Wednesday, March 3, 2010
Winners and Losers in the Madoff Scam...
The WSJ reported yesterday that the courts are deciding whether investors in Madoff's Ponzi scheme who took out more money than they put in should be able to collect recovered funds. The trustee is arguing that any recovered funds should be given to those who took out less than they put in since their funds were already given to the net winners. The article points out that if net winners are also given a share of the recovered funds then this means less funds will go to the net losers. Since, no net loser will ever break even after it's all said and done, the net winners will be better off than the net losers even if they had to forfeit any amounts they received above their investment. The amazing thing is that this has to be debated in court! I think the real net winners are the attorneys who are fueling the arguments!
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There are many "net winners" and "net losers" who are hurting. Most are just plain "losers" ignoring the labeling of "winner" or "loser." Without attorneys to stand up for them they are being bulldozed by a system intent on rewarding the securities industry and SIPC, while depriving, not just the Madoff victim, but any investor, their rights which were created by the SIPA Act of 1970. If the Madoff investors ultimately lose, we all lose. No investment could truly be considered safe, for by the time a person finds out they are being scammed (and new scams come out practically every day), then it is too late to do something about it. And if you were fortunate to discover that your investment was a scam before the SEC does, any money you have taken out could and will be clawed back. SIPC is supposed to protect account balances, not the recently invented "cash in/cash out." Hell, if you had a bank account that you allowed to grow from $20,000 to $40,000 over the years and paid taxes on it from other monies, and the bank folded due to fraud, everyone and their grandmother would expect to get the account balance ($40,000), not the amount you put in 10 years earlier. Who needs the FDIC then? I'd be scared going to sleep each night knowing that only my original investment was protected. FDIC has always covered account balances, and so did SIPC, until now (despite a history of reluctantly objecting whenever it could). Bottom line, SIPC, against warnings from Congress, allowed itself to get hopelessly underfunded, and now they are attempting to save itself by making the Madoff investors the "bad" guys.
ReplyDeleteridiculous!
ReplyDelete"No investment could truly be considered safe, for by the time a person finds out they are being scammed (and new scams come out practically every day), then it is too late to do something about it."
ReplyDeleteRichard, are you implying that getting scammed is inevitable and that investors have no way of avoiding shady investment opportunities?
Aaron,
ReplyDeleteNo, I am not implying that. I was just trying to make a point. What I am attempting to say is that scams unfortunately are becoming too prevalent, and that one does not have the benefit of hindsight to know before its too late that they are being victimized by a scam. Of course I support everyone doing their own due diligence, but its been proven time and again that most investors (and apparently broker/dealers and the SEC) lack the tools to be able to tell an honest investment from a fraudulent one. One might say that anyone who lacks the proper skills should therefore not invest. While that might be a true statement, then you would knock out maybe 90% of the investors in the country. How would Wall Street react to that? Same way they did in 1970 when they supported the creating of SIPC.
SIPC has currently denied fulfilling its original mandate.
SIPC, which has been derelict in their duty to keep the system safe by allowing itself to be underfunded for the last 20 years, forced itself into a corner when the whole Madoff scandal broke.
Aaron, for the vast majority of cases where the brokers are honest and the only thing to worry about is market fluctuations, one does not have to give SIPC a second thought. Its just that there have become too many cases lately where it has been revealed that the investment someone thought was legit, turned out not to be. That is one of the reasons for SIPC's existence.
SIPC, the FDIC and your homeowners policy are all supposed to "insure" what the value is today, not years ago. Taking a contrary position to this that I have not seen mentioned anywhere, in the following example. Let's say a person invests $100,000 and takes nothing out and the investment decreased in value to $70,000, and the broker goes belly up.
Those who talk about SIPC paying you back for your net investment would supposedly argue that you should get back $100,000, your "cash in- cash out" investment. But the SIPA laws state that it is the value of your account on the day of default, which in this case would be $70,000 that should be recovered. Why? Because under SIPA, if SIPC cannot get the securities from the broker they are supposed to go out into the open market and buy them. That cost would be $70,000. Just the reverse would be true if an investment increased in value, SIPC is required to replace those shares. The President of SIPC, Stephen Harbeck, even stated in court a few years ago, that this is what SIPC is supposed to do, even if the shares were never purchased.