SIPC’s mission is to promote confidence in securities markets by seeking to return customers’ cash and securities when a broker-dealer fails. SIPC provides advances for these customers up to the SIPA protection limits— $500,000 per customer, except that claims for cash are limited to $250,000 per customer. SIPA established a fund (SIPC fund) to pay for SIPC’s operations and activities. SIPC uses the fund to make advances to satisfy customer claims for missing cash and securities, including notes, stocks, bonds, and certificates of deposit. The SIPC fund also covers the administrative expenses of a liquidation proceeding (including costs incurred by a trustee, trustee’s counsel, and other advisors) when the general estate of the failed firm is insufficient. SIPC finances the fund through annual assessments it sets for member firms, plus interest generated from its investments in Treasury notes. If the SIPC fund becomes, or appears to be, insufficient to carry out the purposes of SIPA, SIPC can borrow up to $2.5 billion from Treasury through SEC. That is, SEC would borrow the funds from Treasury and relend them to SIPC. According to SIPC senior management, recent demands on the fund, including from the Madoff case, together with a change in SIPC bylaws that increased the target size of the fund from $1 billion to $2.5 billion, led SIPC to impose new industry assessments totaling about $400 million annually. The assessments, equal to one- quarter of 1 percent of net operating revenue, will continue until the $2.5 billion target is reached, according to SIPC senior management. The new assessments replaced a flat annual assessment of $150 per member firm.$91,755 per firm, with a median of $2,095, according to SIPC. SIPA authorizes SIPC to begin a liquidation action by applying for a protective order from an appropriate federal district court if it determines that one of SIPC’s member broker-dealers has failed or is in danger of failing to meet its obligations to customers and one or more additional statutory conditions are met.protective order application. If the court issues the order, the court appoints a trustee selected by SIPC, or, in certain cases, SIPC itself, to liquidate the firm. While SIPC designates the trustee, that person, once judicially appointed, becomes an officer of the court. As such, the trustee exercises independent judgment and does not serve as an agent of SIPC. The broker-dealer can contest the Under SIPA, the trustee must investigate facts and circumstances relating to the liquidation; report to the court facts indicating fraud, misconduct, mismanagement, or irregularities; and submit a final report to SIPC and others designated by the court. Also, the trustee is to periodically report to the court and SIPC on his or her progress in distributing cash and securities to customers. To the extent that it is consistent with SIPA, the proceeding is conducted pursuant to provisions of the Bankruptcy Code. Promptly after being appointed, the trustee must publish a notice of the proceeding in one or more major newspapers, in a form and manner determined by the court. The trustee also must see that a copy of the notice is mailed to existing and recent customers listed on the broker- dealer’s books and records, and provide notice to creditors in the manner SIPA prescribes. Customers must file written statements of claims. The trustee’s notice includes a claim form, and also informs customers how to file claims and explains deadlines. Once filed, the claims undergo various reviews, according to the Trustee. First, the Trustee’s claims agent reviews claims for completeness; if information is found to be missing, the claims agent sends a request for additional information. Second, the Trustee’s forensic accountants review each claim form, information from the Madoff firm’s records about the account at issue, and information submitted directly by the claimant. The Trustee uses the results of this review in assessing his determination of the claim. Finally, claims move to SIPC, where a claims review specialist provides a recommendation to the Trustee on how each claim should be determined. Once that recommendation has been made, the Trustee and trustee’s counsel review it, as well as legal or other issues raised previously. When the Trustee has decided on resolution of a claim, he issues a determination letter to the claimant. As of the start of 2012, the Trustee had received 16,519 customer claims in the Madoff proceeding, and reached determinations on all but two of them. According to SIPC, many Madoff customers were older. For example, according to Trustee information we reviewed on his hardship program (described later in this report), more than half of applicants were age 71 or older. In a liquidation under SIPA, amounts in the customer property fund