[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
ASSESSING THE LIMITATIONS OF 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
SECOND SESSION
__________
SEPTEMBER 23, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-158
----------
U.S. GOVERNMENT PRINTING OFFICE
62-683 PDF WASHINGTON : 2010
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
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:
September 23, 2010........................................... 1
Appendix:
September 23, 2010........................................... 41
WITNESSES
Thursday, September 23, 2010
Borg, Joseph P., Director, Alabama Securities Commission......... 8
Caruso, Steven B., Partner, Maddox, Hargett, & Caruso, P.C....... 15
Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia
Law School..................................................... 11
Hammerman, Ira, Senior Managing Director and General Counsel,
Securities Industry and Financial Markets Association (SIFMA).. 13
Johnson, Hon. Orlan M., Chairman of the Board, Securities
Investor Protection Corporation (SIPC)......................... 10
APPENDIX
Prepared statements:
Kanjorski, Hon. Paul E....................................... 42
Borg, Joseph P............................................... 44
Caruso, Steven B............................................. 59
Coffee, John C., Jr.......................................... 64
Hammerman, Ira............................................... 78
Johnson, Hon. Orlan M........................................ 87
Additional Material Submitted for the Record
Kanjorski, Hon. Paul E.:
Written statement of Ronnie Sue Ambrosino, Coordinator,
Madoff Victims Coalition................................... 99
Letter from Stephen P. Harbeck, President, Securities
Investor Protection Corporation (SIPC), dated February 22,
2010, containing responses to questions posed at the
Capital Markets Subcommittee's December 9, 2009 hearing.... 105
Letter to Stephen P. Harbeck, President, Securities Investor
Protection Corporation (SIPC), dated March 4, 2010, in
response to Mr. Harbeck's February 22nd letter............. 116
Letter to Stephen P. Harbeck, President, Securities Investor
Protection Corporation (SIPC), dated August 20, 2010,
regarding the subcommittee's September 23, 2010 hearing.... 118
Letter from Stephen P. Harbeck, President, Securities
Investor Protection Corporation (SIPC), dated September 7,
2010, in response to Chairman Kanjorski's August 20th
letter..................................................... 120
Written statement of Ron Stein, President, Network for
Investor Action and Protection (NIAP)...................... 128
ASSESSING THE LIMITATIONS OF THE
SECURITIES INVESTOR PROTECTION ACT
----------
Thursday, September 23, 2010
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 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Paul E.
Kanjorski [chairman of the subcommittee] presiding.
Members present: Representatives Kanjorski, Ackerman,
Hinojosa, Baca, Klein, Perlmutter, Carson, Childers; Garrett,
King, and Jenkins.
Also present: Representative Moore of Kansas.
Chairman Kanjorski. This hearing of the Subcommittee on
Capital Markets, Insurance, and Government Sponsored
Enterprises will come to order.
Pursuant to committee rules and prior discussions with the
ranking member, each side will have 10 minutes for opening
statements.
Without objection, all members' opening statements will be
made a part of the record; and I yield 5 minutes to myself.
Nearly 2 years have passed since the massive $65 billion
Madoff Ponzi scheme came to light. Since then, we have enacted
the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Among many other things, this law amended the Securities
Investor Protection Act, the statute that works to return money
and securities to customers of failed brokerages.
To better protect the customers of failed brokerages going
forward, the Dodd-Frank Act increases cash protection limits
and bolsters the resources of the Reserve Fund used to replace
customers' missing cash and securities. This new law also
triples penalties for misrepresentations of membership in or
protections offered by the Securities Investor Protection
Corporation. Moreover, the statute makes important changes to
prevent rather than simply replace the loss of customers'
property, including new custody safeguards for customers'
assets held by certain financial professionals.
The Dodd-Frank Act additionally requires the auditors of
broker-dealers to register with the Public Company Accounting
Oversight Board, and this body has the authority to regulate
these market gatekeepers. This change ought to put incompetent
and unscrupulous one-man-auditor shops like the one which
blessed the books of the Madoff brokerage out of business
before investors get harmed.
Much more, however, remains to be done to protect
investors. The victims of the Madoff Ponzi scheme and the
Stanford Financial fraud include many hard-working families and
frugal retirees who invested their hard-earned money with now
imprisoned or indicted con artists. Numerous press stories have
related accounts about how these victims who sought to play by
the rules have now had to greatly modify the ways they live.
The victims of these frauds believe that SIPC has fallen short
in meeting the responsibilities, and they want change. I do,
too.
We therefore have many questions to explore today. For
example, although SIPA's protections do not currently extend to
customers of investment advisers, we must explore the issue of
expanding SIPA's coverage, as investment advisers may also
commit fraud.
In any serious efforts to reform SIPA, we must also
consider what responsibilities SIPC has to honor the broker
statements that customers receive. SIPC has denied the claims
of customers based on seemingly legitimate paperwork provided
to them by the brokers. Yet SIPC expects customers to use those
very same statements to report unauthorized trading in their
accounts. This inconsistency is unacceptable, and we must work
to resolve it.
Investor trust, for which SIPA was designed to preserve,
has been seriously eroded by SIPC's narrow interpretations of
its statutory mandate. While SIPC's actions may follow the
letter of the law, many would argue that SIPA has ignored the
spirit of the law. We therefore must consider the best way to
change the tone of SIPC and refocus this body on maintaining
confidence in the financial system and promoting investor
protection.
To the extent possible, we ought to also explore how SIPC
could learn from the success of the Federal Deposit Insurance
Corporation in maintaining the public's trust. To address these
questions and many others, SIPC has focused on the
Modernization Task Force, and several members of this panel
will appear before us today in their personal capacities. I
expect this Task Force to complete its work with great
transparency, considerable outreach, and much speed. Moreover,
this Task Force must view its mission as broadly as possible
and work to provide Congress with a comprehensive plan for
reform.
In closing, we can further improve SIPA by building on the
reforms of the Dodd-Frank Act. The witnesses before us today
are recognized securities experts. Their recommendations, along
with those offered by the Madoff victims at our hearing last
December, will undoubtedly help us in our work to update SIPA
and better protect investors.
The Chair recognizes the gentleman from New Jersey for 10
minutes.
Mr. Garrett. Thank you.
``As mad as I am at Madoff, I am even more upset at my own
government over the way I have been treated in the aftermath of
this fraud.'' That is the gist of a quote from one of my
constituents who was defrauded by Bernie Madoff and who feels
failed by the FCC and FINRA in protecting him while the fraud
was going on and who now faces a specific trustee who is
threatening to claw back funds he withdrew from his made-up
account over the course of the last 15 or 20 years.
In a sense, these innocent investors are being held to a
higher standard than both the government that was supposed to
protect them and that gladly took their tax payments and the
organization, SIPC, that was supposedly set up to protect them
while installing and instilling greater confidence in our
securities market.
We are holding today's hearing to assess the limitations of
the Securities Investors Protection Act (SIPA), and the
Securities Investors Protection Corporation (SIPC), and to
identify whether there are potential reforms that would better
protect the investors.
It would seem to me that one major and fundamental reform
would be for them, through the actions of the trustee as
appointed, to see itself as an advocate for, rather than an
adversary against innocent defrauded investors so that they
feel as though they are being assisted by the SIPC process
rather than hunted down and accused somehow of them doing some
sort of wrongdoing.
So there is one piece of legislation that is out there that
could go at least part of the way in making things right for
once and potentially twice victimizing the Madoff investors. A
colleague of mine in New Jersey, Bill Pascrell, has introduced
a bill, H.R. 5058, called the Ponzi Scheme Victims Tax Relief
Act. What it would do is liberalize the ability of those who
are victims of theft to receive a refund for taxes that they
paid on gains that the SIPC trustee is now trying to take back
from them. I am a cosponsor of this bill, which actually should
go a little further than the 10-year look-back since their
trustee is going back further than 10 years in calculating the
so-called net winners and losers.
Another aspect of the trustee's handling of this case is
now in the process of working the way through the court systems
in which matters will be decided. I am concerned, though, about
a looming deadline that is coming up, and that is in December,
when the trustee will decide whether to go forward with
potentially thousands of claw-backs from these innocent
defrauded investors.
SIPC leadership and the trustee have indicated that they
will not be going after the so-called ordinary people, people
who are not leading a lavish lifestyle and who had no knowledge
of the fraud. But if you hear from my office or my staff, that
is not what I am hearing from my constituents and others and
the people I talk to when I go back at home.
I spoke with one gentleman who years ago withdrew money to
pay for college and who lives a very modest lifestyle now. He
contacted the trustee's firm to get clarification that he
wouldn't be clawed back, but he was told that, other than
forgiving a small percentage of what the trustee had calculated
that he owed, he otherwise looks like he would be on the hook
for the rest. In addition, he was told that anything he might
recover in the form of tax refund, that, too, might be subject
to seizure by the trustee.
So I am also concerned that while these court cases are
under way, the SIPC trustee has denied access to Madoff's
records for their victims and attorneys. Access to these
records is important for several key aspects of the case,
including whether or not all transactions reported by Madoff
over the years were actually fraudulent transactions. If some
of them weren't, then the trustee's net equity formulation
would completely be called into question.
Inequitable access to these records results in a
fundamental imbalance of the scales of justice in this case and
also calls into question whether ultimately there will be a
fair trial at the end of the day in this case.
So all of this, when you think about it, should make all of
us feel very uncomfortable. The SIPC decal is supposed to mean
protection. The SEC was supposed to provide protection. The
IRS, taking the tax payment, also serves as a government
imprimatur. SIPC is supposed to provide up to $500,000 in
protection based on ``reasonable expectation of customers.'' In
fact, SIPC was created at the behest of the securities industry
to encourage confidence in a more efficient paperless process,
where investors would no longer have the piece of mind one gets
from holding on to the actual stock certificate like we used to
do in the old days. In their place, customers grew accustomed
to depending on trade confirmations and account statements
which were regulated, of course, by the SEC and FINRA to set
their reasonable expectations that they should have.
As I said earlier, though, instead of SIPC meeting
investors' reasonable expectations, now it seems as though they
are blaming the victims instead. Instead of customers being
able to rely on their account statements to calculate their
SIPC protection, they are basically at the mercy of the
trustee's formulation of net equity that doesn't take into
account for consideration interest earning or the time value of
money. Nor does this so-called customer-friendly methodology
take into account the receiving of SIPC protection as separate
and distinct from the distribution of asset recovers.
One of the results, unfortunately, is a SIPC that has
clearly lost the trust of many investors as well as the trust
of many Members of Congress as well. So this hearing, Mr.
Chairman, is timely. SIPC clearly needs the SIPC Modernization
Task Force to assist in its refocusing on its proper role going
forward. So I do look forward to the testimony we will hear and
the questioning from this panel.
With that, I yield back.
Chairman Kanjorski. Thank you, Mr. Garrett.
We will now hear from the gentleman from New York, Mr.
Ackerman.
Mr. Ackerman. Thank you very much, Chairman Kanjorski, for
calling this very important hearing.
It has been nearly 2 years since Bernard Madoff confessed
to masterminding the largest and longest-running Ponzi scheme
in history and turned himself in. After that fateful day in
December 2008, the Securities Investor Protection Corporation,
which is tasked with insuring victims of broker fraud of
failure and recovering assets from the fraud of those victims,
received over 16,000 insurance claims from Madoff's innocent
victims. Of them, to date, SIPC has granted only 2,200.
That means that right now, at this very minute, many, if
not most, of the over 13,000 innocent victims of Bernard Madoff
who for years reasonably thought that they were entitled to
SIPC insurance on the balance of their accounts in the unlikely
event that their investments were entangled in a broker-dealer
fraud or failure instead are destitute and out of luck. And
those are just the investors who filed actual claims.
What crime did these investors commit? These 13,000 people
and their families, like millions and millions of people who
invest in our markets, put their trust in our financial system,
its regulators, and its safeguards. Two years after Madoff
turned himself in, 2 years after these 13,000 people have been
turned away time and time again from the protection to which
they reasonably believed they were entitled, it has become very
clear that Madoff robbed them, our system betrayed them, and
our government failed them.
Who is responsible? Who caused this problem? Who do we turn
to? Who do the victims turn to?
