[captions copyright national cable satellite corp. 2009] >> tonight on c-span, a house hearing bern about the bernie madoff scheme. rep parker creek it decides to change parties. finally, the report from the annual meeting of the gulf cooperation council. >> the proposal to protect security proposals. the group responsible for

recovering money from investors. -- money for investors. >> this hearing of the subcommittee on capital markets will come to order. i ask unanimous consent that permission be granted to anybody who is a non member of the subcommittee who is present today to sit with the subcommittee. pursuant to committee rules, each side will have 15 minutes for opening statements without objection. opening statements will be made part of the record. the morning, everyone. one year ago, federal authorities arrested mad bernardoff -- bernard madoff for

perpetrating the largest ponzi scheme in history. we are examining for the third time this massive securities fraud. this is a case study to guide our work in reshaping and reforming our financial services regulatory system. last month, our committee hashr3817, the investor protection act. the house will begin to consider it does today. both bills contain a number of provisions that directly swindles.. .

the bills owed -- also provide for an expeditious, independent, and comprehensive review of the entire securities regulatory structure by of high caliber entity with experience in organizational change. this study will identify specific reforms and improvements that the commission and the other entities that oversee our securities market must put in place to ensure superior investor protection going forward. the madoff episode also revealed the need to elevate the

importance of whistleblowers like mr. markopolos -- who made repeated entreaties to the commission regarding mr. madoff s common -- by establishing incentives so that more of them will come board. our regulatory reform package therefore includes a bounty program to help identify wrongdoing in our security markets and reward individuals whose tips lead to successful enforcement actions. with a bounty program, we will effectively have more cops on the beat. in studying the madoff case, we have additionally learned that the public company accounting oversight board lacked the powers it needed to examine and take action against the auditors of broker-dealers. our legislation closes this loophole so schemers like -- schemers like madoff will no longer be able to rely on inept

or corrupt accounting firms to rubber stamp their criminal activities. through our investor protection reforms, we are further sought to strengthen the secured her -- the securities investor protection act, law that helps investors to recover funds when a broker or dealer fails. weaving please the resources available to the securities investor protection corporation to fund liquidations, boosted the level of cash coverage an investor is entitled to, and raised penalties on brokerages for violations of the wall. we have also broadened the eligible types of investments covered. we can do more to reform this law. if we will continue to move this process forward as we examine the ongoing efforts of the securities investor protection corporation to mitigate the sizable losses suffered by mr. madoff's victims, as well as the casualties of the $8 billion stand -- stanford financial

fraud. we will also explore the intended and unintended consequences of several proposed changes to the securities investor protection act that aim to address problems that some madoff and stanford financial victims have encountered. what each of these amendments seeks to fix a perceived deficiency in the law, each proposal -- each proposal will also benefit from a robust debate in order to identify potential problems and possible refinements. some have advocated that the securities investor protection corporation should not claw back the profits taken by early investors who unwittingly partook in a ponzi scheme. i have concerns that such a plan, if implemented, would treat later investors unfairly. that said, clawing back profits already used by charities could prove especially devastating. as such, we must walk a fine line in determining how to proceed, if at all.

in closing, i would like to extend my appreciation to my colleagues from new york, mr. ackerman and mr. maffei, as well as mr. ellison of minnesota, mr. klein of florida, and mr. perlmutter of colorado who have helped to select today's witnesses and advance discussions on reforming the securities investor protection act. together, i hope that we can learn more from these terrible events and figure out how we can further improve our regulatory system. now what would like to recognize the ranking member for his opening statement. >> and i thank the chairman and all of the witnesses for joining us today to testify before our subcommittee. from people situated similar to yourself, i have been all aware of the suffering inflicted on so

many investors, and in my area, that the district of new jersey and across the country as well, due to the madoff situation and the stanford situation as well. it is important that we hold this hearing today to hear first hand from some of the victims. not only to get a better render standing of their situation and their plight, but also to hear your ideas. having been to this experience personally. how to make this process work better and perhaps more importantly and appropriately for all the injured parties involved. let me take a moment with the statement, and i would like to enter two statements into the record from constituents of mine. both of them have been adversely impacted by the madoff fraud. >> without objection, so ordered. >> thank you. the frauds themselves were tragic for so many innocent victims. the purpose of today's hearing

is to examine ways to improve the process so that the victims do not have been needlessly supper once again. as the chairman says, we're looking to reform the process. one idea is to offer a pension fund or other fines bonds. others are talking about this clawback process in which they are seeking to recover funds recovered by some of the madoff investors. there are also calls for a more timely process in extending coverage to affiliate's that we should consider. all of these ideas deserve to be fully explored and vetted by the subcommittee with a private discussion of the pluses and some of the minuses as well. this belief that we can do for the many investors affected -- affected by the past fraud as

well as the future ones as well. unfortunately there will be future schemes that will try to bilk unsuspecting investors. and the specific failure to detect -- or the sec spell your, i should say, to detect the -- the sec's failure, i should say, to detect this fraud is well documented. this could happen in the future. and as fortunately -- and unfortunately, as prof. coffee has indicated, it could be worse. i am committed to exploring other ways to explore the efforts of that agency. i may welcome any insight you will have on this in regards to the hearing today. one thing i think we should not be doing as far as the solution to the problem is saying if we

can throw more money at the sec and not asking for any more results from them. unfortunately, as you all know, as part of the investor protection act approved by this committee, part of the package of bills that will be going to the house for this week, there is an authorization for the sec to be doubled with no strings attached basically on where the money goes. my colleague offered an amendment that i co-sponsor to scale back increases for the sec and what of tied increase is going to the sec to -- for them to half of the recommendations made by the inspector general. you have an organization that did not do his job. we will not reward you by sending more money unless you can prove to was that you have over the last year now begun to implement some of those changes. if you want additional funding in the future, if you will have

to continue on that better path. i appreciate your comment on that. i have a number of other questions related to the witnesses' written testimony. and with that, i yield back. >> now what i'd like to recognize the congressman for three minutes. >> thank you very much for your continued pursuit of this issue and this series of hearings that you have cheered. it is an awful years as bernard madoff told his own house of cards and and added that he had operated the largest ponzi scheme in history. you would think that by this week, a full 12 months removed from his admissions, our financial regulators, some of whom have admitted they were negligent in protecting investors from his fraud, would have helped them -- as many victims as they could.

with the enormity of his ponzi scheme in the human tragedy that it calls, they would have been generous as possible. and you would think that the causes investors receive detailed statements, his victims had every expectation that the money in their accounts was really there, belong to them, and that they were fully protected by the security laws. sadly, you would be wrong. instead, in the years since he turned himself in, largest, most sophisticated financial system and the world, rather than providing restitution to the investors were the largest fraud in history, has manage to create classes of victims who have turned one another, offered pennies on the dollar on what they reasonably thought belonged to them, and there is no end in sight. if there is anything we have learned in the year since bernie madoff turned himself in is that the confidence that the

investors had in the system to police our markets, the specific protection against fraud, was misplaced. today's hearing begins in earnest the process of providing additional legal remedies to madoff's victims. in my view, there are two issues as the subcommittee must address as we clarify this act. the limitation of specifics ability for callbacks for victims who were never -- who are neither complicit or necklace said in a ponzi scheme, and finding insurance for defrauded investors. i look forward to looking together with you, mr. chairman, to address these issues in the coming weeks and to hear from our witnesses today. i would also like to win knowledge that our witnesses, madoff victims, thanking them all for appearing before the subcommittee. there are scores of others who wanted to appear. most of them just could not

afford a car fare or the bus fare, the train or plane fare, to get here. we appreciate the witnesses who are with us here this morning and i testified. i look forward to hearing their testimony. i would ask unanimous consent that at the appropriate place, that this folder of statements from additional witnesses be placed in a witness. >> without objection, so-called -- so ordered. and i will hear from mr. king for five minutes. >> let me thank you for holding this hearing and your attention to this matter. but we also thought -- thank my colleague from new york, mr. ackerman, for the energy he has shown in this matter. the first time i heard the name bernard madoff was a year ago tomorrow night, december 10, i was stopping by a holiday event on the north share to speak with constituents. the person hosting the event told me that shot was through the room because they had just learned that day that they're

like it's fortunes -- they're like fortune's handled by mr. madoff had been part of a ponzi scheme. the next day, the story broke. i could see the shock on people's faces. and since then, the situation has only gotten worse. i have a number request since regarding what has happened over the course of the last year. like mr. ackerman, you see a tragedy like this unfold and did you see over the course of the next year the victims being victimized again. i know that there are no easy answers, but jimmy there has been imputation of fraud to the victims themselves. -- but to meet there has been imputation of fraud to the victims themselves. somehow that they should have known, that there were co- conspirators with bernard madoff. and yet there is no evidence to suggest that at all. we have their redefinition of net equity, and the clawback

which could be devastating, and that taxes paid for many years on nonexistent properties. we have a bond issue, including a former member of congress who said he had never heard of bernard madoff, and it turns out that his life's savings had been invested by bernard madoff. and he has lost everything. and then the entire issue of unfettered power being given to the trusty to change definitions, decide who was born to go after, why people go after them, whether they're specific authority to do that are not -- and these are all issues because this will not be allies ponzi scheme. this will not be the last massive fraud. i don't think enough attention -- and all of us should have enough responsibility to this -- what you do when a massive fraud like this develops? we have to address this. we also have to find ways to

protect those who are currently the victims. i look for to the hearing and to working with all the members of the subcommittee, trying to come up with legislation to address the real needs of victims and also to do what we can to ensure that there is better and more strict enforcement in the future to make sure this does not happen with the spirit and with that, mr. chairman, i look for to the testimony. i thank the witnesses for being here today. i think that victims it took time to be with us here today. and i yield back my time. >> now we will hear from the gentleman from florida for two minutes. >> thank you, mr. chairman, from holding -- for holding this important hearing. i'll also like to thank the witnesses and the victims who have come forward with their stories and their rights to be made whole in different ways. mr. madoff's ponzi scheme, thought to be the largest securities fraud in modern history, has defrauded thousands

of people in my district, charities, lots of people around the indicted states. this episode was not only an embarrassment to the sec as they allowed this massive fraud to continue for well over redacted, despite repeated warnings, but time and time again the sec "investigated" mr. madoff and pronounced his business to these crown -- and pronounced his business to be sound. if you are an investor, if you would think that this would be a sound investment with the sec stepping its regulatory approval. there have been a lot of issues already mentioned, clawback, taxes paid, how were we made whole from this terrible situation? the fact that this is, of -- that this has gone on for over a year is an outrage. the most important thing we have to recognize as citizens and as members of congress and even the victim's it that we have a rule

of law and the united states. we have responsibilities as members of congress and americans to make sure that the sipc and the sec are living up to their statutory right and responsibility. it is important in restoring confidence in our entire investment system. and yet some investors we know were in -- were complicit and they should be prosecuted to the fullest extent of the lopper and yet most others were not. many hard-working americans have invested their life savings, and the sipc symbol and the symbol has to mean something. the sec reported late -- repeatedly gave mr. madoff a clean bill of health. it might has to mean something when you move forward and make an investment in the united states system. to go after the investors who lost everything now violates a sense of fairness. how can they be held to a higher sense of standard than a

professional analyst at the sec? or investors to drew more money out of the account are not entitled to full sipc coverage? i again, i see an inconsistency in interpretation here which needs to be resolved. the purpose of the sipc is to make knowledge load your the month expectation of customers. it is important to provide this protection of the five and a thousand >> not only for the victims of this fraud but to ensure on a going forward basis that americans can have confidence in the security markets in the united states. outlook for to the testimony and a productive discussion and an appropriate conclusion. thank you, mr. chairman. >> and now as unanimous consent -- and now i ask unanimous consent that congressman ellison provided the opportunity for an opening statement. he is recognized for tw of

minutes. >> beattie mr. chairman. let me thank all the witnesses as well. i do not think i will need two minutes. i simply want to say that the amount of disruption that this massive ponzi scheme has caused americans cannot be overestimated. in my on congressional district of minnesota, i have heard from people who thought they were a unqualified to learn that things that now things are not going to be as they were ex -- as they expected. five people -- i heard from people who run charities who had been devastated by the impact of this lapse. i look for to this hearing and from hearing from the witnesses. i want to thank the witnesses for all the work that they have done. and i want to thank the members of the committee as well. i also want to thank the work of mr. mcveigh. he and i have been working together -- mr. maffei.

