The Securities Investor Protection Corporation restores funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. The Securities Investor Protection Corporation was not chartered by Congress to combat fraud, but to return funds (with a $500,000 limit for securities and under that a $100,000 cap on cash) that you held in a covered account.
With the recent Madoff fraud case some may wonder about SIPC coverage. What SIPC would cover is cash fraudulently withdrawn from covered account (if I owned 100 shares of Google and they took my shares that is covered – as I understand it). What SIPC does not cover is investment losses. From my understanding Madoff funds suffered both these types of losses.
And I am not sure how the Ponzi scheme aspects would be seen. For example, I can’t imagine false claims from Mandoff about returns that never existed are covered. Therefore if you put in $100,000 10 years ago and were told it was now worth $400,000, I can’t image you would be covered for the $400,000 they told you it was worth – if that had just been a lie. And if your $100,000 from strictly a investing perspective (not counting money they fraudulently took to pay off other investors) was only worth $50,000 (it had actually lost value) then I think that would be the limit of your coverage. So if they had paid your $50,000 to someone else fraudulently you would be owed that. Figuring out what is covered seems like it could be very messy.
Given that many of those that do have losses are very well connected politically (that means they pay politicians a lot of money and often get special treatment that seems like it is payback for the cash given – even if some politicians claim that is not so) it will be interesting to see if they get the same treatment someone who is on unemployment insurance but under the law is no longer eligible for benefits gets (that the law takes precedence and they stop receiving benefits, they don’t get pay beyond the law because it might be nice for government to do for someone down on their luck) or special favors are granted.
Some think government oversight is not needed. Investors should just be careful. I think government oversight is needed. How is an average investor suppose to protect themselves from fraud? I do expect the SEC to oversee mutual funds and assure that they report truthful information about the investing returns (that the SEC set auditing guidelines, assure they are followed…). This points out one of the reasons why certain investments are limited to supposedly sophisticated investors. The idea is those investors are suppose to know the risks they are taking and understand they are not protected with the same level of government oversight. Obviously fraud is illegal no matter if the investment is regulated (mutual funds…) or less regulated (hedge funds…). But it is much easier to commit fraud with very loosely regulated investments. That is one of the risks people take when choose to invest outside of the more strictly regulated investments. And when you invest without SPIC protection that is another risk. And when you invest above the SPIC limits that is another risk.
You may not have noticed but brokerage accounts, mutual fund accounts normally are covered and note this on their statements. This should be obvious, but just for those that don’t notice. SPIC is does not offer protection from investment losses (investments that decline in value).
I have taken risks with my investments, and have had large losses with some of those risky investments (and some large gains too). When I took risks, I knew the risks I was taking. It is critical that investors know the risks they are taking.