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Rep.ScottGarrett

StatementfortheRecord

AccompanyingRe-introductionoftheEquitableTreatmentofInvestorsAct

Lateinthe111th

Congress,Iintroduced,withco-sponsors,Mr.KingofNewYorkandMs.

Ros-LehtinenofFlorida,theEquitableTreatmentofInvestorsAct(H.R.6531).Thisbill

reaffirmedandclarifiedthekeyprotectionsforsecuritiesinvestorsintendedby

Congressinthe1970enactmentoftheSecuritiesInvestorProtectionAct(SIPA)and

majoramendmentstothatActin1978.

TodayIreintroducethatlegislationwithclarifyingamendments.Thecentralpurposeof

thelegislationistoreaffirmtheoriginalCongressionalintentontwokeyaspectsofthe

administrationofSIPAintheliquidationofabankruptbroker-dealerfirm.First,asa

generalmatter,thedeterminationofcustomernetequityshallrelyonthefinal

accountstatementreceivedfromthedebtorpriortoclosing,plusanyadditional

supportingdocuments,suchastradeconfirmations.Second,andagainasageneral

matter,avoidanceactions,orclawbacks,torecoverpropertytransferredtothe

customerpriortoclosingshallbeprohibited.WhileIemphasizetheseclarificationssimplyreaffirmcurrentlaw,theactionsandinterpretationsofSIPAbeingmadebythe

SecuritiesInvestorProtectionCorporation(SIPC)andtheTrusteeappointedforthe

BernardL.MadoffInvestmentSecuritiesLLC(BLMIS)liquidationproceedingmakethe

passageofthislegislationimportantandnecessary.

Inthislegislation,thereareimportantexceptionstothosetwogeneralcustomer

protectionsthatdenythatbeneficialtreatmenttoanycustomerwhoknewoforwas

complicitinthefraudulentactivityofthedebtorandtoanycustomerwho,asa

registeredprofessionalinthesecuritiesmarkets,withtherequisiteknowledgeofthese

matters,kneworshouldhaveknownofthedebtorsfraudulentactivitiesandfailedto

notifyappropriateregulatoryauthorities.ThisportionofthebillslanguageismeanttoassurethatSIPCandthereceivershipTrusteehavefullyadequatelegalpowerstoact

againstcustomersundeservingofSIPAsinvestorprotections.

Whilethisclarifyinglegislationisintendedtohavegeneralapplicationtoallbroker-

dealerbankruptciesinvolvingdebtorfraud,introductionatthistimeisdirectlyrelated

tothefailureofSIPCanditsTrusteetofairlyandadequatelyacttoprovidestatutorily

mandatedandintendedSIPAprotectionstotheseveralthousandinnocentcustomers

defraudedbyBernardMadoffintheoperationsofhisinvestmentadvisoryandbroker-

dealerfirm,BLMIS.CompoundingthegrievousshortcomingsofSIPCtorespond

promptlyandusefullytothesecustomersfinancialplightisthewell-documented

failuresbytheSECandFINRA,theregulatoryoverseersofBLMIS,todetectandendthe

Madofffraudoveraperiodof25ormoreyears.

GiventhecolossalregulatoryoversightfailureandSIPCneglectinassessingbroker-

dealerfirmsatalevelcommensuratewiththedramaticgrowthofthesecurities

marketsandtheparticipatingbroker-dealerfirms,itwouldbereasonabletoexpectthat

SIPCandtheSECwouldhavemadeexceptionaleffortstomakearapidand

comprehensiveresponsetothefinancialneedsoftheMadoffvictims.Thathasnot

beenthecase.Quitethecontrary,infact,hasoccurred.SIPChasdeniedprotectionto

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overhalftheaccountsatclosing,indirectviolationofthelegalmandatesofSIPAas

currentlyinaffect;providedfullprotectiontoonly25%ofaccounts;takennearlytwo

yearstopayadvancestothelimitedgroupdeemedeligible;andthreatenedtoclaw

backfundsfromroughly1000innocentcustomers.

SothatmycolleaguesmayjudgeforthemselvestheurgentneedforthisCongressional

intervention,letmehighlightkeyfactorssupportingthisneedforaction.

Thelegislativerecordsurroundingtheenactmentsofthe1970Actandthe1978

amendmentsisrepletewithstatementsfromthelegislativefloormanagers,active

supporters,committeereports,theTreasury,theSEC,andsecuritiesindustry

spokespeoplelikeningtheintendedSIPCprotectiontothebankcustomerprotection

offeredbytheFDIC.Likewise,thelegislativehistoryemphasizesprotectionofall

innocentcustomersfrombrokeragefailure,withparticularmentionofsmall,

unsophisticatedcustomers,andtheneedforpromptactionbySIPCinpaymentof

advancesforreliefofindividuals,understandablydevastatedbythesuddenlossofkey

financialassets.

Critically,Congressrecognizedtheneedforrestoringinvestorconfidenceinthefinancial

marketsatatimewhenthefinancialindustrywasundertremendousduressand

overwhelmedbythepaperworkcrunchcausedbytheprocessingofphysicalsecurities.

