[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




 
                  ADDITIONAL REFORMS TO THE SECURITIES
                        INVESTOR PROTECTION ACT

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,

                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 9, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-94



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

               PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York           SCOTT GARRETT, New Jersey
BRAD SHERMAN, California             TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts    MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas                PETER T. KING, New York
CAROLYN McCARTHY, New York           FRANK D. LUCAS, Oklahoma
JOE BACA, California                 DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
BRAD MILLER, North Carolina          JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia                 SHELLEY MOORE CAPITO, West 
NYDIA M. VELAZQUEZ, New York             Virginia
CAROLYN B. MALONEY, New York         JEB HENSARLING, Texas
MELISSA L. BEAN, Illinois            ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin                J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire         JIM GERLACH, Pennsylvania
RON KLEIN, Florida                   JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana                RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California            KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi         BILL POSEY, Florida
CHARLES A. WILSON, Ohio              LYNN JENKINS, Kansas
BILL FOSTER, Illinois
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 9, 2009.............................................     1
Appendix:
    December 9, 2009.............................................    61

                               WITNESSES
                      Wednesday, December 9, 2009

Chaitman, Helen Davis, Madoff Investor and Legal Advisor, Madoff 
  Coalition for Investor Protection..............................    12
Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia 
  University Law School..........................................    19
Conley, Michael A., Deputy Solicitor, U.S. Securities and 
  Exchange Commission............................................    40
Green, Joel H., General Counsel, Upsher-Smith Laboratories, Inc..    10
Harbeck, Stephen P., President, Securities Investor Protection 
  Corporation (SIPC).............................................    42
Lancette, Gregory, Business Manager, Plumbers and Steamfitters 
  Local 267 of Syracuse, NY......................................    18
Langford, Jeannene, Investor in MOT Family Investors.............     8
Leveton, Peter J., Co-Chairman, Agile Funds Investor Committee...    15

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    62
    Baca, Hon. Joe...............................................    64
    Chaitman, Helen Davis........................................    65
    Coffee, John C., Jr..........................................    89
    Conley, Michael A............................................   104
    Green, Joel H................................................   119
    Harbeck, Stephen P...........................................   122
    Lancette, Gregory............................................   128
    Langford, Jeannene...........................................   130
    Leveton, Peter J.............................................   133

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Written statement of the Securities Investor Protection 
      Corporation (SIPC).........................................   145
Garrett, Hon. Scott:
    Written statement of Robert J. Jerome........................   212
    Written statement of Lenore Schupak..........................   216
Klein, Hon. Ron:
    Written statements submitted by Madoff Victims and Two 
      Experts....................................................   218


                  ADDITIONAL REFORMS TO THE SECURITIES
                        INVESTOR PROTECTION ACT

                              ----------                              


                      Wednesday, December 9, 2009

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:08 a.m., in 
room 2128, Rayburn House Office Building, Hon. Paul E. 
Kanjorski [chairman of the subcommittee] presiding.
    Members present: Representatives Kanjorski, Ackerman, 
McCarthy of New York, Baca, Maloney, Klein, Perlmutter, Speier, 
Minnick, Adler, Kosmas, Himes, Peters; Garrett, King, Manzullo, 
Posey, and Jenkins.
    Also present: Representatives Ellison and Maffei.
    Chairman Kanjorski. This hearing of the Subcommittee on 
Capital Markets, Insurance, and Government Sponsored 
Enterprises will come to order.
    I ask unanimous consent that permission be granted to any 
non-member of the subcommittee who is present today to sit with 
the subcommittee.
    Pursuant to committee rules, each side will have 15 minutes 
for opening statements. Without objection, all members' opening 
statements will be made a part of the record.
    Good morning, everyone. One year ago this week, Federal 
authorities arrested Mr. Bernard Madoff for participating in 
the largest Ponzi scheme in U.S. history. It is therefore 
appropriate for us today to meet for the third time to examine 
this massive securities fraud.
    As my colleagues know, I have sought to use the $65 billion 
deception as a case study to guide our work in reshaping and 
reforming our financial services regulatory system.
    Last month, our committee passed H.R. 3817, the Investor 
Protection Act, and we have now rolled this important 
securities reform bill into H.R. 4173, the Wall Street Reform 
and Consumer Protection Act, which the House will begin to 
consider today. Both bills contain a number of provisions that 
directly respond to Mr. Madoff's substantial swindle.
    The repeated failures of the U.S. Securities and Exchange 
Commission, despite having received several leads from a number 
of sources, to detect the Madoff fraud allowed the hoax to 
continue for more than a decade. A lack of effective 
coordination, sufficient funding, and staff expertise each 
contributed to this unfortunate regulatory breakdown.
    In response, our bills double the authorized funding of the 
Commission for 5 years, to ensure that the Agency has the 
resources it needs to hire staff with appropriate expertise, 
and to get the job done. The bills also provide for an 
expeditious, independent, and comprehensive review of the 
entire securities regulatory structure by a high-caliber entity 
with experience in organizational change. This study will 
identify specific reforms and improvements that the Commission 
and the other entities that oversee our securities markets must 
put in place to ensure superior investor protection, going 
forward.
    Mr. Madoff's episode also revealed the need to elevate the 
importance of whistleblowers like Mr. Markopolos, who made 
repeated entreaties to the Commission regarding Mr. Madoff's 
con, by establishing incentives, so that more of them will come 
forward.
    Our regulatory reform package, therefore, includes a bounty 
program, to help identify wrongdoers in our securities markets, 
and reward individuals whose tips lead to successful 
enforcement actions. With the bounty program, we will 
effectively have more cops on the beat.
    In studying the Madoff case, we have additionally learned 
that the Public Company Accounting Oversight Board lacked the 
powers it needed to examine and take action against the 
auditors of the broker-dealers. Our legislation closes this 
loophole, so schemers like Madoff will no longer be able to 
rely on inept or corrupt accounting firms to rubber stamp their 
criminal activities.
    Through our investor protection reforms, we have further 
sought to strengthen the Securities Investor Protection Act, 
the law that helps investors to recover funds when a broker or 
dealer fails. We have increased the resources available to the 
Securities Investor Protection Corporation to fund 
liquidations, bolstered the level of cash coverage an investor 
is entitled to, and raised penalties on brokerages for 
violations of the law. We have also broadened the eligible 
types of investments covered.
    We can, however, do more to reform this law. Today, we will 
continue to move this process forward, as we examine the 
ongoing efforts of the Securities Investor Protection 
Corporation to mitigate the sizeable losses of Mr. Madoff's 
victims, as well as the casualties of the $8 billion Stanford 
Financial fraud.
    We will also explore the intended and unintended 
consequences of several proposed changes to the Securities 
Investor Protection Act that aim to address problems that some 
Madoff and Stanford Financial victims, including retirees, 
pension funds, charities, and others, have encountered.
    While each of these amendments seeks to fix a perceived 
deficiency in the law, each proposal would also benefit from a 
robust debate in order to identify potential problems and 
possible refinements. Some, for example, have advocated that 
the Securities Investor Protection Corporation should not claw 
back the profits taken by earlier investors who unwittingly 
partook in a Ponzi scheme.
    I have concerns that such a plan, if implemented, would 
treat later investors unfairly. That said, clawing back profits 
already used by charities could prove especially devastating. 
As such, we must walk a fine line in determining how to 
proceed, if at all.
    In closing, I would like to extend my appreciation to my 
colleagues from New York, Mr. Ackerman and Mr. Maffei, as well 
as Mr. Ellison of Minnesota, Mr. Klein of Florida, and Mr. 
Perlmutter of Colorado, who have helped to select today's 
witnesses, and advance discussions on reforming the Securities 
Investor Protection Act. Together, I hope we can learn more 
from these troubled events, and figure out how we can further 
improve our regulatory system.
    Now I would like to recognize our ranking member, Mr. 
Garrett, for 5 minutes for his opening statement.
    Mr. Garrett. I thank the chairman, and I thank all of the 
witnesses, too, for joining us today to testify before our 
subcommittee. And from people similarly situated as yourself, I 
have been informed and made keenly aware of the suffering that 
has been suffered and inflicted on so many investors in my area 
in the fifth district of New Jersey, and across the country as 
well, due to the Madoff situation and the Stanford fraud, as 
well.
    And so, Mr. Chairman, it is important that we hold this 
hearing today to hear firsthand from some of the victims, not 
only just to get a better understanding of their situation and 
their plight, but also to hear your ideas, having been through 
this experience personally, on how to make the SIPC process 
work better and, perhaps more importantly and appropriately, 
for all the interested parties involved.
    Before I do that, let me just take a moment on my 
statement. I would like to seek unanimous consent to enter two 
statements into the record from constituents of mine, Robert 
Jerome and Lenore Shupak, into the record. Both of them have 
been adversely impacted by the Madoff fraud.
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Garrett. Thank you. Now, the frauds themselves were, of 
course, tragedies for so many innocent victims. And so the 
purpose of today's hearing is to examine ways to improve the 
SIPC process so that the victims don't have to needlessly 
suffer once again.
    Now, as the chairman says, there are a number of proposals 
in front of us today to reform the process. One idea is to 
offer SIPC coverage to individual investors in a pension fund 
or other fund, rather than the standard half-a-million dollars 
in coverage for the entire fund, under current law.
    Others have put forward ideas to reform the so-called 
clawback process, in which the trustee is seeking to recover 
funds redeemed by some Madoff investors in the name of equity, 
returning funds to all the other Madoff investors.
    There are also calls for a more timely process and advances 
in extending coverage to affiliates of SIPC-registered brokers, 
as well, that we should consider.
    All of these ideas, I think, deserve to be fully explored 
and vetted by this subcommittee, with a frank discussion of the 
pluses and some of the minuses, as well. This is the least, I 
think, that we can do for the many investors affected by the 
past frauds, as well as future ones, as well.
    Because, quite honestly, unfortunately, there will be 
future schemes that will try to bilk unsuspecting investors. 
And the SEC's failure to detect the Madoff situation, despite 
all the red flags and warning signs and testimony that came to 
them, is well documented. So we know that this is the type of 
thing, unfortunately, that could happen in the future.
    And, unfortunately, as Professor Coffee has indicated in 
his testimony, the level of loss justifies more than just the 
serious reforms that have already been adopted by the SEC. And 
there I agree. I am committed to exploring other ways to 
improve the performance of that agency. And so I welcome any 
insights that you may have on this, in regard to the hearing 
today and going forward, as well--the rest of the panel, as 
well.
    One thing I don't think--and I will close on this--we 
should be doing, as far as the solution to that problem, is 
just saying, ``Let's see if we can just throw more money at the 
SEC,'' and not asking for any more results from them.
    Unfortunately, as you probably all know, as part of the 
Investor Protection Act that was approved by this committee--
and that is also a part of the package of bills that will be 
going to the House Floor this week--there is an authorization 
for the SEC to be doubled with basically no strings attached, 
as to where the money goes.
    My colleague, Congressman Neugebauer, offered an amendment 
during the committee process here, and I cosponsored that 
amendment. And what that would have done would have scaled back 
future authorization increases for the SEC, and instead, would 
have tied any of those increases and money going to the SEC 
to--first, for them to have to fulfill some of the 
recommendations that were made by the Inspector General, 
basically saying, ``You have an organization, you didn't do the 
job, we are not going to reward you by sending you more money, 
unless you can prove to us that you already, over the last year 
now, have begun to implement some of those changes. And if you 
want to get additional funding in the future, you will have to 
continue on in a better path.''
    So, that's one other area I would appreciate your comments 
on. I have a number of other questions related to the 
witnesses' written testimony. And so I look forward to hearing 
your testimony, and answering some of those questions.
    With that, I yield back, and I thank you.
    Chairman Kanjorski. Thank you very much, Mr. Garrett. And 
now I would like to recognize Mr. Ackerman for 3 minutes.
    Mr. Ackerman. Thank you very much, Mr. Chairman, for your 
continued pursuit of this issue and this series of hearings 
that you have chaired.
    It has been a full year since Bernard Madoff folded his own 
house of cards, and admitted that he had operated the largest 
Ponzi scheme in history. You would think that by this week, a 
full 12 months removed from Madoff's admission, our financial 
regulators, some of whom have admitted they were negligent in 
protecting investors from Madoff's fraud, would have helped as 
many victims as they could.
    You would think that, given the enormity of Madoff's Ponzi 
scheme, and the human tragedy that it has caused, they would 
have been as generous as possible. And you would think that, 
because Madoff's investors received detailed, genuine-looking 
statements, his victims had every reasonable expectation that 
the money in their accounts was really there, belonged to them, 
and that they were thus fully protected by the securities laws.
    Sadly, you would be wrong. Instead, in the years since 
Madoff turned himself in, the largest and most sophisticated 
advanced financial system in the world, rather than providing 
restitution to the investors in the largest fraud in history, 
has managed to create classes of victims who have turned 
against one another, forced to fight tooth and nail over only 
pennies on the dollar of what they reasonably thought belonged 
to them. And there is no end in sight.
    If there is anything we have learned in the year since 
Bernie Madoff turned himself in, it's that the confidence that 
investors had in the system, from the SEC's ability to police 
our markets to SIPC's guarantee of protection against fraud, 
was misplaced.
    Today's hearing begins in earnest the process of providing 
additional legal remedies to Madoff's victims. In my view, 
there are two issues that this subcommittee must address as we 
clarify and expand the Security Investor Protection Act: a 
limitation of SIPC's ability to claw back assets from innocent 
victims, who are neither complicit nor negligent in a Ponzi 
scheme; and finding some mechanism by which SIPC insurance may 
be provided to defrauded feeder fund investors.
    I look forward to working together with you, Mr. Chairman, 
to address these issues in the coming weeks, and to hear from 
our witnesses today.
    I would also like to acknowledge our witnesses who are 
Madoff victims, and to thank them all for appearing before the 
subcommittee. There are hundreds more, Mr. Chairman, who wanted 
to appear. Most of them just couldn't afford the car fare, the 
bus fare, the train or plane fare to get here. We appreciate 
the witnesses who are here with us this morning, and 
testifying. And I look forward to hearing their testimony.
    And, Mr. Chairman, I would ask unanimous consent that at 
the appropriate place, this folder of statements from 
additional witnesses be placed in the record.
    Chairman Kanjorski. Without objection, it is so ordered.
    Thank you, Mr. Ackerman. And now we will hear from the 
gentleman from New York, Mr. King, for 5 minutes.
    Mr. King. Thank you, Mr. Chairman, and let me thank you for 
holding this hearing, and thank you for your attention to this 
matter. And let me also thank my colleague from New York, Mr. 
Ackerman, for the energy and drive that he has shown on this 
matter.
    Mr. Chairman, the first time I heard the name Bernard 
Madoff, I think, was December 10th. I was actually stopping by 
a holiday event on the North Shore to meet with some 
constituents. When I walked in, the person hosting it told me 
that shock was through the room, because they had just learned 
that day that their life fortunes, which had been handled by 
this Mr. Madoff, whom I hadn't even heard of before, had been 
part of a Ponzi scheme. And, of course, the next day the arrest 
was made and the story broke.
    So, in my first encounter with it, I could see the shock on 
people's faces. I could see the pall that was over the room. 
And since then, the situation has only gotten worse.
    I have a number of questions regarding what has happened 
over the course of the last year. Like Mr. Ackerman, you see a 
tragedy like this unfold, and then you see, over the course of 
the next year, the victims being victimized again. And I know 
there are no easy answers to this, but to me, there has almost 
been an imputation of fraud to the victims themselves, somehow 
implying and imputing Madoff's offenses to them, that somehow 
they should have known, or somehow they are co-conspirators 
with Bernard Madoff. And yet there is no evidence to suggest 
that at all.
    So, we have the redefinition of net equity. We have the 
clawback, which could be devastating. We have the fact that 
taxes have been paid over the years, for many years, on 
nonexistent profits. We have the feeder fund issue, where many, 
including a former Member of Congress, called me. He never 
heard of Bernie Madoff, he lived as far from New York as anyone 
could, and it turns out that his life savings, through a 
broker, had been invested by Bernard Madoff. And he has lost 
everything.
    And then, there is the whole issue of what appears to be 
almost unfettered power being given to the trustee to change 
definitions, decide who he is going to go after, why he is 
going to go after them, whether or not there is specific 
authority for him to do it or not.
    So, these are all issues. Because, as the chairman said and 
I believe the ranking member also said, this will not be the 
last Ponzi scheme. This will not be the last massive fraud. And 
I don't think enough attention--and all of us share 
responsibility for this--has been given over the years to what 
do you do when a massive fraud like this develops. We have to 
address it. And, in addressing it to the future, I think we 
also have to find ways to protect those who are currently the 
victims.
    So, I look forward to the hearing. I look forward to 
working with all the members of the subcommittee and committee, 
in trying to come up with legislation to address the real needs 
of the victims, and also to do what we can to ensure that there 
is much better enforcement in the future, and much stricter 
enforcement, to make sure this does not happen again.
    And with that, Mr. Chairman, I look forward to the 
testimony. I thank the witnesses for being here today. I thank 
the victims who have taken the time to be with us here today. 
And I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much, Mr. King. And now 
we will hear from the gentleman from Florida, Mr. Klein, for 2 
minutes.
    Mr. Klein. Thank you, Mr. Chairman, for holding this 
important hearing. And again, we would also like to thank the 
witnesses and the victims who have come forward with their 
stories, and with their rights to be made whole in different 
ways.
    Mr. Madoff's Ponzi scheme, which was thought to be the 
largest securities fraud in modern history, has defrauded 
thousands of people in my congressional district in south 
Florida, as well as charities, and lots of other people around 
the United States.
    This episode was not only an embarrassment to the SEC, as 
they allowed this massive fraud to continue for well over a 
decade, despite repeated warnings, but time and time again, the 
SEC ``investigated'' Mr. Madoff, and pronounced his business to 
be sound. And if you're an investor, and you have an investment 
in a particular security, you would think that this would be a 
sound investment, with the SEC stamping its regulatory 
approval.
    There have been lots of issues that have already been 
mentioned by Mr. King and others: clawback; taxes paid; how do 
we--how were we made whole from this terrible situation. And 
the fact that this has gone on for over a year is really 
something. It's a moral outrage that hasn't been resolved in 
some successful way.
    Now, I think the most important thing we have to recognize 
is, as citizens and as Members of Congress, and even people who 
are victims, is we have rule of law in the United States. And 
we have a responsibility, as Members of Congress and as 
Americans, to make sure the SIPC and the SEC are living up to 
their statutory responsibilities.
    Ensuring that the Madoff victims receive some protection 
from the government is important in restoring confidence in our 
entire investment system. Some investors, we know, were 
complicit, and they should be prosecuted to the fullest extent 
of the law, yet most others were not.
    Many hard-working Americans have invested their life 
savings, and the SIPC symbol in the window has to mean 
something. The SEC repeatedly gave Madoff a clean bill of 
health. Investors relied on this analysis. And the SIPC symbol, 
as I said, has to mean something when you move forward and you 
make an investment in the United States system.
    To go after these investors who lost everything now 
violates most people's sense of fairness on a consistent level. 
How can they be held to a higher standard than professional 
analysts at the SEC?
    Irving Picard has determined that investors who have drawn 
more money out of the account than they originally put in are 
not entitled to full SIPC coverage. And, further, the trustee 
can claw back money from them. And, again, I see an 
inconsistency in interpretation here, which needs to be 
resolved.
    The purpose of the SIPC is to honor legitimate expectations 
of customers, and instill confidence in our capital markets. 
And it's important to provide SIPC protection up to $500,000, 
not only for the victims of this fraud, but to ensure, on a 
going-forward basis, that Americans can have confidence in the 
securities markets in the United States.
    I look forward to the testimony, and a productive 
discussion, and an appropriate conclusion. Thank you, Mr. 
Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Klein. And now 
I ask unanimous consent that Congressman Ellison be permitted 
to provide an opening statement. If there are no objections, 
Congressman Ellison is recognized for 2 minutes.
    Mr. Ellison. Thank you, Mr. Chairman. Let me thank all the 
witnesses, as well. I don't think I will need 2 minutes.
    I simply want to say that the amount of disruption that 
this massive Ponzi scheme has caused Americans cannot be 
overestimated.
    In my own district, the fifth congressional district of 
Minnesota, I have heard from people who thought they were in 
qualified ERISA plans who now learn that maybe things are not 
going to be as they expected, because of definitions in the 
law.
    I have heard from people who run charities for charitable 
work who have been devastated by this, the impact of this 
lapse.
    And so, I look forward to this hearing. I look forward to 
hearing from the witnesses. I want to thank the witnesses for 
all the work that they have done, and I want to thank the 
members of the committee, as well.
    And I also just want to thank Mr. Maffei for his work. He 
and I have been working together on what may bring relief to 
some people. And I want to, again, thank you, Mr. Chairman, and 
the ranking member for the hearing. Thank you very much.
    Chairman Kanjorski. Thank you very much, Mr. Ellison. Now, 
it's up to the panel. I want to thank the panel for appearing 
before the subcommittee today. And, without objection, your 
written statements will be made a part of the record.
    You will each be recognized for a 5-minute summary of your 
statement. And please contain your remarks to 5 minutes.
    I would now like to recognize Ms. Jeannene Langford, an 
investor in the MOT Family Investors, and an indirect investor 
in Mr. Madoff's fund.
    Ms. Langford?