he had been working together. and i want to thank the chairman. >> thank you very much, mr. ellison. now what is up to the panel. i want to thank them for appearing before the subcommittee today. your written statements will be made a part of the record for you will each be recognized for a five-minute summary of your statement. please continue remarks to five minutes. i would now like to recognize ms. jeannene langford, an investor in the mott family investors and an indirect investors and mr. madoff's fund. >> chairman kanjorski, ranking member garrett, and members of the committee, thank you for holding these hearings and looking into the sec's complicity with bernard madoff

investment. my name is jeannene langford and i live in san rafael, california. as one of the more than 16,000 victims of the madoff ponzi scheme, i am grateful to have the opportunity to present how financially devastating scandal was to me personally. it shattered my trust in my government's ability to serve and protect us. my hope is that congress would choose to recognize and protect all indirect investors such as myself who were victimized by this scandal. i have worked for 30 years as an art and design professional in the stationery and craft industry for the past 17 years have been as a single parent working to provide for myself and my daughter. in the areas where i have little expertise, i recognize the

necessity to hire a specialist. personal investment was one of those areas, and i knew that there were systems such as the sec employees from my research, there was no reason to believe that this investment was not a viable place to put my life savings. i had no way of knowing the partnership where i placed my money was invested with madoff. the money i had invested with madoff represented my life savings. it was my retirement, a down payment for house, investment for the business i was starting, and it was my daughter's education. in short, it was the foundation for my future. i do not have another 30 years to earn this money again. if the sec had done its job, i would have my savings and i would not be looking at working the rest of my life just to get

by. i was shocked to find out my money was gone, and i was outraged to find out that the very governing body that sanctioned this business i need help in understanding how the sec could ignore expert testimony, be lax in its investigations, be influenced by the aura of madoff, and not carry out its duties. i find it tragic and ironic that the interpretation of the language by the sipc leaves out the indirect, hard-working people like myself who are not wealthy and who are now struggling to keep up because their lifetime of hard earned savings or their pension has been stolen. these of the very investors for whom the sipc insurance protection is most important.

congress needs to take action to restore confidence for all future investors. i understand an update to the definition of the word "customer" in the sipa to include indirect investors would ensure that the sipc symbol protect both indirect and direct investors in the financial markets and would begin to restore a sense of trust. if nothing is changed, the current situation would be similar to having a catastrophic landslide, and the government came in to assist those on one side of the street but not the other. i cannot believe this is the intent of this committee or of congress. though i appreciate extending the sipc coverage through the amendment to investors in er i saw -- erisa plans, this does

not go far enough for it -- are not. all of us who invested are also victims of the sec's inability to find the fraud. we are all victims of the same crime and we all need to be granted equal protection. the sec's website reads, the missions of the u.s. securities and exchange commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. i urge you to rectify this current disparity of protection by carrying out the mission you set forth. thank you. >> thank you very much, miss langford. i like to recognize my colleague from minnesota to introduce our second witness. mr. ellison? >> thank you again, mr. chairman.

i am pleased to introduce one of the witnesses, mr. joel green of upsher-smith laboratories, a pharmaceutical company in minnesota. i've heard for many people in my district and state who are victims of the madoff scandals, people who are not high rollers but regular people, ordinary people who work hard and make america great. people like the ones mr. green represents and his colleagues, who were part of a pension profit plant that invested with bernard madoff. they thought that they were protected by the securities investment protection corporation, and unfortunately it sipc held itself out and has not followed out on the petition in many cases. that is why employees to work with my colleague on an amendment to clarify the protection. i look forward to hearing -- to continue to work with you, mr. chairman and members of the committee, on this reform and

others to ensure that sipc makes good on its promises. mr. greene. >> thank you, congressman ellison, and mr. maffei, and chairman and members of the committee. as congressman ellison said, i am told greene, and i work with upsher-smith laboratories of minnesota. i'm here ask your support for legislation that will protect working people throughout america whose retirement security is imperiled by the madoff fraud, including -- including current and former employees of upsher-smith laboratories. i urge your support for the legislation prepared by a the congressman for individual members of qualified plans lost in the madoff fraud. hunter smith laboratories is a family-owned pharmaceutical company. it has approximately 550 employees in the twin cities,

denver, and around the country. in 1974, our owners established a profit sharing plan to share the profits with our company's employees, and beginning in 1995, plan assets were invested with mr. madoff. over the next 12 years, the company contributed over $8 million to the plan for the benefit of our employees and on december 11, 2008, mr. madoff was arrested for fraud and approximately 615 of our current and former employees lost their retirement savings that had been in a profit-sharing accounts invested with mr. madoff. our plan and our plan participants are representative of the average american workers whose retirement savings was intended to promote and his investment sipc was intended to protect. of our 615 plan participants, approximately 550 -- 89% -- had contribution balances of less than $650.

this plan covers the average american worker. yet sipc has stated that only $500,000 is available. is it because the plants account with mr. madoff was held in the name of the plan trustee. but this was required by an administrative requirement imposed by erisa. our plan lost in excess of $8 million in contributions in the madoff fraud, and it could be in excess of $18 million. i symbol sipc recovery of $5 million will not go far enough to recover the losses of our plan participants. the rule under erisa cannot be

allowed to defeat individual investors. for most americans, their primary retirement in are in these plans. if the administrative role is allowed to defeat protection for the losses of individual plan participants, then sipc fails to invest -- protect the investments of the individual investor, as when congress created sipc. the fdic offers a parallel for what we propose here. if a profit sharing plan invested its azides and, even though they were held in the name of the plan trustee, the fdic would cover each plan

participant out to the fdic limits. we had been asked by congressional staff in the spring whether it was possible as a matter of policy to extend sipc protection to individual participants, and not also extend such protection to in the individual investors of feeder funds to invested with mr. madoff appeared with great compassion to those individual investors, and great compassion for ms. langford, we believe that the answer is yes, as a matter of public policy, a distinction can be made. but we support any relief they can be given to the individual investors in feeder funds. the result -- erisa's situations differ. they are not prevented by a federal investigation from

investing directly in their own names. nor is their investment governed by the public policy of encouraging worker savings. for these reasons, if the distinction must be made on a policy basis, we believe that it is possible to provide sipc si coverage for the losses of plan participants of erisa plans. thank you for your time and attention and consideration of this important legislation to extend protection to the plans of in the drugstore -- to the individual participants. >> thank you very much mr. green. and now turn to my colleague from florida, mr. klein, to introduce the third witness. but thank you mr. chairman. it is my honor to introduce helen chaitman, an investor in the limited liability partnership in new york. she is the author of the book. she is counsel to the madoff

coalition for investor protection, a combination of a number of investors who lost assets in a ponzi scheme. she has been someone who has had a fairly good view of the issue and it unhelpful to many others in understanding the nature of what went wrong and what should be done to resolve it. miss chaitman. >> thank you, congressman climb. congressman kanjorski, thank you for having me here. this time this representatives, i think you as well. it was a year ago that i learned that i have lost my life savings and my grandson's college fund in mr. madoff's limit liability fund. it took me a little bit of time to get over the shock and devastation. when i did, i realized that i was one of the lucky ones. i am still working and able to support myself. i devoted myself to the next six months to working completely on

a pro bono basis helping hundreds of destitute madoff investors and their 70's, 80's, and 90's, who had been hit by financial tsunami who can never recover. this committee has dealt with that financial tsunami in the investor protection act of 2009, and i'm not here to speak about that. unfortunately, the madoff investors who i represent, and i represent hundreds of them, have been hit by two financial tsunami is that this committee can do something about. my client profile is a person in his 17's, 80's, and 90's who worked hard his whole life, who trusted this government -- many of my clients served in the second world war with distinction. i have climates -- clients who

are disabled and the korean war and receive medals for their service. they trusted this government, and they worked as honest, law- abiding citizens. they worked in professions, they built up businesses, and when they reach retirement age, they retired and they put their money in an entity that had been blessed repeatedly by the sec. and mr. madoff bragged to potential investors that jealous funds had complained to the sec about his results, and he had been repeatedly investigated, and always come out clean. these are people of whom we should be proud and whom we should be protecting. and instead, these people have been victimized by the government since december 11, 2008. the sec it tsunami that hit my clients was the announcement by

sipc with the blessing of the sec that the statute that this committee played a key role in drafting in 1970, that statute does not mean what it says. my clients relied upon the promise of sipc insurance as required by the securities investor protection act. they invested in madoff, noting that the first $500,000 in their accounts was insured by sipc. they invested in madoff, now weighing that congress mandated that upon the liquidation of a broker, sipc was promptly paid $500,000 by replacing securities and a customer's account. the statute mandates how customers claimed is to be determined. net equity is clearly spelled out in the statute. it is clearly spelled out on

sipc's web site. even today. and yet sipc has decided that it does not in short the first $500,000 in these accounts. if only ensures the net investment going through generations of investors, because a lot of my clients are people his grandparents invested in madoff. and what sipc is doing is going back three generations to net out investments, and they are discounting inherited balances unless the investor can come forward and prove how much the grandfather deposited into the account in 1970. a virtual impossibility. no one keeps records going back that far. and now where did the government put people on notice that if they want to happen sipc claim, they have to keep their records going back 30 and 40 years.

the sec that tsunami was sipc's defiance of net equity. we know from mr. connolly testimony, posted yesterday on the web site, that the sec does not feel it is bound by the statute. american citizens have to trust in the loss. if the statute gives them a promise of insurance, they have to rely upon that. and how can we as a country instill confidence in the capital markets, if we do not stand by our laws and if we won the governmental agency but defies the law? the sec has not taken a persistent -- has now taken a position that people would delegate to their broker and faster decisions do not get insurance as defined by the statute. they do not get net equity. the sec announced yesterday they get their net investment plus

some adjustment for the increase -- a decrease in the buying power of the dollar over period of 30 or 40 years. "what is the purpose of this committee deliberating so carefully on a statute, if the sec can then after there has been a big loss this side, we don't think congress got a right and we do not feel we have to go back to congress. we are going to decide what the law is. how can we make people feel comfortable that they are protected by this government, which days serve and to whom they pay taxes, if the sec, funded by taxpayer >>, can thumb its nose at this institution? the third tsunami that my clients had been hit with is that the sipa trustee has taken a position that he could demand repayment of all withdrawals

within the last six years, even mandatory withdrawals from ira accounts on which people pay taxes, if the net investment going back for generations is a negative number. let me give you one very simple -- -- one simple example. my time is up? you'll have to look to my wrist and testimony. -- to my written testimony. the oilers if you want to state the example, go ahead. >> my grandfather put $500,000 in 1970, and he died in 2003. at which time, the account was worth $3 million. and i took $1.5 million at that account to pay his estate taxes, and then from 2003 to 2008, it would to $2 million. mr. picard would be saying to me, "pay back $1 million.

