[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]




 
                  A LEGISLATIVE PROPOSAL TO AMEND THE
                   SECURITIES INVESTOR PROTECTION ACT

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 21, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-53



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
PETER T. KING, New York              RUBEN HINOJOSA, Texas
EDWARD R. ROYCE, California          STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma             GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas              ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              KEITH ELLISON, Minnesota
MICHAEL G. GRIMM, New York           MELVIN L. WATT, North Carolina
STEVE STIVERS, Ohio                  BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina        TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida
ANN WAGNER, Missouri


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 21, 2013............................................     1
Appendix:
    November 21, 2013............................................    35

                               WITNESSES
                      Thursday, November 21, 2013

Friedman, Neil, a customer of Bernard L. Madoff Investment 
  Securities.....................................................    18
Hammerman, Ira D., Executive Vice President and General Counsel, 
  Securities Industry and Financial Markets Association (SIFMA)..     9
Harbeck, Stephen P., President and CEO, the Securities Investor 
  Protection Corporation (SIPC)..................................     7
Kogutt, Angela Shaw, Director and Founder, the Stanford Victims 
  Coalition......................................................    11
Shean, Suzanne, a customer of Stanford International Bank........    16
Stein, Ron, President, the Network for Investor Action and 
  Protection (NIAP)..............................................    13

                                APPENDIX

Prepared statements:
Friedman, Neil...................................................    36
Hammerman, Ira D.................................................    39
Harbeck, Stephen P...............................................    50
Kogutt, Angela Shaw..............................................    67
Shean, Suzanne...................................................   125
Stein, Ron.......................................................   151

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Written statement of the Financial Services Institute........   156
    GAO report entitled, ``Securities Investor Protection, The 
      Regulatory Framework Has Minimized SIPC's Losses,'' dated 
      September 1992.............................................   163
    Email from Stephen P. Harbeck, dated May 21, 2009............   171
Harbeck, Stephen P.:
    Written responses to questions submitted by Representative 
      Hultgren...................................................   172


                  A LEGISLATIVE PROPOSAL TO AMEND THE
                   SECURITIES INVESTOR PROTECTION ACT

                              ----------                              


                      Thursday, November 21, 2013

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:30 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, Neugebauer, 
Huizenga, Mulvaney, Hultgren, Ross; Maloney, Sherman, 
Perlmutter, Scott, Peters, Watt, and Carney.
    Chairman Garrett. Good morning, everyone. The Subcommittee 
on Capital Markets and Government Sponsored Enterprises will 
come to order.
    Today's hearing is entitled, ``A Legislative Proposal to 
Amend the Securities Investor Protection Act.'' I thank all the 
members of the panel.
    And before we turn to the panel, we will begin with opening 
statements. I recognize myself for 10 minutes.
    Today's hearing is to further examine legislation 
introduced by myself and also by Ranking Member Maloney, H.R. 
3482, the Restoring Main Street Investor Protection and 
Confidence Act.
    I want to begin by directly recognizing and commending the 
esteemed gentlelady from New York, my colleague, for all of her 
hard work and dedication to this bill and to this issue as 
well. It has been an honor, and it has been a privilege to work 
closely with her on this very important issue. I also do want 
to thank the panelists for coming, especially our two victims 
who have felt the full brunt of the two largest financial 
frauds in our Nation's history.
    I also want to specifically thank all of my fellow members 
of the committee, and the broader Congress as well, who have 
formally cosponsored this legislation that we are discussing 
today. I think right now we are at about one quarter of the 
committee on the bill. I hope that number continues to rise as 
Members learn more about this important subject.
    I also want to express my sincere thanks to Senators David 
Vitter and Chuck Schumer for introducing companion legislation 
in the U.S. Senate. Hopefully, now, with this bicameral 
support, it will aid us in coming to a more expedited 
resolution to this problem.
    Now, I want to make it absolutely clear that I am not 
advocating for this legislation because I am trying to score 
any political points. I am supporting this legislation because 
I have studied the law, reviewed past precedent, and analyzed 
the original congressional intent. And it is very clear to me 
that SIPC and the trustees are not applying the law as intended 
by Congress, and they are not adhering to their own past 
precedent, which has been affirmed by the courts. So the 
purpose of this legislation today is to reaffirm the original 
intent of the law and to correct the misapplication of the law 
by SIPC and the trustees.
    It is not some retroactive change of the law. It is a 
reaffirmation of it. SIPC now argues that it is nothing like 
FDIC insurance. Yet years ago, President Nixon's original 
signing statement of SIPA stated, ``Just as the Federal Deposit 
Insurance Corporation protects the users of banking services 
from the danger of bank failures, so will the Securities 
Investor Protection Corporation protect the users of investment 
services from the danger of brokerage firm failure.''
    In case that was not convincing enough, I also found this 
quote from Senator Edmund Muskie during the Senate 
deliberations of SIPA legislation. He said, ``Mr. President, 
since 1934, the United States has insured bank deposits under 
the FDIC and the Federal Savings and Loan Corporation. These 
insurance programs protect bank depositors from loss of their 
savings because of bank failures. And the existence of this 
deposit insurance has become a source of confidence in the 
soundness of our savings institutions. S. 2348, the Securities 
Investor Protection Act of 1970, would accomplish a similar 
purpose for security investors by protecting them from losses 
because of the failure of their brokers.''
    If that wasn't enough, Senator Harrison Williams from New 
Jersey, then the chairman of the Senate Securities 
Subcommittee, stated the legislation ``would establish a 
Federal brokers-dealers insurance corporation. Granted, it is 
not the FDIC, but the FBDIC is pretty darn close to it.''
    I have a 2009 email from from Mr. Harbeck to congressional 
staff, where in it, he directly compared SIPC to FDIC. I would 
like to later insert that in the record.
    In Mr. Hammerman's testimony, he suggested SIPC was never 
intended to cover frauds, and said the legislation was ``to 
introduce a new public policy for SIPA and SIPC, namely 
insuring investors against the risk of loss due to securities 
fraud.''
    Yet when going over the reason for the legislation, Senator 
Muskie specifically said, ``There remain some very basic 
problems within certain parts of the securities industry. There 
are problems of obsolete management techniques, careless 
business practices, inadequate self-regulation, and occasional 
fraudulent activities. All of these account for some part of 
the industry's financial difficulties today.''
    To add further clarification to this topic, the head of the 
New York Stock Exchange, Robert Haack, wrote to the SEC at the 
time to provide their analysis of the potential loss to new 
SIPC funds. The letter states, ``I should make it clear, 
however, that no one can, in our opinion, make a realistic or 
useful evaluation of the potential dollar exposure to SIPC 
because there is no known way to measure the liability which 
might be faced in the event of a broker-dealer failure. The 
fraud of Allied Crude Vegetable Oil against Ira Haupt, for 
example, caused the loss of $27 million, which in no way could 
be anticipated in advance.''
    In 1992, GAO conducted a report on the operations of the 
program and said, ``Within the last 6 years, 26 of the 39 SIPC 
liquidations have involved failures due to fraud.'' They also 
stated in the report, ``In essence, SIPC is a backup line of 
protection to be called upon generally in the event of fraud or 
breakdown of other regulatory protections.''
    With all that, I struggle to see how we are putting a new 
public policy objective of fraud protection on SIPC when the 
record is this long and this clear that protecting investors 
from fraud was a core function of the original statute and has 
been applied that way throughout its existence.
    Again, turning to Mr. Harbeck's testimony, he suggests that 
following a final account statement to determine a customer's 
net equity somehow legitimizes a Ponzi scheme. SIPC argued for, 
and the Second Circuit Court agreed, to support using the exact 
same methodology in the New York Times securitization Ponzi 
scheme resolution in 2004. That New York Times case is very 
similar, almost identical, to the Madoff case. You see, time 
and time again, SIPC changes the rules and its story after the 
fact when it suits its own purposes.
    The clear truth and the long and exhaustive record makes it 
clear that SIPC is an insurance program set up by Congress to 
protect investors and to ensure the appropriate functioning of 
our Nation's securities markets, especially in the case of 
fraud. So, regardless of your views about the original 
appropriateness of programs like these, it is a current duty as 
elected Representatives to ensure the law is followed and 
administered as originally intended by Congress, and that 
investors receive the protection they are promised. The 
legislation before us is designed to improve protections of 
securities investors, particularly the regular retail investor 
lacking professional expertise in the market. It is the direct 
outgrowth of a stunning regulatory failure to detect and 
promptly respond to massive frauds and failures of SEC 
registered broker-dealers, as in the Madoff and Stanford cases, 
or now in the McGinn Smith case, which destroyed the principal 
savings of over 12,000 investors. The devastation of these 
losses has been compounded by the failure of SIPC to fulfill 
its obligation as intended by Congress back in 1970.
    So the provisions are commonsense reform in the bill, 
specifically to do these things: one, remove the inconsistences 
in the application of SIPC coverage, which have led to greater 
confusion; two, to assure the SIPC protective benefits goes to 
innocent customers; three, limit the exposure of taxpayers by 
establishing new accountability measures for SIPC's borrowing 
authority; four, avoid overtechnical legal interpretation at 
odds with SIPA's remedial objectives and the original spirit 
and intent of the law; five, improve the fiduciary character of 
SIPA's liquidations; six, strengthen SEC's plenary oversight of 
SIPA; and finally, direct the SEC and FINRA to give high 
priority to inspection procedures which verify and validate the 
accuracy and authenticity of information provided by broker-
dealers to their customers.
    All of these proposed amendments seek to assure that SIPA 
is administered with constant attention to the perspective and 
the reasonable expectations of the broker-dealer customers, 
those whose confidence's marked participation SIPA is intended 
to engender and maintain. Now, a point too often overlooked is 
that SIPA, while using many of the established practices of the 
Bankruptcy Code, is unconditionally an amendment to the Federal 
securities law meant to strengthen the efficient operation of 
the capital markets by maintaining the confidence of the retail 
user. It is the backbone of the system. Accordingly, the bill 
seeks for the future administration of SIPA to clarify that 
securities law primarily shall have the operative recognition.
    Now, Mr. Harbeck, your written statement this morning 
further emboldened me in my determination to put SIPC back on 
the right course in carrying out SIPA's grand objective of 
deploying its resources to help the financially devastated, 
innocent and unsophisticated victims of broker-dealers in 
bankruptcy, including fraud, such as those who are with us this 
morning, rather than lawyering up to see how narrowly it can 
interpret the law's remedial objectives. It is basically your 
complete confidence in SIPC performing as the 1970 Congress 
intended that troubles me.
    I don't doubt for a second that you believe with genuine 
conviction that SIPC actions are absolutely correct, not only 
with SIPA's letter, but the spirit of the law. And I don't 
question your integrity for a moment. But I am deeply disturbed 
by your satisfaction with SIPC's performance in these massive 
fraud cases, which have thankfully captured the attention of 
Congress now with profound concern. Our bill seeks to reaffirm 
the original intent of Congress in the enactment of SIPA, to 
make reforms in its administration for the future and, above 
all else, to change the culture of SIPC to one that seeks to 
fulfill and not hinder SIPA's remedial purposes.
    I will close by saying I am thankful to a lot of people 
today. I said so at the beginning of my statement. But with all 
the victims and their families still reeling from these frauds, 
I must say that this is not a thankful day. But I will be 
thankful once SIPC is reformed and the original intent of 
Congress is reaffirmed.
    With that, I conclude, and I now turn to the cosponsor of 
this legislation, the gentlelady from New York.
    Mrs. Maloney. Thank you very much, Mr. Chairman, not only 
for holding this hearing, but for your tireless work on this 
really important bill. We, unfortunately, share the same 
situation of representing many people who were hurt by these 
Ponzi schemes. And I know how hard that you focused on trying 
to help them.
    And I welcome all of our panelists, particularly our two 
victims, who will help put a human face on what we are arguing 
about today and debating today. Unfortunately, when Bernie 
Madoff and Allen Stanford's massive Ponzi schemes came crashing 
down, they exposed several key flaws in the Securities Investor 
Protection Corporation and how it operates. Our bill attempts 
to fix these flaws and would reaffirm the primary purpose of 
the Securities Investor Protection Act, which is to protect 
customers of broker-dealers and to maintain investor confidence 
in our securities markets.
    SIPC is supposed to maintain this confidence by winding 
down failed broker-dealers in a fair and equitable manner, 
which above all means protecting innocent customers' assets. 
Unfortunately, in the Madoff case, SIPC and the trustees have 
pursued a highly aggressive strategy that in my opinion has 
unfairly punished some of my constituents who are innocent 
customers, and has almost certainly reduced investor confidence 
in our securities markets.
    In some cases, former Madoff customers who had withdrawn 
their money many, many years before the firm's failure learned 
for the first time that their money was being clawed back only 
when the trustees filed a lawsuit against them. This is hardly 
the way to promote confidence in the securities market. And our 
bill would put a stop to these tactics.
    Now, SIPC has argued that these clawbacks are allowed under 
the Federal Bankruptcy Code. But it is important to remember 
that Congress enacted the Securities Investor Protection Act in 
the 1970s because the Bankruptcy Code was not very useful for 
winding down broker-dealers. Congress recognized that broker-
dealers, like commercial banks, are fundamentally different 
from regular, nonfinancial companies. And just as commercial 
banks are liquidated by the FDIC, broker-dealers need to be 
liquidated by SIPC.
    It is important to recognize that broker-dealers are 
different because they are heavily regulated by the SEC, which 
examines their books and records to make sure that customer 
money is actually there, makes routine on-site inspections, and 
requires annual audits of the broker-dealer. It is this seal of 
approval from the government that customers rely on, and which 
allows investors to place their confidence in the country's 
securities markets. They can have confidence in our securities 
markets because they have confidence in the SEC. Also, because 
they have confidence that if their broker-dealer fails, they 
will be protected by SIPC and treated fairly.
    The account statements are also good enough for the 
government to rely on. After all, these customers pay taxes to 
the IRS on the profits that they see on their account 
statements. Now, SIPC says that they can claim a tax deduction 
on this IRS payment in the case of a clawback, but most of 
these people are retired and don't have the income to have a 
tax deduction. In addition, customers make all of their 
financial decisions based on the financial statements that they 
receive from their brokers, which tell them how much money is 
in their account. For SIPC and the trustee to come in years 
later, in some cases 10, 20, 30 years later and say, sorry, you 
actually can't rely on these financial statements that the 
government has essentially been signing off on for years, they 
are wrong. SIPC should not be able to claw back money that 
innocent customers had withdrawn years ago. Our bill would 
prevent these unfair clawbacks of money that innocent customers 
had long ago withdrawn. It would, however, still allow 
clawbacks in cases where an investor actually knew about the 
fraud when they withdrew their money. That is the way it should 
be. Innocent people should be protected, while customers who 
knew about the fraud do not receive the benefit of government 
protection.
    The time has now come to reform SIPC. And I believe that 
our bill is a good starting point toward a lively debate on 
this issue. I thank the chairman and all of our participants, 
my colleagues, for being here today. And I thank particularly 
the chairman's, I would say inspiring, leadership on this. He 
has been very dedicated in working on this issue for a long 
time.
    And I yield to Mr. Sherman for 2 minutes.
    Mr. Sherman. I want to thank the Chair and the ranking 
member for these hearings. They have studied this issue, and 
know far more about it than many of us on the subcommittee. 
There seems to be a general agreement that the limits on SIPC 
insurance should be clear and should be prospective. And the 
payout from any insurance company needs to be limited by the 
limit of the insurance rather than limited only by our empathy 
for the insured beneficiary. The FDIC faces many of the same 
issues because the limit is per customer, in effect, or per 
depositor. If Three Brothers Moving and Storage Company has a 
$750,000 deposit at a bank, they only have $250,000 of FDIC 
insurance. If three brothers each open up a quarter million 
dollar account at the same bank, those three brothers 
collectively have $750,000. The account name matters. The 
entity that is making the investment matters. And whether it be 
a partnership, a trust, or a corporation, we cannot allow 
General Motors to have $100 million of FDIC insurance just 
because General Motors has millions of shareholders.
    We have cases in progress now, and I think they ought to be 
decided based on what the law was at the relevant time. And I 
would count on judicial and quasi-judicial entities to make 
that determination without a lot of help from Congress. But 
that doesn't mean that there won't be future Madoffs, and 
future Lehman Brothers, and future circumstances for which we 
can't do a much better job in providing. And I look forward to 
learning more here, even though I will have to leave early 
because I have another hearing. Thank you.
    Mrs. Maloney. I now yield 1 minute to Mr. Perlmutter.
    Mr. Perlmutter. I thank the ranking member. And I thank the 
chairman for bringing this bill forward. I do think that there 
are some fundamental questions that we can't forget. The old 
saying is that bad facts make for bad law. And we have to watch 
out that we don't do something here that is a problem. Because 
trying to address a Ponzi scheme, which is a sham, a phony deal 
from the very outset, and the numbers are not real, and there 
is sympathy for the people who are drawn into the fraud, 
obviously. But does the taxpayer in Montana who has nothing do 
with the folks who were defrauded in Boulder, Colorado, is it 
their responsibility to cover the fraud? Madoff and Stanford 
bilked thousands of people of a lot of money. And it was all a 
house of cards. And somebody who gets into the fraud early gets 
to benefit from it against the people who got in late. And so, 
these are very different circumstances.
    I appreciate the panelists today and their testimony. I 
appreciate the sponsors for bringing this. But we have to watch 
this whole area very closely.
    With that, I yield back.
    Mrs. Maloney. I thank the gentleman, and I yield back the 
balance of my time.
    Chairman Garrett. The gentlelady yields back. The 
gentlelady's side went over a little bit.
    Because one of our Members may not be here later, I ask 
unanimous consent to yield 30 seconds to Mr. Mulvaney, without 
objection.
    Mr. Mulvaney. I appreciate that, and I thank the chairman 
and the ranking member.
    And I thank the panelists for being here today.
    In the event I am not able to return, I did want to go on 
record on one important thing that affects SIPC. It is a little 
outside of the topic today, but is still very important. I am 
not sure if folks are aware that SIPC, along with groups like 
the Tobacco Trust Fund, FDA user fee accounts, the Public 
Company Audit Oversight Board, the Financial Accounting 
Standings Board, all of those groups had specific user fee 
funds sequestered. I think it was an unintended consequence of 
the sequester. The sequester was designed to limit the use of 
general account funds, not user-fee funds. What we have is 
groups that are counting on user fees to operate their various 
institutions that have been sequestered. All the more reason 
not to have voted for the sequester in the first place.
    But in any event, I want to tell SIPC that I am 
sympathetic, and tell the other groups that I am sympathetic. 
And as we try and figure out a way to work out various fixes to 
the sequester, I hope we focus attention on the fact that user 
fees were unintentionally sequestered as well, and I think that 
is wrong. Thank you, Mr. Chairman.
    Chairman Garrett. I thank the gentleman.
    With the time for opening statements now expired, we will 
turn to statements from the panel. And again, I wish to say 
thank you to all of the members of the panel who are here today 
for this very important topic. We will run down the aisle as we 
do. Your complete written statements have been made a part of 
the record. We will now yield to you 5 minutes for a summary of 
your statements.
    Many of you have never been here before. There are lights 
in front of you to indicate how much time you have. It will be 
green when you start. It will turn yellow when you have one 
minute left. And it will turn red when you are supposed to have 
concluded. I also ask each one of you when you do speak, 
because I am a little hard of hearing up here sometimes, to 
make sure your microphone is turned on, and that your 
microphone is pulled close to you, like Mr. Hammerman is doing 
right now, good, because it doesn't pick up from a far 
distance.
    So with that being said, we will start with the president 
of SIPC, Mr. Harbeck. Good morning. You are recognized for 5 
minutes.

