[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

                               ----------
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62-683 PDF                       WASHINGTON : 2010 

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

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

               PAUL E. KANJORSKI, Pennsylvania, Chairman

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
















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    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.]


















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                           September 23, 2010

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