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Things at the SIPC (Securities Investor Protection Corporation, 'broker insurance') have changed since the Madoff scandal because this one shined a light into the current working of this insurance company. Madoff customers have found out that the terms 'net equity' and 'Ponzi scheme' can combine to turn insurance into ruin.

In Madoff, net equity means what a customer puts into the fund and not what they could have pulled out of the fund a week before the disaster. Let's say you are a customer and put $200K into the fund 20 years ago and it increased in price to a million. Along the way you took out money to pay for the kid's college, a new house and other items. Now the SIPC say that you only get back your original $200K from 20 years ago and you now must give back the money you took out. So now you lost $800K (1,000K-200K) and have to pay back your college money and house money. Do you have that money lying around?

The court ruled the SIPC can treat it this way because it was a Ponzi scheme and because there is not a clear definition of this term, I think everything will now be a Ponzi scheme whenever the SIPC sees big loses ahead.

Remember, the SIPC is a private insurance among it member brokers. It is not a government agency and cannot regulate companies. As a private corporation it hates to spend its own money and will take it from its victims whenever possible.

http://www.thinkadvisor.com/2014/07/22/kotlikoff-investors-a...

From PBS:
http://www.pbs.org/newshour/making-sense/why-brokerage-accou...

Also, while the insurance covers $500K, it only covers $250K in cash.

Wizand
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