1. The Madoff Fraud
Challenging What you Think you Know
Dallas Association of Certified Fraud Examiners
Wednesday, May 15, 2013

2. “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” (emphasis added)
_________________________________________________
Richard Nixon, Statement on signing into law the
Securities Investor Protection Act, December 30, 1970

3. SIPA and SIPC
Friend or Foe

4. The Tsunami
Tsunami 1
Madoff investors, many in their 80s and 90s wake up on 11
December 2008 to find themselves victims of a crime - and
many are left nearly destitute.
 Tsunami 2
Madoff investors find themselves victimized by the very
laws they thought were there to protect them
Tsunami 3
Madoff investors are sued under “clawback” statutes – first
ever in a SIPC liquidation.

5. What is SIPA/SIPC?
Congress enacted SIPA (Securities Investor Protection Act
of 1970) to instill confidence in the US Markets and help
Wall Street defray costs of certificated stocks.
The SIPA created the Securities Investor Protection
Corporation (SIPC)
Quasi governmental agency
Funded by SIPC members (Wall Street) via annual
assessments – there are no taxpayer dollars at risk.

6. SIPC – the Reality

7. SIPC – the Reality
Legislative Intent –
There is more than ample evidence to prove that the SIPA
was always intended to “provide insurance.”
House and Senate reports, Congressional Record,
Congressional Testimony
SIPC’s Series 500 Rules, 17 C.F.R. 300.500 (enacted
pursuant to SIPA) supports “legitimate expectations” as
the amount noted in and written confirmations and account
statements.

8. SIPC – the Reality
Legal Precedent
For decades and until now in numerous Ponzi scheme
cases, including a case that went to the Second Circuit,
In re New Times Securities Services, Inc., 371 F. 3d 68,
72 (2d Cir. 2004), SIPC has recognized that customers’
“legitimate expectations” are derived from
statements and trade confirmations received from the
fraudster and has paid based on the victims’ last
statement

9. SIPC – the Reality
 SIPC spends more money
fighting claims than paying
claims
 Investor Beware: Many Holes
Weaken Safety Net for Victims of
Failed Brokerages, Gretchen
Morgenson, NY Times September
25, 2000
 SIPC was woefully
underfunded
 Members were charged statutory
minimum of $150 per year for
18 years
 SIPC was repeatedly warned by
Congress and the General
Accounting Office that it would be
unable to manage a “catastrophic
SIPC failure.”
 (1992, 2000, 2003,

10. Bankruptcy Trustee
SIPC appoints – and pays the salary for – the SIPC
bankruptcy trustee
This is Irving Picard’s 7th
SIPC Bankruptcy. To date, his
firm, Baker and Hostetler, has billed SIPC over $750
million (while expenses go unchecked)
Speculation: After reviewing books, Trustee and B&H
determine there just isn’t enough money to pay all the
direct investor claims (nearly 5,000).

11. Net Equity SIPA mandates that a
customer’s claim in a SIPA
liquidation be fixed at the
customer’s “net equity.”
SIPA defines “net equity”
as the value of the
securities as of the SIPA
filing date (in this case
12.11.2008) less any
amount the customer owes
the debtor.
§78III (11)
The term “net equity” means
the dollar amount of the account
or accounts or a customer, to be
determined by –
(A)Calculating the sum which
would have been owned by the
debtor to such customer if the
debtor had liquidated, by sale or
purchase on the filing date, all
securities positions of such
customer (other than customer
name securities reclaimed by
such customer); minus
(B)Any indebtedness of such
customer to the debtor on the
filing date; …

12. What Else Does SIPA Say About Net
Equity?
SIPA specifically prohibits SIPC from changing the
definition of “net equity,” and affirmed by the US
Appellate Court - Second Circuit.
Without legal authority and ignoring 38 years of
precedent, Picard has invented his own definition of “net
equity”
Deposits Less Withdrawals OR Money In Less Money Out
or Net Investment
Picard asserts he has a right to recognize investor claims
only for the amount of the net investment.

13. Effect of Changed Definition
Media campaign to demonize and create
dissension between and amongst the various
victim classes:
Net Winners v. Net Losers
Direct Investors v. Indirect Investors
Older Investors v. Newer Investors
But most importantly – Bottom Line:
 FEWER CLAIMS TO BE PAIDFEWER CLAIMS TO BE PAID
 AND SIPC SAVES WALL STREET ABOUT $1.5AND SIPC SAVES WALL STREET ABOUT $1.5 BILLIONBILLION
IN SIPC INSURANCEIN SIPC INSURANCE

14. Clawbacks
For the first time in history, clawbacks were invoked in
SIPC liquidations
The final degradation – investors have already lost
everything and there is no insurance.
Note that many elderly were required by law to take
federally mandated withdrawals from the IRAs and other
investment vehicles!
Hardship applications take away whatever remaining
dignity a victim may have.
Already low on funds, victims must pay lawyers to work
their way through the process.

15. Taxes
Madoff investors paid taxes on the so-called “fake
profits” for, in some cases, decades at the higher short-
term capital gains rate.
On 17 March 2009, IRS Commissioner Shulman issued
20-009 that provides a five-year theft loss carryback, yet
the Trustee sued for 6 years.
40 cents of every every dollar that SIPC refuses to pay is
borne by the US taxpayer since tax refunds will be paid
vs. SIPC payments.

16. Who is a Customer
 When SIPA was written in1978 the intent was to protect all
investors, however, less than 10% of investments at that time were
through feeder funds, funds of funds, self-directed retirement
vehicles, pension funds, etc.
 While there were 5,000 “direct investors” there were an estimated
20,000 or so who were invested indirectly, i.e., through feeder
funds, funds of funds, self-directed retirement vehicles, pension
funds, etc.
 Under current law, these investors are not considered customers at
all and are ineligible for any SIPC recovery – at all.

17. Specific Recommendations
Source: Network for Investor Action and Protection (NIAP) Testimony
Sept 2010 – House Banking Committee (investoraction.org)
 Congress should clarify that final statements from brokers should be
the measure of net equity
 Eliminate clawbacks for investors that is neither on notice or
complicit of a fraud that created the bankruptcy
 Trustees should no longer be selected by SIPC
 SIPC must increase member assessments to build a fun that can
accommodate at least three simultaneous bankruptcies]
 Increase the maximum limits on SIPC advances.
 Current amount, set in 1978, is $500K
 Increase the advance, retroactive to Jan 1, 2008 to a sum equivalent
to $500,000 in 1978

18. Specific Recommendations
Source: Network for Investor Action and Protection (NIAP) Testimony
Sept 2010 – House Banking Committee (investoraction.org)
Amend the SIPA to accommodate the explosion of assets
invested in hedge funds, family limited partnerships,
private equity, mutual funds, and other entities not
currently regulated
It is estimated that 10s if not 100s of thousands have entered
these markets, unaware of the risks involved
Consider making indirect investors eligible for SIPC and other
advances.