Investors who have lost large sums of money in Bernard Madoff's alleged $50 billion fraud may be able to recover some of their losses by taking steps including making claims through the Securities Investor Protection Corp. (SIPC), taking advantage of the theft-loss deduction, or ultimately filing suit against whatever assets Madoff still has. But the alleged fraud serves to highlight the risks inherent in reliance on one type of investment, often little understood, and on an investment adviser who manages to avoid scrutiny, and can easily access funds in investor accounts for transactions.
Madoff investors might begin recovering some of their money as soon as next month, said Stephen Harbeck, president of the Securities Investor Protection Corporation (SIPC), a Washington-based group funded by member broker- dealers, which acts as a trustee or works with court-appointed trustees to recover funds in missing-asset cases. "You're talking about unscrambling an egg," Harbeck said in an interview with Bloomberg on Monday. Initial payouts from the investor protection fund could occur in "a month or two" if the cash isn't difficult to trace.
At this point, the SIPC's web site states that Harbeck and Irving H. Picard, the court-appointed trustee for the liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS), have mailed out 8,000 claims forms in the Madoff case. The SIPC is not the equivalent of the FDIC. The agency assists customers of a failed brokerage firm to get back all securities (such as stocks and bonds) that already are registered in their name or are in the process of being registered. When sufficient funds are not available in the firm's customer accounts to satisfy claims, the SIPC will distribute cash up to a ceiling of $500,000 per customer, including a maximum of $100,000 for cash claims, a paltry sum for many of Madoff's investors.
Investors may also try to recoup their losses by filing amended returns claiming a theft-loss deduction, which allows investors to increase their taxable losses and possibly claim refunds for taxes paid on income that turned out to be fictitious. But the Internal Revenue Service (IRS) has discouraged this approach, The New York Times reports. A 2004 IRS memorandum says that investors who have been cheated in Ponzi schemes should not file amended returns and seek tax refunds. Instead, they should claim a theft-loss deduction equal to the amount of their original investment, plus any phantom interest or income obtained over all the years.
And, depending on Madoff's assets, investors may also recover some of their investments through legal claims against the assets, in bankruptcy proceeding.