SIPC INSURANCE THE TRUTH

Madoff Coalition, February 2010

THE BEGINNING
! Intentions

December 1970
! Mr. President, since 1934, the United States has insured bank deposits under the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation. These insurance programs protect bank depositors from loss of their savings because of bank failures. And the existence of this deposit insurance has become a source of confidence in the soundness of our savings institutions. S. 2348, the Security Investor Protection Act of 1970, would accomplish a similar purpose for securities investors by protecting them from losses because of the failure of their brokers.

Sen. Edmund Muskie

Sen. Edmund Muskie - Opening Remarks - Securities Investor Protection Act 1970

December 1970
! The willingness of investors to entrust assets of this magnitude to brokerage firms attests to the great confidence the American public has had in our securities industry in the past. But today that confidence is jeopardized. In my judgment, it is clear that the Congress must act now to protect the investor and to restore public confidence in the securities industry.

!
Sen. Edmund Muskie

Sen. Edmund Muskie - Opening Remarks - Securities Investor Protection Act 1970

December 1970
! S. 2348 is a major step toward accomplishing these goals. It does so in three ways.
First, S.2348 proposes the creation of the Securities Investor Protection Corporation (SIPC), a private nonprofit corporation which would administer an insurance fund composed of industry funds raised by annual assessment, backed up by Treasury borrowing authority. This insurance fund would protect investors from the serious hardships that can follow the failure of a brokerage firm. Second, in order to minimize delay in meeting the legitimate claims of customers injured by the insolvency of a broker-dealer, S. 2348 introduces certain procedures for prompt liquidation of SIPC members when required, outside the time-consuming machinery of a bankruptcy proceeding. The bill also would establish procedures for making prompt distribution and payment of claims under certain conditions, without the need for formal proof of claim as is now required by the bankruptcy laws. Third, the establishment of an insurance fund to protect the assets of investors is not sufficient without additional corrective measures to eliminate some of the problems which are causing broker failures. S. 2348 would give the Securities and Exchange Commission greater ability and authority to deal with these problems.

Sen. Edmund Muskie

Sen. Edmund Muskie - Opening Remarks - Securities Investor Protection Act 1970

December 30, 1970

! I AM SIGNING today the Securities Investor Protection Act of 1970. This legislation establishes the Securities Investor Protection Corporation (SIPC), a private nonprofit corporation, which will insure the securities and cash left with brokerage firms by investors against loss from financial difficulties or failure of such firms. Just as the Federal Deposit Insurance Corporation protects the user of banking services from the danger of bank failure, so will the Securities Investor Protection Corporation protect the user of investment services from the danger of brokerage firm failure. This act protects the customer, not the broker, since only the customer is paid in the event of firm failure.

!
Pres. Richard Nixon

December 30, 1970

! This legislation contains a specific statutory mandate to the Securities and Exchange Commission to promulgate rules and regulations with respect to the financial responsibility and related practices of brokers and dealers. The SEC is given flexibility in establishing those rules and regulations. The functioning of the securities industry is a key element in providing the means for continued growth of American business and the economy of this country. Protection for the customer is essential, and has been provided here, as in the mutual fund bill [Public Law 91-547] which I recently signed. The Government and the industry must work together on seeking prompt solutions to the problems of the securities business. While those problems are being defined and resolved, the user of investment services, the small investor, will be protected.

!
Pres. Richard Nixon

April 1970 - July 1970

! "In April 1970, the Acting General Counsel of the Department of the Treasury sent letters to the chairmen of the relevant committees of both the Senate and the House stating that Treasury opposed the bills, in part because the proposed limit on cash advances of $ 50,000 per account far exceeded the $ 20,000 limit per account on coverage provided by FDIC and FSLIC, and, thus, "could be construed as an indication that the Federal Government attaches greater importance to the preservation of public confidence in broker-dealers than to the preservation of confidence in the banking system." The Vice Chairman of the Board of Governors of the Federal Reserve System made a similar observation -- that the proposed SIPC "insurance" would be "more generous than coverage afforded depositors" under the FDIC and FSLIC -- in a July 1970 letter to the House Committee. In re New Times Sec. Servs., 371 F.3d 68, 84-85 (2d Cir. 2004)

Federal Broker - Dealer Insurance Corporation: Hearing Before Senate Subcommittee on Banking & Currency

2010 FINRA Brochure

! SIPC is a non-profit organization created in 1970 under the Securities Investor Protection Act (SIPA) that provides limited insurance to investors on their brokerage accounts if their brokerage firm becomes insolvent. All brokerage firms that do business with the investing public are required to be members of SIPC. SIPC protection is limited. It covers the replacement of missing stocks and other securities up to $500,000, including $100,000 in cash claims. However, it does so only when a firm shuts down due to financial circumstances in which customer assets are missing because of theft, conversion, or unauthorized trading are otherwise at risk because of the firm's failure. SIPC coverage of $500,000 is extended to each "legal customer." For instance, if you have three accounts at a firm and one is an individually held account in your name only, another is a joint account with your spouse, and a third is an IRA account in your name each account is considered a separate "legal customer" and each will be eligible for full SIPC coverage. http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/P116996

