Should the SIPC Be Involved In the Madoff Case?

by | Dec 19, 2008 | Asset Management

Is the SIPC responsible for helping Madoff clients?

The Securities Investor Protection Corporation (also known as SIPC) maintains a special reserve fund — authorized by Congress — to help investors who had accounts and brokerage firms that failed.

Technically, when a brokerage firm fails, and owes customers cash and securities that are missing from customer accounts, SIPC usually gets involved.  Keep in mind: Bernard Madoff’s securities firm did not fail.  His investment advisory practice turned out to be a fraud.

SIPC does not work like the FDIC.  Protection for investment fraud does not exist in the United States.  And since SIPC has a reserve of just over $1 billion, there is simply no way it would be able to compensate all victims in the event of loss due to investment fraud.  The focus of SIPC is very narrow… SIPC was created to help restore funds to investors dealing with bankrupt and otherwise financially troubled brokerage firms.  Not fraud.

I’m not a lawyer and don’t pretend to give legal advice.  But it seems to me that if some of the money was restored to the investors who were wiped out through Madoff, then that *could* prevent them from taking a catastrophic loss against their taxes.  As I’ve noted in another post, taking a catastrophic loss against income might actually be more valuable for some individuals.  But only after consulting with a tax advisor will they know the right answer.

On a related note: the clients who lost money were (technically) clients of Madoff’s investment advisory firm — not the brokerage firm.  That point is somewhat confusing.  Keep in mind that Madoff ran a brokerage firm (which was a member of SIPC) — and also ran an investment advisory firm (which was not a member of SIPC).  It seems a bit of a reach to claim that investors lost money through Madoff’s brokerage firm.

You can read more about SIPC at their website.
You can read about the SIPC and Bernard Madoff here.

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