    STATEMENT OF JEANNENE LANGFORD, INVESTOR IN MOT FAMILY 
                           INVESTORS

    Ms. Langford. Chairman Kanjorski, Ranking Member Garrett, 
and members of the subcommittee, thank you for holding these 
hearings, and looking into the SEC's complicity with Bernard 
Madoff investments.
    My name is Jeannene Langford, and I live in San Rafael, 
California. As one of the more than 16,000 victims of the 
Madoff Ponzi scheme, I am grateful to have the opportunity to 
present how financially devastating this scandal was to me, 
personally. It shattered my trust in my government's ability to 
serve and protect us. My hope is that Congress will choose to 
recognize and protect all indirect investors such as myself, 
who were victimized by this scandal.
    I have worked for 30 years as an art and design 
professional in the stationery and craft industry. The past 17 
years, I have been a single parent working to provide for 
myself and my daughter. In the areas where I have little 
expertise, I recognized the necessity to hire a specialist. 
Personal investment was one of those areas. And I knew that 
there were systems such as the SEC in place to protect me.
    From my research, there was no reason to believe that this 
investment was not a viable place to put my life savings. I had 
no way of knowing the partnership where I placed my money was 
invested with Madoff. The money I had invested with Madoff 
represented my life savings. It was my retirement, a 
downpayment for a house, investment for the business I was 
starting, and it was my daughter's education. In short, it was 
the foundation for my future.
    I do not have another 30 years to earn this money again. If 
the SEC had done its job, I would have my savings, and I would 
not be looking at working the rest of my life just to get by. I 
was shocked to find out my money was gone, and I was outraged 
to find out that the very governing body that sanctioned this 
business did not protect me.
    I need help in understanding how the SEC could ignore 
expert testimony, be lax in its investigations, be influenced 
by the aura of Madoff, and not carry out its duties. I find it 
tragic and ironic that the interpretation of the language by 
the SIPC leaves out the indirect, hardworking people like 
myself, who are not wealthy, and who are now struggling to keep 
up because their lifetime of hard-earned savings or their 
pension has been stolen. These are the very investors for whom 
the SIPC insurance protection is most important.
    Congress needs to take action to restore confidence for all 
future investors. I understand an update to the definition of 
the word ``customer'' in the SIPA to include indirect investors 
would ensure that the SIPC symbol protects both indirect and 
direct investors in the financial markets, and would begin to 
restore a sense of trust.
    If nothing is changed, the current situation would be 
similar to having a catastrophic landslide, and the government 
came in to assist those on one side of the street, but not the 
other. I cannot believe this is the intent of this committee or 
of Congress.
    Though I appreciate extending the SIPC coverage through the 
Maffei-Ellison amendment to investors in ERISA plans, this does 
not go far enough. All of us who invested through family 
partnerships, trusts, hedge funds, feeder funds, and pension 
plans are victims of this crime. All of us who invested are 
also victims of the SEC's inability to find the fraud. We are 
all victims of the same crime, and we all need to be granted 
equal protection.
    The SEC's Web site reads, ``The mission of the U.S. 
Securities and Exchange Commission is to protect investors, 
maintain fair, orderly and efficient markets, and facilitate 
capital formation.'' I urge you to rectify this current 
disparity of protection, by carrying out the mission you set 
forth. Thank you.
    [The prepared statement of Ms. Langford can be found on 
page 130 of the appendix.]
    Chairman Kanjorski. Thank you very much, Ms. Langford. I 
would now like to recognize my colleague from Minnesota to 
introduce our second witness. Mr. Ellison?
    Mr. Ellison. Thank you again, Mr. Chairman. I am pleased to 
introduce one of the witnesses, Mr. Joel Green, of Upsher-Smith 
Laboratories, a pharmaceutical company in Minnesota.
    I have heard from many people in my district and State who 
were victims of the Madoff scam. Those people weren't high 
rollers. They were regular people, ordinary people who work 
hard every day and make America great, people like the ones Mr. 
Green represents, and his colleagues, who are part of a pension 
profit plan that invested with Bernie Madoff.
    They thought they were protected by the Securities 
Investment Protection Corporation, SIPC. Unfortunately, SIPC 
held itself out as the FDIC of the investment world. It hasn't 
followed through on the protection, in many cases.
    That is why I am pleased to work with my colleague from New 
York, Mr. Maffei, on an amendment to clarify why SIPC 
protection should extend to individual participants of pension 
and profit sharing plans. I look forward to continuing to work 
with you, Mr. Chairman, and others in the committee on this 
reform, and others, to ensure that SIPC makes good on its 
promises. Mr. Green?

   STATEMENT OF JOEL H. GREEN, GENERAL COUNSEL, UPSHER-SMITH 
                       LABORATORIES, INC.

    Mr. Green. Thank you, Congressman Ellison, Mr. Maffei, 
Chairman Kanjorski, and members of the subcommittee. Thank you 
for the opportunity to address your subcommittee.
    As Congressman Ellison said, my name is Joel Green, and I 
am with Upsher-Smith Laboratories of Minnesota. I am here to 
ask for your support for legislation that will protect working 
people throughout America whose retirement security is 
imperiled by the Madoff fraud, including current and former 
employees of Upsher-Smith Laboratories.
    I urge your support for the legislation prepared by Mr. 
Ellison and Mr. Maffei to extend SIPC protection, to cover the 
losses of individual participants in pension plans, profit 
sharing plans, and other qualified plans lost in the Madoff 
fraud.
    Upsher-Smith Laboratories is a family-owned pharmaceutical 
company. The company was formed in 1919, and has approximately 
550 employees in the Twin Cities, Denver, and around the 
country. In 1974, our owners established a profit-sharing plan 
to share the profits with our company's employees. And, 
beginning in 1995, the plan assets were invested with Mr. 
Madoff.
    Over the next 12 years, the company contributed over $8 
million to the plan for the benefit of our employees. On 
December 11, 2008, Mr. Madoff was arrested for fraud. And 
approximately 615 of our current and former employees lost 
their retirement savings that had been in the profit-sharing 
accounts invested with Mr. Madoff.
    Our plan, and our plan participants, are representative of 
the average American workers whose retirement savings ERISA was 
intended to promote, and whose investments SIPC was intended to 
protect.
    Of our 615 plan participants, approximately 550--that's 
about 89 percent--had contribution balances of less than 
$50,000. This plan covers the average American worker. Yet SIPC 
has stated that only a single recovery of $500,000 is 
available. This is because the plan's account with Mr. Madoff 
was held in the name of the plan trustee. But this was required 
by an administrative requirement imposed by ERISA that plan 
assets must be held in the name of the plan trustee, and not in 
the name of individual plan participants.
    Our plan lost in excess of $8 million in contributions in 
the Madoff fraud. If one includes the false Madoff profits, 
that number would be in excess of $18 million. A single SIPC 
recovery of $500,000 will not go far to cover the losses of our 
individual plan participants.
    The administrative rule of ERISA requiring that plan assets 
be invested in the name of a plan trustee cannot be allowed to 
defeat the public policy behind ERISA to promote retirement 
savings of average American workers, nor can it be allowed to 
defeat the public policy behind SIPC, to protect the 
investments of average American investors.
    For most Americans, their primary investments are held in 
their pension plans, profit-sharing plans, and other qualified 
retirement plans. If the administrative rule of ERISA is 
allowed to defeat SIPC protection for the losses of individual 
plan participants, then SIPC fails to protect the investments 
of the average American worker, as Congress intended when it 
adopted the Securities Investment Protection Act, and created 
SIPC.
    This, in turn, undermines the public policy of promoting 
savings and providing retirement security for average American 
workers through pension, profit sharing, and other qualified 
plans, as Congress intended when it adopted ERISA.
    The FDIC offers a parallel for what we propose here. If a 
profit-sharing plan invested its assets in FDIC-insured 
deposits, even though the deposits were held in the name of the 
plan trustee, the FDIC would cover each plan participant up to 
the FDIC limits.
    We were asked by a congressional staffer in the spring 
whether it's possible, as a matter of policy, to extend SIPC 
protection to cover the losses of individual participants of 
pension plans invested with Madoff, and not also extend such 
protection to individual investors of feeder funds who invested 
with Mr. Madoff. With great compassion for those individual 
investors, and great compassion for Ms. Langford, we believe 
that the answer is ``yes.'' As a matter of public policy, a 
distinction can be made. Though we, of course, support any 
relief that can be given to the individual investors in feeder 
funds.
    ERISA prevents individual plan participants from investing 
their retirement accounts directly in their own names. The 
situation differs for individual investors in feeder funds. 
They are not prevented by Federal legislation from investing 
directly in their own names, nor is their investment governed 
by the public policy of encouraging workers' savings, as 
embodied in ERISA.
    For these reasons, if a distinction must be made on a 
policy basis, we believe it is possible to provide SIPC 
protection for the losses of plan participants of ERISA plans. 
Though, again, we do support relief for investors in feeder 
funds.
    Thank you for your time and attention and consideration of 
this important legislation to extend SIPC protection to the 
claims of individual participants of pension, profit sharing, 
and other qualified retirement plans.
    [The prepared statement of Mr. Green can be found on page 
119 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Green. And now 
I turn to my colleague from Florida, Mr. Klein, to introduce 
the third witness. Mr. Klein?
    Mr. Klein. Thank you, Mr. Chairman. It's my honor to 
introduce Helen Chaitman, who is a partner in Phillips Nizer, a 
limited liability partnership in New York.
    She is the author of, ``The Law of Lender Liability,'' is 
counsel to the Madoff Coalition for Investor Protection, which 
is a combination of a number of investors who lost assets in 
the Ponzi scheme, and has been someone who, I think, has had a 
fairly good crystalized view of the issue, and has been helpful 
to me and many others in understanding the nature of what went 
wrong, and what should be done to resolve it. Ms. Chaitman?

 STATEMENT OF HELEN DAVIS CHAITMAN, MADOFF INVESTOR AND LEGAL 
       ADVISOR, MADOFF COALITION FOR INVESTOR PROTECTION

    Ms. Chaitman. Thank you, Congressman Klein. Chairman 
Kanjorski, thank you so much for having me here. Distinguished 
Representatives, I thank you as well.
    It was just about a year ago that I learned that I had lost 
my life savings and my grandson's college fund in Mr. Madoff's 
limited liability company. It took me a little bit of time to 
get over the shock and devastation. And when I did, I realized 
that I was one of the lucky ones, because I am still working 
and able to support myself. And I devoted myself for the next 6 
months to working completely on a pro bono basis, helping 
hundreds of destitute Madoff investors in their 70's, 80's, and 
90's, who had been hit by a financial tsunami from which they 
can never recover.
    This committee has dealt with that financial tsunami in the 
Investor Protection Act of 2009. And I am not here to speak 
about that. But, unfortunately, the Madoff investors whom I 
represent--and I represent hundreds of them--have been hit by 
two additional financial tsunamis that this committee can do 
something about.
    My client profile is a person in his 70's, 80's, and 90's 
who worked hard his whole life, and who trusted this 
government. Many of my clients served in the Second World War 
with distinction. I have clients who were disabled in the 
Korean War, and received medals for their service. They trusted 
this government, and they worked as honest, law-abiding 
citizens. They worked in professions, they built up businesses. 
And when they reached retirement age, they retired and they put 
their money in an entity that had been blessed repeatedly by 
the SEC.
    Mr. Madoff bragged to potential investors that jealous 
funds had complained to the SEC about his results, and he had 
been repeatedly investigated, and always come out clean. These 
are people of whom we should be proud, and whom we should be 
protecting. And, instead, these people have been victimized by 
the government since December 11, 2008.
    The second tsunami that hit my clients was the announcement 
by SIPC, with the blessing of the SEC, that the statute that 
this committee played a key role in drafting in 1970 doesn't 
mean what it says.
    My clients relied upon the promise of SIPC insurance, as 
required by the Securities Investor Protection Act. They 
invested in Madoff, knowing that the first $500,000 in their 
accounts was insured by SIPC. They invested in Madoff, knowing 
that Congress mandated that, upon the liquidation of a broker, 
SIPC must promptly pay up to $500,000 by replacing securities 
in a customer's account.
    The statute mandates how a customer's claim is to be 
determined. Net equity is clearly spelled out in the statute. 
It is clearly spelled out on SIPC's Web site, even today. And 
yet, SIPC has decided that it doesn't insure the first $500,000 
in the accounts, it only insures the net investment going 
through generations of investors--because a lot of my clients 
are people whose grandparents invested in Madoff.
    And what SIPC is doing is going back 3 generations to net 
out investments, and they are discounting inherited balances, 
unless the investor can come forward and prove how much the 
grandfather deposited into the account in 1970, a virtual 
impossibility. Nobody keeps records going back that far. And 
nowhere did the government put people on notice that, if they 
want to have an SIPC claim, they have to keep their records 
going back 30 and 40 years. So, the second tsunami was SIPC's 
defiance of net equity.
    And we know from Mr. Conley's testimony, which was posted 
yesterday on the Web site, that the SEC doesn't feel it's bound 
by the statute. American citizens have to trust in the laws. If 
the statute gives them a promise of insurance, they have to 
rely upon that. And how can we, as a country, instill 
confidence in the capital markets if we don't stand by our 
laws, and if we fund a governmental agency which defies the 
law?
    The SEC has now taken a position that people who delegate 
to their broker investment decisions don't get insurance, as 
defined by the statute. They don't get net equity. The SEC 
announced yesterday that they get their net investment plus 
some adjustment for the decrease in the buying power of the 
dollar over a period of 30 or 40 years.
    Well, what's the purpose of this committee deliberating so 
carefully on a statute, if the SEC can then, after there has 
been a big loss, decide, ``We don't think Congress got it 
right, and we don't feel we have to go back to Congress. We're 
going to decide what the law is.'' How can we make people feel 
comfortable that they are protected by this government, which 
they served and to whom they paid taxes, if the SEC, funded by 
taxpayer dollars, can thumb its nose at this institution?
    The third tsunami that my clients have been hit with is 
that the SIPC trustee has taken the position that he can demand 
repayment of all withdrawals within the last 6 years, even 
mandatory withdrawals from IRA accounts on which people pay 
taxes, if the net investment going back for generations is a 
negative number?
    So, let me give you one very simple example.
    Chairman Kanjorski. Time is--
    Ms. Chaitman. My time is up?
    Chairman Kanjorski. Yes.
    Ms. Chaitman. All right. You will have to look at my 
written testimony, then, for the example. Thank you so much.
    Chairman Kanjorski. If you want to state the example, we 
will take that.
    Ms. Chaitman. Thank you so much. If my grandfather put 
$500,000 into Madoff in 1970, and he died in 2003, at which 
time the account was worth $3 million, and I took $1.5 million 
out of that account to pay the estate taxes, and then from 2003 
to 2008, the account went from $1.5 million to $2 million, Mr. 
Picard would be saying to me, ``Pay me back $1 million. Your 
grandfather put in $500,000, you took out $1.5 million to pay 
estate taxes, you owe me $1 million.''
    So my clients, who have lost their life savings, who were 
forced to sell their houses in a down market, and who are 
cherishing the tax refunds that they have received as the only 
funds they have to live on for the rest of their lives, now are 
faced with giving up those monies in order to do what?
    Nobody wants that. I, as an investor, never took money out 
of my account. And I, in theory, am the beneficiary of the 
clawbacks. I, and many of my clients who are just like me, 
never took money out, don't want this money. This is blood 
money.
    These people are entitled to keep what they took out. Thank 
you.
    [The prepared statement of Ms. Chaitman can be found on 
page 65 of the appendix.]
    Chairman Kanjorski. Thank you very much.
    [applause]
    Chairman Kanjorski. The rules do not allow demonstrations. 
I appreciate it. I know this is an emotional time, so we will 
be a little lenient with the rules. But, really, that is not 
appropriate.
    And now we will hear from our friend from Colorado to 
introduce the fourth witness. Mr. Perlmutter?
    Mr. Perlmutter. Thank you. I appreciate the witnesses being 
here today, and the straightforward testimony that you are 
giving to all of us.
    And I just want to lead with this: I think that we have 
four things that we have to consider. One of them actually is 
on the Floor of the House today. And the first is, where was 
the examination? Where was the investigation? Where was the 
oversight? And where is the prosecution of swindlers, crooks, 
bums, cheats, whatever you want to call them?
    In Colorado, we had at least 3 in this last 8 or 10 years: 
Petters; Stanford; and Madoff. They victimized hundreds and 
hundreds of people in Colorado. Some of my closest friends and 
colleagues lost their life savings to one of these three 
crooks. And so, what kind of an environment led to these giant 
Ponzi schemes and frauds?
    I would like to thank the chairman and the ranking member 
for bringing forward the Investor Protection Act, and some of 
the precautions and safeguards that are built into that, that 
we will hear on the Floor of the House today.
    Now, the other three aspects of this, which is what this 
testimony and your--this hearing is about is the bankruptcy 
aspects and the clawback, the reach of SIPC to anybody who was 
swindled and victimized by this. And, finally, what tax 
ramifications are there. Can somebody take an immediate loss 
when they have been defrauded in this respect?
    And so, we have today a constituent of mine and a friend, 
Mr. Pete Leveton, from Lakewood, Colorado. Pete is co-chairman 
of the Agile Funds Investor Committee, which represents over 
200 indirect investors of Agile Group, LLC, a Colorado 
investment group. I have been working with Mr. Leveton and 
members of the Agile Funds Investor Committee for months, 
trying to develop remedies to the inequities between direct 
Madoff fund investors, and those indirect investors like the 
Agile Group.
    The individuals invested with Agile--and, indeed, more than 
15,000 individuals who invested in other hedge funds who also 
invested in Bernard L. Madoff securities--are ordinary folks 
who invested their life savings in what they believed to be 
safe pension plans, trust funds, and investment accounts. They 
did their own research to determine the best investment group 
for their personal situations, and believed that groups like 
Agile best suited their savings plan needs. They trusted groups 
like these investors to turn investments into safe, legal 
funds.
    Unfortunately, Agile and other investment firms like them 
were defrauded by Bernard Madoff, by Stanford, by Petters, and 
all of the savings in funds from these individuals was lost.
    Under the law as written, direct investors of--except now 
with this net investment rule--from SIPC are eligible to recoup 
up to $500,000 on each investment account. But indirect 
investors are not.
    Mr. Chairman, we have the opportunity to restore a piece of 
dignity to the indirect investors. Through no fault of their 
own, they lost their life savings and some are losing their 
homes. They were acting responsibly, in trying to plan and save 
for their future and retirement.
    And I look forward to the testimony of Mr. Leveton today to 
describe some of the travails of the people in Colorado.
    Chairman Kanjorski. Thank you, Mr. Perlmutter.
    Mr. Leveton?