generally are distributed to the failed firm’s customers according to the value of their account holdings, or “net equity.” SIPA generally provides the net equity amount is what would have been owed to the customer if the broker-dealer had liquidated all their “securities positions,” less any obligations of the customer to the firm. In the Madoff case, if the Trustee recovers less than the total amount of allowed claims, some claimants likely will receive only a portion of their allowed claims. The Trustee told us his goal is to recover the full amount, but that is not likely, given developments in litigation and decisions to settle cases. In SIPA liquidations not involving fraud, trustees typically determine that the amounts owed to customers match the amounts shown on their final statements, in what is known as the “final statement method” (FSM). However, in cases involving fraud, amounts in customer accounts may not correspond to statement amounts. In the Madoff case, the Trustee determined that the securities positions shown on customer statements were fictitious. As a result, supported by SIPC and SEC, he decided to value each customer’s net equity according to the amount of cash deposited less any amounts withdrawn—a method known as the “net investment method” (NIM). Under NIM, Madoff claimants generally divide into two categories: “net winners,” who have withdrawn more than the amount they invested with the Madoff firm, and “net losers,” who have withdrawn less than they invested. Some customers challenged the Trustee’s decision on valuing customer net equity, but two courts have considered the issue—the U.S. Bankruptcy Court for the Southern District of New York and the U.S. Court of Appeals for the Second Circuit—and each has affirmed the Trustee’s decision to use NIM. In June 2012, the U.S. Supreme Court declined to hear an appeal on the issue, thus concluding legal challenges to the Trustee’s decision. The Trustee has taken various steps to recover assets for distribution to former Madoff customers, including recovery of bank account balances and sale of the firm’s assets. In addition, the Trustee has filed hundreds of lawsuits known as “avoidance actions” or “clawbacks.” Avoidance powers enable a trustee to “avoid,” or set aside, certain transfers made by a debtor—here, the Madoff firm—prior to the bankruptcy filing, in order to recover transferred funds for the benefit of the estate. In pursuing these actions, a trustee can generally seek return of fictitious profits paid to investors, and in some cases, principal amounts withdrawn, for specified periods of time—90 days, 2 years, and 6 years preceding the filing. In doing so, the Trustee has available state statutes, common law claims, and federal bankruptcy law upon which to build his cases. Actions also can vary according to whether the Trustee alleges a customer acted in good or bad faith. Under the Bankruptcy Code, a recipient’s good faith or bad faith is not relevant to whether the transfer is avoidable but does affect the extent of the recipient’s liability. Table 1 summarizes the legal avenues available. A fuller discussion of legal remedies available can be found in appendix II. Generally, transfers are avoidable as actually fraudulent if the debtor- transferor had intent to defraud; or, as constructively fraudulent if they were made without fraudulent intent but for less than equivalent or fair value, while the debtor was insolvent. Courts generally presume Ponzi scheme payouts to be actually fraudulent. As for constructive fraud, Ponzi scheme transfers in excess of principal are not made for value—meaning they are not paid to satisfy any legitimate obligation the debtor owed to the recipient—and thus fall within the constructive fraud provisions. In our analysis of information obtained from the Trustee, we identified 7,994 accounts with at least one transaction. We examined names on each of these accounts, to determine whether individuals and families (to which we refer jointly as individuals) or institutions held the accounts. We found that individuals held more than three-fourths (77 percent) of accounts, while almost one-quarter (23 percent) of accounts were held by institutions, such as charities, pension funds, and feeder funds. Using these groupings, we further examined the account holders’ claims outcomes—whether they were net winners or net losers—and the pattern of their transactions leading up to the Madoff firm’s collapse. The Trustee, however, noted that accounts held by institutions generally represented funds from individuals as well, because with the exception of funds from nonprofit organizations, the institutions were investing money on behalf of individuals. The Trustee said that based on his examination, he was not aware of any direct corporate investment in the Madoff firm.