June 1 (Bloomberg) -- Wall Street’s insurance fund for failed brokerages is “the worst kind of insurance company,” according to an investor who lost money with Bernard L. Madoff.
The Securities Investor Protection Corp. is “constantly finding technical reasons for choking out victims” said 72-year old Leah Larsen, who lives in New York and works part-time as a paralegal. Larsen, who said she lost about $100,000 with Madoff, said her claim was denied because her money was pooled with her brother’s account.
Larsen was one of five investors who spoke at a forum held by SIPC today at the Grand Hyatt hotel in New York. The purpose was to give investors a chance to voice their opinions on how to improve the group. It was the second in a series of national public forums soliciting input about the organization, which hasn’t been the focus of major new legislation in at least 30 years, according to the group’s website.
SIPC, based in Washington, is a nonprofit membership corporation overseen by the U.S. Securities and Exchange Commission and funded by brokerage firms to compensate investors whose accounts are missing stocks or other assets because of theft or other reasons when a member firm fails. SIPC may reimburse investors for assets of up to $500,000, including up to $250,000 in cash, and generally doesn’t reimburse investors who have been sold worthless investments.
There should be greater scrutiny of trustee fees, said Norma Hill, another investor at the forum, who said she lost more than $1 million in investments directly with Madoff and through feeder funds. Hill, who lives in Westchester County, New York, declined to give her age and said she’s currently living on Social Security benefits.
“There is a lot of over-billing,” Hill said. “Basically, the customer is always shorted but the trustee is always a winner.”
SIPC has paid more than $1.1 billion to Irving Picard, the trustee liquidating the estate of convicted Ponzi schemer Madoff, according to a May report. About $779 million was used to pay customer claims and $346 million was used for administrative expenses such as rent and fees, the report said.
Five members of the SIPC modernization task force attended the forum in person, including Joseph Borg, director of the Alabama state securities commission, and James Giddens, an attorney and the trustee for Lehman Brothers Holdings Inc. The task force, which didn’t answer questions at the forum, will review the public input and expects to present a written report to the SIPC board of directors later this year, Sharon Bowen, vice chair of SIPC, said in introductory remarks. The board may then make recommendations for legislation.
Relying on Statements
SIPC should reimburse victims based on account values listed on their statements rather than by comparing net contributions to and withdrawals from their accounts, said Timothy Murray, 58, who lives in Minneapolis and flew in for the event.
“We can’t do business with our banks and brokers and not be entitled to rely on the statements,” according to Murray, who said 18 members of his family lost “multiples of millions” of dollars with Madoff. “Otherwise we’ve got to go back to mailing paper certificates” of stock ownership, he said.
SIPC should be required to report to Congress periodically and build a larger fund to pay investors, said Ron Stein, president of the Network for Investor Action and Protection, an advocacy group for victims of Ponzi schemes founded by former Madoff investors.
It has a “history of sparing no expense in denying claims,” Stein said. “Its focus now is to remain elusive, under the radar, to minimize fees to the broker-dealer industry and to protect its fund.”
SIPC gets money from assessments on its members with a funding goal of $2.5 billion, according to the task force website, and had about $1.4 billion in assets in December, according to its annual report.
The SEC has been reviewing whether SIPC wrongly denied claims from investors who lost money with R. Allen Stanford. The SEC will decide “in the near future” whether alleged victims should receive reimbursement from SIPC, SEC enforcement director Robert Khuzami and inspections chief Carlo di Florio said in May at a House Financial Services Committee hearing.
Stanford, 61, was indicted in June 2009 on criminal charges claiming he misled clients about the safety and oversight of certificates of deposit issued by his Antigua-based bank. Stanford denies the charges and is scheduled for trial in federal court in Houston in September.
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