Madoff scheme may hurt investor protection fund

The industry-financed fund that protects investors from securities fraud will be stretched badly by the $50 billion scandal involving Wall Street investing legend Bernard Madoff and may need a federal bailout, the head of the Securities Investor Protection Corp. said Monday.

SIPC President Stephen P. Harbeck told the House Financial Services Committee that his government-chartered fund is still calculating the scope of its obligations from the Madoff scandal, widely seen as the largest financial Ponzi scheme ever.

The SIPC offers up to $500,000 to investors who lose money owing to securities fraud, backed by a $1.6 billion insurance fund and a $1 billion line of credit from the U.S. Treasury.

Hedge funds, charities, foundations, pension funds, universities and individual investors are among those who have claimed massive losses in the wake of the collapse of Mr. Madoff’s investment company last month.

SIPC officials said they have mailed about 8,000 claims to investors who might have been victims of the Madoff scheme.

Rep. Brad Sherman, California Democrat, said it was virtually certain that the Madoff case would leave the securities insurance fund with insufficient reserves to deal with future crises.

Asked what would happen if the Madoff claims exceed the SIPC’s resources, Mr. Harbeck said, “We’ll come to Congress.” He called the Madoff case a “remarkable outlier” for the SIPC, which in the past faced claims of a maximum of $1 million from fraud cases.

The hearing gave lawmakers their first crack at the Madoff scandal. Mr. Harbeck and Securities and Exchange Commission Inspector General H. David Kotz faced sharp and at times angry questions about how regulators had failed to detect Mr. Madoff’s dealings.

Rep. Gary L. Ackerman, a Democrat whose New York district includes a large number of people who claim to be victims of Mr. Madoff, said he was determined to find out which regulators had missed the signs of fraud, “because I want to tell those people whose job it is that they suck at it.”

Rep. Paul E. Kanjorski, Pennsylvania Democrat and chairman of the subcommittee overseeing financial markets, said, “Clearly our regulatory system has failed miserably, and we must rebuild it now.”

Mr. Kanjorski and President-elect Barack Obama have cited the Madoff scandal as a clear sign that the government’s financial regulatory system must be overhauled.

Democrats and Republicans on the panel sparred Monday over whether to bolster the SEC’s budget and manpower as the best way to police the market. Democrats argued that the deregulatory policies of the Bush administration had led to lax oversight of Wall Street and a string of scandals capped by the exposure of the Madoff scheme.

Several Republicans challenged the idea that the SEC’s budget had been cut during the Bush years, and said regulators overlooked clear signs in the Madoff case that the investor’s accounts were questionable.

“There were plenty of red flags, but somebody didn’t do their job,” said Rep. Donald Manzullo, Illinois Republican. “How do we know they will do the job if we just throw more money at them?”

SEC Chairman Christopher Cox, who is leaving the agency this month, conceded last month that the agency failed to follow up on “serious and credible” questions about Mr. Madoff’s investment fund, and he ordered an internal investigation. The government filed charges against Mr. Madoff on Dec. 11, only after the investor confessed to his sons that his financial empire had been built on lies.

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