Now, people have reasonable expectations of government, its
agencies, and the organizations that are created by them. Where
I come from, if the police don't do their job and stand idly by
when terrible things happen, if a doctor just stands around and
doesn't do what he is supposed to do, if emergency responders
show up in the ambulance and just sit and watch the accident,
people wind up suing those agencies and the city and the
municipality and the government for negligence. Someone is
liable. Whether it is because of incompetence or misfeasance or
malfeasance, somebody is responsible for not fulfilling the
reasonable expectations that people have and come to rely on.
And here in the Federal Government, if there is not a legal
responsibility, there certainly is a moral responsibility for
creating the climate that people depended on. That we have
failed these investors is heartbreaking enough in terms of
human tragedy, but the damage that has been done to investor
confidence at this critical time in our economic and financial
recovery as a result of our failure to safeguard and protect
these innocent Madoff victims and our country's negligence in
leading them to believe that they were insured is as
frightening as it is self-defeating.
Today's hearing will focus on the Securities Investor
Protection Act and the present and future role of SIPC in
providing insurance to investors in our markets that they are
protected, really protected, not fake protected, against
broker-dealer fraud or failure. It is my strong hope that this
hearing is a prelude to the subcommittee's consideration of the
Ponzi Scheme Investor Protection Act, a bipartisan bill that I
have introduced along with numerous members of this
subcommittee in the House to provide some relief to many of
those innocent victims of Ponzi schemes of all kinds who have
been spurned by SIPC and to proactively assure investors in our
securities markets that they are protected against fraud,
regardless of its scope or longevity.
Mr. Chairman, thank you very much again for scheduling the
hearing, and I, too, look forward to hearing from our
witnesses. I yield back the balance of my time.
Chairman Kanjorski. Thank you, Mr. Ackerman.
Now, we will hear from the other gentleman from New York
for 2 minutes, Mr. King.
Mr. King. Thank you, Mr. Chairman.
At the outset, let me thank you very much for holding this
hearing. I know it is important to get on to the hearing, so I
will keep my remarks brief.
I want to fully identify myself with the statement of Mr.
Garrett both in precise content and also in spirit. The fact is
that the investors of Madoff were let down, were failed by our
government, by SEC, by FINRA. Despite numerous reasons why this
fraud should have been stopped, it wasn't.
So these investors made the mistake of: number one, relying
on Madoff; and number two, and more importantly, relying on our
Federal Government. And now that they are victims, they are
being treated by the trustee as if they were co-conspirators of
Madoff, rather than victims.
I have done some practice of law over the years, and when
you listen to the investors and you listen to the tactics and
methods being used against them by the trustee, it is similar
to people under indictment or under investigation by the grand
jury, by the United States Attorney, by the SEC, that years of
records are being demanded going back 10, 15, 20 years. Every
excuse or every possibility has been looked at by the trustee
to try to suck people into this, to bring them in. Not giving
them the benefit of the doubt but again treating them as if
they were criminal defendants rather than victims.
And to me, as my good friend Mr. Ackerman said, at a time
when we are trying to rebuild investor confidence, we are
sending the worst possible message to investors to show that
not only the government lets them down, but, in effect, the
government allows the trustee to go after them when they are
victims as if they are guilty themselves. And we are talking
about people who have already lost millions of dollars because
of this Ponzi scheme of Madoff now having to spend millions and
millions of dollars in legal fees to defend themselves. When
our government should be working to help them, the government
is going out of its way and the trustee is going out of its way
to make them victims again.
I find this entire process wrong. I think sometimes we can
get caught in our universe when we start debating how many
angels can dance on the head of a pin and not realizing that
good, good people who have been hurt once are being hurt even
worse by the tactics of this trustee. So I think it is
important to keep that in mind as we go forward and debate the
technicalities and legalities, realize the moral harming that
is being done here.
With that, I yield back the balance of my time.
Chairman Kanjorski. Thank you, Mr. King.
The gentleman from Colorado, Mr. Perlmutter, is recognized
for 1 minute.
Mr. Perlmutter. Thank you, Mr. Chairman.
I agree with one point raised by Mr. Garrett and Mr. King,
and I disagree with another point.
To start where we disagree, in terms of the timing of this,
it was under an SEC and under the Administration of George
Bush, and there was really not a lot of police on Wall Street
even though Mr. Markopolos raised the red flags a dozen times.
So you have to take a look at who is in office to decide
whether the system is working or not. But it did not work well
at that time.
I agree with the gentleman that this is insult added to
injury. That really is what we are talking about here, and that
seems to be the unfairness of the system, that individuals who,
through no real--they weren't active participants in a fraud.
They were innocent victims of a fraud perpetrated by Mr.
Madoff. There should be an opportunity for them to recover,
either through their taxes, through claims with SIPC, or to not
have to face a claw-back if they are not active participants.
And the law I think is a real problem in this arena and needs
to be changed, and I look forward to working with the gentleman
on these very subjects.
Thank you.
Mr. Ackerman. [presiding] The Chair will recognize Mr.
Childers for 3 minutes.
Mr. Childers. Thank you.
I want to thank the chairman first for holding this
important and very timely hearing to address the Securities
Investor Protection Act, and I thank our witnesses for being
here today.
This subcommittee has looked at a number of issues related
to SIPA during this Congress, focusing on the Madoff Ponzi
scheme as well as the Stanford Financial Ponzi scheme. I am
here today as an advocate of the victims of the Stanford
Financial scheme.
While the victims of the Madoff scheme and the Stanford
Financial scheme live throughout our country, I realize that,
but too many of those Stanford Financial scheme victims live in
the district that I serve, the northern portion of Mississippi.
They are north Mississippi families who now live an uncertain
future. They invested much of their life savings in
certificates of deposit with the Stanford Group Company, a SIPC
member and registered broker-dealer.
It is estimated that in Mississippi alone, our families
lost $68 million. That is no small matter to me and to the
State of Mississippi. SIPC has denied coverage to the Stanford
victims when the SEC had the jurisdiction to file enforcement
action against Stanford in 2009. These investors purchased
securities they didn't get. They purchased them from an SIPC
member.
SIPC's entire function is to return securities to customers
of a broker-dealer when a firm becomes insolvent. There are
several legalities to the case for extending SIPC coverage to
Stanford victims, and I don't want to get into all of that, but
these investors are ordinary Americans, ordinary Mississippians
who planned and saved for a retirement that they may never
enjoy, and they deserve the protection assured by the SIPC
member Stanford Group Company.
As we examine ideas to improve SIPA and work towards a
resolution for making these Stanford victims whole, I urge all
participants to keep these victims and their hard-working
families in mind and the fact that they worked, many times, a
lifetime to accumulate this money that they have lost.
I yield back my time. Thank you, Mr. Chairman.
Mr. Ackerman. Thank you very much.
We will now hear from our panel of witnesses. Thank you
very much for appearing before the subcommittee today, and,
without objection, your entire written statements will be made
a part of the record. You will each be recognized for 5 minutes
to summarize your statement or present it in any way you see
fit.
We will get right down to it. First, we have Mr. Joseph
Borg, director, Alabama Securities Commission.
Mr. Borg.
STATEMENTS OF JOSEPH P. BORG, DIRECTOR, ALABAMA SECURITIES
COMMISSION
Mr. Borg. Thank you, Mr. Chairman, Ranking Member Garrett,
and members of the subcommittee. I am Joe Borg, director of the
Alabama Securities Commission, and I thank you for the
invitation to participate today.
Our office has administrative, civil, and criminal
authority under the Alabama Securities Act; and we have brought
dozens of investigations of Ponzi and pyramid schemes, illegal
blind pools, fraudulent private placement offerings, and other
scams which have led to numerous enforcement cases and criminal
prosecutions.
I have submitted written testimony which has additional
details and discussion of the bullet points I will outline here
today.
Here are some of my particular areas of concern:
First is the levels of protection. It is my belief that the
level of protection with regard to SIPC funds should be
increased from $500,000 to $1 million. A large portion of
retirement savings consists of securities investments, and most
people just do not leave huge amounts of retirement money in
banks. It is at the brokerage houses. The $1 million level of
protection would also match SIPC's Canadian counterpart, the
Canadian Investor Protection Fund (CIPF), which is currently at
$1 million Canadian. I also believe that the levels of
protection should be indexed to inflation, and indexing would
allow some incremental measure of increased protection going
forward.
On the issue of fictitious securities, a major issue is the
treatment of claims based on a securities position which never
actually existed. There are conflicts between decisions from
the Second and Sixth Circuit Court of Appeals, and I believe
that part of the problem stems from SIPA's distinction between
cash and securities.
The disparate protection between claims for cash and
securities should be eliminated. For example, if I have
$500,000 of securities, I sell $350,000 and the brokerage house
is closed before I either cash the check or the money is still
in the account, I have just lost $100,000 because of the
$250,000 limit.
I would also note that the Canadians eliminated the
distinction between claims for cash and claims for securities
back in 1998. In a discussion with SIPC staff, a change in
favor of eliminating the cash versus securities distinction
would not alter the risk models used by SIPC.
The next item is the increase in the line of credit from
Treasury. If we expect continued growth in the securities
market and a change of coverage to perhaps $1 million cash of
securities and you index it to reflect inflation, it may
require an increase in the line of credit for Treasury. I know
it hasn't been tapped so far in history, but we have asked the
SIPC staff to review the effect of protections at the $1
million level.
It is my personal feeling that a line of credit of $5
billion matched with reserves of $5 billion from the industry
would be an appropriate amount going forward. At the current
level of assessments, it will take a number of years to reach
the $2.5 billion level--I think the staff has told us about 5
years--but I think if we target for $10 billion and we start to
be--let's be realistic and start planning for them now, that
planning should start now.
On assessments, prior to the enactment of Dodd-Frank, SIPC
had a floor of $150, ridiculously low. There are now some SIPC
members, though, who pay zero assessments because of the change
in the law. I think that is just an unintended consequence. It
is my belief that there should be a minimum assessment of some
amount, perhaps $1,000. I would prefer a range somewhere of
$2,000 to $2,500.
Also, I was very surprised to learn that in computing
assessments, revenues on mutual funds are not included; and I
am of the opinion that since all investors benefit from
protection, or should benefit from protection, and broker-
dealers benefit from SIPC availability, that revenues on mutual
funds should be included for assessment purposes as well.
I would also suggest that anytime a target level is
reached, whether it is $1 billion, $2.5 billion, or $5 billion,
there should be another determination of whether assessments
are adequate based on the current level of investors' assets in
the markets.
Let me suggest that the current arrangement with the
Treasury for the line of credit that exists, which is now a
term loan, should actually be a revolving loan in order to
ensure continuity and flexibility in the ability of SIPC to
protect investors where and when needed.
On investor education, the general public has the
misconception that SIPC is some type of insurance, just like
FDIC is insurance for banks. If we are going to make a change,
it is going to change the entire dynamic. And I am not
suggesting we don't change it, but I think that the parameters
of what this Task Force is going to look at will change
depending on congressional intent. If it was not intended to be
insurance for fraud but only for replacing cash and securities,
I think this misconception was exacerbated by references to
FDIC, tying the amounts of coverage to the same levels as FDIC,
and a comparison by the broker-dealer community who tapped
specific protection levels.
Suggestion to fix it: TV ads and seminars and publications
are great, but that is not how you are going to educate the
public. Include in the brokerage statements every quarter or
every month that they go out a section on SIPC protection, what
it is, but, more importantly, what it is not. I think you are
going to need a constant education effort on a regular basis to
get over the misconceptions that have occurred.
And I wouldn't do an insert. You know what I do with
inserts. You throw them away and you read the statement. It
needs to be part of the brokerage statement. I know that SIPC
does not have the power to do that. That would have to come
from SEC and FINRA.
I know my time is up. I have submitted materials with
regard to indirect investing, with regard to retirement plans
and hedge funds. I think they ought to be matched up to the way
that FDIC and FCUA are looking through those procedures at the
present time, utilizing the IRS Code 401(d), 408, and including
457 plans.
And I would lastly say, in conclusion, that under
international relations, I have been specifically tasked by the
Task Force to look into matters involving international
involvement of SIPC. SIPC just became a member of the
International Securities Organization (IOSCO), as an affiliate
member. Some of the things we are going to look at I think
would be formal rules on cross-border protection, create a
dispute resolution mechanism with a team of experts--this is
from the Lehman Brothers matter--establish cooperative
principles, and develop a platform for exchange of information.
