U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

56–237 PDF 2010

ADDITIONAL REFORMS TO THE SECURITIES 

INVESTOR PROTECTION ACT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

DECEMBER 9, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–94 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

December 9, 2009 ............................................................................................. 1 

Appendix: 

December 9, 2009 ............................................................................................. 61 

WITNESSES 

WEDNESDAY, DECEMBER 9, 2009 

Chaitman, Helen Davis, Madoff Investor and Legal Advisor, Madoff Coalition 

for Investor Protection ......................................................................................... 12 

Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia University 

Law School ............................................................................................................ 19 

Conley, Michael A., Deputy Solicitor, U.S. Securities and Exchange Commission ........................................................................................................................ 40

Green, Joel H., General Counsel, Upsher-Smith Laboratories, Inc. ................... 10 

Harbeck, Stephen P., President, Securities Investor Protection Corporation 

(SIPC) .................................................................................................................... 42 

Lancette, Gregory, Business Manager, Plumbers and Steamfitters Local 267 

of Syracuse, NY .................................................................................................... 18 

Langford, Jeannene, Investor in MOT Family Investors ..................................... 8 

Leveton, Peter J., Co-Chairman, Agile Funds Investor Committee .................... 15 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 62 

Baca, Hon. Joe .................................................................................................. 64 

Chaitman, Helen Davis .................................................................................... 65 

Coffee, John C., Jr. ........................................................................................... 89 

Conley, Michael A. ............................................................................................ 104 

Green, Joel H. ................................................................................................... 119 

Harbeck, Stephen P. ......................................................................................... 122 

Lancette, Gregory ............................................................................................. 128 

Langford, Jeannene .......................................................................................... 130 

Leveton, Peter J. ............................................................................................... 133 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Written statement of the Securities Investor Protection Corporation 

(SIPC) ............................................................................................................. 145 

Garrett, Hon. Scott: 

Written statement of Robert J. Jerome .......................................................... 212 

Written statement of Lenore Schupak ............................................................ 216 

Klein, Hon. Ron: 

Written statements submitted by Madoff Victims and Two Experts ........... 218 

(1) 

ADDITIONAL REFORMS TO THE SECURITIES 

INVESTOR PROTECTION ACT 

Wednesday, December 9, 2009 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:08 a.m., in room 

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Ackerman, McCarthy of New York, Baca, Maloney, Klein, Perlmutter, Speier, 

Minnick, Adler, Kosmas, Himes, Peters; Garrett, King, Manzullo, 

Posey, and Jenkins. 

Also present: Representatives Ellison and Maffei. 

Chairman KANJORSKI. This hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises 

will come to order. 

I ask unanimous consent that permission be granted to any nonmember of the subcommittee who is present today to sit with the 

subcommittee. 

Pursuant to committee rules, each side will have 15 minutes for 

opening statements. Without objection, all members’ opening statements will be made a part of the record. 

Good morning, everyone. One year ago this week, Federal authorities arrested Mr. Bernard Madoff for participating in the largest Ponzi scheme in U.S. history. It is therefore appropriate for us 

today to meet for the third time to examine this massive securities 

fraud. 

As my colleagues know, I have sought to use the $65 billion deception as a case study to guide our work in reshaping and reforming our financial services regulatory system. 

Last month, our committee passed H.R. 3817, the Investor Protection Act, and we have now rolled this important securities reform bill into H.R. 4173, the Wall Street Reform and Consumer 

Protection Act, which the House will begin to consider today. Both 

bills contain a number of provisions that directly respond to Mr. 

Madoff’s substantial swindle. 

The repeated failures of the U.S. Securities and Exchange Commission, despite having received several leads from a number of 

sources, to detect the Madoff fraud allowed the hoax to continue for 

more than a decade. A lack of effective coordination, sufficient 

2 

funding, and staff expertise each contributed to this unfortunate 

regulatory breakdown. 

In response, our bills double the authorized funding of the Commission for 5 years, to ensure that the Agency has the resources 

it needs to hire staff with appropriate expertise, and to get the job 

done. The bills also provide for an expeditious, independent, and 

comprehensive review of the entire securities regulatory structure 

by a high-caliber entity with experience in organizational change. 

This study will identify specific reforms and improvements that the 

Commission and the other entities that oversee our securities markets must put in place to ensure superior investor protection, going 

forward. 

Mr. Madoff’s episode also revealed the need to elevate the importance of whistleblowers like Mr. Markopolos, who made repeated 

entreaties to the Commission regarding Mr. Madoff’s con, by establishing incentives, so that more of them will come forward. 

Our regulatory reform package, therefore, includes a bounty program, to help identify wrongdoers in our securities markets, and 

reward individuals whose tips lead to successful enforcement actions. With the bounty program, we will effectively have more cops 

on the beat. 

In studying the Madoff case, we have additionally learned that 

the Public Company Accounting Oversight Board lacked the powers 

it needed to examine and take action against the auditors of the 

broker-dealers. Our legislation closes this loophole, so schemers 

like Madoff will no longer be able to rely on inept or corrupt accounting firms to rubber stamp their criminal activities. 

Through our investor protection reforms, we have further sought 

to strengthen the Securities Investor Protection Act, the law that 

helps investors to recover funds when a broker or dealer fails. We 

have increased the resources available to the Securities Investor 

Protection Corporation to fund liquidations, bolstered the level of 

cash coverage an investor is entitled to, and raised penalties on 

brokerages for violations of the law. We have also broadened the 

eligible types of investments covered. 

We can, however, do more to reform this law. Today, we will continue to move this process forward, as we examine the ongoing efforts of the Securities Investor Protection Corporation to mitigate 

the sizeable losses of Mr. Madoff’s victims, as well as the casualties 

of the $8 billion Stanford Financial fraud. 

We will also explore the intended and unintended consequences 

of several proposed changes to the Securities Investor Protection 

Act that aim to address problems that some Madoff and Stanford 

Financial victims, including retirees, pension funds, charities, and 

others, have encountered. 

While each of these amendments seeks to fix a perceived deficiency in the law, each proposal would also benefit from a robust 

debate in order to identify potential problems and possible refinements. Some, for example, have advocated that the Securities Investor Protection Corporation should not claw back the profits 

taken by earlier investors who unwittingly partook in a Ponzi 

scheme. 

I have concerns that such a plan, if implemented, would treat 

later investors unfairly. That said, clawing back profits already 

3 

used by charities could prove especially devastating. As such, we 

must walk a fine line in determining how to proceed, if at all. 

In closing, I would like to extend my appreciation to my colleagues from New York, Mr. Ackerman and Mr. Maffei, as well as 

Mr. Ellison of Minnesota, Mr. Klein of Florida, and Mr. Perlmutter 

of Colorado, who have helped to select today’s witnesses, and advance discussions on reforming the Securities Investor Protection 

Act. Together, I hope we can learn more from these troubled 

events, and figure out how we can further improve our regulatory 

system. 

Now I would like to recognize our ranking member, Mr. Garrett, 

for 5 minutes for his opening statement. 

Mr. GARRETT. I thank the chairman, and I thank all of the witnesses, too, for joining us today to testify before our subcommittee. 

And from people similarly situated as yourself, I have been informed and made keenly aware of the suffering that has been suffered and inflicted on so many investors in my area in the fifth district of New Jersey, and across the country as well, due to the 

Madoff situation and the Stanford fraud, as well. 

And so, Mr. Chairman, it is important that we hold this hearing 

today to hear firsthand from some of the victims, not only just to 

get a better understanding of their situation and their plight, but 

also to hear your ideas, having been through this experience personally, on how to make the SIPC process work better and, perhaps 

more importantly and appropriately, for all the interested parties 

involved. 

Before I do that, let me just take a moment on my statement. 

I would like to seek unanimous consent to enter two statements 

into the record from constituents of mine, Robert Jerome and Lenore Shupak, into the record. Both of them have been adversely 

impacted by the Madoff fraud. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Mr. GARRETT. Thank you. Now, the frauds themselves were, of 

course, tragedies for so many innocent victims. And so the purpose 

of today’s hearing is to examine ways to improve the SIPC process 

so that the victims don’t have to needlessly suffer once again. 

Now, as the chairman says, there are a number of proposals in 

front of us today to reform the process. One idea is to offer SIPC 

coverage to individual investors in a pension fund or other fund, 

rather than the standard half-a-million dollars in coverage for the 

entire fund, under current law. 

Others have put forward ideas to reform the so-called clawback 

process, in which the trustee is seeking to recover funds redeemed 

by some Madoff investors in the name of equity, returning funds 

to all the other Madoff investors. 

There are also calls for a more timely process and advances in 

extending coverage to affiliates of SIPC-registered brokers, as well, 

that we should consider. 

All of these ideas, I think, deserve to be fully explored and vetted 

by this subcommittee, with a frank discussion of the pluses and 

some of the minuses, as well. This is the least, I think, that we can 

do for the many investors affected by the past frauds, as well as 

future ones, as well. 

4 

Because, quite honestly, unfortunately, there will be future 

schemes that will try to bilk unsuspecting investors. And the SEC’s 

failure to detect the Madoff situation, despite all the red flags and 

warning signs and testimony that came to them, is well documented. So we know that this is the type of thing, unfortunately, 

that could happen in the future. 

And, unfortunately, as Professor Coffee has indicated in his testimony, the level of loss justifies more than just the serious reforms 

that have already been adopted by the SEC. And there I agree. I 

am committed to exploring other ways to improve the performance 

of that agency. And so I welcome any insights that you may have 

on this, in regard to the hearing today and going forward, as well— 

the rest of the panel, as well. 

One thing I don’t think—and I will close on this—we should be 

doing, as far as the solution to that problem, is just saying, ‘‘Let’s 

see if we can just throw more money at the SEC,’’ and not asking 

for any more results from them. 

Unfortunately, as you probably all know, as part of the Investor 

Protection Act that was approved by this committee—and that is 

also a part of the package of bills that will be going to the House 

Floor this week—there is an authorization for the SEC to be doubled with basically no strings attached, as to where the money 

goes. 

My colleague, Congressman Neugebauer, offered an amendment 

during the committee process here, and I cosponsored that amendment. And what that would have done would have scaled back future authorization increases for the SEC, and instead, would have 

tied any of those increases and money going to the SEC to—first, 

for them to have to fulfill some of the recommendations that were 

made by the Inspector General, basically saying, ‘‘You have an organization, you didn’t do the job, we are not going to reward you 

by sending you more money, unless you can prove to us that you 

already, over the last year now, have begun to implement some of 

those changes. And if you want to get additional funding in the future, you will have to continue on in a better path.’’ 

So, that’s one other area I would appreciate your comments on. 

I have a number of other questions related to the witnesses’ written testimony. And so I look forward to hearing your testimony, 

and answering some of those questions. 

With that, I yield back, and I thank you. 

Chairman KANJORSKI. Thank you very much, Mr. Garrett. And 

now I would like to recognize Mr. Ackerman for 3 minutes. 

Mr. ACKERMAN. Thank you very much, Mr. Chairman, for your 

continued pursuit of this issue and this series of hearings that you 

have chaired. 

It has been a full year since Bernard Madoff folded his own 

house of cards, and admitted that he had operated the largest 

Ponzi scheme in history. You would think that by this week, a full 

12 months removed from Madoff’s admission, our financial regulators, some of whom have admitted they were negligent in protecting investors from Madoff’s fraud, would have helped as many 

victims as they could. 

You would think that, given the enormity of Madoff’s Ponzi 

scheme, and the human tragedy that it has caused, they would 

5 

have been as generous as possible. And you would think that, because Madoff’s investors received detailed, genuine-looking statements, his victims had every reasonable expectation that the 

money in their accounts was really there, belonged to them, and 

that they were thus fully protected by the securities laws. 

Sadly, you would be wrong. Instead, in the years since Madoff 

turned himself in, the largest and most sophisticated advanced financial system in the world, rather than providing restitution to 

the investors in the largest fraud in history, has managed to create 

classes of victims who have turned against one another, forced to 

fight tooth and nail over only pennies on the dollar of what they 

reasonably thought belonged to them. And there is no end in sight. 

If there is anything we have learned in the year since Bernie 

Madoff turned himself in, it’s that the confidence that investors 

had in the system, from the SEC’s ability to police our markets to 

SIPC’s guarantee of protection against fraud, was misplaced. 

Today’s hearing begins in earnest the process of providing additional legal remedies to Madoff’s victims. In my view, there are two 

issues that this subcommittee must address as we clarify and expand the Security Investor Protection Act: a limitation of SIPC’s 

ability to claw back assets from innocent victims, who are neither 

complicit nor negligent in a Ponzi scheme; and finding some mechanism by which SIPC insurance may be provided to defrauded 

feeder fund investors. 

I look forward to working together with you, Mr. Chairman, to 

address these issues in the coming weeks, and to hear from our 

witnesses today. 

I would also like to acknowledge our witnesses who are Madoff 

victims, and to thank them all for appearing before the subcommittee. There are hundreds more, Mr. Chairman, who wanted 

to appear. Most of them just couldn’t afford the car fare, the bus 

fare, the train or plane fare to get here. We appreciate the witnesses who are here with us this morning, and testifying. And I 

look forward to hearing their testimony. 

And, Mr. Chairman, I would ask unanimous consent that at the 

appropriate place, this folder of statements from additional witnesses be placed in the record. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Thank you, Mr. Ackerman. And now we will hear from the gentleman from New York, Mr. King, for 5 minutes. 

Mr. KING. Thank you, Mr. Chairman, and let me thank you for 

holding this hearing, and thank you for your attention to this matter. And let me also thank my colleague from New York, Mr. Ackerman, for the energy and drive that he has shown on this matter. 

Mr. Chairman, the first time I heard the name Bernard Madoff, 

I think, was December 10th. I was actually stopping by a holiday 

event on the North Shore to meet with some constituents. When 

I walked in, the person hosting it told me that shock was through 

the room, because they had just learned that day that their life fortunes, which had been handled by this Mr. Madoff, whom I hadn’t 

even heard of before, had been part of a Ponzi scheme. And, of 

course, the next day the arrest was made and the story broke. 

6 

So, in my first encounter with it, I could see the shock on people’s faces. I could see the pall that was over the room. And since 

then, the situation has only gotten worse. 

I have a number of questions regarding what has happened over 

the course of the last year. Like Mr. Ackerman, you see a tragedy 

like this unfold, and then you see, over the course of the next year, 

the victims being victimized again. And I know there are no easy 

answers to this, but to me, there has almost been an imputation 

of fraud to the victims themselves, somehow implying and imputing Madoff’s offenses to them, that somehow they should have 

known, or somehow they are co-conspirators with Bernard Madoff. 

And yet there is no evidence to suggest that at all. 

So, we have the redefinition of net equity. We have the clawback, 

which could be devastating. We have the fact that taxes have been 

paid over the years, for many years, on nonexistent profits. We 

have the feeder fund issue, where many, including a former Member of Congress, called me. He never heard of Bernie Madoff, he 

lived as far from New York as anyone could, and it turns out that 

his life savings, through a broker, had been invested by Bernard 

Madoff. And he has lost everything. 

And then, there is the whole issue of what appears to be almost 

unfettered power being given to the trustee to change definitions, 

decide who he is going to go after, why he is going to go after them, 

whether or not there is specific authority for him to do it or not. 

So, these are all issues. Because, as the chairman said and I believe the ranking member also said, this will not be the last Ponzi 

scheme. This will not be the last massive fraud. And I don’t think 

enough attention—and all of us share responsibility for this—has 

been given over the years to what do you do when a massive fraud 

like this develops. We have to address it. And, in addressing it to 

the future, I think we also have to find ways to protect those who 

are currently the victims. 

So, I look forward to the hearing. I look forward to working with 

all the members of the subcommittee and committee, in trying to 

come up with legislation to address the real needs of the victims, 

and also to do what we can to ensure that there is much better enforcement in the future, and much stricter enforcement, to make 

sure this does not happen again. 

And with that, Mr. Chairman, I look forward to the testimony. 

I thank the witnesses for being here today. I thank the victims who 

have taken the time to be with us here today. And I yield back the 

balance of my time. 

Chairman KANJORSKI. Thank you very much, Mr. King. And now 

we will hear from the gentleman from Florida, Mr. Klein, for 2 

minutes. 

Mr. KLEIN. Thank you, Mr. Chairman, for holding this important 

hearing. And again, we would also like to thank the witnesses and 

the victims who have come forward with their stories, and with 

their rights to be made whole in different ways. 

Mr. Madoff’s Ponzi scheme, which was thought to be the largest 

securities fraud in modern history, has defrauded thousands of people in my congressional district in south Florida, as well as charities, and lots of other people around the United States. 

7 

This episode was not only an embarrassment to the SEC, as they 

allowed this massive fraud to continue for well over a decade, despite repeated warnings, but time and time again, the SEC ‘‘investigated’’ Mr. Madoff, and pronounced his business to be sound. And 

if you’re an investor, and you have an investment in a particular 

security, you would think that this would be a sound investment, 

with the SEC stamping its regulatory approval. 

There have been lots of issues that have already been mentioned 

by Mr. King and others: clawback; taxes paid; how do we—how 

were we made whole from this terrible situation. And the fact that 

this has gone on for over a year is really something. It’s a moral 

outrage that hasn’t been resolved in some successful way. 

Now, I think the most important thing we have to recognize is, 

as citizens and as Members of Congress, and even people who are 

victims, is we have rule of law in the United States. And we have 

a responsibility, as Members of Congress and as Americans, to 

make sure the SIPC and the SEC are living up to their statutory 

responsibilities. 

Ensuring that the Madoff victims receive some protection from 

the government is important in restoring confidence in our entire 

investment system. Some investors, we know, were complicit, and 

they should be prosecuted to the fullest extent of the law, yet most 

others were not. 

Many hard-working Americans have invested their life savings, 

and the SIPC symbol in the window has to mean something. The 

SEC repeatedly gave Madoff a clean bill of health. Investors relied 

on this analysis. And the SIPC symbol, as I said, has to mean 

something when you move forward and you make an investment in 

the United States system. 

To go after these investors who lost everything now violates most 

people’s sense of fairness on a consistent level. How can they be 

held to a higher standard than professional analysts at the SEC? 

Irving Picard has determined that investors who have drawn 

more money out of the account than they originally put in are not 

entitled to full SIPC coverage. And, further, the trustee can claw 

back money from them. And, again, I see an inconsistency in interpretation here, which needs to be resolved. 

The purpose of the SIPC is to honor legitimate expectations of 

customers, and instill confidence in our capital markets. And it’s 

important to provide SIPC protection up to $500,000, not only for 

the victims of this fraud, but to ensure, on a going-forward basis, 

that Americans can have confidence in the securities markets in 

the United States. 

I look forward to the testimony, and a productive discussion, and 

an appropriate conclusion. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Klein. And 

now I ask unanimous consent that Congressman Ellison be permitted to provide an opening statement. If there are no objections, 

Congressman Ellison is recognized for 2 minutes. 

Mr. ELLISON. Thank you, Mr. Chairman. Let me thank all the 

witnesses, as well. I don’t think I will need 2 minutes. 

I simply want to say that the amount of disruption that this 

massive Ponzi scheme has caused Americans cannot be overestimated. 

8 

In my own district, the fifth congressional district of Minnesota, 

I have heard from people who thought they were in qualified 

ERISA plans who now learn that maybe things are not going to be 

as they expected, because of definitions in the law. 

I have heard from people who run charities for charitable work 

who have been devastated by this, the impact of this lapse. 

And so, I look forward to this hearing. I look forward to hearing 

from the witnesses. I want to thank the witnesses for all the work 

that they have done, and I want to thank the members of the committee, as well. 

And I also just want to thank Mr. Maffei for his work. He and 

I have been working together on what may bring relief to some 

people. And I want to, again, thank you, Mr. Chairman, and the 

ranking member for the hearing. Thank you very much. 

Chairman KANJORSKI. Thank you very much, Mr. Ellison. Now, 

it’s up to the panel. I want to thank the panel for appearing before 

the subcommittee today. And, without objection, your written statements will be made a part of the record. 

You will each be recognized for a 5-minute summary of your 

statement. And please contain your remarks to 5 minutes. 