you owe me $1 million." my clients, who have a lot -- who lost their life savings, who were forced to sell their houses and a down market, and work cherishing the tax-free funds that they have received as the only funds they have to live on for the rest of their lives, now are faced with giving up those moneys in order to do what? nobody wants that. i never took money out of my account and i am receiving the beneficiary of the cloth bags? i and many of my client just like me, never took money out, we do not want this money. this is blood money. these people are entitled to keep what they took out. thank you very much. [applause] >> the rules do not allow demonstrations. i know that these are emotional times. we will be lenient with the rules.

and now we will hear from our friend from colorado to hear it -- to introduce the fourth witness. >> i appreciate the witnesses being here today. and the strait for testimony that you're giving to all of us. -- and the straightforward testimony that you are giving to all of this. there are four things that we have to consider. one is on the floor of the house today. where was the examination? where was the investigation? where was the oversight? and where is the prosecution of swimmers, croats, bombs, cheats, what everyone to call them? in colorado, we had at least three in these last eight or 10 years. the victimized hundreds and hundreds of people in colorado, some of my closest friends and colleagues who lost their life savings to one of these three crooks.

what kind of environment led to these giant ponzi schemes and frauds? and i would like to thank the chairman and the ranking member for bringing for the investor protection act and some of the precautions and safeguards built into that that we will hear on all four of the house today. the other three aspects of this, which is what this testimony in this hearing is about, the bankruptcy aspects and the call by. the reach of sipc to anybody who was swindled and victimized by this, and finally, what tax ramifications are there? can someone take an immediate loss? we have today a constituent of mine and a friend, mr. pete leveton, from lakewood. he is a share -- a co-chairman of an investor committee, which represents over 200 indirect

investors of a lot -- of a colorado investment group. i had been working with them and members of the investor committee for months, trying to develop remedies to the inequities between direct bond investors and indirect investors like the actual group. -- the agile group. many others who invested in the securities are ordinary people who invested their life savings on what they thought to be safe pension plans, trust funds, an investment account. they did their own research to determine the best investment group, and they believe big birds like agile invested their savings plans. they trusted groups like these investors to turn investors in the safe legal funds. unfortunately, agile and other investment firms were defrauded by bernard madoff, by stanford,

by others, and all of -- all the savings were lost. many are eligible to recover $500,000, but indirect investors are not. mr. chairman, we have the opportunity to restore at peace of dignity to the indirect investors. through no fault of their own, they lost their life savings and some are losing their home. i look forward to the testimony of mr. leveton today to describe some of the travails of the people in colorado. >> thank you, mr. perlmutter. mr. leveton. >> members of the committee, as

congressman perlmutter just said, my name is peter leveton. i live in lakewood, colorado, a denver suburb and congressman perlmutter's seventh district. i am an unpaid co-chairman of the and agile group llc investor committee. agile was a hedge fund manager based in boulder colorado. thank you for giving me this opportunity to testify on behalf of agile's 205 investors, several hundred ponzi victims, from more than 20 states, and by extension, all made out indirect investors to file more than 11,000 claims -- sipc claims honored before the date of july 2. -- on or before the date of july 2. it is clear that you have a

clear understanding of many of the issues and i will try not to belabor those. the indirect investors are not a homogeneous group. it includes farmers, doctors, teachers, lawyers, businessmen, entreprenuers, and other hard- working americans who have over a period of years diligently saved for their retirement. many of us are your constituents. many of us are now devastated financially and psychologically. many of us have sold or are trying to sell our homes just to obtain money to live on. many of us are retired. some indirect investors have had to beg for support from our siblings and our children. discrimination is not a word that any of us in this room would use lightly.

however, because only direct investors are considered such sipc customers, discrimination is what indirect investors are facing. that is clearly not congress's intent when they created sipc in 1970. pursuant to the current interpretation, direct investor victims who knowingly invested with madoff have an opportunity to recoup up by the thousand >> for each of their accounts. indirect investors, many, maybe most of us, had never heard of bernard madoff until it was too late and they were not considered customers. we will recoup $0. i ask you, where is that justice in that type of interpretation? because the sec has admitted extreme culpability in missing the warning signs of the madoff

scam and others, and because the irs essentially endorsed madoff in 2004 by naming his firm as a non-bank custodian of ira's and other tax referred -- tax- deferred retirement accounts, we believe that congress has a duty see that relief be provided to all victims, not just some victims. the concepts outlined in the maffei/ellison amendment would be a wonderful solution if it were expanded to include all indirect investors. unfortunately it addresses only erisa plan victims and excludes thousands of other indirect victims, including those in self funding retirement plans such as ira's. i ask you again, where is that

justice in that kind of an approach? we see no moral basis for congress to amend sipa to provide customer status to the relatively small special interest group of indirect investors in erisa plans, and exclude all other indirect investors. we indirect investors lost our savings to the same fraudulent ponzi scheme, suffer the same financial devastation as be erisa plan investors and the direct investors. we firmly believe congress should in this discrimination, not for patrick -- not perpetuated as the current amendment would do, if passed as is. we ask congress to enact legislation which clearly defines investors to place their

money and sipc-protected funds. we endorse an amendment that prohibits clawback from investors who withdrew their money in good faith and can prove that. with regard to the 60-day payment amendment, we agreed that sipc payments should be based on the customer account balance as of their last day man. again, assuming that they had no -- that they did not know and have no reason to believe that the madoff operation or other ponzi schemes were fraudulent operations. regardless of what processing period is determining -- determined to be reasonable, we suggest street parameters and guidelines be established and that sipc be required and be held accountable for meeting those standards and guidelines.

in closing, i suggest that this could happen to you. and congressman perlmutter mentioned that it did happen to the one that -- one of the agile members who was a previous member of congress. we look to you and your colleagues to carry out congress's our original intent to protect all investors when it enacted sipc a and help us recover a portion of our -- sipc a -- sipa and abbas recover portion of our savings. i would be pleased to answer any questions. >> now we will hear from our friend from new york to introduce the next witness. >> thank you very much mr. chairman. thank you for holding this important hearing and allowing us from other subcommittees to sit in and and and listen. i want to thank all the witness,

and mr. leveton, i assure you that we will be discussing with mr. pearlman and others your suggestion. we are informed by the plight of our own constituents and did not necessarily know all the different aspects of this. to represent some of the folks in my constituency today, i am pleased to introduce a good friend of mine, of business manager for the local steam fitters union. he has served as the chairman of the employer trust fund since 2005. he is also the president of the central and northern new york building and construction trades council, representing 16,000 pensioners and their families from other unions inside europe. mr. lancette, thank you for coming to speak with us. i want to thank local 26677's counsel for coming down as well. they suffered serious losses because of the madoff council.

while the headline said been full of wealth and prominent investors who lost money, the pension funds of approximately 60,000 union workers and retirees in central and upstate new york were also exposed and suffered great losses. central new york unions loss at least $350 million, and as mr. lancette will tell us, local 267 loss $37 million. it is important to help them recover some of the funds that they have lost. i urge the chairman to continue working with me and others on the committee to address these issues after regulatory reform has passed the full house. currently the securities and investment -- sipc is only allowed to restore five and a thousand >> per fine.

-- $500,000 upon. i have introduced an amendment helping those to recover those money. i want that my colleague from minnesota from working with me and others to relieve victims of madoff. again, i want thank the chairman for holding this important hearing. and for mr. lancette sharing his story with us. >> thank you very much. i like to thank chairman and kanjorski, and the members of the subcommittee on capital markets, insurance, and government sponsored enterprises for having me here. my name is gregory lancette, currently the business manager of plumbers and steamfitters local 267 in syracuse, new york. i am chairman of the jointly administered multi-employer trust fund. i've served in this capacity

since 2005. local 267 is a chartered local union of united association of journeymen and apprentices in the plumbing and pipe fitting industry in the united states and canada. i am here today on behalf of not only by 1115 pension participants and their families, but they also stand here today as president of the central and northern new york building and construction trades council, which represents nearly 16,000 pensioners and their families also from central new york. today gallup like to discuss the direct relationship between sipc and bernard madoff's ponzi scheme. sipc today provides coverage to individuals with an individual and of $500,000. my members pension funds have no real coverage. my members, like millions of workers across the country, rely on pooled coverage which sipc

does not currently protect. when i was elected in 2005, the madoff investment was approximately 30% of our pension fund. we receive regular confirmations that our money was invested in s&p 500 cos. while the return on the account slightly trailed the s&p 500 index, we were assured that the strategy offered adequate there's a versification and lower volatility. we believe that the u.s. securities markets monitored by the securities and exchange commission provided protection for our members. the plumbers and steamfitters local 267 benefited fund had out market value of approximately $34 million invested with madoff's direct brokerage. local 267 had $6.5 million invested with bank and an associates. beacon is a fund consisting of a basket of investments which

comprised of the 40% of total assets invested in madoff. on to the current formula of sipc reimbursement, local 267 will receive $500,000 from the madoff direct account and the reimbursement for the be can i count will only be $900, due to the fact that the amount of local 267's portion consisted of only 1.8% of beacon's total assets. to summarize, local 267's pension loss $236 million and expected to recover $500,900 from sipc. .

the reason behind the amendments is that pension funds would be made closer to call to compare what is being compared back in central new york. currently, if all 30 funds received by kucinich thousand dollars reimbursement from pacific, $15 million will be returned to the new york area compared to $350 million in losses. $50 million returned, $350 million returned. the pension loss of nearly $37

million to equate to $33,183 per participant. this protection would not be unique. a similar path is available to retirement plans for funds in the fdic insured banks. the portion that would be required to reimburse within 60 days would benefit all plans. it to be accomplished by returning assets or paying benefits to retired members. funds that were affected by the backs of 30 madoff are facing insolvency. the securities and exchange commission was not able to defy fraud in a timely manner which led to significant losses. the pension protection act of 2006 requires funds to a more tight debt area. i would ask for consideration of

the tension protection act, allowing the plan to immortalize the losses at a 30 year rate. fthe plant could recover and naturally. it may lead to the plan being turned over to the guaranteed. is john a consideration for multiple investor groups or participants or any multi employer. i strongly urge the pension plans be allowed the proper time frame before the pension protection act to a more a ties -- amoratize losses. >> for we will hear from a

professor at columbia university law school. >> thank you. i am pleased to be here but disappointed on this first anniversary of mr. madoff's debt. they have done so little to prevent the reoccurrence of ponzi schemes. ponzi schemes are predictable. they cost investors on average something like a billion dollars a year. before we even heard of mr. madoff, in 2002, the ponzi scheme losses in that year were $9.6 billion. this is a recurrent problem. it will continue as long as the government persists in allowing advisers to be their own custodian. i will put this in a sentence. mutual funds used an independent

custodian. so do hedge funds. set mr. madoff used his own brokerage firm. his own brokerage firm was serving as the watch dog as a burning madoff the investment and pfizer. when you are your own watchdog, and nothing works. the sec has taken some effort to discourage the use of self- custodians. they have backed off under pressure. we need a true watchdog. that can only come from an independent custodian. that is not a topic today. i will move on to the protection act. i want to make three suggestions. all of all compromises and a line drawing and will be painful. insurance is costly.

