Kady, there appears to be a gray area in the determination of when discretionary brokerage becomes investment advisory activity subject to registration. The rules provide an exemption from RIA registration for certain firms, including broker/dealers, who engage in IA activity only in an “incidental” way. My hypothesis is that this is one reason Bernie got “paid” only in the form of commissions, not an advisory fee. I believe he thought this supported the notion that the advisory activity was “incidental” – after all, he wasn’t charging anything for it.

If any of the 23 clients are covered by SIPC and go insolvent, that will not necessarily help the sub-clients. SIPC’s responsibility in that instance is only to ensure that yes, the client’s account actually still has the securities that are supposed to be there. SIPC will say, you still have your shares of the fund-of-funds, the fact that they are worthless is not our problem, any more than if your broker bought you stock in a company that went bankrupt.

SIPC exists only to make sure that the securities that were supposed to be segregated in your account are returned to you, or that you are reimbursed for securities that are missing. This is why SIPC hardly ever makes payouts – since brokerage account assets are generally segregated, they usually exist somewhere even if the firm that held them for you gets into trouble. In this case SIPC is going to look at whether the securities ever actually made it into segregated accounts. If not, they are probably going to say not our problem, your money got stolen before it was subject to our protection.

One does not have to be a government agency to be “bound” by procedures, SIPC is an insurer, it probably has standards, perhaps set forth in documentation, as to how it verifies who is entitled to compensation. I would assume you normally go by broker/fund records.

In general, I found the report a bit confusing as to why Madoff’s customers would be eligible.

Per Tompain’s comments above, if it is in fact the case that Madoff’s firm only has 23 clients, I have to imagine that some of those 23 clients are going to become insolvent because of this. And if those firms were covered by SIPC, I assume that their clients would also have claims to SIPC insurance. It looks like many of them are also starting to get hit with class action lawsuits for breaching their fiduciary duties.

Even if SIPC protection applies, it is capped at $500k (unless Madoff bought more protection – seems unlikely). His ADV reports 23 clients. It sounds as though many of the people reported in the press to have lost money with him were actually invested with someone else who in turn invested their money in Madoff. That’s the only way you can reconcile the reported client count of 23 (although that could have been a lie). If 23 is correct, SIPC will pay out a max of $11.5 million. Madoff reported that he had $17 billion in assets (also could have been a lie). If the whole $17 billion is somehow gone (where, one wonders?), then $11.5 mil is not going to provide much comfort.

1. Somewhere, there are real records (or at least there _were_ until a few days ago). No way he could’ve kept the scam going for 10 plus years without records as to who was owed what and when.

2. He wasn’t acting alone in the fraud, regardless of what he says and how loud he says it. Fer chrissakes, his niece, Shana Madoff, an attorney, was employed by Madoff as in-house counsel and Compliance Director, and was married to an SEC official. If and when the full details emerge, this is going to blow the doors off the Enron scandal.

Get your eyes of this guy and find the huge scam.

Skippy

Let’s see if I can sketch a script of a purely fictional, full disclaimers, no reference intended to any real characters etc.. kind of movie.

Movie starts. View on a New York street. No music, just taxis honking.

Mr Buttoff buys a bagel and heads up to his office on the 17th floor of the red granite lipstick building.

Mr Buttoff runs a major market-making operation in parallel with a behind the curtains investment fund. Fabolous forniture is just an indication of what a fabolous proposition for investors the double business ought to be.

Scene 2. Mr Buttoff receives a group of perspective investors in his lipstick color boardroom and whispers : ” Hey hey, off the record eh? All we say stays between these four walls ok?” .. “OK, OK” say the investors, intrigued. “Look, you have to know we are sitting on a gold mine right here! (wink wink)… See this floor? Lift the tiles and there’s cables. Broadband cables. Carryinng zilions of electrons with zilions of transactions!. Listen, listen to them… Can you hear how the buzz?…. Oh I love the smell of broadband cables buzzing in the morning..”

