While investors are still reeling from the stunning impact of the revelation of Bernard Madoff's unprecedented $50 billion Ponzi scheme, opinions abound as to where they should turn for relief. Aside from lawsuits against Madoff and the fund-of-funds who invested heavily in Madoff, options include lawsuits against deep-pocketed auditors, tax relief, and SIPC coverage.
Numerous actions have been filed against Madoff and the fund-of-funds that helped fuel his fraud but those funds and their investors are now looking to the auditors as the most likely path to recouping losses. Many of the nation's largest accounting firms gave clean bills of health to the numerous funds that invested with Bernard Madoff and his asset-management firm. At the heart of any claim against these auditors will be the shocking fact that they failed to identify that the underlying assets of the funds were not there despite the numerous red flags that should have aroused their suspicions. However, any claim against an auditor will likely face a defense that the auditor was hired to audit the specific fund-of-funds and not the underlying investment with Madoff.
Another avenue for relief is the theft-loss tax deduction. This rule allows investors who fall prey to criminal theft perpetrated by their investment advisers or brokers to claim a tax deduction stemming from their losses. Under the rules, investors can deduct their losses against 90 percent, and in some cases all, of their adjusted gross income. The rules permit losses stemming from theft to be deducted in the year in which the loss is discovered by the investor. They also allow investors to carry back such losses for three years — one more year than under the rules for capital losses — and to carry forward losses for 20 years. Investors must compute losses according to the adjusted basis in their investment, not the fair-market value.
Before they can claim the loss, though, investors have to be reasonably certain that they will not recover their losses. Because proving that could take months, if not years, investors may have to wait until next year or later to be able to claim any losses on their federal income tax returns. Investors who file claims for reimbursements are typically deemed to be in the process of seeking monetary recoveries. A formal declaration that Madoff’s funds were bankrupt would help investors on the tax front. Investors who paid taxes on their Madoff investments in previous years might also try to seek refunds from the I.R.S.
Lastly, investors may seek relief in the form of SIPC coverage. On December 15, a judge ruled that Madoff's direct customers would be covered by Securities Investor Protection Corp., which typically covers up to $500,000 in losses when a brokerage firm defaults. However, investors in the feeder funds are not usually eligible for SIPC protection. That same day, SIPC announced that it would be liquidating Madoff’s investment firm, in an effort to return cash and securities to the firm’s clients. A federal judge in New York had approved its plan under the Securities Investor Protection Act and had appointed Irving H. Picard as the trustee for the liquidation of Bernard L. Madoff Investment Securities.
S.I.P.C. raises its money from the securities industry and it said its reserves were available to satisfy the remaining claims of each customer up to a maximum of $500,000. That figure includes a maximum of $100,000 for claims of cash. SIPC CEO, Stephen Harbeck has stated that with about $1.6 billion currently on hand, SIPC could satisfy claims of more than 3,000 customers. SIPC can also borrow up to $1 billion from an international consortium of banks and another $1 billion from the Securities and Exchange Commission. When a brokerage firm files for bankruptcy, SIPC will typically step in to help transfer investors' holdings to another firm. With Madoff's firm, however, it's not likely that SIPC and the trustee will be able to transfer the customers’ accounts to a solvent brokerage firm. It could therefore be months, even years, before SIPC starts paying out claims. Harbeck has said that the firm’s financial records were “utterly unreliable” and would take six months to sort out.
Investors will have six months to file their claims, which must be sent by certified mail, from the time the notice is published. Any investors with brokerage accounts at Madoff's firm should save any documentation, such as monthly statements and investor reports going back as far as possible. The SIPC claim form is available at its website.
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