THE BLOG

Why No One Should Use Brokerage Accounts (UPDATE)

06/19/2014 02:23 pm ET | Updated Aug 19, 2014

Financial fraud, in its multiple forms, is a plague that can be temporarily suppressed, but not eradicated. Some of the worst financial actors were exposed in the Great Recession. But every day brings fresh reports of gross misconduct on Wall Streets at home and abroad.

The fact that our regulators, with very limited resources, uncover some 700 fraud cases annually is testimony to the large number of swindlers still at large "managing" our money.

The malfeasants come in all sizes, including extra large. Last week, France's biggest bank, BNP Paribas, was accused of money laundering. Two weeks ago, Credit Suisse pleaded guilty to tax evasion. In October, JP Morgan paid massive fines for overlooking the London Whale. In September, Goldman Sachs was heavily penalized for selling fraudulent mortgages. And ...

With so much financial fraud, we all need to worry where our money is parked. In a checking account, it's guaranteed, up to $250,000, by a government agency -- the Federal Deposit Insurance Corporation (FDIC). If it's invested in a mutual fund and, if there is an independent custodian holding the fund's securities, then the only risk is that the independent custodian is dishonest. But if it's invested with any of our nation's 4,000 brokerage firms, our money is "protected" by a Wall Street agency -- the Securities Investors Protection Corporation (SIPC).

SIPC was established pursuant to a 1970 act of Congress with the purpose of protecting investors. But asking Wall Street to protect us from Wall Street was and is asking for trouble.

SIPC's home page says, "SIPC Protects Customers If their Brokerage Firm Fails." Nothing could be farther from the truth. Investors in brokerage accounts which fail due to fraud, can be forced to pay back to a SIPC-appointed trustee huge sums, indeed far more than what they contributed to their accounts.

Wall Street pays SIPC's bills. So when a SIPC-appointed trustee sues innocent victims, every dollar the trustee takes in is a dollar less Wall Street has to pay out. Thus, Wall Street uses SIPC to further defraud people it's already defrauded.

To see the mechanism, take Frank and Sally, who invested $40,000 in 1991 in a brokerage account. They did so to fund their newborn daughter, Sarah's, college tuition. Frank and Sally knew about the miracle of compound interest and realized that saving early and letting capital markets work for them was the smart approach. Sure enough, their money grew, leaving a $160,000 account balance in 2010 -- just enough to cover Sarah's tuition.

Sarah graduated last Sunday. But yesterday Frank and Sally learned that their brokerage firm had been shut down due to fraud, with not a penny left. Frank and Sally were totally shocked, but thanked God they hadn't lost their investment.

That was yesterday. Today, Frank and Sally learned the truth about SIPC "protection" from Sam, their accountant. They owe the SIPC-appointed trustee $80,000 and will be sued if they don't pay!

Here's how SIPC's swindle works. When a brokerage firm steals your money, SIPC claims the firm went bankrupt but, since the broker was a crook, the customers are not entitled to any appreciation on their money -- even though they paid taxes on the appreciation and would have earned similar returns in honest brokerages! The fact that Frank and Sally knew nothing about the fraud doesn't matter. They are assumed to have known because they withdrew funds within two years of its discovery. As a result, they are treated as if they are the criminals and are forced to pay back money to SIPC (i.e., to Wall Street)!

Under current law, the SIPC-appointed trustee (much to SIPC's distress) can only sue to recover withdrawals for the last two years. Thus, in Frank and Sally's case, they took out $80,000 in the past two years, so they owe $80,000. Had Sarah started college two years earlier, Frank and Sally would be in the clear. They'd also be in the clear if the fraud weren't discovered for two more years.

Also, had Frank and Sally's withdrawals, over the entire history of their account net of their original $40,000 contribution been less than $80,000, their obligation to the SIPC trustee would have been limited to that amount (or zero if the amount were negative). But their net withdrawal amount was $120,000, which exceeds $80,000. Hence Frank and Sally are stuck paying the full $80,000.

And now for the rest of the horror story.

