Monday, December 29, 2008

SIPC Disappointment Down the Road for Madoff Investors

There is such a fundamental misunderstanding of SIPC in the investor community that it is sometimes frightening. SIPC is not a Congressional bailout for investors who lost money. It is not insurance. Its sole function is to protect investors if a brokerage firm goes out of business due to bankruptcy or other financial difficulties and customer assets are missing.

SIPC's role is to return the customer's cash and securities to them from the failed firm. That's all it is. SIPC will get you back your cash (up to $100,000) and will replace your missing securities (up to $500,000).

SIPC is NOT an insurance company, and it does NOT cover an investor's losses that were caused by fraud on the part of the broker dealer.

And that leaves Madoff's investors in the lurch. There will be some interesting twists in this case, but on its face, this is a fraud, not a failed brokerage firm. While SIPC will make sure that the assets that were in the accounts are returned to the investors, the problem is obvious - the firm's statements are undoubtedly fraudulent, and there were no assets in those accounts. It remains to be seen what SIPC will do in that situation.

And, it will be amazing, despite recent press reports, if Judge Stanton opens the SIPC case to investors in the feeder funds. The simple fact is that Judge Stanton cannot do that. It would take, literally, an Act of Congress to expand SIPC in that manner, and for Madoff investors in feeder funds, that is not going to happen.

However, investors in feeder funds do have another alternative - they can sue the feeder funds. Those funds are not bankrupt, and they should have insurance to cover negligence. At the same time, some of those investment agreements attempt to exclude negligence, so feeder fund investors have to be careful, and each claim has to be examined carefully.

There are a lot of law firms out there looking to represent Madoff direct and indirect investors. Ask questions, ask for their background, ask for their experience in securities fraud cases, in ponzi scheme cases, in dealing with brokerage firm issues, and SIPC cases.

Then call us.

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