Introduced in the past week in both the U.S. House and Senate is proposed
legislation that could help victims of
Ponzi scheme investment fraud to recover more of their cash losses.
Titled the "Restoring Main Street Investor Protection and Confidence
Act (H.R. 3482)," it seeks to amend the Security Investor Protection
Act of 1970. Among other things, it would require the Security Investor
Protection Corp. (SIPC) brokerage insurance fund to use actual
account statements from failed brokerage firms when calculating investment fraud victims'
claims. It would also close a current loophole limiting the definition
of what kind of "customer" can seek fraud restitution from the
fund, which is subsidized from assessments on the financial industry.
Currently, the SIPC does not provide a blanket insurance protection for
investors' loss of cash and securities at failed brokerage firms like
FDIC protection for bank losses. It can advance only up to $500,000 to
customers of failed firms, with claims for higher-valued assets funneled
through a firm liquidation in court and administered by an appointed trustee.
Victims whose brokerage firm account statements indicate greater than $500,000-threshold
losses must wait for SEC, SIPC and trustee approval before collecting
any additional lost funds. In some cases where victims of Ponzi schemes
recover additional money, trustees file "clawback" lawsuits
against them, arguing that false profits from the schemes inflated their
recovery and should be repaid to the fund.
The proposed legislation would require the SIPC to calculate losses based
on investors' account statements and would prevent trustees from filing
clawback suits against victims, opening up avenues for increased fraud recovery.
U.S. Sen. Charles Schumer (D-N.Y.) and Sen. David Vitter (R-La.) introduced
the senate bill to benefit victims of one of the largest frauds in the
Northeast in recent history—the Albany, N.Y.
McGinn, Smith & Co. case—and victims of Louisiana's
Stanford Financial Group fraudulent certificates of deposit case, both of which were prosecuted
by law enforcement as Ponzi-like schemes and resulted in criminal convictions
for the wrongdoers. It's likely that victims of
Bernie Madoff's Ponzi scheme would also seek additional recovery if the legislation is passed.