Theftandmisplacementofsecurities,failuresoftradeexecutions,andinsolvencies

werecommonplace.AmidstthebackdropofseveralpopularPonzischemesand

brokeragefailureswasSIPCborn.

Forthecustomerofabankruptbroker-dealerfirmtoqualifyforSIPCprotection,itis

necessaryforthecustomersaccountatclosingtohaveapositivenetequity

determinedbysubtractinganyoutstandingobligationofthecustomertothefirmfrom

theamountthefirmowedthecustomer.ForthefortyyearsofSIPCsexistence,ithasbeenthestandardpracticeinmakingthatsimplecalculationtousethefirmsmost

recentaccountstatementtothecustomer,usuallysupportedbytradeconfirmations,if

any,relevanttothefinalstatementspresentationofholdingsandvalues.Not

surprisingly,thisistheoutcomerequiredbylaw.Underthelegalregimegoverningthe

relationshipbetweenbrokersandcustomers,itisindisputablethatthebrokerowesthe

customertheamountreflectedonthecustomersaccountstatement.Indeed,aworld

wherecustomersand,generallyspeaking,brokersdonotholdphysicalsecurities,it

couldnotbeanyotherway.

Giventhemoveawayfromthepossessionandtradingownershipofactualsecuritiesto

abookentrysystembasedontheessentialtrustofvalidityofthoseaccount

statements,nocustomerwould,therefore,haveanyreasontobelievetheywouldnot

beprotectedbasedupontheiraccountstatementsandconfirmations.IntheSIPC

receivershipfortheMadofffirm,however,thepracticeshavebeeninconsistentwith

thelawandquitedifferentandcontrarytotherepeatedassertionsofSIPCandits

Trustee,nevertotheultimatebenefitoftheinnocentindividualcustomer.

Ratherthanusingthecustomersfinalaccountstatementconsistentwithreasonable

expectationsofacustomer-theSIPCTrusteehasignoredthestatutoryrequirementof

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SIPAandhasdevisedacash-in/cash-outformulation(CICO)todetermineacustomers

netequity.TosuggestthattheSecuritiesInvestorProtectionActwouldhavethe

effectofdenyingcustomerstheirlegalrighttorelyontheiraccountstatementis

counterintuitive.Thisformulationwasdevelopedfromapositionofhindsightoncethe

Trustee,hislawyers,andforensicaccountantswereinsidetheMadofffirmandlearned

thatnotradeshadbeenmadebythefirmforcustomers.

Eventhoughcustomershadregularlyreceivedmonthlyaccountstatementsshowing

tradesandholdingsinrealsecurities(oftenbluechipsintheDow100)thatwere

supportedperiodicallybytradeconfirmationsinthosestocks,theTrusteedeclaredthat

alltransactionswerefictitiousandthatstatutorywordssuchasowedand

positionshadnomeaning.HefurtherhasassertedthatinaPonzischemethe

customerhasnobasisforreasonableexpectationapublicutterancewhichwill

destroythepublicsconfidenceinoursecuritiesmarketsatoddswithSIPAsprimary

policyobjective.

ToexecutetheTrusteesCICOformulationitisnecessarytoexamineeverycustomer

accountovertheentiretermoftherelationship(formanyspanning20to30years)tosumuptotaldepositsandtotalwithdrawals(withoutprovidinganyreturnon

investment--evenastandardrate).Ifdepositsexceedwithdrawalsthecustomerhasa

netequityandqualifiesforSIPCprotectionunderCICO.Ifwithdrawalsexceed

depositsoverthelifeoftherelationship,thecustomerisdeclaredineligibleforSIPC

reliefandmaybetargetedforclawbackofthenetwithdrawals.

How,youmayask,couldtheTrusteeignoretheSIPAdefinitionofnetequityand

proceedtoinstituteclawbackactions?TheanswerliesinSIPAsincorporationby

referenceofprovisionsandpowersundertheFederalBankruptcyCode.However,the

BankruptcyCodedoesnotpermitclawbacksofamountspaidbyabrokertoa

customertosatisfythebrokerslegalobligationstothecustomeroursecuritiessystemcouldnotworkanyotherway.Again,SIPCandtheTrusteearedisregardingthe

clearbodyoflawtofurtherharmtheMadoffvictims.

Letusnowexaminetheresultsofthisreceivershiptodatetodeterminejusthow

equitableitsperformancehasbeen.

Atclosing,theapproximately4900accountsofBLMISthathavefiledclaimsforrelief

withSIPChadaggregatefinalstatementvaluesofroughly$57Billion.Ofthat4900,well

lessthanhalfofthoseaccounts(2053)havebeendeterminedeligibleforSIPA

protectionundertheTrusteesCICOformulation.Only1207ofthoseeligibleaccounts

willreceivefullSIPAreliefbenefits--advancepaymentof$500,000andaprioritystatus

tothedistributionofrecoveredcustomerfundsuptotheremainingbalanceofthe

CICO-approvedclaim.846oftheapprovedclaimswillreceiveadvancepayments

averaging$200,000;andbecausetheadvancesfullysatisfytheCICOclaimthese

accountshavenoprioritystatuswithrespecttocustomerfunds.2728accountsreceive

norelief(advancesorprioritystatus)underSIPA.

