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Cong. Garrett's Congressional Record Statement re: HR 757

Cong. Garrett's Congressional Record Statement re: HR 757

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Published by ibkent
Cong. Garrett prepared these remarks to accompany the introduction of HR 757 to prevent claw backs of innocent investors and to protect the final account statement of net equity.
Cong. Garrett prepared these remarks to accompany the introduction of HR 757 to prevent claw backs of innocent investors and to protect the final account statement of net equity.

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Categories:Types, Letters
Published by: ibkent on Feb 17, 2011
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02/17/2011

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Rep.ScottGarrettStatementfortheRecordAccompanyingRe-introductionoftheEquitableTreatmentofInvestorsAct
Lateinthe111
th
Congress,Iintroduced,withco-sponsors,Mr.KingofNewYorkandMs.Ros-LehtinenofFlorida,theEquitableTreatmentofInvestorsAct(H.R.6531).ThisbillreaffirmedandclarifiedthekeyprotectionsforsecuritiesinvestorsintendedbyCongressinthe1970enactmentoftheSecuritiesInvestorProtectionAct(SIPA)andmajoramendmentstothatActin1978.TodayIreintroducethatlegislationwithclarifyingamendments.ThecentralpurposeofthelegislationistoreaffirmtheoriginalCongressionalintentontwokeyaspectsoftheadministrationofSIPAintheliquidationofabankruptbroker-dealerfirm.First,asageneralmatter,thedeterminationofcustomer“netequity”shallrelyonthefinalaccountstatementreceivedfromthedebtorpriortoclosing,plusanyadditionalsupportingdocuments,suchastradeconfirmations.Second,andagainasageneralmatter,avoidanceactions,or“clawbacks”,torecoverpropertytransferredtothecustomerpriortoclosingshallbeprohibited.WhileIemphasizetheseclarificationssimplyreaffirmcurrentlaw,theactionsandinterpretationsofSIPAbeingmadebytheSecuritiesInvestorProtectionCorporation(SIPC)andtheTrusteeappointedfortheBernardL.MadoffInvestmentSecuritiesLLC(BLMIS)liquidationproceedingmakethepassageofthislegislationimportantandnecessary.Inthislegislation,thereareimportantexceptionstothosetwogeneralcustomerprotectionsthatdenythatbeneficialtreatmenttoanycustomerwhoknewoforwascomplicitinthefraudulentactivityofthedebtorandtoanycustomerwho,asaregisteredprofessionalinthesecuritiesmarkets,withtherequisiteknowledgeofthesematters,kneworshouldhaveknownofthedebtor’sfraudulentactivitiesandfailedtonotifyappropriateregulatoryauthorities.Thisportionofthebill’slanguageismeanttoassurethatSIPCandthereceivershipTrusteehavefullyadequatelegalpowerstoactagainstcustomersundeservingofSIPA’sinvestorprotections.Whilethisclarifyinglegislationisintendedtohavegeneralapplicationtoallbroker-dealerbankruptciesinvolvingdebtorfraud,introductionatthistimeisdirectlyrelatedtothefailureofSIPCanditsTrusteetofairlyandadequatelyacttoprovidestatutorilymandatedandintendedSIPAprotectionstotheseveralthousandinnocentcustomersdefraudedbyBernardMadoffintheoperationsofhisinvestmentadvisoryandbroker-dealerfirm,BLMIS.CompoundingthegrievousshortcomingsofSIPCtorespondpromptlyandusefullytothesecustomers’financialplightisthewell-documentedfailuresbytheSECandFINRA,theregulatoryoverseersofBLMIS,todetectandendtheMadofffraudoveraperiodof25ormoreyears.GiventhecolossalregulatoryoversightfailureandSIPCneglectinassessingbroker-dealerfirmsatalevelcommensuratewiththedramaticgrowthofthesecuritiesmarketsandtheparticipatingbroker-dealerfirms,itwouldbereasonabletoexpectthatSIPCandtheSECwouldhavemadeexceptionaleffortstomakearapidandcomprehensiveresponsetothefinancialneedsoftheMadoffvictims.Thathasnotbeenthecase.Quitethecontrary,infact,hasoccurred.SIPChasdeniedprotectionto
 
