Navigating Through Madoff-Land

Only months before Madoff was arrested, my husband and I moved the last of our investments over to him, having been investors for 21 years. What I couldn't have imagined is how lucky we would turn out to be.
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"Bernard Madoff has been arrested," my husband said, and I knew we were in serious trouble. Only months before we'd moved the last of our disappearing non-Madoff investments over to him, having been investors for 21 years. What I couldn't have imagined in the fog of my shock is how lucky we would turn out to be. Luck, I've learned, is relative.

Lest you think you could never be as foolish, let me suggest that 20/20 hindsight is invaluable in making wise decisions. During the bull market, our nine-percent return seemed conservative. Our detailed monthly statements, insured by SIPC, showed we owned excellent stocks, including US Treasuries.

We became investors without even knowing it through two accountants, Avelino and Bienes. In 1992, the SEC ruled that they were acting as brokers without being licensed and closed them down. We were hugely relieved then to discover our money was with Madoff, whom the SEC had also investigated and found sound.

Over the years, the more we learned about Madoff, the more we considered ourselves blessed. Besides the SEC's virtual endorsement, he had been Chairman of Nasdaq and was often mentioned with respect. People clamored to "get in," and we, hardly big players, had gained access by accident.

My husband, Gene, now 80, is a retired theatrical producer on and off Broadway. I'm 63 and had been in advertising and the cosmetics industry. I then had my own company, Eat Healthy, aka, the Bloomingdale's Diet, because so many of their executives were successful on my program. The Bloomingdale's Eat Healthy Diet became a bestseller. I'd been happily writing fiction before this upheaval. We live in Montauk, a quarter-mile from Madoff's weekend house. He's oceanfront; we're ocean view. In most of the country, we'd have been considered well off. By Hampton's standards, we were comfortable.

I remember sitting at our dining table with Gene that first night, two white-knuckled troopers, trying to take in the implications. I knew I had to go back to paying work, but doing what? Would we sell our house? In this market?

A plan came to me in the middle of that night: I'd start up Eat Healthy again. There were lots of reasonable diets our there but none dealt effectively with keeping weight off. In my numbed shock, I saw that as an opportunity. I imagined starting a small group like last time. Everyone's results had made it mushroom. It would happen again.

What blissful naivete! The difficulty of keeping weight off is the dirty little secret of dieting. And Eat Healthy had mushroomed all right, so quickly we never could catch up with it. It took almost ten years to get it on firm ground. That thought has kept me up plenty of nights since then.

Besides starting the business, we had to plow through Madoff country with its language of legal terms and acronyms. SIPC: Securities Investors Protection Corp, an oxymoron for far too many people. Net Equity: the difference between what you invested and withdrew. And the truly nightmarish clawback (or the verb, to claw back): monies withdrawn within six years that must be returned under certain conditions.

Listen up. While Madoff and his ilk may not have cheated you, the implications affect all investors. Before his arrest, his reputation appeared unassailable. Yet many pillars of the financial industry seem to have suspected the fraud. What threatens all of us is they had no incentive to act. SIPC, which is industry backed insurance, is woefully underfunded. The $500,000 maximum payment, set in 1978, hasn't been adjusted since. Today, by Department of Labor statistics, that would be $1,600,000. If the industry had to pony up, I'd wager they'd police themselves.

The bankruptcy trustee set his own definition of "net equity," contrary to existing case law. The precedent had been your "right of expectation" based on the last statement. Under that definition, many more would be entitled to SIPC coverage.

It was through luck, not design, that Gene and I had positive net equity. We're entitled to a SIPC payment and not threatened with clawbacks. Also, fraud victims were allowed to go back five years instead of the standard three to claim the loss on our taxes. (This is after 21 years of paying taxes on phony income.)

But none of that replaces close to what we lost. What gives us a shot is that I had entrepreneurial experience and perceived a need I feel passionate about. Eat Healthy Your Way, has actually been thriving for three months now. I'm loving it, though building a business at my age, in this economy, with no start up money is daunting.

Many others are not so fortunate. In spite of paying their taxes, they are penalized for using what they thought was their money and denied SIPC coverage. Or they invested through feeder funds, a nightmare on every front. Innocent victims may still be clawed back. Many are retired and don't have ability to start up again, let alone find a job.

I'm close enough to know their dire straits could be mine. If you feel safe, I implore you: pay attention. No one's watching the store.

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