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Dear Frank Rich: Irving Picard is No Pecora re: Madoff

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Dear Frank Rich: Irving Picard is no Pecora. (Madoff)

Perhaps you read Frank Rich's column in the New York Times on Sunday, February 13, 2011, where he likened Irving Picard, the Trustee overseeing the bankruptcy of Bernard L. Madoff  Investment Securities (BLMIS) to Ferdinand Pecora, a true Wall Street reformer.   I am a huge fan of Frank Rich, but he got it wrong this time, dead wrong.  For this analogy to have any kind of credibility, the Trustee would have to be looking out for the little guy, the investor.

Is Irving Picard  doggedly pursuing those who were complicit with Bernie Madoff in pulling off the worst financial crime in the history of the world?  Absolutely. Is Irving Picard also doggedly pursuing hundreds of elderly, now destitute senior citizens, many ailing, all scared to death?  The answer to this is also absolutely.  Irving Picard is more "runaway Trustee" than he is savior.   His heavy handedness when dealing with smaller investors -- those whose only "crime' was trusting their account statements, and trusting a system that was put in place to protect them -- would make for a fascinating John Grisham novel, were it not the sad truth.

Over the Thanksgiving holiday, the Trustee began the outrageous task of filing lawsuits against hundreds and hundreds of innocent investors demanding that they return so-called "false profits".  A vast majority of these investors were invested with Mr. Madoff for nearly 2 decades.  Many investors thought they'd reached the pinnacle of the American Dream.  The typical investor was a WW2 era veteran who got married, had children, built professional practices or businesses.  They then sold those businesses and deposited those funds amount into a Madoff account, and the account balance grew - and grew - and grew. Investors used those profits to pay taxes, children's educational expenses, medical and other everyday living expenses.  They paid short term capital gains tax on that income. Some were forced by federal law to withdraw money from their IRAs.

They now find themselves in a position where they not only have lost whatever money they worked so hard to accumulate, there is no insurance (despite the clear legislative intent SIPC coverage as insurance) and they are being sued by Trustee who has painted himself as a Robin Hood, only in this instance, this Robin Hood is robbing from the poor, and giving to the rich!

To understand this travesty, one needs to understand exactly what it is that the Securities Investor Protection Corporation (SIPC) does. SIPC was created at the dawn of financial regulation as a final safety net for investors should their broker be found to be a fraud or a thief, and should the SEC and FINRA (formerly NASD) fail to detect the crime. The legislative history is clear, payments of up to $500,000, was always intended as "insurance," and the amount you received would be determined by your net equity, also defined in the SIPA that created SIPC, as the amount of your final account statement.

SIPC is a not-for-profit, quasi-governmental, tax-exempt corporation that is funded 100% from member assessments. Who is a member, you may ask. Members are SEC-regulated broker dealers of all sizes. The law clearly states that member firms are to be assessed anywhere from the statutory minimum of $150 per year to a percentage of revenues. For 13 years, SIPC allowed its coffers to drop to dangerously low levels, despite warnings from the GAO and Congress that it could not handle a catastrophic broker failure.  From 1995 -- 2008, they charged their members a measly $150 per year -- not per account, not per month, not per week -- PER YEAR, regardless of broker size or risk.  No wonder its coffers were at dangerously low levels!

Fast forward to December 2008, and Madoff turns himself in.  Within days, Irving Picard was named the Trustee for the liquidation (SIPC), but who looks out for investors?  How can the Trustee --paid by SIPC -- possibly look out for the interests of both the corporation and its creditors?! Irving Picard, as is the case of all SIPC bankruptcies, is paid for by SIPC; in fact, Mr. Picard has earned hundreds of millions of dollars over the years as a SIPC Trustee.  In the Madoff case, he has already billed SIPC $288 MILLION (that's over $1 million per week) and Mr. Harbeck recently confirmed to Congress that legal fees will be in excess of $1 billion by 2014.

In the weeks following the discovery of the fraud, both SIPC General Counsel Josephine Wang and SIPC President Stephen Harbeck assured investors that each account, even if the securities were never purchased, would receive up to the $500,000. This is not a made up number, it is clearly set forth in the Securities Investor Protection Act (SIPA) of 1970 that created SIPC.  However, a month after Mr. Harbeck made these assurances to Congress, he backtracked, now saying that it was not, after all, intended to be insurance.

What is now obvious to anyone who is familiar with this fraud, is that once SIPC realized that it didn't have the funds to pay, that they would concoct, by any means necessary, a way not only to replenish SIPC's coffers, but to recover funds from those who were complicit in the crime.  They have created a new definition of net equity -- now referred to as "cash in/cash out" -- what you initially put in (regardless of any time value of money) less what you took out.  And if you withdrew more than your initial investment -- over the entire term of the investment, then you are in the unenviable position to be sued for that money.  These are known as "claw back" suits. (Here's a not-so-funny aside: the same final account statements that the Trustee now says are worthless, were more than real when it came time to pay taxes.  The IRS is the largest beneficiary of this fraud, with nearly $40 billion collected by the US Treasury over the course of the fraud.  And the only tax relief received to-date is an extension of the theft loss carryback to effect a net operating loss -- increased from 3 to 5 years.) Sure, you can apply for so-called "hardship," but the form is so onerous and the process so demeaning, that many have chosen to just struggle through the legal process, spending a portion of whatever meager funds they still have to defend against these claims.

It is very easy to be blinded by the large numbers that the Trustee has been able to put into the public mindset -- billions here, hundreds of millions there, but lost in this conversation are the hundreds of smaller innocent investors who, even according to Mr. Sheehan, whose investments weren't even a tiny fraction of those numbers. And the Trustee himself acknowledges they did nothing wrong.  Why then are they being sued?  At some point one has to ask if this is really about retrieving money for those who never took any money out? Or is it about billable hours and replenishing SIPC's coffers?

To many on the so-called "List" Mr. Picard is far from Ferdinand Pecora.  He is a shill for Wall Street, working overtime to make the small investor pay for Wall Street's -- and SIPC's -- past failures.
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I am a career trademark licensing sales professional and recent paralegal, whose career recently took a detour when the Madoff fraud was discovered. Seeing the devastation that this crime -- and subsequent immoral behavior of the agencies empowered (more...)
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