I would now like to recognize Ms. Jeannene Langford, an investor in the MOT Family Investors, and an indirect investor in Mr. 

Madoff’s fund. 

Ms. Langford? 

STATEMENT OF JEANNENE LANGFORD, INVESTOR IN MOT 

FAMILY INVESTORS 

Ms. LANGFORD. Chairman Kanjorski, Ranking Member Garrett, 

and members of the subcommittee, thank you for holding these 

hearings, and looking into the SEC’s complicity with Bernard 

Madoff investments. 

My name is Jeannene Langford, and I live in San Rafael, California. As one of the more than 16,000 victims of the Madoff Ponzi 

scheme, I am grateful to have the opportunity to present how financially devastating this scandal was to me, personally. It shattered my trust in my government’s ability to serve and protect us. 

My hope is that Congress will choose to recognize and protect all 

indirect investors such as myself, who were victimized by this scandal. 

I have worked for 30 years as an art and design professional in 

the stationery and craft industry. The past 17 years, I have been 

a single parent working to provide for myself and my daughter. In 

the areas where I have little expertise, I recognized the necessity 

to hire a specialist. Personal investment was one of those areas. 

And I knew that there were systems such as the SEC in place to 

protect me. 

From my research, there was no reason to believe that this investment was not a viable place to put my life savings. I had no 

way of knowing the partnership where I placed my money was invested with Madoff. The money I had invested with Madoff represented my life savings. It was my retirement, a downpayment for 

a house, investment for the business I was starting, and it was my 

daughter’s education. In short, it was the foundation for my future. 

9 

I do not have another 30 years to earn this money again. If the 

SEC had done its job, I would have my savings, and I would not 

be looking at working the rest of my life just to get by. I was 

shocked to find out my money was gone, and I was outraged to find 

out that the very governing body that sanctioned this business did 

not protect me. 

I need help in understanding how the SEC could ignore expert 

testimony, be lax in its investigations, be influenced by the aura of 

Madoff, and not carry out its duties. I find it tragic and ironic that 

the interpretation of the language by the SIPC leaves out the indirect, hardworking people like myself, who are not wealthy, and who 

are now struggling to keep up because their lifetime of hard-earned 

savings or their pension has been stolen. These are the very investors for whom the SIPC insurance protection is most important. 

Congress needs to take action to restore confidence for all future 

investors. I understand an update to the definition of the word 

‘‘customer’’ in the SIPA to include indirect investors would ensure 

that the SIPC symbol protects both indirect and direct investors in 

the financial markets, and would begin to restore a sense of trust. 

If nothing is changed, the current situation would be similar to 

having a catastrophic landslide, and the government came in to assist those on one side of the street, but not the other. I cannot believe this is the intent of this committee or of Congress. 

Though I appreciate extending the SIPC coverage through the 

Maffei-Ellison amendment to investors in ERISA plans, this does 

not go far enough. All of us who invested through family partnerships, trusts, hedge funds, feeder funds, and pension plans are victims of this crime. All of us who invested are also victims of the 

SEC’s inability to find the fraud. We are all victims of the same 

crime, and we all need to be granted equal protection. 

The SEC’s Web site reads, ‘‘The mission of the U.S. Securities 

and Exchange Commission is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.’’ I urge 

you to rectify this current disparity of protection, by carrying out 

the mission you set forth. Thank you. 

[The prepared statement of Ms. Langford can be found on page 

130 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Ms. Langford. I 

would now like to recognize my colleague from Minnesota to introduce our second witness. Mr. Ellison? 

Mr. ELLISON. Thank you again, Mr. Chairman. I am pleased to 

introduce one of the witnesses, Mr. Joel Green, of Upsher-Smith 

Laboratories, a pharmaceutical company in Minnesota. 

I have heard from many people in my district and State who 

were victims of the Madoff scam. Those people weren’t high rollers. 

They were regular people, ordinary people who work hard every 

day and make America great, people like the ones Mr. Green represents, and his colleagues, who are part of a pension profit plan 

that invested with Bernie Madoff. 

They thought they were protected by the Securities Investment 

Protection Corporation, SIPC. Unfortunately, SIPC held itself out 

as the FDIC of the investment world. It hasn’t followed through on 

the protection, in many cases. 

10 

That is why I am pleased to work with my colleague from New 

York, Mr. Maffei, on an amendment to clarify why SIPC protection 

should extend to individual participants of pension and profit sharing plans. I look forward to continuing to work with you, Mr. 

Chairman, and others in the committee on this reform, and others, 

to ensure that SIPC makes good on its promises. Mr. Green? 

STATEMENT OF JOEL H. GREEN, GENERAL COUNSEL, 

UPSHER-SMITH LABORATORIES, INC. 

Mr. GREEN. Thank you, Congressman Ellison, Mr. Maffei, Chairman Kanjorski, and members of the subcommittee. Thank you for 

the opportunity to address your subcommittee. 

As Congressman Ellison said, my name is Joel Green, and I am 

with Upsher-Smith Laboratories of Minnesota. I am here to ask for 

your support for legislation that will protect working people 

throughout America whose retirement security is imperiled by the 

Madoff fraud, including current and former employees of UpsherSmith Laboratories. 

I urge your support for the legislation prepared by Mr. Ellison 

and Mr. Maffei to extend SIPC protection, to cover the losses of individual participants in pension plans, profit sharing plans, and 

other qualified plans lost in the Madoff fraud. 

Upsher-Smith Laboratories is a family-owned pharmaceutical 

company. The company was formed in 1919, and has approximately 

550 employees in the Twin Cities, Denver, and around the country. 

In 1974, our owners established a profit-sharing plan to share the 

profits with our company’s employees. And, beginning in 1995, the 

plan assets were invested with Mr. Madoff. Over the next 12 years, the company contributed over $8 million 

to the plan for the benefit of our employees. On December 11, 2008, 

Mr. Madoff was arrested for fraud. And approximately 615 of our 

current and former employees lost their retirement savings that 

had been in the profit-sharing accounts invested with Mr. Madoff. 

Our plan, and our plan participants, are representative of the average American workers whose retirement savings ERISA was intended to promote, and whose investments SIPC was intended to 

protect. 

Of our 615 plan participants, approximately 550—that’s about 89 

percent—had contribution balances of less than $50,000. This plan 

covers the average American worker. Yet SIPC has stated that only 

a single recovery of $500,000 is available. This is because the plan’s 

account with Mr. Madoff was held in the name of the plan trustee. 

But this was required by an administrative requirement imposed 

by ERISA that plan assets must be held in the name of the plan 

trustee, and not in the name of individual plan participants. 

Our plan lost in excess of $8 million in contributions in the 

Madoff fraud. If one includes the false Madoff profits, that number 

would be in excess of $18 million. A single SIPC recovery of 

$500,000 will not go far to cover the losses of our individual plan 

participants. 

The administrative rule of ERISA requiring that plan assets be 

invested in the name of a plan trustee cannot be allowed to defeat 

the public policy behind ERISA to promote retirement savings of 

average American workers, nor can it be allowed to defeat the pubVerDate Nov 24 2008 18:52 May 21, 2010 Jkt 056237 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\56237.TXT TERRIE
11 

lic policy behind SIPC, to protect the investments of average American investors. 

For most Americans, their primary investments are held in their 

pension plans, profit-sharing plans, and other qualified retirement 

plans. If the administrative rule of ERISA is allowed to defeat 

SIPC protection for the losses of individual plan participants, then 

SIPC fails to protect the investments of the average American 

worker, as Congress intended when it adopted the Securities Investment Protection Act, and created SIPC. 

This, in turn, undermines the public policy of promoting savings 

and providing retirement security for average American workers 

through pension, profit sharing, and other qualified plans, as Congress intended when it adopted ERISA. 

The FDIC offers a parallel for what we propose here. If a profitsharing plan invested its assets in FDIC-insured deposits, even 

though the deposits were held in the name of the plan trustee, the 

FDIC would cover each plan participant up to the FDIC limits. 

We were asked by a congressional staffer in the spring whether 

it’s possible, as a matter of policy, to extend SIPC protection to 

cover the losses of individual participants of pension plans invested 

with Madoff, and not also extend such protection to individual investors of feeder funds who invested with Mr. Madoff. With great 

compassion for those individual investors, and great compassion for 

Ms. Langford, we believe that the answer is ‘‘yes.’’ As a matter of 

public policy, a distinction can be made. Though we, of course, support any relief that can be given to the individual investors in feeder funds. 

ERISA prevents individual plan participants from investing their 

retirement accounts directly in their own names. The situation differs for individual investors in feeder funds. They are not prevented by Federal legislation from investing directly in their own 

names, nor is their investment governed by the public policy of encouraging workers’ savings, as embodied in ERISA. 

For these reasons, if a distinction must be made on a policy 

basis, we believe it is possible to provide SIPC protection for the 

losses of plan participants of ERISA plans. Though, again, we do 

support relief for investors in feeder funds. 

Thank you for your time and attention and consideration of this 

important legislation to extend SIPC protection to the claims of individual participants of pension, profit sharing, and other qualified 

retirement plans. 

[The prepared statement of Mr. Green can be found on page 119 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Green. And 

now I turn to my colleague from Florida, Mr. Klein, to introduce 

the third witness. Mr. Klein? 

Mr. KLEIN. Thank you, Mr. Chairman. It’s my honor to introduce 

Helen Chaitman, who is a partner in Phillips Nizer, a limited liability partnership in New York. 

She is the author of, ‘‘The Law of Lender Liability,’’ is counsel 

to the Madoff Coalition for Investor Protection, which is a combination of a number of investors who lost assets in the Ponzi scheme, 

and has been someone who, I think, has had a fairly good 

crystalized view of the issue, and has been helpful to me and many 

12 

others in understanding the nature of what went wrong, and what 

should be done to resolve it. Ms. Chaitman? 

STATEMENT OF HELEN DAVIS CHAITMAN, MADOFF INVESTOR 

AND LEGAL ADVISOR, MADOFF COALITION FOR INVESTOR 

PROTECTION 

Ms. CHAITMAN. Thank you, Congressman Klein. Chairman Kanjorski, thank you so much for having me here. Distinguished Representatives, I thank you as well. 

It was just about a year ago that I learned that I had lost my 

life savings and my grandson’s college fund in Mr. Madoff’s limited 

liability company. It took me a little bit of time to get over the 

shock and devastation. And when I did, I realized that I was one 

of the lucky ones, because I am still working and able to support 

myself. And I devoted myself for the next 6 months to working 

completely on a pro bono basis, helping hundreds of destitute 

Madoff investors in their 70’s, 80’s, and 90’s, who had been hit by 

a financial tsunami from which they can never recover. 

This committee has dealt with that financial tsunami in the Investor Protection Act of 2009. And I am not here to speak about 

that. But, unfortunately, the Madoff investors whom I represent— 

and I represent hundreds of them—have been hit by two additional 

financial tsunamis that this committee can do something about. 

My client profile is a person in his 70’s, 80’s, and 90’s who 

worked hard his whole life, and who trusted this government. 

Many of my clients served in the Second World War with distinction. I have clients who were disabled in the Korean War, and received medals for their service. They trusted this government, and 

they worked as honest, law-abiding citizens. They worked in professions, they built up businesses. And when they reached retirement 

age, they retired and they put their money in an entity that had 

been blessed repeatedly by the SEC. 

Mr. Madoff bragged to potential investors that jealous funds had 

complained to the SEC about his results, and he had been repeatedly investigated, and always come out clean. These are people of 

whom we should be proud, and whom we should be protecting. 

And, instead, these people have been victimized by the government 

since December 11, 2008. 

The second tsunami that hit my clients was the announcement 

by SIPC, with the blessing of the SEC, that the statute that this 

committee played a key role in drafting in 1970 doesn’t mean what 

it says. 

My clients relied upon the promise of SIPC insurance, as required by the Securities Investor Protection Act. They invested in 

Madoff, knowing that the first $500,000 in their accounts was insured by SIPC. They invested in Madoff, knowing that Congress 

mandated that, upon the liquidation of a broker, SIPC must 

promptly pay up to $500,000 by replacing securities in a customer’s 

account. 

The statute mandates how a customer’s claim is to be determined. Net equity is clearly spelled out in the statute. It is clearly 

spelled out on SIPC’s Web site, even today. And yet, SIPC has decided that it doesn’t insure the first $500,000 in the accounts, it 

only insures the net investment going through generations of invesVerDate Nov 24 2008 18:52 May 21, 2010 Jkt 056237 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\56237.TXT TERRIE
13 

tors—because a lot of my clients are people whose grandparents invested in Madoff. 

And what SIPC is doing is going back 3 generations to net out 

investments, and they are discounting inherited balances, unless 

the investor can come forward and prove how much the grandfather deposited into the account in 1970, a virtual impossibility. 

Nobody keeps records going back that far. And nowhere did the 

government put people on notice that, if they want to have an 

SIPC claim, they have to keep their records going back 30 and 40 

years. So, the second tsunami was SIPC’s defiance of net equity. 

And we know from Mr. Conley’s testimony, which was posted 

yesterday on the Web site, that the SEC doesn’t feel it’s bound by 

the statute. American citizens have to trust in the laws. If the statute gives them a promise of insurance, they have to rely upon that. 

And how can we, as a country, instill confidence in the capital markets if we don’t stand by our laws, and if we fund a governmental 

agency which defies the law? 

The SEC has now taken a position that people who delegate to 

their broker investment decisions don’t get insurance, as defined by 

the statute. They don’t get net equity. The SEC announced yesterday that they get their net investment plus some adjustment for 

the decrease in the buying power of the dollar over a period of 30 

or 40 years. 

Well, what’s the purpose of this committee deliberating so carefully on a statute, if the SEC can then, after there has been a big 

loss, decide, ‘‘We don’t think Congress got it right, and we don’t feel 

we have to go back to Congress. We’re going to decide what the law 

is.’’ How can we make people feel comfortable that they are protected by this government, which they served and to whom they 

paid taxes, if the SEC, funded by taxpayer dollars, can thumb its 

nose at this institution? 

The third tsunami that my clients have been hit with is that the 

SIPC trustee has taken the position that he can demand repayment of all withdrawals within the last 6 years, even mandatory 

withdrawals from IRA accounts on which people pay taxes, if the 

net investment going back for generations is a negative number? 

So, let me give you one very simple example. 

Chairman KANJORSKI. Time is— 

Ms. CHAITMAN. My time is up? 

Chairman KANJORSKI. Yes. 

Ms. CHAITMAN. All right. You will have to look at my written testimony, then, for the example. Thank you so much. 

Chairman KANJORSKI. If you want to state the example, we will 

take that. 

Ms. CHAITMAN. Thank you so much. If my grandfather put 

$500,000 into Madoff in 1970, and he died in 2003, at which time 

the account was worth $3 million, and I took $1.5 million out of 

that account to pay the estate taxes, and then from 2003 to 2008, 

the account went from $1.5 million to $2 million, Mr. Picard would 

be saying to me, ‘‘Pay me back $1 million. Your grandfather put 

in $500,000, you took out $1.5 million to pay estate taxes, you owe 

me $1 million.’’ 

So my clients, who have lost their life savings, who were forced 

to sell their houses in a down market, and who are cherishing the 

14 

tax refunds that they have received as the only funds they have to 

live on for the rest of their lives, now are faced with giving up 

those monies in order to do what? 

Nobody wants that. I, as an investor, never took money out of my 

account. And I, in theory, am the beneficiary of the clawbacks. I, 

and many of my clients who are just like me, never took money 

out, don’t want this money. This is blood money. 

These people are entitled to keep what they took out. Thank you. 

[The prepared statement of Ms. Chaitman can be found on page 

65 of the appendix.] 

Chairman KANJORSKI. Thank you very much. 

[applause] 

Chairman KANJORSKI. The rules do not allow demonstrations. I 

appreciate it. I know this is an emotional time, so we will be a little lenient with the rules. But, really, that is not appropriate. 

And now we will hear from our friend from Colorado to introduce 

the fourth witness. Mr. Perlmutter? 

Mr. PERLMUTTER. Thank you. I appreciate the witnesses being 

here today, and the straightforward testimony that you are giving 

to all of us. 

And I just want to lead with this: I think that we have four 

things that we have to consider. One of them actually is on the 

Floor of the House today. And the first is, where was the examination? Where was the investigation? Where was the oversight? And 

where is the prosecution of swindlers, crooks, bums, cheats, whatever you want to call them? 

In Colorado, we had at least 3 in this last 8 or 10 years: Petters; 

Stanford; and Madoff. They victimized hundreds and hundreds of 

people in Colorado. Some of my closest friends and colleagues lost 

their life savings to one of these three crooks. And so, what kind 

of an environment led to these giant Ponzi schemes and frauds? 

I would like to thank the chairman and the ranking member for 

bringing forward the Investor Protection Act, and some of the precautions and safeguards that are built into that, that we will hear 

on the Floor of the House today. 

Now, the other three aspects of this, which is what this testimony and your—this hearing is about is the bankruptcy aspects 

and the clawback, the reach of SIPC to anybody who was swindled 

and victimized by this. And, finally, what tax ramifications are 

there. Can somebody take an immediate loss when they have been 

defrauded in this respect? 

And so, we have today a constituent of mine and a friend, Mr. 

Pete Leveton, from Lakewood, Colorado. Pete is co-chairman of the 

Agile Funds Investor Committee, which represents over 200 indirect investors of Agile Group, LLC, a Colorado investment group. 

I have been working with Mr. Leveton and members of the Agile 

Funds Investor Committee for months, trying to develop remedies 

to the inequities between direct Madoff fund investors, and those 

indirect investors like the Agile Group. 

The individuals invested with Agile—and, indeed, more than 

15,000 individuals who invested in other hedge funds who also invested in Bernard L. Madoff securities—are ordinary folks who invested their life savings in what they believed to be safe pension 

plans, trust funds, and investment accounts. They did their own reVerDate Nov 24 2008 18:52 May 21, 2010 Jkt 056237 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\56237.TXT TERRIE
15 

search to determine the best investment group for their personal 

situations, and believed that groups like Agile best suited their 

savings plan needs. They trusted groups like these investors to 

turn investments into safe, legal funds. 

Unfortunately, Agile and other investment firms like them were 

defrauded by Bernard Madoff, by Stanford, by Petters, and all of 

the savings in funds from these individuals was lost. 

Under the law as written, direct investors of—except now with 

this net investment rule—from SIPC are eligible to recoup up to 

$500,000 on each investment account. But indirect investors are 

not. 

Mr. Chairman, we have the opportunity to restore a piece of dignity to the indirect investors. Through no fault of their own, they 

lost their life savings and some are losing their homes. They were 

acting responsibly, in trying to plan and save for their future and 

retirement. 

And I look forward to the testimony of Mr. Leveton today to describe some of the travails of the people in Colorado. 

Chairman KANJORSKI. Thank you, Mr. Perlmutter. 

Mr. Leveton? 

STATEMENT OF PETER J. LEVETON, CO-CHAIRMAN, AGILE 

FUNDS INVESTOR COMMITTEE 

Mr. LEVETON. Chairman Kanjorski, Ranking Member Garrett, 

and members of the subcommittee, as Congressman Perlmutter 

just said, my name is Peter J. Leveton. I live in Lakewood, Colorado, a Denver suburb in Congressman Perlmutter’s seventh district. I am an unpaid co-chairman of the Agile Group, LLC Investor 

Committee. Agile was a hedge fund manager based in Boulder, Colorado. 

Thank you for giving me this opportunity to testify on behalf of 

Agile’s 205 investors, several hundred Ponzi Victims’ Coalition indirect investors from more than 20 States, and by extension, all 

Madoff indirect investors who filed more than 11,000 SIPC claims 

on or before the bar date of July 2nd. 

It is clear, from the statements that the Congressmen made earlier in this hearing, that you have a clear understanding of many 

of the issues, and I am going to try not to belabor those. 

The indirect investors are not a homogeneous group. It includes 

farmers, doctors, teachers, lawyers, businessmen, entrepreneurs, 

and other hard-working Americans who have, over a period of 

years, diligently saved for their retirement. 

Many of us are your constituents. Many of us are now devastated 

financially and psychologically. Many of us have sold or are trying 

to sell our homes, just to obtain money to live on. Many of us are 

retired. Some indirect investors have had to beg for support from 

our siblings and our children. 