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

    Mr. Harbeck. Good morning, Chairman Garrett, Ranking Member 
Maloney, and members of the panel. My name is Steve Harbeck. I 
am the president of SIPC. I have been with SIPC for 38 years, 
the last 10 of which as president.
    I will dispense with discussing most of the major 
activities of SIPC since the start of the financial crisis 
because they are listed in my written statement. However, I do 
want to point out one important point, and that is at no point 
in the financial crisis was it more important to improve 
investor confidence than in September of 2008 and the failure 
of Lehman Brothers. SIPC stepped in to liquidate the brokerage 
entity in Lehman Brothers and, with the trustee in place, 
transferred 110,000 customer accounts with $92 billion in them 
within 10 days. I believe that was absolutely critical to 
investor confidence in what was clearly the most dangerous 
period of our time since the Depression.
    We are here today to talk about a specific bill and more 
specifically the performance of SIPC in the Madoff case. I 
appreciate particularly Congressman Perlmutter, who has a 
bankruptcy background, indicating how difficult these decisions 
were. But it is SIPC's belief that to do the greatest good for 
the greatest number, consistent with the law, we have done so. 
And that we have done so consistently with prior precedent.
    What I would like to do is take you through something that 
would occur under the bill if it were passed. And let's go to 
the Madoff case in particular. If the FBI and the Securities 
and Exchange Commission and SIPC had arrived in Mr. Madoff's 
office 2 days later than we did, there were $175 million worth 
of checks on Mr. Madoff's desk that would have gone to innocent 
customers of his choosing. But that would have only left under 
$200 million for the trustee to distribute.
    And further, under the bill, if you strip it from the 
avoiding powers that are specifically given under the existing 
statute, specifically given to a trustee, instead of having the 
$9 billion that he now has to distribute, he would have less 
than $200 million. That is an unintended consequence of the 
activities that this bill would sponsor.
    I realize how difficult it is for the victims. But the fact 
remains that this is a zero-sum game. And if one credits Ponzi 
scheme profits that were generated solely in the mind of Mr. 
Madoff, and if those profits stand on equal footing with the 
net amounts that people have not received back, that means that 
dollar for dollar, people who receive those amounts as 
profits--those profits would be taken directly from people who 
did not receive their own money back. That is bad policy and 
bad law. It is not the law and never has been.
    In any instance, the first of which was in 1973 in the S.J. 
Salmon case, and again in the Adler, Coleman case, and yes, 
even in the cases mentioned by the chairman today, the fact is 
that at no time have fictional profits ever been recognized 
under the Securities Investor Protection Act. That is the 
policy, the consistent policy that was also applied in the 
Madoff case.
    What we have here is the trustee acting, again, to do the 
greatest good for the greatest number consistent with the law. 
I would like to turn to Ranking Member Maloney's mention of the 
fact that the trustee has initiated lawsuits. As soon as he 
initiated those lawsuits, he also initiated what he called a 
hardship program. Because all a person who has been sued has to 
show under the scenario that you correctly laid out, that they 
had used the money over time, the trustee did not know that, 
but if those facts were brought to his attention, the lawsuit 
was summarily dropped. Some people have been ill-advised, in my 
view, by their counsel not to enter the hardship program. I 
believe that people who can demonstrate the sort of hardship 
that you rightly empathize with will have those lawsuits 
dismissed.
    But make no mistake, the current statute does allow what 
are called the avoiding powers. And the entire purpose behind 
those avoiding powers is to do equity. The bill strips those 
away. I would be pleased to answer your questions.
    [The prepared statement of Mr. Harbeck can be found on page 
50 of the appendix.]
    Chairman Garrett. Thank you.
    Mr. Hammerman is now recognized for 5 minutes.