i remember this panel has told you that the definition of " customer" is too limited. is understandably been the tip of the fifth -- understandably limited. in looking at who to protect, i think we should look at the continued big dent in the u.s. been the most injured and least able to protect themselves. for i think that is the pensionr and small pension funds. they suffer the most concentrated loss. they are losing their requirement -- retirement security and cannot judge their own interests. what they do is hire someone like made out to be their

investment adviser. on that kind of criteria, we have suffered a concentrated boss who is least able to monitor themselves. the first category you might think of including where you to expand the definition of customer would be the smaller pension fund. i would suggest to fine contribution plans. that is where they lost balls on the individual pensioner. -- -- where the loss falls on the individual pensioner. you have to put a pension limit on it. i will not tell you what that number should be. this second point is equally controversial. this is callbacks. sica appointee will use the fraudulent conveyance actions

under the bankruptcy code to go after those people who received a very large distributions with in the statute of limitations. this morning's "wall street journal" indicates that it will bring suit seeking a total of $15 billion from people who receive distributions within the statute of limitations. that is $15 billion against total losses of roughly $19 billion. in other words, fraudulent conveyance has the capability of restoring as much as 80% of the investor's total losses. that is not to say he will get the 80%. he has the capacity to prevent these losses. maybe he will get 30%. that is held litigation is settled. even $5 billion [unintelligible] i am advising that you should be

very careful before you disabled the trusty and cut off his effort to restore it these alleged fraudulent conveyances and put them in one common pool for the benefit of all investors. the language that has been offered and says you cannot bring a fraudulent conveyance action unless "the customer did not have a legitimate expectation to the assets in the account" is language that means you are going to have to show that this person was a co- conspirator of madoff before you able to bring a fraudulent conveyance action. that will reduce his recovery from $15 billion to under $1 billion. the cautious about stopping the trusty and going against the larger source of recovery. i would suggest we start with who are the victims who might be most injured by a fraudulent conveyance actions.

i would focus on charitable organizations. the bankruptcy code has long given an immunity against fraudulent conveyance actions to charitable contributions. charitable contributions are not an issue here. here they are charities with accounts. they are trying to get their own money back. the principle is there. congress has recognized that charitable organizations are a special category. i would suggest that if you are doing anything to cut back but to extend the immunity of charitable organizations beyond the contribution and say that a charitable organization cannot be sued for fraudulent conveyance unless it can be shown that either they have actual knowledge of the fraud or the charity was established by the clerk himself.

no one has explained the purpose of fraudulent conveyance. they serve one fundamental purpose. they prevented the crook from choosing the victims that will bear the loss. we do not have fraudulent conveyance statutes, they can still decide to permit some victims to recover and letting other people bear the losses. if we do not have a fraudulent conveyance that too, we will put strong incentives for the crook to direct to be the real victims in who will be the smaller victims. i do not think you want to do that. i think you can use is that he that has a different language. some the case law has construed to mean that you not show just good faith, but yet a good faith of a reasonable person. it is a negligence test.

i think my time is out. for the first time, congress is trying to move from being a rather strange non insurance system to a true insurance system that will charge risk adjusted premiums. for other was, a good brokers are subsidized and crooked brokers [unintelligible] we want the risk your broker to pay more. i will stop. >> each and every one of you has told a compelling story.

you of colleges being to some of the core issues that you are trying to decide 1/5 sell off home run into whether you are a victim of a fraud or the market. people want to be made whole. that is a natural human instinct. our problem is that the losses was somewhere between $7 trillion and $14 trillion in capital. if you had been an investor for one of the major banks in the united states, you go from $50 a share to $2 a share because of bad judgment or investments in the wrong area for potential fraud or participation in fraud, we do not know, there would have

been great disappointment and temptation of every shareholder to 6 "i want to be made whole at the price i got made in at or the high price because i was counting on that for something, " obviously, it was their savings or requirement. that is not a bad argument. foa few among us and the population will turn over the assets to their pension funds or bank accounts, a fellow citizens, to make them more whole. i do not see a long line out here in front of the capital. they have not shown up to suggest that they are willing to provide their fair share of your loss. i doubt that they will. our system and our decision will go to the question of "is it intended to have a system that has no risk?" that may not be the worst system

in the world. if we are that, we should not have pension funds investment and visors. we should have a governmental pension fund and somebody lens that to the united states government at a guaranteed rate. if you have very little upside or downside. if you want to get to the advantage of the free market system, there are risks to the market. you may say "but we did not lose our money in the market, we lost to a broad." that is part of the market. it may be vicious. it may be because she did not understand or know you were investing your money. there is no way in the world you can say it was the government's responsibility. our system does not say that. our system says it is each individual's responsibility to do and protect assets as they will.

i was here when the enron disaster happened. they are people invested their life savings in their 401k that disappeared overnight to the tune of hundreds if not millions of dollars. we were all sorry for them. they had to take their risk. that was the problem. that is our system. it is not the best. i still think it is the best system in the world. it is not a good system if you are on the losing side. if you are on the winning side, it is the best that we ever discussed. our problem is, how do we lessen the impact on everyone? we just cannot. it seems to me we cannot guarantee everyone is insured or guaranteed their return. i do not know how we do it.

if we were to tax the payment of loss of $14 trillion in capital for the last recession, what would it be per head? q. is the mathematician? it would be extraordinary the amount of dollars. and probably all of us have lost in some way. you have lost a great deal. there is no question about it. what do we do? we have done several things. we have provided changes in the investor protection act that will require certain actions go more in depth. we have a chain of command. information will go up the information ladder at the sec. all of those things help future legislation. there is not a lot in there that will help your cause.

can we come up was an equitable position? -- with some equitable position? that is a tough situation. if we were to honor $500,000 per pension member of the pension funds, we would soon end the guarantee appropriation. we do not have the funds in there to do it. i do not think that was ever the intent. i think we probably have to have much more lively -- and i think it will result -- we have to have closer eyes on the subject. we do force pension fund to do certain things with the assumption they will be able to carry them out correctly and they probably cannot. those individuals that did not know that madoff even had a touch on their funds. that is a tragic thing. that is the

responsibility of each individual to find out. my time has expired. if you think realistically, you can go out and buy a 5 and a thousand dollars home. you can buy it from your lawyer, doctor, minister, priest, rabbi, or friend. if you are not smart enough or clever enough or sensitized enough to have its search out that the individual has title to your home and to buy the home and pay your money in any find out that the person that reported to be the owner did not own it, i have news for you. you lost it. you cannot sue the government. you cannot hold anyone else response ible. what a difference is that in a pension fund it? it is really the same policy. our hearts go out to someone who pays five and a thousand dollars for a home that they do not

owner cannot live in. our hearts go out to the people who lose their life savings because of a fraud. it was perpetrated by someone appeared to have all the respectability. the federal law does not provide that because you have to register with the sec and the sec is supposed to test out and investigate, it does not say the guarantee that it has are that if we eliminated. we cannot afford to do that. in some respects, if you look back historically, it is a hell of a lot better today than it was in 1929. i hope it will be a lot better tomorrow when we passed a new reform regulatory bills than it was a year ago. it is the going to be perfect. we are not going to accomplish that. those of us that have the desire or wish are going to be grossly disappointed. i now plan to ask any particular questions. i have exhausted my time.

so many members have expressed their thoughts on the subject of the losses of their constituents. they have suffered. they are looking for a remedy. we are going to work as hard as we can to close some of the holes and weaknesses in the system. we are not one to solving create a perfect system. the possibilities and exposures to the government and people are far above what we can possibly provide. we will work toward getting uppity. there will be fairness. there ain't no equity or complete fairness in this world. it is a tough world. >> thank you.

what we can try to do from the government's perspective and make sure there is justice. we need to strive in order to get justice. i do agree that at the beginning of the day everyone should be held accountable for executing their own due diligence in their investments and part of that due diligence changes from who you are a few are in the proverbial little old lady at one level or conversely the union official who might have more resources than the little old lady would have had a different level to a fund of some sort or association somewhere in between. a level of due diligence will be irresponsible. it varies. we do expect everyone exercises

due diligence. to the respect the two diligences the workout, that is your responsibility. added to that is when that due diligence is in reliance of the government, then that is the responsibility of the government to come forward. when you do your due diligence singing to look to the sec, you are relying on the sec to do their job. when you look to [unintelligible] after the fact, you should be able to look to sica to do their job. they are quite government entities. there is a bill on the floor this week which is in essence what occurred here. it creates a moral hazard by relying on the government.

the government says they will protect you with the sec. you have a right to rely on them. we told you you can rely on it. you should. we said you can rely on it. you did. have you never said those things, he may have made other investments. because we set those entities of, and now we have created a different investment strategy or decision. in the bill we will be voting on, it expands those involvements or activities by the government. in the future comic you may be more reliant on the government. fourth and nothing that is a good thing. one of the comments was in regard to callbacks. everyone except fomr. believes d

not have calawbacks? one of the testimonies entered into record said any clawbacks should begin with the ftc. -- s. you see. you were in reliance upon them. -- the sex. -- sec. you were in reliance upon them. we are doubling their salary and their appropriations. we are saying hopefully in the future you will make some changes but we will increase the. we might want to take a look at what is coming down on the floor tomorrow. we should be holding them accountable for what they did wrong in the past and humming the people for tivoli accountable for the failures they made. before we give them any more money, we should make sure there

are changes. use said that the trustee is running expenses of $100 million a year. they say the trusties have only paid $1.2 million so far. >> i can clarify that. the trustee's legal fees have been approved for the first 15 weeks. it is running at dollars a week. -- at $1 million a week.

at the net investment is not required by the statute. they have said that the expenses are running at the rate of $1 million a week. >> i see my time has come up. it is almost an incentive for things to move at an expedited basis. we have they could be there that is guaranteed to pay. >> there is an inherent conflict of interest in the way the statute is set up. >> some of these aspects may have impact upon getting more fees getting in or broker deals. we did suggest that sica may want to testify or be it the hearing. they declined to do so. we would certainly like to hear from them at some point in time at what they see as the impact. i think i am on board with where most of you are.

for we really have to be real tight in a language. why you do not want to do is come up with language that does not have been you will -- that has wiggle room in it. you will have to hire a lawyer with the release should not have to go to that aggravation. i think you probably agree. lawsuits would be very targeted. i think the target would be very limited. there was the potential for pollution. is that where you are going on that? >just for any other losses that they would have potential? >> i think you could move from the current good faith in defense, which is based on a reasonable person, to a lot of recklessness standard.

it to make it harder to recover on fraudulent conveyance. >> you do not want an overly zealous [unintelligible] now they have a reckless standard. >> mr. picard on behalf of small investments. there is no villain here. i hope he is able to recover a good deal from some of those larger investors to benefit the smaller investors. >> some of those are not the villains. i would assume the best majority of them are not violent either. >> he could have been reckless. >> the error not villains. then have to make that case. we do not want to have the other people being swept into that and incur the expense. but right now they are simply negligent. >> i agree with that.

