The federal ‘rescue’ is failing Bernie Madoff’s victims
Seven years ago today, Bernie Madoff was arrested for orchestrating the most devastating Ponzi scheme in US history. Unfortunately, many of Madoff’s victims still haven’t seen the restitution they were guaranteed under federal law.
Setting up shop as a seemingly legitimate broker-dealer, Madoff conned thousands of people into parting with $65 billion of savings in exchange for a comfortable rate of return. The problem was he never invested the money; he simply cycled money around and skimmed millions in the process. When a scam like this goes awry, as it did in 2008, many hardworking people are crippled financially as they lose their life savings.
To deter such flagrant cases of criminal wrongdoing, in 1970 Congress passed the Securities Investor Protection Act. This set up an industry-funded safeguard, the Securities Investor Protection Corporation, to step in and liquidate offending firms so innocent investors could get some of their losses back.
But it hasn’t worked this way for Madoff’s victims. And that needs to change.
The average investor who trusted Madoff has faced costly legal battles and dead ends, and in some cases was forced to pay for a crime he or she didn’t commit. These are not institutional investors, Wall Street tycoons or broker-dealers who should have known something was amiss — they’re everyday people who parked their children’s college savings or their retirement savings in these investments.
They can’t simply write off these losses. The investor-protection corporation was specifically designed to protect them from bad actors, and the Madoff case was tailor-made for SIPC to live up to its responsibilities.
When people invest their money, they receive a monthly statement from their broker detailing how much is in their account. For example, if you invested $10,000 five years ago and have made $3,000 on your investment, your statement will show that you have $13,000 in your account.
You assume this number is correct because federal law promises to protect you from fraud, and you trust that your broker is legitimate. If you’re the victim of fraud, your final statement would be used to calculate your restitution. (Known as the “final-statement” method.)
Now imagine that you withdrew your $13,000 investment and spent it before Madoff’s plot unraveled. As a normal investor, you have no way of knowing that you were a victim in this Ponzi scheme, but the investor-protection corporation is going to sue you and claw back your money because you’re considered a “winner” that came out ahead.
This is known as the “net investment” method. It’s the method being used on Madoff’s victims. So when SIPC claims that it’s making victims “whole,” they don’t mention that some of the money they want to use is coming from people who were sued even though they didn’t do anything wrong.
For this reason, I have introduced the Restoring Main Street Investor Protection and Confidence Act. This bill doesn’t add to existing regulation, it simply enforces the statute that’s been on the books since 1970 and makes good on the government’s guarantees.
By directing SIPC to use the final-statement method instead of the net-investment method, my bill recognizes that withdrawals made by investors reflected their confidence in the government-mandated (but private-sector-funded) coverage despite the possibility of broker fraud.
Pretending that the Madoff victims don’t deserve the same treatment as other victims of broker fraud is disingenuous and deeply unfair, and Congress must hold the Securities Investor Protection Corporation accountable. After all, its job is to protect fraud victims, and this is one industry group that can certainly afford to meet its commitments.
Congress shouldn’t work for the few or the privileged; it should represent everyone who works hard to save for their families, their retirement or just for a rainy day. I commend the dozens of Republicans and Democrats who have thrown their support behind this bill to stand up for our constituents and their right to be treated fairly under law.
Scott Garrett (R-NJ) is chairman of the House Financial Services Committee Subcommittee on Capital Markets and Government-Sponsored Enterprises.