Discrimination is not a word that any of us in this room would 

use lightly. However, because only direct investors are considered 

SIPC customers, discrimination is exactly what indirect investors 

are facing—clearly not Congress’ intent when it passed SIPA and 

created SIPC in 1970. 

Pursuant to the current interpretation, direct investor victims 

who knowingly invested with Madoff have an opportunity to recoup 

16 

up to $500,000 for each of their accounts. Indirect investors—many, 

maybe most of us—had never heard of Bernard L. Madoff until it 

was too late. We are not considered customers. We will recoup zero. 

I ask you, where is the justice in that kind of an interpretation? 

Because the SEC has admitted extreme culpability in missing 

the warning signs of the Madoff scam and others, and because the 

IRS essentially endorsed Madoff in 2004, by naming his firm as a 

non-bank custodian of IRAs and other tax-deferred retirement accounts, we believe that Congress has a duty to ensure that equal 

SIPC relief be provided to all victims, not just some victims, as is 

currently the case. 

The concepts outlined in the Maffei-Ellison amendment would be 

a wonderful solution if it were expanded to include all indirect investors. Unfortunately, it addresses only ERISA plan victims, and 

excludes thousands of other indirect victims, including those in 

self-funded retirement plans, such as IRAs. I ask you again, where 

is the justice in that kind of an approach? 

We see no moral basis for Congress to amend SIPA to provide 

customer status to a relatively small special interest group of indirect investors in ERISA plans, and exclude all other indirect investors. We indirect investors lost our savings to the same fraudulent 

Ponzi scheme, suffered the same financial devastation as the 

ERISA plan members, and the direct investors. 

We firmly believe that Congress should end this discrimination, 

not perpetuate it, as the present draft of the Maffei-Ellison amendment would do, if passed as-is. We urge Congress to enact legislation which clearly defines SIPA customers as all investors who 

place their money in SIPA-protected Ponzi scheme operations. 

With regard to the proposed clawback amendment, we endorse 

an amendment that prohibits clawbacks from investors who withdrew their money in good faith, and can prove it. 

With regard to the 60-day payment amendment, we agree that 

SIPC payments should be based on the customer’s account balance 

as of their last statement—again, assuming that they did not 

know, and had no reason to believe that the Madoff operation or 

other Ponzi schemes were fraudulent operations. 

Regardless of what processing period is determined to be reasonable, we suggest that strict parameters and guidelines be established, and that SIPC be required to—and be held accountable for 

meeting those standards and guidelines. 

In closing, I suggest that this could happen to you. As Congressman Perlmutter mentioned, it did happen to one of the Agile investors who was a previous Member of Congress. We look to you and 

your colleagues to carry out Congress’ original intent to protect all 

investors when it enacted SIPA, and to help us recover a portion 

of our tax-deferred retirement account losses. 

Thank you again for the opportunity to present these matters. I 

would be pleased to answer any questions that you may have. 

[The prepared statement of Mr. Leveton can be found on page 

133 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Leveton. And 

now we will hear from our friend from New York, Congressman 

Maffei, to introduce the next witness. 

17 

Mr. MAFFEI. Thank you very much, Mr. Chairman, for holding 

this important hearing. And thank you especially for allowing those 

of us from other subcommittees to sit in. Just listening, I want to 

thank all of the witnesses. 

And, Mr. Leveton, I assure you we will be—I’m sure Mr. Ellison 

and I will be discussing with Mr. Perlmutter and others your suggestions. We are informed by the plight of our own constituents, 

and don’t necessarily know all of the different aspects of this. 

And to represent some of the folks in my constituency today, I 

am very pleased to introduce a very good friend of mine, Greg 

Lancette, the business manager for the Plumbers and Steamfitters 

Local 267 in Syracuse, New York. 

Mr. Lancette has served as chairman of Local 267’s jointly administered multi-employer trust fund since 2005. He is also the 

president of the Central and Northern New York Building and 

Construction Trades Council, representing 16,000 pensioners and 

their families from other unions in central New York. 

Mr. Lancette, thank you for coming to speak with us. I look forward to hearing your testimony. 

I also want to thank Local 267’s counsel, Michael Herron, for also 

coming down from snowy upstate New York to be with us here 

today. 

The Plumbers and Steamfitters Local 267 pension fund suffered 

serious losses because of the Madoff scandal. While the headlines 

have been full of wealthy and prominent investors who lost money 

in the Madoff Ponzi scheme, the pension funds of approximately 

60,000 union workers and retirees in central and upstate New York 

were also exposed, and suffered grave losses. Central New York 

unions lost at least $350 million. And as Mr. Lancette, I’m sure, 

will tell us, Local 267 lost approximately $37 million. 

It is important to help these hardworking men and women recover some of the funds they have lost. While the Investor Protection Act could have provided the means to do that, I urge the chairman to continue working with me and others on the committee to 

address these issues after regulatory reform has passed the full 

House. 

Currently, the Securities and Investor Protection Corporation, 

SIPC, is allowed to advance only up to $500,000 per fund, not 

$500,000 per individual in a pension fund. Funds meant to support 

the retirement of hundreds of thousands of retirees are only eligible for the same investor protection as one person. 

This makes no sense. And that is why I have introduced an 

amendment to help workers and retirees whose pension funds were 

exposed to recover that money. 

I especially want to thank my colleague from Minnesota, Mr. 

Ellison, for working with me and others to get relief to the innocent 

workers, retirees, and business people who have become Madoff’s 

victims. 

Again, I want to thank the chairman for holding this very important hearing, and Mr. Lancette for sharing his story with us. 

Chairman KANJORSKI. Thank you very much, Mr. Maffei. 

Mr. Lancette? 

18 

STATEMENT OF GREGORY LANCETTE, BUSINESS MANAGER, 

PLUMBERS AND STEAMFITTERS LOCAL 267 OF SYRACUSE, NY 

Mr. LANCETTE. I would like to first thank Chairman Kanjorski, 

Ranking Member Garrett, and the members of the Subcommittee 

on Capital Markets, Insurance, and Government Sponsored Enterprises, and Representative Maffei, for having me here. 

As you heard, my name is Gregory Lancette. I am currently the 

business manager of the Plumbers and Steamfitters Local 267, Syracuse, New York, and chairman of the jointly administered multiemployer trust funds. I have served in these capacities since 2005. 

Local 267 is a chartered local union of the United Association of 

Journeymen and Apprentices in the plumbing and pipefitting industry in the United States and Canada. 

I am here today on behalf of not only my 1,115 pension participants and their families, but I also stand here today as president 

of the Central and Northern New York Building and Construction 

Trades Council, which represents nearly 16,000 pensioners and 

their families, also from central New York. 

Today, I would like to discuss the direct relationship between 

SIPC and Bernard Madoff’s Ponzi scheme. SIPC today provides 

coverage to individuals with an individual limit of $500,000. 

But my members’ pension investments have no real coverage. Because my members, like millions of workers across the country, rely 

on pooled investments for their future retirement, SIPC coverage 

does not currently protect them. 

The Local 267 benefit funds first invested with Madoff Securities 

in the mid-1990’s. When I was elected in 2005, the Madoff investment was approximately 30 percent of our pension fund. We received regular confirmations that our money was invested in S&P 

500 companies. While the return on the account slightly trailed the 

S&P 500 index, we were assured that the strategy offered adequate 

diversification and lower volatility. We believed that the U.S. securities market, monitored by the Securities and Exchange Commission, provided protection for our members. 

Plumbers and Steamfitters Local 267 benefit funds, at the time 

of Madoff’s arrest, had a market value of approximately $34 million 

invested with Madoff’s direct brokerage. Also, Local 267 had $6.5 million invested with Beacon and Associates. Beacon is a fund consisting of a basket of investments which 

was comprised of up to 40 percent of total assets invested in 

Madoff. 

Under the current formula of SIPC reimbursement, Local 267 

will receive $500,000 for the Madoff direct account. The reimbursement for the Beacon account will only be approximately $900, due 

to the fact that the amount of Local 267’s portion consisted of only 

1.8 percent of Beacon’s total assets. To summarize, Local 267’s pension lost almost $37 million and is expected to recover $500,900 

from SIPC. 

As the chair of the board of trustees of benefit funds, I am regularly solicited by investment managers seeking to advise the funds. 

Our collective funds pay hundreds of thousands of dollars in fees 

each year. The securities industry welcomes our collective investments, and should be prepared to provide adequate SIPC coverage 

in the event of a fraud. 

19 

I must take a moment to reiterate that the only reason why I am 

here today is that we had money invested with Bernie Madoff. Mr. 

Madoff has stolen billions of dollars and the Securities and Exchange Commission failed to recognize this criminal behavior, even 

after investigating him half-a-dozen times. 

The reason behind the proposed amendments regarding SIPC 

treating each pension as an individual investor is that pension 

funds would be made closer to whole. To compare with what is currently being paid back to pension plans in central New York currently, if all 30 funds received $500,000 reimbursement from SIPC, 

a total of $15 million will be returned to the central New York 

area, compared to nearly $350 million in losses—$15 million returned, $350 million gone. To further illustrate Local 267’s pension loss of nearly $37 mil- lion, that equates to approximately $33,183 per participant. This 

protection of pooled investors would not be unique. Similar passthrough account protection is available to individual account retirement plans with funds in the FDIC-insured banks. 

The portion of the amendment that would require SIPC to reimburse within 60 days would benefit all plans in many ways. This 

would be accomplished by either returning assets to invest, or to 

pay benefits to retired members. 

Numerous pension and health funds that were affected by the 

axe of Bernie Madoff are facing insolvency. The Securities and Exchange Commission was not able to identify the fraud that took 

place in a timely manner, which resulted in much more significant 

losses as the criminal act progressed. 

The Pension Protection Act of 2006 requires pension funds to amortize debt in a 15-year period. I would ask for consideration or relaxation of the Pension Protection Act, allowing a pension plan to 

amortize the Madoff-related losses at a 30-year rate. That would 

help ensure pension stability. The plans could recover naturally, instead of the plan solvency being jeopardized, which may ultimately 

result in the plan being turned over to the Pension Benefit Guaranty Corp. 

In summary, I strongly urge the consideration for multiple investor groups or participants in multi-employer ERISA plans or any 

multi-employer investments to be considered as an individual investor, and that SIPC be funded to operate and reimburse in this 

manner. 

I also strong urge that pension plans be allowed the proper time 

frame before the Pension Protection Act to amortize losses. 

Thank you very much for your time. 

[The prepared statement of Mr. Lancette can be found on page 

128 of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Lancette. 

And next we will hear from Mr. John Coffee, the Adolf A. Berle 

professor of law at Columbia University Law School. Professor? 

STATEMENT OF JOHN C. COFFEE, JR., PROFESSOR OF LAW, 

COLUMBIA UNIVERSITY LAW SCHOOL 

Mr. COFFEE. Thank you, Chairman Kanjorski, also Ranking 

Member Garrett and fellow Congressmen. I am pleased to be here, 

but disappointed that on this first anniversary of Mr. Madoff’s arVerDate Nov 24 2008 18:52 May 21, 2010 Jkt 056237 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\56237.TXT TERRIE
20 

rest, the Federal Government has done so little, so very little, to 

prevent the recurrences of future Ponzi schemes. 

Ponzi schemes are predictable. They appear to cost American investors, on average, something like a billion dollars a year. Before 

we even heard of Mr. Madoff, in 2002, the Ponzi scheme losses in 

that year alone were $9.6 billion. So this is not a trivial problem, 

it’s a recurrent problem. And I think it will continue, as long as 

the government persists in allowing investment advisors to be their 

own custodian. 

I will put this just in a sentence, because it’s not the topic today, 

but mutual funds have to use an independent custodian. So do 

hedge funds. Investment advisors are permitted by—under the Investment Advisor Act rules to use a self-custodian. That is, Mr. 

Madoff used his own brokerage firm. That means his own brokerage firm, Madoff Securities, was serving as the watchdog of Bernie 

Madoff, the investment advisor. When you are your own watchdog, 

nothing works. 

The SEC has made some modest efforts this year to discourage 

the use of self-custodians, but they have already backed off, under 

industry pressure. We need a true watchdog over investment advisors, and that can only come from requiring an independent custodian. 

That’s not the topic today, so I will move on to the Securities Investor Protection Act. Here, I want to make three suggestions. All 

of them involve compromises, all of them involve line-drawing, and 

all of them will be painful. But I think we have to make some compromises, because insurance is costly, and we can’t insure all investors to the full extent of their losses. 

So, every member of this panel has told you that the definition 

of ‘‘customer’’ under the Securities Investor Protection Act is too 

limited. I agree that you can expand it. It’s understandably limited, 

because if we cover all indirect investors, this system will collapse. 

CalPERS alone has over $700 billion in assets, and that’s just one 

customer. And there were larger, private pension funds. 

But in looking at who to protect, I think we should look at the 

continuum of injured victims, and see who has been the most injured, and is the least able to protect himself. In my judgement, 

using two criteria, I think that is the pensioner in smaller pension 

funds. Such pensioners suffer the most concentrated loss, because 

they are losing their retirement security. And smaller pensioners 

can do nothing to guard their own interests, nor do small pension 

funds have any in-house capacity to monitor. What they do, instead, is they hire someone like Madoff to be their investment advisor. 

So, on that kind of criteria, who suffered the most concentrated 

loss? Who is least able to monitor and protect himself? I would 

think the first category that you might think of including, were you 

to expand the definition of ‘‘customer’’ under SIPA, would be the 

smaller pension fund, both Taft-Hartley funds, public funds, and 

private employer funds. But only, I would suggest, defined contribution plans, because that’s where the loss really falls on the individual pensioner, and not on the corporate employer who is contingently liable. 

21 

I think you can feasibly define ‘‘customer’’ to include smaller 

ERISA plans, but you will have to put some financial limit on it. 

That will be painful. And I’m not going to tell you what that number should be; that’s a question for the actuaries. 

Second point, equally controversial—and you have heard from everyone else already—this is clawbacks. The SIPA-appointed trustee, both in the Madoff case and earlier cases, like Bayou Funds, 

will use the fraudulent conveyance actions under the Bankruptcy 

Code to go after those people who received very large distributions 

within the statute of limitations. 

This morning’s Wall Street Journal estimates that Irving Picard will eventually bring suits seeking a total of $15 billion from people 

who received distributions within the statute of limitations. That’s 

$15 billion against total losses that Mr. Picard estimates of roughly 

$19 billion. 

In other words, fraudulent conveyance statutes have the capability of restoring as much as 80 percent of the investors’ total 

losses. That’s not to say he will get the 80 percent, but he has the 

capacity to sue for 80 percent of these losses. Maybe if he brings 

these suits, maybe he will get 25 percent, 30 percent. That’s how 

litigation usually settles. But even $5 billion dwarfs any other 

source of recovery that the injured investors will receive. 

Therefore, I am advising you that you should be very careful before you disable the trustee and cut off his effort to restore these 

alleged fraudulent conveyances and put them in one common pool 

for the benefit of all investors. 

The language that has been offered, the language that says that 

you cannot bring a fraudulent conveyance action unless ‘‘the customer did not have a legitimate expectation that the assets in his 

account belonged to him’’ is really language that I, as a law professor, believe means you’re going to have to show that this person 

was a co-conspirator of Madoff before you will be able to bring a 

fraudulent conveyance action. That would reduce this recovery 

from $15 billion, in my judgement, to well under $1 billion. Be cautious about stopping the trustee, going against the largest source 

of recovery. 

That doesn’t mean you can’t do something. Again, this is a matter of line-drawing. I would suggest we start with, who are the victims who might be most injured by fraudulent conveyance actions? 

I would focus here first on charitable organizations. 

In fact, the Bankruptcy Code, if you look at section 548, which 

is the section that principally deals with fraudulent conveyances, 

has long given an immunity against fraudulent conveyance actions 

to charitable contributions. Now, charitable contributions are not at 

issue here. They are usually what’s at issue in fraudulent conveyances. Here, these are charities who had an account. They are trying to get their own money back, rather than hold on to a charitable contribution. 

But the principle is there. Congress has recognized in the past 

that charitable organizations are a special category, and I would 

suggest that if you’re going to do anything in the field of cutting 

back on fraudulent conveyances, you extend the immunity of charitable organizations beyond simply the contribution, and say that a 

charitable organization cannot be sued for fraudulent conveyance 

22 

unless it can be shown that either: (A) they had actual knowledge 

of the fraud; or (B) the charity was established by, in effect, the 

crook himself. 

Let me say one last word about fraudulent conveyances. No one 

has explained their purpose. They go back to the time of Queen 

Elizabeth. They have been around for a very, very long time. And 

they serve one fundamental purpose: They prevent the crook from 

choosing the victims who will bear the loss. 

If we don’t have fraudulent conveyance statutes, a crook at the 

12th hour can still decide to permit some victims to recover by 

hinting to them they should redeem, and letting other people bear 

the loss. If we don’t have fraudulent conveyance statutes, we’re 

going to create very strong incentives for the crook to, in effect, direct who will be the real victims and who will be the token victims. 

I don’t think you want to do that. I don’t think you really want to 

stop Mr. Picard. 

I think you can use a statute that has a different language, a 

recklessness test. Today, anyone who is sued in a fraudulent conveyance has a good faith defense under the Bankruptcy Code. The 

case law has construed that to mean that you have to show not just 

subjective good faith, but that you have the good faith of an objective reasonable person. It’s a negligence test. You could soften this 

down to a recklessness test, as I suggested in my prepared testimony. 

I think my time has expired. The last sentence I will say is I 

want to congratulate you, Mr. Chairman. For the first time, Congress, in your section 511, is trying to move SIPC from being a 

rather strange non-insurance system to a true insurance system 

that will charge risk-adjusted premiums. You want to charge riskadjusted premiums, because otherwise good brokers are subsidizing 

crooked brokers. We can’t have everybody pay the same amount. 

We want the riskier broker to pay more. 

On that note, I will stop. 

[The prepared statement of Professor Coffee can be found on 

page 89 of the appendix.] 

Chairman KANJORSKI. Thank you very much. And I want to 

thank all the witnesses for their testimony. Each and every one of 

you have told a compelling story on its own. 

And any of the questions, particularly mine—I am going to be 

sort of a devil’s advocate, if you will, and not intending to downplay 

your sufferance, but trying to get to some of the core issues that 

we are going to have to decide. I think the professor clearly laid 

it on the line. This is not an absolute guaranty program. 

And so often we run into, whether you are a victim of a fraud 

or you are a victim of the market, people want to be made whole. 

That’s a natural human instinct. Our problem is that, with the crisis that we have just gone through for the last year, depending on 

who makes the estimations, the loss in the United States was 

somewhere between $7 trillion and $14 trillion in capital. 

And if you had been an investor in one of the major banks in the 

United States that went from $50 to $2 a share because of maybe 

bad judgement, perhaps investments in the wrong area, or some 

people would even say potential fraud or participation in fraud— 

we do not know; that has never been proven—but that would have 

23 

been a great disappointment. It would have been the temptation of 

every shareholder to say, ‘‘I want to be made whole at the price I 

either got in at,’’ if it were above $2, ‘‘or the high price, because 

I was counting on that for something.’’ Obviously, it was their savings or their retirement. 

Well, that is not a bad argument. I cannot fault you for having 

it, but I sort of would pose the question, who among us in the population will turn over the assets of their homes, their pension fund, 

their bank accounts to their fellow citizens to make them more 

whole? I do not see a long line out here in front of the Capitol. 

They have not shown up for this testimony to suggest that they are 

willing to provide their fair share of your loss. And I doubt that 

they will. 

Our system—and our decision, it seems to me—will go to the 

question of, is it intended that we have a system that has no risk? 

And that may not be the worst system in the world. But if we are, 

then we really should not have pension funds with investment advisors. We could have a governmental pension fund we would pay 

into, and somebody would then lend that money to the U.S. Government at a guaranteed rate. An investor would get very little upside, but also very little downside. 

If an investor wants to enjoy the benefits of the capital system, 

the free market system, and its extraordinary upside, there are 

risks to the market. One may say, ‘‘But I did not lose my money 

in the market; I lost it to a fraud.’’ That is part of the market. I 

mean, caveat emptor is still a principle, I believe, Professor. 