    STATEMENT OF PETER J. LEVETON, CO-CHAIRMAN, AGILE FUNDS 
                       INVESTOR COMMITTEE

    Mr. Leveton. Chairman Kanjorski, Ranking Member Garrett, 
and members of the subcommittee, as Congressman Perlmutter just 
said, my name is Peter J. Leveton. I live in Lakewood, 
Colorado, a Denver suburb in Congressman Perlmutter's seventh 
district. I am an unpaid co-chairman of the Agile Group, LLC 
Investor Committee. Agile was a hedge fund manager based in 
Boulder, Colorado.
    Thank you for giving me this opportunity to testify on 
behalf of Agile's 205 investors, several hundred Ponzi Victims' 
Coalition indirect investors from more than 20 States, and by 
extension, all Madoff indirect investors who filed more than 
11,000 SIPC claims on or before the bar date of July 2nd.
    It is clear, from the statements that the Congressmen made 
earlier in this hearing, that you have a clear understanding of 
many of the issues, and I am going to try not to belabor those.
    The indirect investors are not a homogeneous group. It 
includes farmers, doctors, teachers, lawyers, businessmen, 
entrepreneurs, and other hard-working Americans who have, over 
a period of years, diligently saved for their retirement.
    Many of us are your constituents. Many of us are now 
devastated financially and psychologically. Many of us have 
sold or are trying to sell our homes, just to obtain money to 
live on. Many of us are retired. Some indirect investors have 
had to beg for support from our siblings and our children.
    Discrimination is not a word that any of us in this room 
would use lightly. However, because only direct investors are 
considered SIPC customers, discrimination is exactly what 
indirect investors are facing--clearly not Congress' intent 
when it passed SIPA and created SIPC in 1970.
    Pursuant to the current interpretation, direct investor 
victims who knowingly invested with Madoff have an opportunity 
to recoup up to $500,000 for each of their accounts. Indirect 
investors--many, maybe most of us--had never heard of Bernard 
L. Madoff until it was too late. We are not considered 
customers. We will recoup zero. I ask you, where is the justice 
in that kind of an interpretation?
    Because the SEC has admitted extreme culpability in missing 
the warning signs of the Madoff scam and others, and because 
the IRS essentially endorsed Madoff in 2004, by naming his firm 
as a non-bank custodian of IRAs and other tax-deferred 
retirement accounts, we believe that Congress has a duty to 
ensure that equal SIPC relief be provided to all victims, not 
just some victims, as is currently the case.
    The concepts outlined in the Maffei-Ellison amendment would 
be a wonderful solution if it were expanded to include all 
indirect investors. Unfortunately, it addresses only ERISA plan 
victims, and excludes thousands of other indirect victims, 
including those in self-funded retirement plans, such as IRAs. 
I ask you again, where is the justice in that kind of an 
approach?
    We see no moral basis for Congress to amend SIPA to provide 
customer status to a relatively small special interest group of 
indirect investors in ERISA plans, and exclude all other 
indirect investors. We indirect investors lost our savings to 
the same fraudulent Ponzi scheme, suffered the same financial 
devastation as the ERISA plan members, and the direct 
investors.
    We firmly believe that Congress should end this 
discrimination, not perpetuate it, as the present draft of the 
Maffei-Ellison amendment would do, if passed as-is. We urge 
Congress to enact legislation which clearly defines SIPA 
customers as all investors who place their money in SIPA-
protected Ponzi scheme operations.
    With regard to the proposed clawback amendment, we endorse 
an amendment that prohibits clawbacks from investors who 
withdrew their money in good faith, and can prove it.
    With regard to the 60-day payment amendment, we agree that 
SIPC payments should be based on the customer's account balance 
as of their last statement--again, assuming that they did not 
know, and had no reason to believe that the Madoff operation or 
other Ponzi schemes were fraudulent operations.
    Regardless of what processing period is determined to be 
reasonable, we suggest that strict parameters and guidelines be 
established, and that SIPC be required to--and be held 
accountable for meeting those standards and guidelines.
    In closing, I suggest that this could happen to you. As 
Congressman Perlmutter mentioned, it did happen to one of the 
Agile investors who was a previous Member of Congress. We look 
to you and your colleagues to carry out Congress' original 
intent to protect all investors when it enacted SIPA, and to 
help us recover a portion of our tax-deferred retirement 
account losses.
    Thank you again for the opportunity to present these 
matters. I would be pleased to answer any questions that you 
may have.
    [The prepared statement of Mr. Leveton can be found on page 
133 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Leveton. And 
now we will hear from our friend from New York, Congressman 
Maffei, to introduce the next witness.
    Mr. Maffei. Thank you very much, Mr. Chairman, for holding 
this important hearing. And thank you especially for allowing 
those of us from other subcommittees to sit in. Just listening, 
I want to thank all of the witnesses.
    And, Mr. Leveton, I assure you we will be--I'm sure Mr. 
Ellison and I will be discussing with Mr. Perlmutter and others 
your suggestions. We are informed by the plight of our own 
constituents, and don't necessarily know all of the different 
aspects of this.
    And to represent some of the folks in my constituency 
today, I am very pleased to introduce a very good friend of 
mine, Greg Lancette, the business manager for the Plumbers and 
Steamfitters Local 267 in Syracuse, New York.
    Mr. Lancette has served as chairman of Local 267's jointly 
administered multi-employer trust fund since 2005. He is also 
the president of the Central and Northern New York Building and 
Construction Trades Council, representing 16,000 pensioners and 
their families from other unions in central New York.
    Mr. Lancette, thank you for coming to speak with us. I look 
forward to hearing your testimony.
    I also want to thank Local 267's counsel, Michael Herron, 
for also coming down from snowy upstate New York to be with us 
here today.
    The Plumbers and Steamfitters Local 267 pension fund 
suffered serious losses because of the Madoff scandal. While 
the headlines have been full of wealthy and prominent investors 
who lost money in the Madoff Ponzi scheme, the pension funds of 
approximately 60,000 union workers and retirees in central and 
upstate New York were also exposed, and suffered grave losses. 
Central New York unions lost at least $350 million. And as Mr. 
Lancette, I'm sure, will tell us, Local 267 lost approximately 
$37 million.
    It is important to help these hardworking men and women 
recover some of the funds they have lost. While the Investor 
Protection Act could have provided the means to do that, I urge 
the chairman to continue working with me and others on the 
committee to address these issues after regulatory reform has 
passed the full House.
    Currently, the Securities and Investor Protection 
Corporation, SIPC, is allowed to advance only up to $500,000 
per fund, not $500,000 per individual in a pension fund. Funds 
meant to support the retirement of hundreds of thousands of 
retirees are only eligible for the same investor protection as 
one person.
    This makes no sense. And that is why I have introduced an 
amendment to help workers and retirees whose pension funds were 
exposed to recover that money.
    I especially want to thank my colleague from Minnesota, Mr. 
Ellison, for working with me and others to get relief to the 
innocent workers, retirees, and business people who have become 
Madoff's victims.
    Again, I want to thank the chairman for holding this very 
important hearing, and Mr. Lancette for sharing his story with 
us.
    Chairman Kanjorski. Thank you very much, Mr. Maffei.
    Mr. Lancette?

 STATEMENT OF GREGORY LANCETTE, BUSINESS MANAGER, PLUMBERS AND 
             STEAMFITTERS LOCAL 267 OF SYRACUSE, NY

    Mr. Lancette. I would like to first thank Chairman 
Kanjorski, Ranking Member Garrett, and the members of the 
Subcommittee on Capital Markets, Insurance, and Government 
Sponsored Enterprises, and Representative Maffei, for having me 
here.
    As you heard, my name is Gregory Lancette. I am currently 
the business manager of the Plumbers and Steamfitters Local 
267, Syracuse, New York, and chairman of the jointly 
administered multi-employer trust funds. I have served in these 
capacities since 2005. Local 267 is a chartered local union of 
the United Association of Journeymen and Apprentices in the 
plumbing and pipefitting industry in the United States and 
Canada.
    I am here today on behalf of not only my 1,115 pension 
participants and their families, but I also stand here today as 
president of the Central and Northern New York Building and 
Construction Trades Council, which represents nearly 16,000 
pensioners and their families, also from central New York.
    Today, I would like to discuss the direct relationship 
between SIPC and Bernard Madoff's Ponzi scheme. SIPC today 
provides coverage to individuals with an individual limit of 
$500,000.
    But my members' pension investments have no real coverage. 
Because my members, like millions of workers across the 
country, rely on pooled investments for their future 
retirement, SIPC coverage does not currently protect them.
    The Local 267 benefit funds first invested with Madoff 
Securities in the mid-1990's. When I was elected in 2005, the 
Madoff investment was approximately 30 percent of our pension 
fund. We received regular confirmations that our money was 
invested in S&P 500 companies. While the return on the account 
slightly trailed the S&P 500 index, we were assured that the 
strategy offered adequate diversification and lower volatility. 
We believed that the U.S. securities market, monitored by the 
Securities and Exchange Commission, provided protection for our 
members.
    Plumbers and Steamfitters Local 267 benefit funds, at the 
time of Madoff's arrest, had a market value of approximately 
$34 million invested with Madoff's direct brokerage.
    Also, Local 267 had $6.5 million invested with Beacon and 
Associates. Beacon is a fund consisting of a basket of 
investments which was comprised of up to 40 percent of total 
assets invested in Madoff.
    Under the current formula of SIPC reimbursement, Local 267 
will receive $500,000 for the Madoff direct account. The 
reimbursement for the Beacon account will only be approximately 
$900, due to the fact that the amount of Local 267's portion 
consisted of only 1.8 percent of Beacon's total assets. To 
summarize, Local 267's pension lost almost $37 million and is 
expected to recover $500,900 from SIPC.
    As the chair of the board of trustees of benefit funds, I 
am regularly solicited by investment managers seeking to advise 
the funds. Our collective funds pay hundreds of thousands of 
dollars in fees each year. The securities industry welcomes our 
collective investments, and should be prepared to provide 
adequate SIPC coverage in the event of a fraud.
    I must take a moment to reiterate that the only reason why 
I am here today is that we had money invested with Bernie 
Madoff. Mr. Madoff has stolen billions of dollars and the 
Securities and Exchange Commission failed to recognize this 
criminal behavior, even after investigating him half-a-dozen 
times.
    The reason behind the proposed amendments regarding SIPC 
treating each pension as an individual investor is that pension 
funds would be made closer to whole. To compare with what is 
currently being paid back to pension plans in central New York 
currently, if all 30 funds received $500,000 reimbursement from 
SIPC, a total of $15 million will be returned to the central 
New York area, compared to nearly $350 million in losses--$15 
million returned, $350 million gone.
    To further illustrate Local 267's pension loss of nearly 
$37 million, that equates to approximately $33,183 per 
participant. This protection of pooled investors would not be 
unique. Similar pass-through account protection is available to 
individual account retirement plans with funds in the FDIC-
insured banks.
    The portion of the amendment that would require SIPC to 
reimburse within 60 days would benefit all plans in many ways. 
This would be accomplished by either returning assets to 
invest, or to pay benefits to retired members.
    Numerous pension and health funds that were affected by the 
axe of Bernie Madoff are facing insolvency. The Securities and 
Exchange Commission was not able to identify the fraud that 
took place in a timely manner, which resulted in much more 
significant losses as the criminal act progressed.
    The Pension Protection Act of 2006 requires pension funds 
to amortize debt in a 15-year period. I would ask for 
consideration or relaxation of the Pension Protection Act, 
allowing a pension plan to amortize the Madoff-related losses 
at a 30-year rate. That would help ensure pension stability. 
The plans could recover naturally, instead of the plan solvency 
being jeopardized, which may ultimately result in the plan 
being turned over to the Pension Benefit Guaranty Corp.
    In summary, I strongly urge the consideration for multiple 
investor groups or participants in multi-employer ERISA plans 
or any multi-employer investments to be considered as an 
individual investor, and that SIPC be funded to operate and 
reimburse in this manner.
    I also strong urge that pension plans be allowed the proper 
time frame before the Pension Protection Act to amortize 
losses.
    Thank you very much for your time.
    [The prepared statement of Mr. Lancette can be found on 
page 128 of the appendix.]
    Chairman Kanjorski. Thank you, Mr. Lancette.
    And next we will hear from Mr. John Coffee, the Adolf A. 
Berle professor of law at Columbia University Law School. 
Professor?