I thank you again for the invitation and the opportunity to
be here today, and I will be happy to answer any questions.
Thank you.
[The prepared statement of Mr. Borg can be found on page 44
of the appendix.]
Mr. Ackerman. Thank you, Mr. Borg.
Next, we have the Honorable Orlan Johnson, the chairman of
the board of the Securities Investor Protection Corporation.
STATEMENT OF THE HONORABLE ORLAN M. JOHNSON, CHAIRMAN OF THE
BOARD, SECURITIES INVESTOR PROTECTION CORPORATION (SIPC)
Mr. Johnson. Thank you, Mr. Chairman.
Chairman Kanjorski, Ranking Member Garrett, and members of
the subcommittee, I would like to thank you for the opportunity
to appear before you today to discuss the work of SIPC and the
possible improvements to the Securities Investor Protection
Act.
I am Orlan Johnson, and I am the chairman of SIPC. I also
serve as chairman of the SIPC Modernization Task Force, which
is conducting a complete and comprehensive review of SIPC's
operations as well as the changes to SIPA.
The Task Force was convened on June 17th of this year, and
it consists of a very wide range of experts. We are in the
midst of a review of all the considerations that are necessary
from a statutory standpoint, from a procedural standpoint, and
other reforms as it relates to SIPA and SIPC.
At my confirmation hearing before the Senate Banking
Committee last December, I made crystal clear that my intent
from the beginning was to come in and to have a comprehensive
review; and this review is being undertaken. Chairman Kanjorski
thereafter contacted us and suggested a number of important
topics for the Task Force to consider, and today I will briefly
describe SIPC and the work of the Task Force, in addition to
providing responses to issues that the subcommittee presented
to me in their letter dated September 16th.
The Task Force has drawn its members from all ranks, from
all parts of the United States. We have drawn from the ranks of
State regulators, attorneys who represent investors, academia,
the securities industry, and the trustee of the largest
securities brokerage insolvency in history. We have included
also the chairman of SIPC's counterpart in China and an
observer from the SEC. We anticipate that the diversity of
viewpoint results in what I would call a rigorous analysis of
the issues that concern investors today.
We have begun our work in earnest, and we are examining the
extent of protection and also the problems that have occurred
as a result of indirect investors, the use of bankruptcy
avoidance powers, and other fundamental issues of concerns to
investors and to Congress.
We anticipate that some of our recommendations are not
going to make everyone happy. Nevertheless, it is the role of
this Task Force to have everything on the table, all aspects of
what we need to be looking at, all aspects of what needs to be
reviewed.
We have also created a public input platform on our Web
site in which the public is invited to share their comments for
all to see.
We have also undertaken a major public outreach to ensure
that as many investors as possible will learn about this
process and get an opportunity to participate.
In using our Web site portals, we have conducted an open
online forum. We did our first one on September 14th. We have
another one that is going to be taking place fairly soon. We
also are hoping to organize a live event so that we can have
members of the public present their views directly to the Task
Force.
After discussion of some of the issues, several members of
the Task Force have volunteered to help us draft a number of
recommendations which we intend to present to the SIPC board,
and it is our goal to get a full set of recommendations
sometime in the early part of the first quarter of 2011.
My written submission to the committee addresses a number
of the specific issues of concern to Congress, and SIPC's work
is the focus of attention as it never has been in the last 40
years. The Dodd-Frank Wall Street Reform and Consumer
Protection Act amended SIPA and gives SIPC a new and different
role in the wind-down of systemically significant financial
conglomerates where a SIPC member brokerage firm is involved. I
would hope that the Task Force will soon present additional
recommendations that will lead to additional legislation and to
further enhance and update the SIPC program of investors.
In conclusion, I want to assure the subcommittee that the
Task Force is making progress and will continue its work aimed
at developing and recommending substantial reform to SIPA and
SIPC. I would like to thank you for the time, and I would like
to thank you for having members of our Task Force with you. I
would be pleased to answer any questions that the members of
the subcommittee may have.
Thank you again, Mr. Chairman.
[The prepared statement of Mr. Johnson can be found on page
87 of the appendix.]
Mr. Ackerman. Thank you very much, Chairman Johnson.
Next, we have Mr. John Coffee, the Adolf A. Berle Professor
of Law at Columbia University. Mr. Coffee.
STATEMENT OF JOHN C. COFFEE, JR., ADOLF A. BERLE PROFESSOR OF
LAW, COLUMBIA LAW SCHOOL
Mr. Coffee. Chairman Kanjorski, I have only two points to
make in my brief remarks: There are things Congress should do
to amend, extend, and modernize the Securities Investor
Protection Act, but, too, there are things Congress should not
do. My hopes for what Congress could do must be balanced
against my fears of what Congress might do. The first rule
always has to be, do no harm; and I think there are some harms
here in some of the potential reforms. Let me start with my
hopes.
I agree very much with Mr. Borg's comments. I think I won't
cover the same ground he has covered, so let me start with a
different point. Congress should extend the definition of
``customer'' to reach beneficial and indirect owners in a
variety of collective investment vehicles. Americans today
invest through collective investment vehicles. The highest
priority should be to cover the smaller pension funds and other
collective investment vehicles where typically the legal owner
has failed or neglected to inform the covered broker of all of
the individual accounts that are represented in that collective
fund. The presumption, the strong presumption should be in
favor of a pass-through approach. That is what both the Federal
Deposit Insurance Corporation Act and the Federal Credit Union
Act already adopted over a decade ago.
SIPA, the Securities Investor Protection Act, is behind the
pack in not having adopted a pass-through approach that reaches
the beneficial and indirect owners. Such a pass-through
approach is superior to what is being provided and proposed in
H.R. 5032, which only amounts to a $100,000 advance to the
indirect owner, and it requires the indirect owner to waive
their right to sue the feeder funds who put them into the Ponzi
scheme. I can see no reason in the world why Congress wants to
exempt bodies like Fairfield Greenwich that appear to have
behaved very, very recklessly, at the least.
Now I realize that what I am saying, that we should cover
beneficial or indirect owners, would be costly for SIPC; and,
thus, I think it is necessary to prioritize. I don't think I
would initially try to cover the large mutual fund or the very
large pension fund because they are, by law, diversified and
cannot suffer really significant losses from a Ponzi scheme,
but the smaller funds and the smaller pension funds would be my
priority to cover first.
And, yes, this may require some increase in the assessment
which right now starts at one-half of 1 percent of your gross
revenues until the fund reaches a certain size. I think the
average small businessman in America spends more than one-half
of 1 percent of their gross revenues on covering insurance and
similar costs.
My basic point, though, is we now have a system that
doesn't cover the smaller person, because they are more likely
to be the person who is in the indirect position of being a
beneficial owner.
The next point--which Mr. Borg also said and I will say it
very briefly--I think we should abolish the distinction between
cash and securities. It produces arbitrary distinctions because
it is a happenstance what your account consists of on the
moment that the broker-dealer fails.
Now, on the other side of the ledger, there are proposed
reforms that I would urge Congress not to adopt. Particularly,
I would advise you against limiting the powers of the SIPC
trustee to sue the net winners in a Ponzi scheme. Because in
reality, Ponzi schemes are composed of net winners and net
losers. To the extent we protect the net winners, we injure the
net losers. When Mr. Pickard, the Madoff trustee, sues the net
winners, he is not giving that money to the Federal Government.
He is seeking to aid the net losers. Although I can sympathize
with the position of some of the net winners, their experience
was far less tragic, far less traumatic than that of the net
losers; and I don't think Congress should subordinate the net
losers to the net winners.
I note that Mr. Pickard has filed as of April some 14
actions seeking $14.8 billion. Those 14 actions are not against
poor, unsuspecting people. They are against very large
entities. And if 5032 passes in its current form, I think the
settlement value would be dramatically reduced.
Thus, I am urging you in my written testimony that if you
want to do something for the net winners that you think are
unsuspecting, unfortunate victims, it would be better to create
either a de minimus exception saying no recovery until the
fictitious profits go above a certain level, or use what I will
call an imputed interest factor. Say if you put money in 10
years ago, you are entitled to at least a 10 percent return a
year, and that would double the recovery. But if you use the
current approach, there are going to be people who, according
to a published article in the Wall Street Journal, have offered
to settle in the neighborhood of $2 billion in just one case
who we are going to find that the settlement value of that kind
of recovery will be greatly reduced because it is going to be
very difficult to prove anybody was complicit in Madoff's fraud
or that they are negligent, where they will say they were
relying on audited financial information.
Lastly, in just one second, I do think the approach taken
in the Financial Services appropriation bill which would compel
the SIPC to cover all the losses in the Stanford scandal
probably goes beyond what the SIPC can possibly handle. It was
established to cover securities that were in the custody of the
broker or that were on the broker's books. Asking the SIPC to
cover all fraud-related losses could threaten the solvency of
the SIPC. That should not be done retroactively.
At this point I will stop, and I am happy to answer further
questions.
[The prepared statement of Professor Coffee can be found on
page 64 of the appendix.]
Mr. Ackerman. Thank you very much, Mr. Coffee.
Next, we have Mr. Ira Hammerman, senior managing director
and general counsel of the Securities Industry and Financial
Markets Association. Mr. Hammerman.
STATEMENT OF IRA HAMMERMAN, SENIOR MANAGING DIRECTOR AND
GENERAL COUNSEL, SECURITIES INDUSTRY AND FINANCIAL MARKETS
ASSOCIATION (SIFMA)
Mr. Hammerman. Thank you, Mr. Chairman, Ranking Member
Garrett, and members of the subcommittee. I am pleased to
testify on behalf of the Securities Industry and Financial
Markets Association on this important subject. My testimony
focuses on SIFMA's preliminary recommendations regarding
revisions to SIPA in light of issues emerging from recent
liquidations and the effect of the Dodd-Frank Act.
SIPA's fundamental purpose is to promote investor
confidence in the capital markets by protecting customers
against the loss of cash or securities in the failure of the
broker holding such property. It is not intended to protect
investors against losses on their investments, only against
losses of their investments. When a broker fails, SIPA provides
for the distribution of the customer property pro rata to all
customers; and to the extent there are shortfalls, $500,000
from SIPC is available to restore to each customer's missing
cash or securities. Investors who lose money because of a
decline in the value of the securities purchased for their
accounts, however, are not protected by SIPA against such
losses, whether the decline is due to market forces or even due
to fraud.
In this regard, SIFMA opposes the Culberson amendment, as
it would extend SIPC's protection to cover fraud by the issue
of securities which are neither lost nor stolen but in fact are
in the customer's possession.
SIPA's customer protection framework has been challenged
like never before by two recent events. The Madoff Ponzi
scheme, a massive long-term fraud that inflicted significant
harm on many investors, including individuals, families,
charitable, and educational institutions highlighted questions
about the scope of customer protection under SIPA, especially
as it applies to the calculation of a customer's net equity in
a Ponzi scheme and the application of SIPC's protection of
indirect investors. The insolvency of Lehman Brothers exposed
inconsistencies between SIPA and the SEC's customer protection
rule.
When a failed broker was operated as a Ponzi scheme, we
believe that customer property should be distributed to the
victims based on the net amounts entrusted to the failed
broker, reduced by any distributions received, without regard
to fictitious profits shown on fraudulent account statements.
The property held by a Ponzi scheme and available for
distribution to the investors is simply the pooled property of
all the victims, and distributions based on anything other than
their net investment would be fundamentally unfair.
Indirect investors who do not have accounts with the failed
broker but invested in another entity like a hedge fund that
had an account are not eligible for SIPC's protection. SIPC
generally should not provide greater protection to institutions
than to individuals.
And, accordingly, SIFMA opposes an increase in the
protection provided to customers that are hedge funds,
corporations, or partnerships. This principle, however, may not
apply to trusts or employee benefit plans, which represent the
interests of their beneficiaries in a more straightforward way.
Before expanding SIPC protection to these indirect investors,
however, Congress should consider the additional cost.
SIPA and the SEC's customer protection rules should work
together. This rule requires each broker to maintain possession
of its customers' fully paid and excess margin securities and
deposit into a reserve account in an amount generally equal to
its net monetary obligations to customers. In a SIPA
liquidation, the customers' securities are available for
distribution to customers. If SIPA and the customer protection
rule are harmonized, a failed broker that complied with the
rules should have sufficient customer property to satisfy the
net equity claims of all customers. Unfortunately, the two are
not fully harmonized today.
