Picard should be reminded that when Charles Ponzi perpetrated his fraud, SIPC did not exist and therefore any precedent set would be superseded by the enactment of SIPA in 1970. In reality, SIPC was created to ensure that investors would be protected from the likes of the Charles Ponzi type.
As for the "redistribution' of funds between Madoff "net losers and net winners", this is preposterous. The function of SIPC is to promptly pay investors of a defrauded broker (up to $500,000). It is not the responsibility of another defrauded investor to pay out this money. That is SIPC's role. Mr. Picard has tried to put the responsibility on the investors and thus eliminate the need for SIPC to fulfill its role.
Nowhere in the SIPC statute does it mention that protection is not available for Ponzi schemes. Mr. Madoff stole customer funds and as such, SIPC is required to pay those customers based on the value of their securities on the date of the bankruptcy filing. It is not Mr. Picard's role to determine whether an investor was fully paid or received more than they deposited. If this were to be true, then what is the purpose of SIPC?
In your article, Mr. Picard says, "The fact that the customer property we recover will not be sufficient to satisfy all allowed customer claims is unfortunately the nature of Ponzi Schemes."
The GAO and Congress both admonished SIPC for not sustaining adequate funding, should a large claim be made against them (as was the case in the Madoff fraud). Despite this, SIPC continued to collect $150/year from its member brokers to protect their customers. In fact, it wasn't until more than 4 months after Madoff turned himself in that SIPC raised its dues. However, the lack of reclaimed customer property is not an issue to thousands of victims who will receive less than $500,000 due to Mr. Picard's faulty interpretation of net equity. If a victim who has a positive net equity (based on Picard's interpretation) gets an advance from SIPC, they are not entitled to partake in a distribution from the customer property unless their SIPC payment exceeds $500,000. Thus, it is beneficial to SIPC to underpay the customers. Any excess money collected goes directly to SIPC's coffers. This money is used to pay, amongst other expenses, the fees of the trustee. In the Madoff case, Irving Picard's law firm has received a weekly fee exceeding $1.3M.
There is one additional fact that needs to be addressed in order to give the complete facts. Mr. Picard mentioned that, "The process that my consultants were involved in coordinating with the FBI included the recovery of data from hard drives, servers, and other media that were physically damaged; conducting site surveys to identify and preserve floppy disks, DVD/CDs, etc.; previewing each collected computer hard drive; and extracting for analysis and review data identified for particular named individuals. The preserved data have been forensically imaged and have been loaded into a secure web-based document review program. Similarly stored are e-mails, data from desktop and laptop computers, AS/400 computers, backup tapes, hard drives, network storage, memory cards, and other data."
I wonder why the voluminous volume of papers found in the Long Island City warehouse that were diligently bar coded are not mentioned. These papers were not damaged and I can't understand why Mr. Picard did not mention them?
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