1 / 18

The Madoff Fraud

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

chaney
Download Presentation

The Madoff Fraud

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  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 • Public pronouncements by SIPC officials • Stephen Harbeck, President • Harbeck testifies at a House Committee hearing in 2009 that SIPCwas indeed investor protection (except for market risk) and agreed it performed an insurance like function. • Josephine Wang, General Counsel • “Based on a conversation with … Josephine Wang, if clients were presented statements and had reason to believe that the securities were in fact owned, the SIPC wil be required to buy these securities in the open market … to make the customer whole up to $500K. So, if Madoff client number 1234 was given a statement showing they owned 1000 GOOG shares, even if a transaction never took place, the SIPC has to buy and replace the 1000 GOOG shares. • Source: December 16, 2008 Insiders’ Blog www.streetinsider.com

  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. 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. Net Equity §78III (11) The term “net equity” means the dollar amount of the account or accounts or a customer, to be determined by – 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 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 PAID • AND SIPC SAVES WALL STREET ABOUT $1.5 BILLION IN 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 RecommendationsSource: 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 RecommendationsSource: 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.

More Related