FINRA - If a Brokerage Firm Closes Its Doors

September 1994
! The financial health and soundness of our nations securities markets depend partly on public confidence that these markets operate fairly and honestly. A key factor in public confidence is the level of trust between investors and their brokers. SEC, state regulators, and the industry all have a role in protecting investors from unscrupulous brokers. Given that even a few unscrupulous brokers can do serious harm to investors, surveillance and disciplinary policies and practices need to be as effective as possible.

GAO REPORT: Securities Markets-Actions needed to Better Protect Investors Against Unscrupulous Brokers.

June 20, 2000

! Washington, D.C., June 20, 2000 - A record payment of $31 million from a special reserve fund authorized by Congress to help investors at bankrupt brokerage firms is being used to restore stocks and cash that 9,738 investors lost due to theft at Sunpoint Securities, a Longview, Texas-based firm, officials at the Securities Investor Protection Corporation (SIPC) announced today. "This case, which is the most expensive in our history, illustrates in vivid terms why it is that SIPC is the investor's first line of defense in the event of brokerage bankruptcy," said SIPC President Michael Don.

http://www.sipc.org/media/release4.cfm

November 13, 2002

! "I will bring the vigilance and dedication that the role deserves. Individual investors are comfortable knowing that SIPC is behind them if anything should happen, and I will work hard to maintain and strengthen that confidence. In this era of uncertainty about the stock market, SIPC directors should bring nothing less than their full attention to their task. I promise to do so in the tradition of the many directors before me who have helped maintain a solid foundation beneath the strongest capital markets in the world.
http://www.sipc.com/media/release13november.cfm

Deborah D. McWhinney

Deborah D. McWhinney confirmed as SIPC Director

December 1, 2003
! When SIPC was founded in 1970, Congress stated that one of the primary purposes of the legislation was to restore confidence in the market. Stephen Harbeck President & CEO of SIPC

Stephen Harbeck President, SIPC

sipc.org/media/release01dec03.cfm

December 16, 2008

! The SIPC maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms. The SIPC reserves are available to satisfy the remaining claims of each customer up to a maximum of $500,000. Streetinsider.com

Josephine Wang General Counsel, SIPC

SIPC protects customers. SIPC officials Michael Don and Josephine Wang have stated that because SIPA is a statutory scheme with very definite goals, the concept of customer is defined in furtherance of those goals. One of those goals, Don and Wang argue, is to protect persons who had entrusted cash or securities to their brokers for the purposes of trading and investing, that is, for some purpose connected with participation in the securities market.

THE INTERVENING YEARS

! The Inconsistencies & Ambiguities ! The Realities

December 16, 2008

! If clients were presented statements and had reason to believe that the securities were in fact owned, the SIPC will be required to buy these securities in the open market to make the customer whole up to $500K each. Josephine Wang SIPC General Counsel Conversations with Streetinsider.com regarding the Madoff case.

Josephine Wang General Counsel, SIPC

January 5, 2009
! Brad Sherman:Everybody who has one of these statements where they invested in Madoff and the positions are here listing the securities you are supposed to have, it is insured up to half a million dollars correct?....You do perform an insurance company function? Stephen Harbeck: YES

Rep. Brad Sherman

Stephen Harbeck President, SIPC

Congressional Hearing - Madoff Fraud Allegations and Financial Markets Regulation

January 5, 2009
! ! Sherman: There is no more obvious fraud than someone selling insurance or claiming to be providing insurance that doesnt have any capital to pay anybody off. Should your members put an asterisk by the decal that they all have in their windows saying, Yes SIPC corporation provides the protection but there is virtually no net worth. Your net worth is trivial or negative compared to the well over $1T of security that youre supposed to be providing the investors in all of our districts, right? Harbeck: We look at the condition of our solvency at every board meeting. Sherman: Im not asking for your solvency, Im asking for your net worth, your assets minus your liabilities, including the liabilities you have in the Madoff situation. Your net worth is less than $1B and we have over $1T worth of accounts with securities brokers here in the US that are under the half, and Im only counting the ones that are under the half million dollar limit.

Rep. Brad Sherman

! !