It may be vicious. It may be because an investor did not even understand or know who was investing his/her money. But there is 

no way in the world he can say it was the government’s responsibility. Our system does not say that. Our system says it is each individual’s responsibility to protect his or her assets as they will. 

I was here when the Enron disaster occurred. And their people 

had invested their life savings in their 401(k)s that absolutely disappeared, almost overnight, to the tune of hundreds, if not millions 

of dollars. And we were all sorry for them. But they had to take 

their licks. That was the problem, that is our system. Not the 

best—well, I still think it is the best system in the world. Not a 

good system, if you are on the losing side. If you are on the winning 

side, it is absolutely the best that was ever constructed. 

Our problem is, how do we lessen the impact on everyone? Well, 

we just cannot, it seems to me, guarantee everybody is insured, or 

everybody is guaranteed their return. I do not know how we do it. 

I do not see how our system would afford that opportunity. 

If we were to tax the payment of the loss of $14 trillion in capital, just for the last recession, what would it be per head? Who is 

the mathematician on the board? It would be extraordinary, the 

amount of dollars every individual American would have to come 

up with to make some of our fellow citizens whole. 

Probably all of us have lost in some way. You, in particular, have 

lost a great deal. There is no question about it. 

Now, what do we do? We have done several things. We have now 

provided changes in the Investor Protection Act that will require 

more in-depth investigative processes, that the SEC have a stronger chain of command, that information go up the information ladVerDate Nov 24 2008 18:52 May 21, 2010 Jkt 056237 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\56237.TXT TERRIE
24 

der and the leadership ladder at the SEC. Our future legislation 

will help future thinking on all of these things. There is not an 

awful lot in there that is going to make you whole. 

Can we come up with some equitable position? Going particularly 

to Mr. Maffei’s witness, the pension fund is a tough situation. But 

if we were to honor $500,000 per pension member of the pension 

fund, we would soon end the Guaranty Corporation. We just do not 

have the funds in there to do it. 

I do not think that was ever the intent. I think we probably have 

to have much more lively—and I think it will result, probably from 

the experience that we have all had—we have to have closer eyes 

on the subject. Do we force pension funds to do certain things with 

the assumption they will be able to carry them out correctly, and 

they probably cannot in certain instances? 

Those individuals who did not know that Madoff even had a 

touch on your funds, that is a tragic thing. But it is the responsibility of each individual to find out. 

I will leave with this. My time has expired. But if you think in 

terms of real estate, you can go out and buy a $500,000 home. And 

you can buy it from your lawyer, your doctor, your minister, your 

priest, your rabbi, or your friend. And if you are not smart enough 

or clever enough or sensitized enough to have it searched out, then 

that individual has title to your home, and you buy the home and 

you pay your money and then you find out that the person who 

purported to be the owner did not own it, then it is lost. The government cannot be sued. You cannot hold anybody else responsible. 

It is important to search out the ownership of title. 

What difference is that in a pension fund, in terms of who is handling the pension fund, who is making the investment? It is really 

the same policy. 

Certainly, our hearts go out to someone who pays $500,000 for 

a home that they do not own and cannot live in, as our hearts go 

out to those people who lose their life savings because of a fraud 

perpetrated by someone who appeared to have all the indicia of respectability. 

But the Federal law doesn’t provide that, because a company has 

to register with the SEC, and the SEC is supposed to test out and 

investigate, it doesn’t say that it guarantees that the SEC has 

eliminated all frauds. We cannot afford to do that. 

In some respects, if we look back historically, it is a lot better 

today than it was in 1929. I hope it is going to be a lot better tomorrow, when we pass the new reform regulatory bills than it was 

a year ago. But it is not going to be perfect. We are not going to 

accomplish that end. And those of us who have the desire or wish 

are going to be grossly disappointed. 

I am not going to ask any particular questions, because I have 

exhausted my time. But we wanted to have this hearing today because so many of the fellow members of the committee have expressed their thoughts on the subject of the losses of their constituents. They have suffered. They are looking for a remedy. And the 

commitment, as chairman of the subcommittee, that I have made 

to them is that we are going to work as hard as we can to close 

some of the holes, some of the weaknesses in the system. 

25 

But I just want to caution you all, we are not going to solve and 

create a perfect system. You may not be happy with the end result, 

because the possibilities and the exposures to the government and 

to the people are far and above what we can possibly provide as 

protection. 

So, we will work toward getting equity and fairness. But as the 

law professor will tell you, there is no equity, and there is no complete fairness in this world. 

The gentleman from New Jersey, Mr. Garrett. 

Mr. GARRETT. Thank you. There may not be fairness. What we 

can try to do, I guess from the government’s perspective, is to make 

sure that there is justice, however. 

[applause] 

Mr. GARRETT. No, no, no, no. You will use up my time. We need 

to strive in order to get justice. And I do agree that, at the beginning of the day, everyone should be held accountable for executing 

their own due diligence in their investments, right? 

And part of that due diligence, as Professor Coffee would say, 

changes from who you are. If you are the proverbial little old lady, 

at one level. Conversely, the union official who might have more resources than the little old lady would be at a slightly different level 

to a fund of some sort, or an association somewhere in between 

those. 

So, the level of due diligence is going to vary. But we do expect 

in this country that everyone exercises due diligence. And to the 

extent, then, that due diligence doesn’t work out as far as investments going up and down, that is your responsibility. 

Added to that, however, is when that due diligence is in reliance 

on the government in certain areas, then that is a responsibility of 

the government to come forward. So when you do your due diligence, as Ms. Chaitman is saying, looking into the SEC, has the 

SEC done their job, well, you are appropriately relying on the SEC 

to do their job. And when you look to—that’s before the fact, right? 

And after the fact, you should be able to look to SIPC to do their 

job, because they are quasi-government entities. 

See, this is a whole issue. There is a bill on the Floor this week, 

today and tomorrow, which, in essence, does what occurred here. 

It creates what I will call a moral hazard, if you will, by relying 

on the government, as you did, because the government says, ‘‘We 

are going to protect you with the SEC.’’ And so, you have a right, 

then, to rely on that. Maybe you would have done more due diligence if it wasn’t out there, but we told you that you can rely on 

it. So you did. And that’s right. You should. 

Also, we set up the SIPC and said, ‘‘You can rely on it.’’ And you 

did. Had we never set those things up, you may have made other 

investments, or made other decisions. But because we set those entities up, now we have created a different investment strategy—a 

decision is what we call moral hazard. 

And the bill that we’re going to be voting on, just for your information, today and tomorrow, expands those involvements or intrusions or activities by the government so you in the future maybe 

even say, ‘‘I can be more reliant on the government and less on due 

diligence,’’ which I think is not a good thing. 

26 

For example, one of the comments from one of the people that 

I entered into the record said, with regard to clawbacks—and let’s 

do a quick show of hands. If I understood the testimony, everyone 

except for Mr. Coffee, on this panel, believes that we should not 

have clawbacks. Is that correct? If you’re in favor of clawbacks potentially, in any one shape or form or another, as Mr. Coffee—okay, 

and I understand that. 

But one of the testimonies was—a letter I entered into the record 

from a gentlelady from Bergenfield said, ‘‘Indeed, any clawbacks, if 

we’re going to have them, should begin with the SEC,’’ and clawing 

back from the SEC because you were in reliance upon them, and 

maybe we should be clawing back from them. 

And that’s why I gave my opening comments, that we’re not asking much from them in the bill that’s passing tomorrow. In fact, 

we are doubling their salary and their authorization, and saying, 

‘‘Hopefully in the future you will make some changes. But we are 

going to increase it.’’ 

So you might just want to take a look at what’s coming down on 

the Floor tomorrow and today, because we are really not asking for 

those things, what I think we should be. We should be holding 

them accountable for what they did wrong in the past, and holding 

the people particularly accountable for the failures that they made. 

And before we give them any more money, we should be making 

sure that they make some changes. 

Now, Ms. Chaitman, you said—just to get into the weeds on one 

little—not a little point. But in one point in some of the material 

you supplied us with, you said that the trustee—and correct me if 

I’m wrong—the trustee and SIPC are running administrative expenses of approximately $100 million per year. But Mr. Harbeck 

says, in his testimony, that the trustees have only paid $1.2 million 

so far. Can you— 

Ms. CHAITMAN. Well, I think I can— 

Mr. GARRETT. —clarify that? Yes. 

Ms. CHAITMAN. Yes. The trustee’s legal fees have been approved 

for the first 15 weeks at the rate of $1 million a week. He then 

filed an application for another 23 weeks, and he is running again 

at $1 million a week. So, if you project that for a year, it would 

be $50 million a year. 

And Mr. Harbeck has said publicly that the non-legal fees, the 

forensic accountants, etc., who were going back through generations to figure out the net investment—which, of course, is not required by the statute—Mr. Harbeck had said in the press that 

those expenses are running at the rate of $1 million a week. 

Mr. GARRETT. Right. So it’s one of those cases that’s a typical— 

I see my time has come up already—cases where there is almost 

an incentive for—and I’m not saying that there is; I’m just—on the 

face of it, there is an incentive for things not to move at an expedited basis, because you have a pretty good fee there that’s guaranteed to be paid for the period of time— 

Ms. CHAITMAN. There is an inherent conflict of interest in the 

way the statute is set up. 

Mr. GARRETT. Yes. And if I can just—I just want to make one 

statement, that we—some of these aspects are—may have impacts 

27 

upon getting more fees in, may have impacts upon broker-dealers, 

of course, right? 

And we did suggest to SIFMA that they might want to come and 

testify, or at least be at the hearing today. They declined to do so. 

So we would certainly like to hear from them at some point in 

time, what they see as the impact. 

Because if you want to do—and I think I’m on board with where 

most of you are—and, Mr. Coffee, I understand if you want to go 

where you need to, and I will close on this—we have to be really 

tight in that language. Because what you don’t want to do is to 

come up with language that—and I’m a lawyer too—has any wiggle 

room in it that then puts somebody here on the spot, that they 

even have to go out and go to the aggravation of hiring a lawyer 

in a—where they really shouldn’t have to go through that aggravation. And I think you probably would agree that you want to be 

able to draw that line clearly enough so that they would not just 

have mass lawsuits under this thing, that it would just be very targeted. 

And I would think that target would be very, very limited as to 

ones that the government has any evidence whatsoever on, that 

there is—or even was—potential for collusion, whether it’s family 

members or other business associates or just something like that. 

Is that where you’re going on that? 

Mr. COFFEE. The charitable— 

Mr. GARRETT. Not the charitable—well, maybe the charitable, 

but just for any of the other lawsuits that they would potentially— 

Mr. COFFEE. I think you could move from the current good faith 

defense, which is based on a reasonable person— 

Mr. GARRETT. Right. 

Mr. COFFEE. —to more of a recklessness standard. That would 

make it somewhat harder to recover under a fraudulent conveyance 

statute. 

Mr. GARRETT. Yes. You just don’t want an overly zealous SIPC 

going after people and saying, ‘‘Well, now, we have a reckless 

standard, and we’re going to still go after people who’’— 

Mr. COFFEE. I understand. 

Mr. GARRETT. Because I know how— 

Mr. COFFEE. I just remembered that Mr. Picard is suing on behalf of small investors. There is no villain here. This is a zero sum 

game between some large investors and the smaller investors. And 

I hope he is able to recover a good deal from some of those larger 

investors to benefit the smaller investors. 

Mr. GARRETT. But remember, some of those are not villains. I 

would assume the vast majority of them are not villains either, 

right? 

Mr. COFFEE. They could have been reckless, however. 

Mr. GARRETT. They could have been reckless. But if they’re not 

villains, then you have to make that case. And we don’t want to 

have the other people be swept into that, and incur the expense— 

Mr. COFFEE. If you’re simply negligent— 

Mr. GARRETT. Right. 

Mr. COFFEE. —you don’t get the good faith defense. 

Mr. GARRETT. I agree with you on that. Thank you, Mr. Chairman. 

28 

Chairman KANJORSKI. Thank you, Mr. Garrett. We will next 

hear from the gentleman from New York, Mr. Ackerman. 

Mr. ACKERMAN. Thank you, Mr. Chairman. We don’t really know 

the full extent of the number of victims. What we do know is that 

the first victim was the public trust, the trust of people in their 

government, the trust of people in us, the trust in the system that 

we set up that they believed would protect them and have every 

reasonable right and expectation that it was going to. 

We know the number of claims that have been filed. We know 

the number of people who have been named. We know the number 

of entities that are on the list. But as we can see from just one 

local union, that they are named as a victim. But a lot of these 

groups, organizations, trust funds, investment groups represent 

thousands and thousands and thousands and thousands of Americans, some of whom think they are very lucky, because they have 

no stake—or had no stake—or investment in Madoff. But they do. 

A lot of people don’t understand this issue. And they don’t look 

sympathetically at the victims, because these are people who they 

think had more money than they did, who didn’t do due diligence, 

who were getting a high interest rate, and therefore they should 

have known better. 

This is part of what we usually call blame-the-victims mentality, 

that it’s the victims’ fault that they’re in the predicament that 

they’re in, where nothing could really be further from the truth, because there is no way—show of hands. How many of you knew Mr. 

Madoff? Only the person who is not a victim. 

[laughter] 

Mr. ACKERMAN. Not one of the other people who are victims 

knew Mr. Madoff. That’s the problem. How could they do due diligence? They relied on their government to do due diligence. Maybe 

we should take away the right of the government agencies to do 

due diligence, and pronounce people like Mr. Madoff, or even people not like Mr. Madoff, free of sin, crime, culpability, ill intention, 

incompetence, or anything else. 

Maybe we should let the little old lady from Peoria be able to do 

due diligence and go and personally audit Mr. Madoff. Every citizen should be able to do due diligence, if that’s what the American 

people think. How do we do it? 

Well, we do it by doing what we did—obviously, not effectively 

enough—by empowering government agencies and entities and people with badges to go in and investigate and make pronouncements 

that other people trust. That’s what we do in a sophisticated financial system, in a civilized society such as ours. Everybody can’t investigate everything. You don’t have a right, the way the system 

stands. 

And the only people who think in the blame-the-victim mentalities are people who are not victims, because they think they were 

lucky. And some of them were not. There are so many victims here 

that we don’t even contemplate right now, because you put money 

in your bank and your bank invests through a brokerage and puts 

money in something safe. And we know the first line of defense, because those are all public, if your bank invested in Madoff. 

But if your bank invested in a brokerage which went through 

somebody else and they invested in Madoff, so many other thouVerDate Nov 24 2008 18:52 May 21, 2010 Jkt 056237 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\56237.TXT TERRIE
29 

sands of people may lose money that we’re never going to hear of, 

in the end. And the system loses all this money. 

Obviously, there is not enough money in this insurance fund that 

people thought that they had to make them whole to the extent of 

at least $500,000, those people who had that much money, whether 

it was the initial investment or money that grew to that amount 

or greater, but really didn’t. 

We have a mess on our hands. First of all, we have a large group 

of American investors who were first robbed by Mr. Madoff, abused 

by the government and the system into thinking that they were insured, and they were not. They were then devastated by the IRS 

if they paid taxes on the money that they thought they had. 

They didn’t have the investment returns, and the government 

then robbed them by charging them tax that they can only go back 

a few years and not the full 13, as some of us have proposed, to 

get the tax back that the government illegally robbed them of. 

And then, so many of them are now being raped by the clawback 

provision for reliably, understandably thinking that they had this 

money in their account that they didn’t have in there, and then 

they spent to live on, because that’s what it was for. 

I have met people who have contempt for the victims, because 

they should have known better. How? 

You know, I represent the North Shore of Long Island, the base 

from where Mr. Madoff operated, the country clubs that he belonged to. And thousands of people who thought they were lucky 

to know such a nice man who was so reliable, received all the accolades that society can heap upon an individual, who is making a 

company and returning investments and interest to people for so, 

so many years. 

These are the people who thought they were lucky. And they 

were probably the unluckiest people of all. Besides having fallen 

into the categories that I named, they were further ripped apart 

because they personally knew this guy who they thought was this 

wonderful human being, and how lucky were they. And now they 

are personally, personally devastated because of the abuse of the 

relationship, in addition to all of that. 

So, for those people who look upon the victims and say, ‘‘I’m 

lucky I’m not there, and they should have done better, and how 

smart am I, and how stupid are they,’’ they really don’t get it. And 

some of them are involved in this fraud personally, and with their 

finances, as well. We have to be able to somehow do better. 

I think it’s interesting—and I see that my time has expired 

also—that so many of us have such strong opinions. Maybe that’s 

because almost everybody on the panel, or most of us at this hearing today, have actually selected witnesses that—myself included— 

appear before us today, so that we understand who the victims 

really are. 

But keep in mind that what we have to do is try to fix the system so that it makes sense, and brings the things that I think we 

all know. We can’t treat everybody equally. We have set people 

upon themselves, against each other like a bunch of piranhas, because of whether or not they needed to live off their interest, or 

were able to continue working so they didn’t need to live off the interest. Which group is luckier? It behooves us to figure it out. 

30 

I think that, despite the fact that this is the more marketable, 

I would call it, of the panels for the American people to understand 

what happened, but I think we’re going to have a lot more questions of the next panel, Mr. Chairman. I think we all look forward 

to hearing from them. 

I thank the people who have come here today and shared their 

tragic stories with America, and to keep in mind that we all bear 

some culpability here in this situation in which we all find ourselves. And I yield back the balance of my time. 

Chairman KANJORSKI. Thank you very much, Mr. Ackerman. I 

just want to throw out the figure I mentioned. If the loss that we 

have just suffered in the last recession—or in this recession—$14 

trillion, it would break down to $46,666 per man, woman, and child 

in America. And bear in mind what that would mean if we try and 

make up for everybody’s losses and everybody’s failings who has 

been in the system. 

That money was lost by a lot of people in a lot of different ways, 

some through fraud, some through error, some through bad judgement. I just wanted to throw that out. Even if it’s half that, it’s 

$23,000 per man, woman, and child. That’s a lot of money. 

Let’s see, Mr. King of New York. 

Mr. KING. Thank you, Mr. Chairman. Again, I want to thank the 

witnesses. 

Mr. Coffee, I don’t want to relive the anxiety of being back in law 

school class and debating the professor, so I will ask my question 

in a very respectful way. But my question is for you and for Ms. 

Chaitman, primarily. 

I agree with the overriding principles that you are enunciating. 

But we also have competing principles. To me, one of the main purposes of SIPC is to maintain consumer confidence, to encourage 

people to invest, to give them at least some reasonable assurance 

that they’re—if they invest in good faith, if they do use reasonable 

diligence, that their investment will be protected. If the stock collapses, that’s part of the game, you lose. 

Now, when I look at the SIPC Web site, you know, it states the 

SIPC mission: ‘‘When a brokerage firm is closed due to bankruptcy 

or other financial difficulties and customer assets are missing, 

SIPC steps in as quickly as possible and, within certain limits, 

works to return customer’s cash,’’ etc. ‘‘Without SIPC, investors of 

financially troubled brokerage firms might lose their securities or 

money forever, or wait for years while assets are tied up in court.’’ 

And it does have the caveat on there, ‘‘within certain limitations,’’ but then the next sentence goes on to say, ‘‘Although not 

every investor is protected by SIPC, no fewer than 99 percent of 

persons are eligible to get all their money back.’’ So, we have the 

government implicitly stating that if you play by the rules you will 

be protected. 

And so, when we have people who have played by the rules, it 

appears to me that we have a trustee who seems to be taking—is 

trying to make villains. Whether he calls them villains or not, the 

fact is he is creating one category of villains and one category of 

victims, when 99 percent of these people are all victims. 

And so, I would ask you and Ms. Chaitman how you—let me just 

ask the question, first question. Are either of you aware of any inVerDate Nov 24 2008 18:52 May 21, 2010 Jkt 056237 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\56237.TXT TERRIE
31 

stance in which SIPC has defined net equity the way the trustee 

is doing in this case? Mr. Coffee, and then Ms. Chaitman? 

