Wednesday, March 4, 2009



Families, Small Businesses, Charities, and Pension Funds Among Innocent Victims of Ponzi Schemes – Madoff Scheme Cost Investors $50 Billion, $350 Million Scheme Recently Uncovered on LI

Schumer, Cantwell, Menendez Call for Senate Finance Hearing to Examine Ways the Federal Government Can Help Institutions Recoup Losses, Protect Against Future Scams

Today, U.S. Senators Charles E. Schumer (D-NY), Maria Cantwell (D-WA) and Robert Menendez (D-NJ) announced they have requested that the Senate Finance Committee conduct a first ever hearing in to ways the federal government can help innocent victims of the recent rash of multi-million ponzi schemes recoup some of their losses. The Senators said that families, small businesses, charities, and pension funds were just some of the countless innocent victims of the massive ponzi scheme involving billions of dollars. The largest ponzi scheme, run by disgraced financier Bernie Madoff, cost investors more than $50 billion. The Senators however pointed out that there are many other similar schemes that have been uncovered including one on Long Island that robbed investors of more than $350 million.

“Virtually overnight, entire savings, retirements, and pension accounts were wiped out, leaving the financial well-being of thousands of families and institutions in peril. These victims were not only sophisticated financial professionals, but also ordinary people who believed they were making safe, responsible investments for their future,” Schumer said.

"The financial security and future for the thousands of victims of these unprecedented schemes is now up in the air," said Cantwell. "The Finance Committee has a duty to have an open discussion as to how these victims were duped and whether they can recover any of what was stolen from them."

“Families, charities and retirees – people who live and work far away from Wall Street – have been utterly devastated by the collapse of this house of cards," said Menendez. "Many have been left with nothing in the midst of the worst economic crisis of their lifetime. They are now also coming to the realization that, for years, they’ve been paying taxes on phantom investments. It is their right to know if there is a remedy for what seems to be an injustice.”

In their letter to Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA), the Senators wrote that the Madoff affair as well as other ponzi schemes have brought to light several complicated issues that lie within the jurisdiction of the Finance Committee. The Senators outlined five different areas the committee should examine during the hearing:

1) At time since Mr. Madoff’s arrest, as former clients attempt to assess and make sense of the massive fraud, several questions have arisen about provisions of the tax code that apply to victims of theft, including when the Madoff victims could avail themselves of that relief. The Internal Revenue Code's “theft loss” deduction could allow Madoff’s victims to recoup a substantial share of what they lost—the deduction is equal to the full loss less 10 percent of Adjusted Gross Income and a $100 fee. So if an individual investor lost $750,000 with Madoff and has an annual income of $100,000, he or she would be able to claim a loss of $739,900. However, while a theft loss typically is claimed in the year it is discovered, the Code stipulates that a loss cannot be claimed until it has been determined with “reasonable certainty” that the claimant will not be able to recover any of the loss. Given that the investigation of Madoff is ongoing and is unlikely to be resolved for several years, there is a great deal of uncertainty among investors about whether and when it is appropriate for them to claim the deduction.

2) Madoff’s clients were sent bogus earnings statements showing “phantom income” on dividends that were reinvested with Madoff’s fund. These taxpayers paid the taxes they thought were due, but in reality there was no income. There is tremendous uncertainty about whether these individuals can file amended returns to recoup those taxes paid in past years. For instance, several of their constituents have asked whether the IRS will allow this procedure, under what circumstances, and for how many past years.

3) There are potential tax implications for investors who cashed out before the alleged Ponzi scheme was revealed. Based on the legal principle of “fraudulent conveyance” and the precedent set by the Bayou Group fraud, there is an open question about whether this group of investors may have to return some or even all of the amount they received by cashing out portions of their investments before the fraud was revealed.

4) There are issues involving the Securities Investment Protection Corporation (SIPC), a nonprofit organization created by Congress in 1970 and funded by the securities industry. Ostensibly, SIPC covers losses up to $500,000 resulting from securities fraud. SIPC is within the jurisdiction of the Banking Committee, but it is unclear whether it covers individuals who invested with Madoff indirectly, such as the many Taft-Hartley union pension plans in our states that invested millions with Madoff’s funds and are now in serious financial trouble as a result.

5) The Madoff scheme has impacted more than 150 private foundations. It is unclear whether these foundations will be forced to pay onerous excise taxes as a result of the fraud. A sizeable tax hit would be especially problematic for foundations that are already in dire financial straits.

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