SPIC also tells Frank and Sally that because their "net equity" -- the difference between their contributions and withdrawals -- is negative, they can never recover a single penny of their lost savings through SIPC insurance, even if SPIC is able to recover funds from the true criminals -- the broker dealers who conducted the fraud.

Yes, this is complicated -- for a reason. It keeps people with brokerage accounts from understanding the risks they face in actually spending their accumulated savings.

And the notion that savers who withdraw the proceeds of their investments -- something every IRA brokerage-account holder over 70 and one half is legally required to do -- should be criminalized for spending those withdrawals is as antithetical to capitalism as it gets.

A bipartisan bill before Congress -- HR3482 and S1725 -- would change SIPC's definition of "net equity" and prevent SIPC from persecuting Frank and Sally and other victims of financial fraud. Until that law is passed, the best way to avoid the SIPC threat is to simply not to invest in brokerage accounts, period. Had Frank and Sally, for example, invested their original $40,000 directly in a mutual fund with a reputable third-party custodian they would never have faced this madness.

What if you already have money in a brokerage account whose account balance exceeds the amount contributed? Move your money out of your brokerage account today! Invest it in a safely custodied mutual fund, and don't spend any of it for two years. Only after that time period will you be able to spend the full amount without facing the risk of being branded a criminal by the real criminals.

UPDATE:

Stephen P. Harbeck, President and CEO of the Securities Investor Protection Corporation (SIPC) has written a strongly worded response (which appears in full below) to my column entitled "Close Your Brokerage Account." A longer version of this column entitled, "Why No One Should Use Brokerage Accounts" was published by PBS NEWSHOUR.

I respond below to each of Mr. Harbeck's statements on a line-by-line basis. I indicate my response with my initials, LJK. I indicate his statements by the initial H.

Harbeck's statement:

Don't Close Your Brokerage Account!

By Stephen P. Harbeck, President and CEO, Securities Investor Protection Corporation

The article by Laurence Kotlikoff entitled "Why No One Should Use Brokerage Accounts" (HuffPost Money, June 19, 2014.) is misleading in the extreme. The author omits facts which are very important to understanding the reality here.

First, the author fails to mention that the brokerage firm he describes was Bernard Madoff's firm and that the fraud in question was a Ponzi Scheme. The account statements the victims received in that case were complete fictions. No investments were ever made for them. Under the law, what each investor was entitled to receive was the return of the net amount deposited with Madoff. The court overseeing Madoff's fraud agreed, and stated that using the phony account statements to determine what each victim should receive was "absurd." Using those statements would have allowed the thief, Madoff, to decide who wins and who loses. The Court of Appeals also agreed, and stated that using those statements "would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff's machinations."

Second, the author fails to note that any money a participant receives in such a case, over and above the amount deposited, is money stolen from other innocent investors. To enable other victims to recover the amounts they invested, a trustee has a duty under the law to those other victims to recover funds where possible. A Ponzi Scheme is a zero sum game. A dollar of fictional "profit" given to one person who has received more than he or she contributed is a dollar that can't be given to a victim that was unlucky enough to have lost principal.

Third, the trustee in the Madoff case didn't sue people like Frank and Sally, the hypothetical victims mentioned by the author. To deal with situations exactly like the one described in the article, the trustee instituted a hardship program. The trustee exercised discretion in instances where suing to recover assets would not be appropriate. Mr. Kotlikoff asserts that his hypothetical victims "are treated as if they are criminals" and "forced to pay back money to SIPC." No one has ever asserted that people in this situation are criminals or wrongdoers. Indeed, sadly, they too are victims of Madoff. But if a trustee has sued Frank and Sally, it is because they withdrew more than they deposited, and in doing so, received other people's money. The assets returned by Frank and Sally would go back to other victims who had not yet been made whole.

