The Madoff civil case hits court today. The judge will consider three issues, including a plea from a Madoff investor that SIPC protections be extended to those who invested with Madoff through feeder funds like Fairfield Greenwich.
Normally, SIPC protection would not apply to these “indirect” investors, and it’s not even clear that it will apply to any of Madoff’s victims. If it doesn’t, though, we imagine the government will just fudge the rules a bit.
The fact that this case has to go through a judge instead of Congress is a wildcard in these rulings (the judge’s ruling will probably depend on his attitude toward our bailout culture), but in the current environment, we would not be surprised to see the SIPC’s $500,000-per-investor protections extended to cover indirect US investors as well.
NYT: Judge Louis L. Stanton of United States District Court, who is handling the civil case against Mr. Madoff, is being urged to consider broadening the protections normally available to investors in failed Wall Street firms to allow for the “devastating” circumstances of the Madoff scandal.
Judge Stanton has also established Wednesday as the deadline for Mr. Madoff to provide federal securities regulators with a full accounting of his and his New York firm’s assets — from real estate to art works to bank accounts. Regulators are to notify the judge if the report is not filed on time.
And finally, the court has been notified by the trustee overseeing the liquidation of Mr. Madoff’s brokerage firm that he will send out the first mass notification to customers of the firm by the end of next week….
Because Mr. Madoff operated a brokerage firm, some of his direct investors may be covered under the Securities Investor Protection Corporation, a federal fund created to cover fraud losses in brokerage accounts.
But many of the victims in the fraud scheme were not direct customers of the Madoff brokerage firm, Bernard L. Madoff Investment Securities. Instead, they had invested in various “feeder funds,” some of them operated by well-known Wall Street figures, which in turn invested with Mr. Madoff.
In a letter posted in the court docket on Monday, one of those indirect investors — Daniel R. Goldenson of Bremen, Me. — urged Judge Stanton to consider looking past those feeder funds to the individuals ultimately affected by Mr. Madoff’s collapse. They, not just the feeder funds, should be considered direct customers of Mr. Madoff’s firm, Mr. Goldenson argued.
He acknowledged in his letter that a strict reading of the SIPC guidelines would not treat him as a customer. “But in this devastating case we feel it is appropriate to broaden investors eligibility beyond direct investments,” Mr. Goldenson wrote.
“Please consider broadening access to SIPC for all individuals who lost so much or all of their life savings,” he concluded. “This was an intertwined system of deceit and theft within our financial markets that has left retirees like ourselves having to sell our homes and raise money any way we can.” Judge Stanton acknowledged the letter, but simply cited the early stages of the case and the complex legal issues that surround eligibility for brokerage-account protection without indicating whether he would consider Mr. Goldenson’s request.
Stephen P. Harbeck, the president of SIPC, said in an interview that he could not predict whether the judge would follow Mr. Goldenson’s suggestion. The key step now, he said, is for affected investors to submit their claims, so that they are on the record as the legal issues are worked out.
That process is ready to move forward, as the trustee working for SIPC has notified the court that he is ready to send out the first published and mailed notices to Madoff customers by Jan. 9, a week from Friday.
See Also: Bernie Madoff’s Victims: The Slideshow