Stephen Harbeck President, SIPC

Congressional Hearing - Madoff Fraud Allegations and Financial Markets Regulation

November 25, 2000

! The corporation itself has paid investors $233 million over almost 30 years. But that amount is far less than the money received by the lawyers that act as trustees and the firms that help them shepherd the cases through the bankruptcy courts, trying to recover additional assets from the failed brokerage firms and assessing customer claims for validity. Since 1971, trustees have received $320 million, 37 percent more than has been paid to wronged investors. Gretchen Morgenson The New York Times November 25, 2000

Gretchen Morgenson

1995
! In the liquidation of clearing firm Adler Coleman, which failed in 1995, legal fees have reached almost $12 million, with an additional $1.1 million in expenses. http://www.securitiesarbitration.com/news/2000/08/07/investorprotection-agencys-scroogelike-ways-draw-fire-in-trade-dispute/ Picard, who SIPC has hired as a trustee on seven liquidations, is not the only lawyer to have won repeat assignments from the agency. When it comes to paying Picard, the recovered funds will not be touched. Instead, SIPC will pay all fees and administrative costs related to the case from monies it receives from its member institutions, an account with some $1.6 billion in it. But Picard still stands to put a pretty penny in his pocket. SIPA trustees like Picard and their staffs get hourly fees and expenses paid for, as well as discretionary amounts based on a number of factors. Normally, Chapter 7 bankruptcy trustees personally receive 3% of anything over $1 million they recover for victims. In SIPA cases, however, the amount is not based strictly on a percentage of monies recovered since often there is no money remaining in accounts.Read more: http://www.time.com/time/business/article/0,8599,1901593,00.

! Irving Picard Trustee

2009
! ! First, the myth that the SIPC protects against all forms of fraud. We are not an insurance company. Your money is at risk. Most, but not all, products are covered by the SIPC. Products not covered include fixed annuities, commodities, and unregistered limited partnerships. These products may loosely fit within the definition of securities, but they do not qualify as securities for the SIPC purposes.
http://www.theinvestmentprofessional.com/vol_2_no_4/interview-HarbeckPicard.html

Stephen Harbeck President, SIPC

The Investment Professional - Interview with Picard & Harbeck

FEBRUARY 2, 2010
! The trustee understands his responsibilities" under the Securities Investor Protection Act of 1970. And he tried to dispel notions that the Securities Investor Protection Corp. (SIPC), a federally mandated non-profit agency created to protect customers of failed brokerage firms, has an insurance fund to compensate victims. According to Mr. Sheehan, while investors can receive up to a $500,000 advance from the agency, that is only after someone has "already determined that you have an allowed claim. "There's no insurance. There's no $500,000 that everyone gets a check for. I don't understand why people don't get that," he told Judge Lifland. But Brian J. Neville of Lax & Neville in Manhattan said the trustee's method was contrary to 80 years of precedent in securities law and a throwback to the discredited concept of "buyer beware." He said that SIPC, which acts as a "backstop" when a brokerage firm fails, had clearly "failed the Madoff victims. law.com/jsp/nylj/PubArticleNY.

David Sheehan Baker & Hostetler !

Madoff Hearing before the Hon. Judge Lifland

1973 - 1996 Court Cases

! ! In re Omni Mut., 193 B.R. 678, 680 (S.D.N.Y. 1996)( SIPA created SIPC and SIPC maintains an insurance fund not unlike the Federal Deposit Insurance Corporation.) Rich v. Touche Ross & Co., 415 F. Supp. 99 (S.D.N.Y. 1976)(In SIPC liquidation, securities of various issuers are returned to the extent they are available; missing securities, as to which there is a shortage, are deemed reduced to their cash equivalent as of the close of business on the SIPA filing date, and claims are paid from SIPC's insurance fund or the general assets of the defunct stockbroker.) Securities Investor Protection Corp. v. Charisma Sec. Corp., 371 F. Supp. 894, 899 (S.D.N.Y. 1974)(In addition, revision of the SIPA should be considered to more fully apprise members of the public that general contract and fraud claims as well as claims for market losses against brokerage houses are not included in the insurance umbrella afforded by SIPC, and that only net equities of the customers are recoverable up to the ceiling limits given in the statute. Handelman v. Weiss, 368 F. Supp. 258, 263 (S.D.N.Y. 1973)(SIPC administers an insurance program designed to protect the customers of its members.) United States v. LaScola, 2007 U.S. Dist. LEXIS 46054 at *6 (D.R.I. June 25, 2007)(From the papers submitted, it appears that the principal sources of the funds used to reimburse the victims were insurance proceeds paid by the Securities and Investment Protection Corp. ("SIPC") and proceeds from the RBG notes, purchased by LaScola on behalf of his victims without their consent.)

! !

July 14, 2009

! Ackerman: Which Madoff investors are eligible for SIPC insurance?

Rep. Gary Ackerman

Schapiro: Congressman, let me just say that this shouldnt be such a difficult issue, but it is , and of course, it is a very heartbreaking issue, because, the tragic truth is there is not enough money available to pay off all the customer claims.