Then Mr. Buttoff goes on taking them through a narrow dark alley. Subjects himself to retinal scans and palm reading with red laser light. A door materializes on a wall that seemed perfectly smooth at first. The door opens, leading to a room. Two geeky looking weirdos, Mc Donalds jam on their shirts, filthy keyboards, coffee spills all over, sleeping bags, obvious signs of one too many nights spent in the office. The room leads to a refrigerated one, with cables sprouting out and a hideous noise. Mr Buttoff takes his perspective investors through that and says .. “Look, this is a supercomputer as big as Big Blue! And those quants are so smart you won’t believe! I feed them intravenously and keep them here 24/7 to catch and sqeeze the golden buzzz… Remember the buzz? (wink wink). I call them my two golden boys (wink wink).”

That sales pitch was sooo damn good, the best on the street. He put together a very select list of very powerful and well known clients. Charities, government people, secret services, private banks holding for who knows who. The clients [in my movie of course, totally fictional disclaimer here, no pun intended, don't shoot on this fictional writer...] knew perfectly well he was a crook. That was the essence of the marketing pitch for heavens sake!

Also the SECT, the agency that should have overseen Mr Buttoff, knew perfectly well he was a crook! They were absolutely certain that, had they lifted the veil, they would have opened a pandora’s box way bigger than themselves. They imagined these weird geeks tapping into wires from the floor below. So of course they didn’t mess up.

Then [da daan .. dark tense music in the background] .. here comes the great reversal!

Sure enough Mr Buttoff was a crook, so very true to his own promise. But he was a different kind of crook than most believed! He didn’t have the brain power to play crooked tricks of market timing. Didn’t even bother trying to put one together! No geeks tapping into fiber optic lines. No 007 type of equipment. No super-duper computers.. Not even paper. No records. Only cash flows, cash in and cash out. Genial! He was just running a damn stupid piramid scheme. All he needed was two employees who would just look geek for the show, spill coffee around, tap like monkeys on keyboards .. But hey they did not have to ever ever even write on paper!

His investors who knew he was a crook in the first place were devasted by knowing the miserable plot. Humilated even, ashamed. Had he lost money because of the crisis, they would have been just angry. But not this! Please!

So the big disgrountled boys get together in a dark boardroom, punch fists on the table and say: “Being had this way f***s up our own reputation, g****it!. We won’t be had by a crook ourselves! We will have our money back and we will have it now! Let’s rewrite the b***y insurance policy from downstairs, mention also the 17th floor .. That will do, d****it! What is this? Floor discrimination?”.

The movie viewers at this point have appreciated the full scope of the tragedy and are truly shocked. But here, to make this movie marketable, we need to add an extra twist or it won’t work.

The problem is that the public will likely feel defrauded, maybe even start throwing popcorn and soft drinks to the screen and make a mess. “Why rewrite an insurance policy? With tax payer money again? That’s not fair! Taxpayers are US! Life is never fair, but this is way too much.. We have had it!” Then step out, ask for their money back and go post inflamatory blogs on the internet!

No, disgruntled viewers would not be a good thing for the movie. There has to be part three or it won’t work.

So genius again! The movie gibes and [daa daaannn, light intriguing music in the background] turns from tragedy into black comedy. So at least the viewers will have a laugh.

Investors get all together in the dark war room and the meeting of great minds conceives an extraordinarily twisted idea: Let’s blame it all on that poor slob of Carlo Ponzi! Oh yeah.. yeah Ponzi, Ponzi, you know? Never trust a guy whose name ends by vowel! Let’s smash his mug on front pages!

Conclusion. Carlo Ponzi is digged out of his grave and is taken to court to stand on trial. His old lawyer is present but he is also speechless [his body rotten after decades of questionably deserved rest]. Everyone else gets acquitted, except the poor bastard whose lawyer didn’t say ah.

Last scene, Carlo Ponzi’s body is put in shackles and he is taken to rotten in another grave. This time in a case with bars and for eternity! “So he learns to mess around with us, g****it”!

Closing titles telling the aftermath of the story and chanting the glory of more and more and yet more splendid rules and regulations that have now restored prosperity and peace of mind to mankind and will be with us for many centuries to come….

THE END