  STATEMENT OF IRA D. HAMMERMAN, EXECUTIVE VICE PRESIDENT AND 
  GENERAL COUNSEL, SECURITIES INDUSTRY AND FINANCIAL MARKETS 
                      ASSOCIATION (SIFMA)

    Mr. Hammerman. Chairman Garrett, Ranking Member Maloney, 
and members of the subcommittee, I would like to express my 
deepest sympathy for the victims of the Madoff and Stanford 
schemes. I have family and friends whose financial lives were 
adversely impacted on December 11, 2008. And I know from 
personal interactions the havoc caused to individuals, 
retirees, and wonderful charities by Madoff and the feeder 
funds that never even disclosed they were investing in Madoff. 
So I understand and in fact applaud the tenacity being 
expressed by Chairman Garrett and Ranking Member Maloney as 
they seek to help their constituents and the investing public 
at large. I also commend you for recognizing more generally the 
need to consider changes to SIPA in order to better protect 
investors and increase investor confidence in the financial 
markets.
    I served on the 2012 task force that undertook a 
comprehensive review of SIPA. And I agree, there are proposals 
for reform that warrant consideration. Any reform proposal 
should be made with an analysis of their costs to SIPC, the 
members of SIPC, and the investing public. This is particularly 
important with respect to the proposed legislation, which would 
materially expand SIPC's mandate to provide insurance against 
the risk of loss due to securities fraud and fictitious 
profits.
    Congress enacted SIPA in 1970 in response to the paperwork 
crisis of the 1960s, a time when stock certificates routinely 
went missing, trade processing errors were common, and there 
were multiple failures of brokerage firms. Congress created 
SIPC to protect the custody function that broker-dealers 
perform. And while it is certainly within the prerogatives of 
Congress these 44 years later to expand SIPA's scope to provide 
insurance against losses due to securities fraud and fictitious 
profits, we believe the costs would be extraordinarily high.
    The SIPC Modernization Task Force recommended changes that 
would increase the protection available to customers in at 
least 3 important ways: increase the cap on advances from 
$500,000 to $1.3 million; eliminate the lower cap of $250,000 
applicable to customer claims for cash versus securities; and 
make individuals eligible for advances with respect to shares 
of their pension plans account. These types of changes would 
appropriately expand SIPA, while continuing to reflect its core 
purpose of protecting investors against the loss of cash or 
securities in the event the brokerage firm holding their 
property becomes insolvent.
    The proposed legislation provides that the assets of a 
customer would be determined on the basis of the last account 
statement, with customer property in liquidation allocated 
accordingly. We have significant concerns with this approach 
since customer account statements in situations involving fraud 
reflect fictitious transactions and do not truly represent 
customers' positions. The property held by a Ponzi scheme is 
simply the pooled investments of all the victims of the scheme 
less the amounts already misappropriated, and making 
distributions based on anything other than the victims' net 
investments would be fundamentally unfair.
    The net investment method has been used with respect to 
fraudulent schemes as far back as the 1920s. It has been 
applied by several trustees and courts in SIPA liquidations, 
and we believe it should be used to determine net equity for 
purposes of allocating customer property in situations 
involving fraud.
    The proposed legislation would also add to the customer 
definition any person whose assets were misappropriated by an 
affiliate of a brokerage firm, whether or not the firm had 
custody, possession, or control of such assets. Expanding SIPA 
in this manner could ultimately result in significant increases 
in the costs borne by investors, and in some cases result in 
investors losing access to the financial markets altogether.
    Regarding the effective date, we question whether 
application of the draft bill to active liquidation proceedings 
is even feasible. For example, in liquidations in which 
distributions have already commenced, it is unclear whether 
customers would be required to return assets to the trustee so 
that the trustee could redetermine claims and allocations. At a 
minimum, retroactive application of the proposed bill would 
significantly slow down the current SIPA proceedings.
    Finally, it is a very unfortunate fact of life that fraud 
exists and that crooks will continue to use the financial 
system to find victims because, to quote notorious bank robber 
Willie Sutton, that is where the money is. Criminals who steal 
investors' hard-earned money and life savings should be 
prosecuted and put in jail, but using fraudulent account 
statements to insure all of us against the risk of fraud is 
quite another undertaking, and its ramifications for businesses 
and investors should be carefully analyzed and debated, lest we 
inadvertently let the criminals decide which victims recover 
what amounts.
    Thank you for allowing me the opportunity to testify. I 
would be pleased to answer your questions.
    [The prepared statement of Mr. Hammerman can be found on 
page 39 of the appendix.]
    Chairman Garrett. Thank you.
    Our next witness is making her way up here, I believe. Take 
your time.
    Welcome.
    And just to recap, since I know you just came in, please 
make sure your microphone is on. You will be recognized for 5 
minutes. The little lights in front of you are green, yellow, 
and red, for that purpose. Your full written statement will be 
made a part of the record, and we therefore ask all the 
witnesses to give a summary during their 5-minute presentation. 
So you are now welcome and recognized for 5 minutes.

  STATEMENT OF ANGELA SHAW KOGUTT, DIRECTOR AND FOUNDER, THE 
                   STANFORD VICTIMS COALITION

    Ms. Kogutt. Thank you, Chairman Garrett. My name is Angela 
Shaw Kogutt, and I am the director and founder of the Stanford 
Victims Coalition, a nonprofit advocacy group for the victims 
of the Stanford Financial Group Ponzi scheme.
    Chairman Garrett, Ranking Member Maloney, thank you for 
holding this hearing today to discuss a much-needed amendment 
to the Securities Investor Protection Act of 1970. I applaud 
you both for your leadership in introducing the Restoring Main 
Street Investor Protection and Confidence Act, which has given 
hope to thousands of financially devastated investor victims 
across the country who feel they have been unfairly denied the 
protection of which the SEC has determined they are entitled. I 
also thank the distinguished members of the subcommittee who 
have already joined H.R. 3482, and I ask those of you here 
today to consider this important legislation.
    I want to point out right away that I am not the typical 
face of the Stanford victims. I am a second generation victim. 
Most of the victims are senior citizens, and for the past 
almost 5 years now, I have spent a majority of my life serving 
as their advocate, hoping to help them recover some of their 
losses. I have done this because I am younger than they are and 
because they deserve it.
    Like thousands of other Stanford victims, my life was 
forever changed by the events of February 17, 2009. As we 
watched the news and feared the worst in the immediate 
aftermath of Madoff's confession, we eventually realized that 
Allen Stanford had stolen what two generations of my family 
worked 4 generations to build. And he did it through Stanford 
Group Company, a registered broker-dealer and member of SIPC.
    The SEC had known for more than a decade that Stanford was 
operating a Ponzi scheme. While Madoff had outsmarted the SEC, 
Stanford hadn't. And the SEC knew for 12 years that he was 
using the U.S. broker-dealer to steal customer funds intended 
to purchase CDs from Stanford International Bank. In that 
timeframe, the Stanford Ponzi scheme grew by $5 billion, 
including the investments of every single U.S. citizen who 
invested in the CDs.
    My father-in-law is an 87-year-old World War II veteran and 
a first-generation American who, again, like so many Stanford 
victims, was able to live the American dream, only to have it 
snatched away practically overnight. In 1965, he started a 
manufacturing business with a few thousand dollars borrowed 
from family members. He and my mother-in-law put in long hours 
for several years, and eventually all three of their sons, 
including my husband, joined the business. The family worked 
together for more than 3 decades to build the business to more 
than 300 employees and close to $20 million a year in revenue. 
At that point, the business had outgrown the family, and they 
made the decision to sell at just the right time, before the 
economic collapse of 2008.
    As soon as the sale of the business closed, our lawyer who 
handled the transactions suggested we invest with a brokerage 
firm that specialized in managing large accounts. She then 
recommended what she called a boutique brokerage firm, Stanford 
Group Company, which specialized in high-wealth clients. The 
family had never heard of Stanford but agreed to a meeting. 
Other firms were also considered, but Stanford really stood out 
because of their enthusiasm, professionalism, their very high 
public profile, the top notch credentials of their advisers, 
and what we misinterpreted as genuine and sincere interest in 
our investment goals.
    What we didn't know is that financial advisers at Stanford 
Group Company were hooked on what they internally called bank 
crack in the highly lucrative commissions and bonuses they 
received for selling the CDs from Stanford International Bank. 
Also, little did we know that none of the financial advisers at 
Stanford Group Company knew what assets were held, if any, in 
Stanford International Bank's investment portfolio.
    How someone who has a fiduciary duty to their clients could 
recommend putting any of their funds in an investment vehicle 
for which they didn't even know the underlying investments 
seems extremely questionable, but that was also an inside 
secret that Stanford paid them enough to overlook.
    Ultimately, a substantial portion of the proceeds of the 
sale of my family's business was invested with two Stanford 
Group Company financial advisers. At the first meeting, the 
family explained that they were very conservative and risk-
averse. One of the advisers, Bill Leighton, was an estate 
planning lawyer. The other, Patrick Cruickshank, was a 
certified financial planner, and NFL, NBA, and NHL-approved 
financial adviser and Series 7 license holder. They told us 
their safest, most conservative investment was their exclusive 
signature product, the Stanford International Bank CDs for 
accredited investors. We learned at the meeting that the entire 
Stanford financial group of companies, which included Stanford 
Group Company, Stanford International Bank, Stanford Trust 
Company, and more than 100 other Stanford entities all owned by 
Allen Stanford was headquartered and operated out of Houston, 
Texas, and regulated by the SEC and numerous State regulators, 
as the SEC had 33 offices across the country and more than 250 
financial advisers who are still working in the business today 
with no record on their FINRA broker check.
    We were also told that the bank's portfolio was managed by 
a team of money managers in Memphis, Tennessee, with a company 
called Stanford Capital Management, which was also regulated by 
the SEC. We were told that the international CDs were better 
than investing in a U.S. bank CD because the international CDs 
were securities, and they were backed by SIPC, which was up to 
$500,000, and the FDIC at the time was only $100,000. Many 
Stanford victims made their decision to make that investment 
because of the securities product versus the bank product.
    It is now almost 5 years later and SIPC has continued to 
deny protection of Stanford Group Company customers by saying 
we received the securities we purchased through SGC, which 
simply is not true. Our money was stolen. How could we have 
gotten a security when the owner of the broker-dealer stole our 
funds? Allen Stanford is serving a 110-year jail sentence for 
stealing our money right here in the United States, not for 
committing an Antiguan bank fraud, which has not even been 
alleged in the country of Antigua.
    In November 2009, the Stanford Victims Coalition formally 
asked the SEC to review the SIPC's determination about SGC 
customers' right to protection under SIPA. After more than a 
year of the SVC suffering the burden of proof and producing 
hundreds of SGC customer documents at a time to the SEC only to 
have the target moved each time and more documents requested, 
it appeared the SEC was obviously avoiding making a 
determination. The SVC's members then asked our political 
leaders to urge the SEC to make a determination. More than 50 
Members of the House and Senate signed on to a letter asking 
the SEC to give the SVC an answer. Still, no answer, only 
repeated promises that a vote would happen soon, which I have 
now learned in SEC language could be months or even years, 
given the way they have handled the Stanford case.
    Finally, when it appeared this game would go on forever, 
while Stanford victims were losing their homes and going 
without life necessities, Senator David Vitter blocked the 
nomination of an incoming SEC Commissioner until Stanford 
victims were given an answer. This was not a political play. 
Senator Vitter never told the SEC how to vote. He just asked 
them to give the investors an answer, to just take a fair vote 
and give us an answer. The vote was taken, and as the SVC and 
our counsel had hoped, the SEC determined that SGC customers 
were entitled to protection under SIPA because the SIB CDs were 
fictitious securities, and SGC customer funds intended to 
purchase the CDs were either acquired by Stanford Group Company 
to pay the broker-dealer's expenses or were outright stolen by 
Allen Stanford.
    Chairman Garrett. I am going to ask you--
    Ms. Kogutt. In closing, I would just like to say one more 
thing. There are thousands of investors who truly are living in 
poverty right now. This summer, an article came out in the 
Baton Rouge newspaper that a food bank was going under, mainly 
because of the devastation caused by the losses in Baton Rouge 
of the victims of the Stanford financial fraud. They are living 
on donations from charity.
    Chairman Garrett. Thank you.
    Ms. Kogutt. Thank you for holding this hearing and for 
allowing me to speak for the victims.
    [The prepared statement of Ms. Kogutt can be found on page 
67 of the appendix.]
    Chairman Garrett. Thank you.
    Mr. Stein, you are now recognized.

