Tuesday, June 30, 2009

Should Govt make Madoff Victims Whole?

In a word – NO!! While Madoff's is a master criminal and belongs in jail for 1,000 years, the federal government is not responsible (legally or morally) for the losses sustained by investors in his funds. Although I feel sorry for every one of the Madoff victims, the federal government does not (and should not) insure investments made through investment advisors. Since Madoff cannot make good on their losses, the investors are looking to the blame the government for their problems.

  1. They assert the SEC should have caught him. While probably true, the SEC does not guarantee any investment advisor is "honest." While the SEC can punish offenders it catches, it never has and never will give any investment advisor a "good housekeeping seal of approval."
  2. They assert the SIPC is screwing them. From what I can tell, they have two arguments.
    1. They say their losses should be based upon the "Statement values," not the amount they invested. I will discuss why they are wrong below.
    2. The people who invested in "feeder funds" are not getting much from the SIPC. The reason for this is simple. They invested in hedge funds. To do so, they had to be qualified investors and had to prove they knew (or should have known) what they were doing. They paid their investment advisors to do due diligence for them.

How much have the victims actually lost? They assert they have lost the amount they invested and the amount of investment gains they "thought" they had made.

Example: Let's say you invested $1m with Madoff in 2000.

  • Investor A reinvests the returns and has a statement value of $2m when Madoff is caught.
  • Investor B collects "dividends" of $1m of the years. When Madoff is caught, B's account "value" is $1m.

Victim A would say he is out $2m and Victim B would say he is out $1m. In reality, Investor A actually "lost" $1m and Investor B lost nothing. Simply put, the victims are wrong and the government is correct. The victims are not entitled (legally or morally) to the investment "gains" that never existed.

As SIPC states on their website: "It is important to understand that SIPC is not the securities world equivalent of FDIC–the Federal Deposit Insurance Corporation. Congress specifically considered creating a Federal Broker-Dealer Insurance Corporation, but lawmakers wisely concluded that such a designation would be both misleading and out of step in the risk-based investment marketplace that is so different from the world of banking." Source:

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