Mr. COFFEE. Do you want to go first, or— 

Ms. CHAITMAN. Yes, I would be happy to. I can assure this committee that there has never been a case in a SIPA liquidation 

where SIPC or the SEC has taken the position that SIPC does not 

have to comply with the law. This is the first time in SIPC’s history that SIPC has taken the position that net equity, as defined 

by Congress, does not apply to SIPC. 

Mr. KING. Professor Coffee? 

Mr. COFFEE. I want to start with your point that SIPC should 

not misrepresent what it is doing to the American public. 

We have to understand that, until recently, SIPC was extremely 

underfunded insurance, because broker-dealer firms paid only $150 

a year. That’s awfully cheap. I think when you look at this insurance system, you should look at what most small businesses do. 

They may spend one percent of their revenues on insurance or surety bonds. So this has been an awfully cheap and somewhat illusory system of insurance. It has never been under great stress before the Madoff debacle, but it could happen again. 

The other point I would make about change over time is that in 

the old days when this was set up, most investors were individual 

investors. That has changed. Only about 25 percent of investors 

today are individual retail investors. Most of them invest collectively, through pension funds, mutual funds, etc. 

I agree entirely with what Chairman Kanjorski is saying, that 

we cannot give insurance to everyone. And I think if we tried to 

give insurance to hedge fund investors, it would look like socialism 

for the rich. But I do think there are special categories where we 

could recognize that if we’re going to make any change we should 

start at the end of the continuum where we have the most exposed 

victims. And I am suggesting that’s the smaller pension plan. 

But in answer to the final part of your question— 

Mr. KING. Right. 

Mr. COFFEE. —because I do think there has been some misrepresentation here to the public about what SIPC can do and is doing, 

I think the SEC is probably consistent with the prior law in what 

they’re saying. It’s just never come up before in this dramatic a 

way. 

Mr. KING. I would just comment on that, that to me, any time 

you get beyond the specifics of the law, you’re taking a chance. And 

to say, ‘‘Well, maybe these people are more deserving than those, 

maybe we can set up a different category,’’ to me it’s a very risky 

path to allow a government official to go down. 

My time is starting to run out. Let me just ask one other question on the issue of taxes. If both of you could, address the issue 

of reimbursing people who paid taxes on nonexistent profits, paying 

taxes on money which they never received. 

Mr. COFFEE. I’m not a tax lawyer, but I do think that the legislation that has been proposed would allow you to carry these losses 

forward and back, and that would be a way of at least reducing 

some of the bite. 

32 

And I think it was an illusory profit that you were paying taxes 

on, so I think we should be very sympathetic in that context, because it was a phony tax that you were paying. 

Mr. KING. And Ms. Chaitman? 

Ms. CHAITMAN. Thank you. There are two things I would like to 

say. 

First, we are not seeking a total bailout or restitution. All we are 

seeking is that the SEC and SIPC comply with the law. We are 

seeking the $500,000 in SIPC insurance that we were promised. 

And I am not asking for coverage for indirect investors, because 

I don’t think the statute, as it’s presently drafted, contemplates 

that. But the statute clearly contemplates that a customer who deposits money with a broker for the purpose of purchasing securities 

is entitled to $500,000 in SIPC insurance, based upon the customer’s last statement. That’s what the statute says, that’s what 

the SEC has said in every case until now. That’s what SIPC has 

said in every case until now. When a customer had a statement 

which showed the purchase of real securities, that customer was 

entitled to replacement securities up to $500,000, even if those securities had tripled in value. 

And how can we trust our government if Mr. Harbeck, the president of SIPC, can assure a court, as he did in the southern district 

of New York in the New Times case, that even if the securities 

which were never purchased—because it was another Ponzi 

scheme—even if those securities tripled in value, SIPC would replace the securities up to $500,000? We had a right, as law-abiding 

citizens, to rely upon that statement, and rely upon the law. 

Now, with respect to the taxes, there is no question that, economically, the Internal Revenue Service was the largest beneficiary 

of Madoff’s Ponzi scheme, because he was generating short-term 

capital gains, and people were paying taxes on the income they 

thought they were receiving at the highest tax rate. 

But I think that the Internal Revenue Service and Congress have 

done a great deal to help investors on the tax side. There are proposals—Congressman Ackerman has a bill, Kendrick Meek proposed a bill. Senator Schumer announced the other day a proposed 

bill in the Senate which will give Madoff investors a great deal of 

relief. It’s not 100 percent. We’re not asking for 100 percent. 

But on the SIPC issue, we are asking that SIPC be required to 

comply with the law. 

Mr. KING. Mr. Chairman, could I have 5 seconds, please, just 

to—Mr. Chairman? 

Chairman KANJORSKI. Yes. 

Mr. KING. I will just make one final statement, because I may 

not be able to be here for the second panel of witnesses. 

I have real concerns about a trustee being able to receive $1 million a week in legal fees. To me it’s encouragement for him to keep 

litigation going, to go after—now, whether it is or not—let’s assume 

he is acting totally honorably. But the fact is, it does put an appearance of evil, if you will, an appearance of a conflict of interest 

there, to pay someone for the more energetic he is in going after 

one class of victims, as opposed to another. And I just want that 

on the record. I yield back. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. King. 

33 

Mr. Leveton, do you have something to throw in, just briefly, in 

response to that? 

Mr. LEVETON. No, I want to take the conversation in a different 

direction. 

It seems that there is a dialogue going, and it’s an excellent dialogue. But the attorneys at this panel are, with all due respect, 

dominating the dialogue. 

Chairman KANJORSKI. Okay. 

Mr. LEVETON. So— 

Chairman KANJORSKI. Point well taken. 

Mr. LEVETON. May I make a couple of comments? 

Chairman KANJORSKI. Yes. 

Mr. LEVETON. Okay. 

Chairman KANJORSKI. We will have Mr. Perlmutter ask you 

some questions, so you will get a response. 

Mr. LEVETON. Okay. 

Mr. PERLMUTTER. Okay. 

Chairman KANJORSKI. We will now hear from the gentlelady 

from New York, Mrs. McCarthy. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman, and 

thank you for holding this hearing. I agree with some of my colleagues on the committee, and I disagree with others. 

The bill that is on the Floor today and tomorrow was put in place 

mainly because, in my opinion, the government certainly has failed 

in many, many ways. Also, it is our job to protect the average citizen. 

So, Mr. Leveton, I will give you a chance to talk about what you 

want to talk about, because I have to say, you know, my husband 

was a stock broker for close to 30 years, and he used to come home 

all the time and basically say, ‘‘Number one, brokers shouldn’t get 

commissions. That only drives them to buy and sell and line their 

pockets.’’ He said, you know, they should get a good salary and 

whatever. 

But with that being said, what we have seen in the last 2 

years—let’s go back to Enron. There has been a slow deterioration 

of moral obligation with large corporations. And, if anything, we 

have seen that, unfortunately, with the meltdown of the economy 

that we have right now. We have seen victims. 

And as far as helping some of those victims with a tax break, tax 

credit, they don’t have any money left to pay taxes, or they don’t 

even need a tax credit. The money is gone. And the ones who were 

injured were a lot of people who did everything right. 

And as far as, consumer beware, I’m one of those who will read 

everything that comes into my house. And you know what? I’m not 

a lawyer, and I don’t understand it all. And if I ask my broker a 

question, he has to look up the answer. So, as far as consumer beware, we trust—we try to trust—businesses. And unfortunately, 

that has not worked out. 

But I will give Mr. Leveton a chance to speak about anything he 

wants in the remaining balance of time. 

Mr. LEVETON. Thank you very much. I have a couple of comments. 

Do you remember the camel trying to put its nose in the tent example? That’s where the indirect investors are. I totally understand 

34 

the issues of net equity and clawbacks, and a number of other 

things that I think are very valid. However, for the indirect investor, unless they are in the SIPC customer definition, for lack of a 

better way to say it, none of those things are relevant. They’re not 

going to get any benefit anyway. 

I think that this is not so much a legal issue as it is an issue 

of fairness, because you’re distinguishing between the direct investors on one hand, and the indirect investors on the other hand. And 

now there is a further definition here, and that is the pension fund 

investors, as separated from the other indirect investors. 

Everybody lost their money in the same way with the same 

fraud. 

I can’t speak about the wealth of the direct investors. And I can 

really only speak about the wealth of the indirects in our particular 

hedge fund. These are people who have worked all their lives, 

played by the rules, saved diligently, and accumulated enough 

money to invest in a hedge fund at a level that was over the minimum requirement. They are not rich, by any means. 

To the extent that they might have more investable and liquid 

assets than the example of people who were only able to scrape together $50,000 in a pension fund, that may well be right. But from 

the standpoint of this discussion, to distinguish between those people—who, by the way, have created many, many jobs over the 

years—but to distinguish between the indirect hedge fund investor 

and the direct investor seems to me to be totally unfair and not appropriate. 

I think, Congressman Ackerman, that you understand. I think 

what you said was right on. 

My reading of the discussion in 1970, when Senator Muskie, for 

example, said the SIPA legislation will protect all Americans—he 

didn’t say direct investors and indirect investors; he said all Americans—from brokerage firm fraud and that is what was intended. 

Whoever drafted the SIPA legislation didn’t do it clearly enough to 

indicate that. But that was the intent. 

And now, what is happening, Chairman Kanjorski, is just what 

you have said. And Congressman Ackerman, it’s just what you 

have said. You have group A against group B against group C. 

That clearly was not the intent. 

And I think that there is no way that SIPC can rectify that, regardless of how good our arguments are. But Congress can. And it 

can start right here, because you have taken the time and effort 

to allow this group to talk with you very freely. Thank you. 

Chairman KANJORSKI. Thank you, Mr. Leveton. Our next member is Mr. Posey. 

Mr. POSEY. Thank you very much, Mr. Chairman. I think it is 

clear that the heart of every Member aches for the experiences that 

the indirect investors have suffered. There is no doubt about that, 

whatsoever. 

I think we also ache because, despite the fact that Mr. 

Markopolos tipped the SEC off almost a decade ago to the fact that 

Madoff was trying to pull a Social Security-like Ponzi scheme off, 

they ignored him. And he was allowed to do it, and allowed to do 

it, and allowed to do it. 

35 

And, although I don’t think it’s realistic to expect that we can 

ever have laws that guarantee people won’t become criminals, and 

they won’t try and exploit other individuals, the deterrent to that 

is swift and sure punishment. And I am very sad to say that, to 

this day, despite the numerous inquiries, the testimony, the investigations, I don’t know that anyone at the SEC has had their wrist 

slapped yet. I don’t even know that there has been a verbal reprimand. I don’t think anybody has been fired. We just don’t know 

how they have addressed it. 

The only way to deter criminal activity—I mean, you police it the 

best that you can, and when you find it you must have swift and 

sure punishment. Even if the government is in on it, you still must 

have swift and sure punishment if you want to deter bad activity. 

You already made it illegal to perform bad activity. We have 

plenty of laws there right now that were violated. Madoff wouldn’t 

be any less or any more of a crook if we have another couple of 

books of statutes piled up that he violated. The damage was done. 

It could not have been much worse, I don’t think. 

But I think we need to focus on having a day of reckoning for 

that kind of bad behavior, which seems to have permeated industry. They referred to Enron earlier. 

The whole reason that this economy is in the dumps that it is 

now, and that future generations, in addition to this, are facing the 

uncertainty that they are now, boils down to just one word, and 

that’s greed. It’s a lack of respect for the process, it’s a lack of respect for your fellow man. It’s a lack of respect for your investors. 

It’s a lack of respect for everybody. It’s putting the dollar first. And 

a lot of people have a right to be greedy, but they don’t have a right 

to steal from other people. 

And so, until we see that—besides just one man, Bernard 

Madoff, until we see that there is justice dealt out for everybody 

who is culpable in letting him pull off that scheme, it’s just going 

to encourage more activities of the same, despite how many laws 

that we enact. 

Thank you, Mr. Chairman. I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Posey. Our 

next member is Mr. Klein of Florida. 

Mr. KLEIN. Thank you, Mr. Chairman. I have some specific questions. But just a quick note on Mr. Posey’s comments. 

Part of the frustration I think most Americans have, as well as 

the people who were defrauded here, is the fact that there hasn’t 

been enough punishment. Accountability is one thing, and there is 

the responsibility within our government agencies to follow 

through, and those people need to be removed if they can’t do their 

job. 

And one of the big explanations that has come forward on this 

problem is the fact that there weren’t enough people, at least in my 

view, providing regulation. The quality people—many over the 

years—were pushed out. And bad decisions were made. Mr. 

Markopolos is a perfect example of the fact that information was 

presented. This should have been shut down a long time ago, yet 

people didn’t make decisions. And those people need to be punished. 

36 

But there is a second line on this that goes into the private sector. And I don’t think, personally, that there is enough punishment, 

criminal punishment, for people who break the laws and defraud 

the American public. 

Part of it comes down to Mr. Madoff. Yes, sure, he is in prison. 

He couldn’t have done this by himself. I just can’t accept that. I 

mean, there are too many other people involved in this process. 

And there needs to be swift punishment, I agree with that. That 

sends a very strong message. 

But let’s get to the specifics here. Thank you for your testimony, 

both as individual investors and as professionals, to give your 

thoughts on this. One of the problems that I see is that there 

seems to be some inconsistency in interpretation by the SEC and 

the SIPC. 

One of the things that I said before is, people need to know that 

on their Web site, and on the door, that SIPC symbol means something. The investor public needs to know that it means something. 

And if the—if we look back at the original language in the SIPC 

series rules—and there is a Federal regulation 300.500—it says, 

‘‘The rules provide for the classification of claims in accordance 

with the ‘legitimate expectations’ of a customer, based upon the 

written transaction confirmations sent by the broker-dealer to the 

customer.’’ Seems pretty obvious to me. 

Did you get a statement? 

Ms. CHAITMAN. Yes. 

Mr. KLEIN. Was it a reasonable expectation that your statements, one after the other, looked like any other statements you 

got from Merrill Lynch or anybody else? 

Ms. CHAITMAN. That’s right. 

Mr. KLEIN. I think the answer is probably yes. There probably 

weren’t any big signals going the other way. So, again, I think this 

is—this set of expectations that you all had in this process. 

One of the interpretations—I guess I will ask Ms. Chaitman this 

question—of the SEC seems to be talking about, based on this lack 

of precedent, is that there is no case law that really talks about the 

fact that the interpretation should be that if an investor told a 

broker to purchase specific securities, that seems to be a very clear 

case where the SIPC can come in and fund. 

But if you didn’t have that specific line of securities requested— 

and most of us go into a broker, and there is a sort of a risk assessment of, ‘‘I want some bonds and some of this and some growth, 

and everything else,’’ that doesn’t seem to be covered. 

Ms. Chaitman, do you have a thought on what is the SEC’s 

view—and why that doesn’t seem to make sense? 

Ms. CHAITMAN. Well, the first I learned of the SEC’s position was 

last evening, when I saw their written testimony. And I have to tell 

this body that there is no authority in the statute for the SEC’s position. 

In other words, you can read SIPA from beginning to end, from 

the first word to the last word, and nowhere does it say that the 

full protections of this statute are reserved for customers who make 

their own investment decisions, but not for customers who rely 

upon financial advisors. 

37 

And if you analyze the economics of what the SEC is suggesting, 

instead of protecting investors—which is what we, as taxpayers, 

fund them to do—they are protecting the industry-funded insurance company, because the vast majority of Americans don’t make 

their own investment decisions. My clients are in their 70’s, 80’s, 

and 90’s. They don’t have the capacity to decide whether they 

should buy something one day and sell it the next day. They hire 

financial advisors, and they go to brokers who make those decisions 

for them. They invest through Fidelity or Vanguard, and they buy 

funds. And those fund managers make investment decisions for 

them. 

Mr. KLEIN. Is it your view that if this interpretation were held 

up, and this was the SEC’s interpretation throughout, that—it 

would seem to me that millions of investors who just give a more 

general parameter of investment authority to an investment house 

may not be covered by a failed account, a failed broker whom the 

SIPC steps in on. 

Ms. CHAITMAN. Precisely. They wouldn’t be covered for the full $500,000. And the purpose of the statute was to instill confidence 

in the capital markets. 

If the FDIC tomorrow, in the next bank liquidation, decided, 

‘‘You know what? We don’t insure the accounts, except for the net 

investments, so we’re eliminating all interest that may have accumulated over the last 30 years, and we’re only going to pay the net 

deposit,’’ there would be a run on the banking system. 

And the SEC’s filing yesterday for this committee could create a 

run on the securities firms, because no investor in this country has 

any idea what kind of coverage they have, in the event that they 

are dealing with a dishonest broker. 

Mr. KLEIN. Professor Coffee, you had a comment about zero sum 

game, where—if the SIPC assessed its members to provide for 

the—you made a—I agree with your comment, that it is illusory, 

and the amount of actual cash in the bank— 

Mr. COFFEE. I congratulate— 

Mr. KLEIN. What did you say, sir? 

Mr. COFFEE. I congratulate this committee, because you are raising the assessment from 150 to 0.2 percent. 

Mr. KLEIN. Well, it seems to me, Professor Coffee, that one of the 

problems here is there is a certain amount of money, and we’re sort 

of backing our coverage into that amount of money, as opposed to 

creating— 

Mr. COFFEE. It’s how you’re funded. You are quite right. 

Mr. KLEIN. Right. The law is the law. And if it happens to be 

underfunded, then there ought to be an assessment, or some way 

of making the people whole, not saying, ‘‘Well, it’s not $500,000 because we don’t have enough cash in the bank to make this thing 

whole.’’ 

And again, I would just go back to how important it is, how strategic and essential it is, for the public to know that if they invest, 

that the money—there is a fund there to protect them, if there is 

fraud and insolvency in those things out there. 

Mr. COFFEE. I think you are quite right. I want to make one little comment. To the extent that you raise the amount of assessment that the brokerage industry has to pay, you will also give 

38 

them an incentive, through organizations like FINRA, to cut back 

on risky behavior by brokerage firms such as Mr. Madoff. 

Right now, they have no interest in stopping Mr. Madoff from 

being a cowboy, and doing what he is doing. But if they have to 

pay higher assessments, and the prospect of higher payouts will 

raise those, then they will have an interest in controlling the 

outliers within the broker community. 

Mr. KLEIN. Right. And, Mr. Chairman, just to conclude, again, 

my view of this is, let’s follow the law. If the protection is there, 

the $500,000 protection is there, those people should be given that 

full $500,000. 

The clawback, we have already been through this discussion. Nobody is looking for $8 million to $10 million back. I mean, if they 

are, it’s not reasonable. But the SIPC has a responsibility, and the 

SEC has a responsibility, to make sure the law is followed correctly. 

Ms. CHAITMAN. May I make one response to something Mr. Klein 

said? 

Chairman KANJORSKI. I think we are going to hold, because Mr. 

Klein already did run off— 

Ms. CHAITMAN. Okay. 

Chairman KANJORSKI. —and we allowed that courtesy. But we 

want to get Mr. Perlmutter in. So just hold. Maybe he will come 

to you with a question. Mr. Perlmutter? 

Mr. PERLMUTTER. Thank you, Mr. Chairman. And I would like 

to start with Mr. Green. He has had his hand up a couple of times. 

So if you, sir, would sort of share what you are going to share, and 

then I will launch into my tirade. 

Mr. GREEN. Thank you, Mr. Perlmutter. I wanted to comment— 

well, two things. One is I wanted to acknowledge, because at the 

beginning of my remarks I did not comment that I was a lawyer, 

so I just wanted to comment that I will participate, though I did 

not before, as a lawyer in the dialogue. 

But in this discussion about how decisions will be made, Mr. 

Chairman, you raised the issue that some tough choices are going 

to have to be made. And I would like to again try and focus on 

some of the prior policy considerations, public policy considerations, 

particularly embodied in ERISA. ERISA was created as one of the 

three legs of the stool to promote the retirement savings of the average American worker, the other ones being individual savings, 

Social Security, and qualified plans. 

The concept of qualified plans was the public policy was to encourage employers to create plans to put funds into retirement, instead of having profit sharing funds go at the end of the year just 

into dollars for workers to spend. There was a keen observation by 

Congress that workers were not saving those funds for retirement. 

And so, incentives were created that there be qualified funds, that 

they be put into retirement. 

