The Madoff revelations continue apace. The latest tidbit is that the records are such a mess that it may take the Securities Investors’ Protection Corporation six months (!) to make meaningful headway in unravelling Madoff books and records. From the Financial Times:
Bernard Madoff left behind a trail of “falsified” and “unreliable” records, hampering efforts by investigators to unravel the mystery of the $50bn “Ponzi” scheme allegedly perpetrated by the New York broker, officials said on Tuesday.Stephen Harbeck, president of the Securities Investor Protection Corporation, an industry-funded body set up by Congress to help investors in failed brokerages, said it could take at least six months to “get a handle” on the situation…
“Statements received by investors do not reflect an accurate picture of what the brokerage firm actually has on hand,” he said. “There are missing securities. The records are thus incorrect and certainly falsified… They are certainly unreliable in terms of what the customers say they owned versus what is here.”
Now the SIPC is operating under the assumption that Madoff’s scheme constituted theft, and is in the process of contacting account holders to file claims (the maximum payable is $500,000). Roger Ehrenberg has pointed out that investors may have an additional source of recourse, from investors who redeemed funds in the last two years (their withdrawals could be considered fruadulent conveyance and clawed back, although Ehrenberg thinks from a practical standpoint that this would be a terrible idea).
But it sound as if the records are a complete shambles. I am assuming SIPC has the ability to do forensic work, It is too easy to envision a customer’s records going missing (even early accounts said most if not all of the records were paper-based, making it easy for something to get lost in the mess. SIPC even suggested that it will be hard to tell what is legit:
“We don’t have any faith or reliability in the firm’s statements,” says SIPC’s president and chief executive Steve Harbeck.“The individual victims will have to file claims asserting and proving what they gave to Madoff securities, and we’ll have to compare that to records that we have on hand,” Mr. Harbeck says. “We don’t know how much people gave to this organization, and we don’t know how much realistically they think they’re owed.”
The requirement of matching a customer’s records with the phony-by-design records of a confessed fraudster seems odd. In this age of forensics, how hard would it be to verify that the documents actually came from the Madoff firm? Or is SIPC bound by procedures that contemplate, say, that employees might collude with outsiders to generate phony accounts and defraud the government?
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SIPC returns money or missing securities.
Some questions?
1. Is Madoff a broker covered by SIPC? His web pages said "Member NASD & SIPC"
2. What of the accounts with him are covered? Which are not?
3. What securities did the individual hold if the individual never really held them?
From the SIPC web site:
SIPC does not cover investment contracts.
"Insurance" for investment fraud does not exist in the U.S. The Federal Trade Commission, Federal Bureau of Investigation, state securities regulators and other experts have estimated that investment fraud in the U.S. ranges from $10-$40 billion a year. In the case of microcap stock fraud, the toll on investors has been estimated as $1-3 billion annually.
With a reserve of slightly more than $1 billion, SIPC could not keep its doors open for long if its purpose was to compensate all victims in the event of loss due to investment fraud.
It is important to understand that SIPC is not the securities world equivalent of FDIC–the Federal Deposit Insurance Corporation. Congress specifically considered creating a Federal Broker-Dealer Insurance Corporation, but lawmakers wisely concluded that such a designation would be both misleading and out of step in the risk-based investment marketplace that is so different from the world of banking.
How can I be sure I am dealing with a SIPC member? Why is that important?
Look for this language:
MEMBER SECURITIES INVESTOR PROTECTION CORPORATION
Those words – or “Member SIPC” — appear in all signs and ads of SIPC members. If you have a question as to whether or not a particular firm is a member of SIPC, you may call the SIPC Membership Department at 202/371-8300 or visit us on the Web at http://www.sipc.org.
Why is the issue of SIPC membership relevant to you? SIPC protects customers of broker- dealers as long as the broker-dealer is a SIPC member. However, if a SIPC member's registration with the U.S. Securities and Exchange Commission is terminated, the broker-dealer's SIPC membership is also automatically terminated. SIPC loses its power to protect customers of former SIPC members 180 days after the broker-dealer ceases to be a member of SIPC. Normally, the SEC will not permit the termination of the registration and SIPC membership of a broker-dealer if the firm owes securities or cash to customers. However, a SIPC membership may be terminated if the Commission is unaware the firm owes securities or cash to customers.
Who is not eligible for SIPC protections?
Most customers with cash and securities missing from customer accounts are eligible for SIPC assistance. However, SIPC's funds may not be used to pay claims of any failed brokerage firm customer who also is:
* A general partner, officer, or director of the firm.
* The beneficial owner of five percent or more of any class of equity security of the firm (other than certain nonconvertible preferred stocks).
* A limited partner with a participation of five percent or more in the net assets or net profits of the firm.
* Someone with the power to exercise a controlling influence over the management or policies of the firm.
* A broker or dealer or bank acting for itself rather than for its own customer or customers.
Internet archive of Madoff's web site:
http://web.archive.org/web/*/http://www.madoff.com/