SIPC Expects a Hard Time With Madoff Claims

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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  1. Anonymous

    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:


    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

    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:*/

  2. Fraud Guy

    “the requirement of matching a customer’s records with the phony-by-design records of a confessed fraudster seems odd.”

    Not really. They create an external picture of what investors purport to have been in the fund. At the same time, they create an internal picture, based off of the phony and real documents, or as many as can be reliably placed. They are looking to reconstruct the activities, and check the internal versus the external, plus whatever additional data they have (probably principals financials, etc.). Based upon what gives the most consistent picture, they decide who actually deserves reimbursement, as well as the extent of what was hidden in plain sight.

  3. Anonymous

    If the investors were invested in a fund, why would SIPC coverage apply? SIPC covers (some) securities and cash missing from a customer account at a brokerage.

    brokerage – a firm that acts as an intermediary between a purchaser and a seller.

  4. Anonymous

    Yves Smith ends with “Or is SIPC bound by procedures that contemplate, say, that employees might collude with outsiders to generate phony accounts and defraud the government?”

    Actually, I don’t think SIPC is a governmental agency. I think it’s a private organization with its own pool of insurance. From the SIPC website: “SIPC often draws down its reserve to aid investors”. I don’t think that it is backed up by the US government like the FDIC.

  5. IF

    As Madoff’s fund had a high turnover, shouldn’t they just look at previous IRS filings under short term gains? If the investors paid taxes on it they probably believed they owned it.
    (This will also be important for tax deductions due to theft.)

  6. Richard Kline

    Curiouser and curiouser, and in no good way. From a commentor here on NC we here, second hand, that Maddof’s outfits was, as of c. 10 years since, a paperless office where staff were _terminated_ for putting anything on paper. Then there are the published remarks that when Madoff was investigated (by the SEC??) in 2001, “everything checked out.” I do suppose that that wasn’t much of an investigation—“You good, Bernie?” “Hell yes, I’m holding.” “S’aright.”—but that’s a rotting corpse under a rock to be exhumed some other day. So the picture presented does not manage to either come into focus or stay inside a frame. Then there is the issue that, since he wasn’t a registered investment management (supposedly what he provided for a fee was ‘advice’), it’s hard to be sure just _what records_ he was supposed to be keeping since he wasn’t supposed to be keeping open investment accounts FOR ANYONE.

    Myself, I suspect that the paper the forensic investigators are going though is a complete sham, tied to nothing whatsoever. Or at most tied to a certain amount of for-show trading churn which had nothing to do with either the purported accounts read back to clients in ‘statements’ or to what was actually done with the money.

    And that last phrase to me is the key in why this all smells so bad. What _was_ actually done with cash flows coming in the door? Did Madoff actually invest in anything? Or did he simply, really, and truly do what ol’ Carlo Ponzi did, and draw down accounts and inflows to maintain scheduled payouts and cover withdrawals. Sure sounds like the latter, at least over the last six-seven years to a surmise. That is, if Snook A had $1B in, Madoff told him it had grown to $1.5B while actually whittling it down to $.1B making payouts to all and sundry. Of course, if the latter was the operative mode, there _ARE_ no ‘records,’ only running balances seen by very few eyes. *yeesh* —But somebody generated all that false paper if so, and that somebody is not in custody. I would like to know who that ‘Person(s) B’ in this scheme is.

  7. eh

    More interesting will be the lawsuits against the SEC since IMO this is more obviously a case of SEC malfeasance than SIPC liability.

  8. Anonymous

    Co-founder of NASDAQ, huh?

    “……Bernard Madoff left behind a trail of “falsified” and “unreliable” records…..”

    No shit, Sherlock.

  9. Anonymous

    Fraudulent conveyance/transfer claims against investors that received money from Bernie make total sense. These claims are intended to spread losses among creditors of a ill-intentioned insolvent debtor. The principle is similar to that of the tort system, which has one goal of spreading losses from victims to business so that the business can spread them to customers, employees, owners, and other stakeholders in the business as an operating cost.

    Ehrenberg may not like the loss-spreading policies behind fraud or other tort claims, but that doesn’t mean the policies don’t make sense. That just means he doesn’t like them. Tough petutie.

  10. Kevin Smith

    Über-gonif Bernie Madoff has left a legacy which will provide a lifetime of employment for some lawyers, forensic accountants and commentators. I am eagerly awaiting the movie.

  11. Anonymous

    Artur Levitt, Chairman emeritus of the SEC, was “astonished” that his close friend and confidante was the world’s greatest con man. Kinda says it all.

    Now, if it turns out that Bernie gave it all to the poor, we have the makings of a classic childrens tale.

  12. Irene

    A movie would be a terrific idea!

    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….


  13. Anonymous

    Um, good magician's trick, look at this hand while the other one is playing the trick. F*&^ this little gub look for the big fish!

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


  14. ruetheday

    Two things to be certain of:

    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.

  15. tompain

    Quite a few posters here seem to think Madoff ran a fund (ie a legal vehicle in which customer funds are commingled). He didn’t. He ran brokerage accounts for his clients. He had hedge funds among his clientele, but he himself did not (so far as we know to date) run a fund.

    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.

  16. Kady

    Ok, now I’m confused (and can’t find information) – what exactly was the structure of Madoff’s organization? I’ve read that it was a brokerage with a separate asset management division. Would that mean that the brokerage is under SIPC protection, but not the asset manager? Also, although I understand that brokerages can make investment decisions on behalf of their clients, when does this cross the line, and the broker becomes and investment advisor?

    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.

  17. Yves Smith

    Anon of 1:45 AM,

    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.

  18. Anonymous

    I would like to sy that Irene on this blog has a lot of nerve to waste peoples time with her BS movie scenario and should donate her time and be a volunteer at a hospital if she has nothing else to do. I am here to get valuable information not listen to a moron spew forth asinine thoughts, especially hers about a movie. Get a life Irene!!!!!!!!!!!

  19. tompain

    Upon further reflection, it’s likely that the majority of the people whose money Madoff made off with were not actually among the 23entities he reported as clients of his Investment Advisory unit. After all, he had no RIA unit at all prior to 2006, but we know he was managing money for lots of people before then. We don’t know why he created a RIA in 2006, nor what was special about the 23 clients or $17 billion that got them put into that unit rather than left among the other people he was ripping off before registering. In fact, the more I think about it, those 23 are probably LESS likely to have SIPC coverage than the others who appear to have been ripped off through their brokerage accounts. SIPC insures broker/dealer operations, not RIA operations, as far as I know.

    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.

  20. Kady

    Although SIPC is theoretically a private organization, I wonder if this isn’t going to become another (back-door) vehicle for the govt to bailout the moneyed interests in America. B/c I really have to say, I can’t for the life of me figure out why the investors would be eligible for SIPC coverage, given the unusual structure of Madoff’s organization.

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