Fourth, the author's proposed solution was not thought through. He proposes a boycott of brokerage accounts in favor of investing directly in mutual funds. There is certainly nothing wrong with investing directly in mutual funds. But if Madoff, or someone like him, establishes a mutual fund, and runs a Ponzi Scheme of the same magnitude and duration, avoiding regulatory scrutiny and making no actual purchases of securities for that mutual fund, the investors would receive nothing. This is precisely what has happened, on a smaller scale, in a number of hedge fund frauds.

Fifth, the legislation the author champions has the unintended effect of legitimizing Ponzi Schemes. Indeed, under that legislation, taxpayer money could be used to pay fictional Ponzi Scheme profits. The legislation would make the outcome the Court of Appeals called "absurd" the law of the land...and an obligation of the taxpayers.

Finally, the author's disparagement of the SIPC program in the article is without foundation. SIPC has advanced approximately $700 million to the trustee to satisfy Madoff's customers and spent $1 billion in administrative expenses in that case. This has resulted in the trustee's recovery, through litigation and settlements, of $9.8 billion. Over $5.2 billion of that has already been distributed. Any investor who gave Madoff $925,000, net, has already received all of his or her original investment back, with more distributions to come. The legislation championed by the author would rob future trustees of the tools that made those recoveries possible, and rob future victims of potential compensation. Further, the trustee's investigation of the Madoff fraud, financed by SIPC, has been instrumental to the convictions in the Madoff criminal cases and to the recovery of assets forfeited to the Government. Not one cent of those administrative costs has been taken from the funds recovered for customers or paid out of taxpayer monies.

Mr. Kotlikoff initially published his article in Forbes. After I wrote a response, Mr. Kotlikoff disclosed in a reply, also published in Forbes, that his relatives were victims of the Madoff fraud. Presumably, they have been sued by the Madoff Trustee. SIPC is sympathetic to all of the victims of the Madoff fraud. But the legislative proposals proffered by Mr. Kotlikoff are replete with unintended results. To be sure, under the proposed legislation, Mr. Kotlikoff's relatives would be allowed to keep their fictitious profits, but it would be at the expense of even more unfortunate victims of the fraud who have not yet recovered all of their principal. In that sense, even greater unfairness is perpetuated, and the statutory program SIPC administers makes market reality out of the thief's fraud.

The Huge Hidden Risks to Your Brokerage Account -- Reply to SIPC's CEO

Mr. Harbeck claims that my article entitled "Close Your Brokerage Account!" (Forbes, June 30, 2014.) is misleading in the extreme.

LJK: I omitted no facts that were relevant to the point that investing funds in brokerage accounts runs the extreme risk of a) paying taxes each year on the reported appreciation and b) withdrawing those funds, spending them on a legitimate purpose (charity, supporting older parents, tuition, etc.), and then being sued by a SIPC-appointed trustee because it turns out that your broker or the broker at the next desk was a crook. If you are sued, you will potentially have to pay back every penny you withdrew in the last two years (six years if the trustee gets his way in federal court).

This leaves customers of brokerage firms unable to safely spend the fruits of their investment. This is why, until H.R. 3482 and S. 1725 or some comparable law is passed by Congress and signed by the President, I very strongly advise everyone with a brokerage account to immediately close their accounts and move their money to mutual fund companies operating with one of the major, trustworthy custodial companies that is not, itself, in the brokerage business.

This critical fact, that a SIPC-appointed and SIPC-controlled trustee might sue you for withdrawing funds from your own brokerage account is entirely omitted from SIPC's homepage in what I consider to be an act of consumer fraud, which the Consumer Financial Protection Bureau should investigate.

Mr. Harbeck criticizes me for not mentioning Bernard Madoff's Ponzi Scheme.

LJK: For the record, I have relatives, friends, acquaintances, and colleagues (including Eli Wiesel at Boston University) who were victims of the Madoff fraud. But my column was not about the Madoff fraud or about its victims. It is about the SIPC fraud and SIPC's victims.

We should not be surprised that there are Madoffs. The world is full of crooks. But we should be stunned that there is a SIPC, formed to protect brokerage customers, that actually exists to penalize them.

