The revenge of Madoff’s victims

August 6, 2009

By Lynnley Browning
(Lynnley Browning is a guest columnist. The views expressed are her own. She is a frequent contributor to the business pages of The New York Times and is a former Moscow-based correspondent for Reuters, where she covered energy and commodities.)

Some have argued that the victims of Bernie Madoff’s enormous fraud should simply take their lumps for having trusted their money to the greatest con artist in history.

The victims, not surprisingly, disagree. More important, many of them are organizing in a way that could change the way investors are treated in the future. As the Obama administration pushes to add greater protections and even a new agency for investors, the Madoff victims stand to make an impact that goes beyond simply being objects of pity.

Two groups of Madoff investors, the Madoff Survivors Group and, are trying to persuade Congress to overhaul the rules that limit the ability of investors to try to recoup their losses.

The Madoff groups want the Internal Revenue Service to extend the time that investors can reclaim taxes paid on fictitious Madoff earnings beyond the current limit of five years. They are also backing legislation in Congress that would create tax breaks for phantom profits and extend carry-back losses to 10 years.

And the Madoff victims are pressing for changes at the Securities Investor Protection Corporation, the government chartered insurance agency that is funded by the securities industry and whose mission is to protect and reimburse investors.

SIPC has infuriated many victims by saying it will only reimburse, up to the $500,000 limit, those who invested directly with Madoff, instead of those who went through feeder funds like the Fairfield Greenwich Group.

It has also angered some victims by using a new definition of “net equity” that largely limits recoveries to how much money the victims initially put into Madoff’s scheme, minus what they took out — not how much money Madoff said they had on their balance statements.

The government, says Sherry Morse, a victim, “is disenfranchising a whole class of investors.” Ronnie Sue Ambrosino, coordinator of the Coalition, argues that the SIPC is not doing what the SEC authorizes it to do: to borrow money, by issuing bonds or other notes, to repay swindled investors. Mary Schapiro, the SEC chairman has said that SIPC lacked the money needed to repay all the Madoff victims.

Lawrence Velvel, the dean of the Massachusetts School of Law and himself a victim, contends that the government should issue bonds that would reimburse victims for their losses. The bonds would be bought by the securities industry, which would pay the interest and principal to the victims.

“Industry will end up financing the payment to the victims, because the whole meltdown is because of the industry,” he says.

The battle pitting early investors in Madoff, who withdrew gains over the years, against later investors, who typically lost more and paid taxes on phantom profits, is a wedge that could blunt the coordination of all the efforts.

But it’s not an intractable division, said Frank Partnoy, a professor of law and finance at the University of San Diego, who says that the victims’ demands dovetail with those voiced in recent years by activist shareholders.

Arthur Levitt, a former SEC commissioner who is now co-chairman of the Investors’ Working Group, a new, independent task force aimed at protecting investors, says the Madoff victims’ efforts mark “the empowerment of the investor community as a political force.”

In recent weeks, the Madoff Survivors Group has formulated what its main spokeswoman, Ilene Kent, calls the “adopt-a-congressman” strategy, aimed at helping compelling victims to court key members of Congress.

The Madoff groups are considering a fund-raising effort among survivors who were not wiped clean to bankroll the estimated $1.5 million needed to hire a Washington lobbyist.

The Madoff victims’ efforts represent a potential turning point in the crusades of activist investors because of the resources they can muster — many of the victims are still wealthy even after being defrauded — and because the scandal is a rare instance of late where the wealthy, largely because they are individuals and not abstract banks or insurers, are seen sympathetically.

On this drive for new protections for investors, Morse says, “we’re the canary in the coal mine.”


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