The Madoff Fraud And The Role of SIPC
Thanks to the now infamous Bernard L. Madoff, we have heard a lot about “SIPC.” But what is SIPC and what role does it play with investors who have lost substantial amounts of money as a result of the Madoff fraud?
The Securities Investor Protection Act of 1970 “(SIPA”) established the Securities Investor Protection Corporation (“SIPC”). SIPC is a quasi governmental agency whose focus is to restore funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms.
When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in and, within certain limits, works to return customers’ cash, stock and other securities. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait for years while their assets are tied up in court. Although not every investor is protected by SIPC, according to SIPC’s website (www.sipc.org) no fewer than 99 percent of persons who are eligible get their investments back from SIPC.
SIPC does not cover individuals who are sold worthless stocks and other securities. SIPC helps individuals whose money, stocks and other securities are stolen by a broker or put at risk when a brokerage fails for other reasons. SIPC administers the SIPC Fund from which advances are made to satisfy customer claims. The fund is supported by assessments on SIPC member firms and its assets total $1.7 billion. In addition, SIPC maintains a commercial line of credit with an international consortium of banks, and by statute, has a $1 billion line of credit with the United States Treasury.
In the Madoff case, after Bernard Madoff confessed to having stolen customer property over a period of many years, a SIPC liquidation proceeding was initiated for his company, Bernard L. Madoff Investment Securities, LLC. A SIPC liquidation is a specialized form of a bankruptcy.
Unfortunately, the maximum amount under SIPA that SIPC can advance to any one claimant is $500,000.00, even if the claimant has a much higher valid claim. The extent of recovery by customers beyond the $500,000.00 maximum advanced by SIPC depends upon the amount of customer property that the trustee is able to recover on behalf of all victims. In the Madoff case, for example, a victim who has a valid claim for $10 million would only be eligible for a maximum of $500,000.00 from SIPC plus their pro rata share of what ever property is recovered by the trustee. It is estimated that Madoff’s victims have claims of approximately $50 billion and that SIPC has identified approximately $830 million in liquid assets that may be subject to recovery. Accordingly, there is very little chance that most of Madoff’s victims will ever be made financially whole.