  STATEMENT OF RON STEIN, PRESIDENT, THE NETWORK FOR INVESTOR 
                  ACTION AND PROTECTION (NIAP)

    Mr. Stein. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. My name is Ron Stein. 
I am the president of the Network for Investor Action and 
Protection, a national not-for-profit organization dedicated to 
improving our Nation's investor protection system. I am also a 
registered investment adviser, a certified financial planner, 
and a member of the financial services industry in good 
standing.
    Over 1,000 members of our organization were victims of the 
Madoff fraud. I am honored to speak to you today, as others 
have done before me, to give voice to the mostly middle-class 
investors who were devastated by this fraud, and who are being 
stripped of protections from SIPC and the SIPC-appointed 
trustee.
    Perhaps more, I am here on behalf of small investors, 
millions of small investors who have not yet been victimized, 
who depend on Congress, the regulatory apparatus, and the 
industry for the protection of their life savings should 
similar financial disaster befall them.
    So where do we stand today, 5 years after, regarding the 
Madoff fraud? Frankly, thousands of lives upended with another 
thousand being sued, story after dismal story of family 
horrors, depression, premature deaths, suicide, loss of medical 
care, life savings obliterated, gruesome and devastating 
stories.
    This is not what Congress intended when it first passed 
SIPA law in 1970 amidst the turmoil of hundreds of brokerage 
insolvencies, recession, massive theft, fraud, and, yes, Ponzi 
schemes. The creation of SIPC, the insurance-like entity, was 
the cornerstone of that legislation and an essential step to 
providing certainty, confidence, and trust to investors as 
Congress was ushering them away from the certainty of their 
physical securities to the new, more manageable world of the 
investment statement. It goes way beyond a custody function; it 
goes to ensuring confidence in the investment markets 
themselves.
    Now, Congressman Garrett quoted President Nixon and several 
others. I would just like to include one additional excerpt 
from the original Nixon testimony on signing SIPA legislation 
in 1970. He said pertaining to the SIPA law, ``It protects the 
small investor, not the large investor, since there is a limit 
on reimbursable losses. And it assures that the widow, the 
retired couple, the small investor who has invested their life 
savings in securities will not suffer loss because of an 
operational failure.''
    I would like to point out that neither Nixon nor anyone 
else at that time ever said that profits weren't going to be 
protected, or mentioned the words ``fictitious profits'' as an 
exception to this protection. That is revisionist history.
    Following the passage of this legislation in 1970, every 
brokerage firm trumpeted SIPC protection to its customers, and 
every customer was informed that they are/were protected to the 
SIPC limit based on their account statement values should their 
broker fail. This was part of every broker's security training, 
every one. I know. There were no asterisks. There were no 
exceptions. There was no hint of being sued. And it was upon 
these promises that the financial services industry was able to 
gain the trust of the American public and explode in size.
    Now, how do those promises and Congress' intentions comport 
with the realities today?
    Fact: The majority of Madoff investors will not receive a 
penny of the SIPC advance guaranteed by Congress under SIPA 
statute as a result of the net investment methodology the 
trustee has chosen to use.
    Fact: Over 1,000 investors acknowledged as being innocent 
by the trustee are being vigorously sued like thieves and 
criminals, many having already lost everything.
    Fact: Institutions and professional investors are receiving 
over 80 percent of the recoveries of customer property. Many of 
these entities that the trustee himself has indicated should 
have or could have known about the fraud.
    Fact: In addition to saving SIPC over $1 billion by the 
trustee's own calculations, the trustee and his associated 
consultants have similarly been enriched by almost $1 billion, 
and that number could grow, and those are funds which could 
have gone to those who have been devastated and go to needed 
education to prevent further frauds of this nature.
    There is simply no rational way to conceive that this is 
the outcome that Congress would have preferred were it sitting 
here today. Indeed, this is precisely what Congress would have 
sought to avoid, and clearly in no way would the American 
public have supported a SIPA law in 1970 if this was seen as a 
possible outcome.
    The implications of this would be disastrous and could be 
disastrous to all investors today. What investor in their right 
mind could possibly trust that SIPC would be there or, worse, 
not sue them for withdrawing funds from their own accounts? 
What retirees would want to see their protections reduced just 
when they are drawing on their life savings? Once investors 
realized their protections don't exist, consider the impact on 
the financial services industry as investors withdraw and move 
funds from one firm to another.
    Let me be clear. I am deeply, deeply troubled as a 
financial practitioner about the failures of the regulatory 
entities that were charged with the responsibility to protect 
or unmask this fraud at a much earlier level. But I am also 
deeply distressed that members of my own industry, when they 
had the knowledge or the thought or the concern about a fraud, 
chose not to come forward. I hope that will change as we go 
forward.
    But I am truly infuriated at SIPC's lack of response in a 
human way to help protect the investors they were charged with 
protecting, and that they have thumbed their noses at Congress, 
refused to go to Congress when they could have to ask for 
guidance in this issue and instead taken it on their own to 
create the situation we are in today.
    H.R. 3482, the Restoring Main Street Investor Protection 
and Confidence Act is an important step to restoring the most 
basic protections that investors need at this time. I want to 
thank Congressman Garrett for showing tremendous leadership in 
this, for Congresswoman Maloney and the rest of the committee 
in sharing support, and I truly hope the industry will stand 
with us in supporting this very important legislation. Thank 
you very much.
    [The prepared statement of Mr. Stein can be found on page 
151 of the appendix.]
    Chairman Garrett. Thank you.
    Ms. Shean, welcome, and you are recognized for 5 minutes.

      STATEMENT OF SUZANNE SHEAN, A CUSTOMER OF STANFORD 
                       INTERNATIONAL BANK

    Ms. Shean. Thank you. I would like to thank Chairman Scott 
Garrett and Ranking Member Carolyn Maloney for holding this 
hearing today and allowing me to speak about my experience as a 
victim of the Stanford Financial Group Ponzi scheme. I would 
also like to thank you from the bottom of my heart for giving 
victims like me hope for recovering our stolen retirement 
savings by introducing H.R. 3482. Thank you also to all the 
subcommittee members here who have already joined this 
desperately needed bill.
    My name is Suzanne Shean, and I am 64 years of age. I live 
in Carriere, Mississippi. Allen Stanford and the SIPC member 
broker-dealer Stanford Group Company took more than my life 
savings of a quarter million dollars invested just 18 months 
before the SEC took the Stanford group of companies into 
receivership. He took from me what money can't buy. He took my 
husband's life, my soul mate, my daughter's daddy, my 
grandchildren's granddad, and the life we had together.
    When the news of the Stanford scandal broke, I had just had 
surgery and was undergoing radiation treatments for breast 
cancer. My sweet husband Michael sheltered me from the news for 
months during my treatments and recovery. Michael had also had 
cancer, colon cancer, and underwent surgery in March of 2008. 
The doctors were able to remove it all, and they said he did 
not need radiation or chemo or any kind of other treatment, but 
being a victim of a Ponzi scheme is like cancer itself. The 
stress eats away at you. For some, that happens slowly. For 
Michael, it only took 6 months.
    His cancer returned with a vengeance and quickly spread 
throughout his body. The burden of losing our life savings was 
just too much for him, especially when he carried that burden 
alone for so long to protect me while I was sick.
    He died on April 29, 2011, at the age of 66 years old.
    Before Michael died, he worried so much about me and my 
future alone without our savings. My greatest hope was that he 
would be comforted with the knowledge that SIPC would make 
things right for us before he died. That didn't happen.
    I only saw my husband cry 3 times in our 43 years of 
marriage. Tears of joy at the birth of our daughter in 1969, 
tears of helplessness when neighbors had to help me pick him up 
after he fell a few weeks before he died, and tears of anguish 
when he asked me to forgive him. He had liquidated our IRA 
stock market portfolios to invest in safer IRA CDs with 
Stanford International Bank, with the Stanford Group Company. 
He was inconsolable, but it was not his fault. The safety net 
created to protect investors like us had failed to do so.
    During our whole lives together, Michael and I worked so 
hard to put money away so we could retire one day and enjoy our 
golden years. For him to die thinking that was all in vain is 
an abomination of the very soul of our society.
    Discovering that the SEC knew Stanford Group Company was 
involved in a Ponzi scheme for more than a decade before we 
invested with them added insult to injury. The double whammy of 
SIPC announcing it had absolved itself from protecting us was 
just inconceivable.
    I am now forced to work two jobs to keep my home. As a 
working widow under 66 years of age, I am not entitled to my 
husband's Social Security checks because my salary is over 
$17,000 a year. I should be enjoying my grandchildren and the 
fruits of my labor for these past 64 years. Instead, retirement 
is not an option now that our entire IRA is gone.
    What will happen to me when I can no longer work? The 1 
percent recovered by the Stanford receiver after almost 5 years 
will just about cover one house note and my trip here today.
    Michael and I were very conservative investors, and we 
entrusted Stanford Group Company, a registered broker-dealer 
and SIPC member, to invest our IRA funds safely. We were told 
because we had an IRA that Stanford Trust in Louisiana would 
hold custody of our investments, and we felt comfortable with 
this investment because every aspect was being managed in the 
United States and regulated by government.
    But what we didn't know did hurt us. We had no idea that 
Stanford Trust Company was created by SGC as a way to tap into 
a whole new source of money to feed the Ponzi scheme. Hundreds 
of millions of dollars of innocent investors' IRA funds were 
lost. The Stanford Trust Company was a subsidiary company of 
SGC and was created as a State-regulated entity solely to evade 
oversight by the Federal Government. The Louisiana Attorney 
General's Office later explained that SGC employees operated 
the trust company and even served as its board of directors. In 
short, SGC held custody of our CDs, and our savings never left 
the United States and never went to purchase securities of any 
kind.
    We were shocked when we found out that SIPC announced we 
didn't qualify for protection because we weren't customers of 
SGC because it supposedly didn't hold custody of the fictitious 
Stanford International Bank CDs. But we had a customer contract 
with SGC, and our account numbers begin with STSGC. What SIPC 
was telling us seemed like hyper-technical legalese designed 
solely to avoid covering our losses, despite other similar SIPC 
cases in which investors were protected. SIPC was behaving as 
if it was a private insurance company with government immunity, 
and they have gotten away with it so far at the expense of 
thousands of victims just like me.
    Here we are, innocent investors, who used a SIPC member 
broker to purchase securities that come to find out didn't even 
exist, and SIPC is treating us as their enemy. The CDs were an 
imaginary investment vehicle designed to take money from 
Stanford's right hand, Stanford Group Company, and steal it 
with its left hand, Stanford International Bank. In short, we 
have been victimized again and again, first by the SEC for not 
stopping Stanford Group Company when they were aware of 
misappropriations of customer funds and other fraudulent 
activities, and then by Allen Stanford himself, who stole our 
money, and then a third time by SIPC because they have told us 
Allen Stanford stole our money the wrong way.
    Chairman Garrett. Ms. Shean, I would ask you to come to a 
conclusion.
    Ms. Shean. Okay. I beg you to please close the loopholes in 
the law that SIPC has manipulated in order to protect it. It 
means Michael--I will never have Michael back, but I know his 
soul will rest in peace if he knew I was taken care of. That 
would mean the world to me. I am a survivor. Yesterday was my 
5th year anniversary of being cancer free. Please don't take 
hope away from me. Thank you for your time and your attention. 
It has been my honor to share my story with you today.
    [The prepared statement of Ms. Shean can be found on page 
125 of the appendix.]
    Chairman Garrett. Thank you, Ms. Shean.
    And finally, Mr. Friedman is recognized for 5 minutes.