Additionally, as the SEC begins to develop the requirements
applicable to securities-based swap dealers, the divergences
between the SEC's customer protection requirements and SIPA
will only increase. Dodd-Frank amended the liquidation
provisions of the Bankruptcy Code to treat accounts holding
securities-based swaps as securities accounts, but no similar
amendment was made to SIPA, leaving unclear the treatment in a
SIPA liquidation of customer security based swaps and related
margin.
Lastly, SIPA provides for the distribution of a single pool
of property pro rata among all customers, which may unfairly
impose risks of the more complex types of accounts like
portfolio margin accounts on the customers who have simpler
accounts like cash accounts. To protect customers with the
simpler accounts, customers should be divided into separate
account classes. The rules tailored to create a separate pool
of customer property for each account class and SIPA and the
Bankruptcy Code should provide for the distribution of each
such separate pool to the customers in their related account
class. The best way to harmonize the customer protection rules
with the liquidation process and to tailor both to separate
account classes is for Congress to authorize the SEC to make
appropriate rules under SIPA, the Bankruptcy Code, and the
Exchange Act. We also believe that the basis on which members
contribute to SIPC's fund may be outdated and should be
reviewed in light of the manner in which members currently
operate.
In conclusion, SIFMA is strongly committed to working
constructively with the SIPC Task Force and this subcommittee
to recommend ways to better protect investors and thereby
increase investor confidence in the financial markets.
I would be pleased to answer any questions you may have.
Thank you.
[The prepared statement of Mr. Hammerman can be found on
page 78 of the appendix.]
Mr. Ackerman. Thank you very much, Mr. Hammerman.
Finally, we have Mr. Steven Caruso, partner in Maddox,
Hargett & Caruso. Mr. Caruso.
STATEMENT OF STEVEN B. CARUSO, PARTNER, MADDOX, HARGETT, &
CARUSO, P.C.
Mr. Caruso. Thank you, Chairman Kanjorski, Ranking Member
Garrett, and members of the subcommittee.
My name is Steven Caruso, and I am an attorney from New
York City with the law firm of Maddox, Hargett & Caruso. Our
law firm represents investors. That is what we do. I am also
now a member of the SIPC Modernization Task Force, and I view
my role on that Task Force as looking forward: What can we do
to make sure that what we have experienced in the past few
years does not happen again?
There is a lot of blame to go around. We can blame the SEC.
We can blame FINRA. We heard earlier somebody blaming the prior
Administration. That doesn't answer the question.
There are in my mind two questions when we leave here
today: One, what do we do to keep anything tragic from
happening as we move forward? And, two, what do we do to remedy
what has happened to investors in Madoff, in Stanford, and in a
host of other situations where investors have been screwed?
Plain and simple. That, in my view, is what this committee
needs to consider going forward.
We have heard from other colleagues on this panel about
increasing SIPC coverage. That has to be done. We have heard
about increasing the target level. That must be done.
Just think over the past few years what we have all seen.
Lehman Brothers is gone. Bear Stearns is gone. Who is next? And
what happens if somebody needs to step up to cover the exposure
associated with those firms?
You need to eliminate the distinction between cash and
securities. Every investor for covered securities should get,
plain and simple, at least $1 million of coverage. That is the
only fair and decent thing to do.
There are other suggestions and other questions that I have
put in my materials, but, make no mistake about it, Madoff will
happen again. There are people out there who are greedy.
Stanford will happen again. Lehman Brothers. It is going to
happen again. So what do we do? We build in protections going
forward. But it begs the question, what do we do about all
these people who have been hurt in the past?
Now, I am not aware of any legislation having been
introduced by the Congress that would provide any financial
restitution to these people. And it is very convenient to make
SIPC the whipping boy for what has happened. But if we want to
take care of those people, then I today call on Congress to
introduce legislation in addition to the tax relief that would
provide a means of restitution away from the SIPC process. That
is the most equitable and the fairest thing to do.
I thank you for inviting me today, and I would be pleased
to answer any questions.
[The prepared statement of Mr. Caruso can be found on page
59 of the appendix.]
Mr. Ackerman. I thank you very much, Mr. Caruso.
I thank the entire panel for your testimony. I think we all
have some questions, and I will begin with my own. We will take
5 minutes each, and we will go as many rounds as anybody would
like.
I will go backwards and start with the statement that Mr.
Caruso just made and that is seeing the mission as looking
forward. When I look forward, I see before me some of the
wounded warriors of the past, the victims, at least a thousand
of whom were traumatized by Bernard Madoff and are now being
terrorized by the trustee. That is what I see looking forward
for some people. And I believe it was Professor Coffee who
said, recalling the Hippocratic Oath of ``first do no harm,''
to look at the situation that we are doing tremendous harm with
the issue of the claw-back to many, many people.
I think one of the terrible things that we have done here
is, because of the way the zero sum game equation works, we
have created classes of victims--I don't understand really, and
I know the math--net winners and net losers.
Except for the few who have yet to be identified, should
there be those who are complicit with Madoff, everybody else is
a victim. People who might have taken more money out of money
that they think is theirs have been victimized. People who put
their money in a bank--and I know that is a different system
when you are talking about the FDIC and not SIPC--who are using
their own money, and suddenly somebody says that wasn't really
your money because you weren't entitled to that 7 percent
interest or whatever it was, they are victims. If you are
telling people their whole lifestyle, not just in the future
but in the past, has to be reversed, that they can no longer
live in their house or maintain their business or drive in
their car or continue to pay for their children or
grandchildren's education, they are victims. That is traumatic.
And to create classes of people by saying some are rich,
wealthy entities and some are not, a guy dies and the insurance
company isn't doing so well so you say to the widow, ``I know
you have a policy. But you are okay. I will give it to someone
else.'' If you think the money is yours and you paid for the
premium--and I don't know what kind of premium, by the way--you
think you get $500,000 worth of insurance for $150 a year, and
the systems pretends that people have real insurance and the
SEC agrees that is real insurance after they are supposed to be
supervising the agency. And the U.S. Congress, which is
complicit in this thing as well, because we are supposed to be
overseeing--and everybody is just pretending. At least in the
commercial, the doctor says, ``I'm not a real doctor. I'm just
playing one on TV.'' This isn't real insurance. We are just
playing make-believe to make you feel better.
My question is about claw-back. If we are going to move
forward, how do you move backwards? That is question number
one, claw-back. Anybody? Everybody?
Mr. Caruso. I will offer a suggestion.
I think anytime you get into the issue of claw-backs, you
not only implicate SIPC and SIPA but you also do the Bankruptcy
Code. Is it fair to go back to somebody who took out money to
pay taxes? Is it fair to go after somebody who may have taken
money to pay for a grandchild's education? I don't think
anybody in this room would say it is necessarily fair. And I
think Congress has the power to step up and say that is not
fair. That is simply not fair.
Whether you should be able to go back a year or 2 years--
clearly, for insiders, it would be different. But for other
people to go back 5, 6, 7 years, in my personal opinion, I find
that to be stretching the limit. But I don't think SIPC or the
Task Force has the power to change that. I think it rests with
the Congress. And maybe I am wrong on that, but if--
Mr. Ackerman. And what would you suggest should be the
policy? Do we have a responsibility to those people?
Mr. Caruso. I think you clearly have a responsibility to
those people. And I heard earlier a suggestion about a
distinction about how much of a claw-back would you go after.
Would there be a threshold limit? Clearly, if there is somebody
like a feeder fund who benefited by millions or billions of
dollars, there should be no limitation on the ability to get
the money back.
Mr. Ackerman. Isn't this a moral question and not a means-
tested thing? I am sure, without knowing anything--maybe I
shouldn't be so sure. But I would be willing to bet that there
are people who took nothing out of their accounts who are much
wealthier, much wealthier than some people who took 150 percent
out of their account because they had to live on it. Do we
means test this thing, or do we make a policy decision and try
to do what is right? This is a real Solomonic question that is
before us, and I think we need some policy guidance.
You all are looking at this thing prospectively, how to
protect people in the future, but when you come up with a cure
for a disease, it is our obligation not only to inoculate
people who have not yet gotten the disease but to treat the
people who are suffering from it at the same time. How do we
deal with these people?
Mr. Coffee. May I try to address that, Congressman?
Mr. Ackerman. Professor Coffee, please, and then I am going
to yield to my colleague, Mr. Garrett, because my time is up.
Mr. Coffee. I would just suggest to you when we look at all
of the participants who fall into this heading of net winners,
who took more cash out than they put cash in, there is a
continuum. There may be people that Congress wants to protect.
You could protect them with a de minimus test, saying only that
fictitious profits over dollar sign ``X'' could be recovered.
You could protect them with what I will call an imputed
interest test. Because if you put this money in 10 years ago,
the fact that you made 10 percent a year would entitle you to
take out 100 percent or more above the money you put in.
But you do not need to protect the feeder funds and the
other people who look like they behaved irresponsibly and
probably corruptly. Those names are well known to the financial
press. Whether it is Fairfield Greenwich, Mr. Merkin, Stanley
Chais, Jeffrey Picker Worth, those people are cheering you on
right now. Because if you move the standard up, anytime you
make the recovery harder for the trustee, you will reduce the
settlement value of the trustee's claims against them, and the
trustee can get billions of dollars back from them for the net
losers.
I don't think Congress should make it harder to recover by
the trustee on behalf of the net losers from the people whom I
think were very culpable, and there were a number of those
people. Thus, if you would protect the people you want to
protect by instead using a de minimus test or an imputed
interest test, I think you will achieve most of your objectives
without protecting those people who are culpable.
Mr. Ackerman. I will respond in a different round or probe
that a little bit in a different round.
Mr. Garrett.
Mr. Garrett. Thanks.
So, going forward, does anyone have a recommendation with
regard to the SIPC logo? Some people have suggested that we put
a little asterisk by it saying that--warning you that the
statements that you are receiving may be interpreted in a
different way and you may be subject to claw-backs in the
future or other interpretations.
I say that facetiously, but maybe not. Because a couple of
your comments--everyone's comments seemed to imply that the
investor had a misinterpretation of exactly what they were
getting if they understood that SIPC was there and what they
were relying on.
But some of you have suggested, Mr. Hammerman, if I was
following, I think you said different pools or classifications
or what have you. Mr. Coffee, you are a professor. You were
talking about it not in those terms but in a similar approach
getting to the end place.
I--as the typical little investor going into my local shop
to make my investment and seeing the SIPC logo there probably
is not going to know right away, Mr. Hammerman, do I fall in
pool number A, B, C, or is there no water in my pool at the end
of the day because I miscalculated?
Someone over there, Mr. Coffee or Mr. Johnson, somebody
made the comment--no, it was Mr. Borg, about not reading all of
the disclaimers and everything you get in the mail, just like
none of us read the disclaimers that we get from the credit
card companies and all of those things. So how do we address
that? Are we going to create a whole bunch of different
classifications? I will start with Mr. Hammerman there. And
then for me, the little guy who just doesn't follow this to
begin with?
Mr. Hammerman. I think the heart of your question is
investor education and informing the public to a better extent
than we have been doing historically as to what SIPC is all
about.
Again, when I talk about SIPC, it is the SIPC of the last
40 years. There is a lot of discussion about where this should
go in the future. But certainly, from the industry standpoint,
we would be willing to work with all experts--SIPC, NSA, the
SEC, FINRA, consumer groups, whomever the right people in the
room are--if there is a way to do a better job of investor
education so that investors understand. And it is not just a
one-time thing, so it is not just a disclosure at the opening
of the account. As Mr. Borg said, this needs to be ingrained
over time.
Mr. Garrett. I don't know about you. I get my statements
regularly, and I get them all the time. And I look at the
number, and, oh, I am doing pretty good. Right now, I am doing
pretty poorly. I am not reading through the rest of all the
fine print. Maybe I am abnormal in that regard. Maybe other
people read through all of that stuff.
So if we do try to reeducate folks and tell them that, in
the future--and I think I agree on this--in the future, the
American public should not rely upon the Federal Government to
be protecting them to the extent that they thought the Federal
Government was protecting them in the past, because we have
shown that the Federal Government in these areas, the various
agencies can't do it. So I think that is one learning lesson
that the American people need.