The type of fund we have is known as an eligible individual account fund, which means that for each participant, there has to be 

an individual account that has to provide for individual accounting 

of income, individual accounting for expenses. The only purpose for 

which it is aggregated is for investment purpose. It is an adminisVerDate Nov 24 2008 18:52 May 21, 2010 Jkt 056237 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\56237.TXT TERRIE
39 

trative requirement. And it is for that reason alone that the investments go in the name of the trustee. 

Now, the consequence—because we have talked about consequences of decisions that will be made by this committee and by 

Congress on this issue—if, in fact, we undercut the confidence in 

ERISA-qualified plans because we do not extend SIPC protection to 

them, then we will discourage the confidence of employers of putting those funds into the qualified plans, will instead encourage 

them to give them directly to the workers, which is phenomenal for 

those employers who do profit sharing like that, but— 

Mr. PERLMUTTER. Let me ask you a question on that, then. 

Mr. GREEN. Yes. 

Mr. PERLMUTTER. For each person in the plan, you think there 

should be $500,000 in insurance? 

Mr. GREEN. What I would say is for each participant, there ought 

to be coverage for the plan, up to the account for each individual, 

subject to whatever the SIPC limit is. 

Mr. PERLMUTTER. Okay. So, under today’s SIPC levels, it would 

be up to $500,000 per person in that plan. 

Mr. GREEN. Yes. Now, I am not going to comment on the net equity issue. I am not qualified to do that. 

Mr. PERLMUTTER. And that’s okay. Let me just— 

Mr. GREEN. Right. 

Mr. PERLMUTTER. —and then I have some questions for Ms. 

Langford. 

Mr. GREEN. Yes. 

Mr. PERLMUTTER. Just so you all understand my background, I 

represented bankruptcy trustees in Ponzi schemes, okay, and I represented investors who were victimized, and who were either—had 

received more than they had put in, had invested $100,000, got 

$50,000 back, but other people got zero back. So, I understand 

where Mr. Coffee is coming from in some of his comments. 

And so, where I—what I am trying to figure out is going back 

to those three things that I brought up earlier: bankruptcy; how 

far, and who should be subject to the clawback; and SIPC, how far 

should the insurance reach? 

So, in my State, and in my area, I have the indirect investors 

that Mr. Leveton has talked about, who didn’t know Madoff, they 

didn’t know Petters, they didn’t know any of these guys, they invested through a fund that then invested in these particular entities. How far should this SIPC insurance reach? I mean, that’s the 

policy decision we have to make. 

And then, tax-wise, when can somebody take a loss—can you 

take those illusory gains and get a net operating loss carry-back so 

that might give you at least some recovery? 

Those are the three big policy questions I have. But I also am 

just interested—like, Ms. Langford, how did you get into the 

Madoff network? 

Ms. LANGFORD. How I got in was by looking for a vehicle to— 

I had just sold my house. And it was my retirement. I asked a 

friend, I said, ‘‘I want something safe, liquid, and diversified.’’ And 

he said, ‘‘Hands down, this is the safest place you can put your 

money.’’ So I entered into it that way. 

40 

Mr. PERLMUTTER. So you were a direct investors with Madoff, 

or— 

Ms. LANGFORD. No, no, in— 

Mr. PERLMUTTER. —did you come through something else? 

Ms. LANGFORD. It was indirect. It was a partnership. And—a 

limited partnership—and so, technically, it wasn’t a—technically a 

retirement account. But it was my retirement money. So— 

Mr. PERLMUTTER. Okay, thank you. And I just—one more point 

to Mr. Coffee’s statement. 

Mr. Kanjorski’s bill that we’re going to hear today and tomorrow 

and Friday does, I think, at a $10 million level, separate custodial 

accounts from investment advisor accounts, to try to separate those 

things so that somebody isn’t posting you phony statements and 

advising you at the same time, or—hopefully that kind of separation will work, as you have suggested. 

Chairman KANJORSKI. Thank you very much, Mr. Perlmutter. 

At this point, we are waiting for the House to go back into session, at which time we will have three votes. And certainly rather 

than tie this panel up with any further questions, my intention is 

to dismiss the panel and thank you very much for your examination, and then to stand in recess until 30 minutes after the call of 

the next vote. So, we anticipate that the call may occur within the 

next 10 to 15 minutes, and then we will return to take the second 

panel 30 minutes after that call. 

Without any other further comments or objections, the committee 

will stand in recess. 

[recess] 

Chairman KANJORSKI. This hearing will come to order. I am 

pleased to welcome our second panel. But before I introduce members of the panel, may I caution the audience that it is against the 

rules of the House to have demonstrations of emotions. We understand how feelings run high, but we would appreciate that you extend the same courtesies to the witnesses in this second panel, as 

you did to the witnesses in the first panel, with the absence of 

cheering. And that being said, we will address it no more. 

And now I am pleased to first recognize Mr. Michael Conley, 

Deputy Solicitor for the Securities and Exchange Commission. Mr. 

Conley? 

STATEMENT OF MICHAEL A. CONLEY, DEPUTY SOLICITOR, U.S. 

SECURITIES AND EXCHANGE COMMISSION 

Mr. CONLEY. Chairman Kanjorski, Ranking Member Garrett, and 

members of the subcommittee, thank you for the opportunity to appear before you today on behalf of the Securities and Exchange 

Commission. My name is Michael Conley, and I am the SEC’s Deputy Solicitor. 

There are a number of issues being discussed here today, but I 

wish to focus my limited time on explaining the Commission’s 

views regarding the SIPC liquidation of Bernard Madoff’s securities 

firm. We at the SEC are keenly aware of the devastating losses incurred by the thousands of investors who entrusted their money to 

Madoff. Many, if not most of his victims, have had their lives upended. 

41 

At the SEC, Chairman Schapiro has urged all of us to learn from 

that experience, and reform the way we operate. Over the past 

year, we have taken significant steps in that regard, reinvigorating 

the Enforcement Division, enhancing our inspections, bolstering 

our training program, revamping our tips and complaints process, 

and hiring personnel with new skill sets. And we will continue to 

reform. 

With regard to the Madoff liquidation, the Commission and its 

staff have been analyzing SIPA, its legislative history, and case law 

to determine how to properly value the claims of the investors. 

While claims for losses suffered by investors are determined under 

SIPA, the statute does not expressly address how to calculate the 

net equity in a customer’s account when a broker-dealer has engaged in the sort of fraudulent scheme Madoff perpetrated. 

As a result, the bankruptcy court will soon hear arguments on 

the various theories proposed for valuing customer claims. In the 

end, the court will decide how the investors’ claims should be valued. 

The Madoff liquidation raises a new question. Specifically, how 

does SIPA apply when a customer’s brokerage statements show 

nonexistent positions in real securities that the broker concocted 

after the fact to support pre-determined fictional investment returns? 

Two primary approaches have been proposed. The first is known 

as the final account statement method. Under this method, the net 

equity in customer accounts would be based on the securities positions shown on the final account statements customers received before the firm was placed in liquidation. 

The second principal approach is the cash-in/cash-out method. 

Under this approach, net equity is determined by crediting the 

amount of cash the customer deposited in the account, and subtracting any amounts withdrawn from the account. 

Based on our analysis, the Commission will recommend to the 

bankruptcy court that customer claims in this case should be determined through the cash-in/cash-out method advocated by the trustee and SIPC. However, we believe that the amount should be adjusted to constant dollars, to ensure that investor claims in this 

long-running scheme are valued most accurately and fairly. 

The Commission decided not to recommend the final account 

statement method on the facts of this case, because it believed it 

would result in claims based on account balances that Madoff himself concocted, and that bore no relation to reality. Madoff essentially promised customers that he would pick winning stocks for 

them, did not tell them which stocks he would purchase, waited to 

see which stocks did well, and then falsely reported that he selected stocks that met their investment expectations. 

Through no fault of investors, the account statements Madoff 

sent were illegitimate tallies of a fraudulent scheme. Neither SIPA, 

nor any of the cases interpreting it, can be read to support an approach that would value claims based on the fictitious investment 

returns of such a scheme. 

As a result, the Commission has concluded that the fairest and 

most reasonable way to measure the value of the Madoff customers’ 

net equity is to look to the money those customers invested with 

42 

Madoff as a proxy for the unspecified investments in securities 

Madoff told them he would make for their accounts. 

To do otherwise would have the effect of favoring early investors—many of whom withdrew all or more than the principal they 

invested with Madoff—over later investors—some of whom will not 

receive a distribution equal even to their principal. 

At the same time, the Commission is sensitive to fairness concerns raised by the cash-in/cash-out method. That method favors 

later customers at the expense of earlier customers, by treating a 

dollar invested in 1987 as having the same value as a dollar invested in 2007. In our view, it is appropriate to convert the dollars 

invested into constant dollars. We believe that approach, rooted in 

the economic concept of time value of money, will result in greater 

fairness across different generations of Madoff investors—in effect, 

treating early and later investors alike, in terms of the real economic value of their investments. 

The Commission understands that the total pool of money available to distribute claims is limited, and that there will not be 

enough to compensate all victims. That means that money allocated to one Madoff victim will affect the amount of money available to compensate other victims. The bankruptcy court’s task, and 

the Commission’s goal in making its recommendation, is to arrive 

at the fairest way, consistent with the law, of dividing that limited 

pool. 

I thank you again for the opportunity to appear before you today, 

and would be pleased to answer any questions you may have. 

[The prepared statement of Deputy Solicitor Conley can be found 

on page 104 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Conley. 

Next, we will hear from Steve Harbeck, president and chief executive officer of the Securities Investor Protection Corporation. 

Mr. Harbeck? 

STATEMENT OF STEPHEN P. HARBECK, PRESIDENT, 

SECURITIES INVESTOR PROTECTION CORPORATION (SIPC) 

Mr. HARBECK. Thank you, Mr. Chairman. Chairman Kanjorski, 

Ranking Member Garrett, and members of the subcommittee, 

thank you for giving me an opportunity to discuss SIPC’s work over 

the last year, and to discuss possible amendments to the Securities 

Investor Protection Act. My name is Stephen Harbeck. I am the— 

I have worked at SIPC for 34 years, and I became president in 

2003. 

SIPC has no role in the investigation and regulation of brokerage 

firms. That duty falls to the SEC and the self-regulators. When 

SIPC is informed that a brokerage firm has failed, we institute a 

customer protection proceeding in district court, and then refer it 

to the bankruptcy court. Customers of brokerage firms are protected within statutory limits. 

The first such source of protection is a prorated distribution of 

customer property. As Professor Coffee noted this morning, that 

makes it a zero sum game. SIPC can supplement customer property by as much as $500,000 per customer, with a limit of $100,000 

for cash. 

43 

SIPC has overseen the return of approximately $160 billion to 

customers, and has advanced more than $323 million, prior to the 

Madoff case, to do so. 

About 11 months ago, I appeared before you to report on the two 

largest brokerage firm failures in history, Lehman Brothers and 

Madoff. I would refer you to my written comments for progress 

with respect to Lehman Brothers, which I think is substantial. 

In the Madoff case, unlike the Lehman case, a transfer of accounts was simply impossible. Through the claims process, the following is the status of the claims. The trustees allowed $4.6 billion 

worth of claims. That represents returns to 1,600 claimants. SIPC 

has committed, and has advanced most of, $559 million. This is 

more than in all previous SIPC liquidation proceedings combined 

in the past. 

There have been 16,000 claims filed, and there have been 11,500 

claims determined, or 71 percent of the claims. The trustee has 

thus far collected $1.1 billion, and he has filed 14 lawsuits seeking 

the return of $14.8 billion. And we will discuss that again in just 

a moment. 

The subcommittee has asked specifically for information on the 

fees in this case. As you heard this morning, the trustee has been 

paid $1.275 million, and the law firm of Baker and Hoestetler has 

received $37.5 million. I remind you that this is the largest Ponzi 

scheme in history. And most of the trustee’s and legal fees efforts 

that are being expended here are for the purpose of recovering assets. 

In terms of the legislative initiatives that are before you, SIPC 

has proposed a number of amendments to SIPC, and these include: 

increasing the amount that SIPC can advance for claims for cash 

to $250,000, and to index that dollar figure to inflation by a specific 

formula; we would increase SIPC’s line of credit with the Treasury 

from $1 billion, where it has been since 1970, to $2.5 billion; we 

would increase the number of cases where SIPC can use a streamlined procedure. And I would suggest to you that the members of 

this morning’s panel should agree with all of those changes. 

But there are other proposals that I must address. One is extended coverage for participants in pension funds, which was extensively discussed this morning. On a going-forward basis, this 

certainly deserves study. However, the proposal lacks any analysis 

in terms of risk management, or possible cost to either SIPC or the 

Treasury. And, as both the chairman and the ranking member implied this morning, it is imprudent to enact a measure without that 

analysis, and knowing what it would cost, as a possible drain on 

the Treasury. 

SIPC cannot take a position on this without the appropriate due 

diligence. And my written statement contains a great deal more on 

that issue. 

SIPC is a complex law, but the pension fund issues shows the 

current state of the law is somewhat in accord with common sense. 

If you have an account, and you can call your broker and make a 

purchase or trade and get a statement, you’re a customer. Granted, 

the statute was drafted in a simpler time, when that was the 

standard. But that is still the law. 

44 

In terms of extended coverage for other—indirect claimants, one 

of this morning’s panel members testified that he is an indirect victim, and he certainly is. But I think I have to elaborate. He placed 

his money with a hedge fund which invested in another hedge fund 

which invested in another hedge fund, which invested in Madoff. 

Again, as Professor Coffee said, it would be very, very difficult to 

craft legislation that would cover that situation and expand the 

coverage of the statutes beyond what was ever intended to be. 

Now I would like to address a point that I feel personally very 

strongly about, and that is depriving a trustee in the prospective 

legislation of the right to recover preferences in fraudulent transfers in certain instances. Ms. Chaitman testified about this issue. 

Mr. Chairman and members of the subcommittee, I cannot urge 

you strongly enough to reject this amendment. If enacted, it would 

deprive the victims Ms. Chaitman represents of, literally, millions 

of dollars. Mr. Coffee noted that this morning, and he is absolutely 

correct in that regard. 

The Madoff trustee has used the awarding powers granted to 

him by SIPA and the Bankruptcy Code judiciously. He has not 

sued small investors. He has sued 14 large investors. He has urged 

any Madoff customer who has received more money than he placed 

with Mr. Madoff to open discussions with him. And he is open to 

reason. 

This is a man who is extraordinarily practical. He has served as 

a trustee in more of these cases than any other human being, ever. 

He has instituted preference in fraudulent transfer proceedings 

against large investors who received disproportionate returns. But 

the weapons in the trustee’s arsenal include the fact that all he 

must prove is disparate return, without any issue of legitimate expectation arising. 

Ms. Chaitman’s written statement, at page 17, says that the 

trustee in Madoff has already sued several elderly, virtually destitute investors. Ms. Chaitman is a vigorous advocate, but she is 

factually incorrect. The only situation in the Madoff case where 

small investors have been sued were three instances where the 

claimants ignored the claims filing procedure that has been in 

place for 39 years, and initiated a lawsuit against the trustee. In 

short, the trustee was required to institute mandatory counterclaims. And those are the only small investors who have been sued. 

In short, the proposed legislation addresses a problem which has 

not arisen, will not arise in this case or any other, and would do 

extensive damage to the very people it seeks to help. 

Indeed, it would actually encourage Ponzi schemes in a real 

sense, because it would allow people to be free of the prospect of 

what you have heard today called clawback, and what are more accurately described as congressionally-mandated equitable distributions. It would deprive the trustee of the ability to get money back 

from someone who has gotten all of their money back, someone who 

has kept stolen money from others, and who will share in that common pool of assets at the direct expense of other people who have 

not gotten all their money back. That is wrong, as a matter of both 

law and policy. 

In the written questions submitted by the subcommittee, you 

asked if extending SIPC coverage to the victims in situations such 

45 

as the Stanford Financial Group make sense. And there is legislation to deal with that situation. SIPC protects the custody function 

that brokerage firms perform. And, in the Stanford case, investor 

assets were not located at the SIPC member firm. 

Instead, in the Stanford case, investors sent money, at their own 

request, to a bank in Antigua. The bank issued certificates of deposit. The investors have physical possession of those CDs, and the 

bank defaulted, due to fraud. 

The investors are not covered by SIPC. I do not believe the subcommittee should make the SIPC fund, and the United States 

Treasury, the insurer of the underlying value of any security, and 

I don’t believe the subcommittee wants the United States Treasury 

to guarantee the debts of an offshore bank. 

Retroactive application of any of those amendments, particularly 

with respect to the Madoff case, would change the advantage from 

one group to another in a completely arbitrary way. For the reasons given in my written statement, any amendments, should you 

consider them, should be prospective. 

I would like to address Mr. Conley’s mention of the constant dollar theory. The first time SIPC was presented with this theory was 

November 23rd. The concept simply isn’t in the statute. Congress 

knows how to write a law in constant dollars. And, in fact, we 

have, in our amendments, asked for an index to inflation with respect to the cash protection under our statute. It creates arbitrary 

results, different arbitrary results from the ones that the statute 

now has. 

The consequences for your constituents are that if you back a 

concept of constant dollars, you would have to say that a person 

who received all his money back, and who received stolen money, 

will get even more at the direct expense of people who have not 

been made whole. 

In a limited sample of about 2,000 of those accounts, we located 

in New York 138 people who had received net—given what we expect the trustee to recover—$19 million less. So we don’t think that 

is the best of all possible worlds. It is a zero sum game. That said, 

you know, because this is an issue of first impression, we will continue discussions with the SEC on that matter. 

So, with that, I would be pleased to answer your questions. 

[The prepared statement of Mr. Harbeck can be found on page 

122 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Harbeck. 

I am just going to ask a few questions, perhaps unrelated to the 

testimony this morning. But in the particular instance you were 

mentioning, Stanford Financial, did they at any time advertise that 

they were insured? 

Mr. HARBECK. The SIPC member may have. But the SIPC member, with respect to actual customer assets, custodied them at a 

clearing brokerage firm. And the people who had their assets at the 

clearing firm now have them all back. 

The folks who are missing—and I met with the receiver for Stanford last weekend to discuss this matter with him, and I have had 

extensive discussions at various levels with the SEC on this subject—and the problem is that since SIPC protects the custody function that brokerage firms perform, and since those people have 

46 

physical possession of the CD that is the security, what you would 

be giving them back is the initial purchase price of a fraudulent security. And that has never been the law. 

Chairman KANJORSKI. I understand. But those who bought the 

securities in the offshore banks, in their place of business or on 

their stationery, did they indicate to the customer that they were 

insured by your corporation? 

Mr. HARBECK. I don’t know the answer to that. 

Chairman KANJORSKI. Do you not think it would be sort of important that you do know that? 

Mr. HARBECK. On the facts of this case, no, because the— 

Chairman KANJORSKI. Well— 

Mr. HARBECK. The determining factor—go ahead, I’m sorry. 

Chairman KANJORSKI. Yes. Why is it not important for you to 

find out whether or not there are some people fraudulently using 

your potential insurance to entice customers into their establishment? 

Mr. HARBECK. It would be interesting, but we could do nothing 

about that, because we don’t have any enforcement powers. That 

is the SEC. 

Chairman KANJORSKI. Well— 

Mr. HARBECK. The fact of the matter is, even if people are defrauded into believing they have coverage, that does not make it so. 

Chairman KANJORSKI. No, that is true. But I do not recall—and 

I have been sitting here a long time, and sometimes we miss all 

the mail that comes into the committee, or into our various subcommittees—but I do not recall any letters from your organization 

indicating that you needed additional authorities, that you felt 

there were loopholes in the law, that there were failures in the system in all of the 25 years that I have been sitting here. Did I miss 

a lot of that communication? 

Mr. HARBECK. Of course you didn’t, Mr. Chairman. And the reason you didn’t is until September of last year, the system was gliding along very, very well. And we had protected 99 percent of the 

investors who went into liquidation. 

Chairman KANJORSKI. While times were good, it was no problem. 

When times get bad, that is usually the case. When the water goes 

down after the flood, that is when we find the bodies. 

Did anyone in your organization not anticipate that the water 

was not going to stay up all the time, and that in fact there may 

be some victims of the flood? 