>> we will hear from the gentlemen from new york. but thank you. we do not really know the full extent of the number of victims. what we do know is that the first victim was the public trust, the trust the people in their government, the trust the people in the us, the trust in the system that we set up that they believed would protect them and have every reasonable right and expectation that it was going to. we know the number of claims that have been filed. we know the number of people who have been named. we know the number of entities that are on view this. as we can sneak -- on the list. as we can see from one local union, they are named as a victim but a lot of these

groups and organizations and investment groups represent thousands and thousands and thousands of americans, some of whom think they are lucky because they had no stake in madoff. they do. 11 people do not understand this issue. -- a lot of people do not understand this issue. they do not look sympathetically at victims that have more money than they did. if they were getting a high interest rates. they should have known better. this is part of what we used to call blame the victim mentality. it is the victim's fault there in the predicament that there and when nothing could really be further from the truth. chopin's, how many new mr. madoff? -- show me hands, how many people knew mr. madoff? not one of the victims knew mr.

madoff. that is the problem. how could they do due diligence? they relied on the government to do due diligence. maybe we should take away the right of the government agency to do diligence and enough people like mr. madoff free of sen, crime, culpability, el intention and anything else. maybe we should let the little old lady from peoria be able to do due diligence and go in personally to mr. madoff. every citizen should be able to do due diligence how do we do it? we do it by doing what we do. we do it by empowering government agencies and entities and people with badges to go in and investigate and make pronouncements that other people trust. that is what we do in a sophisticated financial system

hig. everybody can investigate anything. the only people have the blame the victim mentality are the people who are not victims. they think they were lucky. some of them or not. there are so many victims here that we do not even contemplate right now. you put money in your bank. you have brokers. you put your money somewhere safe. you know the line of defense, because those are all public. if your bank went through brokers, so many other thousands of people may lose money that we will never hear of any end. fourth the system loses all the money. there is not enough money in this insurance fund that people thought that they had.

-- to make them whole to the extent of $500,000. we have a mess on their hands. we have a large group of american investors who were first robbed by mr. madoff, abuse by the governments in the system into thinking that they wear and -- they were insured. they were not. there were devastated by the irs. they were taxed on the money they thought they had. they did not have the investment returns. the government robbed them by charging them a tax. they can only go back a few years and not the full 13. the government illegally robbed them of taxes. so many are now being raped by

the clawback decision. it the think they have this money in their account that they did not have and they spent it to live on. that is what it was for. i have met people who have content for the victims because they should have known better. how? i represent the north shore of long island. it is paces from where mr.. operated. country club see belonged to. thousands of people who thought they were likely to know such a nice man who is so reliable received all the alkylates did alkylates -- all the accolades.

these people thought they were lucky. they were probably the unluckiest people of all. they were further ripped apart. they knew this guy they thought was a wonderful human being. how lucky were they? now they are personally devastated. to those people who look upon the victims and thought how smart they are and how stupid they were, they really do not get it. some of them are involved in this fraud personally.

we have to be able to somehow do better. i think it is interesting almost everybody on the panel have actually selected witnesses to appear before is that we understand who the victims really are. what we have to do is try to fix the system so it makes sense. we cannot treat everybody equally. we said people upon themselves like a bunch of piranhas. which group is luckier? it behooves us to figure it out.

i think that despite the fact that this is the more marketable panel i think we will have a lot more questions on the next panel. i think we look forward to hearing from them. i think the people who come here today to share their tragic stories with america. keep in mind, we all bear some culpability here in the situation which we all find ourselves. i will yield back the balance of my time. >> thank you. >> if the loss that we just suffered in the last recession, $14 trillion, was broken down into $46,666 per man, woman, and child in america. we have to bear in mind what i

would mean to make up for everyone losses and failings. that money was made -- lost by a lot of people. i just want to throw that out. even if it does have that, that is $23,000. that is a lot of money. mr. kean of new york. >> thank you. i do not want to revisit the anxiety of law school class. have questions for you. i agree with the overriding principles. we also have competing principles. one of the main purposes of sica to maintain consumer confidence. it gives some reasonable assurance that if they invest in

good faith for and use reasonable diligence, that they will be protected. if the stock collapses, that is part of the game. you lose. when i look at this specific web site, it had a specific mission. customer assets are missing. without it, investors might lose their securities are monies for ever. it does have a caveat in there. there is certain limitations. but every investor is protected, no fewer than 99% eligible to get their money back. it is stating that if you play by the rules he will be protected. when we have people that have played by the rules, it appears

to me we have a trustee that is trying to make villains. he is creating a one category of villains and victims. 99% of the people are all victims. let me ask you a question. are either of you aware of any instance where they have defined equity? >> do you want to go first? >> i would be happy to. i can assure this committee that there has never been a change where a they get taken the position that they do not have to comply with the law. this the first time in spic's history where they have taken the position that net equity does not apply to sipc.

>> they should not misrepresent what they are doing to the american public. until recently, sipc was underfunded insurance. broker-dealer firms paid only $150 a year. that is awfully cheap. when you look at this insurance system, you should look at what most of businesses do. they may spend 1% of their revenue. this test been an awfully cheap insurance. it has never been under great stress before. it could happen again. in the old days when this was set up, most investors were individual investors. that is change. only 25% of investors are individual retail investors. most of them to invest collectively through pension funds, etc. we cannot give insurance to everyone.

it to look like socialism for the rich. i do think there are special categories where we could recognize that if we are willing to make any change, we should start at the end of the continuing. i think there has been some misrepresentation about what s ipc can do. i think the sec is probably consistent with what they are doing. it has never come up before in this way. >> i would comment on that. anytime you get beyond the specific of the law, they are more deserving. it is a risky path. my time is starting to run. if all of you could address the issue of reimbursement of people

who pay taxes. they pay taxes on money they never received. >> i do think the legislation that is being proposed would allow you to carry these losses forward. that would be a way of reducing some of the bite. i think we should be very sympathetic. it was a phony tax that you were paying. >> thank you. we are not seeking a total bailout or restitution. all we are seeking is that the sec and sipc comply with the law. we are seeking the five and a thousand dollars of swipc insurance that we were promised. -- $500,000 of sipc insurance that we were promised. i do not think the present statute contemplate that. the statute clearly caught and tapes -- contemplated that a customer that deposits with a broker is entitled to buy from a

thousand dollars in sipc insurance and based upon the customer's last 8 them. -- entitled to $500,000 in sipc assurance based upon the customer's last insurance. the customer was entitled to replacement securities up to five and a thousand dollars, even if they have tripled in value. how come we trust our government if the president of sipc can assure a court that even if the securities, which were never purchased, tripled in value, sipc would replace the securities up to $500,000. we had a bright to rely upon that statement and rely upon the ball. with respect to taxes, there is no question that economically

the irs was the largest in this area of madoff's ponzi scheme. used in treating short-term capital gain and people were paying taxes on the income they thought they were receiving at the highest tax rate. the internal revenue service and congress have done a great deal to help investors on the tax side. it will give madoff investors a great deal of relief. it is not 107. we are asking that they be retired -- required to comply with the law. >> i want to make one final statement. from i have real concerns about a trustee who received $1

million a week in legal fees. it is an encouragement to keep litigation going. it does put an appearance of a conflict of interest there to pay someone for the more energetic going after one class of victims as opposed to another. [applause] >> do you have something to throw in in a response? >> i want to take a conversation in a different direction. it seems there is a dialogue going. it is an excellent dialogue. the attorneys of this panel are, with all due respect, dominating the dialogue. >> point well made. >> can make a couple comments? >> yes. >> thank you.

thank you for holding this hearing. i agree with some of my colleagues on the committee. i disagree with others. the bill that is on the floor today and tomorrow. it was put in place mainly because for the government has failed in many ways. it is our job to protect the average citizen. i will keep you a chance to talk about what you want to talk about. my husband was a stockbroker. he used to come down. come home all the time and say brokers should not get commissions. and he said they should get a good salary.

what we have seen in the last few years, let's go back to an rahm. there has been a slow deterioration of moral obligation with large corporations. we have seen that with the meltdown of the economy the victims. they do not have any money left to pay taxes. they do not even need a tax credit. the money is gone. the ones that are injured are people that did everything right. as far as consumer be where, -- beware, i will read everything that comes into my house. i'm not a lawyer. i do not understand it. if i ask the broker a question, he has to look up the answer. we try to trust businesses. unfortunately, it has not worked

out. >> do you remember the camel trying to put their nose in the tent? that is with the indirect investors are. -- where the indirect investors are. i understand the issues of net equity. a number of things are valid. for the injured investor, unless they are in the customer definition, none of the things are relevant. they are not going to get any benefit. i think this is not a legal issue as much as it is an issue of fairness. your distinguishing between the direct investors on one hand in the indirect investors on the

other hand. now there is a further definition. that is the pension fund has separated from the other indirect investors. everybody lost their money in the same way with the same fraud. i cannot speak about the wealth of the direct investors. i can really only speak about the wealth of the in directors in our particular hedge funds. these are people who have worked all their lives, played by the rules, saved diligently, and accumulated enough money to invest in hedge funds at a level that was over the minimum requirement. they are not rich by any means. to the extent that they might have more liquid assets fund

those who were only able to scrape together $50,000 on a pension fund. they may well be right. from the standpoint of this, to distinguish between those people, it distinguishes between the hedgefund investor it seems to me to be totally unfair and not appropriate. i think it was right on. my reading of the discussion in

1970 said that the legislation will protect all americans -- it did not say direct or indirect investors -- all americans from brokerage firm of fraud is what was intended. whoever drafted the sipc legislation did not do it clearly enough to indicate that. that was the intent. now what is happening is what you have said. i think there is no way that sipc could rectify that, regardless of how good they are. congress can. it can start right here, the committee had taken the time and effort to allow this group to

talk with you very freely. thank you. >> thank you very much. i think it is clear that the heart of every member takes for the experiences that the indirect investors have suffered. there is no doubt about that whatsoever. i think we also a because despite the fact that he tipped to the sec of almost a decade ago to the fact that madoff was trying to play ponzi scheme, they ignored him. he was allowed to do it and allowed to do it .

although i do not believe it is realistic to have laws that guarantee people will not become criminals and a one not try to exploit individuals, the deterrent to that is flaswift punishment. i am sad to say that to this day, despite the numerous inquiries and testimony, investigations, i do not know that anyone at the sec has had to risk that yet. i didn't even believe there has been a verbal reprimand. i do not believe anybody has been fired. i just do not know how they have addressed it. the only way to deter criminal activity -- i mean you police is the best you can. when you find it, you must have swift and sure punishment, even

if the government is in on it. he must have slipped in sure punishment. -- you must have swift and sure punishment. from we have plenty of laws that were violated. made of would not be any more of a creeook if there were more violations. for a think we need to focus on having a day of reckoning for the bad behavior. they referred to in run earlier. -- enron earlier. it boils down to one word, agreed. it is a lack of respect for the process. it is a lack of respect for your fellow man and investors.

it is a lack of respect to everybody. and led the people have the right to be greedy -- a lot of people have the right to be greedy, but they do not have a right to steal from other people. besides bernard madoff, until we see there is justice, everyone eligible of that scheme is just going to encourage more activity in the same, despite the many laws we enact. i yield. >> thank you very much. >> thank you. i have some specific questions. part to the frustration i think most americans have is the fact that there has not been enough punishment. accountability is one thing.

there is irresponsibility to follow through. this people need to be removed if they cannot do their jobs. they are not in the people providing regulation. the quality people they needed were pushed out. bad decisions were made. it should have been shut down a long time ago. people did not make good decisions. they need to be punished. there is a second line on this that goes into the private sector. i do know believe there is enough criminal punishment that people -- for people who defraud the american public. sure madoff is in prison. he could have done this by himself. i cannot accept that. there are too many other people involved in this process. there needs to be some punishment. i agree with that. let's get to the specifics. thank you for your testimony.

and one of the problems i see is that there seems to be some inconsistency in interpretation by the sec and the sipc. one thing i said before it is people need to know that on the website the sec symbol means something. it means something. if we look back at the regional language at the series rules it says rules provide for the classification claims in accordance with the "legitimate expectations or the customer based on the brand transactions sent by the broker-dealer to the customer." it seems obvious to me. did you get a statement that was it a reasonable expectation that your statements would look like any of the statement to got from merrill lynch? i think the answer is probably "yes."

there probably were not any big signals going the other way. i think the set of expectations that you had. . f.