  STATEMENT OF NEIL FRIEDMAN, A CUSTOMER OF BERNARD L. MADOFF 
                     INVESTMENT SECURITIES

    Mr. Friedman. Thank you, Mr. Chairman, and members of the 
subcommittee, for the opportunity to be here and to tell my 
story. My greatest loss is something that SIPC would never 
cover, the loss of my wife after 53 years of marriage. I am 79 
years old. I am a veteran of Korea, and I am left with two 
wonderful children and four grandchildren. My daughter has MS. 
My children relied upon me and my account--although it was not 
large, because I by no means was considered rich--to take care 
of them if they needed it. I put in--let me go back to my story 
on how I got involved, if I may, with Madoff.
    A friend of mine in 1962 had a daughter the age of my son 
who played in a playground together. Their father was Bernie 
Madoff's CPA, Jerry Horowitz, and Jerry and I were strictly 
friends until I went into my own business, which was 
subsequently in the middle of the 1960s, when I opened a life 
insurance agency, and he became my CPA. Jerry had been 
investing with Madoff well before the 1980s, and so I felt that 
his due diligence, with the SEC as a backup and SIPC as a last 
resort would take care that if we lost everything, we would at 
least recover something. I put in my pension plan assets. I 
even sold Madoff in the early 1980s a retirement program and 
had free access to his office at 1 Wall Street, walked around, 
knew all the employees, and was never aware of anything that 
was not honorable.
    I am a graduate of NYU. I graduated as an accountant, hated 
that as a profession, and ended up in the insurance business, 
which was more personable. I grew moderately, I marketed with 
16 different life insurance companies across the United States, 
actually specializing in impaired risks as well as competitive 
products. And I was able to amass, I guess, well, the balance 
was about $2 million in my retirement program, which my 
employees had the option of not partaking in, thank God, and my 
personal savings.
    I am now living on Social Security, with a little money in 
the bank, which primarily was the result of refunds from 
Internal Revenue for the taxes I paid in my, was forced to pay 
mandatory at 70 and a half to withdraw moneys. In essence, that 
is my story. I got a part-time job, maybe 1 day a week or 2 or 
whatever they needed me, and I really have no source of income 
other than Social Security, which is $1,400 a month. I had to 
put my house in a reverse mortgage just so I could stay there. 
I would not live with my children. And I thank you all for 
this.
    [The prepared statement of Mr. Friedman can be found on 
page 36 of the appendix.]
    Chairman Garrett. I thank you for your testimony, and I 
thank everyone for the testimony, and so we will go to 
questioning now. I guess I will begin with Mr. Harbeck. Would 
you agree that when SIPA was passed in 1970, the creation of 
the SIPC fund capitalized by industry assessments was the 
feature given the most attention in the Floor discussion in the 
House and the Senate?
    Mr. Harbeck. I am not sure I understand.
    Chairman Garrett. In other words, the establishment of the 
fund, the focus was in large part in setting up a fund because 
it provided liquidations at broker-dealer firms with another 
source of relief coming from the assessments.
    Mr. Harbeck. That was absolutely one of the major 
components of the bill, yes, sir.
    Chairman Garrett. Right. So, by doing that, you are going 
beyond conventional bankruptcy to try to do what, to mitigate 
losses, correct?
    Mr. Harbeck. That is correct.
    Chairman Garrett. And so in providing for the supplemental 
relief to customers of failed broker-dealers, is it correct to 
say that the overarching congressional purpose was to restore 
and maintain the confidence of investors, particularly 
nonprofessional investors, in their continued participation in 
capital markets for the benefit of the economy?
    Mr. Harbeck. That is also correct.
    Chairman Garrett. Right. So, a couple of points taken from 
that.
    Mr. Stein, what was the number you gave as far as where the 
distribution is at this point as far as between regular just 
retail investors versus institutional investors?
    Mr. Stein. Over 80 percent.
    Mr. Harbeck. I would love to address that, if I may.
    Mr. Stein. Over 80 percent of the funds in terms of dollar 
amount will be going to institutional investors based upon the 
recovery numbers that the trustee and SIPC have provided.
    Chairman Garrett. And is it true--overall, have the 
majority of people who have been taken advantage of in the 
Madoff situation received compensation payments or have the 
majority not received payments?
    Mr. Stein. The majority have--first of all, talking about 
direct investors, if we added indirect investors, the number of 
those who have received relief is fractional, but the majority 
of investors have not received any SIPC protection whatsoever, 
and significant numbers of those who have received protection 
have had those protections, those amounts reduced significantly 
because of the net investment method adopted by the trustee.
    Chairman Garrett. And I should probably take this moment 
just to be clear here that we are talking about two, I don't 
want to call it pots of money here, but two avenues of money of 
relief, right? One is advances, correct me if I am wrong on any 
of this, the advances which basically comes from the industry-
generated fees, right? And the other is the recaptured or 
recovered money when the trustee goes out and re-collects, 
collects the money from the bad actors in this; is that 
correct?
    Mr. Stein. Yes.
    Chairman Garrett. Right. So there are two pots of money 
here. And in the legislation before us, essentially we are 
talking about making sure that--we are really not making any 
changes with regard to the recovered money? I will go to Mr. 
Stein for that.
    Mr. Stein. The trustee is given a significant range of 
opportunity to apply what methodology he feels is most 
appropriate regarding the recoveries of customer property, but 
regarding SIPC advances themselves, this legislation is making 
clear that the trustee does not have the right to change the 
intent of SIPA law to suit the purposes of the SIPA fund or any 
other rationalization he can come up with to do so.
    Chairman Garrett. Right. Mr. Hammerman, I do sincerely 
appreciate your opening comment with regard to your concern for 
the victims and also for your statements and your association 
to try to work with us on this legislation, I do appreciate 
that. One comment that you did make, though--you did say this 
point, you said that fraud is a fact of life, and you said 
something that has been with us always, words to that effect 
you said. Ponzi schemes, I guess, have been with us always. You 
didn't say that, but I guess that means that you would agree 
with that in one way, shape or form or another, right?
    So if that is the case, then back in 1970 when they created 
this law, and they created the fund, created the whole--and the 
focus was on the SIPC fund, they must have known at that point 
in time that Ponzi schemes existed, but I didn't see anything 
in the original law, and I certainly didn't see anything in the 
Senate discussions on this where they created a Ponzi 
exemption. When did that come about?
    Mr. Hammerman. Mr. Chairman, there is no Ponzi exemption, 
as you explain. The way I understand it is the way it would 
work is if you as a customer gave, let's say, $100,000 to a 
brokerage firm with the expectation that the brokerage firm 
would buy securities for you--
    Chairman Garrett. Right.
    Mr. Hammerman. --in the account, and then that brokerage 
firm turns out to be a Ponzi scheme, for example, then you 
would be covered for that $100,000 of cash that you gave for 
the purpose of buying securities, full stop.
    What would not be covered is, let's say you gave that 
$100,000 and the monthly statement--
    Chairman Garrett. But that was--I know where you are going 
to go with this, but that was not said in the original law. 
Isn't that just a creation of later court cases?
    Mr. Hammerman. That is not my understanding, but I am not 
an expert in SIPC and the court cases.
    Chairman Garrett. Okay. And I am going to be mindful of the 
time because we are coming up on votes, so--I have a whole 
series of other questions, but I will return probably in a 
second round to the gentlelady from New York.
    Mrs. Maloney. Thank you, Mr. Chairman.
    And I thank all the panelists, and I think the basic 
question is, what does SIPC insure? And going forward, what 
should it insure in the future? How do we make that clear to 
investors? Because we heard from victims that in the case of 
Stanford, they weren't insured in anything.
    Is that correct, Ms. Kogutt? SIPC did not insure or give 
any paybacks at all to the Stanford victims, right?
    Ms. Kogutt. None whatsoever.
    Mrs. Maloney. None whatsoever.
    Ms. Kogutt. We actually haven't even been able to file 
claims because there is no liquidation, so we have had no right 
of a judicial review of if our claims are valid or not.
    Mrs. Maloney. So this is a tremendous problem going 
forward, and in terms of Madoff, were payments done in Madoff 
or not from SIPC?
    Mr. Stein. Yes. Approximately half of the Madoff direct 
customers received SIPC compensation.
    Mrs. Maloney. What, $500,000 for securities, or what 
compensation did they get?
    Mr. Stein. Up to $500,000. The average payment is a little 
less than that. But for those who were fortunate enough, and I 
say that very carefully, when they were fortunate enough not to 
have needed to pull funds out of their plan to live on, they 
were able to receive SIPC compensation, and that gets to the 
fundamental problem, and the public policy debacle that SIPC 
and the trustee are representing here.
    Witness, as Exhibit A, what Mr. Friedman has experienced. 
Here is a man who has put his whole life savings into a 
retirement plan. He retires with the intention of being able to 
live off that savings, and because he has withdrawn money to 
live off those savings, precisely as Congress would have wanted 
him to do, precisely as he needed to do, he is being tortured 
because those funds are being denied him. Any penny he has 
taken out in his retirement has been deducted from the amount 
of money that he has put in. So basically anybody who is 
utilizing a retirement experience, who has been withdrawing 
funds for the cost of living over any period of time, has 
probably exceeded even the amount of money that they have 
contributed over their lifetime to their savings. We are 
actually having--we are actually reducing protections for those 
people precisely for whom we should be going out of our way to 
improve protections, and that is an unfortunate consequence.
    Mrs. Maloney. Also they are saying if it is a Ponzi scheme, 
you are not covered. Obviously, they didn't know it was a Ponzi 
scheme; the government didn't know it was a Ponzi scheme. And 
so, I think a crucial issue, and I guess I want to ask Mr. 
Hammerman, what does SIPC cover now, and if you could get it 
back to us in writing, and what do you think it should cover in 
the future? And obviously, the situation of Stanford, of where 
no determination and an outrageous Ponzi scheme, I would like 
to know from Mrs. Kogutt in writing where you say the SEC knew 
about this Ponzi scheme for 12 years, if anyone knew about it 
and didn't report it or stop it, that is a criminal offense. 
So, that is a whole other subject. We are looking at the SIPC 
moneys now. So who do you think--what does it cover now, and 
what should it cover? And if you could answer some of the 
salient issues that the victims raised to you today.
    Mr. Hammerman. Ranking Member Maloney, as I tried to 
explain in answering the chairman's question, I believe today, 
SIPC would cover an investor who put in, let's say, $100,000 
with a brokerage firm with the expectation that the brokerage 
firm was going to purchase securities, and if that brokerage 
firm turned out to be a Ponzi scheme, that amount of money 
would be covered and advanced by SIPC.
    When you asked about what it should cover going forward, I 
