, BY LAW, were REQUIRED to take out funds from their Madoff-invested IRAs) These people have and likely will not receive a dime; in fact, many have been sued for the difference; the net “losers” – those who were wealthy enough to leave the money where it was. These people will have a very Merry Christmas. And finally, the indirect investors – those who invested in mutual funds, pension plans, funds of funds — they will not get a penny.

The Bankruptcy Trustee has continually ignored the law that requires a) net equity be determined by your final account balance (SIPA – Section 16 #11) and b) the trustee make payouts in a timely fashion. Neither of which has occurred.  The Trustee has taken it upon himself to rewrite the law and the Courts have allowed it.   If Congress had intended exemptions, they likely would have written them in.

The so-called net winners have no problem with these payouts – they simply want the law to be enacted as written and as intended by SIPC.  (BTW, SIPC has changed its website as a result of the Madoff fraud to say there are “instances” where there will not be payout – but the law is the law.) One final thought – for purposes of defying decades of precedent – the trustee did not allow the profits to count towards net equity. Meanwhile — the IRS was taxing – and kept — these gains. You figure it ou.

Baker and Hostetler has earned over $1.1 billion paid for by SIPC.  Imagine if they had just used that money to fulfill their statutory obligations.

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