My elderly parents - now 89 and 92 - were victims of the largest brokerage failure in US history - Bernard L. Madoff Investment Securities. Some have even called it a $65 billion government failure. So, I read with great interest Julie Steinberg's story in yesterday's Wall Street Journal titled Protecting a Small Brokerage Account or as I have now dubbed it - "The Rules of Engagement for Dealing with Wall Street." It's funny how the very steps she suggests that investors take to ensure they are working with a healthy and honest broker (no pun intended) are pretty much the very same things that investors with Bernie Madoff did. My parents were not among the uber wealthy. They were, best I can tell, small investors, and they lost a good portion of their savings. Admittedly some Madoff investors did not split their funds among various firms, but other than that, I can assure you that an overwhelming majority of those who invested with the fraudster of the century -- and likely millennium -- did exactly as you suggest. They DID their homework, they DID follow the trades. They also believed that their accounts were insured by SIPC. And frankly, were told so in the days immediately following Madoff's arrest, not only by Mr. Stephen Harbeck, whom you mention in your article, but also by Ms. Josephine Wang, former General Counsel of SIPC, that EVERY ACCOUNT would be insured up to $500,000 -- EVEN IF NO TRADES TOOK PLACE!
It wasn't until the bankruptcy trustee, Mr. Irving Picard, and his pitbull, Baker Hostetler Managing Director, David Sheehan, discovered that SIPC's failure to replenish the SIPC funds (despite repeated warnings from Congress and the GAO) left a pot of funds so small that they could not possibly pay all account holders. So, now, it wasn't just a "brokerage failure" it was a Ponzi scheme - I'm sure you've read the SIPA law and challenge you to find where the exceptions to this SIPC payout!
Where were the government watchdogs? Where was FINRA? Where was the SEC? Harry Markopolis' multiple attempts to warn the SEC are now legend. But somehow, those agencies get off scot free. What the Madoff scandal should prove is that SIPC can make up the rules as they go. So, my message to investors would be, do NOT count on SIPC. They are hardly honest brokers -- their membership is comprised 100% of Wall Street firms and they will go to any length to protect Wall Street, rather than investors.
One more point, it is almost 4 years since the Madoff fraud was discovered. All the claims have been "satisfied," and thanks to Messrs. Picard and Sheehan's shenanigans investors most in need of SIPC funds were not only denied those funds but, because of the length of time they were invested, were sued under "clawback" laws. As I'm sure you know, Madoff victims were not asking for a government bail out. Far from it. The SIPC fund is financed 100% by Wall Street, and any supplemental funds required, per SIPA law, could be borrowed from the US Treasury.
I think it's time that the real story about the Madoff fraud, and SIPC's failure to pay out to those most in need, be told.
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