Several House lawmakers on Wednesday criticized the treatment of Madoff fraud victims by the agency charged with resolving brokerage firm failures, saying new legislative remedies may be needed to help the investors.
Actions by the industry-funded Securities Investor Protection Corp. and the trustee in the Madoff bankruptcy have "the victims being victimized again," Rep. Peter King, R-N.Y., said at a House Financial Services Committee hearing.
The criticism was buttressed by testimony from some defrauded Madoff investors, putting a human face on the scandal that broke a year ago when Bernard Madoff was arrested at his Manhattan penthouse and the biggest investment fraud in U.S. history came to light. Losses are estimated at $13 billion to $19 billion.
"The money I had invested with Madoff represented 30 years of my life savings," Jeannene Langford, a design consultant from San Rafael, Calif., told the committee. "This was my retirement, a down payment for a house, investment for the business I was starting, and it was money for my daughter's education. I do not have another 30 years to earn this money again."
Thousands of individuals _ including ordinary people and Hollywood celebrities _ as well as big hedge funds, international banks and charities worldwide lost money investing with Madoff. He is serving a 150-year sentence in federal prison after pleading guilty in March.
The SIPC, created by Congress to protect investors when a brokerage firm fails, can provide up to $500,000 for each customer. It has adopted a "cash-in-cash-out" method for determining claims _ angering the Madoff investors who say the basis should be the amount reported on their final account statement.
The cash-in-cash-out approach repays customers the money they invested minus the cash they withdrew from their account. The bankruptcy court overseeing the case is resolving the dispute between the investors and SIPC and the trustee _ which maintain that claims can't be based on final Madoff statements because the amounts reported were bogus.
The Securities and Exchange Commission, already under fire for bungling numerous investigations of Madoff's business and failing to detect his scheme despite red flags, drew reproach for supporting the SIPC's position. The SEC supports the "cash-in-cash-out" claims method plus an additional payment to investors to adjust for inflation.
The SEC is recommending use of that method "with an additional adjustment to ensure that the investors' claims in this long-running scheme are valued most accurately and fairly," said Michael Conley, the SEC's deputy solicitor.
But the SEC's stance "could create a run on the securities firms" because investors couldn't have confidence they would fully recover their funds if their brokerage fails, said Helen Chaitman, legal adviser to the Madoff Coalition for Investor Protection.
The court-appointed trustee, Irving Picard, is seeking to recover around $700 million from investors who unwittingly made money from the stunning Ponzi swindle _ so-called clawbacks of bogus profits. Some people who withdrew significant amounts from their Madoff accounts have long since spent the money, then lost the rest of their savings in the fraud.
Rep. Gary Ackerman, a Democrat whose New York district encompasses the affluent north shore of Long Island that's home to many of Madoff's victims, said many investors were being gouged by the clawback provision.
Lawyers representing investors are challenging the legality of the clawbacks, and some members of the House panel said legislation was needed to restrain them.
But Rep. Paul Kanjorski, D-Pa., the panel's chairman, said he was concerned that would lead to unfair treatment of later investors in the Madoff scheme. At the same time, Kanjorski said, clawing back profits from Madoff that charitable organizations already have used "could prove especially devastating."
"We must walk a fine line in determining how to proceed, if at all," Kanjorski said.
John Coffee, a securities law professor at Columbia University, told the lawmakers that restraining Picard's ability to claw back profits could slash the amount he recovers for victims.
SIPC President Stephen Harbeck said in prepared testimony that it has so far paid out $559 million to Madoff investors. That's more than the combined total of all the brokerage busts it previously handled. More than 16,000 claims have been filed by investors with SIPC, representing $4.6 billion, Harbeck said.
Fourteen lawsuits seeking $14.8 billion from "feeder funds" that channeled money to Madoff have been filed, and $1.1 billion has been recovered, Harbeck noted.
Critics say that SIPC is underfunded. Its reserve fund has fallen to $1.2 billion from $1.7 billion before the Madoff blowup. Legislation authored by Kanjorski _ part of the financial overhaul package now before the House _ would increase the fees SIPC could charge securities firm and more than double its line of credit with the Treasury Department to $2.5 billion from $1 billion.