SIPC insurance is a scam -- indeed a bigger scam than Madoff. And investors should realize this.

When Congress enacted SIPA in 1970, Charles Ponzi had been dead for 21 years (1882-1949). If Congress had wanted to deny victims of Ponzi schemes the protections of SIPA, Congress could easily have done so by including the following sentence: "The protections of this statute do not apply to victims of Ponzi schemes." It is not for SIPC to re-write the statute; only Congress can write a statute; SIPC is legally bound to abide by it and it has breached the statute in the Madoff case. The egregious treatment of customers in the Madoff case was proposed by SIPC and by the SIPC-appointed trustee.

LJK: Madoff was an SEC-regulated broker for over 40 years. If his customers can be denied SIPC insurance at the whim of SIPC, then so can every customer of every other SEC-regulated broker. If SIPC's members had paid more than $150 per year, per firm (including the nation's largest investment companies), for SIPC insurance, SIPC would have had enough money to fund SIPC insurance up to $500,000 based on each customer's last statement. It is solely because the brokerage firms decided to provide essentially free insurance to themselves that the customers were victimized. Should we be surprised that Wall Street wanted something for nothing? SIPC induced innocent, honest Americans to entrust their life savings to brokerage firms with the promise of SIPC insurance. But when it came to honoring that promise, SIPC decided it was cheaper to betray the investors and protect Wall Street.

As for the Madoff fraud being a Ponzi scheme, the clearest definition of a Ponzi scheme that I can construct as an economist is a financial enterprise that knowingly cons the public. Under that definition, SIPC itself is a Ponzi scheme. It is claiming to provide insurance against fraud in your brokerage account when it is, in fact, a) providing you no insurance whatsoever if you withdrew over the entire history of your account what you understood to be your assets and those withdrawals exceeded your contributions and b) also, in that case, suing you for all withdrawals you made for the past 2 years up to that excess.

Mr. Harbeck is bringing up Madoff and calling that particular con job a "Ponzi scheme" for a reason. He wants to suggest that Ponzi schemes are unique and extremely rare and, hey, not to worry, chances are your brokerage account isn't running a Ponzi scheme. In fact, a new Ponzi scheme is uncovered every five days.

The key thing that Mr. Harbeck is not telling you, however, is that SIPC is free to define any fraud it comes across as a Ponzi scheme and then can sue you if you fall into their to-be-sued bucket, which is very easy to do!

In fact, Madoff had an enormous trading operation with 200 employees. 188 of those employees operated a legitimate trading operation; only 12 were involved in the fraudulent investment advisory business. If that is a Ponzi scheme, every brokerage firm is, potentially, a Ponzi scheme.

Mr. Harbeck states that the account statements the victims received in the Madoff case were complete fictions. But how do we know whether the statements we receive from any brokerage firm are accurate? As customers of an SEC-regulated broker, how can we verify the statements sent to us?

Moreover, if the statements are complete fictions, why is the SIPC-controlled Trustee suing innocent customers based on those statements?

H: No investments were ever made for them.

LJK: "No investments ever" contradicts SPIC's own website that states that "At the start of the (Madoff) liquidation the trustee took custody of approximately $860 million in cash and proprietary securities." Those were investments. So Mr. Harbeck and his website make my point. SIPC is free to decide what is and is not a Ponzi scheme and, consequently, free to decide whether or not to sue you after processing in its own chosen manner statements that it claims are "complete fictions."

H: Under the law, what each investor was entitled to receive was the return of the net amount deposited with Madoff. The court overseeing Madoff's fraud agreed, and stated that using the phony account statements to determine what each victim should receive was "absurd." Using those statements would have allowed the thief, Madoff, to decide who wins and who loses.

LJK: Mr. Harbeck is completely misleading his readers. Madoff did not tell customers when to invest and when to withdraw funds. It was the customers who, for almost 50 years, made those investment decisions. Thus, it is absurd to say that we can't allow the thief, Madoff, to decide who wins and who loses. Madoff didn't decide. His customers did.