Mr. Coffee. That is a very good question. I think your
question is a profound one. Because when you give an investor
an education and you show that there are some arbitrary lines,
it really becomes incumbent upon Congress to change those lines
and not insist upon arbitrary distinctions.
Mr. Borg, I, and others have told you that the definition
of ``customer'' is too limited. Rather than tell all investors
that the definition of customer is limited and arbitrary, it is
better to change the definition of customer so it makes a
little bit more sense and it includes the smaller person who
thought he had coverage but doesn't.
Mr. Garrett. I appreciate that, and maybe I could do a
round--but I want to get to another question for Mr. Johnson.
In your statement, you claim that in the past, the courts
and SIPC have rejected using a customer's last statement as a
guide for the SIPC coverage in cases where fictitious profits
are involved. But in the leading case in the Second Circuit,
New Times One, in fact, the customer's final statement was
used, I understand, in calculating their SIPC reimbursement.
Comments?
Mr. Johnson. We have a number of cases and also the
bankruptcy courts have always looked at whether or not there
was reason to believe that last statement that you had received
actually was the information that was accurate.
One of the things that we have been doing is trying to
figure out how do we make sure that we can utilize these
statements in a way that we are protecting all the investors.
What the primary concern is regarding the final statement is
making sure that we don't create an environment where the
wrongdoer actually has an opportunity to create the forum for
who would be successful and who would not be successful. The
reason that is important is because you could have a
situation--let's take the Madoff case--where you have someone
who tells you something that from the very beginning was not
true, but the final statement they tell you is, guess what, you
have nothing to worry about, because whatever I got on that
final statement is what you are going to be protected from.
That would be the only true statement that would come out
of their mouths, and what we would do is be creating an
environment where the wrongdoer now gets an opportunity to set
the tone for how the government then will be responsible for
responding.
So the primary issue we are concerned with is making sure
that whatever methods we use are going to ensure that we are
not going to allow the wrongdoer to actually set the parameters
of how we would go about final decisions and putting Congress
in the position where they end up doing something that may be
unintended as well.
Mr. Garrett. You are sort of going down a slightly
different road on that, but I understand what you are saying.
But there is case law now that says the final statement can be
used by you for reimbursement purposes. So going forward on
that case law is contrary to the position of SIPC then.
Mr. Johnson. There is case law that has said that. There
are also bankruptcy rulings that have mentioned the fact that
you can look at things from a different standpoint as it
relates to not only whether or not you have this fictitious
statement but also whether or not you are a net winner or a net
loser. And part of that calculation takes into consideration
whether or not this fictitious statement or the statement you
have is one that is valid.
Now, whether or not it should be taken into consideration,
it should be. But at the end of the process, there has to be
some analysis to determine whether or not that actual statement
is what you should end up using as the basis of how you would
go about making a payment on a claim.
Mr. Garrett. But you are going to continue to reject the
use of that as a guide for your coverage in cases?
Mr. Johnson. What we will do is we will continue to look at
the statements that come in and then we will continue to look
at the global aspect of what happened in a particular set of
circumstances. And then, if there is a conflict, we will take
it to the court and allow a third party to help us to make a
decision whether or not we should move forward.
All we are trying to do is hopefully vigorously pursue the
law as we understand it and interpret it. And we understand
there can be reasonable minds that may differ on how you may
interpret the law, but once we are told from a third party or
anyplace else that we should be operating differently, then we
intend to vigorously move forward in that vein as well.
Mr. Garrett. Mr. Caruso, I don't want to throw you on the
spot on that one. Any response to that, considering where you
come from?
If not, that is fine.
Mr. Caruso. Clearly, there are going to be different
opinions from different circuits from different courts. Part of
the confusion that exists is that there is no well-defined
standard that is universal throughout the country. And the only
way that I know of that finally could be resolved would be
through the Congress of the United States. Because you are
going to have different court opinions on every issue.
Mr. Johnson. I think one other point that is worth
mentioning regarding the Second Circuit case is it also points
out the fact that where the decision regarding what those
amounts are on the statement are arbitrary--and in this case we
are looking at a situation where the numbers, for example, in
the Madoff statements, were arbitrary--then that would be taken
into consideration in terms of coming to a final analysis as
well.
Mr. Ackerman. Thank you.
Next, my co-collaborator and cosponsor of the Ponzi Scheme
Investment Action Act, Mr. King.
Mr. King. Thank you, Mr. Ackerman.
Listening to this, I don't think we are getting the full
import or impact of the reality that, while SIPC was set up to
protect investors, in too many cases right now the trustee is
acting as a prosecutor of victims. We can try to explain it
anyway we want, but the fact is that these people were victims
and they are now being subjected to the same type of treatment
that defendants are put through in massive criminal
conspiracies. Yet there is no evidence that any of these people
are co-conspirators. They are victims.
I look at the SIPC Web site and it says, although not every
investor is protected by SIPC, no fewer than 99 percent of
persons who are eligible get their investments back from SIPC.
So, clearly what is being done in reality is different from
what people had every reason to expect. They relied on the
statements they received from Madoff. They relied on statements
from SIPC that 99 percent of investors would be protected. Yet,
in addition to all the money they have lost because of Madoff,
they are now running up incredible legal fees, they are being
required to produce documents going back 25 and 30 years, and
it is being done in I believe a very arbitrary and high-handed
way and a very heavy-handed way, which is just perpetuating the
terrible injustice that was inflicted upon them in the first
place.
Now, as far as going forward with SIPC, if I could just be
clear in my mind, how was the trustee, how was Picard
appointed?
Mr. Johnson. He is really appointed by the bankruptcy
court. They have an opportunity to review who the potential
trustees may be. There will be recommendations that will be
made. They will check to see if there are any conflicts of
interest. And then they will go forward and go through that
selection process.
Mr. Picard is obviously someone who has been involved in
this industry for a long time.
Mr. King. Let me stop you, because time is running out.
Did SIPC make any recommendation on who the trustee would
be?
Mr. Johnson. Yes, we do make a recommendation regarding who
we think would be a good trustee.
Mr. King. Who did you recommend?
Mr. Johnson. Who did we recommend?
Mr. King. Yes.
Mr. Johnson. I believe we recommended Mr. Picard.
Mr. King. Mr. Picard. So, in effect, we have the court
selecting a trustee that you recommended, and the argument can
be made that he is now putting a tremendous effort in to
protecting SIPC's funds, that, rather than protecting
investors, he is actually working to protect SIPC, and to me
there is almost an inherent conflict of interest in that.
I know the court made the final decision, but the
recommendation was made by SIPC. And it seems to me if we are
going forward with recommendations in the future, maybe trying
to correct the injustice of the present, we would find a way to
have a much more independent person appointed as trustee in
which SIPC would have no input whatsoever.
Mr. Johnson. Let me make one thing clear. I don't think
that we need a trustee to protect SIPC funds under any
circumstances, because these funds, from my standpoint, don't
belong to any of us. These are funds that should be utilized in
order to protect the customers.
What we are trying to do is make sure that whatever the
role of the trustee is going to be utilizing is going to be in
compliance with the law. Now, we do have a certain
responsibility as we manage this fund, but we are not in the
business of trying to figure out how to get as few people
helped as possible. But we are in the business of making sure
whatever policies and procedures we use can be protected under
the law.
Mr. King. But to me, looking at the record, what the
trustee is doing is not trying to protect as many people as
possible, but he is using--apart from the fact he has already
gotten, I believe, $36 million in fees authorized to himself, I
just think--I have seen runaway prosecutors, special
prosecutors, and to me what I am seeing in this is a runaway
trustee who is putting innocent, wounded people through
increased suffering.
I know even as--Professor Coffee made the statement. He
said, people we might think are innocent. Don't we have to
assume they are innocent? Is there any reason to think that any
of the people in this room who lost millions of dollars and are
now being put on the rack, is there any reason to assume they
are not innocent?
There is almost an inference here that the trustee is being
hired because--or has been appointed or his job is to find out
those who may have been involved and we think others are
involved, when there is no evidence that they were. And to me
the presumption should be that these people are innocent, how
do we help them, not put them through the incredible ravages
and suffering they are going through right now.
There is something wrong about the system. I think somehow
we are standing back at 30,000 feet and we are saying, okay, we
dropped the bomb and there may be collateral damage, but we are
not really--that is what happens in war. The fact is there is a
lot of collateral damage right now and it is from people who
are already damaged and are now being collaterally damaged
again. And I don't know if we are really addressing that, the
inequity, the injustice, the horror of that.
Mr. Johnson. I think, Congressman King, your point is well
taken, and one of the things that I have tried to do as
chairman is to make sure that we start out with the proper tone
as to how we are going to go forward dealing with any of the
individuals who have been victimized.
I think the role of the trustee is one that is difficult
and complex in that when you begin to start to go through the
process it is unclear who may be complicit, who may have
engaged in wrongdoing and who has not. But the one thing we
have made clear is that we wanted to make sure that everyone
had an opportunity, even if you ``received a service of a
document,'' that you had an opportunity to come in and speak
with the trustee. Because our goal is to make sure that we are
going after the correct individuals.
We are not trying to simply just go after anybody for the
sake of going after anybody. We understand that this is a very
sensitive issue, and we sympathize with some of the horrors
that individuals have gone through. And we want to make sure
that at the end of the day, that process is taking place in a
way in which we will all be comfortable.
That is basically the commitment that I would like to
continue to make here today.
Mr. King. If Mr. Ackerman will just give me time for one
more question, one more statement. If that is the case, then I
think someone should tell Mr. Picard. Because I have spoken to
many of these people, and they described to me what they are
going through. They are not being treated as citizens. They are
being treated as defendants. They are being treated as
criminals. And there is a high-handed, arrogant attitude by the
trustee towards these people.
And I think something has to be done, that the message
should come from you or the court or someone, but to tell him
to knock it off and treat them like victims, not as criminals.
Mr. Johnson. Your point is noted, Congressman King.
Mr. Ackerman. And I will also note for the record that
there are compassionate conservatives.
Mr. King. I take exception to that.
Mr. Ackerman. You are exceptional.
Several things. These letters that are going out aren't,
hey, I am from the government. I am here, and I want to help
you. These letters set the tone of a very adversarial
relationship, and it is scaring a lot of people. It is now us
against you or you against us. And these are people, not if
they might have been victimized, they are victims.
What kind of attitude is it, they might have been
victimized? Is there any question that they have been
victimized? People who have directed their entire lives and the
future of their families after working hard over their lives
and doing the right things wind up with nothing in an account
and being told they are accomplices to spending stolen money?
That is pretty adversarial. And you have to give it back, even
if you don't have it, and if you have a problem with that, come
and talk to me.
I understand your argument, Chairman Johnson, that you
don't want to put the crooks in charge of setting the dialogue
by having the Ponzi scheme operator send you a statement. But
just because the guy lied and put that as the bottom line on
the statement, you believed it, and therefore you are guilty of
something and therefore the crooks are in charge of the agenda
and it is your fault for believing the bottom line--let me tell
you something. Your government, my government, our government,
the Internal Revenue Service was very pleased, was happy, was
delighted to rely on the bottom line in collecting taxes and
going after them if people didn't pay based on that bottom
line. We empowered that bottom line as being gospel and telling
people they had to pay based on that bottom line because that
bottom line was the bottom line. And why didn't the government
investigate? Why didn't the government do it?
This whole thing is bizarre. It is Kafkaesque.
``First do no harm'' should be the rule. It was cited here,
and properly so. But instead of the Hippocratic Oath, we are
taking the hypocritic oath. We are saying ``first do no harm''
and then going after these people. The whole notion is weird.
My colleague, Mr. Garrett, talked about the SIPC logo. This
is the SIPC logo. People look in shorthand, they look for
symbols, they look for things, and this is the way we conduct
our lives, fortunately or not. And we all get those little
statements from our financial institutions 15 times a week with
all that fine print, and it is folded in 16 pieces, and we
don't read it, and we throw it out. And sometimes we say, who
made these people send this out? And then I scratch my head and
say, oh, my God, what have we done?
But we don't read those things. We do the shorthand. People
go into the bank. It says, ``protected by the FDIC,'' and
people believe they know what that means. It is the government
standing behind and they have insurance up to a certain amount,
that we just increased in this last Congress, and they know
they got insurance and the government is standing behind it.
