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Wall Street Journal: GOP Lawmaker Urges SEC to Wait on Madoff-Claims Ruling



WASHINGTON—A top House Republican is urging the Securities and Exchange Commission to wait for a congressional watchdog report before reconsidering its position on the method to calculate claims for victims of Bernard Madoff's Ponzi scheme.

Rep. Scott Garrett (R., N.J.) said that before reconsidering the issue, the SEC ought to wait until the Government Accountability Office completes a review of the Securities Investor Protection Corp.—a compensation body overseen by the SEC—and the actions of Irving Picard, the trustee for the liquidation of the Madoff firm. The GAO said in July that it would review the matter.

"It is my expectation that the Commission will consider all relevant information before a new decision is officially rendered, including the new policies' impact on the many victims of this tragedy," Rep. Garrett, chairman of the House Financial Services capital-markets subcommittee, wrote in a letter to SEC Chairman Mary Schapiro on Monday.

Rep. Garrett's letter comes days after Ms. Schapiro said the SEC would reassess its position on Madoff claims in light of an internal watchdog report last month that argued the agency's former attorney general had a conflict in his participation in the SEC's investigation of Mr. Madoff.

In December 2009, the SEC said victims' net equity shouldn't be based on the fictitious amounts shown on their final account statements when the Madoff Ponzi scheme collapsed a year earlier.

Instead, the SEC had said victims' net equity should be measured by their net investment with Mr. Madoff, in an approach embraced by SIPC and the trustee, known as money-in/money-out. The SEC had also concluded that the claims should account for the effects of inflation over time—or the constant-dollar approach.

A bankruptcy court has ruled in favor of the money-in/money-out approach but has yet to weigh in on the constant-dollar method. Ms. Schapiro said that the commission would only revisit its position on the constant-dollar approach.

SEC spokesman John Nester said there is no timetable for the commission to reconsider the issue.

In adopting a money-in/money-out approach, SIPC and the Madoff trustee were concerned that basing claims off the last statements would quickly deplete the assets available to pay victims' claims, possibly requiring the SEC to seek help from Congress. The SEC watchdog report notes SIPC and Picard were concerned that other methods might "drain the fund," "necessitate the SEC going to Congress" or cause "dramatic fee increases for broker-dealers."

But Rep. Garrett, who believes claims should be based on the final statement, warned that the approach by SIPC and the trustee is "patently self serving" and violates the explicit definition of net equity established by Congress. He also said it has led to a series of suits seeking to claw back funds from victims, exacerbating their hardships.

"Ironically, the unquestionable beneficiaries of the cash-in cash-out definition are SIPC and its Trustee—not the victims who the SIPC fund is intended to protect," Rep. Garrett wrote.

Rep. Garrett and three House colleagues asked the GAO in June to investigate Mr. Picard and his law firm, Baker & Hostetler LLP, warning his approach is too "lawyer-intensive," largely because of the clawback suits.

Last week, a federal judge appeared to curtail the scope of overall funds that Mr. Picard can legally seize in the historic ponzi scheme.

Specifically, U.S. District Court Judge Jed Rakoff shortened the period during which Mr. Picard can attempt to recover investors' withdrawal of false profits or principal from six years prior to the bankruptcy of Madoff's firm—the limit under New York law—to a two-year window allowed under federal law.

Rep. Garrett said in his letter that the ruling is "only a first step."

"More remains to be done to protect these innocent victims from the Trustee's remaining overreaching clawback efforts," he wrote.