Now, however, it is SIPC and the SIPC-controlled trustee who are deciding. SIPC decided that all customers will lose because it failed to fund the insurance fund. Not a single Madoff customer has been compensated for the loss of the use of his money, in many cases for decades, and the return it would have produced in legitimate investments. If SIPC had used the last statement balance, as the law required it to do, every customer would have received SIPC insurance up to $500,000 based on his last statement. Using the last statement balance would have required SIPC to do what its homepage says it does -- protect investors in brokerage account fraud -- up to $500,000, i.e., honor its insurance commitment. It would have also required SIPC to act as a proper fiduciary in checking that all brokerage accounts it insured were being properly custodied.

And, by the way, there are other ways to determine losses, namely taking contributions and accumulating them up at concomitant average market rates of return in comparable, non-fraudulent investments. Had the Trustees advanced this definition of a victim's loss -- the net amounts contributed accumulated at prevailing comparable returns -- the courts would likely have approved it. But that would have left SIPC, i.e., its Wall Street handlers, with a much larger bill to pay and would have prevented SIPC from suing any victim.

H: The Court of Appeals also agreed, and stated that using those statements "would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff's machinations."

LJK: Again, neither SIPC nor the Court of Appeals proposed an alternative, economically appropriate means for assessing losses. Instead, SIPC and the Court of Appeals, ignoring the statute, took the economically absurd position that investors are not entitled to a return on their investment -- even over 50 years. And because SIPC took this position, it has, I believe, gravely damaged the industry it serves.

H: The author fails to note that any money a participant receives in such a case, over and above the amount deposited, is money stolen from other innocent investors.

LJK: Mr. Harbeck, let me ask a question on behalf of the thousands of victims of Madoff and other frauds that SPIC and its trusty Trustee have further victimized.

Have you no shame?

If you, Mr. Harbeck, had invested in Madoff and had done well and thought all was above board and then taken your account balance and spent it, maybe on charity, maybe on your older parents, maybe on your children's educations, would you proclaim yourself to be a thief? Would you wish to be treated like a thief? Would you like to be publicly labeled a thief? No sir, you would not.

If there is any thief at large here besides Madoff and those who assisted him or turned a blind eye, it's SIPC.

H: To enable other victims to recover the amounts they invested, a trustee has a duty under the law to those other victims to recover funds where possible.

LJK: You and your organization are saying that someone who, say, took out all their money exactly 2 years before Madoff was discovered is a thief. But someone who took out all their money exactly 2 years and 1 day before Madoff was discovered is not a thief???

SIPC's duty is to recover funds where possible from criminals, not from innocent victims. And its main duty is to honor its promise to pay SIPC insurance up t $500,000 per account based on the last statement.

H: A Ponzi Scheme is a zero sum game. A dollar of fictional "profit" given to one person who has received more than he or she contributed is a dollar that can't be given to a victim that was unlucky enough to have lost principal.

LJK: That is precisely why Congress enacted SIPA: to provide insurance to protect Wall Street's customers. Legitimate honest people don't claim to be providing insurance and then sue the injured party. That's fraud in my book. Furthermore, Mr. Harbeck's statement is untrue. The first $500,000 that each customer receives is to come from SIPC -- the Wall Street firms, not from other customers.

H: The trustee in the Madoff case didn't sue people like Frank and Sally, the hypothetical victims mentioned by the author. To deal with situations exactly like the one described in Mr. Kotlikoff's article, the trustee instituted a hardship program. The trustee exercised discretion in instances where suing to recover assets would not be appropriate.

LJK: I made no mention of the economic situation of Frank and Sally in my column. So Mr. Harbeck is assuming they are poor in order to claim the Trustee is only suing rich thieves, which is certainly not the case. I have also been told by highly knowledgeable sources that the Madoff trustee's "hardship" program was a sham -- that he has pursued hundreds of elderly people with no assets but their IRA accounts. Moreover, insurance is not supposed to be up to the insurer's discretion. That's another thing not disclosed on SIPC's homepage.