think that raises an entirely appropriate--
    Mrs. Maloney. Mr. Hammerman, that is not what she testified 
to. That is not with the Stanford people. They bought 
securities. They bought CDs that apparently the SEC and other 
people knew about, and then they are told that is not 
applicable.
    Mr. Hammerman. Ranking Member Maloney, I do not profess to 
be an expert or extremely familiar with every underlying fact 
with Stanford. From my limited understanding, the investors 
invested in CDs issued by an Antiguan bank. Now, they may 
have--that is my understanding of what happened, and what 
foreign--
    Mrs. Maloney. At the very least, going forward, it should 
be clear--
    Mr. Hammerman. No, going forward--
    Mrs. Maloney. --any CD from a foreign bank, that nothing 
from a foreign bank is covered because they can't even get it 
resolved in the foreign bank, they won't even acknowledge that 
there was a problem. So the main thing is investors have to 
know what they are getting, and they were totally misled. They 
thought it was insured, that they would have this protection, 
and going forward, we made a mistake, it is in a foreign bank, 
you are not covered. So, I think we have to be clear at the 
very least going forward that people know what their situation 
is.
    Mr. Hammerman. I agree. I am sorry, Mr. Chairman?
    I was just going to say I agree on a going-forward basis 
that we need to be clear, and there is a public policy issue 
about insuring against all sorts of financial fraud. The FBI 
estimates $40 billion of financial fraud a year. They also 
estimate $1 billion to $3 billion in micro cap securities 
fraud, and the question is, what are we going to be--
    Chairman Garrett. Thank you. I know there is--but I want to 
get to the gentleman from Virginia.
    Mr. Hurt. Thank you, Mr. Chairman.
    I want to first of all thank the chairman for holding this 
hearing.
    And I want to thank each of you for being here. This is 
sort of rare in Washington, it seems to me, where you have 
folks who are not necessarily represented by moneyed interests 
here testifying before your Congress, a Congress that you own, 
about how to improve a law that clearly has been implemented in 
a way that is less than perfect. So I want to, as a former 
prosecutor who has dealt with people who have been the victim 
of theft, outright theft, thank you for joining us today. I 
thank the chairman for spearheading an effort to try to improve 
the way this works.
    I guess I would like to begin with Mr. Harbeck, who it 
sounds like you have been with SIPC for 38 years total. Mr. 
Stein in his opening statement and in his written testimony 
indicated, and the chairman alluded to this, indicated that as 
a fact that institutions and professional investors were 
receiving over 80 percent of the recoveries in the Madoff case. 
Over $9 billion has been recovered, and that is a striking--I 
think that is a striking fact as stated.
    Mr. Harbeck, I would like to know if you think that is--
first, do you agree with that, and second, if that is true, do 
you think that is consistent with what the intent of this law 
was as passed?
    Mr. Harbeck. Let's connect the dots. Thank you for the 
opportunity to do so.
    Mr. Hurt. Yes, but please be--
    Mr. Harbeck. The answer, sir, is that if an institution 
such as a pension fund has a claim with Mr. Madoff, and the 
pension fund has a thousand indirect victims of Mr. Madoff, by 
paying that institution, one gets the money to the indirects. 
That is precisely how the system works. The pension fund had 
the contract with Mr. Madoff. If it had a $10 million pension 
fund with Mr. Madoff--
    Mr. Hurt. Okay.
    Mr. Harbeck. They have already gotten 4.2 back.
    Mr. Hurt. Do you believe that has been applied fairly, and 
is that the way the law is intended to work?
    Mr. Harbeck. Yes, sir.
    Mr. Hurt. Mr. Stein, do you have a response to that?
    Mr. Stein. I think the first response is that it doesn't 
take into consideration the fact that you have 1,000-plus 
victims who have been denied any SIPC protection whatsoever, so 
let's just start there, that whether or not funds are going to 
a pension fund is immaterial to the moneys that SIPC should be 
advancing to those small, middle-income investors who invested 
directly with a regulated registered broker-dealer, as Congress 
and the financial service industry intended.
    Getting to the issue of a pension fund, a very small 
percentage of the total dollars that have been distributed to 
the institutional investors are going to pension funds, which 
is not to say that pension funds shouldn't receive their 
distribution, but Mr. Harbeck uses an example of an entity that 
is receiving a benefit. And in using that particular example, 
he misleads the committee as to the most, what constitutes the 
majority of the entities that are receiving the funds. And the 
fact of the matter is that the kinds of funds, the kinds of 
institutions the trustee himself has alleged could have known 
and should have known about this fraud were the ones that are 
receiving most of these funds, and the fact of the matter is 
that over a thousand innocent victims are being sued.
    Mr. Hurt. Okay. I hope I have time for one more question. 
Again to Mr. Harbeck, a second fact that is stated in Mr. 
Stein's testimony is the fact that in addition to saving SIPC 
over a billion dollars by the trustee's own calculations, the 
trustee and his associated consultants have similarly been 
enriched by almost $1 billion, funds which could have gone 
instead to the devastated and desperately needed, those who 
desperately needed it. Is that true? Would you agree with that 
as a fact? And, again, do you believe that is consistent with 
the intent of Congress, and is that fair?
    Mr. Harbeck. The billion dollars in administrative expenses 
in the Madoff case went to compile the $9 billion fund that the 
trustee has been able to recover.
    Mr. Hurt. So you think that is fair?
    Mr. Harbeck. I think that is an extraordinary return, yes, 
sir.
    Mr. Hurt. Mr. Stein?
    Mr. Stein. That is kind of patently absurd on its face 
because $7.2 billion or approximately was immediately recovered 
by the Department of Justice. Early in the trustee's 
proceedings, long before the number had reached $100 million, 
another 2.2 was negotiated with another estate. So the amount 
of money the trustee has actually utilized to effectively 
recover funds has been an enormous amount. If you look at the 
investment quality of the return on investment for the trustee 
for the majority of that $1 billion in expenditures, a 
relatively small amount of money has been recovered from the 
large institutional investors.
    Mr. Hurt. Okay. Thank you. My time has expired.
    Chairman Garrett. Thank you.
    The gentleman from Colorado.
    Mr. Perlmutter. And I, again, want to thank the Chair and 
the ranking member for tackling what is a very difficult and 
unsatisfying problem because no matter how you push the 
balloon, somebody gets hurt, because this is all a sham, and 
everybody has been robbed from the beginning to the end. Now 
the way I look at it is, there are three pots of money--we 
talked about two. There really are three pots of money. And I 
am sorry, ma'am, you are Ms. Kogutt? How do you say it?
    Ms. Kogutt. ``Kogutt.''
    Mr. Perlmutter. ``Kogutt,'' pardon me. There really are 
three pots of money: You have the insurance fund, and how big 
are we going to make that insurance fund so that we can cover 
people who have been lost, and how many tiers down? Is it the 
direct investor, is it the second direct, indirect investor, 
third? Then, you have the recovery that goes on among the 
people who have been defrauded.
    So, Ms. Shean, you get, your husband gets in at the end of 
Stanford, okay? You are helping the guys who got in earlier 
into the fraud than your poor husband and you. You are in 18 
months before they close it down, but there were people in 3 
years, 4 years, 5 years; they are the ones getting interest 
payments off of your money. So, that is the second.
    Then, you are trying to figure out how do we resolve it so 
that everybody is treated equally, the early guys get paid, but 
the late guys don't get paid? They are hurt?
    And then there is the third pot of money, which, Ms. 
Kogutt, you reminded me of, is those people who got you into 
the deal, okay? Whether it was the lawyers or the accountants 
or the advisers or some other company, and then there are all 
those lawsuits about--
    Ms. Kogutt. Actually, there are no lawsuits.
    Mr. Perlmutter. There certainly are in the Madoff side.
    Ms. Kogutt. There should be.
    Mr. Perlmutter. I don't know about on the Stanford side, 
but there certainly are on the Madoff side.
    Ms. Kogutt. There should be on the Stanford. There is a 
litigation stay that has been in place since February 2009.
    Mr. Perlmutter. Here is the question, and I appreciate the 
ranking member and the chairman for tackling this. Do we try to 
even it out? Is equity--everybody was robbed, so everybody is 
going to be treated equally, or do the first people get to make 
out better than the guys who put their money in at the end? 
That is a policy question. For me, I think the equality, 
everybody being treated equally is appropriate.
    You then have the lawsuits against the advisers, and then 
you have the question of how big should we have this insurance 
fund? And will the broker-dealers or the taxpayers add to that 
insurance fund? Because the losses from Madoff and the losses 
from Stanford are so huge, they swamp the fund. It is just 
gone. It is bankrupt because we haven't made it that big 
because we hadn't seen those kinds of losses before. And in my 
previous life as a lawyer, I represented victims of Ponzi 
schemes. I represented trustees trying to collect money for the 
victims of Ponzi schemes. These are horrible situations because 
everybody is--and I want to use a crass term, but I am not 
going to since I am on the microphone--robbed, and I don't know 
that there is a good answer.
    Ms. Shean, please?
    Ms. Shean. One of the things that confuses me is that we 
invested in Stanford Trust Company.
    Mr. Perlmutter. It is all phony.
    Ms. Shean. But Stanford was a member of SIPC.
    Mr. Perlmutter. Absolutely, I agree.
    Ms. Shean. As an investor, when I purchase an IRA 
government-approved account, or I should say my husband did, 
and my statements come from Baton Rouge, Louisiana; there is no 
mention of Antigua. I have--
    Mr. Perlmutter. I know, but it is snake oil. It is not 
real. That is the problem. And when you told--when you brought 
up that the SEC knew 12 years in advance, okay, that is 
horrible. And I don't know how we want to try to compensate you 
for that. That is terrible.
    Ms. Shean. So since Stanford was a member of SIPC, what is 
SIPC covering?
    Mr. Perlmutter. There ought to be something from the 
insurance fund available to you, and I don't know why you are 
not getting some recovery, but there were so many people making 
a claim against that fund, it is gone.
    Ms. Shean. So they were accepting money from a brokerage 
firm that was being run illegally?
    Mr. Perlmutter. Correct.
    Ms. Kogutt. Can I comment on that?
    Mr. Perlmutter. Sure.
    Ms. Kogutt. Part of the provisions of SIPA, 78eee(a)(1), if 
the SEC or any self-regulatory organization is aware of facts 
which lead it to believe that any broker or dealer subject to 
its regulation is in or is approaching financial difficulty, it 
shall immediately notify SIPC. However, in 1997, the SEC had an 
item of interest in their very first exam--
    Mr. Perlmutter. That is a troubling fact, and I am not sure 
what the heck to do with that, because you don't have to have a 
claim against the United States, I am not sure you could do it, 
but I feel like you have a claim--
    Ms. Kogutt. There have been lawsuits against the SEC. The 
one that has moved forward the most is the one that has alleged 
the SEC's violation of SIPA for this particular role because 
the broker-dealer had a negative 1,400 percent loss year after 
year, so they are at a negative operating loss, and it grew 
every single year.
    Mr. Perlmutter. And, look--
    Ms. Kogutt. Why didn't SIPC know that?
