Let’s Put the ‘I’ and ‘P’ Back in SIPC

by Jacob Zamansky on January 2nd, 2009 at 10:47 am : Comments 000

On January 5^th victims of the Bernie Madoff Ponzi Scheme should turn their attention to the Congressman Barney Frank’s House Committee on Financial Services.  The full committee is expected to be in attendance at a hearing called “Assessing the Madoff Ponzi and the Need for Regulatory Reform.”  While the SEC is likely to get the medieval stockade treatment, another agency will hopefully be called to task: the Securities Investment Protection Corporation (SIPC), which is supposed to cover investors in the event that a major brokerage fails.

But if history serves as any example, Bernie Madoff’s victims, who are hoping for monetary relief from SIPC, are in for a rude awakening.

According to its website:

[SIPC] is the investor’s first line of defense in the event a brokerage firm fails owing customers cash and securities that are missing from customer accounts. From the time Congress created it in 1970 through December 2007, SIPC has advanced $508 million in order to make possible the recovery of $15.7 billion in assets for an estimated 625,000 investors. Although not every investor is protected by SIPC, SIPC estimates that no fewer than 99 percent of persons who are eligible have been made whole in the failed brokerage firm cases that it has handled to date.

The key word in the above is “eligible.” At nearly every turn, it seems SIPC goes out of its way to reject investor claims.  Their approach to paying out claims is akin to a corner store insurance company who wears out their rejection stamp on a weekly basis.

If you don’t believe me, take a look at the ongoing plight of the victims of Stratton Oakmont, the infamous brokerage that operated as a boiler room throughout the 1990s.  According to a recent Newsday column, only 41 of the 3,337 investors who filed claims during Stratton’s liquidation received money and SIPC says it will only repay nine more.  Adding insult to injury, reimbursements are expected to come from original stock which is most likely a worthless penny stock.

Needless to say, the Madoff liquidation will make Stratton’s look like child’s play.   Furthermore, in all likelihood Bernie Madoff isn’t the only crook out there running a Ponzi Scheme.  Investor redemptions will almost assuredly cause other schemes to fail.

SIPC is wholly unprepared for this.  The $1.8 billion SIPC holds for investor claims  is clearly insufficient and their maximum payouts are severely outdated.  The $100,000 for stolen cash and $500,000 for stolen securities hasn’t changed since the 1970s.  Why? One explanation is that SIPC is influenced by its sugar daddy: Wall Street.

Because SIPC’s budget is paid for by Wall Street they naturally wanted to pay in as little as possible and SIPC’s leadership has never pressured its gravy train to up the ante, even as Wall Street put trillions of dollars of investor funds at risk.

Congress needs to overhaul SIPC in the following ways: filing claims needs to be easier and faster, maximum payouts should double and Wall Street’s SIPC premiums should increase so there is a bigger cushion if another brokerage firm fails.

It’s probable that after Congress learns of SIPC’s lack of preparedness, talk of a bail-out will ensue.  But at least this bail-out will go to the real victims of Wall Street’s self-destruction instead of its perpetrators.

Filed under Investment Fraud, SIPC