>> they hire financial advisors and go to brokers and invest through fidelity or vanguard and they make investment decisions for them. >> is it your view that this interpretation were held up and this was the s.e.c.'s interpretation throughout that it would seem to me that millions of investors who just give a more general parameter of investment authority to an investment house may not be covered by a failed account, a failed broker who sipc steps in on. >> precisely. they wouldn't be covered for the full amount and the purpose of the statute was to instill confidence in the capital markets if the fdic tomorrow in the next bank liquidation decided, you know what? we don't insure the accounts except for the net investments so we're eliminating all interest that may have accumulated over the last 30

years and we're only going to pay the net deposit, there would be a run on the banking system. and the s.e.c.'s filing yesterday for this committee could create a run on the securities firms because no investor in this country has any idea what kind of coverage they have in the event that they're dealing with a dishonest broker. >> professor coffee, you had a comment about zero sum game if they assess the members to provide for the cover. i agree with the comment that it's like actual cash in the bank. we -- what did you say, sir? >> i congratulate this commit because you are raising the assessment from 150 to 0.2%. >> well, it seems to me, professor coffee, is one of the problems is there's a certain amount of money and we're sort of backing our coverage into that amount of money as opposed to --

>> it's funded, you're quite right. >> the law is the law and it happens to be underfunded, there ought to be an assessment or some way of making the people whole. it's not to say it's not $500,000. and again, i go back to how important it is and how strategic and essential it is for the public to know that if they invest, that the money -- there is a fund there to protect them if there's fraud, insolven insolvency, and those things throughout. >> i think you are quite right. i want to make one little comment. to the extent you rage assessment that the brokerage industry has to pay, you give them an incentive to organizations to cut back on risky behavior by brokerage firms such as mr. madoff. right now they have no interest in stopping mr. madoff from being a cowboy and doing what he's doing, but if they have to pay higher assessments and the prospects of higher payout to erase those, then they'll have an interest in controlling the outliers in the brokage

community. >> mr. chairman, just to conclude, let's follow the law. if the $500,000 protection is there, the people should be given the full $500,000 and the claw back, we have been through this discussion. nobody is looking for $8 to $10 million back and if they are, it's not reasonable, b the s.e.c. and the spic has a responsibility to make sure the law is followed correctly. >> may i just make one response to something mr. klein said? >> i think we're going to hold because he did run off and we allowed that courtesy, but let -- maybe he'll come to you with a question. >> thank you, mr. chairman. and like to start with mr. green. he has had his hand up a couple of times, so if you, sir, would sort of share what you were going to share and then i'll launch into my tirade. >> thank you. i wanted to comment, well, two thing. one is i wanted to acknowledge because at the beginning of my

remarks i did not comment that i was a lawyer, so i just wanted to comment that i'll participate though i did not before as a lawyer in the dialogue. and in the discussion about how decisions will be made, mr. chairman, you raised the issue that some tough choices are going to have to be made. i would like to, again, try and focus on some of the prior public policy considerations, particularly embodied in arisa which was created as one of the three legs of the stool to promote the retirement savings of the average american worker. the other one being individual savings, social security, and qualified plans. and the concept of qualified plans was the public policy was to encourage employers to create plans to put funds into retirement instead of having prof profiteering funds at the end of the year going into dollars for the worker's dispense. there was a keen observation by congress that workers were not

saving those funds for retirement. and so ip seincentives were cre qualified funds that they be put into retirement. the type of fund we have is known as an eligible individual account fund, which means that for each participant there has to be an individual account that has to provide for individual accounting of income, individual accounting for expenses. the only purpose for which it is aggregated is for investment purpose. it's an administrative requirement. and it is for that reason alone that the investments go in the name of the trustee. now, the consequence because we have talked about consequences of decisions that will be made by this committee and by congress on this issue, if, in fact, we undercut the confidence in the qualified plans because we do not extend civic protection to them, then we will

discourage the confidence of employers of putting those funds into the qualified plans and will instead encourage them to give them directly to the workers which is phenomenal for those employers who do profit sharing like that. >> all right. so let me ask you a question on that, then. so for each person in the plan, there should be $500,000 in insurance? >> what i would say is for each participant there ought to be coverage for the plan up to the account for each individual subject to whatever the specific limit is. >> okay. so under today's specific levels, it would be up to $500,000 per person in the plan. >> i am not going to comment on the net equity issue. i am not qualified to do that. >> right. that is okay. let me just -- then i have questions for ms. langford. just so you all understand my background, i represented

bankruptcy trustees in ponzi schemes. and i represented investors who were victimized. and who were either had received more than they put in, had invested $1 h00,000 and got $50,000 but other people got zero back, so i understand where mr. coffee is coming from and some of his comments. so where i -- what i am trying to figure out is going back to the three things that i brought up earlier. bankruptcy, how far and who should be subject to the claw back. specific, how far should the insurance reach. so in my state and in my area i have the indirect investors that mr. leveton that didn't nomadoff or peters and they invested through a fund that then invested in these particular entity. how far should that insurance reach? that is the policy decision we have to make.

a&d tax wise, when can somebody take a loss? a net loss operating carry back to give you some recovery? those are the three big policy questions i have, but i also am just interested, like ms. langford, how did you get into the madoff network? >> how i got in is looking for a vehicle -- i had just sold my house and it was -- it was my retirement. and i asked a friend. i said i want something safe, liquid, and diversified. he said, hands down, this is the safest place you can put your money. so i entered into it that way. >> you were a direct investor with madoff? did you come through something else?

>> it was indirect. it was a partnership. and limited partnership. and so technically it wasn't technically retirement account, but it was my retirement money. >> okay. thank you. and i just -- one more point to mr. coffee's statement. the bill that we're going to hear today and tomorrow and friday does, i think, add a $10 million level separate custodial accounts from investment advisor accounts to try to separate those things so somebody isn't posting you phony statements and advising you at the same time. hopefully that kind of separation will work as you've suggested. >> thank you very much, mr. perlmutter. we're at the point where we're waiting for the house to go back into session at which time we'll

have three votes. certainly rather than tie this panel up with any further questions, my intention is to dismiss the panel. thank you very much for your examination. and then to stand in recess until 30 minutes after the call of the next vote. so we anticipate the call may occur within the next 10 to 15 minutes and the return to take the second panel 30 minutes after that call. without any other further comments or objections, the committee will stand in recess. >> this hear willing come to order. -- this hearing will come to order. i am pleased to welcome our

second panel, but before i introduce members of the panel, may i caution the audience that is against the rules of the house to have demonstrations of emotions. we understand how feelings run high, but we would appreciate that you extend the same courtesy to the witnesses in this second panel as you did to the witnesses in the first panel with the absence of the chairman. and that being said, we'll address it no more. and now i am pleased to first recognize mr. michael conley, deputy solicitor for the securities and exchange commission. mr. conley? >> chairman kanjorski, ranking member garrett and members of the subcommittee, thank you for the opportunity to appear before you today on behalf of the securities and exchange commission. my name is michael conley and i am the s.e.c.'s deputy solicitor. there are a number issues being discussed but i want to take my time on the specific liquidation

of bernard madoff's securities firm. we are at the s.e.c. are keenly aware of the devastating losses incurred by the thousands of investors who entrusted their money to madoff. most of the victims have had their lives up tended. chairman shapiro has urged all of us to learn from that experience and reform the way we operate. over the past year we have taken significant steps in that regard, reinvigorating the enforcement division, enhancing our inspections, bolstering the training program, revamping our tips and complaints process, and hiring personnel with new skill sets. and we will continue to reform. with regard to the madoff liquidation t commission and its staff have been analyzing cipat legislative history and case law to determine how to properly value the claims of the investors. while claims for losses suffered by investors are determined, the statute does not address how to address the net ebbing neck a

customer's account when a broker-dealer has engaged in the sort of fraudulent scheme madoff perpetrated. as a result, the bankruptcy court will soon hear arguments on the various series proposed for valuing customer claims. in the end the court will decide how the investors' claims should be valued. the madoff liquidation raises a new question. specifically, how does cipa apply when a customer's brokerage statements show nonexistent positions in real securities that the broker concocted after the facts to support predetermined fictional investment returns? two primary approaches have been proposed. the first is known as the final account statement method. under this method, the net equity in customer accounts would be based on the securities position shown on the final account statements customers received before the firm was placed in liquidation. the second principle approach is the cash in, cash out method. under this approach, net equity is determined by crediting the amount of cash the customer

deposited in the account and subtracting any amounts withdrawn from the account. based on our analysis, the commission will recommend to the bankruptcy court the customer claims in this case should be determined through the cash in, cash out method advocated by the trustee. however, we believe that the amount should be adjusted to constant dollars to ensure that investors' claims in the long-running scheme are valued most accurately and fairly. the commission decided not to recommend the final account statement method on the facts of this case because it believed it would result in claims based and account balances that madoff himself concocted and bore no relation to reality. madoff essentially promised customers he would pick winning stocks for them, did not tell them which stocks h he would purchase, waited to see which stocks did well and falsely reported he selected stocks that met their investment expectation. through no fault of investors, the account statements madoff

sent were illegitimate tallies of a fraudulent scheme. neither cipa or any of the cases interpreting it can be read to support an approach that values claims based on the fictitious returns of such a scheme. as a result t commission has concluded that the fairest and most reasonable way to measure the value of the madoff customers net ebbing second to look to the money the customers invested as a proxy for the unspecified investments and securities madoff told them he would make for the accounts. to do otherwise would have the effect of favoring early investors, many of whom withdrew all or more of the principal they invested over later investors, some of whom will not receive a distribution equal even to the principal. at the same time, the commission is sensitive to fairness concerns raised by the cash in, cash out method. that method favors later customers at the expense of earlier customers by treating a dollar invested in 1987 as having the same value as a dollar invested in 2007.