 STATEMENT OF JOHN C. COFFEE, JR., PROFESSOR OF LAW, COLUMBIA 
                     UNIVERSITY LAW SCHOOL

    Mr. Coffee. Thank you, Chairman Kanjorski, also Ranking 
Member Garrett and fellow Congressmen. I am pleased to be here, 
but disappointed that on this first anniversary of Mr. Madoff's 
arrest, the Federal Government has done so little, so very 
little, to prevent the recurrences of future Ponzi schemes.
    Ponzi schemes are predictable. They appear to cost American 
investors, on average, something like a billion dollars a year. 
Before we even heard of Mr. Madoff, in 2002, the Ponzi scheme 
losses in that year alone were $9.6 billion. So this is not a 
trivial problem, it's a recurrent problem. And I think it will 
continue, as long as the government persists in allowing 
investment advisors to be their own custodian.
    I will put this just in a sentence, because it's not the 
topic today, but mutual funds have to use an independent 
custodian. So do hedge funds. Investment advisors are permitted 
by--under the Investment Advisor Act rules to use a self-
custodian. That is, Mr. Madoff used his own brokerage firm. 
That means his own brokerage firm, Madoff Securities, was 
serving as the watchdog of Bernie Madoff, the investment 
advisor. When you are your own watchdog, nothing works.
    The SEC has made some modest efforts this year to 
discourage the use of self-custodians, but they have already 
backed off, under industry pressure. We need a true watchdog 
over investment advisors, and that can only come from requiring 
an independent custodian.
    That's not the topic today, so I will move on to the 
Securities Investor Protection Act. Here, I want to make three 
suggestions. All of them involve compromises, all of them 
involve line-drawing, and all of them will be painful. But I 
think we have to make some compromises, because insurance is 
costly, and we can't insure all investors to the full extent of 
their losses.
    So, every member of this panel has told you that the 
definition of ``customer'' under the Securities Investor 
Protection Act is too limited. I agree that you can expand it. 
It's understandably limited, because if we cover all indirect 
investors, this system will collapse. CalPERS alone has over 
$700 billion in assets, and that's just one customer. And there 
were larger, private pension funds.
    But in looking at who to protect, I think we should look at 
the continuum of injured victims, and see who has been the most 
injured, and is the least able to protect himself. In my 
judgement, using two criteria, I think that is the pensioner in 
smaller pension funds. Such pensioners suffer the most 
concentrated loss, because they are losing their retirement 
security. And smaller pensioners can do nothing to guard their 
own interests, nor do small pension funds have any in-house 
capacity to monitor. What they do, instead, is they hire 
someone like Madoff to be their investment advisor.
    So, on that kind of criteria, who suffered the most 
concentrated loss? Who is least able to monitor and protect 
himself? I would think the first category that you might think 
of including, were you to expand the definition of ``customer'' 
under SIPA, would be the smaller pension fund, both Taft-
Hartley funds, public funds, and private employer funds. But 
only, I would suggest, defined contribution plans, because 
that's where the loss really falls on the individual pensioner, 
and not on the corporate employer who is contingently liable.
    I think you can feasibly define ``customer'' to include 
smaller ERISA plans, but you will have to put some financial 
limit on it. That will be painful. And I'm not going to tell 
you what that number should be; that's a question for the 
actuaries.
    Second point, equally controversial--and you have heard 
from everyone else already--this is clawbacks. The SIPA-
appointed trustee, both in the Madoff case and earlier cases, 
like Bayou Funds, will use the fraudulent conveyance actions 
under the Bankruptcy Code to go after those people who received 
very large distributions within the statute of limitations.
    This morning's Wall Street Journal estimates that Irving 
Picard will eventually bring suits seeking a total of $15 
billion from people who received distributions within the 
statute of limitations. That's $15 billion against total losses 
that Mr. Picard estimates of roughly $19 billion.
    In other words, fraudulent conveyance statutes have the 
capability of restoring as much as 80 percent of the investors' 
total losses. That's not to say he will get the 80 percent, but 
he has the capacity to sue for 80 percent of these losses. 
Maybe if he brings these suits, maybe he will get 25 percent, 
30 percent. That's how litigation usually settles. But even $5 
billion dwarfs any other source of recovery that the injured 
investors will receive.
    Therefore, I am advising you that you should be very 
careful before you disable the trustee and cut off his effort 
to restore these alleged fraudulent conveyances and put them in 
one common pool for the benefit of all investors.
    The language that has been offered, the language that says 
that you cannot bring a fraudulent conveyance action unless 
``the customer did not have a legitimate expectation that the 
assets in his account belonged to him'' is really language that 
I, as a law professor, believe means you're going to have to 
show that this person was a co-conspirator of Madoff before you 
will be able to bring a fraudulent conveyance action. That 
would reduce this recovery from $15 billion, in my judgement, 
to well under $1 billion. Be cautious about stopping the 
trustee, going against the largest source of recovery.
    That doesn't mean you can't do something. Again, this is a 
matter of line-drawing. I would suggest we start with, who are 
the victims who might be most injured by fraudulent conveyance 
actions? I would focus here first on charitable organizations.
    In fact, the Bankruptcy Code, if you look at section 548, 
which is the section that principally deals with fraudulent 
conveyances, has long given an immunity against fraudulent 
conveyance actions to charitable contributions. Now, charitable 
contributions are not at issue here. They are usually what's at 
issue in fraudulent conveyances. Here, these are charities who 
had an account. They are trying to get their own money back, 
rather than hold on to a charitable contribution.
    But the principle is there. Congress has recognized in the 
past that charitable organizations are a special category, and 
I would suggest that if you're going to do anything in the 
field of cutting back on fraudulent conveyances, you extend the 
immunity of charitable organizations beyond simply the 
contribution, and say that a charitable organization cannot be 
sued for fraudulent conveyance unless it can be shown that 
either: (A) they had actual knowledge of the fraud; or (B) the 
charity was established by, in effect, the crook himself.
    Let me say one last word about fraudulent conveyances. No 
one has explained their purpose. They go back to the time of 
Queen Elizabeth. They have been around for a very, very long 
time. And they serve one fundamental purpose: They prevent the 
crook from choosing the victims who will bear the loss.
    If we don't have fraudulent conveyance statutes, a crook at 
the 12th hour can still decide to permit some victims to 
recover by hinting to them they should redeem, and letting 
other people bear the loss. If we don't have fraudulent 
conveyance statutes, we're going to create very strong 
incentives for the crook to, in effect, direct who will be the 
real victims and who will be the token victims. I don't think 
you want to do that. I don't think you really want to stop Mr. 
Picard.
    I think you can use a statute that has a different 
language, a recklessness test. Today, anyone who is sued in a 
fraudulent conveyance has a good faith defense under the 
Bankruptcy Code. The case law has construed that to mean that 
you have to show not just subjective good faith, but that you 
have the good faith of an objective reasonable person. It's a 
negligence test. You could soften this down to a recklessness 
test, as I suggested in my prepared testimony.
    I think my time has expired. The last sentence I will say 
is I want to congratulate you, Mr. Chairman. For the first 
time, Congress, in your section 511, is trying to move SIPC 
from being a rather strange non-insurance system to a true 
insurance system that will charge risk-adjusted premiums. You 
want to charge risk-adjusted premiums, because otherwise good 
brokers are subsidizing crooked brokers. We can't have 
everybody pay the same amount. We want the riskier broker to 
pay more.
    On that note, I will stop.
    [The prepared statement of Professor Coffee can be found on 
page 89 of the appendix.]
    Chairman Kanjorski. Thank you very much. And I want to 
thank all the witnesses for their testimony. Each and every one 
of you have told a compelling story on its own.
    And any of the questions, particularly mine--I am going to 
be sort of a devil's advocate, if you will, and not intending 
to downplay your sufferance, but trying to get to some of the 
core issues that we are going to have to decide. I think the 
professor clearly laid it on the line. This is not an absolute 
guaranty program.
    And so often we run into, whether you are a victim of a 
fraud or you are a victim of the market, people want to be made 
whole. That's a natural human instinct. Our problem is that, 
with the crisis that we have just gone through for the last 
year, depending on who makes the estimations, the loss in the 
United States was somewhere between $7 trillion and $14 
trillion in capital.
    And if you had been an investor in one of the major banks 
in the United States that went from $50 to $2 a share because 
of maybe bad judgement, perhaps investments in the wrong area, 
or some people would even say potential fraud or participation 
in fraud--we do not know; that has never been proven--but that 
would have been a great disappointment. It would have been the 
temptation of every shareholder to say, ``I want to be made 
whole at the price I either got in at,'' if it were above $2, 
``or the high price, because I was counting on that for 
something.'' Obviously, it was their savings or their 
retirement.
    Well, that is not a bad argument. I cannot fault you for 
having it, but I sort of would pose the question, who among us 
in the population will turn over the assets of their homes, 
their pension fund, their bank accounts to their fellow 
citizens to make them more whole? I do not see a long line out 
here in front of the Capitol. They have not shown up for this 
testimony to suggest that they are willing to provide their 
fair share of your loss. And I doubt that they will.
    Our system--and our decision, it seems to me--will go to 
the question of, is it intended that we have a system that has 
no risk? And that may not be the worst system in the world. But 
if we are, then we really should not have pension funds with 
investment advisors. We could have a governmental pension fund 
we would pay into, and somebody would then lend that money to 
the U.S. Government at a guaranteed rate. An investor would get 
very little upside, but also very little downside.
    If an investor wants to enjoy the benefits of the capital 
system, the free market system, and its extraordinary upside, 
there are risks to the market. One may say, ``But I did not 
lose my money in the market; I lost it to a fraud.'' That is 
part of the market. I mean, caveat emptor is still a principle, 
I believe, Professor.
    It may be vicious. It may be because an investor did not 
even understand or know who was investing his/her money. But 
there is no way in the world he can say it was the government's 
responsibility. Our system does not say that. Our system says 
it is each individual's responsibility to protect his or her 
assets as they will.
    I was here when the Enron disaster occurred. And their 
people had invested their life savings in their 401(k)s that 
absolutely disappeared, almost overnight, to the tune of 
hundreds, if not millions of dollars. And we were all sorry for 
them. But they had to take their licks. That was the problem, 
that is our system. Not the best--well, I still think it is the 
best system in the world. Not a good system, if you are on the 
losing side. If you are on the winning side, it is absolutely 
the best that was ever constructed.
    Our problem is, how do we lessen the impact on everyone? 
Well, we just cannot, it seems to me, guarantee everybody is 
insured, or everybody is guaranteed their return. I do not know 
how we do it. I do not see how our system would afford that 
opportunity.
    If we were to tax the payment of the loss of $14 trillion 
in capital, just for the last recession, what would it be per 
head? Who is the mathematician on the board? It would be 
extraordinary, the amount of dollars every individual American 
would have to come up with to make some of our fellow citizens 
whole.
    Probably all of us have lost in some way. You, in 
particular, have lost a great deal. There is no question about 
it.
    Now, what do we do? We have done several things. We have 
now provided changes in the Investor Protection Act that will 
require more in-depth investigative processes, that the SEC 
have a stronger chain of command, that information go up the 
information ladder and the leadership ladder at the SEC. Our 
future legislation will help future thinking on all of these 
things. There is not an awful lot in there that is going to 
make you whole.
    Can we come up with some equitable position? Going 
particularly to Mr. Maffei's witness, the pension fund is a 
tough situation. But if we were to honor $500,000 per pension 
member of the pension fund, we would soon end the Guaranty 
Corporation. We just do not have the funds in there to do it.
    I do not think that was ever the intent. I think we 
probably have to have much more lively--and I think it will 
result, probably from the experience that we have all had--we 
have to have closer eyes on the subject. Do we force pension 
funds to do certain things with the assumption they will be 
able to carry them out correctly, and they probably cannot in 
certain instances?
    Those individuals who did not know that Madoff even had a 
touch on your funds, that is a tragic thing. But it is the 
responsibility of each individual to find out.
    I will leave with this. My time has expired. But if you 
think in terms of real estate, you can go out and buy a 
$500,000 home. And you can buy it from your lawyer, your 
doctor, your minister, your priest, your rabbi, or your friend. 
And if you are not smart enough or clever enough or sensitized 
enough to have it searched out, then that individual has title 
to your home, and you buy the home and you pay your money and 
then you find out that the person who purported to be the owner 
did not own it, then it is lost. The government cannot be sued. 
You cannot hold anybody else responsible. It is important to 
search out the ownership of title.
    What difference is that in a pension fund, in terms of who 
is handling the pension fund, who is making the investment? It 
is really the same policy.
    Certainly, our hearts go out to someone who pays $500,000 
for a home that they do not own and cannot live in, as our 
hearts go out to those people who lose their life savings 
because of a fraud perpetrated by someone who appeared to have 
all the indicia of respectability.
    But the Federal law doesn't provide that, because a company 
has to register with the SEC, and the SEC is supposed to test 
out and investigate, it doesn't say that it guarantees that the 
SEC has eliminated all frauds. We cannot afford to do that.
    In some respects, if we look back historically, it is a lot 
better today than it was in 1929. I hope it is going to be a 
lot better tomorrow, when we pass the new reform regulatory 
bills than it was a year ago. But it is not going to be 
perfect. We are not going to accomplish that end. And those of 
us who have the desire or wish are going to be grossly 
disappointed.
    I am not going to ask any particular questions, because I 
have exhausted my time. But we wanted to have this hearing 
today because so many of the fellow members of the committee 
have expressed their thoughts on the subject of the losses of 
their constituents. They have suffered. They are looking for a 
remedy. And the commitment, as chairman of the subcommittee, 
that I have made to them is that we are going to work as hard 
as we can to close some of the holes, some of the weaknesses in 
the system.
    But I just want to caution you all, we are not going to 
solve and create a perfect system. You may not be happy with 
the end result, because the possibilities and the exposures to 
the government and to the people are far and above what we can 
possibly provide as protection.
    So, we will work toward getting equity and fairness. But as 
the law professor will tell you, there is no equity, and there 
is no complete fairness in this world.
    The gentleman from New Jersey, Mr. Garrett.
    Mr. Garrett. Thank you. There may not be fairness. What we 
can try to do, I guess from the government's perspective, is to 
make sure that there is justice, however.
    [applause]
    Mr. Garrett. No, no, no, no. You will use up my time. We 
need to strive in order to get justice. And I do agree that, at 
the beginning of the day, everyone should be held accountable 
for executing their own due diligence in their investments, 
right?
    And part of that due diligence, as Professor Coffee would 
say, changes from who you are. If you are the proverbial little 
old lady, at one level. Conversely, the union official who 
might have more resources than the little old lady would be at 
a slightly different level to a fund of some sort, or an 
association somewhere in between those.
    So, the level of due diligence is going to vary. But we do 
expect in this country that everyone exercises due diligence. 
And to the extent, then, that due diligence doesn't work out as 
far as investments going up and down, that is your 
responsibility.
    Added to that, however, is when that due diligence is in 
reliance on the government in certain areas, then that is a 
responsibility of the government to come forward. So when you 
do your due diligence, as Ms. Chaitman is saying, looking into 
the SEC, has the SEC done their job, well, you are 
appropriately relying on the SEC to do their job. And when you 
look to--that's before the fact, right? And after the fact, you 
should be able to look to SIPC to do their job, because they 
are quasi-government entities.
    See, this is a whole issue. There is a bill on the Floor 
this week, today and tomorrow, which, in essence, does what 
occurred here. It creates what I will call a moral hazard, if 
you will, by relying on the government, as you did, because the 
government says, ``We are going to protect you with the SEC.'' 
And so, you have a right, then, to rely on that. Maybe you 
would have done more due diligence if it wasn't out there, but 
we told you that you can rely on it. So you did. And that's 
right. You should.
    Also, we set up the SIPC and said, ``You can rely on it.'' 
And you did. Had we never set those things up, you may have 
made other investments, or made other decisions. But because we 
set those entities up, now we have created a different 
investment strategy--a decision is what we call moral hazard.
    And the bill that we're going to be voting on, just for 
your information, today and tomorrow, expands those 
involvements or intrusions or activities by the government so 
you in the future maybe even say, ``I can be more reliant on 
the government and less on due diligence,'' which I think is 
not a good thing.
    For example, one of the comments from one of the people 
that I entered into the record said, with regard to clawbacks--
and let's do a quick show of hands. If I understood the 
testimony, everyone except for Mr. Coffee, on this panel, 
believes that we should not have clawbacks. Is that correct? If 
you're in favor of clawbacks potentially, in any one shape or 
form or another, as Mr. Coffee--okay, and I understand that.
    But one of the testimonies was--a letter I entered into the 
record from a gentlelady from Bergenfield said, ``Indeed, any 
clawbacks, if we're going to have them, should begin with the 
SEC,'' and clawing back from the SEC because you were in 
reliance upon them, and maybe we should be clawing back from 
them.
    And that's why I gave my opening comments, that we're not 
asking much from them in the bill that's passing tomorrow. In 
fact, we are doubling their salary and their authorization, and 
saying, ``Hopefully in the future you will make some changes. 
But we are going to increase it.''
    So you might just want to take a look at what's coming down 
on the Floor tomorrow and today, because we are really not 
asking for those things, what I think we should be. We should 
be holding them accountable for what they did wrong in the 
past, and holding the people particularly accountable for the 
failures that they made. And before we give them any more 
money, we should be making sure that they make some changes.
    Now, Ms. Chaitman, you said--just to get into the weeds on 
one little--not a little point. But in one point in some of the 
material you supplied us with, you said that the trustee--and 
correct me if I'm wrong--the trustee and SIPC are running 
administrative expenses of approximately $100 million per year. 
But Mr. Harbeck says, in his testimony, that the trustees have 
only paid $1.2 million so far. Can you--
    Ms. Chaitman. Well, I think I can--
    Mr. Garrett. --clarify that? Yes.
    Ms. Chaitman. Yes. The trustee's legal fees have been 
approved for the first 15 weeks at the rate of $1 million a 
week. He then filed an application for another 23 weeks, and he 
is running again at $1 million a week. So, if you project that 
for a year, it would be $50 million a year.
    And Mr. Harbeck has said publicly that the non-legal fees, 
the forensic accountants, etc., who were going back through 
generations to figure out the net investment--which, of course, 
is not required by the statute--Mr. Harbeck had said in the 
press that those expenses are running at the rate of $1 million 
a week.
    Mr. Garrett. Right. So it's one of those cases that's a 
typical--I see my time has come up already--cases where there 
is almost an incentive for--and I'm not saying that there is; 
I'm just--on the face of it, there is an incentive for things 
not to move at an expedited basis, because you have a pretty 
good fee there that's guaranteed to be paid for the period of 
time--
    Ms. Chaitman. There is an inherent conflict of interest in 
the way the statute is set up.
    Mr. Garrett. Yes. And if I can just--I just want to make 
one statement, that we--some of these aspects are--may have 
impacts upon getting more fees in, may have impacts upon 
broker-dealers, of course, right?
    And we did suggest to SIFMA that they might want to come 
and testify, or at least be at the hearing today. They declined 
to do so. So we would certainly like to hear from them at some 
point in time, what they see as the impact.
    Because if you want to do--and I think I'm on board with 
where most of you are--and, Mr. Coffee, I understand if you 
want to go where you need to, and I will close on this--we have 
to be really tight in that language. Because what you don't 
want to do is to come up with language that--and I'm a lawyer 
too--has any wiggle room in it that then puts somebody here on 
the spot, that they even have to go out and go to the 
aggravation of hiring a lawyer in a--where they really 
shouldn't have to go through that aggravation. And I think you 
probably would agree that you want to be able to draw that line 
clearly enough so that they would not just have mass lawsuits 
under this thing, that it would just be very targeted.
    And I would think that target would be very, very limited 
as to ones that the government has any evidence whatsoever on, 
that there is--or even was--potential for collusion, whether 
it's family members or other business associates or just 
something like that. Is that where you're going on that?
    Mr. Coffee. The charitable--
    Mr. Garrett. Not the charitable--well, maybe the 
charitable, but just for any of the other lawsuits that they 
would potentially--
    Mr. Coffee. I think you could move from the current good 
faith defense, which is based on a reasonable person--
    Mr. Garrett. Right.
    Mr. Coffee. --to more of a recklessness standard. That 
would make it somewhat harder to recover under a fraudulent 
conveyance statute.
    Mr. Garrett. Yes. You just don't want an overly zealous 
SIPC going after people and saying, ``Well, now, we have a 
reckless standard, and we're going to still go after people 
who''--
    Mr. Coffee. I understand.
    Mr. Garrett. Because I know how--
    Mr. Coffee. I just remembered that Mr. Picard is suing on 
behalf of small investors. There is no villain here. This is a 
zero sum game between some large investors and the smaller 
investors. And I hope he is able to recover a good deal from 
some of those larger investors to benefit the smaller 
investors.
    Mr. Garrett. But remember, some of those are not villains. 
I would assume the vast majority of them are not villains 
either, right?
    Mr. Coffee. They could have been reckless, however.
    Mr. Garrett. They could have been reckless. But if they're 
not villains, then you have to make that case. And we don't 
want to have the other people be swept into that, and incur the 
expense--
    Mr. Coffee. If you're simply negligent--
    Mr. Garrett. Right.
    Mr. Coffee. --you don't get the good faith defense.
    Mr. Garrett. I agree with you on that. Thank you, Mr. 
Chairman.
    Chairman Kanjorski. Thank you, Mr. Garrett. We will next 
hear from the gentleman from New York, Mr. Ackerman.
    Mr. Ackerman. Thank you, Mr. Chairman. We don't really know 
the full extent of the number of victims. What we do know is 
that the first victim was the public trust, the trust of people 
in their government, the trust of people in us, the trust in 
the system that we set up that they believed would protect them 
and have every reasonable right and expectation that it was 
going to.
    We know the number of claims that have been filed. We know 
the number of people who have been named. We know the number of 
entities that are on the list. But as we can see from just one 
local union, that they are named as a victim. But a lot of 
these groups, organizations, trust funds, investment groups 
represent thousands and thousands and thousands and thousands 
of Americans, some of whom think they are very lucky, because 
they have no stake--or had no stake--or investment in Madoff. 
But they do.
    A lot of people don't understand this issue. And they don't 
look sympathetically at the victims, because these are people 
who they think had more money than they did, who didn't do due 
diligence, who were getting a high interest rate, and therefore 
they should have known better.
    This is part of what we usually call blame-the-victims 
mentality, that it's the victims' fault that they're in the 
predicament that they're in, where nothing could really be 
further from the truth, because there is no way--show of hands. 
How many of you knew Mr. Madoff? Only the person who is not a 
victim.
    [laughter]
    Mr. Ackerman. Not one of the other people who are victims 
knew Mr. Madoff. That's the problem. How could they do due 
diligence? They relied on their government to do due diligence. 
Maybe we should take away the right of the government agencies 
to do due diligence, and pronounce people like Mr. Madoff, or 
even people not like Mr. Madoff, free of sin, crime, 
culpability, ill intention, incompetence, or anything else.
    Maybe we should let the little old lady from Peoria be able 
to do due diligence and go and personally audit Mr. Madoff. 
Every citizen should be able to do due diligence, if that's 
what the American people think. How do we do it?
    Well, we do it by doing what we did--obviously, not 
effectively enough--by empowering government agencies and 
entities and people with badges to go in and investigate and 
make pronouncements that other people trust. That's what we do 
in a sophisticated financial system, in a civilized society 
such as ours. Everybody can't investigate everything. You don't 
have a right, the way the system stands.
    And the only people who think in the blame-the-victim 
mentalities are people who are not victims, because they think 
they were lucky. And some of them were not. There are so many 
victims here that we don't even contemplate right now, because 
you put money in your bank and your bank invests through a 
brokerage and puts money in something safe. And we know the 
first line of defense, because those are all public, if your 
bank invested in Madoff.
    But if your bank invested in a brokerage which went through 
somebody else and they invested in Madoff, so many other 
thousands of people may lose money that we're never going to 
hear of, in the end. And the system loses all this money.
    Obviously, there is not enough money in this insurance fund 
that people thought that they had to make them whole to the 
extent of at least $500,000, those people who had that much 
money, whether it was the initial investment or money that grew 
to that amount or greater, but really didn't.
    We have a mess on our hands. First of all, we have a large 
group of American investors who were first robbed by Mr. 
Madoff, abused by the government and the system into thinking 
that they were insured, and they were not. They were then 
devastated by the IRS if they paid taxes on the money that they 
thought they had.
    They didn't have the investment returns, and the government 
then robbed them by charging them tax that they can only go 
back a few years and not the full 13, as some of us have 
proposed, to get the tax back that the government illegally 
robbed them of.
    And then, so many of them are now being raped by the 
clawback provision for reliably, understandably thinking that 
they had this money in their account that they didn't have in 
there, and then they spent to live on, because that's what it 
was for.
    I have met people who have contempt for the victims, 
because they should have known better. How?
    You know, I represent the North Shore of Long Island, the 
base from where Mr. Madoff operated, the country clubs that he 
belonged to. And thousands of people who thought they were 
lucky to know such a nice man who was so reliable, received all 
the accolades that society can heap upon an individual, who is 
making a company and returning investments and interest to 
people for so, so many years.
    These are the people who thought they were lucky. And they 
were probably the unluckiest people of all. Besides having 
fallen into the categories that I named, they were further 
ripped apart because they personally knew this guy who they 
thought was this wonderful human being, and how lucky were 
they. And now they are personally, personally devastated 
because of the abuse of the relationship, in addition to all of 
that.
    So, for those people who look upon the victims and say, 
``I'm lucky I'm not there, and they should have done better, 
and how smart am I, and how stupid are they,'' they really 
don't get it. And some of them are involved in this fraud 
personally, and with their finances, as well. We have to be 
able to somehow do better.
    I think it's interesting--and I see that my time has 
expired also--that so many of us have such strong opinions. 
Maybe that's because almost everybody on the panel, or most of 
us at this hearing today, have actually selected witnesses 
that--myself included--appear before us today, so that we 
understand who the victims really are.
    But keep in mind that what we have to do is try to fix the 
system so that it makes sense, and brings the things that I 
think we all know. We can't treat everybody equally. We have 
set people upon themselves, against each other like a bunch of 
piranhas, because of whether or not they needed to live off 
their interest, or were able to continue working so they didn't 
need to live off the interest. Which group is luckier? It 
behooves us to figure it out.
    I think that, despite the fact that this is the more 
marketable, I would call it, of the panels for the American 
people to understand what happened, but I think we're going to 