H: Further, if the trustee had sued Frank and Sally, it would have been because they withdrew more than they deposited and received other people's money.

LJK: Everyone who took out a penny from Madoff accounts over his long history of operation could be said to have stolen other people's money. What Frank and Sally took out was the fruits of their investing as they understood them at the time. They could have invested that $40,000 in plenty of other places and earned, on average, the $160,000 I referenced. Spending what you understand to be your property is not theft. Theft is when you know or have reason to know that you are taking money to which others may or do have a claim.

H: The author's proposed solution was not thought through. He proposes a boycott of brokerage accounts in favor of investing directly in mutual funds. There is certainly nothing wrong with investing directly in mutual funds. But if Madoff, or someone like him, establishes a mutual fund, and runs a Ponzi Scheme of the same magnitude and duration, avoiding regulatory scrutiny and making no actual purchases of securities for that mutual fund, the investors would receive nothing. This is precisely what has happened, on a smaller scale, in a number of hedge fund frauds.

LJK: This is a reasonable and important point. But I referenced mutual funds with safe custody arrangements. I have in mind mutual funds using major custodians who do nothing but custody securities.

H: Fifth, the legislation the author champions has the unintended effect of legitimizing Ponzi Schemes. Indeed, under that legislation, taxpayer money could be used to pay fictional Ponzi Scheme profits. The legislation would make the outcome the Court of Appeals called "absurd" the law of the land...and an obligation of the taxpayers.

LJK: This is perhaps the crux of the matter -- that SIPC was and remains grossly under-funded for the insurance it promised and promises investors. Mr. Harbeck is suggesting that the taxpayer would have had to have bailed out SIPC in the Madoff case had HR 3482 and S. 1725 been the law of the land. But here again Mr. Harbeck is misleading. SIPA requires the Wall Street firms to fund SIPC -- and not on the token basis of $150/year per Wall Street firm. If anything was a fraud, it was the SIPC insurance program with effectively zero funding but plenty of promises.

And, to repeat, imputing an average return in comparable investments on past net contributions to brokerage accounts would be a reasonable way to determine what one actually lost. So if SIPC is opposed to HR 3482 and S. 1725, it was and remains free to advocate other measures of investors' losses that don't invoke the remarkably Marxian notion that the fruits of one's legitimate or assumed to be legitimate investments are not the properly insurable property of the investor.

H: Finally, the author's disparagement of the SIPC program in the article is without foundation. SIPC has advanced approximately $700 million to the trustee to satisfy Madoff's customers and spent $1 billion in administrative expenses in that case. This has resulted in the trustee's recovery, through litigation and settlements, of $9.8 billion. Over $5.2 billion of that has already been distributed. Any investor who gave Madoff $925,000, net, has already received all of his or her original investment back, with more distributions to come.

LJK: Congressman Garrett who co-sponsored HR 3482 very strongly disagrees. I suggest that every investor read this statement by the Congressman.

H: The legislation championed by the author would rob future trustees of the tools that made those recoveries possible, and rob future victims of potential compensation.

LJK: No, the legislation or a modification of it, along the lines I mentioned, would simply prevent SIPC from criminalizing innocent victims and force SIPC to pay its obligations to all victims. It would also prompt SIPC to exercise due diligence in insuring brokerage accounts. The big unasked question is why SIPC failed to check that Madoff and other brokerage firms actually had the assets they claimed to be holding. This is a gross failure of SIPC's fiduciary responsibility, whether legally mandated or not, to its real clients -- individual investors.

H: Further, the trustee's investigation of the Madoff fraud, financed by SIPC, has been instrumental to the convictions in the Madoff criminal cases and to the recovery of assets forfeited to the Government. Not one cent of those administrative costs has been taken from the funds recovered for customers or paid out of taxpayer monies.

LJK: Good to hear. But the payments in general to the Trustee and others "settling" the Madoff case border on the obscene. And Mr. Harbeck does not reveal that the SIPC-appointed Trustee personally earns 15 percent of every dollar in fees paid to his law firm. This is an outrage to all the Madoff customers who have been denied the promised SIPC insurance.

