WASHINGTON, D.C. — Upsher-Smith Laboratories, a Minneapolis-based pharmaceutical company, lost more than $8 million in the Bernard Madoffs Ponzi scheme. Like most investors, they’re trying to recoup those losses. But the investors have run into an obscure federal regulation, which means that by law they can only ask for $500,000 back, just one-sixteenth of the amount they were defrauded.
The rules on this are complicated, but they boil down to this: If you have 500 direct investors who are defrauded, they’re each insured up to $500,000, a potential total of $250 million. If they form a group to invest — such as in a company-backed pension profit-sharing plan that complied with Employee Retirement Income Security Act (ERISA) regulations by using a single fund manager — they’re treated as a single entity and thus restricted to just a single $500,000 claim.
“This administrative rule of ERISA, requiring that plan assets be invested in the name of the plan trustee, cannot be allowed to defeat the public policy behind ERISA, to promote the retirement savings of average American workers,” said Joel Green, general counsel of Upsher-Smith. “Nor can it be allowed to defeat the public policy behind [the Securities Investment Protection Corporation] to protect the investments of the average American investor.”
Rep. Keith Ellison has proposed an amendment to investor-protection legislation currently before the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprise that would change that rule. It mimics Federal Deposit Insurance Corporation (FDIC) guidelines that would have treated the Upsher-Smith fund investors as individual claimants, rather than a single entity.
“These people weren’t high-rollers, just regular people like Joel and his colleagues who were part of a profit-sharing plan that was invested with Bernie Madoff,” Ellison said. “They thought that they were protected by the Securities Investment Protection Corporation [SIPC]. Unfortunately, while SIPC held itself out as the FDIC of the investment world, it hasn’t followed through on this protection in many cases.”
The subcommittee hearing Wednesday was punctuated several times by applause from Madoff victims in the audience, agreeing with members of Congress on the panel who alternated between slamming Madoff and expressing empathy for victims’ losses.
However, it is unlikely the government will wholly reimburse victims of the Madoff and other investment frauds, Chairman Paul Kanjorski of Pennsylvania said, noting that the potential cost to taxpayers would be too high.
Losses resulting from just Madoff’s fraud are now estimated to run about $19.4 billion, according to The Wall Street Journal, down from an initial estimate Madoff himself made of $50 billion . The lesser figure isn’t chump change — that sum could fund all of NASA for an entire year and still have $700 million left over.
“I don’t think anybody’s going to be completely satisfied at the end of all this,” Kanjorski said.
Green, while advocating for the entire sum to be returned, but said he could compromise if there simply weren’t enough funds available.
“If you can’t fund everybody at a 100 percent [loss reimbursement] level, but you can fund them at an 80 percent level, then fund them at an 80 percent level,” he said.
There is a bit of a happy ending for the defrauded investors at Upsher-Smith. Green said company owners have repaid employees the profit-sharing money that Madoff defrauded them of, dollar-for-dollar, plus what he described as a “reasonable pension return.”
While Green wouldn’t disclose the rate of return, he said it’s not anywhere near the fake figures Madoff promised.
At least it’s something.