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Thesenumbers,derivedfromSIPCresponsestotheHouseFinancialServices

SubcommitteeonCapitalMarkets,portrayanoutcomedistressinglyoutofstepwith

CongressintentforSIPAprotection.

Theoverallrecordofperformanceinprovidinginvestmentprotectioninthiscaseis

evenworse.Thebulkofadvancepaymentstoeligibleaccountholdersweredistributed

inthelastquarterof2010,fullytwoyearsaftertheclosingofBLMIS.Thereisabsolutely

nowaytosquarethatperformancewiththeclearmandateinSection9(a)ofSIPAfor

promptpaymentofadvancesamandatewhichrecognizedthatmostcustomers,

victimizedbybankruptcyoftheirbroker-dealer,willbeindireneedofurgentfinancial

relief.

Nowletusturnourattentiontotheclawbacksuitsagainstinnocentcustomerswho

overthecourseoftheirinvestmentrelationshipwithdrewwhattheyrightlybelievedto

beearningsfornormalreallifepurposesincometosupportretirement,paymentof

Federal,State,andlocaltaxes,helpingachildwithahomepurchase,assistinga

grandchildwithcollegecostsetc.onlynowtofindtheTrusteedemandingareturnof

someofthosedisbursements.

WhattheTrusteenowsuggestsasreliefforalltheMadoffvictims,thosewhohave

receivednoSIPAfinancialprotection(overhalf)andthosereceivinginadequateand

dilatoryrelief,istheopportunitytofilefraudclaimsagainstthegeneralbankruptcy

estate,whenandifassetsareassignedtoit.Formostoftheinnocentcustomers,now

indesperatefinancialconditionandfraughtwithdailyanxiety,suchreliefistemporally

distantwithchallengingprospectsforsuccess.Inageneralbankruptcyproceeding

theseindividuals,manyofthemaged,willbecompetingwithclaimants(financial

institutionsandthelike)withfargreaterresourcesandtop-linelegalrepresentation.

Tohiscredit,theTrustee,withaidprovidedbytheU.S.Attorneysoffice,hasassembledsomesignificantassetsfrompartiescomplicitwiththedebtor.Theinnocentcustomers

ofMadoffshouldwithoutquestionhavethefirstandpriorityclaimforreliefinthe

distributionofthoseassets.ThatistheclearintentofSIPAinestablishingclaimsto

customerfundsbeforeassetsmoveintothegeneralbankruptcyestate.Hadthe

Trustee,attheoutsetofthisreceivership,followedhistoricSIPCpracticesusing

customerfinalstatementstodeterminenetequity,thenalloftheseinnocent

customerswouldnowbeeligibleforthedistributionofcustomerfundsundersome

equitableplandevisedbytheTrusteewiththeapprovaloftheBankruptcyCourt.

Moreover,theywouldbeprotectedandassistedintheirdistressbyfulladvancesfrom

theSIPCFund,whichhastheresourcestoprovidesuchrelief.

Twoadditionalmattersneedtobeunderstoodbymycolleagues.Becausetheuseof

theCICOmethodologyreduceddramaticallythenumberofcustomersqualifyingfor

advancesfromtheSIPCFund(anentityfundedbythebroker-dealercommunityand

expresslyestablishedfortheearlyreliefofcustomers),thatFundhasbenefitedbya

savingsofover$1billion.Tomakethisoutcomemoreunacceptable,thefailureto

distributethosefundsmeansthatcustomerrefundclaimstotheIRSfortheftlosses

willbeincreasedbysome$300million.Thusthebroker-dealercommunitys

responsibilitygetspassedontotheAmericantaxpayer.

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Theconductofthisreceivershiphasbeenpitifullyinadequateinfulfillingtheprotections

oftheMadoffvictimscontemplatedbyCongressin1970and1978.Theprocesses

employedbytheTrustee,fromthestandpointofthetypicalcustomer,havebeen

needlesslytimeconsumingandremarkablyexpensive.Initsmostrecentresponseto

theCapitalMarketsSubcommittee,SIPCadvisesthattheTrustee,hislawfirm,and

otherconsultantshavebeenpaidsome$288millionovertwoyearsandcontemplate

billingforanother$1billionoverthenextfouryears.Allthewhile,manyMadoff

victimsarescramblingtoexist.

Itismyearnesthopethatanoverwhelmingmajorityofmycolleagueswilljoinmein

supportingthislegislation,whichissoimportant,notonlyfortheprotectionofmany

innocentinvestors,butalsoforencouraginginvestmentgoingforward,whichiscritical

totheeconomicrenewalourcountryneeds.