January 16, 2009
Previously published on December 17, 2008
On December 11, 2008, Bernard Madoff was arrested in connection with a Ponzi scheme that may have resulted in as much as $50 billion in investor losses. In the days following discovery of the fraud and Madoff's arrest, numerous financial institutions, charitable trusts, and wealthy individuals have been identified as having invested directly or indirectly in funds managed by Madoff. Approximately $25 billion in exposure has been attributed to those investors named thus far. Uncertainty regarding what other financial institutions might have invested in funds managed by Madoff, and where the remaining $25 billion in estimated losses resides, has led to additional downward pressure on the stock prices of many financial services companies already depressed due to the subprime debt crisis.
On Monday, December 15, 2008, the Securities Investor Protection Corporation (SIPC) obtained the appointment of a trustee pursuant to the Securities Investor Protection Act (SIPA) to liquidate Bernard L. Madoff Investment Securities, LLC, the securities broker dealer firm owned by Madoff. Many news reports have referred to this development as bringing some relief in the form of SIPC coverage to investors defrauded by Madoff. Due to the nature of SIPC protection, however, it is not clear if funds available under SIPA will extend to those investors harmed by the fraudulent scheme.
Coverage under SIPA, generally limited to $500,000 in the aggregate and $100,000 in cash, is only available to "customers" of the broker dealer. If an investor was not a customer of the Madoff broker dealer, but instead is an investor in a fund that was itself the customer of the broker dealer, there is no assurance that the investor will be entitled to coverage under SIPA. If a fund is the customer of the broker dealer, and the fund's coverage is limited by the statutory cap of $500,000 per customer account, the SIPA liquidation of the Madoff broker dealer may have little real impact on investor recoveries. Defrauded investors may instead seek recovery from fiduciaries or other advisors who invested their clients' money with Madoff without conducting an investigation into Madoff's operations.
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