Mr. HARBECK. The—well, again, if you’re referring to Stanford, 

the fact of the matter is that if Stanford—even if the bank was in 

the United States, the—I don’t think you want us to—and we never 

have been in the business of—giving people back money when 

they—the value of their investment goes down for any reason. 

Chairman KANJORSKI. No, and I am sympathetic to that, and we 

want fairness to the whole system, as best as possible. 

I guess what I am getting to is, did you hear the outrage of the 

panel that we had earlier this morning? 

Mr. HARBECK. Mr. Chairman, I hear it every day. 

Chairman KANJORSKI. Okay. Well, I have to believe that outrage 

was sincere, and somewhat based on reason. 

47 

There was a statement there by these people that they felt there 

were representations made by the individuals they dealt with, 

whether they were dealers, whether they were banks, whomever 

they were, that the U.S. Government was in some way was watching out for their best interests and, in fact, in some instances under 

the law, insuring them. And it was not until after the fact they 

found out that they were totally misinformed, or they misunderstood, or that they just were not supported. 

And prospectively, I guess they are asking us to look at this. And 

that is one of the things we clearly can do. 

Mr. HARBECK. Certainly. 

Chairman KANJORSKI. What we can do to prevent or to recompensate them for some of their losses is very questionable. I do not 

know how far we’re going to get there. But there are probably some 

things we can do, and we will be directed toward that end. 

But I think what I am particularly disturbed about this whole 

last 15- to 18-month disaster that we have been in, is an attitude 

at the governmental level, or quasi-governmental level that it is 

not our problem, we do not have to take preventative steps, investigative steps. 

And I think you do. It is our problem. It is the committee’s problem. It is the Congress’ problem. It is the President’s problem. You 

know, we just, as a matter of course, cannot accept in this country 

that some people feel that their government let them down, wrongly so, and that they were not acting in its best—and in many of 

these instances—and I hear their testimony—there is very little 

that they could have done. 

I raised the question, caveat emptor, and I am a great believer 

in that. But, in some of these instances, I do not care what actions 

they took—somebody mentioned to me, and I will not identify Mr. 

Ackerman by name— 

[laughter] 

Chairman KANJORSKI. —that during the stock market crash, Mr. 

Madoff was getting calls from officials of the United States Government, and asked what his recommendation—should they close the 

market, what should happen? That is understood. Was he not the 

president of NASDAQ at one time? He was a pretty substantial 

person in this country. 

But after we see what happened, what are we doing to prevent 

this in the future? Are we checking out some of the things that 

some of these very substantial people are involved in? Are they 

trading on that? Are they enticing relatively innocent people to 

trust them, and give them their life savings and their pension 

funds, and everything else? What have we done? 

For instance, what has your corporation done—across the country, all these workers’ pension funds, and ask them how are they 

getting advice as to where to invest, what advice is being made? 

Who are they using? Are we finding some method to check these 

people out? Or are we just saying it is up to them, and if they get 

cleaned, they get cleaned? 

It seems to me that once you see something like this happening, 

being either in the government or quasi in the government, we 

have more of a responsibility to do something. We cannot cure it 

all. We cannot save everybody. We cannot prevent all injury. But 

48 

obvious injury, obvious things that are at fault, or failures that 

exist, we have an obligation. 

When I first started this long discourse on my part—and I see 

my time is up—I feel offended that more Federal agencies, or 

quasi-Federal agencies such as your own, are not coming forward 

to tell us what they need. What authorities do you need? What 

could we do better? How can we change the law? How can we better educate people? 

It is not enough to just say, ‘‘Gee, tough luck.’’ Fifty, sixty billion 

dollars, thirteen, fifteen thousand people got clipped by a very professional artist. We have to learn from that, and we have to take 

actions to find out there are not other Madoffs out there, there are 

not other Stanford Financials out there. And I am not sure I am 

getting the impression that the two agencies are doing that. 

I am not putting all my weight on you, Mr. Harbeck. I think I 

have taken some action in the legislation that is on the Floor today 

against the SEC on that very substance. 

Let me point out, Mr. Deputy Solicitor, what I found so offensive 

in this whole thing, is that you are so channeled over there that 

you have no chain of command. 

I cannot believe that you can do three, four investigations over 

more than a decade and come up with some really, I think, important questions of the credibility and viability of a person—although 

very highly thought of on Wall Street—but it never goes up beyond 

1 or 2 levels in an organization that has 10 levels. You have no 

chain of command. 

What would we do to a four-star general who put a lieutenant 

in the field who killed 150 innocents? If he did not know about it 

within 24 hours and take action, he would be gone—or should be 

gone. Sometimes, now that I think about it, no one at the SEC has 

been disciplined in any way. 

But we have to have a chain of command, whether it is in the 

military or whether it is in civilian life. If it is the government, we 

have to find out what is happening at the lowest level. If it violates 

good sense and acceptable practices, we have to take action. And 

we have to make sure that chain of command has good communications up and down. 

And I think the SEC—I saw the Chairman the other night, and 

Mary and I are very good friends, so we had a heart-to-heart discussion on that very subject. This is something I want you all to 

take back to the SEC. We want you to do a study, not inside, but 

outside, of the most thorough type, to study where the dysfunctional nature of the SEC exists. 

And if there is anybody over there who does not think the organization is dysfunctional, then read the Inspector General’s report on 

Madoff. It is the most classic bit of evidence I have ever seen that 

shows a dysfunctional operation. And it is just not Madoff, it is in 

other areas of the organization. We have to clean that up. 

And I do not believe you can do it from the inside. I am not going 

to speak for Chairman Schapiro, but my impression is she tends to 

agree, too, that you really have to go out and do an honest thing 

here. 

And as I said to her last night, I do not want to even stop at the 

SEC. All related agencies around the SEC should be so studied and 

49 

investigated and disclosed, and a report sent to Congress for remedial action. 

But I think that should be the beginning point for what I am 

sensing from the American people. They are not going to take it 

any more, that we in government just said, ‘‘Well, we cannot do 

anything about it. It happened. We are sorry.’’ That is nice. We did 

not lose. These people lost. That does not make them feel too 

good—it would not make me feel good, if I lost $5 million, $10 million, or $50 million. It does not matter. I lost, and I should not 

have. 

If everybody had been performing their function the ideal way, 

it would not have happened. But they obviously were not. And the 

number of security people who were asleep at the switch is incredible in this instance. So, I want you to take that message back. 

I have eaten up more than my 5 minutes. And I will be very lenient—since we have no Republicans, look how lenient I can be to 

my friend from New York. Gary? 

Mr. ACKERMAN. Notice, Mr. Chairman, I didn’t tell you your time 

was up. 

[laughter] 

Mr. ACKERMAN. I could not agree with more of what you said, 

and the way you put it, Mr. Chairman. Everybody, including the 

people who are testifying in this panel, has been trying to get us 

out of this muddle somehow. And I think all of their intentions are 

beyond question. 

I think there is a—this is a very difficult Gordian Knot to untie. 

And trying to make some sense and understanding it, listening to 

what you have just said, Mr. Chairman, I just wanted to note that 

for a long number of years, nobody came to us to confront our obligations and responsibilities from any Federal agency, including 

that which is before us today—or those which are before us today— 

saying that, ‘‘We need more resources.’’ 

As a matter of fact, the previous Administration seemed to have 

a philosophy, if not an agenda, for deregulation, rather than more 

regulation, and did not want to provide the resources. Chairman 

Frank, as a matter of fact, had a proposal to more fully provide assets to the SEC and SIPC for additional resources to be able to do 

the kinds of investigations that were obviously needed, and that 

was moving forward until it was scuttled at the time by Mr. DeLay 

during a different congressional leadership. 

It wasn’t until Chairman Schapiro came along, and doing the 

fine job that she’s doing, started asking for additional resources so 

that we could do a better job, prospectively. But that does not necessarily resolve the situation that is before us right now, as it has 

already regrettably occurred. 

I think there is a difference between the average citizen investor 

being told that they didn’t do due diligence—which certainly many 

of them did to at least 100 percent of their capability, ability, and 

legal limits of what they could do for due diligence—but certainly 

our agencies could have been doing a little bit more of a better job, 

including coming to us and telling us over a large number of years, 

a long number of years, that they couldn’t handle the workload, 

that with the complications and the large number of investments 

50 

and investors, and the complications of the system, that they needed additional assets. 

We did not see that. We did not hear that. And we rely upon the 

Administration. We don’t have the tools. That’s not the function of 

the Congress. We do oversight, which means we rely heavily on 

what the agencies tell us, and ask, and try to supervise whether 

they’re applying their resources, which they didn’t ask for in this 

case. 

I have several questions to ask. In what we have just heard in 

our testimony from this panel about the smaller investors versus 

the larger investors, is there a distinction in either of your minds 

in the morality of larger investors versus middle-sized investors 

versus small? Are one more immoral than the other? 

Mr. HARBECK. I— 

Mr. ACKERMAN. I’m not talking about specific individuals. 

Mr. HARBECK. No, I simply— 

Mr. ACKERMAN. If you’re wealthy and make investments, does 

that make you immoral? 

Mr. HARBECK. Absolutely not. 

Mr. ACKERMAN. Are they more suspect, because they had— 

Mr. HARBECK. Absolutely not. I think that is why the trustee— 

you know, in the Madoff case in particular—has done a rigorous investigation of very complicated facts, and started 14 lawsuits. Some 

of those lawsuits assert knowledge or a newer should-have-known 

standard. Others do not. 

So, certainly with respect to the former, the trustee is doing his 

job, and he is trying to return to the common pool of assets—defined in this case as customer property—the largest amount to distribute to the greatest number of people, consistent with the law. 

And he is doing that. 

To get to your point on morality, I would like to turn it to a case 

of practicality and compassion. The trustee has taken the position 

that you—that—he sent a letter to everyone who received more 

than they put into this scheme, and said, ‘‘Come and talk to me. 

If it’s something that you withdrew over time, and you can’t pay’’— 

but the trustee isn’t going after you. That makes no sense in any— 

Mr. ACKERMAN. What’s the difference if you withdrew it over 

time, or if you withdrew it late in the game, rather than earlier in 

the game? 

Mr. HARBECK. The answer to that is in all Ponzi schemes, going 

back to the original Ponzi scheme with Charles Ponzi, people who 

get out the day before—and Professor Coffee spoke to this rather 

eloquently—should do no better than the person who didn’t have 

that good luck. And that has just been the law, as enacted by Congress since at least the 1920’s. 

Mr. ACKERMAN. So it’s a matter of luck? 

Mr. HARBECK. No, it should not be a matter of luck, sir. It is— 

that’s the whole concept behind bringing money back in. And I 

think, in this case, the trustee has exercised his avoidance authority with discretion and compassion. He hasn’t reached back to the 

small investors, particularly people who have no— 

Mr. ACKERMAN. Is it possible, in your mind, speaking of compassion, that there are large investors—and I’m not advocating for 

anybody here, I’m just trying—and there is a problem, because this 

51 

is a zero sum game when somebody gets—somebody—it’s coming 

out of the same pot of money, of people who are all losers—is it 

possible in your mind that you can conceive of situations, many of 

them, where larger investors are more desperate than some of the 

smaller investors? 

Mr. HARBECK. I haven’t seen that in this case, sir. 

Mr. ACKERMAN. You think there are no larger investors—say someone with $100 million—who is doing something and invested 

the rest of another $100 million, because they’re that big an investor, and is now upside down in their real estate, or house, or business, or property, despite the fact that they took money out, and 

now they wind up paying—having paid $50 million in taxes to 

which the government should not be entitled, have borrowed from 

the banks to do things on a business, have invested other people’s 

money along with their own to do something, and are now being 

told that not only do they have nothing, but they owe back $200 

million? 

Mr. HARBECK. I can speak to a number of those points, the— 

Mr. ACKERMAN. That is at least as desperate as the other people 

for whom I have great sympathy, who had $200,000 and invested 

$100,000 and lost it. They only lost $100,000. A lot of people aren’t 

sympathetic, because they think that’s a lot of money. 

But they might still have—so it’s—how do you morally make a 

distinction here? And is it possible in all this formulation that 

somehow you can come up with some kind of solution, and splitting, according to some formulaic way, how to deal with all these 

people? 

Mr. HARBECK. Congressman Ackerman, I don’t think a formula 

is the answer. I think analyzing individual situations is the answer. And I think that’s— 

Mr. ACKERMAN. Each case individually? 

Mr. HARBECK. Yes, sir. I think that’s exactly what the trustee— 

Mr. ACKERMAN. If I was getting paid $1 million a week, I would 

like that. 

[applause] 

Mr. HARBECK. I believe that this trustee is— 

Mr. ACKERMAN. I’m not questioning the trustee; I’m just pointing 

out the irony in this situation. 

Mr. HARBECK. Two points. First, no customer money goes to pay 

attorneys’ fees or trustee’s fees. That’s point number one. 

Mr. ACKERMAN. Where is that money coming from? 

Mr. HARBECK. It comes from the Securities Investor Protection 

Corporation. We have taken the view that every paperclip that gets 

sold will be designated to monies that go to the victims. 

The second point is that, you know, looking at these cases individually, our statute was designed to protect the small investor. 

And I think that’s exactly what Mr. Picard is doing. 

Mr. ACKERMAN. As I understand it, brokers and investment advisors are required to put $150 into the fund to be covered by SIPC. 

Mr. HARBECK. That is not correct. Currently, the assessments by 

our bylaw require each brokerage firm to be assessed one quarter 

of one percent of their net operating revenues. 

When we started paying Madoff claims, we instituted, effective 

April 1st, assessments based on revenues, rather than— 

52 

Mr. ACKERMAN. Beginning when? 

Mr. HARBECK. April 1st. 

Mr. ACKERMAN. April Fools Day? 

Mr. HARBECK. Yes, sir. 

Mr. ACKERMAN. Well, some people think that is when you identify the people who have been April-fooled. That is after the Madoff 

Ponzi scheme fell apart because he turned himself in. 

Mr. HARBECK. Well— 

Mr. ACKERMAN. I mean, how does—before that it was $150? 

Mr. HARBECK. When we reached $1 billion, which our risk— 

Mr. ACKERMAN. But before Madoff, it was $150? 

Mr. HARBECK. When we reached the figure of— 

Mr. ACKERMAN. I don’t have a lot of time left, so if we could just 

focus on a couple of more— 

Mr. HARBECK. The answer is, based on revenues, until 1990, 

when we reached $1 billion, then from 1990 through April of this 

year, it was a flat fee. 

Mr. ACKERMAN. Of? 

Mr. HARBECK. $150. And we have—and we will have— 

Mr. ACKERMAN. That wasn’t hard. So, before then it was $150. 

So, if I was one of those brokerage firms or investment advisors, 

I would have to pay $150 to get that $500,000 worth of insurance? 

Mr. HARBECK. Investment advisors are not part of the statutory 

program at all. 

Mr. ACKERMAN. Okay. So if I was a brokerage, I would have to pay $150 at that time? 

Mr. HARBECK. At that time, yes. 

Mr. ACKERMAN. So if I had, say, 600 clients or customers, that 

would—give me a second; I’m a junior high school math teacher, 

but—$.25 an account. So for each of my accounts, I was—in premium I was paying, I would get a half-a-million dollars by charging 

people two bits each? 

Somebody should have come down here and sounded the alarm 

and said, ‘‘I am paying too little for insurance.’’ How much insurance can I really buy for $.25 an account? If somebody was charging me $.25 an account for my car insurance, I would suspect that 

I wasn’t getting a lot of coverage. No? 

Mr. HARBECK. The— 

Mr. ACKERMAN. Asked and answered. Let me go on to something 

else. 

Mr. HARBECK. Okay. 

Mr. ACKERMAN. If I may, Mr. Chairman? 

Chairman KANJORSKI. We will give you just a couple more minutes. 

Mr. ACKERMAN. Okay, thank you. 

People relied heavily on SIPC and the SEC, very heavily, for 

stuff that you can’t expect them to be able to do themselves. That’s 

the reason for SIPC, and that’s the reason for the SEC. People 

can’t become attorneys and investigators, and spend their whole 

life investigating something, whether or not—so, you know, if you 

don’t know if something is kosher, you ask the rabbi. And if the 

rabbi says it’s kosher, by me it’s kosher. 

You guys are the rabbi to all these people. When you said a guy 

was legitimate, he was legitimate. They relied on that. It was the 

53 

indicia of your agency and your agency and my government that 

was on these products that—and the person who presented them— 

that said that they were fine. 

People thought they had the insurance on money, whether or not 

it was the interest—if my account is insured, I don’t differentiate 

between how much I put in, I figure my account is insured for up 

to $100,000 in my bank—now $250,000 for the rest of this year or 

whatever—and I don’t say my interest isn’t insured, only my principal is insured. Everything is insured. So, it becomes a different 

number for everybody who had an investment over a long period 

of time. 

And, as a matter of fact, it was you and your agency that testified—and your testimony in the New Times case—where you say, 

‘‘Reasonable and legitimate claimant expectations on the filing date 

are controlling, even when inconsistent with transaction reality’’— 

I am quoting you—‘‘Thus, for example, where a claimant orders a 

security purchase and receives a written confirmation’’—which 

every Madoff victim did with every statement—‘‘reflecting that purpose, the claimant generally has a reasonable expectation that he 

or she holds securities identified in the confirmation, and therefore, 

generally is entitled to recovery of those securities within the limits 

imposed by SIPA’’—that’s the financial limitation of $500,000 or 

whatever it is—‘‘even when the purchase never actually occurred, 

and the debtor instead converted the cash deposited by the claimant to fund the purchase.’’ 

It seems that these people were again reassured that the way we 

wrote the law, the way the regulations existed, and the way you 

interpreted them, telling them that they are entitled to that money, 

even if—and I won’t go on reading—even if their money tripled and 

there was no money there. Even if they didn’t have real money in 

the account, because somebody fraudulently stole it. 

Now what has happened is we go to a different court case, and 

you change your view, saying that the money was stolen and not 

invested. This is a shell game that you are playing with investors 

who have—I mean, this is over the heads of most of the people on 

our committee, I would think, how this happened, and that this is 

being done. 

People relied on you, and they were let down. And we have to 

all collectively figure out a way to make all of them as whole as 

we can make them. 

Chairman KANJORSKI. Thank you, Mr. Ackerman. We will now 

hear from the gentleman from New Jersey, Mr. Garrett. 

Mr. GARRETT. Thank you, and I appreciate it. I think I just have 

a couple of questions, because I understand some of the other questions were covered. 

Mr. Harbeck, you raised—just as I was walking in—your line 

that you are here to help the small investor. And I think that’s 

what the message is, and—throughout the hearing, that is what 

we’re trying to look out for. But I raise the three questions: time; 

money; and who. 

The time aspect of it is, if we’re really trying to help out the 

small investor—and I guess we can define who that is later—how 

long does it take, and still say that we’re helping them out? Obviously, if it takes 10 years to do it, then we’re not helping out the 

54 

small investor. Obviously, if it takes 5 years—now it has been 

about a year. And at some point in time, we can just say we are 

not helping the small investor. 

So what is the timeline that, if we were to say we invite you back 

here for another hearing such as this, that you can say that, ‘‘We 

are done, and the folks have been compensated to a large extent?’’ 

Mr. HARBECK. There are two points to that response. First, in 

the two largest cases prior to the Madoff case, the overwhelming 

majority of investors were in complete control of their accounts 

within 10 days of the failure, and we’re very proud of that result. 

In both Lehman Brothers and in MJK Clearing, which collapsed— 

Mr. GARRETT. And I understand that. I’m not— 

Mr. HARBECK. —right after. In this case, the utter lack of records 

makes it very, very difficult to answer your question. There are 

still 7,000 boxes of records in the controls of the prosecutor that— 

it’s difficult to access, and they aren’t digital records. We are working with that as fast as we can. 

Mr. GARRETT. So you haven’t— 

Mr. HARBECK. Seventy-one percent of the people have been— 

have had their claims determined, and we will get the rest of them 

out as fast as we can. 

Mr. GARRETT. Around three— 

Mr. HARBECK. The complications involve when accounts are tied 

to others, when accounts are tied to insiders, when accounts are 

split. And those are very, very difficult accounting procedures. 