H: Mr. Kotlikoff initially published his article in Forbes. After I wrote a response, Mr. Kotlikoff disclosed in a reply, also published in Forbes, that his relatives were victims of the Madoff fraud. Presumably, they have been sued by the Madoff Trustee. SIPC is sympathetic to all of the victims of the Madoff fraud. But the legislative proposals proffered by Mr. Kotlikoff are replete with unintended results. To be sure, under the proposed legislation, Mr. Kotlikoff's relatives would be allowed to keep any fictitious profits, but it would be at the expense of even more unfortunate victims of the fraud who have not yet recovered all of their principal.

LJK: Mr. Harbeck is intent on turning the huge, undisclosed risks imposed by SIPC on all brokerage account holders as of this very minute into an historical discussion of Madoff. He's doing so to divert the attention of current brokerage account holders from the very real risks they face -- not just from Wall Street crooks, but from SIPC itself.

Dragging my relatives into the discussion is a further attempt to change the subject. I purposely did not mention Madoff in my original PBS NEWSHOUR column because Madoff is no longer relevant. What SIPC has done to all current brokerage account holders in shirking its obligations in the course of handling the Madoff fraud has produced the current dangerous situation for them, which is the relevant issue -- the one I wrote about.

Mr. Harbeck is also following SIPC's despicable strategy of calling some victims "winners" and others "losers." All Madoff investors are losers. SIPC is paying not a single penny to any Madoff investor for the loss of the return they would have received had the investments been legitimate. Mr. Harbeck is claiming that a new investor who contributed just $1 to Madoff's fund the day before it went bust -- is "more unfortunate" than many older, middle class people who lost their entire life savings.

Mr. Harbeck is shamelessly trying to deceive the public. It is SIPC, that is, Wall Street, which promised each customer of a brokerage firm insurance up to $500,000 based upon that customer's last statement. You don't need to take my word for it. Here's what SIPC's general counsel, Josephine Wang, December 16, 2008, told Street Insider five days after Madoff confessed:

"... if clients were presented statements and had reason to believe that the securities were in fact owned, the SIPC will be required to buy these securities in the open market to make the customer whole up to $500K each. So if Madoff client number 1234 was given a statement showing they owned 1000 GOOG shares, even if a transaction never took place, the SIPC has to buy and replace the 1000 GOOG shares."

Or consider what Mr. Harbeck himself told the New Times Bankruptcy Court ((Tr. at 37-39, In re New Times Securities Services, Inc., No 00-8178 (B.E.D.N.Y. 7/28/00).

Harbeck: ...if you file within 60 days, you'll get the securities, without question. Wheter -- if they triple in value, you'll get the securities...even if they're not there.

Court: Even if they're not there.

Harbeck: Correct

Court: In other words, if the money was diverted, converted --

Harbeck: And the securities were never purchased.

Court: Okay

Harbeck: And if those positions triple we will gladly give the people their security positions.

While Mr. Harbeck wants people to believe he is trying to help Madoff's victims, the fact is that SIPC has brutalized the victims in order to save the Wall Street firms money. To Mr. Harbeck, it's business as usual for Wall Street to get something for nothing -- Wall Street and SIPC promised insurance and gained the trust of the public; then it didn't pay for the insurance; and then, when there was insufficient money to pay the promised insurance, Mr. Harbeck and his associates decided to victimize the victims. They should all be deeply ashamed for their part in this.

Here's the bottom line, which has nothing to do with me or with my relatives or, at this point, with Madoff per se. SIPC has put every brokerage account holder at major risk. The proposed legislation or reasonable modifications of it would make the use of brokerage accounts much safer than is now the case and eliminate one of the major risks of investing in brokerage accounts, namely being called a thief by SIPC for doing what every responsible American is supposed to do -- save and invest.

_____________

Laurence Kotlikoff is a William Warren Fairfield Professor of Economics at Boston University and a Fellow of the American Academy of Arts and Sciences.