have a lot more questions of the next panel, Mr. Chairman. I 
think we all look forward to hearing from them.
    I thank the people who have come here today and shared 
their tragic stories with America, and to keep in mind that we 
all bear some culpability here in this situation in which we 
all find ourselves. And I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much, Mr. Ackerman. I 
just want to throw out the figure I mentioned. If the loss that 
we have just suffered in the last recession--or in this 
recession--$14 trillion, it would break down to $46,666 per 
man, woman, and child in America. And bear in mind what that 
would mean if we try and make up for everybody's losses and 
everybody's failings who has been in the system.
    That money was lost by a lot of people in a lot of 
different ways, some through fraud, some through error, some 
through bad judgement. I just wanted to throw that out. Even if 
it's half that, it's $23,000 per man, woman, and child. That's 
a lot of money.
    Let's see, Mr. King of New York.
    Mr. King. Thank you, Mr. Chairman. Again, I want to thank 
the witnesses.
    Mr. Coffee, I don't want to relive the anxiety of being 
back in law school class and debating the professor, so I will 
ask my question in a very respectful way. But my question is 
for you and for Ms. Chaitman, primarily.
    I agree with the overriding principles that you are 
enunciating. But we also have competing principles. To me, one 
of the main purposes of SIPC is to maintain consumer 
confidence, to encourage people to invest, to give them at 
least some reasonable assurance that they're--if they invest in 
good faith, if they do use reasonable diligence, that their 
investment will be protected. If the stock collapses, that's 
part of the game, you lose.
    Now, when I look at the SIPC Web site, you know, it states 
the SIPC mission: ``When a brokerage firm is closed due to 
bankruptcy or other financial difficulties and customer assets 
are missing, SIPC steps in as quickly as possible and, within 
certain limits, works to return customer's cash,'' etc. 
``Without SIPC, investors of financially troubled brokerage 
firms might lose their securities or money forever, or wait for 
years while assets are tied up in court.''
    And it does have the caveat on there, ``within certain 
limitations,'' but then the next sentence goes on to say, 
``Although not every investor is protected by SIPC, no fewer 
than 99 percent of persons are eligible to get all their money 
back.'' So, we have the government implicitly stating that if 
you play by the rules you will be protected.
    And so, when we have people who have played by the rules, 
it appears to me that we have a trustee who seems to be 
taking--is trying to make villains. Whether he calls them 
villains or not, the fact is he is creating one category of 
villains and one category of victims, when 99 percent of these 
people are all victims.
    And so, I would ask you and Ms. Chaitman how you--let me 
just ask the question, first question. Are either of you aware 
of any instance in which SIPC has defined net equity the way 
the trustee is doing in this case? Mr. Coffee, and then Ms. 
Chaitman?
    Mr. Coffee. Do you want to go first, or--
    Ms. Chaitman. Yes, I would be happy to. I can assure this 
committee that there has never been a case in a SIPA 
liquidation where SIPC or the SEC has taken the position that 
SIPC does not have to comply with the law. This is the first 
time in SIPC's history that SIPC has taken the position that 
net equity, as defined by Congress, does not apply to SIPC.
    Mr. King. Professor Coffee?
    Mr. Coffee. I want to start with your point that SIPC 
should not misrepresent what it is doing to the American 
public.
    We have to understand that, until recently, SIPC was 
extremely underfunded insurance, because broker-dealer firms 
paid only $150 a year. That's awfully cheap. I think when you 
look at this insurance system, you should look at what most 
small businesses do. They may spend one percent of their 
revenues on insurance or surety bonds. So this has been an 
awfully cheap and somewhat illusory system of insurance. It has 
never been under great stress before the Madoff debacle, but it 
could happen again.
    The other point I would make about change over time is that 
in the old days when this was set up, most investors were 
individual investors. That has changed. Only about 25 percent 
of investors today are individual retail investors. Most of 
them invest collectively, through pension funds, mutual funds, 
etc.
    I agree entirely with what Chairman Kanjorski is saying, 
that we cannot give insurance to everyone. And I think if we 
tried to give insurance to hedge fund investors, it would look 
like socialism for the rich. But I do think there are special 
categories where we could recognize that if we're going to make 
any change we should start at the end of the continuum where we 
have the most exposed victims. And I am suggesting that's the 
smaller pension plan.
    But in answer to the final part of your question--
    Mr. King. Right.
    Mr. Coffee. --because I do think there has been some 
misrepresentation here to the public about what SIPC can do and 
is doing, I think the SEC is probably consistent with the prior 
law in what they're saying. It's just never come up before in 
this dramatic a way.
    Mr. King. I would just comment on that, that to me, any 
time you get beyond the specifics of the law, you're taking a 
chance. And to say, ``Well, maybe these people are more 
deserving than those, maybe we can set up a different 
category,'' to me it's a very risky path to allow a government 
official to go down.
    My time is starting to run out. Let me just ask one other 
question on the issue of taxes. If both of you could, address 
the issue of reimbursing people who paid taxes on nonexistent 
profits, paying taxes on money which they never received.
    Mr. Coffee. I'm not a tax lawyer, but I do think that the 
legislation that has been proposed would allow you to carry 
these losses forward and back, and that would be a way of at 
least reducing some of the bite.
    And I think it was an illusory profit that you were paying 
taxes on, so I think we should be very sympathetic in that 
context, because it was a phony tax that you were paying.
    Mr. King. And Ms. Chaitman?
    Ms. Chaitman. Thank you. There are two things I would like 
to say.
    First, we are not seeking a total bailout or restitution. 
All we are seeking is that the SEC and SIPC comply with the 
law. We are seeking the $500,000 in SIPC insurance that we were 
promised.
    And I am not asking for coverage for indirect investors, 
because I don't think the statute, as it's presently drafted, 
contemplates that. But the statute clearly contemplates that a 
customer who deposits money with a broker for the purpose of 
purchasing securities is entitled to $500,000 in SIPC 
insurance, based upon the customer's last statement. That's 
what the statute says, that's what the SEC has said in every 
case until now. That's what SIPC has said in every case until 
now. When a customer had a statement which showed the purchase 
of real securities, that customer was entitled to replacement 
securities up to $500,000, even if those securities had tripled 
in value.
    And how can we trust our government if Mr. Harbeck, the 
president of SIPC, can assure a court, as he did in the 
southern district of New York in the New Times case, that even 
if the securities which were never purchased--because it was 
another Ponzi scheme--even if those securities tripled in 
value, SIPC would replace the securities up to $500,000? We had 
a right, as law-abiding citizens, to rely upon that statement, 
and rely upon the law.
    Now, with respect to the taxes, there is no question that, 
economically, the Internal Revenue Service was the largest 
beneficiary of Madoff's Ponzi scheme, because he was generating 
short-term capital gains, and people were paying taxes on the 
income they thought they were receiving at the highest tax 
rate.
    But I think that the Internal Revenue Service and Congress 
have done a great deal to help investors on the tax side. There 
are proposals--Congressman Ackerman has a bill, Kendrick Meek 
proposed a bill. Senator Schumer announced the other day a 
proposed bill in the Senate which will give Madoff investors a 
great deal of relief. It's not 100 percent. We're not asking 
for 100 percent.
    But on the SIPC issue, we are asking that SIPC be required 
to comply with the law.
    Mr. King. Mr. Chairman, could I have 5 seconds, please, 
just to--Mr. Chairman?
    Chairman Kanjorski. Yes.
    Mr. King. I will just make one final statement, because I 
may not be able to be here for the second panel of witnesses.
    I have real concerns about a trustee being able to receive 
$1 million a week in legal fees. To me it's encouragement for 
him to keep litigation going, to go after--now, whether it is 
or not--let's assume he is acting totally honorably. But the 
fact is, it does put an appearance of evil, if you will, an 
appearance of a conflict of interest there, to pay someone for 
the more energetic he is in going after one class of victims, 
as opposed to another. And I just want that on the record. I 
yield back. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you, Mr. King.
    Mr. Leveton, do you have something to throw in, just 
briefly, in response to that?
    Mr. Leveton. No, I want to take the conversation in a 
different direction.
    It seems that there is a dialogue going, and it's an 
excellent dialogue. But the attorneys at this panel are, with 
all due respect, dominating the dialogue.
    Chairman Kanjorski. Okay.
    Mr. Leveton. So--
    Chairman Kanjorski. Point well taken.
    Mr. Leveton. May I make a couple of comments?
    Chairman Kanjorski. Yes.
    Mr. Leveton. Okay.
    Chairman Kanjorski. We will have Mr. Perlmutter ask you 
some questions, so you will get a response.
    Mr. Leveton. Okay.
    Mr. Perlmutter. Okay.
    Chairman Kanjorski. We will now hear from the gentlelady 
from New York, Mrs. McCarthy.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman, and 
thank you for holding this hearing. I agree with some of my 
colleagues on the committee, and I disagree with others.
    The bill that is on the Floor today and tomorrow was put in 
place mainly because, in my opinion, the government certainly 
has failed in many, many ways. Also, it is our job to protect 
the average citizen.
    So, Mr. Leveton, I will give you a chance to talk about 
what you want to talk about, because I have to say, you know, 
my husband was a stock broker for close to 30 years, and he 
used to come home all the time and basically say, ``Number one, 
brokers shouldn't get commissions. That only drives them to buy 
and sell and line their pockets.'' He said, you know, they 
should get a good salary and whatever.
    But with that being said, what we have seen in the last 2 
years--let's go back to Enron. There has been a slow 
deterioration of moral obligation with large corporations. And, 
if anything, we have seen that, unfortunately, with the 
meltdown of the economy that we have right now. We have seen 
victims.
    And as far as helping some of those victims with a tax 
break, tax credit, they don't have any money left to pay taxes, 
or they don't even need a tax credit. The money is gone. And 
the ones who were injured were a lot of people who did 
everything right.
    And as far as, consumer beware, I'm one of those who will 
read everything that comes into my house. And you know what? 
I'm not a lawyer, and I don't understand it all. And if I ask 
my broker a question, he has to look up the answer. So, as far 
as consumer beware, we trust--we try to trust--businesses. And 
unfortunately, that has not worked out.
    But I will give Mr. Leveton a chance to speak about 
anything he wants in the remaining balance of time.
    Mr. Leveton. Thank you very much. I have a couple of 
comments.
    Do you remember the camel trying to put its nose in the 
tent example? That's where the indirect investors are. I 
totally understand the issues of net equity and clawbacks, and 
a number of other things that I think are very valid. However, 
for the indirect investor, unless they are in the SIPC customer 
definition, for lack of a better way to say it, none of those 
things are relevant. They're not going to get any benefit 
anyway.
    I think that this is not so much a legal issue as it is an 
issue of fairness, because you're distinguishing between the 
direct investors on one hand, and the indirect investors on the 
other hand. And now there is a further definition here, and 
that is the pension fund investors, as separated from the other 
indirect investors.
    Everybody lost their money in the same way with the same 
fraud.
    I can't speak about the wealth of the direct investors. And 
I can really only speak about the wealth of the indirects in 
our particular hedge fund. These are people who have worked all 
their lives, played by the rules, saved diligently, and 
accumulated enough money to invest in a hedge fund at a level 
that was over the minimum requirement. They are not rich, by 
any means.
    To the extent that they might have more investable and 
liquid assets than the example of people who were only able to 
scrape together $50,000 in a pension fund, that may well be 
right. But from the standpoint of this discussion, to 
distinguish between those people--who, by the way, have created 
many, many jobs over the years--but to distinguish between the 
indirect hedge fund investor and the direct investor seems to 
me to be totally unfair and not appropriate.
    I think, Congressman Ackerman, that you understand. I think 
what you said was right on.
    My reading of the discussion in 1970, when Senator Muskie, 
for example, said the SIPA legislation will protect all 
Americans--he didn't say direct investors and indirect 
investors; he said all Americans--from brokerage firm fraud and 
that is what was intended. Whoever drafted the SIPA legislation 
didn't do it clearly enough to indicate that. But that was the 
intent.
    And now, what is happening, Chairman Kanjorski, is just 
what you have said. And Congressman Ackerman, it's just what 
you have said. You have group A against group B against group 
C. That clearly was not the intent.
    And I think that there is no way that SIPC can rectify 
that, regardless of how good our arguments are. But Congress 
can. And it can start right here, because you have taken the 
time and effort to allow this group to talk with you very 
freely. Thank you.
    Chairman Kanjorski. Thank you, Mr. Leveton. Our next member 
is Mr. Posey.
    Mr. Posey. Thank you very much, Mr. Chairman. I think it is 
clear that the heart of every Member aches for the experiences 
that the indirect investors have suffered. There is no doubt 
about that, whatsoever.
    I think we also ache because, despite the fact that Mr. 
Markopolos tipped the SEC off almost a decade ago to the fact 
that Madoff was trying to pull a Social Security-like Ponzi 
scheme off, they ignored him. And he was allowed to do it, and 
allowed to do it, and allowed to do it.
    And, although I don't think it's realistic to expect that 
we can ever have laws that guarantee people won't become 
criminals, and they won't try and exploit other individuals, 
the deterrent to that is swift and sure punishment. And I am 
very sad to say that, to this day, despite the numerous 
inquiries, the testimony, the investigations, I don't know that 
anyone at the SEC has had their wrist slapped yet. I don't even 
know that there has been a verbal reprimand. I don't think 
anybody has been fired. We just don't know how they have 
addressed it.
    The only way to deter criminal activity--I mean, you police 
it the best that you can, and when you find it you must have 
swift and sure punishment. Even if the government is in on it, 
you still must have swift and sure punishment if you want to 
deter bad activity.
    You already made it illegal to perform bad activity. We 
have plenty of laws there right now that were violated. Madoff 
wouldn't be any less or any more of a crook if we have another 
couple of books of statutes piled up that he violated. The 
damage was done. It could not have been much worse, I don't 
think.
    But I think we need to focus on having a day of reckoning 
for that kind of bad behavior, which seems to have permeated 
industry. They referred to Enron earlier.
    The whole reason that this economy is in the dumps that it 
is now, and that future generations, in addition to this, are 
facing the uncertainty that they are now, boils down to just 
one word, and that's greed. It's a lack of respect for the 
process, it's a lack of respect for your fellow man. It's a 
lack of respect for your investors. It's a lack of respect for 
everybody. It's putting the dollar first. And a lot of people 
have a right to be greedy, but they don't have a right to steal 
from other people.
    And so, until we see that--besides just one man, Bernard 
Madoff, until we see that there is justice dealt out for 
everybody who is culpable in letting him pull off that scheme, 
it's just going to encourage more activities of the same, 
despite how many laws that we enact.
    Thank you, Mr. Chairman. I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Posey. Our 
next member is Mr. Klein of Florida.
    Mr. Klein. Thank you, Mr. Chairman. I have some specific 
questions. But just a quick note on Mr. Posey's comments.
    Part of the frustration I think most Americans have, as 
well as the people who were defrauded here, is the fact that 
there hasn't been enough punishment. Accountability is one 
thing, and there is the responsibility within our government 
agencies to follow through, and those people need to be removed 
if they can't do their job.
    And one of the big explanations that has come forward on 
this problem is the fact that there weren't enough people, at 
least in my view, providing regulation. The quality people--
many over the years--were pushed out. And bad decisions were 
made. Mr. Markopolos is a perfect example of the fact that 
information was presented. This should have been shut down a 
long time ago, yet people didn't make decisions. And those 
people need to be punished.
    But there is a second line on this that goes into the 
private sector. And I don't think, personally, that there is 
enough punishment, criminal punishment, for people who break 
the laws and defraud the American public.
    Part of it comes down to Mr. Madoff. Yes, sure, he is in 
prison. He couldn't have done this by himself. I just can't 
accept that. I mean, there are too many other people involved 
in this process. And there needs to be swift punishment, I 
agree with that. That sends a very strong message.
    But let's get to the specifics here. Thank you for your 
testimony, both as individual investors and as professionals, 
to give your thoughts on this. One of the problems that I see 
is that there seems to be some inconsistency in interpretation 
by the SEC and the SIPC.
    One of the things that I said before is, people need to 
know that on their Web site, and on the door, that SIPC symbol 
means something. The investor public needs to know that it 
means something.
    And if the--if we look back at the original language in the 
SIPC series rules--and there is a Federal regulation 300.500--
it says, ``The rules provide for the classification of claims 
in accordance with the `legitimate expectations' of a customer, 
based upon the written transaction confirmations sent by the 
broker-dealer to the customer.'' Seems pretty obvious to me.
    Did you get a statement?
    Ms. Chaitman. Yes.
    Mr. Klein. Was it a reasonable expectation that your 
statements, one after the other, looked like any other 
statements you got from Merrill Lynch or anybody else?
    Ms. Chaitman. That's right.
    Mr. Klein. I think the answer is probably yes. There 
probably weren't any big signals going the other way. So, 
again, I think this is--this set of expectations that you all 
had in this process.
    One of the interpretations--I guess I will ask Ms. Chaitman 
this question--of the SEC seems to be talking about, based on 
this lack of precedent, is that there is no case law that 
really talks about the fact that the interpretation should be 
that if an investor told a broker to purchase specific 
securities, that seems to be a very clear case where the SIPC 
can come in and fund.
    But if you didn't have that specific line of securities 
requested--and most of us go into a broker, and there is a sort 
of a risk assessment of, ``I want some bonds and some of this 
and some growth, and everything else,'' that doesn't seem to be 
covered.
    Ms. Chaitman, do you have a thought on what is the SEC's 
view--and why that doesn't seem to make sense?
    Ms. Chaitman. Well, the first I learned of the SEC's 
position was last evening, when I saw their written testimony. 
And I have to tell this body that there is no authority in the 
statute for the SEC's position.
    In other words, you can read SIPA from beginning to end, 
from the first word to the last word, and nowhere does it say 
that the full protections of this statute are reserved for 
customers who make their own investment decisions, but not for 
customers who rely upon financial advisors.
    And if you analyze the economics of what the SEC is 
suggesting, instead of protecting investors--which is what we, 
as taxpayers, fund them to do--they are protecting the 
industry-funded insurance company, because the vast majority of 
Americans don't make their own investment decisions. My clients 
are in their 70's, 80's, and 90's. They don't have the capacity 
to decide whether they should buy something one day and sell it 
the next day. They hire financial advisors, and they go to 
brokers who make those decisions for them. They invest through 
Fidelity or Vanguard, and they buy funds. And those fund 
managers make investment decisions for them.
    Mr. Klein. Is it your view that if this interpretation were 
held up, and this was the SEC's interpretation throughout, 
that--it would seem to me that millions of investors who just 
give a more general parameter of investment authority to an 
investment house may not be covered by a failed account, a 
failed broker whom the SIPC steps in on.
    Ms. Chaitman. Precisely. They wouldn't be covered for the 
full $500,000. And the purpose of the statute was to instill 
confidence in the capital markets.
    If the FDIC tomorrow, in the next bank liquidation, 
decided, ``You know what? We don't insure the accounts, except 
for the net investments, so we're eliminating all interest that 
may have accumulated over the last 30 years, and we're only 
going to pay the net deposit,'' there would be a run on the 
banking system.
    And the SEC's filing yesterday for this committee could 
create a run on the securities firms, because no investor in 
this country has any idea what kind of coverage they have, in 
the event that they are dealing with a dishonest broker.
    Mr. Klein. Professor Coffee, you had a comment about zero 
sum game, where--if the SIPC assessed its members to provide 
for the--you made a--I agree with your comment, that it is 
illusory, and the amount of actual cash in the bank--
    Mr. Coffee. I congratulate--
    Mr. Klein. What did you say, sir?
    Mr. Coffee. I congratulate this committee, because you are 
raising the assessment from 150 to 0.2 percent.
    Mr. Klein. Well, it seems to me, Professor Coffee, that one 
of the problems here is there is a certain amount of money, and 
we're sort of backing our coverage into that amount of money, 
as opposed to creating--
    Mr. Coffee. It's how you're funded. You are quite right.
    Mr. Klein. Right. The law is the law. And if it happens to 
be underfunded, then there ought to be an assessment, or some 
way of making the people whole, not saying, ``Well, it's not 
$500,000 because we don't have enough cash in the bank to make 
this thing whole.''
    And again, I would just go back to how important it is, how 
strategic and essential it is, for the public to know that if 
they invest, that the money--there is a fund there to protect 
them, if there is fraud and insolvency in those things out 
there.
    Mr. Coffee. I think you are quite right. I want to make one 
little comment. To the extent that you raise the amount of 
assessment that the brokerage industry has to pay, you will 
also give them an incentive, through organizations like FINRA, 
to cut back on risky behavior by brokerage firms such as Mr. 
Madoff.
    Right now, they have no interest in stopping Mr. Madoff 
from being a cowboy, and doing what he is doing. But if they 
have to pay higher assessments, and the prospect of higher 
payouts will raise those, then they will have an interest in 
controlling the outliers within the broker community.
    Mr. Klein. Right. And, Mr. Chairman, just to conclude, 
again, my view of this is, let's follow the law. If the 
protection is there, the $500,000 protection is there, those 
people should be given that full $500,000.
    The clawback, we have already been through this discussion. 
Nobody is looking for $8 million to $10 million back. I mean, 
if they are, it's not reasonable. But the SIPC has a 
responsibility, and the SEC has a responsibility, to make sure 
the law is followed correctly.
    Ms. Chaitman. May I make one response to something Mr. 
Klein said?
    Chairman Kanjorski. I think we are going to hold, because 
Mr. Klein already did run off--
    Ms. Chaitman. Okay.
    Chairman Kanjorski. --and we allowed that courtesy. But we 
want to get Mr. Perlmutter in. So just hold. Maybe he will come 
to you with a question. Mr. Perlmutter?
    Mr. Perlmutter. Thank you, Mr. Chairman. And I would like 
to start with Mr. Green. He has had his hand up a couple of 
times. So if you, sir, would sort of share what you are going 
to share, and then I will launch into my tirade.
    Mr. Green. Thank you, Mr. Perlmutter. I wanted to comment--
well, two things. One is I wanted to acknowledge, because at 
the beginning of my remarks I did not comment that I was a 
lawyer, so I just wanted to comment that I will participate, 
though I did not before, as a lawyer in the dialogue.
    But in this discussion about how decisions will be made, 
Mr. Chairman, you raised the issue that some tough choices are 
going to have to be made. And I would like to again try and 
focus on some of the prior policy considerations, public policy 
considerations, particularly embodied in ERISA. ERISA was 
created as one of the three legs of the stool to promote the 
retirement savings of the average American worker, the other 
ones being individual savings, Social Security, and qualified 
plans.
    The concept of qualified plans was the public policy was to 
encourage employers to create plans to put funds into 
retirement, instead of having profit sharing funds go at the 
end of the year just into dollars for workers to spend. There 
was a keen observation by Congress that workers were not saving 
those funds for retirement. And so, incentives were created 
that there be qualified funds, that they be put into 
retirement.
    The type of fund we have is known as an eligible individual 
account fund, which means that for each participant, there has 
to be an individual account that has to provide for individual 
accounting of income, individual accounting for expenses. The 
only purpose for which it is aggregated is for investment 
purpose. It is an administrative requirement. And it is for 
that reason alone that the investments go in the name of the 
trustee.
    Now, the consequence--because we have talked about 
consequences of decisions that will be made by this committee 
and by Congress on this issue--if, in fact, we undercut the 
confidence in ERISA-qualified plans because we do not extend 
SIPC protection to them, then we will discourage the confidence 
of employers of putting those funds into the qualified plans, 
will instead encourage them to give them directly to the 
workers, which is phenomenal for those employers who do profit 
sharing like that, but--
    Mr. Perlmutter. Let me ask you a question on that, then.
    Mr. Green. Yes.
    Mr. Perlmutter. For each person in the plan, you think 
there should be $500,000 in insurance?
    Mr. Green. What I would say is for each participant, there 
ought to be coverage for the plan, up to the account for each 
individual, subject to whatever the SIPC limit is.
    Mr. Perlmutter. Okay. So, under today's SIPC levels, it 
would be up to $500,000 per person in that plan.
    Mr. Green. Yes. Now, I am not going to comment on the net 
equity issue. I am not qualified to do that.
    Mr. Perlmutter. And that's okay. Let me just--
    Mr. Green. Right.
    Mr. Perlmutter. --and then I have some questions for Ms. 
Langford.
    Mr. Green. Yes.
    Mr. Perlmutter. Just so you all understand my background, I 
represented bankruptcy trustees in Ponzi schemes, okay, and I 
represented investors who were victimized, and who were 
either--had received more than they had put in, had invested 
$100,000, got $50,000 back, but other people got zero back. So, 
I understand where Mr. Coffee is coming from in some of his 
comments.
    And so, where I--what I am trying to figure out is going 
back to those three things that I brought up earlier: 
bankruptcy; how far, and who should be subject to the clawback; 
and SIPC, how far should the insurance reach?
    So, in my State, and in my area, I have the indirect 
investors that Mr. Leveton has talked about, who didn't know 
Madoff, they didn't know Petters, they didn't know any of these 
guys, they invested through a fund that then invested in these 
particular entities. How far should this SIPC insurance reach? 
I mean, that's the policy decision we have to make.
    And then, tax-wise, when can somebody take a loss--can you 
take those illusory gains and get a net operating loss carry-
back so that might give you at least some recovery?
    Those are the three big policy questions I have. But I also 
am just interested--like, Ms. Langford, how did you get into 
the Madoff network?
    Ms. Langford. How I got in was by looking for a vehicle 
to--I had just sold my house. And it was my retirement. I asked 
a friend, I said, ``I want something safe, liquid, and 
diversified.'' And he said, ``Hands down, this is the safest 
place you can put your money.'' So I entered into it that way.
    Mr. Perlmutter. So you were a direct investors with Madoff, 
or--
    Ms. Langford. No, no, in--
    Mr. Perlmutter. --did you come through something else?
    Ms. Langford. It was indirect. It was a partnership. And--a 
limited partnership--and so, technically, it wasn't a--
technically a retirement account. But it was my retirement 
money. So--
    Mr. Perlmutter. Okay, thank you. And I just--one more point 
to Mr. Coffee's statement.
    Mr. Kanjorski's bill that we're going to hear today and 
tomorrow and Friday does, I think, at a $10 million level, 
separate custodial accounts from investment advisor accounts, 
to try to separate those things so that somebody isn't posting 
you phony statements and advising you at the same time, or--
hopefully that kind of separation will work, as you have 
suggested.
    Chairman Kanjorski. Thank you very much, Mr. Perlmutter.
    At this point, we are waiting for the House to go back into 
session, at which time we will have three votes. And certainly 
rather than tie this panel up with any further questions, my 
intention is to dismiss the panel and thank you very much for 
your examination, and then to stand in recess until 30 minutes 
after the call of the next vote. So, we anticipate that the 
call may occur within the next 10 to 15 minutes, and then we 
will return to take the second panel 30 minutes after that 
call.
    Without any other further comments or objections, the 
committee will stand in recess.
    [recess]
    Chairman Kanjorski. This hearing will come to order. I am 
pleased to welcome our second panel. But before I introduce 
members of the panel, may I caution the audience that it is 
against the rules of the House to have demonstrations of 
emotions. We understand how feelings run high, but we would 
appreciate that you extend the same courtesies to the witnesses 
in this second panel, as you did to the witnesses in the first 
panel, with the absence of cheering. And that being said, we 
will address it no more.
    And now I am pleased to first recognize Mr. Michael Conley, 
Deputy Solicitor for the Securities and Exchange Commission. 
Mr. Conley?

