Proposed Law Could Mean Greater Recovery for Ponzi Scheme Victims

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.


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