Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, March 7, 2012

GAO Reports on How SIPC Selected Madoff Trustee

GAO released an Interim Report on the Madoff Liquidation Proceeding (GAO-12-14).  According to the report,  it conducted the investigation because:

With the collapse of Bernard L. Madoff Investment Securities, LLC—a broker-dealer and investment advisory firm with thousands of clients—Bernard Madoff admitted to reporting $57.2 billion in fictitious customer holdings. The Securities Investor Protection Corporation (SIPC), which oversees a fund providing up to $500,000 of protection to qualifying individual customers of failed securities firms, selected a trustee to liquidate the Madoff firm and recover assets for its investors. The method the Trustee is using to determine how much a customer filing a claim could be eligible to recover—an amount known as “net equity”—has been the subject of dispute and litigation. This report discusses (1) how the Trustee and trustee’s counsel were selected, (2) why the method for valuing customer claims was chosen, (3) costs of the liquidation, and (4) disclosures the Trustee has made about its progress. GAO examined the Securities Investor Protection Act; court filings and decisions; and SIPC, Securities and Exchange Commission (SEC), and Trustee reports and records. GAO analyzed cost filings and interviewed SIPC, SEC, and SEC Inspector General officials, and the Trustee and his counsel.

GAO recommends that:

SEC should advise SIPC to (1) document its procedures for identifying candidates for trustee or trustee’s counsel, and in so doing, to assess whether additional outreach efforts should be incorporated, and (2) document a process and criteria for appointment of a trustee and trustee’s counsel. SEC and SIPC concurred with our recommendations.

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