    Mr. Perlmutter. Your testimony is very compelling, but my 
time has expired.
    Chairman Garrett. The gentleman's time has expired.
    Mr. Perlmutter. I appreciate you all coming here and 
sharing with us. This is a tough deal, and I appreciate them 
tackling it. I am not sure they have the right answer.
    Chairman Garrett. I appreciate that the gentleman's time 
has expired. I also appreciate the fact that the gentleman 
indicated that Ms. Shean probably should receive something from 
the SIPC fund.
    I now recognize Mr. Hultgren.
    Mr. Hultgren. Thank you, Mr. Chairman.
    I, too, thank you all for being here today. I know this is 
a very difficult thing.
    I would like to focus my questions for on, Mr. Harbeck, if 
that is all right, just for me to help understand a little bit 
more of some of the challenges here. Focusing on the SIPC 
Modernization Task Force report, I know one of the 
recommendations is to eliminate the distinction between claims 
for cash and claims for securities during the resolution of a 
failed broker-dealer. First, I wondered if you can explain why 
this distinction between cash and securities claims may have 
existed before and, second, why SIPC feels the distinction is 
no longer appropriate or necessary?
    Mr. Harbeck. First of all, that is not SIPC's position; it 
is the task force's position. And SIPC will be responding to 
the task force on or before its next February board meeting. 
What the original distinction tied the amount of cash directly 
to the amount of cash available for the FDIC, and rose with 
that dollar number. But in point of fact, sometimes cash gets 
literally caught in the form of a check going to someone when 
they didn't really want to leave cash with the brokerage firm, 
it just happened to be caught as cash as the brokerage firm 
failed. The task force looked at that and said it might be 
appropriate to simply abolish the difference.
    Mr. Hultgren. I wonder if you could explain how fictitious 
securities are categorized in this process. And as you talk 
about that, are claims for fictitious securities considered 
cash claims or security claims? I understand there has been 
some confusion over that in the courts, and I wonder what 
SIPC's position is on that?
    Mr. Harbeck. There is a split in the circuits on this. The 
Sixth Circuit has taken the position that the only conceivable 
way to measure cash legitimately deposited for the purpose of 
purchasing a security which does not ever exist would be 
protected as a claim for cash.
    The Second Circuit has taken a different view, and 
protected it as a claim for securities. But one important thing 
with respect to any claim for securities is that SIPC, under no 
circumstances and in no case, was ever intended to guarantee 
the underlying value of a security. SIPC was designed to get 
you your security back. If it went up, excellent. If it went 
down, that is the way the marketplace works. Under no 
circumstances, regardless of why a security moves up or down in 
value, does SIPC protect the underlying value. It simply 
returns the security to you.
    Mr. Hultgren. I know another recommendation from the SIPC 
Modernization Task Force report is to increase the maximum 
level of protection from $1.3 million and index it to 
inflation. If the distinction between cash and security claims 
is eliminated, effectively eliminating any cash maximum, and 
the level of protection is raised to $1.3 million, this means 
that all cash up to $1.3 million would be SIPC-covered. That is 
over 5 times the level of FDIC coverage. Is that desirable? And 
how might that affect cash holdings in deposit accounts and 
brokerage accounts?
    Mr. Harbeck. I think there may be unintended consequences 
to the task force's recommendation. And I am sure that the SIPC 
board will be actively debating that and has begun that debate 
already.
    Mr. Hultgren. And that response will be in the next few 
months?
    Mr. Harbeck. It is my understanding that the board intends 
to reply to the task force on or before its February board 
meeting in 2014.
    Mr. Hultgren. One last thing. Appreciating that one of the 
fundamental principles guiding SIPC is to certainly protect 
small investors, I wonder how raising the maximum coverage 
level would affect small brokers. Surely you would think this 
would raise broker-dealer assessments.
    Mr. Harbeck. The fact of the matter is that what we will do 
when we reach the target of $2.5 billion, which matches the 
Federal line of credit that we have against the United States 
Treasury, I am confident that the board will assess whether at 
that particular point in time--our current assets are $1.9 
billion--whether a target of $2.5 billion is appropriate or 
whether it should be increased. I think we will take a hard 
look at where we stand and where our obligations are and what 
our legal obligations are as to whether the assessments should 
be raised, lowered, or stay the same.
    Mr. Hultgren. Thank you all. My time has almost expired.
    I yield back. Mr. Chairman, thank you so much.
    Chairman Garrett. Thank you. The gentleman yields back.
    Mr. Carney is recognized.
    Mr. Carney. Thank you, Mr. Chairman.
    I would like to thank you and the ranking member for having 
this hearing today, and particularly for your tenacity on 
behalf of your constituents. Knowing how important our 
constituents are, I have great sympathy and appreciation for 
the work that you are doing. I appreciate in particular the 
victims who have come here today.
    For me, I think our role is at some level to establish what 
the facts are and to try to come up with the best public 
policy, not just for these two terrible cases, the Stanford 
case and the Madoff swindle, but also going forward for 
everything else. So I am going to try to I think address most 
of my questions to Mr. Harbeck and Mr. Hammerman.
    First, I want to have some more discussion about the 
treatment of institutional investors versus retail investors. 
Mr. Stein, I think, said that 80 percent of the institutional 
investors were protected, and obviously, a lot of retail 
investors were not getting assistance.
    Mr. Harbeck, you mentioned the situation with pension 
funds.
    Mr. Stein seemed to take some exception to that.
    What is it? Is that the full explanation, or what other 
institutional investors might we be talking about here?
    Mr. Harbeck. The statute makes no distinction between a 
corporate investor, a large investor, or a small investor. The 
measurement is how much and, in the Madoff case, how much net 
did that investor put in.
    Mr. Carney. So is it the case that the institutional 
corporate investors put in more money than the retail 
investors? Is that part of the explanation?
    Mr. Harbeck. Whatever the net amount in was for any 
individual, whether it is a corporation, a hedge fund, or 
anything else.
    Mr. Carney. So it would be your view that in fact SIPC is 
not treating institutional investors any differently than 
retail investors in terms of the methodology that you are 
using.
    Mr. Harbeck. The methodology is the same for all.
    Mr. Carney. So should we look at that methodology if the 
effect is to maybe, this is my word, favor institutional 
investors over retail investors? Or is there something in the 
methodology that gives preference to institutional investors?
    Mr. Harbeck. It gives no preference to institutional 
investors. It gives preference, on a pro rata basis, to a 
larger contributor to the fund.
    Mr. Carney. Which at some level is fair, right?
    Mr. Harbeck. Especially when you consider that the 
institutional investor, whether it is a hedge fund which has 
partners, or whether it is a pension fund which has pension 
participants, if that institutional investor is an innocent 
institutional investor, it will get a proportional share.
    One thing that I take strenuous exception to is the fact 
that any institution that should have known about this or is 
alleged to have known about this has not shared, nor will it.
    Mr. Carney. Quickly, Mr. Stein, you are jumping out of your 
chair to get a point in here. Please feel free. My time is 
running out, but go ahead.
    Mr. Stein. I get back to the words that Mr. Garrett stated 
initially when he was referring to the opening comments that 
President Nixon made. This legislation and the statute was 
intended--its very purpose was to protect the small investor. I 
don't know how many times that point has to be reiterated for 
it to sink in to SIPC's conceptual thinking. But that is the 
essential point. It is understood that professional investors 
and institutions have the resources and the recourse to be able 
to protect themselves and their investors.
    Mr. Carney. Fair enough. So should the methodology then 
slant towards the retail investor?
    Mr. Stein. I think it is a legitimate question to pose 
going forward. But I interpreting the law as it is written now, 
I think first of all it is from a public policy point of view, 
it is essentially we protect the smaller investor and the 
middle-class investor, as it was intended in the law.
    Mr. Carney. That makes a lot of sense to me. There is 
something to be said for that. But does the kind of the 
fundamental part of the bill going from a calculation of actual 
net investment to last statement method, does that do that?
    Mr. Stein. Actually, the bill that Congressman Garrett has 
written gives the trustee the ability to determine what is in 
the best interests when it comes to the recovery of customer 
property, that second pool of money that Congressman Perlmutter 
was referring to. So those moneys that are recovered--we are 
talking about everybody getting their $500,000--the pool of 
money that is recovered, the trustee now has the ability to 
look to the SIPA legislation and say, what is the most 
equitable way to distribute this money? Do we give most of it 
to the small investor? Do we give most of it to the large 
investor? How are we going to split it?
    Mr. Carney. That seems to me to be a fundamental question.
    My time has run out. I may have additional time at some 
point. But I appreciate everybody coming in. Again, thank you 
to the chairman and the ranking member for your tenacity on 
this issue.
    Chairman Garrett. Thank you. And we are going to stay for 5 
more minutes and then go to vote, or 10 more minutes, to go a 
second round, without objection.
    So, Mr. Hammerman and Mr. Harbeck, you have heard the 
testimony or the statements by Ms. Shean and Mr. Friedman as to 
how Mr. Shean invested and how Mr. Friedman invested. Can you 
tell the committee, and I guess all the American public who is 
watching them as just regular investors going forward, can you 
tell us what exactly did they do as regular investors that was 
wrong in their process of making their investments?
    Mr. Harbeck. Chairman Garrett, these victims did nothing 
wrong, nor has anyone ever said that they did.
    Chairman Garrett. Okay.
    Mr. Hammerman, as far as the clients or the institutions in 
your association, would you say on their behalf that either one 
of them did something wrong as far as their selection?
    Mr. Friedman told how he went out and knew about it, 
actually went to the company and went through it, which is sort 
of amazing. That, to me, is due diligence. Do you think they 
did anything wrong?
    Mr. Hammerman. Absolutely not, Mr. Chairman. These are 
victims of terrible financial crimes.
    Chairman Garrett. So if America is watching right now, and 
they put themselves in the shoes of Ms. Shean and Mr. Friedman, 
and that those two people did absolutely everything right, and 
looking, they went in and they saw the SIPC logo there, Mr. 
Harbeck, and they saw that there was a guarantee that SIPC 
would protect them, and now America realizes there is no 
protection, as you were saying before, both of you were saying 
before, for fraud or these Ponzi schemes, what is the answer 
then for other Americans?
    Mr. Hammerman, should there be an addendum, or Mr. Harbeck, 
should there be an addendum on the SIPC logo that when they go 
into Mr. Hammerman's, any of the firms in his association, 
should there be a bold statement saying that you are protected 
by SIPC; however, if there is fraud by this firm or if there is 