in our view it is appropriate to convert the dollars invested into constant dollars. we believe that approach, rooted in the economic concept of time value of money, will result in greater fairness across different generations of madoff investors. and in effect, treating early and later investors alike in terms of the real economic value of their investment. the commission understands the total pool of money available to distribute claimants is limited and there will not be enough to compensate all victims. that means that money allocated to one madoff victim will affect the amount of money available to compensate other victims. the bankruptcy court's task and the commission's goal in making its recommendations is to arrive at the fairest way consistent with the law of dividing that limited pool. i thank you, again, for the opportunity to appear before you today and would be pleased to answer any questions you may have. >> thank you very much, mr. conley. next we will hear from steve harbeck, president and chief

executive officer of securities investor protection corporation. >> thank you, mr. chairman. chairman, ranking member garrett, members of the committee, thank you for giving me an opportunity to discuss the work over the last year and discuss possible amendments. my name is steven harbeck. i worked at sipc for 34 year. sipc has no role in the investigation of the firms. when sipc is informed that a brokerage firm has failed, we institute a customer protection proceeding and refer it to the bankruptcy court. customers of brokage firms are protected within statutory limits. the first such source of protection is a pro rated distribution of customer property as professor coffee noted this morning, that makes ate zero sum game. sipc can supplement customer

property by as much as $500,000 per customer with a limit of $100,000 for cash. sipc has overseen the return of approximately $160 billion to customers and has advanced more than $323 million prior to the madoff case to do so. about 11 months i appeared before you to report on the lehman brothers and i would refer you to my written report which i think is subtannial. in the madoff case, unlike the lehman case, a transfer of accounts was simply impossible. through the claims process, the following is the status in claims. the trustee is allowed $4.6 billion worth of claims. that represents returns to 1,600 claimants. sipc has committed and advanced most of $559 million. this is more than in all previous sipc liquidation

proceedings combined in the past. there have been 16,000 claims filed and there have been 11,500 claims determined or 71% of the claims. the trustees thus far electric $1.1 billion and these filed 4 lawsuits seeking the return of $14.8 billion and we will discuss that again in just a moment. the subcommittee has asked specifically for information on the fees in this case. as you heard this morning, the trustee has been paid $1.275 million in the law firm of baker and hustett has received $30.75 million. i remind you that this is the largest ponzi scheme in history and most of the trustees and legal fees' efforts that are being expended here are for the purpose of recovering assets. in terms of the legislative initiatives that are before you, sipc has proposed a number of amendments to sipc, and these include increasing the amount

that sipc can advance for claims for cash to $250,000 and to index that dollar figure to inflation by a specific formula. we would increase the line of credit with the treasury from $1 billion where it's been since 1970 to $2.5 billion. we would increase the number of cases where sipc can use a streamlined procedure. and i would suggest to you that the members of this morning's panel should agree with all those change. but there are other proposals that i must address. one is extended coverage for participants in pension funds which was extensively discussed this morning. on a going forward basis this, certainly deserves study. however t proposal lacks any analysis in terms of risk management or possible cost to either sipc or the treasury. and it's both the chairman and the ranking member implied this morning, it is imprudent to enact a measure without that analysis and knowing that what it will cost as o possible drain

on the treasury. sipc cannot take a position on this without the appropriate due diligence and my written statement contains a great deal more on that issue. sipc is a complex law, but the pension fund issue shows that the current state of the law is somewhat in accord with common sense. if you have an account and you can call your broker and make a purchase or trade and get a statement, you're a customer. granted, the statute was drafted in a simpler time when that was the standard, but that is still the law. in terms of extended coverage for other indirect claimants, one of this morning's panel members testified he is an indirect victim and he certainly is, but i think i have to elaborate. he placed his money with -- he placed his money with a hedge fund which invested in another hedge fund which invested in another hedge fund which invested in madoff. and again, as professor coffee

said, it would be very, very difficult to craft legislation that would cover that situation and expand the coverage of the statutes beyond what was ever intended to be. now i'd like to address a point that i feel personally very strongly about. and that is depriving a trustee and the prospective legislation of the right to recover preferences and transfers in certain instances. ms. chaitman testified about this issue. mr. chairman and members of the subcommittee, i can not urge you strongly enough to reject this amendment. if enacted, it would deprive the victims ms. chaitman represents of literally million of dollars. mr. coffee noted that this morning and he is absolutely correct in that regard. the madoff trustee had used the avoiding powers granted him by the bankruptcy code judiciously. he has not sued small investors. he's sued 14 large investors. he has urged any madoff customer who has received more money than

he placed with mr. madoff to ep o open discussions with him and he is open to reason. this is a man who is extraordinarily practical. he served as a trustee in more of the cases than any other human being ever and instituted preference against large investors who deafed disproportionate returns but the rp p weapons in the trustee's arsenal is he must prove disparate return. ms. chaitman's written statement on page 17 says that the trustee in madoff has sued several elderly, virtually destitute investors. ms. chaitman is a vigorous advocate, but she is factually incorrect. the only situation in the madoff case where small investors have been sued were three instances where the claims ignored the claims filing procedure that has been in place for 39 years and initiated a lawsuit against the trustee. in short, the trustee was required to institute mandatory

counterclaims and those are the only small investors who have been sued. in short, the proposed legislation addresses a problem which has not arisen and will not arise in this case or any other and would do extensive damage to the very people it seeks to help. indeed, it would actually encourage ponzi schemes in a real sense because it would allow people to be free of the prospects of what you have heard today of claw back and what are more accurately described as congressionally manned dated equitable distribution. and it would deprive trustee of the ability to get the money back from someone who has gotten all the money back, someone who has kept stolen money from others and who will share in that common pool of assets at the direct expense of other people who have not gotten all their money back. that is wrong as a matter of both law and policy.

in the written questions submitted by the subcommittee, you have asked if extending sipc coverage to the victims in situations like the stanford financial group makes sense, and there is legislation to deal with that situation. sipc protects the custody function that brokerage firms perform and in the stanford case, investor assets were not located. instead, in the stanford case, investors sent money at their own request to a bank in antigua and the bank issued certificates of deposit. the investors have physical possession of the cd's and the bank defaulted due to fraud. these investors are not covered by sipc. i do not believe the subcommittee should make the sipc fund and the united states treasury the insurer of the underlying value of any security and i don't believe the subcommittee wants the united states treasury to guarantee the deaths of an offshore bank.

retroactive legislation would b change the advantage from one group to another in a completely arbitrary way. for the reasons given in my written statement, any amendmen amendments, should you consider them, should be perspective. i want to mention the constant dollar theory and the first time sipc was presented with this was november 23 and the concept isn't in the statute. congress knows how to write a law in constant dollars and we have asked for an index with respect to the cash perspective under our statute. it creates arbitrary results, different ar trash results from the ones that the statute now has. and the consequences for your constituents are if you back a concept of constant dollars, you would have to say that a person who received all the money back and the stolen money would get

more at the direct expense of people who have not been made whole. in a limited sample of 2,000 of those accounts, we locate d in new york 138 people with $19 million less and we don't think that is the best of all possible worlds. it is a zero sum game. that said, because this is an issue of first impression, we will continue discussions with the s.e.c. on that matter. what that, i'd be pleased to answer your questions. >> thank you very much. i am just going to ask a few questions perhaps unrelated to the testimony this morning, but in the particular instance you were mentioning about stanford financial, did they at any time advertise they were insureed? >> the sipc member may have, but

the sipc member with respect to actual customer assets custodied them at a clearing brokerage firm and people who had the assets at the clearing firm now have them all back. the folks who are missing -- and i met with the receiver last weekend to discuss this mat we are them and i have had extensive discussions with the s.e.c. on this subject. and the problem is since it protects the custody function and since they have physical possession of the c.d. that is the security, what you would be giving them back is the initial purchase price of a fraudulent security and that has never been the law. >> i understand, but those that bought the securities at the offshore banks, in their place of business or on their stationery, do they indicate to the customer that they were

insured by your corporation? >> i don't know the answer to that. >> i think it would be sort of important that you do know that. >> on the facts of this case, no, because the the determining factor -- go ahead, i'm sorry. >> why isn't it important for you to find out whether or not there are some people fraudulently using your potential insurance to entice customers into their establishment? >> it would be interesting but we could do nothing about that because we don't have any enforcement powers. that is the s.e.c.. the fact of the matter is even if people are defrauded into believing they have coverage, that does not make it so. >> that is true but i don't recall -- i have been sitting here a long time and sometimes we miss all the mail that comes into the committee or into our various subcommittees, but i don't recall any letters from your organization indicating that you needed additional authorities and felt there were

loopholes in the law and there were failures in the system and in all 25 years that i have been sitting here. did i miss a lot of that communication? >> of course you didn't, mr. chairman, and the reason you didn't is until september of last year the system was gliding along very, very well and we had protected 99% of the investors who went into liquidation. >> when times were good, it was no problem. times get bad and that is usually the case when the water goes down in the flood, that's when we find the bodies. didn't anyone in the organization anticipate that the water wasn't going to stay up all the time and there may be victims to the flood? >> well, again, if you are rp referring to stanford, the fact of the matter is even if the bank was in the united states, i don't think you want us to and we have never been in the

business of giving people back money when the value of their investment goes down for any reason. >> i'm sympathetic to that. we want fairness as best possible. what i am getting to is did you hear the outrage of the panel we had earlier this morning? >> mr. chairman, i hear it every day. >> i have to believe that that outrage was sincere and somewhat based on reason. there was a statement by the people that they felt there were representations made by the individuals they dealt with whether they were dealer or banks or whoever they were that the united states government in some way was watching out for their best interest and, in fact, in some instances under the law insuring them and it wasn't until after the fact they found out they were totally

misinformed or misunderstood or just weren't supported. i guess they are asking us to look at this and that is one of the things we clearly can do. >> certainly. >> what we can do to prevent or recompensate them for some of losses is very questionable. i don't know how far we're going to get there, but there are probably some things we can do and we will be directing them toward that end, but i think what i am particularly disturbed about is this whole last 15, 18 months of disaster that we have been in is an attitude at the governmental level or quasi governmental level that it's not our problem. we don't have to take preventive steps, investigative steps. and i think you do. it is our problem. >> it is the committee's problem. it is the congress' problem. it's the president's problem. and we just as a matter of

course cannot accept in this country that some people feel their government let them down wrongly so and that they weren't acting in as best -- and in many of the instances and i hear the testimony, there's very little that they could have done. i raise the question and that i'm a great believe in and that by god, some of the instances i don't care how they took the actions -- and i won't identify mr. ackerman by name that during the stock market crash mr. madoff was getting calls from officials of the united states government and asked what his recommendation, should they close the markets? that's understood. he was the president of the nasdaq at one time and a substantial person in this country, but after we see what

happened, what are we doing to prevent this in the future? are we checking out some of the these very substantial people are involved? are they trading on that? are they enticing relatively innocent people to trust them? what has your company done? we have asked them how are they getting advice on where to invest and what advice is being made and who are they using and are we finding some way to check the people out and if they get creamed, they get creamed. it seems that once you see something like this happen, being either in the government or quasi in the government, we have more of a responsibility to do something. we can't cure it all. we can't save everybody. we can't prevent all injury, but

