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When Bernie Madoff’s multibillion-dollar Ponzi scheme exploded two years ago, thousands of victims saw their financial reality vaporized. Now, some have organized with PR and lobbying teams to work Capitol Hill to make sure it never happens again.
The Network for Investor Action & Protection, which began last year with about 200 members, now boasts about 1,000.
“The key takeaway is what happened to Madoff’s victims ... will and could happen again unless significant actions are taken,” said the network’s president, Ron Stein. “The entire investor-protection regime has failed investors terribly and is in desperate need of comprehensive overhaul.”
For years, many of Stein’s relatives had invested with Madoff.
To push for an overhaul, the network has hired PR gurus Phil Singer, a Democrat, and his Republican partner, Ron Bonjean. And the group has brought on the lobbying firm Smith-Free Group, which is working pro bono to take its pitch to members of Congress.
The message: While the Wall Street reforms that President Barack Obama signed into law this summer helped correct many of the industry’s systemic problems, consumer protections still need to be strengthened.
The network is pushing to reform the Securities Investor Protection Corp., which processes the claims of Madoff’s victims. The corporation is charged with restoring funds to investors with assets in bankrupt or financially troubled brokerage firms — and, in most cases, is required to reimburse victims up to $500,000 for their losses.
But Stein and his group take issue with how it’s calculating the value of each investor’s account. Victims have pushed for the corporation to use account balance statements to determine values. But the corporation argues that those figures include fictional profits.
Instead, the corporation subtracts the amount invested in the account from the amount paid out to determine how much the account is worth.
For instance, if a victim invested $100,000 and withdrew $50,000 during the life of the account, it would be valued at $50,000, no matter what a fraudulent account statement might say.
But if a victim invested $100,000 and took out $200,000 over the life of the account, the victim would have to pay back $100,000 under the corporation’s rules.
“It’s devastating for an investor who lost everything to then have to give money back,” Stein said.
Stein’s network is championing a bill sponsored by Rep. Gary Ackerman (D-N.Y.) that would prevent the corporation from taking back assets from investors who were unknowingly defrauded. The prohibition would be retroactive to cover Madoff’s victims.
“This legislation would provide added relief and much-needed protection to victims of Ponzi schemes who’ve suffered from unimaginable devastation caused by the unconscionable greed of people like Bernie Madoff and others,” Ackerman said when the bill was introduced. “It is essential that Congress provide these critical protections to assist victims of Ponzi schemes and restore investor confidence to our financial markets.”
Last week, the House Financial Services Subcommittee on Capital Markets held a hearing to assess the shortcomings of the law that created the SIPC. And the panel’s chairman, Rep. Paul Kanjorski (D-Pa.), had some tough words for the corporation.
“The victims of these frauds believe that SIPC has fallen short in meeting its responsibilities, and they want more change. I do, too,” he said. “In any serious efforts to reform [the law], we must also consider what responsibility SIPC has to honor the broker statements that customers receive. SIPC has denied the claims of customers based on the seemingly legitimate paperwork provided to them by their brokers.”
The corporation opposes Ackerman’s bill. SIPC President and Chief Executive Officer Stephen Harbeck argued that it would harm those “most damaged” by Madoff.
The money that is taken back from investors, Harbeck said, is used to ensure that those left with nothing see fair restitution, putting victims on equal footing. Using the formula of money invested minus money withdrawn is “the way we have always treated fictional profits,” he said.
For example, Harbeck said, suppose two victims deposited money with Madoff on the same day. One of the investors withdraws all his money, including fictional profits, a week before the scheme comes crashing down. The other doesn’t.
“What the trustee is trying to do,” Harbeck said, “is to make sure that one person is not trying to take away, in essence, money that is stolen from the other person.”
The trustee charged with ruling on the claims, Harbeck said, has no interest in forcing retired people who lost everything to pay the money back.
“The trustee is not insane. He’s not going after grandma,” Harbeck said. “If you’ve been living on it, go in peace. ... We have no intention of persecuting people.”
Nonetheless, Smith-Free Group lobbyist Andy Barbour has called the corporation’s formula “insane.”
“You might as well just rip the net out from under the investor protections in this country, because it’s not worth anything,” he said.
Barbour argued that because people paid taxes on fraudulent statement balances, there’s a reasonable expectation that the value of their accounts would be based on their statements.
“If it’s good enough for the IRS,” he said, “it should be good enough for SIPC.”