US Lawmakers Criticize Method Of Paying Madoff Victims

A senior U.S. lawmaker criticized the method being used to pay claims to victims of the Madoff and Stanford Ponzi schemes as unfair and vowed to pursue changes at the Securities Investor Protection Corp.

Rep. Paul Kanjorski (D., Pa.) said the SIPC has damaged investor trust by denying claims of victims based on brokerage statements reporting false paper profits.

"Investor trust, for which SIPA was designed to preserve, has been seriously eroded by SIPC's narrow interpretations of its statutory mandate," Kanjorski, who heads the House Financial Services Subcommittee on Capital Markets, said Thursday at a hearing. The Securities Investor Protection Act established the SIPC in 1970 to return money to the customers of failed brokerages.

"While SIPC's actions may follow the letter of the law, many would argue that SIPC has ignored the spirit of the law," he continued.

Kanjorski said he would pursue changes to require the SIPC to fulfill claims of customers based on the account statements they received from failed broker-dealers. He also said he would explore whether the SIPC coverage should apply to investment advisers as well as broker-dealers.

Rep. Scott Garrett (R., N.J.), the panel's top Republican, said he was concerned about the plans of Madoff trustee Irving Picard to clawback funds from people who withdrew fraudulent profits from the Ponzi scheme over the years.

"SIPC leadership and the trustee have indicated that he will not be going after so-called 'ordinary' people who are not leading a lavish lifestyle and who had no knowledge of the fraud," Garrett said. "But that's not what I'm hearing from my constituents and others."

A Ponzi scheme typically leaves two classes of victims in its wake: Net winners who had withdrawn more funds than they invested and net losers who didn't recoup their original investment. The net winners may also be considered victims if they didn't withdraw amounts equal to the false profits they were told they had earned.

In testimony Thursday, SIPC Chairman Orlan Johnson defended the method being used by Picard, saying it wouldn't be right to pay claims based on account statements containing phony trading profits.

The method calculates claims based on the net equity in a customer's account, or the amount invested minus any funds that are withdrawn. The SIPC has denied some claims based on account statements the filers received from their brokers.

In June, the SIPC launched a task force designed to explore changes, including the adequacy of the fund used to pay customers, the corporate governance of SIPC and the levels of protection offered to investors.

For the most part, brokerage accounts are protected by SIPC up to $500,000.

In testimony, Alabama Securities Commission Director Joseph Borg urged an increase in coverage from $500,000 to $1 million. He also said the protection levels should be indexed to inflation.

"Americans today are heavily invested in the markets and...a large portion of their retirement savings consist of securities investments," Borg said in prepared remarks.

He added that the public has been concerned with SIPC's "lack of adjustments over the years."

To assuage investor concerns, Johnson told lawmakers that the task force is mulling whether or not to expand the definition of "customer" to be more inclusive.

"I am confident that the resulting determination will expand protection in this area on a prospective basis," he said.