SIPC Task Force

June 23, 2010

Dear Ron:

Because of the major brouhaha raised by SIPC’s announcement of a special review committee, I have decided to put my initial views in writing.

It seems to me that eight out of thirteen members of the review committee appointed by SIPC come from SIPC, the SEC or the industry, and should not be regarded as friends of the victimized investors. The powerful committee chairpersons (Bowen and Johnson, who also are partners in major law firms) are also the Chairman and Vice Chairman of the Board of SIPC. They are the people on whose watch disaster has occurred, yet now they are to oversee a committee which is supposed to investigate the very things which they allowed to happen on their watch.

A third member (Heyman) is also on the Board of Directors of SIPC, so it is on his watch too that the disasters occurred. Moreover, he is from a major institution in the financial industry (Travelers). Since the industry will likely have to pay for major necessary changes that will be proposed, e.g., with regard to net equity and coverage of indirects, etc., he should not be expected to be favorable to small, powerless investors who would benefit, such as those who belong to NIAP by the hundreds.

A fourth member (Macchiaroli) is from the SEC, which ostensibly has supervisory authority over SIPC, but allowed the SIPC disasters to occur and now has an interest in diminishing their importance.

A fifth member (Hammerman) is from a major securities industry association. As with Heyman, since his is the industry which would likely have to foot the bill for major necessary changes that will be proposed, Hammerman should not be expected to be favorable to small, powerless victims who would be beneficiaries.

A sixth member (Giddens) is from a major Wall Street firm and is well known as a Trustee for SIPC. Doubtless he makes a nice piece of change from SIPC, and can hardly be expected to favor anything that would be contrary to SIPC’s desires.

A seventh member (Coffee) is a professor, parts of whose testimony before Congress have been strongly criticized by small victims.

An eighth member (Chen Gongyan) is not American but rather is an official in the Chinese financial industry. He is Chair of an agency which was set up with the assistance of SIPC (apparently, I have read, with the assistance of Harbeck personally). As well, it is hard to understand why a Chinese official would be on the Committee.

There are two Committee members (Aidikoff and Caruso) whom SIPC seems to claim are plaintiffs’ lawyers (the claim appears to be correct), and three (Borg, Lubin and Smith), who are state securities officials. I know little about any of these five, although it has been claimed that some of the relevant states have not been active in protecting investors, unlike New York and Massachusetts -- whose relevant officials were not picked for the Committee. It probably is fair to assume, however, that these five might be open minded on crucial issues.

It is important, I would think, that SIPC’s statement of the task force’s mission says “SIPC staff” will be involved in the work of the Committee (which SIPC calls a “Task Force”). This means that the very staff which created the recurrent disasters, and which therefore has vast self interest to protect, will be deeply involved in the work of (in the mission statement’s words) “identify[ing] key issues, provid[ing] assessments . . . suggest[ing] reforms and the means to their implementation” . . . [and] discuss[ing] any impediments and the estimated costs of reform to SIPC, its members . . . .” The staff and the three Review Committee members who are directors of SIPC (including SIPC’s Chair and Vice Chair, who head the Committee) have every interest in defending, minimizing and not having to explain the reasons behind their prior SIPC actions that have wreaked disaster upon victims. So it seems fair to say that the fox has been put in charge of the hen house. And this entirely aside from the fact that several other members of the Task Force come from the industry that likely would have to pay for changes and are therefore likely to be unfavorable to them.

Needless to say, SIPC has provided no information that I know of on how the task force members were selected. And given the interests of the staff, SIPC Board members and industry personnel in defending, minimizing and not having to explain prior bad actions, we cannot expect deep address, or sometimes even any address, by the Task Force of vital issues such as the sudden, unexpected use of cash-in/cash-out and SIPC’s refusal to say whether lack of funds to cover the final statement method was the underlying reason for such use, litigating for decades for a very narrow definition of customers, a definition which has been very harmful to indirects, explaining whether the same lawyers are constantly picked to be the Trustee in major cases because they do what SIPC desires and thereby save it money by finding alleged reasons to turn down large percentages of applicants for payments from the SIPC fund, explaining why SIPC charged so little to brokerage houses for so many years, which proved disastrous, the failure of SIPC to pay with promptness despite Congress’ repeatedly stated intent that payment should be prompt, SIPC’s use of cash-in/cash-out as a method of circumventing normal rules of bankruptcy regarding alleged preferences, explaining what SIPC was told by actuaries when it failed to heed Congressional demands that it increase the size of its fund in the early 2000s, how SIPC managed to dissuade the SEC from supervising it although the SEC was supposed to supervise it, and other crucial pertinent questions which defenders of SIPC have every reason to try to evade.

There are some other problems also. As shown by the work of a similar, perhaps identical, committee in the 1970s, the new committee’s work is likely to take years before anything comes of it. And even if one thinks that this might be alright for the long term, especially when it deals with matters mentioned in the mission statement as being of interest but which are nonetheless of little concern to current victims (like “corporate governance” and international affairs), work that takes years before it is completed and has effect will not solve the problem that there are thousands of innocent, injured investors who desperately need certain changes now, not years from now, as occurred in the 1970s. (It is much like the Gulf oil spill: whatever might be decided about offshore drilling in the long term, the gushing of oil needs to be stopped now.) That people need help now cannot be stressed enough. People in their 70s and 80s cannot wait until 2015 or 2020 for specific needed reforms. They need help immediately.

As well, as shown in the 1970s, it is too easy for people whose careers are invested in the industry to ignore the real problems. You may remember that the record of Senate hearings in the 1970s contained a memorandum of about 40 pages from a constituent that Senator Cranston put into the record. That memo identified many, many of the already existing problems that Gretchen Morgenson wrote about twenty-five years or so later, in 2000, and that were again brought to consciousness by the Madoff scandal in 2008. Yet the 1970s committee ignored these already existing problems, as then did the Congress, so the problems are still with us. The new task force, comprised heavily of SIPC and industry insiders with deep interests to protect, and with its staff work to be done by the very SIPC staff who likewise have much in the way of heavily criticized actions to protect, can all too plainly be expected to repeat the 1970s performance of ignoring vital matters, or at minimum soft pedaling them.


Larry