Mary Schapiro Chairman, SEC

Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises Hearing

January 2009 - February 2010

! ! ! ! ! ! ! On Aug 6, 2009, Baker & Hostetler (Trustee Irving Picards firm) was awarded nearly $ 17M in legal fees and expenses for a four month period. January 2010 - Baker & Hostetler was awarded an additional $ 21.2M in fees covering five months work. Baker & Hostetler are billing at a rate of $ 1M/week. Trustee Irving Picards share has not been disclosed. The standard compensation is 33% of what you bring in - a potential minimum of $17M/yr. Every million denies two innocent victims of SIPC insurance. All monies are paid from SIPC funds NOT from taxpayer money. THESE PAYMENTS ARE MADE FROM THE SAME FUND THAT MS. SCHAPIRO STATED WAS INSUFFICIENT TO PAY CUSTOMER CLAIMS.

December 9, 2009
! The Madoff trustee has used the avoiding powers granted him by SIPA and the Bankruptcy Code judiciously. He has not sued small investors. He's sued 14 large investors. He has urged any Madoff customer who has received more money than he placed with Mr. Madoff to open discussions with him. And he is open to reason.

Stephen Harbeck President, SIPC

Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises Hearing

FEBRUARY 2, 2010
! The law mandates that Net Equity be determined by reference to the final customer account statements, which best reflect the customers reasonable expectations. More specifically, where, as here: (i) customers receive trade confirmations and account statements involving real securities which exist in the market and could have been purchased and (ii) the customer was neither complicit in the scheme nor had actual knowledge of it,Net Equity is equal to, and determined by, the customer's last account statement. Realistically, the Trustee asks this Court to approve a result-driven approach rather than one guided by the Congressional intent as manifested in the SIPA statute - with a result which is directly opposite to the stated legislative intent. Bluntly, the Trustee has predetermined what he wishes to accomplish: to minimize the financial costs to SIPC and ultimately to SIPC's securities industry members, without real regard for investor protection and expectations. With that as the goal, the Trustee then crafted a definition of Net Equity to achieve that result. In doing so, the Trustee seeks to trump Congressional authority and the clearly expressed intent to protect reasonable customer expectations and foster investor confidence in the capital markets. In the process, the Trustee and the SEC are mangling the SIPA statute and the controlling case law virtually beyond recognition.

Bernfeld, DeMatteo & Bernfeld !

Madoff Hearing before the Hon. Judge Lifland

FEBRUARY 2, 2010
! Sheehan contended at the hearing that the approach of the objecting investors would "ignore the reality" of a Ponzi scheme. "The last customer statement, being the concoction of a fraudster, is not something on which you can rely" in calculating net equity, said Sheehan, a partner at Baker & Hostetler. In fact, that would only "reinforce Bernie's fraud, he claimed.
lawyers-law.com/trustee-madoff-investors-spar-over-payout-calculation/

David Sheehan Baker & Hostetler

The statements issued to Madoff investors on a monthly basis were relied upon without question by the IRS to collect tax revenue.

Madoff Hearing before the Hon. Judge Lifland

THE FUTURE
! The Consequences ! The Uncertainty

DECEMBER 9, 2009
! And they tell me that, under present conditions to handle the claims that are out there -- because they're under all the various laws of the 23 nations involved -- that it's going to take something like 30 years to resolve these claims. And I was going through the -- the roughly $100 million a year of the trustee's fees. Are you prepared to pay out $3 billion over the next 30 years to the trustee so that he can be around to settle these claims? Because, quite frankly, I think it's going to end up -- his fees are going to be a hell of a lot larger than the claims. Rep. Kanjorski questioning Stephen Harbeck

!
Rep. Paul Kanjorski

Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises Hearing

July 14, 2009

! Ackerman:That leaves, if I could just interject there, a larger problem because that means our citizens are not entitled to have confidence in the system.

Rep. Gary Ackerman

Schapiro: Well, there is no doubt that what has happened with Madoff has shaken everybodys confidence in the integrity of the financial services industry and in the regulations system to protect investors

Mary Schapiro Chairman, SEC

Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises Hearing

July 14, 2009

! The justification is that their cache of funds is finite and paying defrauded investors who may have some troublesome aspects to their claims will leave an empty bag for future claimants, said Harvey Pitt, a former chairman of the Securities and Exchange Commission, which monitors SIPCs operations. In his view, Mr. Harbeck is missing an opportunity for SIPC to stand up for those who have been defrauded by a master swindler.
http://www.nytimes.com/2009/12/09/business/09madoff.html?_r=2&pagewant ed=2&dbk

!
Harvey Pitt, Former SEC Chairman

December 29, 2009

! The key problem plaguing our markets is a total breakdown of that trust - investor confidence. Arthur Levitt, Former SEC Chairman

Arthur Levitt

Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises Hearing