obvious injury, we have an obligation. that is where i first started this long discourse on my part and my time is up. i feel offended that more federal agencies or quasi federal agencies aren't coming forward to tell us what they need. what authorities do you need? what could we do better? how could we change the law and better educate people? it's not enough to say, gooe, tough lock. $50, $60 billion, 13,000, 15,000 people got clipped by a very professional artist. we have to learn from that and we have to take actions to find out there aren't other madoff's out there and there aren't other standard financials. and i am not sure that i'm getting the impression that the two agencies are doing that and i am not putting all my weight on that. i think i have taken actions and legislations on the floor

against the s.e.c. on that very substance. you all have to -- let me point out, mr. solicitor, that what i found so damn offensive in this thing that you are so channeled over there that you have no chain of command. i can not believe that you can do three, four investigations over more than a decade and come up with really important questions of the credibility and viability of a person who, although very high thought of on the street, but it never goes up beyond one or two levels in an organization that's 10 levels. what the hell would we do to a four-star general who put a lieutenant in the field that killed 150 innocents? if he didn't know about it within 24 hours about it to take action, he'd be gone or should be gone. now, sometimes if i think about it, we haven't had a discipline in any way, but we have to have a chain of command whether it's

in the military or civilian life. if it's the government, we have to find out what's happening at the lowest level and if it's of good sense and acceptable practices. we have to take action. we have to make sure that that chain of command has good communication. and i think the s.e.c. -- and i saw can commission the other night, or the chairman, and mary and i are very good friends and we had a heart to heart discussion and we wrote in this law something i want you to take back to the s.e.c.. we want you to do a study not inside but outside of the most thorough type and the study where the distuksal nature of the s.e.c. exists and if there is anybody over there that doesn't think that the organization is functional, read the inspector general's report on madoff. it is the most classic bit of evidence i have ever seen that shows distungsal operation and it is not madoff, but it is in other areas and we have to clean

that up. i don't believe that you can do it from this side. and i am not going to speak for the chairman, but my impression is she tends to agree, too. you have to do an honest thing here and as i said to her, i don't want to stop at the s.e.c.. all related agencies around the s.e.c. should be so studied and investigated and disclosed and the reports sent to congress for remedial action, but i think that should be the beginning point for what i am sensing from the person people that they are not going to take it anymore that we in government just said, well, we can't do anything about it. it happened. we're sorry. well, that's nice. we didn't lose. these people lost. that doesn't makel this feel good. it wouldn't make me fee good if i lost a $5 million, $10 million, or $50 million. it doesn't matter. i lost it and i shouldn't have. if even had been performing their function in the ideal way,

it wouldn't have happened. but they obviously weren't and the number of security people that were sleeping on the switch were incredible in this instance. so i want you to take that message back and i have eaten up more than my five minutes and i will be very lenient since we have no republicans, how lenient i can be to my friend from new york. >> notice, mr. chairman, i didn't tell you your time was up. i could not agree with more of what you said and how you put it, mr. chairman. everybody, including the people testifying in this panel have been trying to get us out of this muddle somehow and i think all of their intentions are beyond question. i think this is a very difficult

knot to untie and trying to make some sense in understanding it listening to what you have just said, mr. chairman, i just wanted to note that for a long number of years nobody came to us to front our obligations and responsibilities from any federal agency including that which is before us today saying we need more resources. as a matter of fact, the previous administration seemed to have a philosophy, if not an agenda, for deregulation rather than more regulation and did not want to provide the resources. chairman frank, as a matter of fact, had a proposal to more fully provide assets to the

s.e.c. and sipc for additional resources to be able to do the kind of investigations that were obviously needed and that was moving forward until it was scuttled by mr. delay during a different congressional leadership. it wasn't until chairman shapiro came along and doing the fine job that she's doing started asking for additional resources so that we could do a better job prospectively but that does not necessarily resolve the situation that's. us right now as it has already regrettably occurred. i think there's a divens between the average citizen investor being told that they didn't do

due diligence which certainly many of them did to at least 100% of their capability and legal limits of what they could do for due diligence, but certainly the agencies could have been doing a little bit more of a better job including coming to us and telling us over a large number of years, or a long number of years, that they couldn't handle the workload and with the complications and the large number of investments and investors and the complications of the system, that they needed additional asset. we did not see that. we did not hear that and we rely upon the administration. we don't have the tool. that is not the function of the congress. we do oversight and we try to supervise whether they were

applying the resources which they didn't ask for this this case. i have several questions to ask. in what we just heard in our testimony from this panel about the smaller investors versus the larger investors, there a distinction in either of your mind in the morality of larger investors versus middle size investors versus small or is one more immoral than the other? i am not talk about specific individuals. if you're wealthier and make investments, does that make you immoral? >> absolutely not. >> are they more suspect? >> absolutely not. i think that is why the trustee

in the madoff case in particular has done a rig route investigation of very complicated facts and started 14 lawsuits. some of those lawsuits assert knowledge or a new er standard. others do not. and so certainly with respect to the former, the trustee is doing his job and he is trying to return to the common pool of assets to find in this case the customer property and the largest amount to distribute to the largest number of people with the law. and to get to the point on morality, this is a case of practicality and compassion. the trustee has taken the position that he sent a letter to everyone who received more than they put into the scheme and said come and talk to me. and if you're -- if it's something that you withdrew over

time and can't pay, the trus see isn't going after you. >> what is the difference if you withdrew it over time or if you withdrew it late in the game rather than earlier in the game? >> the answer to that is in in all ponzi schemes going back to the original ponzi scheme with charles ponzi, people who get out the day before, and professor coffee spoke this this rather eloquently -- should do no better than the person who didn't have that good luck. and that is just been the law as enacted by congress since at least the 20's. >> so it's a matter of luck? >> it should not be a matter of luck, sir. that's the whole concept behind bringing money back in and i think in this case the trustee has exercised his avoidance authority with discretion and

compassi compassion. he hasn't reached back to the small investors. >> is it possible in your mind, speaking of compassion, that there are large investors -- and i am not at voe kating for anybody here. there is a problem because this is a zero sum game and it's coming out of the same pot of money as people who are all losers. and is it possible this your mind that you can conceive of situations, many of them, where larger investors are more desperate than some of the smaller investors? >> i haven't seen that in this case, sir. >> you think there are no larger investors of someone with $100 million whose doing something and invested the rest of another $100 million that big an investor is now upside down in

their real estate or house or business or property despite the fact they took money out and now they wind up paying and having paid $50 million in tacks to which the government should not be entitled and have borrowed from the banks to do thing on a business and have informsed other people's money along with their own to do something and are being told that not only do they have nothing but they go back $200 million? >> i can speak to a number of those points. >> that is at least as desperate as the other people for whom i've great situationthy who had $200,000 and invested $100,000 and lost it and they only lost $100,000. a lot of people aren't sympathetic if they think that is a lot of money, but they might still have some. how do you morally make a

distinction here? is it possible in all this formulation that snou you can come up with a solution that kind of splits, according to some formulaic way, how to deal with all these people? >> congressman ackerman, i don't think formula is the answer. i think analyzing individual situations is the answer. >> each case individually? >> yes, sir. >> if i was getting paid $1 million a week, i'd like that. [applause] >> i believe this trustee -- >> i am just pointing out the irony in this situation. >> two points. first, no customer money goes to pay attorney's fees or trustee's fees. that is point number one.

>> where is that money coming from? >> from the securities investor protection corporation. every paper clip that gets sold will be designated as money to go to the victim. the second point is looking at these cases individually, our statute was designed to protect the small investor and i think that's what mr. bacard is doing. >> as i understand it, brokeers and investment advisors are required to put into the fund to be covered by sipc $150. >> that is not correct. currently the assessments by our bylaw require each brokerage firm to be assessed one quarter of 1% of their net operating

revenues. when we started paying madoff claims we instituted effective april 1 assessments based and revenues -- >> beginning when? >> april 1. >> april fool's day? >> yes, sir. >> some people think that's when you identify the people who have been april fooled. that's after the madoff ponzi scheme fell apart because he turned himself in. before that it was $150? >> when we reached $1 billion. >> but before madoff it was $150? >> when we reached the figure of -- >> i don't have a lot of time left, so if we could koe us if on questions. >> the answer is based until 1990 when we reached $1 billion and from 1990 to april of this year it was a flat fee. >> of? >> $150. and we have -- we will have --

>> that is not the question. before then it was $150 and if i was one of the brokerage firms or investment advisors i would have to pay $150 to get that $500,000 worth of insurance. >> investment advisors are not part of the statutory program at all. >> if i was a brokerage, i would pay $150 at that time? >> at that time, yes. >> if i had 600 clients or custome customers, that would, give me a second. i'm a junior high school math teacher, but 25 cents an account. for each of my accounts, in premium i was paying, i'd get half a million dollars? somebody should have done down here and sounded the alarm and

said i'm paying too little insurance. how much insurance can i really buy for 25 cents an account? somebody was charging me 25 cents an account for my car insurance, i would suspect i wasn't getting a lot of coverage. no? >> i can answer. >> let me go on to something else. if i may. thank you. >> people relied heavily on sipc and the s.e.c. and the stuff you can't expect them to do themselves. that is the reason for sipc and for the s.e.c. and people can't become attorneys and investigators and spend their whole life investigating something whether or not -- so if you don't know if something

is kosher, you ask the rabbi. if the rabbi says it's kosher, then to me it's kosher. you guys are the rabbi. when you say he was legitimate, they relied on that and it was your agency and my government that was on the products that, and the present who presented them, that said they were fine. people thought they had the insurance on money and whether or not it was the interest and if any account is insured, i don't differentiate between how much i put in. i figure it is insured for up to $100 out this in the bank and now $250,000 for the rest of the year and i don't say the interest is insured and only the principal is insured. everything is insured. it becomes a different number for everybody who has an investment over a long period of time and as a matter of fact, it was you and your agency that

testified in a time space where you say we're a claimant or this is a quote. reasonable and legitimate claimant expectations on the filing data of controlling even when inconsistent with transaction reality. i'm quoting you. thus, for example, where a claimant orders a security purchase and receives a written confirmation which every madoff vick did with every statement and reflecting that purpose, the claimant generally has a reasonable expectation that he or she holds securities identified in the confirmation and therefore, generally is entitled to recovery of those securities within the limits imposed by cipa, a financial limitation of $500,000 or whatever it is, even when the purchase never actually occurred and the debtor instead converted the cash deposited by the

claimant to fund the purchase. these people were again reassured that the way we wrote the law, the way the regulations existed, and the way you interpreted them, telling them that they're entitled to that money even if -- and i won't go on reading, but even if the money triples and there was no money there and if somebody fraudulently stole it. what has happened is there is a different court case and you say the money was stolen and not invested. this is a shell game that you're playing with investors. this is over the heads of most of the people on our committee i would think have this happen and that this is being done. people relied on you and they were let down and we have to all collectively figure out a way

collectively to make them as whole as we can make them. >> thank you, mr. ackerman. now to the gentleman from new jersey. >> thank you. i have a couple of questions. mr. harbeck, you raised this as -- you are here to help the small investor and i think that's what the message is throughout the hearings that that's what we're trying to look out for and raise the three questions of time, money, and who. the time aspect is if we're really trying to help out the small investor and we can define who that is later, how long does it take and still say that we're helping them out? obviously if it takes 10 years to do it, we're not helping out the small investor. obviously if it takes five years and now it's been about a year. and at some point in time you can just say we are not helping the small investor. what is the timeline if we were to say we invite you back here for another hearing such as this that you can say we're done and folks have b