Then they go to their broker, and they see this, and it
looks kind of like the same kind of deal. And you go to your
guy to make an investment, and he hands you his business card--
and we just pulled two out of the fishbowl that we got. And on
it, it says he is a member of the NASD and he is a member of
SIPC. Everybody's business card, they are proud, they are a
member of SIPC. That is code for ``you are protected'' and
Uncle Sam and the government are standing behind you.
You go into the guy's shop and you go to your broker-dealer
and this is on the door. And if you looked them up, like I used
to do not too many years ago and those of us who are
technologically challenged, and you go to the Yellow Pages and
his ad has this in it, his stationary has this on it, his radio
ad tells you, his TV ad tells you. You go to the Internet and
he is advertising he is a member of SIPC.
And you see what it says right under the logo: Securities
Investor--that is me--Protection--that is what I need--
Corporation--that is what I have. And instead of a dot on the
I, guess what we have? We have the American eagle, just like on
my stationary and on the shield of the President of the United
States and the Supreme Court.
That is shorthand for ``your government is standing behind
this.'' And we have allowed this to happen. It is, ``I am not a
real doctor, but I am playing one to fool you,'' and your
government is accepting it, and you have insurance for
$500,000, except you don't have anything.
We have a moral responsibility to these people, do we not,
or am I missing something? Question mark?
Mr. Johnson. I think we do have a responsibility to these
people, and I think when we look at things, we have a
responsibility to every victim who was part of a scheme. And
one of the things that we have to figure out is how we balance
and whether we do it the right way or do it the wrong way, how
do we ensure that we are not simply going to benefit those who
by the luck of time got out at the right time, as opposed to
those individuals who may not have been as fortunate.
Mr. Ackerman. If you got a transfusion first, we should
take out the blood to give it to somebody who is a pint short?
Mr. Johnson. I wouldn't take out the blood, Congressman, in
order to have somebody take their lives away, but we do give
blood to others from time to time who are in need. And one of
the things that we are simply trying--
Mr. Ackerman. Shouldn't that be a collective decision that
we do as a society and not have a trustee decide who to go
after and take their blood back?
Mr. Johnson. I think maybe the role that Congress will end
up taking is to help us to get more specific guidelines as to
how that needs to take place, and I think we will be more than
happy to vigorously follow that rule until whatever way
Congress decides to move forward.
Mr. Ackerman. Yes, but we are looking to you. This is not
King Solomon's court, and none of us pretend to be. And it is
an awesome responsibility. And you by virtue of the fact of the
role that you have looking forward, which I agree is your role,
and sometimes we have to see how to fix the problem looking
forward, what we do about the collateral damage, as Pete King
said that we have left behind, the carnage here. We shouldn't
be trampling on the bodies of those who are injured in order to
help those in the future. We have to try to help everybody. And
you don't do that by further wounding those people who are
suffering.
It is not taking away. We are where we are. It is a static
situation right now. Do you go in and further probe the wounds
of those people who may or may not have the wherewithal to do
anything to give to people who are ``net losers,'' who may be
richer than the net winners? I don't know how you figure this
thing out.
We have some legislation on the people who went through
broker-dealers and third parties and all that to give them up
to $100,000 insurance each. As a society, maybe we who are
complicit in it, which is society and us and you and everybody
else for letting this happen, to say, okay, this is the help we
have to give people. We all bore the responsibility, and we
have to pay for it.
It is not just voter education. We all know you can't go
over the speed limit, but we still put cops out there. People
rely on the cops to enforce the law, and our cops haven't done
that. Everybody thought they were doing what they were supposed
to be doing and then find out their whole world is topsy-turvy.
My time is up.
Mr. Garrett. Thank you.
I wasn't sure where you were going with this King Solomon
reference, but in the case of King Solomon, of course, we all
know the story from the Old Testament. At the end of the day,
of course, he didn't slice the baby in half and the baby
survived. I thought he was going to go and suggest that in this
case we are slicing the baby in half and making that wrong
decision, and then the penalty is on both the mother and the
dead child.
So just to follow along then also where Peter--the
gentleman from New York, excuse me, was saying with regards to
the trustee, just two quick questions there.
One question we get oftentimes is, do you know what the
trustee has billed SIPC so far and where do those funds come
from actually?
Mr. Johnson. Yes. I think he has billed the court about $39
million.
Mr. Garrett. $39 million.
Mr. Ackerman. Did he get paid on time?
Mr. Garrett. The question from almost the peanut gallery,
from my colleague here, is does he get paid on time and where
do those funds come from?
Mr. Johnson. They come from fees that are paid by SIPC
members.
Mr. Garrett. So, in essence, it comes from the same pot of
money.
The question was asked by the gentleman from New York with
regard to the appointment of the trustee, and I understand your
answer. But over time, not just in this case, is it just the
norm with regard that SIPC makes a recommendation for a
trustee, and is it the norm that the judge would approve that?
Mr. Johnson. It is the norm for SIPC to make the
recommendation, and it is simply up to the judge. And I can't
say that I know of other circumstances where the judge may not
have accepted that recommendation, but at the end of the day,
it is completely in the judge's discretion.
Mr. Garrett. Do we know, in other cases, does the investor
class or anyone else make recommendations to the court as to
who they would--
Mr. Johnson. We make the designation basically by statute.
So if the statute was different, then it would allow others to
be able to make the call. But we are designated by statute to
do so, so that is why we really don't have any other third
parties that are involved.
Mr. Caruso. I don't believe investors would have the right
to propose their own trustee, at least initially.
Mr. Garrett. Just a quick question--
Mr. Coffee. Your statement is correct. It is SIPC who makes
the recommendation. The court simply decides if the proposed
trustee is qualified. So there is a strong presumption in favor
of the SIPC nominee.
Mr. Garrett. Does anybody here on the panel suggest that is
good, bad, or should be changed?
Mr. Coffee. I think SIPC is very much overseen by the SEC
in this regard, and it is the SEC who has asked SIPC to
generate a list of potential trustees in advance. So I think
this is a combination of the SEC and SIPC that has developed
this approach of developing a list of potential trustees in
advance.
Mr. Garrett. Okay. And does anybody suggest that is not the
appropriate--some of you said looking forward, so, looking
forward, is this something we should be looking at?
Mr. Johnson. In terms of that whole process, that is on the
table in terms of what we are looking at during the Task Force.
The way we are looking at the Task Force is we want to take a
look at everything that we are doing from top to bottom. We
just went and had a complete full view of the operations of the
staff, which was something that I wanted to have an opportunity
to take a look at. So we have everything on the table in terms
of how we think we can best protect investors and customers
when this is all said and done.
Mr. Garrett. Okay, would one of those other things--and
anyone can answer this question, and this was in my opening
statement--was the question regarding how net equity should be
calculated and the question as far as access to the records to
the investor class in order to help make those determinations.
I understand that--obviously, it will be critically important
for the investor class to be able to have those information as
well as SIPC to have them. But, right now, I guess they are not
done.
I understand the SIPC trustees--SIPC's formulation could be
called into question if you were to have access to those
records and to look at those records and to say in those
examples that some of you are raising that, yes, some of these
transactions over the last--how many years--couple of decades
were actually legitimate transactions, right? And so when I got
my statement I put in a half million on and it said $3 million,
maybe $750,000 of them were actually legitimate transactions,
right?
So when you all figure out the net valuation on that, you
want to know that, right? But if the investor folks don't have
access to the information, they are not in a position to argue
that. So what are we doing with those records?
Mr. Johnson. That point is well noted, and I think from my
standpoint I don't really see a reason why they shouldn't have
access to that documentation, and that is one of the issues we
will look at and make the recommendation potentially with the
Task Force.
Mr. Garrett. But where are we right now on that?
Mr. Johnson. I am sorry?
Mr. Garrett. It is in the court right now. Is this
something that can be changed with regard to what is going on
right now?
I am not talking about Mr. Caruso's fine comment saying
what do we do in the future on the next Madoff? We are talking
about the situation right now I guess for some of the folks
behind you. Can we say that tomorrow this information is
available, or where are we?
Mr. Johnson. In terms of where we are right now, I am not
sure if we have the authorization to make that available. But
that is something that we can take a look at, and if we have
the authorization to do so, we will.
Mr. Garrett. So there is a question of whether SIPA itself
may need to be amended in order for that to occur?
Mr. Johnson. That is clearly the case.
I make it very clear that is a statute that really hasn't
been reviewed for about 40 years in a serious way, and that is
part of the reason we are trying to figure out how to get this
statute to be more flexible to be able to deal with the issues
that we are currently dealing with in this type of market, in
this type of investment climate, and understanding the type of
investors we are dealing with right now.
Mr. Garrett. Just so I am clear, that needs to be done, and
you don't have the flexibility under the current language?
Mr. Johnson. We are reviewing it, and we will determine
whether or not we have the flexibility under the current
language. So, in the event that we do not, that may be a
recommendation that we may move forward with.
Mr. Garrett. All right, then you just opened up the next
question then when you said you are trying to determine this:
How long does that take in order to determine it? Because I
think that is the information I would want yesterday.
Mr. Johnson. That is information that we can find out very
quickly; and as soon as I have that response I can get it back
to you, Congressman. But I can't imagine it would take us a
long time to make that determination.
Mr. Garrett. Thanks.
The gentleman next to you?
Mr. Borg. I was going to make an analogy to some of the
cases that are non-SIPC. Most of the cases I prosecute, my
office prosecutes, are Ponzi schemes with fictitious securities
and whatnot, but there is no SIPC coverage or there hasn't been
in the past. I would like to see nothing better than everybody
get all their money back, but I am not so sure how you can do
that.
Mr. Garrett. Hold that thought. Can you explain how it
comes about that they are not going through SIPC?
Mr. Borg. Historically, because the securities are not
either held by a broker-dealer. For example, private placements
is a big area for us, the Reg Ds. We have complained about this
many, many times.
The sales have that occur through a broker-dealer, it might
be a private placement where they get an LLC partnership, a
limited partnership type certificate or something. The
certificate is not held at the broker-dealer. It is not in
inventory.
They do get account statements, because there is a report,
and they will actually get, say, that according to your oil and
gas well or whatever it may have been, you have ``XX'' dollars.
Historically, that has not gone through SIPC, and I guess I
have had this discussion with SIPC since the mid-1990's on
that, but there was no interest from any government body at the
time to take that on up. This goes back to the microcap area
that I testified to in the Senate back in 1996.
As a practical matter, though, the Ponzi schemes that we
oversee end up having a very limited pool of funds. Although we
very rarely see the claw-back issue come up, because, quite
honestly, these Ponzi schemes usually don't last 20 years. The
ones we see on a local level are a lot shorter in duration, and
therefore, the time value of money is not really that
significant. And let's face it, most of these folks don't want
the cheese, they just want out of the trap and to get their
money back, if they can. Most of the time it is pennies on the
dollar.
I am going to suggest, though, if we are looking at things
like covering the Stanford matter, I have five cases right now
in the last year. That is another $7 billion that need to be
added to that.
What is not reported is that Stanford and Madoff, just
because of sheer size, are not unusual cases. They are unusual
because of the size. I have one case that had 18,000 victims in
it, but the dollar numbers were small because we caught it
early. But, that being said, there was no coverage there.
I think that as much as I would like to get everybody
coverage, if you are going to cover the fictitious securities
outside of the broker-dealer custody area, you are probably
going to look at a several hundred billion dollar fund that
needs to be funded, and that is going to take time, depending
on what you do with the assessment.
I would love that to happen. I don't think it is practical,
at least under the current standards. But I do think--let's not
forget, I think, that there are other frauds out there that, if
we are going to expand coverage, we need to do it for all
Americans and all frauds, not just a Stanford fraud or a Madoff
fraud. I can give you a list of 20 that we have prosecuted in
the last 12 months that range from anywhere from half a million
dollars to a couple hundred million dollars. The effect of
losing your retirement funds to Madoff--
Mr. Ackerman. I think all of the legislation that we have
cited here that we have proposed is not Madoff-specific, but
they apply to all Ponzi schemes, some of them within a
timeframe.
Mr. Borg. I think that is something that really does need
to be looked at, and I compliment you for that.
Mr. Ackerman. Mr. King.
Mr. King. Thank you, Mr. Ackerman.
Mr. Johnson, what rate, if any, does SIPC give to the final
statement?
Mr. Johnson. I am sorry?
Mr. King. I said, what rate, if any, does SIPC give to the
final statement in Madoff?