    STATEMENT OF MICHAEL A. CONLEY, DEPUTY SOLICITOR, U.S. 
               SECURITIES AND EXCHANGE COMMISSION

    Mr. Conley. Chairman Kanjorski, Ranking Member Garrett, and 
members of the subcommittee, thank you for the opportunity to 
appear before you today on behalf of the Securities and 
Exchange Commission. My name is Michael Conley, and I am the 
SEC's Deputy Solicitor.
    There are a number of issues being discussed here today, 
but I wish to focus my limited time on explaining the 
Commission's views regarding the SIPC liquidation of Bernard 
Madoff's securities firm. We at the SEC are keenly aware of the 
devastating losses incurred by the thousands of investors who 
entrusted their money to Madoff. Many, if not most of his 
victims, have had their lives up-ended.
    At the SEC, Chairman Schapiro has urged all of us to learn 
from that experience, and reform the way we operate. Over the 
past year, we have taken significant steps in that regard, 
reinvigorating the Enforcement Division, enhancing our 
inspections, bolstering our training program, revamping our 
tips and complaints process, and hiring personnel with new 
skill sets. And we will continue to reform.
    With regard to the Madoff liquidation, the Commission and 
its staff have been analyzing SIPA, its legislative history, 
and case law to determine how to properly value the claims of 
the investors. While claims for losses suffered by investors 
are determined under SIPA, the statute does not expressly 
address how to calculate the net equity in a customer's account 
when a broker-dealer has engaged in the sort of fraudulent 
scheme Madoff perpetrated.
    As a result, the bankruptcy court will soon hear arguments 
on the various theories proposed for valuing customer claims. 
In the end, the court will decide how the investors' claims 
should be valued.
    The Madoff liquidation raises a new question. Specifically, 
how does SIPA apply when a customer's brokerage statements show 
nonexistent positions in real securities that the broker 
concocted after the fact to support pre-determined fictional 
investment returns?
    Two primary approaches have been proposed. The first is 
known as the final account statement method. Under this method, 
the net equity in customer accounts would be based on the 
securities positions shown on the final account statements 
customers received before the firm was placed in liquidation.
    The second principal approach is the cash-in/cash-out 
method. Under this approach, net equity is determined by 
crediting the amount of cash the customer deposited in the 
account, and subtracting any amounts withdrawn from the 
account.
    Based on our analysis, the Commission will recommend to the 
bankruptcy court that customer claims in this case should be 
determined through the cash-in/cash-out method advocated by the 
trustee and SIPC. However, we believe that the amount should be 
adjusted to constant dollars, to ensure that investor claims in 
this long-running scheme are valued most accurately and fairly.
    The Commission decided not to recommend the final account 
statement method on the facts of this case, because it believed 
it would result in claims based on account balances that Madoff 
himself concocted, and that bore no relation to reality. Madoff 
essentially promised customers that he would pick winning 
stocks for them, did not tell them which stocks he would 
purchase, waited to see which stocks did well, and then falsely 
reported that he selected stocks that met their investment 
expectations.
    Through no fault of investors, the account statements 
Madoff sent were illegitimate tallies of a fraudulent scheme. 
Neither SIPA, nor any of the cases interpreting it, can be read 
to support an approach that would value claims based on the 
fictitious investment returns of such a scheme.
    As a result, the Commission has concluded that the fairest 
and most reasonable way to measure the value of the Madoff 
customers' net equity is to look to the money those customers 
invested with Madoff as a proxy for the unspecified investments 
in securities Madoff told them he would make for their 
accounts.
    To do otherwise would have the effect of favoring early 
investors--many of whom withdrew all or more than the principal 
they invested with Madoff--over later investors--some of whom 
will not receive a distribution equal even to their principal.
    At the same time, the Commission is sensitive to fairness 
concerns raised by the cash-in/cash-out method. That method 
favors later customers at the expense of earlier customers, by 
treating a dollar invested in 1987 as having the same value as 
a dollar invested in 2007. In our view, it is appropriate to 
convert the dollars invested into constant dollars. We believe 
that approach, rooted in the economic concept of time value of 
money, will result in greater fairness across different 
generations of Madoff investors--in effect, treating early and 
later investors alike, in terms of the real economic value of 
their investments.
    The Commission understands that the total pool of money 
available to distribute claims is limited, and that there will 
not be enough to compensate all victims. That means that money 
allocated to one Madoff victim will affect the amount of money 
available to compensate other victims. The bankruptcy court's 
task, and the Commission's goal in making its recommendation, 
is to arrive at the fairest way, consistent with the law, of 
dividing that limited pool.
    I thank you again for the opportunity to appear before you 
today, and would be pleased to answer any questions you may 
have.
    [The prepared statement of Deputy Solicitor Conley can be 
found on page 104 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Conley.
    Next, we will hear from Steve Harbeck, president and chief 
executive officer of the Securities Investor Protection 
Corporation.
    Mr. Harbeck?

STATEMENT OF STEPHEN P. HARBECK, PRESIDENT, SECURITIES INVESTOR 
                 PROTECTION CORPORATION (SIPC)

