Several Democratic congressmen and one Republican have introduced legislation aimed at increasing the pool of Ponzi scheme victims eligible to receive restitution from the Securities Investor Protection Corp.The Ponzi Scheme Investor Protection Act (H.R. 5032) would require SIPC to provide up to $100,000 worth of insurance coverage to “indirect investors” in Ponzi schemes—that is, people who invested through feeder funds or other indirect sources. At the same time, however, indirect Ponzi investors who received a SIPC insurance payment would waive their right to sue the feeder fund.
SIPC, created by Congress, maintains a special reserve fund to protect customers of insolvent brokerage firms.
According to an April 15 release from Rep. Gary Ackerman's (D-N.Y.) office, SIPC currently provides coverage to direct investors. Besides Ackerman, the other primary sponsors of the bill are Democratic Reps. Ron Klein (Fla.), Dan Maffei (N.Y.), Ed Perlmutter (Co.), and Jackie Speier (Cal.), and Republican Rep. Peter King (N.Y.).
In addition to including third-party investors in SIPC coverage, Ackerman said the bill would restrict the ability of SIPC to “claw back” funds from Ponzi victims who withdrew more than they invested. According to Ackerman, SIPC currently is able to recover assets from investors harmed by Ponzi schemes “regardless of whether or not they had any involvement or knowledge of the fraud.”
Under the bill, however, SIPC would be prohibited from such action “unless the bilked investor was proven to be complicit or negligent” via their participation in the scheme. Ackerman said the provision also would be extended to cover the decisions of trustees appointed to liquidate assets in the large Ponzi schemes already uncovered. The lawmaker noted this provision would cover, for instance, Irving Picard in the liquidation of Bernard Madoff's assets.
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Under the bill, however, SIPC would be prohibited from such action “unless the bilked investor was proven to be complicit or negligent” via their participation in the scheme. Ackerman said the provision also would be extended to cover the decisions of trustees appointed to liquidate assets in the large Ponzi schemes already uncovered. The lawmaker noted this provision would cover, for instance, Irving Picard in the liquidation of Bernard Madoff's assets.
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