Mr. Johnson. The final statement has to be part of the
analysis, because that is where we begin to determine exactly
how we got to this point and then we start to look back from
there. So in terms of the final statement, we have to begin
with something, and then once we start to go through the
analysis regarding how did we get to that point, that is when
we have to determine whether or not it is fictitious. And the
bankruptcy courts and SIPC and the trustees have reviewed this
issue for a number of years and we have found that in instances
where it is fictitious, the courts will come in and make a
decision that is something we have to look through and go to
find out what the real loss is going to be.
So we do have to begin with that and then hopefully try to
draw some type of analogy as to where we are supposed to end
up.
Mr. King. Does it weigh at all in determining the
reasonable expectation of the investor or what the reasonable
belief of the investor was?
Mr. Johnson. Oh, sure. No one is saying that we have a
situation where you get this statement that someone is
complicit and therefore should not have had some type of
reasonable belief.
What we are trying to do is to make sure that, even when we
go through that analysis, we have a bigger picture to
understand, that although you may have believed this was the
case, and in most Ponzi schemes you have a lot of individuals
who believe that something actually belonged to them and the
responsibility of the third party is to come in and make clear
what really belonged to somebody else and try to figure out how
you balance that equation so more people are going to be
benefited when it is all said and done. That is the same
practice that we go through.
Mr. King. Moving on, I guess my concern--first, I thank all
of you for your testimony. Obviously, this is a very complex
situation.
But I am just wondering after all of this, if another
Madoff scheme occurs 10 years from now, is there any reason to
believe that investors would receive any more equity than they
are right now? With all of the recommendations that are coming
out here, unless we set up a fund of several hundred billion
dollars, it would appear we could be back in the same place 10
years from now where you have innocent people who took the
money out, relying on a statement which they thought was
guaranteed by the government, and they then get clawed back;
and then others who left their money in, also, they are in a
terrible situation, too.
Is there anything that is coming out of this hearing or any
of the review that would make the situation any better 10 years
from now for innocent people in a Madoff-like scheme?
Mr. Johnson. That would be the hope. The idea is when you
look back to when the first Ponzi scheme came into play, we
would have hoped we would have never had to see that happen
again; and our primary goal is hopefully trying to put in place
some modernization that will make our statute flexible enough
to be able to deal with those things that we can't imagine.
The biggest issue that we have is that the 1970, the
current statute we had, could not have anticipated this, and we
are hoping we are going to put something in place that would
deal with this.
Mr. King. I guess what I am saying, besides hope, is there
any reasonable expectation for the hope we would be able to
protect a person who took his money out, say systematically
relying on the statements, took the money out over the years
and now is suddenly confronted with a massive claw-back which
is going to destroy that person, destroy that family, destroy
their business, and also destroy any hope of financial security
for their children and grandchildren?
Do you see anything coming out of the discussion so far
that would protect those people in the future, in a large-scale
scheme such as this?
Mr. Borg. I have listened to Professor Coffee's idea. I
don't think that under the current system, if another Madoff
happened in 10 years, you would be any different. I think where
you would be different is if you do set the limitations on the
claw-back that Professor Coffee has suggested.
Because, from my point of view, there is also a limited
pool of money; and, historically, in the cases that we have--
again, the non-SIPC, because that is where most of our
experience is--we always have, for example, $10 million. That
is all I have. That is every asset. We have taken the houses
and the lands and whatnot, and I have $100 million worth of
claims.
The only fair way I have been able to do it, without having
any SIPC coverage, is to say if you put in $100,000 and you
took $50,000 out, yes, I know that you were expecting that was
interest. But I have somebody here who put $100,000 in and
never took anything out. Therefore, your loss has to be $50,000
and their loss is $100,000. And then when I do the mathematics
pro rata, you are all going to get the same sort of share of
the loss, as opposed to trying to make you whole.
If you have an unlimited fund or a fund of $500 billion or
something like that, then, of course, you can do different, if
you have that expectation and you can cover anybody's
expectation. I don't think it is practical to cover everybody's
expectation for the full amount without some limitations, 10
years, 5 percent, 10 percent, whatever it is, though I do think
10 percent is high in the current economy. I would love to get
10 percent on a CD at a bank, if I could.
But whatever the number is, I think the important thing is
that we have a finite number to start with, and that is a
finite number that has to be divided. If I have five people in
my family and there is a lemon pie, I can cut it into five
pieces. But if somebody already has a piece, I am not sure they
are entitled to a full piece the next time around.
Mr. King. Let me start with Professor Coffee on that. Have
you done any of the math if that reasonable expectation was
built in over the years, how that--
Mr. Coffee. Let me take Mr. Borg's example, and take it one
step further. If you put in $1 million and you take out $50
million--and there are those cases in Madoff--I do not want to
totally disarm the trustee. Trustees in bankruptcy for the last
500 years have had the power to attack fraudulent conveyances.
I think we would be sweeping too broadly if we totally disarmed
the trustee.
I understand your concerns. I think the better way to deal
with the people you are most sympathetic to is to create either
a de minimus test, saying if it is only $500,000, $700,000,
some number like that, that you took out, that is immune. Or
your personal assets, your home is immune. Or we could say we
are going to give you a minimum return of 10 percent a year
because you have been invested in here for 10 years. All of
those techniques would reach most of the people you are talking
about.
But if we were to disarm the trustee entirely, the next
case may come along and you are going to be having a
congressional hearing as to why this trustee couldn't do
anything when there was real fraud going on here. So I am
saying be careful about how broadly you disarm the trustee.
Mr. King. I realize that dilemma is there. I am just
wondering, has anyone done any research on what the impact
would be if it was 8 percent or 9 percent or 10 percent had
been built in as the reasonable rate of return over the years,
how that would affect Madoff investors?
Mr. Coffee. Madoff went on for over 20 years, maybe 25
years or more. If you used compounded interest, you would be
able to get up to 3 or 4 times what you invested and be exempt
from any kind of claw-back.
Mr. King. Thank you very much.
Mr. Ackerman. Can I come back to the pie? What if you
discovered suddenly that you had more pie than you thought?
Mr. Borg. I can tell you from my personal experience on the
occasion where we do have more pie than we thought we make the
pro rata distributions go up. It is almost like all the victims
would get--you get a dollar, a dollar, you raise it all up.
Mr. Ackerman. Would you continue to try to stomach pump the
guy who ate the first piece of pie?
Mr. Borg. If I had enough to go around? I personally
wouldn't. I do not like claw-backs. I have very, very rarely
ever done a claw-back.
But, again, most of my Ponzi schemes are not 20-year-long
Ponzi schemes, so the claw-backs haven't been significant
enough to even make that determination. But if you have more
assets and you can cover all folks, then why do the claw-back?
Mr. Ackerman. If you somehow discover that you have more
pie, I am sure it is not going to be enough to cover
everybody's total expectations, and probably not even if you do
the imputed interest that my colleague, Mr. King, was inquiring
about. But would you discontinue doing harm to those people who
already ate the pie? They could have eaten that pie 3 years
ago.
Mr. Borg. That is true. But there are some folks who tried
to save that pie and put it over in the fridge and didn't eat
it, and now they don't have it at all, so they never got the
benefit of the first piece of pie in the first place.
Mr. Ackerman. Yes, but those people may have six other
pies.
Mr. Borg. Yes, but the problem with that is we don't get
into--at least I haven't, and I am not talking about the Madoff
situation because I am not involved in the Madoff trustee case.
That is why I don't know the details. But in the cases we have
where we have seen that someone else has a lot of assets, the
point is they are still entitled to protection under my statute
and they are entitled to cover that.
Mr. Ackerman. Exactly.
Mr. Borg. If I have excess property, I probably don't have
much of a case to worry about, because I have enough money to
go around.
Mr. Ackerman. Not excess, but more than you thought you
had. Nobody is going to get excess, because there wasn't enough
money generated.
Mr. Coffee. We do have a $50 billion loss here, and even if
there is more pie here, it is going to add just a few more
pennies, a few more dollars to the recovery of the entire class
of victims.
Mr. Ackerman. One of the things that I think we would like
to look to you towards, you are tasked with the responsibility
of what we do in the future to make this situation better for
future investors, and you guys are looking at this in a lot
more depth than the total Congress or even this committee. We
have lots of other legislation and stuff that we do, despite
the fact that the victims would like to think we are doing this
and this exclusively full time. Everybody knows we have a lot
of other balls that we are trying to keep in the air. So, you
guys, this is your job as well. We are not begging off at all.
But it would be useful for us to hear your suggestions for
the future to treat people fairly and equitably and justly. Why
wouldn't those recommendations that hopefully you will make
sooner than later be applicable to the people who were already
victimized as far as how we approach this? If this is the way
we should have done it because we are going to do this in the
future, why can't we backfill and see if we could be helpful to
these people that way?
Mr. Johnson. Really what that boils down to, it would be a
legal question. If it turns out that, pursuant to the law, that
we can look back, then that is something we can take into
consideration. But if the law, for example, sets certain
specific guidelines, like, for example, we have been talking
about how far back the trustee can go, the law actually has a
limit as to how far back the trustee can go, and that is 6
years. You can't get beyond that timeframe in terms of doing an
analysis.
So what we would be looking to do is really to be in
compliance with the law. If it turns out that the law allows us
to be able to look back in some way, then that will have to be
taken into consideration as we go forward in making
recommendations. But that basically would be what we would use
as, hopefully, the parameter as to how we would make the
decision of what we would do retroactively.
Mr. Ackerman. If you are tasked with the responsibility of
looking forward, it doesn't mean that you can't look over your
shoulder.
Mr. Johnson. I don't think we can really adequately know
what to do for it unless we have looked back over our shoulder
to do a real analysis as to where we came from.
Mr. Ackerman. My question is, if you are making judgments
based on what you believe is just--I am asking a theoretical
question--why should that not be applicable? Why should we not
use that as a standard?
Mr. Coffee. We sympathize. I am not saying we can't. But
this is a private insurance system, and if you suddenly decide
you want to cover losses that the insurance system never
reserved for, you are going to sink the insurance system. That
is the problem of Alan Stanford. If you ask broker-dealers to
cover fraud-related damages, that is the kind of liability that
dwarfs what is in the fund.
Mr. Ackerman. I don't want to go back and beat a dead
horse, but I know that we all know that this private insurance
system was inadequately funded. Now, whose fault that is, is a
matter of speculation on people's part, and I think there is a
big shared responsibility here.
I would say it is not the fault of the guy who walked into
a broker's office and saw this. It is not his fault or her
fault. We have allowed that to perpetuate in a myth that these
people were adequately protected.
The hospital hires a guy who is not a real doctor and he
operates on your kid, God forbid. There is a liability here.
This guy who hung up this certificate to operate on your
finances wasn't protected with the insurance that you thought
he had, and your goal is to try to fix that in the future. But
the way that you fix it in the future I would think would set a
moral tone to the responsibility that we have to look at as far
as how do we help the people who already took a hit, and not
only that they already took a hit but, with the claw-back
thing, are going to continue to be traumatized.
Before I move on to my colleague, I just want to--and this
is not your responsibility either, but the government should
not be the ultimate beneficiary of the ill-gotten gains of
Bernard Madoff. And that is our job, to try to figure out how
to fix that. Some of us have some legislation that is moving
forward in the Congress.
Mr. Garrett?
Mr. Garrett. Thanks.
So, just to wrap up, so the gentleman from New York often
holds that logo up and the issue of what the expectation was.
As I sit here listening to that and sit here also thinking
about what we have done in Congress over the last year-and-a-
half and what the Fed has done, I think we are probably in even
a more difficult position than ever before as far as lowering
the level of expectations, regardless of what SIPC did or
didn't do in this situation.
I can make the suggestion, oh, what we really should do is
just send out a blanket notice to everyone who comes in the
dealer's office and say you are not protected for X, Y, and Z
in big bold letters or something like that so everyone would
know, and you all say education or what-have-you.
We already had a law to that effect on something that I
use, and that is the money market fund. Every time I call up my
money market fund, I get an automatic recording at the
beginning or the end of the phone call that says these are not
FDIC-insured so there is no protection by the Federal
Government. I knew that going in, that there was absolutely no
guarantee.
But guess what? At the end of the day, when the Reserve
Fund had a problem and there was a problem on Wall Street, all
of a sudden they basically were guaranteed, and they didn't
want all the funds to break the dollar at that point.