    Mr. Harbeck. Thank you, Mr. Chairman. Chairman Kanjorski, 
Ranking Member Garrett, and members of the subcommittee, thank 
you for giving me an opportunity to discuss SIPC's work over 
the last year, and to discuss possible amendments to the 
Securities Investor Protection Act. My name is Stephen Harbeck. 
I am the--I have worked at SIPC for 34 years, and I became 
president in 2003.
    SIPC has no role in the investigation and regulation of 
brokerage firms. That duty falls to the SEC and the self-
regulators. When SIPC is informed that a brokerage firm has 
failed, we institute a customer protection proceeding in 
district court, and then refer it to the bankruptcy court. 
Customers of brokerage firms are protected within statutory 
limits.
    The first such source of protection is a prorated 
distribution of customer property. As Professor Coffee noted 
this morning, that makes it a zero sum game. SIPC can 
supplement customer property by as much as $500,000 per 
customer, with a limit of $100,000 for cash.
    SIPC has overseen the return of approximately $160 billion 
to customers, and has advanced more than $323 million, prior to 
the Madoff case, to do so.
    About 11 months ago, I appeared before you to report on the 
two largest brokerage firm failures in history, Lehman Brothers 
and Madoff. I would refer you to my written comments for 
progress with respect to Lehman Brothers, which I think is 
substantial.
    In the Madoff case, unlike the Lehman case, a transfer of 
accounts was simply impossible. Through the claims process, the 
following is the status of the claims. The trustees allowed 
$4.6 billion worth of claims. That represents returns to 1,600 
claimants. SIPC has committed, and has advanced most of, $559 
million. This is more than in all previous SIPC liquidation 
proceedings combined in the past.
    There have been 16,000 claims filed, and there have been 
11,500 claims determined, or 71 percent of the claims. The 
trustee has thus far collected $1.1 billion, and he has filed 
14 lawsuits seeking the return of $14.8 billion. And we will 
discuss that again in just a moment.
    The subcommittee has asked specifically for information on 
the fees in this case. As you heard this morning, the trustee 
has been paid $1.275 million, and the law firm of Baker and 
Hoestetler has received $37.5 million. I remind you that this 
is the largest Ponzi scheme in history. And most of the 
trustee's and legal fees efforts that are being expended here 
are for the purpose of recovering assets.
    In terms of the legislative initiatives that are before 
you, SIPC has proposed a number of amendments to SIPC, and 
these include: increasing the amount that SIPC can advance for 
claims for cash to $250,000, and to index that dollar figure to 
inflation by a specific formula; we would increase SIPC's line 
of credit with the Treasury from $1 billion, where it has been 
since 1970, to $2.5 billion; we would increase the number of 
cases where SIPC can use a streamlined procedure. And I would 
suggest to you that the members of this morning's panel should 
agree with all of those changes.
    But there are other proposals that I must address. One is 
extended coverage for participants in pension funds, which was 
extensively discussed this morning. On a going-forward basis, 
this certainly deserves study. However, the proposal lacks any 
analysis in terms of risk management, or possible cost to 
either SIPC or the Treasury. And, as both the chairman and the 
ranking member implied this morning, it is imprudent to enact a 
measure without that analysis, and knowing what it would cost, 
as a possible drain on the Treasury.
    SIPC cannot take a position on this without the appropriate 
due diligence. And my written statement contains a great deal 
more on that issue.
    SIPC is a complex law, but the pension fund issues shows 
the current state of the law is somewhat in accord with common 
sense. If you have an account, and you can call your broker and 
make a purchase or trade and get a statement, you're a 
customer. Granted, the statute was drafted in a simpler time, 
when that was the standard. But that is still the law.
    In terms of extended coverage for other--indirect 
claimants, one of this morning's panel members testified that 
he is an indirect victim, and he certainly is. But I think I 
have to elaborate. He placed his money with a hedge fund which 
invested in another hedge fund which invested in another hedge 
fund, which invested in Madoff. Again, as Professor Coffee 
said, it would be very, very difficult to craft legislation 
that would cover that situation and expand the coverage of the 
statutes beyond what was ever intended to be.
    Now I would like to address a point that I feel personally 
very strongly about, and that is depriving a trustee in the 
prospective legislation of the right to recover preferences in 
fraudulent transfers in certain instances. Ms. Chaitman 
testified about this issue.
    Mr. Chairman and members of the subcommittee, I cannot urge 
you strongly enough to reject this amendment. If enacted, it 
would deprive the victims Ms. Chaitman represents of, 
literally, millions of dollars. Mr. Coffee noted that this 
morning, and he is absolutely correct in that regard.
    The Madoff trustee has used the awarding powers granted to 
him by SIPA and the Bankruptcy Code judiciously. He has not 
sued small investors. He has sued 14 large investors. He has 
urged any Madoff customer who has received more money than he 
placed with Mr. Madoff to open discussions with him. And he is 
open to reason.
    This is a man who is extraordinarily practical. He has 
served as a trustee in more of these cases than any other human 
being, ever. He has instituted preference in fraudulent 
transfer proceedings against large investors who received 
disproportionate returns. But the weapons in the trustee's 
arsenal include the fact that all he must prove is disparate 
return, without any issue of legitimate expectation arising.
    Ms. Chaitman's written statement, at page 17, says that the 
trustee in Madoff has already sued several elderly, virtually 
destitute investors. Ms. Chaitman is a vigorous advocate, but 
she is factually incorrect. The only situation in the Madoff 
case where small investors have been sued were three instances 
where the claimants ignored the claims filing procedure that 
has been in place for 39 years, and initiated a lawsuit against 
the trustee. In short, the trustee was required to institute 
mandatory counter-claims. And those are the only small 
investors who have been sued.
    In short, the proposed legislation addresses a problem 
which has not arisen, will not arise in this case or any other, 
and would do extensive damage to the very people it seeks to 
help.
    Indeed, it would actually encourage Ponzi schemes in a real 
sense, because it would allow people to be free of the prospect 
of what you have heard today called clawback, and what are more 
accurately described as congressionally-mandated equitable 
distributions. It would deprive the trustee of the ability to 
get money back from someone who has gotten all of their money 
back, someone who has kept stolen money from others, and who 
will share in that common pool of assets at the direct expense 
of other people who have not gotten all their money back. That 
is wrong, as a matter of both law and policy.
    In the written questions submitted by the subcommittee, you 
asked if extending SIPC coverage to the victims in situations 
such as the Stanford Financial Group make sense. And there is 
legislation to deal with that situation. SIPC protects the 
custody function that brokerage firms perform. And, in the 
Stanford case, investor assets were not located at the SIPC 
member firm.
    Instead, in the Stanford case, investors sent money, at 
their own request, to a bank in Antigua. The bank issued 
certificates of deposit. The investors have physical possession 
of those CDs, and the bank defaulted, due to fraud.
    The investors are not covered by SIPC. I do not believe the 
subcommittee should make the SIPC fund, and the United States 
Treasury, the insurer of the underlying value of any security, 
and I don't believe the subcommittee wants the United States 
Treasury to guarantee the debts of an offshore bank.
    Retroactive application of any of those amendments, 
particularly with respect to the Madoff case, would change the 
advantage from one group to another in a completely arbitrary 
way. For the reasons given in my written statement, any 
amendments, should you consider them, should be prospective.
    I would like to address Mr. Conley's mention of the 
constant dollar theory. The first time SIPC was presented with 
this theory was November 23rd. The concept simply isn't in the 
statute. Congress knows how to write a law in constant dollars. 
And, in fact, we have, in our amendments, asked for an index to 
inflation with respect to the cash protection under our 
statute. It creates arbitrary results, different arbitrary 
results from the ones that the statute now has.
    The consequences for your constituents are that if you back 
a concept of constant dollars, you would have to say that a 
person who received all his money back, and who received stolen 
money, will get even more at the direct expense of people who 
have not been made whole.
    In a limited sample of about 2,000 of those accounts, we 
located in New York 138 people who had received net--given what 
we expect the trustee to recover--$19 million less. So we don't 
think that is the best of all possible worlds. It is a zero sum 
game. That said, you know, because this is an issue of first 
impression, we will continue discussions with the SEC on that 
matter.
    So, with that, I would be pleased to answer your questions.
    [The prepared statement of Mr. Harbeck can be found on page 
122 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Harbeck.
    I am just going to ask a few questions, perhaps unrelated 
to the testimony this morning. But in the particular instance 
you were mentioning, Stanford Financial, did they at any time 
advertise that they were insured?
    Mr. Harbeck. The SIPC member may have. But the SIPC member, 
with respect to actual customer assets, custodied them at a 
clearing brokerage firm. And the people who had their assets at 
the clearing firm now have them all back.
    The folks who are missing--and I met with the receiver for 
Stanford last weekend to discuss this matter with him, and I 
have had extensive discussions at various levels with the SEC 
on this subject--and the problem is that since SIPC protects 
the custody function that brokerage firms perform, and since 
those people have physical possession of the CD that is the 
security, what you would be giving them back is the initial 
purchase price of a fraudulent security. And that has never 
been the law.
    Chairman Kanjorski. I understand. But those who bought the 
securities in the offshore banks, in their place of business or 
on their stationery, did they indicate to the customer that 
they were insured by your corporation?
    Mr. Harbeck. I don't know the answer to that.
    Chairman Kanjorski. Do you not think it would be sort of 
important that you do know that?
    Mr. Harbeck. On the facts of this case, no, because the--
    Chairman Kanjorski. Well--
    Mr. Harbeck. The determining factor--go ahead, I'm sorry.
    Chairman Kanjorski. Yes. Why is it not important for you to 
find out whether or not there are some people fraudulently 
using your potential insurance to entice customers into their 
establishment?
    Mr. Harbeck. It would be interesting, but we could do 
nothing about that, because we don't have any enforcement 
powers. That is the SEC.
    Chairman Kanjorski. Well--
    Mr. Harbeck. The fact of the matter is, even if people are 
defrauded into believing they have coverage, that does not make 
it so.
    Chairman Kanjorski. No, that is true. But I do not recall--
and I have been sitting here a long time, and sometimes we miss 
all the mail that comes into the committee, or into our various 
subcommittees--but I do not recall any letters from your 
organization indicating that you needed additional authorities, 
that you felt there were loopholes in the law, that there were 
failures in the system in all of the 25 years that I have been 
sitting here. Did I miss a lot of that communication?
    Mr. Harbeck. Of course you didn't, Mr. Chairman. And the 
reason you didn't is until September of last year, the system 
was gliding along very, very well. And we had protected 99 
percent of the investors who went into liquidation.
    Chairman Kanjorski. While times were good, it was no 
problem. When times get bad, that is usually the case. When the 
water goes down after the flood, that is when we find the 
bodies.
    Did anyone in your organization not anticipate that the 
water was not going to stay up all the time, and that in fact 
there may be some victims of the flood?
    Mr. Harbeck. The--well, again, if you're referring to 
Stanford, the fact of the matter is that if Stanford--even if 
the bank was in the United States, the--I don't think you want 
us to--and we never have been in the business of--giving people 
back money when they--the value of their investment goes down 
for any reason.
    Chairman Kanjorski. No, and I am sympathetic to that, and 
we want fairness to the whole system, as best as possible.
    I guess what I am getting to is, did you hear the outrage 
of the panel that we had earlier this morning?
    Mr. Harbeck. Mr. Chairman, I hear it every day.
    Chairman Kanjorski. Okay. Well, I have to believe that 
outrage was sincere, and somewhat based on reason.
    There was a statement there by these people that they felt 
there were representations made by the individuals they dealt 
with, whether they were dealers, whether they were banks, 
whomever they were, that the U.S. Government was in some way 
was watching out for their best interests and, in fact, in some 
instances under the law, insuring them. And it was not until 
after the fact they found out that they were totally 
misinformed, or they misunderstood, or that they just were not 
supported.
    And prospectively, I guess they are asking us to look at 
this. And that is one of the things we clearly can do.
    Mr. Harbeck. Certainly.
    Chairman Kanjorski. What we can do to prevent or to 
recompensate them for some of their losses is very 
questionable. I do not know how far we're going to get there. 
But there are probably some things we can do, and we will be 
directed toward that end.
    But I think what I am particularly disturbed about this 
whole last 15- to 18-month disaster that we have been in, is an 
attitude at the governmental level, or quasi-governmental level 
that it is not our problem, we do not have to take preventative 
steps, investigative steps.
    And I think you do. It is our problem. It is the 
committee's problem. It is the Congress' problem. It is the 
President's problem. You know, we just, as a matter of course, 
cannot accept in this country that some people feel that their 
government let them down, wrongly so, and that they were not 
acting in its best--and in many of these instances--and I hear 
their testimony--there is very little that they could have 
done.
    I raised the question, caveat emptor, and I am a great 
believer in that. But, in some of these instances, I do not 
care what actions they took--somebody mentioned to me, and I 
will not identify Mr. Ackerman by name--
    [laughter]
    Chairman Kanjorski. --that during the stock market crash, 
Mr. Madoff was getting calls from officials of the United 
States Government, and asked what his recommendation--should 
they close the market, what should happen? That is understood. 
Was he not the president of NASDAQ at one time? He was a pretty 
substantial person in this country.
    But after we see what happened, what are we doing to 
prevent this in the future? Are we checking out some of the 
things that some of these very substantial people are involved 
in? Are they trading on that? Are they enticing relatively 
innocent people to trust them, and give them their life savings 
and their pension funds, and everything else? What have we 
done?
    For instance, what has your corporation done--across the 
country, all these workers' pension funds, and ask them how are 
they getting advice as to where to invest, what advice is being 
made? Who are they using? Are we finding some method to check 
these people out? Or are we just saying it is up to them, and 
if they get cleaned, they get cleaned?
    It seems to me that once you see something like this 
happening, being either in the government or quasi in the 
government, we have more of a responsibility to do something. 
We cannot cure it all. We cannot save everybody. We cannot 
prevent all injury. But obvious injury, obvious things that are 
at fault, or failures that exist, we have an obligation.
    When I first started this long discourse on my part--and I 
see my time is up--I feel offended that more Federal agencies, 
or quasi-Federal agencies such as your own, are not coming 
forward to tell us what they need. What authorities do you 
need? What could we do better? How can we change the law? How 
can we better educate people?
    It is not enough to just say, ``Gee, tough luck.'' Fifty, 
sixty billion dollars, thirteen, fifteen thousand people got 
clipped by a very professional artist. We have to learn from 
that, and we have to take actions to find out there are not 
other Madoffs out there, there are not other Stanford 
Financials out there. And I am not sure I am getting the 
impression that the two agencies are doing that.
    I am not putting all my weight on you, Mr. Harbeck. I think 
I have taken some action in the legislation that is on the 
Floor today against the SEC on that very substance.
    Let me point out, Mr. Deputy Solicitor, what I found so 
offensive in this whole thing, is that you are so channeled 
over there that you have no chain of command.
    I cannot believe that you can do three, four investigations 
over more than a decade and come up with some really, I think, 
important questions of the credibility and viability of a 
person--although very highly thought of on Wall Street--but it 
never goes up beyond 1 or 2 levels in an organization that has 
10 levels. You have no chain of command.
    What would we do to a four-star general who put a 
lieutenant in the field who killed 150 innocents? If he did not 
know about it within 24 hours and take action, he would be 
gone--or should be gone. Sometimes, now that I think about it, 
no one at the SEC has been disciplined in any way.
    But we have to have a chain of command, whether it is in 
the military or whether it is in civilian life. If it is the 
government, we have to find out what is happening at the lowest 
level. If it violates good sense and acceptable practices, we 
have to take action. And we have to make sure that chain of 
command has good communications up and down.
    And I think the SEC--I saw the Chairman the other night, 
and Mary and I are very good friends, so we had a heart-to-
heart discussion on that very subject. This is something I want 
you all to take back to the SEC. We want you to do a study, not 
inside, but outside, of the most thorough type, to study where 
the dysfunctional nature of the SEC exists.
    And if there is anybody over there who does not think the 
organization is dysfunctional, then read the Inspector 
General's report on Madoff. It is the most classic bit of 
evidence I have ever seen that shows a dysfunctional operation. 
And it is just not Madoff, it is in other areas of the 
organization. We have to clean that up.
    And I do not believe you can do it from the inside. I am 
not going to speak for Chairman Schapiro, but my impression is 
she tends to agree, too, that you really have to go out and do 
an honest thing here.
    And as I said to her last night, I do not want to even stop 
at the SEC. All related agencies around the SEC should be so 
studied and investigated and disclosed, and a report sent to 
Congress for remedial action.
    But I think that should be the beginning point for what I 
am sensing from the American people. They are not going to take 
it any more, that we in government just said, ``Well, we cannot 
do anything about it. It happened. We are sorry.'' That is 
nice. We did not lose. These people lost. That does not make 
them feel too good--it would not make me feel good, if I lost 
$5 million, $10 million, or $50 million. It does not matter. I 
lost, and I should not have.
    If everybody had been performing their function the ideal 
way, it would not have happened. But they obviously were not. 
And the number of security people who were asleep at the switch 
is incredible in this instance. So, I want you to take that 
message back.
    I have eaten up more than my 5 minutes. And I will be very 
lenient--since we have no Republicans, look how lenient I can 
be to my friend from New York. Gary?
    Mr. Ackerman. Notice, Mr. Chairman, I didn't tell you your 
time was up.
    [laughter]
    Mr. Ackerman. I could not agree with more of what you said, 
and the way you put it, Mr. Chairman. Everybody, including the 
people who are testifying in this panel, has been trying to get 
us out of this muddle somehow. And I think all of their 
intentions are beyond question.
    I think there is a--this is a very difficult Gordian Knot 
to untie. And trying to make some sense and understanding it, 
listening to what you have just said, Mr. Chairman, I just 
wanted to note that for a long number of years, nobody came to 
us to confront our obligations and responsibilities from any 
Federal agency, including that which is before us today--or 
those which are before us today--saying that, ``We need more 
resources.''
    As a matter of fact, the previous Administration seemed to 
have a philosophy, if not an agenda, for deregulation, rather 
than more regulation, and did not want to provide the 
resources. Chairman Frank, as a matter of fact, had a proposal 
to more fully provide assets to the SEC and SIPC for additional 
resources to be able to do the kinds of investigations that 
were obviously needed, and that was moving forward until it was 
scuttled at the time by Mr. DeLay during a different 
congressional leadership.
    It wasn't until Chairman Schapiro came along, and doing the 
fine job that she's doing, started asking for additional 
resources so that we could do a better job, prospectively. But 
that does not necessarily resolve the situation that is before 
us right now, as it has already regrettably occurred.
    I think there is a difference between the average citizen 
investor being told that they didn't do due diligence--which 
certainly many of them did to at least 100 percent of their 
capability, ability, and legal limits of what they could do for 
due diligence--but certainly our agencies could have been doing 
a little bit more of a better job, including coming to us and 
telling us over a large number of years, a long number of 
years, that they couldn't handle the workload, that with the 
complications and the large number of investments and 
investors, and the complications of the system, that they 
needed additional assets.
    We did not see that. We did not hear that. And we rely upon 
the Administration. We don't have the tools. That's not the 
function of the Congress. We do oversight, which means we rely 
heavily on what the agencies tell us, and ask, and try to 
supervise whether they're applying their resources, which they 
didn't ask for in this case.
    I have several questions to ask. In what we have just heard 
in our testimony from this panel about the smaller investors 
versus the larger investors, is there a distinction in either 
of your minds in the morality of larger investors versus 
middle-sized investors versus small? Are one more immoral than 
the other?
    Mr. Harbeck. I--
    Mr. Ackerman. I'm not talking about specific individuals.
    Mr. Harbeck. No, I simply--
    Mr. Ackerman. If you're wealthy and make investments, does 
that make you immoral?
    Mr. Harbeck. Absolutely not.
    Mr. Ackerman. Are they more suspect, because they had--
    Mr. Harbeck. Absolutely not. I think that is why the 
trustee--you know, in the Madoff case in particular--has done a 
rigorous investigation of very complicated facts, and started 
14 lawsuits. Some of those lawsuits assert knowledge or a newer 
should-have-known standard. Others do not.
    So, certainly with respect to the former, the trustee is 
doing his job, and he is trying to return to the common pool of 
assets--defined in this case as customer property--the largest 
amount to distribute to the greatest number of people, 
consistent with the law. And he is doing that.
    To get to your point on morality, I would like to turn it 
to a case of practicality and compassion. The trustee has taken 
the position that you--that--he sent a letter to everyone who 
received more than they put into this scheme, and said, ``Come 
and talk to me. If it's something that you withdrew over time, 
and you can't pay''--but the trustee isn't going after you. 
That makes no sense in any--
    Mr. Ackerman. What's the difference if you withdrew it over 
time, or if you withdrew it late in the game, rather than 
earlier in the game?
    Mr. Harbeck. The answer to that is in all Ponzi schemes, 
going back to the original Ponzi scheme with Charles Ponzi, 
people who get out the day before--and Professor Coffee spoke 
to this rather eloquently--should do no better than the person 
who didn't have that good luck. And that has just been the law, 
as enacted by Congress since at least the 1920's.
    Mr. Ackerman. So it's a matter of luck?
    Mr. Harbeck. No, it should not be a matter of luck, sir. It 
is--that's the whole concept behind bringing money back in. And 
I think, in this case, the trustee has exercised his avoidance 
authority with discretion and compassion. He hasn't reached 
back to the small investors, particularly people who have no--
    Mr. Ackerman. Is it possible, in your mind, speaking of 
compassion, that there are large investors--and I'm not 
advocating for anybody here, I'm just trying--and there is a 
problem, because this is a zero sum game when somebody gets--
somebody--it's coming out of the same pot of money, of people 
who are all losers--is it possible in your mind that you can 
conceive of situations, many of them, where larger investors 
are more desperate than some of the smaller investors?
    Mr. Harbeck. I haven't seen that in this case, sir.
    Mr. Ackerman. You think there are no larger investors--say 
someone with $100 million--who is doing something and invested 
the rest of another $100 million, because they're that big an 
investor, and is now upside down in their real estate, or 
house, or business, or property, despite the fact that they 
took money out, and now they wind up paying--having paid $50 
million in taxes to which the government should not be 
entitled, have borrowed from the banks to do things on a 
business, have invested other people's money along with their 
own to do something, and are now being told that not only do 
they have nothing, but they owe back $200 million?
    Mr. Harbeck. I can speak to a number of those points, the--
    Mr. Ackerman. That is at least as desperate as the other 
people for whom I have great sympathy, who had $200,000 and 
invested $100,000 and lost it. They only lost $100,000. A lot 
of people aren't sympathetic, because they think that's a lot 
of money.
    But they might still have--so it's--how do you morally make 
a distinction here? And is it possible in all this formulation 
that somehow you can come up with some kind of solution, and 
splitting, according to some formulaic way, how to deal with 
all these people?
    Mr. Harbeck. Congressman Ackerman, I don't think a formula 
is the answer. I think analyzing individual situations is the 
answer. And I think that's--
    Mr. Ackerman. Each case individually?
    Mr. Harbeck. Yes, sir. I think that's exactly what the 
trustee--
    Mr. Ackerman. If I was getting paid $1 million a week, I 
