Fraud Professionals are the Real Winners in Madoff Case

The fees paid to fraud professionals such as attorneys, consultants and accountants to clean up the mess that Bernie Madoff's famous Ponzi scheme left is projected to reach over $1 billion! According to the Washington Post the fees paid to such professionals last year were almost $300 million and an additional $800 million is projected. Almost half of the fees went to the law firm of the trustee, Irving Picard. These fees are being criticized by those overseeing the case as described in the following quote from the Washington Post:

Winners and Losers in the Madoff Case

Irving Picard

Irving Picard, the trustee in the Madoff case, was in court last week as a panel of three judges heard arguments on whether net winners in the Madoff case ought to be able to collect money from the government. Net winners are those who took more cash out of Madoff's funds than they put in. Apparently, there are several of these guys who think they should get more money. Hmmmm.....

The WSJ had this to say about the case: "The judges' decision is likely to determine which Madoff customers may collect up to $500,000 apiece from the Securities Investor Protection Corp., an industry association created under federal law to insure investors in failed brokerages. It is also expected to affect how to divide billions of dollars Mr. Picard is recovering through legal settlements with people who withdrew money from the Ponzi scheme."

Now, it seems just a bit greedy to me that investors who got more money from Madoff than they put in would also be trying to collect from the taxpayers simply because Madoff sent them a statement showing they had more fictitious profits than they had already withdrawn! Apparently, the judges showed signs of wonder too as the WSJ reported the following:

How Should Madoff's Victims Be Compensated?

The government has an insurance fund that covers broker-dealer accounts known as the Securites Investors Protection Corp. (SIPC). The SIPC generally covers victims' losses up to $500k. As such, victims who had more than $500k invested with Bernie Madoff, will receive $500k from the SIPC plus the law allows for recovered assets to be divided among the victims based on a weighted average of their actual funds over $500k that they had deposited with Madoff.

There are two groups of victims in a Ponzi scheme such as that run by Madoff: net winners and net losers. The net winners took out more money than they put in. Under the current rules, this group gets nothing when a Ponzi scheme collapses and they may be asked to give some of their assets back to the net losers in what is known as a "clawback."As for the net losers, they are covered by SIPC and get a share of the recovered assets.

Some victims of Madoff are saying that they should be entitled to recoup what Bernie's statements showed they had in their account. In other words, suppose they put in $500k and never took any out. If they had the money with Bernie for, say, a dozen years or so, it would have supposedly grown to about $2 million. Now, these victims would love to get the SIPC to give them $500k and then to get some share of the recovered assets based on the additional $1.5 million that Bernie said was in their account. Under the current rules, they will get $500k and nothing else.

The question some lawmakers are asking is whether this is fair? Apparently, a few of our esteemed representatives in Washington don't think so. The WSJ reported recently that Rep. Paulk Kanjorski (D., Pa.) "would pursue changes to require the SIPC to fulfill claims of customers based on the account statements they received from failed broker-dealers." Well, I'm afraid the good Senator is confused about where money comes from. He must think the government can just print some up and give it to these victims without it hurting anyone else. Let's consider the options.

To What Extent Should We Bail Out Madoff Victims?

For some time now, I've been thinking about the extent to which victims in a Ponzi scheme such as the Madoff scheme should be bailed out by the government. Given the attention in Congress to reform the regulatory environment of the U.S. financial industry, I think this is a timely topic. Also, I've heard many complaints of Madoff investors who think the government should do more for them. (These complaints have been voiced in both the comments on this blog and in the news). To what extent should the American taxpayers help victims of Ponzi schemes? I know this will be a controversial topic but maybe it will generate some comments. I hope you share your thoughts in the comments!

Madoff victims beware...

I can't believe the nerve of some fraudsters out there! A recent WSJ article reported that a fake SIPC (Securities Investor Protection Corp) website is defrauding victims of the Madoff fraud. They are contacting Madoff victims and telling them that they are the real SIPC and need their information to process claims. They then steal the victims' identities and inflict pain on these individuals who just lost a good chunk or all of their life savings! Another sad testament that wherever there is money there are greedy lifeforms that are trying to get it!

Madoff victims, SIPC and a zero-sum game...

How would it be to be in charge of deciding which Madoff victims get protection under SIPC and can receive up to $500k in government insurance? That's what Stephen B. Harbeck does as the head of SIPC. A New York Times article today gives some details on how SIPC goes about this process. Here is a quote from Mr. Harbeck:

“Nobody likes to say no to people who are, without question, victims,” Mr. Harbeck said in an interview. “That’s been hard for me. That’s been hard for my staff. But this is a zero-sum game — a dollar we give to someone who is not eligible is a dollar we do not have for someone who is.”

Madoff victims get some money

It was reported today that victims of Bernard Madoff's Ponzi scheme received $530 million which was guaranteed by the Securities Investors Protection Corp (aka SIPC). The SIPC guarantees brokerage accounts up to $500,000 and is similar to the FDIC which guarantees bank accounts. Apparently, this payout of over one-half billion dollars is a record which exceeded the combined payout of the SIPC from 321 previous payouts since 1970! Sad as it is, Bernie Madoff will definitely be remembered as a fraudster for the record books!