ROBERT SIEGEL, host:
From NPR News, this is All Things Considered. I'm Robert Siegel.
MELISSA BLOCK, host.
And I'm Melissa Block. Today is the deadline for Bernard Madoff to disclose the full extent of his assets to the Securities and Exchange Commission. The SEC is investigating allegations that Madoff ran a Ponzi scheme which defrauded investors of billions of dollars. The disclosures required today, which were not made public, would indicate how much money Madoff has left.
SIEGEL: Investors who were burnt by Bernard Madoff may seek redress by going to the Securities Investor Protection Corporation, a non-profit that was created by Congress. But the S-I-P-C, or SIPC as it's called, doesn't appear likely to be of much help to the really high rollers who invested and lost with Madoff. John Coffee teaches law at Columbia University and directs the Center on Corporate Governance there. Professor Coffee, what is SIPC?
Professor JOHN COFFEE, JR. (Law, Columbia University): Well, it's the Securities Investor Protection Corporation. It was credited by Congress in 1970 to be the functional equivalent of the Federal Deposit Insurance Company for brokerage firms. It insures brokerage firms just as the FDIC ensures bank accounts, but it insures them only against theft or misappropriation. It doesn't cover market risk or the simple decline of the value of securities. Nonetheless, Mr. Madoff is proposing a pretty clear case of theft and misappropriation and thus SIPC would stand liable for 500,000 per account for each account that's on the books of Madoff.
SIEGEL: Each account? Well, if there were thousands of accounts, could SIPC actually pay that much money out to people?
Prof. COFFEE: Most of the money in the Madoff scheme came from these very large fund to funds or feeder funds that put as much as 7.3 billion into the Madoff account. That's 7.3 billion will only produce a claim against SIPC for 500,000 unless - unless a court were to determine, as it's being asked to determine at the request of investors, to an effect revise SIPC's criteria and allow SIPC to pay claims for each individual investor who invested through these hedge funds. And I think courts will be a little bit constrained by the fear that they could wind up, in effect, bankrupting the system.
SIEGEL: And just to clarify this point, there were number of funds which simply took investors' money and put it with Madoff. And the question is if I put my money in one of those funds, can I go to that fund and say I know you didn't commit the fraud, but you should have been watching what you were doing with this money when you put it with Madoff? I want some money back, too.
Prof. COFFEE: There definitely will be litigation against those feeder funds and it will be partly on a security fraud claim. Most of these feeder funds claim that they are going to diversify and they're going to screen and find you very safe institutions to invest in. Yet, some of these, like Ascot Partners, put all their assets just into Madoff without any diversification and with fairly little screening. So they could be sued partly on negligence grounds for being a negligent trustee and partly on fraud grounds for having misrepresented what their investment policy actually was.
SIEGEL: If indeed Bernard Madoff was running a Ponzi scheme, a pyramid scheme, people at the bottom of the pyramid were making some money before all the later investors came along. Can later investors go and recover funds from people who made profits early on?
Prof. COFFEE: Well, that's just what a Federal Court has ordered with respect to the Bayou fund which was another Ponzi fee scheme run as a hedge fund. And there it said those investors who got back profits over the last six years will be required to pay back at least the profits into the bankruptcy proceeding. And I think there may be more money there than we're going to find in what's left of the corps of Bernie Madoff's fund.
SIEGEL: But is the principle at work there that if I'm an investor, if it's too good to be true, I'm accountable. I should know it's not true. That is if I'm making a very good return, I'm responsible because I'm making too much money out of the fund.
Prof. COFFEE: It's not really the responsibility of the investor. The point is instead that the company making the payment was insolvent at the time it paid these assets out. And because it was insolvent, it was paying other people's money and they have the right to get that money brought back into the fund and prorated.
SIEGEL: So there might be some satisfied customers of Mr. Madoff out there to whom the message is, not so fast.
Prof. COFFEE: They probably are learning from their own lawyers right now that there's some real danger. That once the bankruptcy trustee is appointed and authorized, he will be subpoenaing all them to find out what distributions they have received over the last six years.
SIEGEL: That sounds like a lawsuit that could be quite entertaining to say the least.
Prof. COFFEE: I think there's going to be lots of litigation among lots of participants. Everybody may wind up suing everybody in these proceedings.
SIEGEL: Well, Professor Coffee, thanks a lot for talking with us.
Prof. COFFEE: Thank you.
SIEGEL: It's Professor John Coffee of Columbia University where he is the director of the Center on Corporate Governance.
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