would like that.
    [applause]
    Mr. Harbeck. I believe that this trustee is--
    Mr. Ackerman. I'm not questioning the trustee; I'm just 
pointing out the irony in this situation.
    Mr. Harbeck. Two points. First, no customer money goes to 
pay attorneys' fees or trustee's fees. That's point number one.
    Mr. Ackerman. Where is that money coming from?
    Mr. Harbeck. It comes from the Securities Investor 
Protection Corporation. We have taken the view that every 
paperclip that gets sold will be designated to monies that go 
to the victims.
    The second point is that, you know, looking at these cases 
individually, our statute was designed to protect the small 
investor. And I think that's exactly what Mr. Picard is doing.
    Mr. Ackerman. As I understand it, brokers and investment 
advisors are required to put $150 into the fund to be covered 
by SIPC.
    Mr. Harbeck. That is not correct. Currently, the 
assessments by our bylaw require each brokerage firm to be 
assessed one quarter of one percent of their net operating 
revenues.
    When we started paying Madoff claims, we instituted, 
effective April 1st, assessments based on revenues, rather 
than--
    Mr. Ackerman. Beginning when?
    Mr. Harbeck. April 1st.
    Mr. Ackerman. April Fools Day?
    Mr. Harbeck. Yes, sir.
    Mr. Ackerman. Well, some people think that is when you 
identify the people who have been April-fooled. That is after 
the Madoff Ponzi scheme fell apart because he turned himself 
in.
    Mr. Harbeck. Well--
    Mr. Ackerman. I mean, how does--before that it was $150?
    Mr. Harbeck. When we reached $1 billion, which our risk--
    Mr. Ackerman. But before Madoff, it was $150?
    Mr. Harbeck. When we reached the figure of--
    Mr. Ackerman. I don't have a lot of time left, so if we 
could just focus on a couple of more--
    Mr. Harbeck. The answer is, based on revenues, until 1990, 
when we reached $1 billion, then from 1990 through April of 
this year, it was a flat fee.
    Mr. Ackerman. Of?
    Mr. Harbeck. $150. And we have--and we will have--
    Mr. Ackerman. That wasn't hard. So, before then it was 
$150. So, if I was one of those brokerage firms or investment 
advisors, I would have to pay $150 to get that $500,000 worth 
of insurance?
    Mr. Harbeck. Investment advisors are not part of the 
statutory program at all.
    Mr. Ackerman. Okay. So if I was a brokerage, I would have 
to pay $150 at that time?
    Mr. Harbeck. At that time, yes.
    Mr. Ackerman. So if I had, say, 600 clients or customers, 
that would--give me a second; I'm a junior high school math 
teacher, but--$.25 an account. So for each of my accounts, I 
was--in premium I was paying, I would get a half-a-million 
dollars by charging people two bits each?
    Somebody should have come down here and sounded the alarm 
and said, ``I am paying too little for insurance.'' How much 
insurance can I really buy for $.25 an account? If somebody was 
charging me $.25 an account for my car insurance, I would 
suspect that I wasn't getting a lot of coverage. No?
    Mr. Harbeck. The--
    Mr. Ackerman. Asked and answered. Let me go on to something 
else.
    Mr. Harbeck. Okay.
    Mr. Ackerman. If I may, Mr. Chairman?
    Chairman Kanjorski. We will give you just a couple more 
minutes.
    Mr. Ackerman. Okay, thank you.
    People relied heavily on SIPC and the SEC, very heavily, 
for stuff that you can't expect them to be able to do 
themselves. That's the reason for SIPC, and that's the reason 
for the SEC. People can't become attorneys and investigators, 
and spend their whole life investigating something, whether or 
not--so, you know, if you don't know if something is kosher, 
you ask the rabbi. And if the rabbi says it's kosher, by me 
it's kosher.
    You guys are the rabbi to all these people. When you said a 
guy was legitimate, he was legitimate. They relied on that. It 
was the indicia of your agency and your agency and my 
government that was on these products that--and the person who 
presented them--that said that they were fine.
    People thought they had the insurance on money, whether or 
not it was the interest--if my account is insured, I don't 
differentiate between how much I put in, I figure my account is 
insured for up to $100,000 in my bank--now $250,000 for the 
rest of this year or whatever--and I don't say my interest 
isn't insured, only my principal is insured. Everything is 
insured. So, it becomes a different number for everybody who 
had an investment over a long period of time.
    And, as a matter of fact, it was you and your agency that 
testified--and your testimony in the New Times case--where you 
say, ``Reasonable and legitimate claimant expectations on the 
filing date are controlling, even when inconsistent with 
transaction reality''--I am quoting you--``Thus, for example, 
where a claimant orders a security purchase and receives a 
written confirmation''--which every Madoff victim did with 
every statement--``reflecting that purpose, the claimant 
generally has a reasonable expectation that he or she holds 
securities identified in the confirmation, and therefore, 
generally is entitled to recovery of those securities within 
the limits imposed by SIPA''--that's the financial limitation 
of $500,000 or whatever it is--``even when the purchase never 
actually occurred, and the debtor instead converted the cash 
deposited by the claimant to fund the purchase.''
    It seems that these people were again reassured that the 
way we wrote the law, the way the regulations existed, and the 
way you interpreted them, telling them that they are entitled 
to that money, even if--and I won't go on reading--even if 
their money tripled and there was no money there. Even if they 
didn't have real money in the account, because somebody 
fraudulently stole it.
    Now what has happened is we go to a different court case, 
and you change your view, saying that the money was stolen and 
not invested. This is a shell game that you are playing with 
investors who have--I mean, this is over the heads of most of 
the people on our committee, I would think, how this happened, 
and that this is being done.
    People relied on you, and they were let down. And we have 
to all collectively figure out a way to make all of them as 
whole as we can make them.
    Chairman Kanjorski. Thank you, Mr. Ackerman. We will now 
hear from the gentleman from New Jersey, Mr. Garrett.
    Mr. Garrett. Thank you, and I appreciate it. I think I just 
have a couple of questions, because I understand some of the 
other questions were covered.
    Mr. Harbeck, you raised--just as I was walking in--your 
line that you are here to help the small investor. And I think 
that's what the message is, and--throughout the hearing, that 
is what we're trying to look out for. But I raise the three 
questions: time; money; and who.
    The time aspect of it is, if we're really trying to help 
out the small investor--and I guess we can define who that is 
later--how long does it take, and still say that we're helping 
them out? Obviously, if it takes 10 years to do it, then we're 
not helping out the small investor. Obviously, if it takes 5 
years--now it has been about a year. And at some point in time, 
we can just say we are not helping the small investor.
    So what is the timeline that, if we were to say we invite 
you back here for another hearing such as this, that you can 
say that, ``We are done, and the folks have been compensated to 
a large extent?''
    Mr. Harbeck. There are two points to that response. First, 
in the two largest cases prior to the Madoff case, the 
overwhelming majority of investors were in complete control of 
their accounts within 10 days of the failure, and we're very 
proud of that result. In both Lehman Brothers and in MJK 
Clearing, which collapsed--
    Mr. Garrett. And I understand that. I'm not--
    Mr. Harbeck. --right after. In this case, the utter lack of 
records makes it very, very difficult to answer your question. 
There are still 7,000 boxes of records in the controls of the 
prosecutor that--it's difficult to access, and they aren't 
digital records. We are working with that as fast as we can.
    Mr. Garrett. So you haven't--
    Mr. Harbeck. Seventy-one percent of the people have been--
have had their claims determined, and we will get the rest of 
them out as fast as we can.
    Mr. Garrett. Around three--
    Mr. Harbeck. The complications involve when accounts are 
tied to others, when accounts are tied to insiders, when 
accounts are split. And those are very, very difficult 
accounting procedures.
    Mr. Garrett. So there are problems just getting those 
records from the prosecutor. Is that what I'm hearing?
    Mr. Harbeck. I think we have transparency back to some time 
in the 1980's. But we don't have complete transparency on all 
the records.
    Mr. Garrett. Because?
    Mr. Harbeck. The sheer volume is one answer.
    Mr. Garrett. And what about the prosecutor? You said 7,000 
records are--
    Mr. Harbeck. I believe the prosecutor still has--on their 
ongoing criminal investigation--a large segment of the records.
    Mr. Garrett. And you--
    Mr. Harbeck. We access those, but we don't have complete 
access to them.
    Mr. Garrett. All right. So, to try to give me a short 
answer, which I'm sure the folks behind you are watching--would 
be you would anticipate, in light of all the constraints, in 
light of the fact that this is the largest case you have ever 
handled like this, and in light of all the difficulties, a 
reasonable answer to--a reasonable timeframe would be, in light 
of all those hardships, would be?
    Mr. Harbeck. A year.
    Mr. Garrett. Okay. Secondly, with regard to the money--and 
I think I was just coming in on this question, as well, and the 
gentleman from New York was asking about the old fee and the 
new fee, and what have you--the new fee that is out there, two 
questions.
    One, based on what you know now--and I understand from your 
last answer, you don't have all the information--but based on 
what you know now, is that fee an adequate fee to compensate, 
as you're planning to pay out?
    Mr. Harbeck. The answer to your question is yes.
    Mr. Garrett. Okay.
    Mr. Harbeck. The fee is adequate to pay on what we 
anticipate paying, as we understand the claims.
    Mr. Garrett. You have heard the testimony of the panel 
before you, and I think some of the questions were along this 
line of--and some of us would take that view, that it should 
probably--to go back to your point of helping the small 
investor--it should be more expansive than what you are 
intending to pay out right now.
    If the definition of who--third point of who should be 
paid--the question of saying that it should--I forget the 
gentleman who was sitting over here before, I'm sorry--it's not 
just the direct investor, but one who has gone through a fund, 
and what have you, and so to their point of saying that it's 
not just for this--each case could be a small investor, right? 
Each case could only have $10,000 in the fund, either direct or 
through one of these funds.
    If the definition is broadened as to who you should pay 
out, as some would suggest that it should be, would that fee be 
adequate to cover for that?
    Mr. Harbeck. If it is--if the definitions are expanded in 
some of the ways we heard this morning, the answer is no.
    Mr. Garrett. Okay. And then, would you be able to come up 
with an estimation of what the fee should be to adequately 
cover that?
    Mr. Harbeck. It's probably doable, but it would be 
difficult, because of the way some of the large hedge funds 
have their claims, and how often--how many iterations you would 
have to go down, in terms of treating individuals. So it would 
be very hard.
    Mr. Garrett. Okay. I would suggest, if you could--I know 
that--is to try to give some sort of ballpark. But I think that 
would go to one of the other questions.
    As you heard, I invited some broker-dealers and others to 
come in. If we were to go down that road, that would have 
impact not only on what you have to do, but would have impact 
upon who the fees would be assessed against, and they might 
want to have some input on that, as well.
    So, if you're able to do that--and I believe--I see my time 
is up.
    I think some of the other questions were touched on before. 
I got into the netting aspect, the clawback provisions. And I 
don't want to repeat myself on the comments that I made 
earlier, that we are obviously not looking necessarily for 
fairness, because I don't know that you can get fairness.
    But what we're looking for with the folks here is justice 
in the reliance that they made, not on independent investment 
decisions that they were making in the normal course of things, 
but on their reliance, and what the government assured them 
through--both through this program after the fact, and through 
the assurances that--these being registered in the fund--his 
fund coming under the SEC as well. Thank you.
    Chairman Kanjorski. The gentlelady from California, Ms. 
Speier.
    Ms. Speier. Thank you, Mr. Chairman. I guess my first 
question is to you, Mr. Harbeck.
    I have only been around here for less than 2 years. But my 
take on what happens is basically, the industry gets a license 
to do a lot of things, and then fails at it, and we are left to 
pick up the pieces.
    If you look at why SIPC was created, it was created because 
there were these huge bankruptcies that occurred in the early 
1970's, and money was taken from investors, and we wanted to 
make investors whole. So then SIPC was created. And, as you 
pointed out, for a long period of time--because you thought you 
had ample funds--these brokers were only paying $150 a year. 
For 19 years, they were paying $150 a year.
    Now, you have increased it recently because of the Madoff 
scandal. But I have one question, which is I think the 
insurance product is out of date. I think that it's very 
important for you to go back and reformulate an insurance 
product that reflects the way people invest today. People 
invest today through mutual funds and hedge funds. And if 
you're going to offer a product that has no relevance today but 
had relevance in 1970, I don't believe you are doing your job.
    Now, secondly, I have a question for you, which is if now 
you are charging one quarter of one percent of the revenue, the 
net revenue that's generated by a broker to refill the fund, 
what would prevent you from coming up with a one-eighth of one 
percent of revenue to create a fund to pay the Madoff victims 
some kind of compensation? There is nothing that precludes you 
from doing that, is there?
    Mr. Harbeck. It would have to be statutory, Congresswoman.
    Ms. Speier. It would have to be--
    Mr. Harbeck. Yes.
    Ms. Speier. Well, you were able to make this change from 
$150 to 1/4 of 1 percent with no trouble, right?
    Mr. Harbeck. Yes, by bylaw.
    Ms. Speier. You did that by law?
    Mr. Harbeck. By bylaw.
    Ms. Speier. By bylaw.
    Mr. Harbeck. When--
    Ms. Speier. Couldn't you create a new bylaw?
    Mr. Harbeck. We can only expend our money in one particular 
way, to supplement the fund of customer property in the way 
that the statute describes. Our bylaw says that when our fund 
is in danger of reaching $1 billion or less, that we can 
reinstitute for that purpose.
    But what you are saying is that we would have to repurpose 
the statute to create a fund specifically for these victims.
    Ms. Speier. And you're saying that would require statutory, 
not something you could do--you're a separate corporation. 
There is--I am having a hard time understanding why you, as a 
corporation, can't just decide that, because of this travesty, 
that--and because the insurance product that you offer is 
inadequate today, and it should have been reformulated anyway--
that you cannot create a new fee that would be imposed. It 
would be a modest fee, but it could help immeasurably a lot of 
people.
    Mr. Harbeck. We are, in fact, a creature of statute. We are 
not a government organization, but the statute creating us was 
a Federal statute.
    Ms. Speier. Well, you know, that's the problem. We do--we 
are really great at passing laws, creating these entities 
outside of government to operate--FINRA is another one that I 
can't quite understand--and yet you have to come back to 
government to fix things.
    Either you should be a Federal agency where we have 
responsibility and the ability to act immediately, or you 
should be an independent corporation, and then would have the 
ability to do things that you do, independent of statute.
    But having said that, I have a question for Mr. Conley, and 
we're about to go for a vote.
    Mr. Conley, from my perspective--and this may predate your 
involvement at the SEC--but having observed over the course now 
of these 2 years the Madoff fiasco, the travesty that it has 
created, not just for the American people, but for the Federal 
Government, the SEC failed. It failed miserably.
    When you--when we had the whistleblower before us, I was 
astonished at the degree by which he continued to pursue this. 
I mean, he came before the SEC 5 or 6 times, seeking the SEC to 
take some action against Mr. Madoff.
    And even when the SEC went out to see Mr. Madoff, Mr. 
Madoff has now admitted that when he--the question was asked of 
him, ``Who is your custodian,'' and he rattled off a name, and 
he was convinced that within the next 3 days, he would be shut 
down because the custodian did not provide those services to 
Mr. Madoff, but then the SEC never even made the phone call to 
find out whether or not Mr. Madoff was operating through that 
custodian.
    So, from my perspective, the government, the Federal 
Government, failed miserably, and the SEC, in particular. So, 
my question to you is this: Since we were responsible for this 
travesty, shouldn't we take some responsibility now, in trying 
to make the people who were impacted by our incompetence and by 
our malfeasance, by creating a fund to make them somewhat 
whole? And what would prevent the SEC from doing that?
    Mr. Conley. Thank you, Congresswoman. I can respond in two 
ways. Creating the fund that you talk about is certainly 
something that Congress could do, if it determined that was the 
appropriate thing to do here; certainly you could do that.
    With respect to the failures that you have identified, that 
is something which the Commission has recognized, and takes 
extremely seriously. And since Chairman Schapiro has come to 
the Commission, in fact, there have been numerous reforms that 
have been put in place that are directly responsive to what you 
identified, and which the Inspector General's report identified 
as very serious failings at the Commission.
    And among the things that have changed that, on a going-
forward basis, to make sure that something like this will not 
happen again, is that hundreds of employees have been trained 
to be certified fraud examiners. There is the requirement now--
in all examinations--of third-party verification of customer 
assets that are held by the investment advisor or broker-
dealer. And we also have been hiring more people with 
particularized expertise that will make the examination teams 
much more effective. And we are working to deploy more people 
to the front lines, more investigators who will be there, and 
be able to root out this fraud in an effective way.
    So, all that has happened. And there are even greater 
reforms coming down the road. Next week, for example, the 
Commission will be voting on rules designed particularly to 
address the situation of investment advisors with custody of 
customer assets. Those rules would encourage investment 
advisors not to have custody of customer assets, and instead, 
to place them with third parties, to prevent the exact kind of 
misconduct that occurred here.
    Ms. Speier. My time has expired, Mr. Chairman, but I 
certainly think that we need to appreciate that going forward 
doesn't fix those who have been injured by government's 
inaction, and that we should really reflect on what we can do 
to make whole some of these people.
    Chairman Kanjorski. I just have a couple of questions. I 
think you are absolutely correct, Ms. Speier, and we are going 
to work toward that end, I hope, as a committee.
    But I notice you are talking about increasing the premiums 
in the future. Why have you not thought about making a back 
assessment? You are really punishing the people who are going 
to come into the business who may not even have been in the 
business when Madoff was around.
    Why should we not put the assessment on the people who were 
in the business when it happened? And with the law professor, 
Professor Coffee, indicating that would put an incentive on the 
dealers to be working more in conjunction with the SEC and with 
your organization, to see that this does not happen, because 
there would be a payment that they would have to make, why--in 
order to accomplish an assessment instead of a future increase 
in premiums, would you need legislation to do that?
    Mr. Harbeck. Yes, we would, Mr. Chairman.
    Chairman Kanjorski. Would you prepare that request, so you 
get it to the committee, and we can look at it?
    The second request I have of you is not totally unrelated 
to this hearing. But I have spent a number of days meeting with 
legal representatives of about 1,300 claimants who are in 23 
countries around the world. And they tell me that, under 
present conditions, to handle the claims that are out there, 
because they are under all the various laws of the 23 nations 
involved, that it is going to take something like 30 years to 
resolve these claims.
    I was going through the roughly $100 million a year of the 
trustee's fees. Are you prepared to pay out $3 billion over the 
next 30 years to the trustee, so he can be around to settle 
these claims? And, quite frankly, I think it is going to end up 
that his fees are going to be a lot larger than the claims.
    Now, what I am saying to you is, what are you doing, in 
terms of establishing some sort of method of arbitration for 
international settlement of claims? And why should that not be 
before the Congress? And should that recommendation not be 
coming from your organization?
    You know what you face. You know what your problems are. 
You know that we are going to be doing more international 
business, and not less. These frauds will continue to occur in 
the future. Why do we not have a simplified way of getting the 
issue before an arbitration board or somebody on a relatively 
uniform basis, instead of just spending these inordinate fees 
for trustees?
    I am not against lawyers; I am one myself. But, that is a 
big one. I do not think there is any member of this panel who 
would assume for a million-and-a-half a week--maybe they would 
leave the Congress and take that trusteeship. I am being 
facetious. Naturally, we would never do that.
    But seriously, can you make recommendations to the 
committee as to what should be done to facilitate international 
claims of this sort that will occur in the future--
    Mr. Harbeck. The--
    Chairman Kanjorski. --are existent now that we can act on?
    Mr. Harbeck. Yes. The one thing that we have done 
prospectively on an international basis is to enter into 
memorandums of understanding with our foreign counterparts to 
SIPC, in case a brokerage firm fails with a footprint in more 
than one jurisdiction. We have those agreements with Canada, 
the United Kingdom, China, Korea, and Taiwan. We seek to expand 
that.
    What you have suggested is far more complex, but I would be 
certainly willing to discuss it with any international expert 
that we can find.
    Chairman Kanjorski. This is not a one-time deal. We are 
going to have these transactions, we are going to have these 
occurrences. Let us not end up paying fees to trustees and 
lawyers that take money away from the basic account that could 
be paid to the claimants. That is going to happen in this case, 
and it is going to be a tragedy.
    Let me give Mr. Ackerman one question, and then Ms. Speier.
    Mr. Ackerman. Yes, I just wanted to follow up on the first 
question that the chairman just asked. Your response was that 
you're a creature of legislation.
    Under legislation under which you act, you have a line of 
credit of $1 billion, as I understand, which can be accessed if 
the fund is depleted--and there is still a lot of money in the 
fund.
    If you did--and therefore can--act by resolution, why can't 
you generously and liberally pay out to the greatest number of 
people promptly, as the statute requires, whatever money is in 
there, access your line of credit, and at least have $1 
billion. You don't have to wait for all this legislative 
process to take place.
    You know, everybody working on this, and who are working 
hard and are entitled to whatever money they are entitled to 
earn on being trustees, and whatever, all this money every 
week, they expect to be paid promptly.
    If the people who are victims were paid promptly a couple 
of months ago, some of them could have ridden the 40 percent 
rise, because they're all investors--or at least were; they're 
investors without money, some of them--could have gotten 40 
percent in the market right now. I mean, everybody is losing 
and double losing and triple losing here, because of the delay.
    Can you spin that out, and request it by resolution, or 
whatever?
    Mr. Harbeck. No. And the reason is the only people we can 
protect are those people who fit within the statutory 
definitions. And we believe that people who--
    Mr. Ackerman. Which of your interpretations of that 
statutory definition?
    Mr. Harbeck. The same cases that have uniformly, since 
1973, held that with respect to fraudulent statements that are 
backdated, all of the cases uniformly--including the New Times 
case--hold that those claims are not customer claims, and that 
the fraudulent documents should be ignored.
    Mr. Ackerman. His testimony didn't say that.
    Chairman Kanjorski. Okay, thank you. Ms. Speier, do you 
have any further questions? We re down to less than 5 minutes 
now for the vote.
    Ms. Speier. Okay, I will be very brief. Mr. Harbeck, I 
would like for you to come back to the committee with a 
proposal of providing an insurance product that really is going 
to reflect the kind of investing done by average American 
investors today, who do most of their investing through funds, 
and who do not have the sophistication to know whether or not 
the actual stocks they have purchased are indeed being 
purchased. That is where the SEC comes to play.
    But I--we need a different product. The product that exists 
just doesn't meet the needs of the American people.
    And then, if you could, just provide to us what does one 
quarter of one percent of revenue actually generate?
    Mr. Harbeck. This year--and again, because it fluctuates 
with the brokerage firm--
    Ms. Speier. Yes.
    Mr. Harbeck. --revenues, I believe it's $480 million.
    Ms. Speier. $480 million. And you came up with one fourth 
of one percent on your own. It could have been a half a 
percent, or it could have been--
    Chairman Kanjorski. May I suggest that this calculation be 
made and supplied to Ms. Speier, so we can get this wound up 
and get our members over to vote?
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the record will remain open for 30 
days for members to submit written questions to today's 
participants, and to place their responses in the record.
    I thank you gentlemen for participating. We appreciate it. 
And may I just make the request, I think of all the members 
present here right now, let's have a little better interaction 
between your respective organizations and the committee, to get 
to the bottom of the substantive questions that have to be 
answered.
    Thank you very much for participating in today's hearing. 
The panel is dismissed, and this meeting is adjourned.
    [Whereupon, at 2:55 p.m., the hearing was adjourned.]



                            A P P E N D I X



                            December 9, 2009


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