a Ponzi scheme by this firm, you will not be protected? I am 
willing to do that. Are you?
    Mr. Harbeck. Chairman Garrett, SIPC has given $800 
million--
    Chairman Garrett. Answer the question.
    Mr. Harbeck. I am. $800 million to the victims of a Ponzi 
scheme.
    Chairman Garrett. But you are not to this one.
    Mr. Harbeck. Yes, sir, $800 million.
    Chairman Garrett. Not to Ms. Shean, you haven't. Not to Mr. 
Friedman, you haven't.
    Mr. Harbeck. No. We have not started a liquidation 
proceeding for Stanford because the courts have upheld the 
position that it is inappropriate to start such a case.
    Chairman Garrett. Ms. Kogutt?
    Ms. Kogutt. That is under appeal right now with the D.C. 
Circuit Court.
    Chairman Garrett. So, in the Madoff situation, then, are 
you willing to say that if they had invested in Madoff, as 
opposed to in Mr. Stanford's case, you are saying in this case, 
you are willing now to have SIPC advances being made so that 
they can be guaranteed that those payments will be made?
    Mr. Harbeck. SIPC advanced $800 million to the victims of 
the Madoff Ponzi scheme.
    Chairman Garrett. In the case where they are in similar 
situations, where they have withdrawn more than they have 
invested in the fund?
    Mr. Harbeck. If you wish to put an addendum saying SIPC 
does not permit the payment of fraudulent, fictional profits, 
we would be in agreement. Because the courts have 
consistently--
    Chairman Garrett. How about this situation, then? Say I put 
$1,000 into one of Mr. Hammerman's firms or clients a few years 
ago, and I have been taking out, like Mr. Friedman says, I took 
out enough just to pay my taxes, I took out just to pay my 
medical bills and so on. So after so many years, I have taken 
out my $1,000. But my statement says I still have a thousand or 
more, right? Under your understanding, how much would I get 
from advances?
    Mr. Harbeck. If the entire--if the entire scheme is a Ponzi 
scheme--
    Chairman Garrett. Right.
    Mr. Harbeck. --then the answer is--
    Chairman Garrett. Zero, right?
    Mr. Harbeck. The answer is zero. And the reason the answer 
is zero, sir, is because it would take money away from people 
who did not get their own money.
    Chairman Garrett. Wait. The time is mine. So what you are 
advising to do, what I have to do and what they should do in 
the future, everyone watching this should do in the future, is 
when you go to a broker-dealer and you make an investment, you 
should keep track every day that you take money out of that 
broker-dealer--every day you take out money to make a tax 
payment, every day you take your money out to make a payment 
for your insurance or your health care--keep track so that you 
say, as soon as I get to that limit, in my case my 
hypothetical, I took out my $1,000 original investment, you are 
telling me at that point my coverage with SIPC ended, so you 
know what I would do as a prudent investor? I would close my 
account with that dealer, and I would walk across the street to 
another dealer, and at that point, it resets. Is that true that 
it would reset when I walk across the street?
    Mr. Harbeck. I think what you--
    Chairman Garrett. Answer that question, please. Would it 
reset?
    Mr. Harbeck. I am trying to answer it, sir.
    Chairman Garrett. Yes or no?
    Mr. Harbeck. The answer to your question is that if you did 
that, you would be protected. But it is not necessary. And it 
is not necessary because--
    Chairman Garrett. Tell me how else I would be protected for 
that thousand dollars.
    Mr. Harbeck. The answer is, in the history of SIPC--
    Chairman Garrett. No, tell me how I should be protected.
    Mr. Harbeck. You should be protected by the regulatory 
system, you should be protected by the auditors of the firm.
    Chairman Garrett. Okay. So you have been there for 38 
years. You know you are not protected that way. So how am I 
going to be protected?
    Mr. Harbeck. I believe that one of the things that has come 
out of the financial crisis is heightened review by the PCAOB 
of auditors of--
    Chairman Garrett. So, we don't need SIPC any more because 
my protection is not from SIPC at that point; it is from the 
SEC and the other agencies. Is that what you are telling me?
    Mr. Harbeck. Certainly, that is the first line of defense 
against fraud, yes.
    Chairman Garrett. That is. But I thought SIPC was my second 
line, my final line. You are telling me SIPC is not going to be 
there for me.
    I think that is one of the takeaways from today is that 
first, you are willing to change the SIPC logo to say that 
there is a caveat and that your members will now have a caveat 
or statement, and that should be indicated to them on a regular 
basis--I think that is significant that we are going to have to 
do that. And second, your takeaway is that to be a prudent 
investor, as Ms. Shean and Mr. Friedman should be going 
forward, is that you should roll your money every so often from 
one broker-dealer to another broker-dealer as soon as you have 
come to that capstone, because my only reliance is on the 
regulators, and we know how good regulators are, and we know, 
you have just stated, that SIPC will not be there to protect 
me. I think that is a significant takeaway from this hearing. 
Ms. Kogutt?
    Ms. Kogutt. That is assuming that the Ponzi scheme has gone 
on long enough for all of the investors to have withdrawn 
anything. In my case, we invested 9 months before the collapse 
of the Stanford Ponzi scheme.
    But I want to point out that SIPC's Web site right now says 
that SIPC helps individuals whose money, stocks, and other 
securities are stolen by a broker-dealer or put at risk when a 
broker fails for other reasons.
    But Mr. Harbeck has said SIPC doesn't cover fraud. How do 
you steal a customer's funds without defrauding them? Isn't 
that burglary? There has to be some level of fraud to steal 
money.
    Chairman Garrett. Yes. This issue is so frustrating on so 
many levels.
    Mr. Harbeck, you indicated you have been there for 37 
years. Can you tell me, prior to this collapse, what was the 
insurance rate that you charged the member firms during that 
period of time?
    Mr. Harbeck. It has varied dramatically over that 38-year 
period.
    Chairman Garrett. Okay. Just prior to the crisis in--
    Mr. Harbeck. Just prior to the crisis, when we had $1.6 
billion, we felt that was enough. And there was a token 
assessment of $150 per firm.
    Chairman Garrett. $150.
    Ms. Kogutt. Stanford paid $1,750 for their protection for 
their--
    Chairman Garrett. So Goldman Sachs in New York, what were 
they paying?
    Mr. Harbeck. At the time, they were paying $150 a year. 
Once we turned the assessment spigot back on, they paid tens of 
millions of dollars.
    Chairman Garrett. Right. Just coincidentally, I am in the 
market right now to buy a used truck. It costs $1,500. So I 
called up the insurance agent last night and said, how much 
does it cost me to insure this truck that I bought for $1,500? 
They said, it is going to cost you $1,000 a year to insure that 
truck. If I have homeowners' insurance, it is going to cost me 
about $1,000 on my house. If you go to a Sears and you go and 
you buy a large TV or something like that, when you leave, they 
try to sell you one of these insurance policies, which will 
cost you $200 or $300. Goldman Sachs was paying $150 for 
basically--for coverage. That doesn't seem irresponsible to 
you?
    Mr. Harbeck. I will refer to my written statement, where I 
have gone through SIPC's financial condition, Chairman Garrett. 
And we are currently in a stronger position than we were in 
2008.
    Chairman Garrett. Right. But you were not in a strong 
enough position in 2008 not to have to make these draconian, 
what appears to be draconian increases, sudden increases, which 
I can understand completely when I meet with Mr. Hammerman, 
some of your smaller members, and they are saying, hey, I 
budgeted, or I planned, and this is my operating budget, my 
budget for this much. And all of a sudden, wham, I am going to 
be hit this much. I can understand that. If your guys--I am 
sorry, if your members had known back in 1980, it was this 
much; in 1990, it was this much; and in 2000, it is this much, 
as a business owner, you could probably have planned for that 
and made for appropriate adjustments in your operation, and I 
can understand that completely. But to go from next to nothing, 
less than it costs to buy insurance on a TV at Sears, to go to 
what some of your members, Mr. Hammerman, are going to right 
now, you can tell us, is this significant to them, the changes? 
The increases that some of your members are going to have to--
    Mr. Hammerman. It sounds like, from Mr. Harbeck's 
testimony, that it is multiples of millions of dollars.
    Chairman Garrett. Right. And I can understand that is 
probably unconscionable to your members' situation, and that 
they just can't adapt to it.
    That is why, Mr. Harbeck, when you say you have been there 
for years and you have seen this ramping up to this, and the 
preparation wasn't made, it goes back to my opening questions. 
What did they do wrong? Nothing. What did the regulators do 
wrong? A lot. What did SIPC do wrong? Apparently not a 
significant amount with regard to preparing the fund and being 
in preparation for cases like this.
    Ms. Shean?
    Ms. Shean. Nothing.
    Chairman Garrett. The committee will stand in recess. Mr. 
Stein, do you--
    Mr. Stein. Yes, Chairman Garrett, I just wanted to thank 
you very much. I think you have hit a lot of the key points. I 
think there are two things that I would just ask for 
consideration here.
    I think we are finally getting a chance to shine a light on 
the culture of SIPC. I think it has been largely opaque for 
probably the 38 years that Mr. Harbeck has been there. I think 
the transparency is essential. I think we are getting to see 
some of the warts, but I think we need to dig deeper. I think 
we need to truly see whether SIPC is in fact even worthwhile. 
Is bad insurance better than no insurance at all?
    The second point, more of an overarching issue, is getting 
back to what the concept was in setting up basic issues of 
certainty for the banking industry and the financial services 
industry, and that means that when people see a bank deposit 
statement or a bank statement or an investment statement, there 
has to be a certain level of certainty in order for those 
markets to operate with the kind of confidence and trust that 
allows this economy to prosper.
    Once we start chipping away and nuancing at those very, 
very fundamental assumptions, we are threatening great damage 
to our financial and banking systems.
    If we applied the same characteristics that Mr. Harbeck and 
Mr. Hammerman have just been speaking about to the banking 
industry, to bank statements, to bank depositors, imagine the 
horrific result that would take place.
    I have to encourage the committee to consider, again, in 
all these decisions what the impacts are going to be to the 
financial industry and the importance of creating certainty and 
confidence in the markets, particularly now after what we have 
gone through collectively in this country.
    Chairman Garrett. Thank you.
    Without objection, and it doesn't look like I am going to 
have any objections, I am going to put into the record: a 
statement from the Financial Services Institute; the GAO report 
of 1992; and an email of May 21, 2009, from Mr. Harbeck 
relative to the matters that we somewhat touched upon during 
the course of this hearing.
    We are in votes, and I know that the other Members will be 
leaving town. So I want to take this opportunity to thank each 
and every one of the witnesses who have come here today. I 
appreciate your concern for this issue, and I very much 
appreciate the testimony. We look forward to any input that any 
of you have on suggestions as we move forward on this 
legislation.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And with that, this hearing is adjourned.
    [Whereupon, at 11:24 a.m., the hearing was adjourned.]


                            A P P E N D I X



                           November 21, 2013


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