overhalftheaccountsatclosing,indirectviolationofthelegalmandatesofSIPAascurrentlyinaffect;providedfullprotectiontoonly25%ofaccounts;takennearlytwoyearstopayadvancestothelimitedgroupdeemedeligible;andthreatenedtoclawbackfundsfromroughly1000innocentcustomers.SothatmycolleaguesmayjudgeforthemselvestheurgentneedforthisCongressionalintervention,letmehighlightkeyfactorssupportingthisneedforaction.
Thelegislativerecordsurroundingtheenactmentsofthe1970Actandthe1978amendmentsisrepletewithstatementsfromthelegislativefloormanagers,activesupporters,committeereports,theTreasury,theSEC,andsecuritiesindustryspokespeoplelikeningtheintendedSIPCprotectiontothebankcustomerprotectionofferedbytheFDIC.Likewise,thelegislativehistoryemphasizesprotectionofallinnocentcustomersfrombrokeragefailure,withparticularmentionofsmall,unsophisticatedcustomers,andtheneedforpromptactionbySIPCinpaymentofadvancesforreliefofindividuals,understandablydevastatedbythesuddenlossofkeyfinancialassets.Critically,Congressrecognizedtheneedforrestoringinvestorconfidenceinthefinancialmarketsatatimewhenthefinancialindustrywasundertremendousduressandoverwhelmedbythepaperworkcrunchcausedbytheprocessingofphysicalsecurities.Theftandmisplacementofsecurities,failuresoftradeexecutions,andinsolvencieswerecommonplace.AmidstthebackdropofseveralpopularPonzischemesandbrokeragefailureswasSIPCborn.Forthecustomerofabankruptbroker-dealerfirmtoqualifyforSIPCprotection,itisnecessaryforthecustomer’saccountatclosingtohaveapositive“netequity”determinedbysubtractinganyoutstandingobligationofthecustomertothefirmfromtheamountthefirm“owed”thecustomer.ForthefortyyearsofSIPC’sexistence,ithasbeenthestandardpracticeinmakingthatsimplecalculationtousethefirm’smostrecentaccountstatementtothecustomer,usuallysupportedbytradeconfirmations,ifany,relevanttothefinalstatement’spresentationofholdingsandvalues.Notsurprisingly,thisistheoutcomerequiredbylaw.Underthelegalregimegoverningtherelationshipbetweenbrokersandcustomers,itisindisputablethatthebrokerowesthecustomertheamountreflectedonthecustomer’saccountstatement.Indeed,aworldwherecustomersand,generallyspeaking,brokersdonotholdphysicalsecurities,itcouldnotbeanyotherway.Giventhemoveawayfromthepossessionandtradingownershipofactualsecuritiestoa“bookentry”systembasedontheessentialtrustofvalidityofthoseaccountstatements,nocustomerwould,therefore,haveanyreasontobelievetheywouldnotbeprotectedbasedupontheiraccountstatementsandconfirmations.IntheSIPCreceivershipfortheMadofffirm,however,thepracticeshavebeeninconsistentwiththelawandquitedifferentandcontrarytotherepeatedassertionsofSIPCanditsTrustee,nevertotheultimatebenefitoftheinnocentindividualcustomer.Ratherthanusingthecustomer’sfinalaccountstatement–consistentwith“reasonableexpectations”ofacustomer-theSIPCTrusteehasignoredthestatutoryrequirementof
 
SIPAandhasdeviseda“cash-in/cash-out”formulation(CICO)todetermineacustomer’s“netequity”.TosuggestthattheSecuritiesInvestorProtectionActwouldhavetheeffectofdenyingcustomerstheirlegalrighttorelyontheiraccountstatementiscounterintuitive.ThisformulationwasdevelopedfromapositionofhindsightoncetheTrustee,hislawyers,andforensicaccountantswereinsidetheMadofffirmandlearnedthatnotradeshadbeenmadebythefirmforcustomers.Eventhoughcustomershadregularlyreceivedmonthlyaccountstatementsshowingtradesandholdingsin“realsecurities”(oftenbluechipsintheDow100)thatweresupportedperiodicallybytradeconfirmationsinthosestocks,theTrusteedeclaredthatalltransactionswere“fictitious”andthatstatutorywordssuchas“owed”and“positions”hadnomeaning.HefurtherhasassertedthatinaPonzischemethecustomerhasnobasisfor“reasonableexpectation”–apublicutterancewhichwilldestroythepublic’sconfidenceinoursecuritiesmarketsatoddswithSIPA’sprimarypolicyobjective.ToexecutetheTrustee’sCICOformulationitisnecessarytoexamineeverycustomeraccountovertheentiretermoftherelationship(formanyspanning20to30years)tosumuptotaldepositsandtotalwithdrawals(withoutprovidinganyreturnoninvestment--evenastandardrate).Ifdepositsexceedwithdrawalsthecustomerhasa“netequity”andqualifiesforSIPCprotectionunderCICO.Ifwithdrawalsexceeddepositsoverthelifeoftherelationship,thecustomerisdeclaredineligibleforSIPCreliefandmaybetargetedfor“clawback”ofthenetwithdrawals.How,youmayask,couldtheTrusteeignoretheSIPAdefinitionof“netequity”andproceedtoinstitute“clawback”actions?TheanswerliesinSIPA’sincorporationbyreferenceofprovisionsandpowersundertheFederalBankruptcyCode.However,theBankruptcyCodedoesnotpermit“clawbacks”ofamountspaidbyabrokertoacustomertosatisfythebroker’slegalobligationstothecustomer–oursecuritiessystemcouldnotworkanyotherway.Again,SIPCandtheTrusteearedisregardingtheclearbodyoflawtofurtherharmtheMadoffvictims.Letusnowexaminetheresultsofthisreceivershiptodatetodeterminejusthowequitableitsperformancehasbeen.Atclosing,theapproximately4900accountsofBLMISthathavefiledclaimsforreliefwithSIPChadaggregatefinalstatementvaluesofroughly$57Billion.Ofthat4900,welllessthanhalfofthoseaccounts(2053)havebeendeterminedeligibleforSIPAprotectionundertheTrustee’sCICOformulation.Only1207ofthoseeligibleaccountswillreceivefullSIPAreliefbenefits--advancepaymentof$500,000andaprioritystatustothedistributionofrecovered“customerfunds”uptotheremainingbalanceoftheCICO-approvedclaim.846oftheapprovedclaimswillreceiveadvancepaymentsaveraging$200,000;andbecausetheadvancesfullysatisfytheCICOclaimtheseaccountshavenoprioritystatuswithrespecttocustomerfunds.2728accountsreceivenorelief(advancesorprioritystatus)underSIPA.

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