We just created something, and I guess the appointment was
made this past week, of a new CFPA, Consumer Financial
Protection Agency. So now the American public really doesn't
have to worry about anything, if you listened to the testimony
over the last several months, because we have an agency out
there that will protect us from ourselves, and any investment
or any--not securities per se under the CFPA, but any financial
product that is out there, because the CFPA is going to be
watching out for us.
So regardless I guess of what SIPC does in this regard, we
know that the good faith and credit of the United States
Federal Government will be behind any future financial activity
that I engage in and I should be able to look to the Federal
Government.
I think that is a problem that you will have going forward
to be able to actually, whatever your recommendations are, to
delineate exactly what your responsibilities are, whether it is
$500,000 or $1 million, as some people say, or something else.
The folks at home are going to think, no, it is not. The Fed is
going to step in, Congress is going to step in, just like they
did in these other situations, and it is irrelevant.
So you have a difficult job ahead of you to try to
reeducate and convince the public that there are limitations to
this.
One question on that, though--and I know you weren't around
back then--but back in 2003--you were around someplace in 2003,
but you weren't here--the GAO and Members of Congress warned
that the size of the fund wasn't the right size, I guess, and
should be increased. I guess that was done.
So if you want to comment on your understanding of what may
have occurred back then to your best analysis, your best
opinion on that. But more to the point where you right now, now
you have at $2.5 billion. Is there statistics or an actuarial
analysis to say that is the right size? Because I think some
other folks here were suggesting that should be a much higher
figure.
Mr. Johnson. That is actually, I would say, one of the real
conversation points that we have as it relates to the Task
Force, how do we right-size that number? And a lot of it really
boils down to what would be the ultimate responsibilities that
we would be taking on at SIPC.
If, for example, Congress were to decide that SIPC should
be in the business of protecting against fraud, then that
number would have to be a completely different analysis that we
would have to go through. It could be a situation why you take
the number up to $10 billion maybe that we are raising from
fees and therefore you never tap the Treasury line. That would
be an analysis of how we could figure out what number we need
to be at.
But part of what we are going through with the Task Force
is really going through an analysis and hiring those to be part
of the process to help us figure out how do we right-size what
that number is. And what it really boils down to is what are
the responsibilities that the Congress wants us to take moving
forwards, and that would help us be able to get to that point.
Mr. Garrett. Of course, the issue of fraud, most people
coming into the broker don't differentiate what they are being
protected for right now. It is just like I don't differentiate
under the FDIC what I am being protected for. I am just
protected to the limits.
Which goes to a question, Mr. Borg was saying that you
dealt with cases outside of SIPC, right? So it seems to me we
are talking about maybe two different things here when you are
talking about claw-backs and what have you. In your non-SIPC
case, then you are just dealing with--what--an estate, right?
And you are taking this little estate or big estate and saying,
how am I going to divvy it up and maybe use some of it? If it
was long term, present value of money, you might have done
that. If it is short term, you are not going to do that, right?
Mr. Borg. That is correct, on a cash-in, cash-out basis,
plus whatever you took out.
Mr. Garrett. Exactly. But here we are dealing with that,
and so you have to make those decisions, and I understand that,
and with regards to the issue about the statements and
everything, and you understand that.
But here you are talking about something else with SIPC,
right? Because you are dealing with--what--sort of my way of
thinking, an insurance policy but a separate pot of funds that
you have collected over the years from the dealers.
There that is different in my estimation with regard to how
that should be treated. Because that is really where the
expectation--when I come in, I see that thing. I think, if I am
smart enough--I'll bet you most people don't even ask how much
I am covered for, but if is up to $500,000, then it goes to Mr.
Coffee's comment. If I invested $500,000 20 years ago and now
it is $50 billion and I took out $50 billion, I still have an
expectation, just like I have--I am sorry I used the word--an
insurance policy for $500,000 worth of coverage, regardless of
whether I took it out or not. That is different in my
estimation of what you are doing or you are also doing with the
estate residual. Is that correct?
Mr. Borg. Yes, sir, that is absolutely correct. That is why
I was trying to distinguish the SIPC coverage from the non-SIPC
coverage, only from the point of view of anything over that
amount we still have to do some sort of proration. My point was
really that the coverage is going to depend on how big a pot
you have to deal with.
Mr. Garrett. But only for the residual, not for the
$500,000.
Mr. Borg. Exactly. I think we are saying the same thing,
but I was using that as an example to show what else is out
there on the net equity type calculations.
Mr. Garrett. Right. So when you give the example you did
before, if somebody invested a million bucks, so he thinks he
has $500,000, right, and he took out--what did you say--$50
million over the last years, but the statement comes out and
still says I have $1 million on my statement today, right, that
person should still have the correct interpretation that he has
a half a million dollars worth of coverage or protection and
there should be absolutely no claw-back for that $500,000,
correct?
Mr. Coffee. There is never a claw-back for the SPIC funds.
The claw-back is for the amounts that were earlier distributed
that were fraudulent conveyances, arguably.
Mr. Garrett. Right. That is why I wanted a clarification on
Mr. Borg's comment.
Thank you, and I thank the panel, too.
Mr. Ackerman. I have one question, and then we have Mr.
Klein.
Has any thought been given to, as you point out, the
private sector? Because this is private-sector insurance, the
private sector that made so much money over the years on
people's investments, huge profits, underpaying insurance to
give people--that in effect gave people a false sense of
confidence, that they stepping up to the plate and increasing
the size of the pie by putting in whatever by whatever
formulaic circumstance additional amounts, perhaps based on a
recalculation of what a reasonable premium should have been,
because they indeed stand to profit--made a profit and stand to
profit additionally by restoring investor confidence in the
market.
Mr. Johnson. I think the role of--
Mr. Ackerman. Or is that too sensitive of an issue for you
guys to go to?
Mr. Johnson. I think the role--I guess what I was kind of
trying to mull through in my mind is the role of private
insurance. It sounds like what we are talking about is to
actually act as an additional backstop. Is that where we are
going with that, Congressman?
Mr. Ackerman. No. I am saying, hey, boys, let's chip in and
make this thing good.
Mr. Johnson. I see what you are saying. What we wind up
doing really is increasing the assessments. Because increasing
the assessments at some point is the only way that we will
actually end up getting the funding.
Mr. Ackerman. I know. But we have made a decision that the
assessments should have been a heck of a lot larger to begin
with. We are going to fix that in the future.
But has anybody given any thought to saying the guys who
are going to profit by keeping investors as investors, making
good to restore confidence and paying what they should have
paid in the first place into the fund?
Mr. Johnson. That is an area that we can take under
consideration.
In terms of how that role would be going forward, I am
unclear on how it would play out, but that is something that we
could take a look at.
Mr. Ackerman. I think that might be a good thing.
Mr. Klein from Florida.
Mr. Klein. Thank you very much, Mr. Chairman; and I thank
the panel and the people here today in support of a full
understanding of what can be done to fix this.
Obviously, there is the going-forward assessment of what
can we do to avoid something in the future, but I think we have
all heard from in our communities the people who have suffered
and have lost these resources and had certain expectations
based on the SIPC sign on the door and the rest of these
things.
So first, I want to associate myself with Mr. Ackerman's
and Mr. King's comments. I think they were strong, and I agree,
and they don't have to be repeated.
Certainly representing South Florida, where I am from, we
have had a whole lot of people who are very, very concerned
about the whole claw-back issue, again, based on expectations,
based on the fact that they paid taxes on monies they received,
and there doesn't seem to be any relief from that whole story.
This is a serious problem.
And the fact that there is a limited amount of pooled
resources available is making it even more complicated,
particularly based on Mr. Ackerman's last comment that there
was an underassessment in the first place. And I would agree
with that. I think there was a ridiculously under-assessed
issue. So I guess I want to stress the point about addressing
the claw-backs and even if we have to change the definition of
net equity to get to the right place here.
I think, again, the people who have come to me and talked
about this--and they have been on both sides of the equation
here. But, again, just in what is fair in terms of trying to
make it whole and make sure the SIPC lives up to its
obligations, maybe Mr. Ackerman's comments are the way to get
there, but I certainly want to encourage as quickly as
possible--this has taken a long, long time to get through all
these things. People have been suffering through having lost
these resources. Some had to make pretty dramatic changes in
their lives.
I also want to mention the Stanford issue, also, because
although it is complicated, again, it seems to me that these
victims also should be compensated under the SIPC as well.
So, again, I think the questions have been asked, and I
just want to be here to support very strongly, as quickly as
possible. A lot of frustration has gone on through this whole
thing.
And, again, I look at the victims, and that is one level.
But I also look at the investor public that really depends, and
our country's economy depends, on confidence in investing. And
if we don't have that kind of confidence, it creates a whole
lot of other problems.
And we are not looking to go back to the point in time
where people are putting money in their mattress. We want
people to feel when they invest and they are getting a
statement and they are dealing with people that, in the absence
of fraud, that they know where this money is and how they can
recompense themselves. And we have to have a structure going
forward that is set up in a way to make sure that the
resources--and the people who are benefiting from it, these
companies, have to stand up for it. And I think that is just
part of the deal.
So, Mr. Chairman, I won't take up any more time. But I want
to reflect on that issue in as strong as possible statement to
get the SIPC right on this and to get our folks who have been
impacted made whole.
Mr. Ackerman. Thank you, Mr. Klein.
The committee would just like one clarification of
something I think Chairman Johnson might have said on the issue
of claw-back. Did you say that the trustee was looking on going
back limited to only 6 years on the claw-back?
Mr. Johnson. We have a statute of limitation, I believe, as
to how far back we can go.
Mr. Coffee. Six years is the New York rules. And the
statute lets you use either the Federal rule or the State
rules. So 6 years is New York's.
Mr. Ackerman. So we are under New York law on this?
Mr. Coffee. The statute lets you use the Federal rule,
which I believe is 2 years, or the State rule, which is, in New
York's case, is 6 years.
Mr. Ackerman. So you have chosen the New York statute?
Mr. Coffee. I have chosen nothing. I am just a humble
academic.
Mr. Ackerman. Mr. Johnson?
Mr. Johnson. That is what the trustee has chosen. Yes.
Mr. Ackerman. So the claw-back can go back 6 years and no
further?
Mr. Johnson. That is correct.
Mr. Ackerman. Let me thank the panel. You have been very,
very helpful. This is a very complicated and emotionally
charged issue. We appreciate all the thought and the work that
you have put into it, and we know that everybody is going to
not be completely satisfied. Some people will be emotionally as
well as financially scarred forever, and we know you are doing
the best that you can. We have to do some work as well. But you
have been very helpful to us in our deliberations. I thank the
members of the committee as well.
The Chair would also note that some members may have
additional questions for the panel which they wish to submit in
writing. If you would answer them in writing to us, we would be
appreciative, and that would be made part of the official
record. Without objection, the hearing record therefore will
remain open for 30 days for members to submit questions in
writing and for the responses to be placed in the record.
Without objection, that is so ordered.
There being no further business before the committee, the
panel is dismissed with our thanks.
I have a script. Before we adjourn, the following written
statements will be made part of the record of this hearing: the
statement of Mr. Ron Stein, president, Network for Investor
Action and Protection; the statement of Ms. Ronnie Sue
Ambrosino, coordinator, Madoff Victims Coordination; a letter
dated February 22, 2010, from Mr. Stephen Harbeck, president of
the Securities Investor Protection Corporation (SIPC), in
response to Members' questions during the December 9, 2009,
hearing entitled, ``Additional Reforms of the Securities
Investors Protection Act''; a letter dated March 4, 2010, from
Chairman Kanjorski to Mr. Stephen Harbeck, president of SIPC,
encouraging the broad representation of the newly-created task
force to consider SIPA reforms; a letter dated August 20, 2010,
from Chairman Kanjorski and Ranking Member Scott Garrett to Mr.
Stephen Harbeck, president of SIPC, requesting claims data;
and, finally, a letter dated September 7, 2010, from Mr.
Harbeck, president, SIPC, in response to a request from
Chairman Kanjorski and Ranking Member Garrett requesting claims
data.
Without objection, it is so ordered.
The panel is dismissed with the thanks of the committee and
the Congress, and the hearing is adjourned.
[Whereupon, at 12:09 p.m., the hearing was adjourned.]
A P P E N D I X
September 23, 2010
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]