Mr. GARRETT. So there are problems just getting those records 

from the prosecutor. Is that what I’m hearing? 

Mr. HARBECK. I think we have transparency back to some time 

in the 1980’s. But we don’t have complete transparency on all the 

records. 

Mr. GARRETT. Because? 

Mr. HARBECK. The sheer volume is one answer. 

Mr. GARRETT. And what about the prosecutor? You said 7,000 

records are— 

Mr. HARBECK. I believe the prosecutor still has—on their ongoing 

criminal investigation—a large segment of the records. 

Mr. GARRETT. And you— 

Mr. HARBECK. We access those, but we don’t have complete access to them. 

Mr. GARRETT. All right. So, to try to give me a short answer, 

which I’m sure the folks behind you are watching—would be you 

would anticipate, in light of all the constraints, in light of the fact 

that this is the largest case you have ever handled like this, and 

in light of all the difficulties, a reasonable answer to—a reasonable 

timeframe would be, in light of all those hardships, would be? 

Mr. HARBECK. A year. 

Mr. GARRETT. Okay. Secondly, with regard to the money—and I 

think I was just coming in on this question, as well, and the gentleman from New York was asking about the old fee and the new 

fee, and what have you—the new fee that is out there, two questions. 

One, based on what you know now—and I understand from your 

last answer, you don’t have all the information—but based on what 

55 

you know now, is that fee an adequate fee to compensate, as you’re 

planning to pay out? 

Mr. HARBECK. The answer to your question is yes. 

Mr. GARRETT. Okay. 

Mr. HARBECK. The fee is adequate to pay on what we anticipate 

paying, as we understand the claims. 

Mr. GARRETT. You have heard the testimony of the panel before 

you, and I think some of the questions were along this line of—and 

some of us would take that view, that it should probably—to go 

back to your point of helping the small investor—it should be more 

expansive than what you are intending to pay out right now. 

If the definition of who—third point of who should be paid—the 

question of saying that it should—I forget the gentleman who was 

sitting over here before, I’m sorry—it’s not just the direct investor, 

but one who has gone through a fund, and what have you, and so 

to their point of saying that it’s not just for this—each case could 

be a small investor, right? Each case could only have $10,000 in 

the fund, either direct or through one of these funds. 

If the definition is broadened as to who you should pay out, as 

some would suggest that it should be, would that fee be adequate 

to cover for that? 

Mr. HARBECK. If it is—if the definitions are expanded in some of 

the ways we heard this morning, the answer is no. 

Mr. GARRETT. Okay. And then, would you be able to come up 

with an estimation of what the fee should be to adequately cover 

that? 

Mr. HARBECK. It’s probably doable, but it would be difficult, because of the way some of the large hedge funds have their claims, 

and how often—how many iterations you would have to go down, 

in terms of treating individuals. So it would be very hard. 

Mr. GARRETT. Okay. I would suggest, if you could—I know that— 

is to try to give some sort of ballpark. But I think that would go 

to one of the other questions. 

As you heard, I invited some broker-dealers and others to come 

in. If we were to go down that road, that would have impact not 

only on what you have to do, but would have impact upon who the 

fees would be assessed against, and they might want to have some 

input on that, as well. 

So, if you’re able to do that—and I believe—I see my time is up. 

I think some of the other questions were touched on before. I got 

into the netting aspect, the clawback provisions. And I don’t want 

to repeat myself on the comments that I made earlier, that we are 

obviously not looking necessarily for fairness, because I don’t know 

that you can get fairness. 

But what we’re looking for with the folks here is justice in the 

reliance that they made, not on independent investment decisions 

that they were making in the normal course of things, but on their 

reliance, and what the government assured them through—both 

through this program after the fact, and through the assurances 

that—these being registered in the fund—his fund coming under 

the SEC as well. Thank you. 

Chairman KANJORSKI. The gentlelady from California, Ms. 

Speier. 

56 

Ms. SPEIER. Thank you, Mr. Chairman. I guess my first question 

is to you, Mr. Harbeck. 

I have only been around here for less than 2 years. But my take 

on what happens is basically, the industry gets a license to do a 

lot of things, and then fails at it, and we are left to pick up the 

pieces. 

If you look at why SIPC was created, it was created because 

there were these huge bankruptcies that occurred in the early 

1970’s, and money was taken from investors, and we wanted to 

make investors whole. So then SIPC was created. And, as you 

pointed out, for a long period of time—because you thought you 

had ample funds—these brokers were only paying $150 a year. For 

19 years, they were paying $150 a year. 

Now, you have increased it recently because of the Madoff scandal. But I have one question, which is I think the insurance product is out of date. I think that it’s very important for you to go back 

and reformulate an insurance product that reflects the way people 

invest today. People invest today through mutual funds and hedge 

funds. And if you’re going to offer a product that has no relevance 

today but had relevance in 1970, I don’t believe you are doing your 

job. 

Now, secondly, I have a question for you, which is if now you are 

charging one quarter of one percent of the revenue, the net revenue 

that’s generated by a broker to refill the fund, what would prevent 

you from coming up with a one-eighth of one percent of revenue to 

create a fund to pay the Madoff victims some kind of compensation? There is nothing that precludes you from doing that, is there? 

Mr. HARBECK. It would have to be statutory, Congresswoman. 

Ms. SPEIER. It would have to be— 

Mr. HARBECK. Yes. 

Ms. SPEIER. Well, you were able to make this change from $150 

to 1/4 of 1 percent with no trouble, right? 

Mr. HARBECK. Yes, by bylaw. 

Ms. SPEIER. You did that by law? 

Mr. HARBECK. By bylaw. 

Ms. SPEIER. By bylaw. 

Mr. HARBECK. When— 

Ms. SPEIER. Couldn’t you create a new bylaw? 

Mr. HARBECK. We can only expend our money in one particular 

way, to supplement the fund of customer property in the way that 

the statute describes. Our bylaw says that when our fund is in danger of reaching $1 billion or less, that we can reinstitute for that 

purpose. 

But what you are saying is that we would have to repurpose the 

statute to create a fund specifically for these victims. 

Ms. SPEIER. And you’re saying that would require statutory, not 

something you could do—you’re a separate corporation. There is— 

I am having a hard time understanding why you, as a corporation, 

can’t just decide that, because of this travesty, that—and because 

the insurance product that you offer is inadequate today, and it 

should have been reformulated anyway—that you cannot create a 

new fee that would be imposed. It would be a modest fee, but it 

could help immeasurably a lot of people. 

57 

Mr. HARBECK. We are, in fact, a creature of statute. We are not 

a government organization, but the statute creating us was a Federal statute. 

Ms. SPEIER. Well, you know, that’s the problem. We do—we are 

really great at passing laws, creating these entities outside of government to operate—FINRA is another one that I can’t quite understand—and yet you have to come back to government to fix 

things. 

Either you should be a Federal agency where we have responsibility and the ability to act immediately, or you should be an independent corporation, and then would have the ability to do things 

that you do, independent of statute. 

But having said that, I have a question for Mr. Conley, and we’re 

about to go for a vote. 

Mr. Conley, from my perspective—and this may predate your involvement at the SEC—but having observed over the course now 

of these 2 years the Madoff fiasco, the travesty that it has created, 

not just for the American people, but for the Federal Government, 

the SEC failed. It failed miserably. 

When you—when we had the whistleblower before us, I was astonished at the degree by which he continued to pursue this. I 

mean, he came before the SEC 5 or 6 times, seeking the SEC to 

take some action against Mr. Madoff. 

And even when the SEC went out to see Mr. Madoff, Mr. Madoff 

has now admitted that when he—the question was asked of him, 

‘‘Who is your custodian,’’ and he rattled off a name, and he was 

convinced that within the next 3 days, he would be shut down because the custodian did not provide those services to Mr. Madoff, 

but then the SEC never even made the phone call to find out 

whether or not Mr. Madoff was operating through that custodian. 

So, from my perspective, the government, the Federal Government, failed miserably, and the SEC, in particular. So, my question 

to you is this: Since we were responsible for this travesty, shouldn’t 

we take some responsibility now, in trying to make the people who 

were impacted by our incompetence and by our malfeasance, by 

creating a fund to make them somewhat whole? And what would 

prevent the SEC from doing that? 

Mr. CONLEY. Thank you, Congresswoman. I can respond in two 

ways. Creating the fund that you talk about is certainly something 

that Congress could do, if it determined that was the appropriate 

thing to do here; certainly you could do that. 

With respect to the failures that you have identified, that is 

something which the Commission has recognized, and takes extremely seriously. And since Chairman Schapiro has come to the 

Commission, in fact, there have been numerous reforms that have 

been put in place that are directly responsive to what you identified, and which the Inspector General’s report identified as very serious failings at the Commission. 

And among the things that have changed that, on a going-forward basis, to make sure that something like this will not happen 

again, is that hundreds of employees have been trained to be certified fraud examiners. There is the requirement now—in all examinations—of third-party verification of customer assets that are 

held by the investment advisor or broker-dealer. And we also have 

58 

been hiring more people with particularized expertise that will 

make the examination teams much more effective. And we are 

working to deploy more people to the front lines, more investigators 

who will be there, and be able to root out this fraud in an effective 

way. 

So, all that has happened. And there are even greater reforms 

coming down the road. Next week, for example, the Commission 

will be voting on rules designed particularly to address the situation of investment advisors with custody of customer assets. Those 

rules would encourage investment advisors not to have custody of 

customer assets, and instead, to place them with third parties, to 

prevent the exact kind of misconduct that occurred here. 

Ms. SPEIER. My time has expired, Mr. Chairman, but I certainly 

think that we need to appreciate that going forward doesn’t fix 

those who have been injured by government’s inaction, and that we 

should really reflect on what we can do to make whole some of 

these people. 

Chairman KANJORSKI. I just have a couple of questions. I think 

you are absolutely correct, Ms. Speier, and we are going to work 

toward that end, I hope, as a committee. 

But I notice you are talking about increasing the premiums in 

the future. Why have you not thought about making a back assessment? You are really punishing the people who are going to come 

into the business who may not even have been in the business 

when Madoff was around. 

Why should we not put the assessment on the people who were 

in the business when it happened? And with the law professor, Professor Coffee, indicating that would put an incentive on the dealers 

to be working more in conjunction with the SEC and with your organization, to see that this does not happen, because there would 

be a payment that they would have to make, why—in order to accomplish an assessment instead of a future increase in premiums, 

would you need legislation to do that? 

Mr. HARBECK. Yes, we would, Mr. Chairman. 

Chairman KANJORSKI. Would you prepare that request, so you 

get it to the committee, and we can look at it? 

The second request I have of you is not totally unrelated to this 

hearing. But I have spent a number of days meeting with legal representatives of about 1,300 claimants who are in 23 countries 

around the world. And they tell me that, under present conditions, 

to handle the claims that are out there, because they are under all 

the various laws of the 23 nations involved, that it is going to take 

something like 30 years to resolve these claims. 

I was going through the roughly $100 million a year of the trustee’s fees. Are you prepared to pay out $3 billion over the next 30 

years to the trustee, so he can be around to settle these claims? 

And, quite frankly, I think it is going to end up that his fees are 

going to be a lot larger than the claims. 

Now, what I am saying to you is, what are you doing, in terms 

of establishing some sort of method of arbitration for international 

settlement of claims? And why should that not be before the Congress? And should that recommendation not be coming from your 

organization? 

59 

You know what you face. You know what your problems are. You 

know that we are going to be doing more international business, 

and not less. These frauds will continue to occur in the future. Why 

do we not have a simplified way of getting the issue before an arbitration board or somebody on a relatively uniform basis, instead of 

just spending these inordinate fees for trustees? 

I am not against lawyers; I am one myself. But, that is a big one. 

I do not think there is any member of this panel who would assume for a million-and-a-half a week—maybe they would leave the 

Congress and take that trusteeship. I am being facetious. Naturally, we would never do that. 

But seriously, can you make recommendations to the committee 

as to what should be done to facilitate international claims of this 

sort that will occur in the future— 

Mr. HARBECK. The— 

Chairman KANJORSKI. —are existent now that we can act on? 

Mr. HARBECK. Yes. The one thing that we have done prospectively on an international basis is to enter into memorandums of 

understanding with our foreign counterparts to SIPC, in case a brokerage firm fails with a footprint in more than one jurisdiction. We 

have those agreements with Canada, the United Kingdom, China, 

Korea, and Taiwan. We seek to expand that. 

What you have suggested is far more complex, but I would be 

certainly willing to discuss it with any international expert that we 

can find. 

Chairman KANJORSKI. This is not a one-time deal. We are going 

to have these transactions, we are going to have these occurrences. 

Let us not end up paying fees to trustees and lawyers that take 

money away from the basic account that could be paid to the claimants. That is going to happen in this case, and it is going to be a 

tragedy. 

Let me give Mr. Ackerman one question, and then Ms. Speier. 

Mr. ACKERMAN. Yes, I just wanted to follow up on the first question that the chairman just asked. Your response was that you’re 

a creature of legislation. 

Under legislation under which you act, you have a line of credit of $1 billion, as I understand, which can be accessed if the fund is 

depleted—and there is still a lot of money in the fund. 

If you did—and therefore can—act by resolution, why can’t you 

generously and liberally pay out to the greatest number of people 

promptly, as the statute requires, whatever money is in there, access your line of credit, and at least have $1 billion. You don’t have 

to wait for all this legislative process to take place. 

You know, everybody working on this, and who are working hard 

and are entitled to whatever money they are entitled to earn on 

being trustees, and whatever, all this money every week, they expect to be paid promptly. 

If the people who are victims were paid promptly a couple of 

months ago, some of them could have ridden the 40 percent rise, 

because they’re all investors—or at least were; they’re investors 

without money, some of them—could have gotten 40 percent in the 

market right now. I mean, everybody is losing and double losing 

and triple losing here, because of the delay. 

Can you spin that out, and request it by resolution, or whatever? 

60 

Mr. HARBECK. No. And the reason is the only people we can protect are those people who fit within the statutory definitions. And 

we believe that people who— 

Mr. ACKERMAN. Which of your interpretations of that statutory 

definition? 

Mr. HARBECK. The same cases that have uniformly, since 1973, 

held that with respect to fraudulent statements that are backdated, 

all of the cases uniformly—including the New Times case—hold 

that those claims are not customer claims, and that the fraudulent 

documents should be ignored. 

Mr. ACKERMAN. His testimony didn’t say that. 

Chairman KANJORSKI. Okay, thank you. Ms. Speier, do you have 

any further questions? We re down to less than 5 minutes now for 

the vote. 

Ms. SPEIER. Okay, I will be very brief. Mr. Harbeck, I would like 

for you to come back to the committee with a proposal of providing 

an insurance product that really is going to reflect the kind of investing done by average American investors today, who do most of 

their investing through funds, and who do not have the sophistication to know whether or not the actual stocks they have purchased 

are indeed being purchased. That is where the SEC comes to play. 

But I—we need a different product. The product that exists just 

doesn’t meet the needs of the American people. 

And then, if you could, just provide to us what does one quarter 

of one percent of revenue actually generate? 

Mr. HARBECK. This year—and again, because it fluctuates with 

the brokerage firm— 

Ms. SPEIER. Yes. 

Mr. HARBECK. —revenues, I believe it’s $480 million. 

Ms. SPEIER. $480 million. And you came up with one fourth of 

one percent on your own. It could have been a half a percent, or 

it could have been— 

Chairman KANJORSKI. May I suggest that this calculation be 

made and supplied to Ms. Speier, so we can get this wound up and 

get our members over to vote? 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the record will remain open for 30 days for 

members to submit written questions to today’s participants, and 

to place their responses in the record. 

I thank you gentlemen for participating. We appreciate it. And 

may I just make the request, I think of all the members present 

here right now, let’s have a little better interaction between your 

respective organizations and the committee, to get to the bottom of 

the substantive questions that have to be answered. 

Thank you very much for participating in today’s hearing. The 

panel is dismissed, and this meeting is adjourned. 

[Whereupon, at 2:55 p.m., the hearing was adjourned.] 

(61) 

A P P E N D I X 

December 9, 2009 

62 


56237.001
63 


56237.002
64 


56237.003
65 


56237.004
66 


56237.005
67 


56237.006
68 


56237.007
69 


56237.008
70 


56237.009
71 


56237.010
72 


56237.011
73 


56237.012
74 


56237.013
75 


56237.014
76 


56237.015
77 


56237.016
78 


56237.017
79 


56237.018
80 


56237.019
81 


56237.020
82 


56237.021
83 


56237.022
84 


56237.023
85 


56237.024
86 


56237.025
87 


56237.026
88 


56237.027
89 


56237.028
90 


56237.029
91 


56237.030
92 


56237.031
93 


56237.032
94 


56237.033
95 


56237.034
96 


56237.035
97 


56237.036
98 


56237.037
99 


56237.038
100 


56237.039
101 


56237.040
102 


56237.041
103 


56237.042
104 


56237.043
105 


56237.044
106 


56237.045
107 


56237.046
108 


56237.047
109 


56237.048
110 


56237.049
111 


56237.050
112 


56237.051
113 


56237.052
114 


56237.053
115 


56237.054
116 


56237.055
117 


56237.056
118 


56237.057
119 


56237.058
120 


56237.059
121 


56237.060
122 


56237.061
123 


56237.062
124 


56237.063
125 


56237.064
126 


56237.065
127 


56237.066
128 


56237.067
129 


56237.068
130 


56237.069
131 


56237.070
132 


56237.071
133 


56237.072
134 


56237.073
135 


56237.074
136 


56237.075
137 


56237.076
138 


56237.077
139 


56237.078
140 


56237.079
141 


56237.080
142 


56237.081
143 


56237.082
144 


56237.083
145 


56237.084
146 


56237.085
147 


56237.086
148 


56237.087
149 


56237.088
150 


56237.089
151 


56237.090
152 


56237.091
153 


56237.092
154 


56237.093
155 


56237.094
156 


56237.095
157 


56237.096
158 


56237.097
159 


56237.098
160 


56237.099
161 


56237.100
162 


56237.101
163 


56237.102
164 


56237.103
165 


56237.104
166 


56237.105
167 


56237.106
168 


56237.107
169 


56237.108
170 


56237.109
171 


56237.110
172 


56237.111
173 


56237.112
174 


56237.113
175 


56237.114
176 


56237.115
177 


56237.116
178 


56237.117
179 


56237.118
180 


56237.119
181 


56237.120
182 


56237.121
183 


56237.122
184 


56237.123
185 


56237.124
186 


56237.125
187 


56237.126
188 


56237.127
189 


56237.128
190 


56237.129
191 


56237.130
192 


56237.131
193 


56237.132
194 


56237.133
195 


56237.134
196 


56237.135
197 


56237.136
198 


56237.137
199 


56237.138
200 


56237.139
201 


56237.140
202 


56237.141
203 


56237.142
204 


56237.143
205 


56237.144
206 


56237.145
207 


56237.146
208 


56237.147
209 


56237.148
210 


56237.149
211 


56237.150
212 


56237.151
213 


56237.152
214 


56237.153
215 


56237.154
216 


56237.155
217 


56237.156
218 


56237.157
219 


56237.158
220 


56237.159
221 


56237.160
222 


56237.161
223 


56237.162
224 


56237.163
225 


56237.164
226 


56237.165
227 


56237.166
228 


56237.167
229 


56237.168
230 


56237.169
231 


56237.170
232 


56237.171
233 


56237.172
234 


56237.173
235 


56237.174
236 


56237.175
237 


56237.176
238 


56237.177
239 


56237.178
240 


56237.179
241 


56237.180
242 


56237.181
243 


56237.182
244 


56237.183
245 


56237.184
246 


56237.185
247 


56237.186
248 


56237.187
249 


56237.188
250 


56237.189
251 


56237.190
252 


56237.191
253 


56237.192
254 


56237.193
255 


56237.194
256 


56237.195
257 


56237.196
258 


56237.197
259 


56237.198
260 


56237.199
261 


56237.200
262 


56237.201
263 


56237.202
264 


56237.203
265 


56237.204
266 


56237.205
267 


56237.206
268 


56237.207
269 


56237.208
270 


56237.209
271 


56237.210
272 


56237.211
273 


56237.212
274 


56237.213