SIPC's Scroogelike Ways Draw Scrutiny: Part 2

Continued from Part 1.

SIPC has never handled a colossal failure. If it is forced to, the fund is bolstered by an additional $2 billion in bank credit lines and direct federal subsidies. Broker fees support the fund, but over time the assessments have been reduced to the current $150 fee per firm -- no matter the size -- because the treasury has grown so much.

SIPC and its trustees reject the argument that law firms get business if they keep payouts low.

"I think that's outrageous," said Picard, who maintains that the agency keeps bringing him back because of the quality of his work. "I'm personally offended."

"This is not a private corporation that's looking to make a profit," said SIPC General Counsel Stephen Harbeck. "We have no compunction whatsoever to use our corporate funds the way Congress intended."

But the record seems to support at least some concerns of SIPC critics.

Consider:

• In 1990, the SIPC fund had $570 million and paid out $134 million, or almost 25% of its assets, to cover investor losses. That year it collected $65 million in fees from its members, based on a rate of 3/16 of 1% of each of their annual revenues.

• By last year, the SIPC fund had almost doubled to $1.1 billion, but with a similar caseload, the agency actually paid out less -- $122.7 million, or only about 11% of the value of its fund -- to cover customer losses.

Flatlining Payouts stagnate even as SIPC fund grows

Source: SIPC

Harbeck said the amount SIPC pays out to cover investor losses each year is unrelated to its fund size. "I don't think there is or was intended to be a correlation between our usual expenditures and what the board of directors thought we ought to have [in the fund] in a time of crisis," he said.

Cash Cows

Although the desire for wider access to SIPC's treasury has growing appeal, securities experts suggest the need for lawmakers and regulators to move cautiously. Above all, they say, the system cannot be extended to cover market risks, and they worry liberalizing the rules will subject brokerage firms to claims from investors who want to be made whole for legitimate investment losses.

"It makes for very difficult policy-making," says Professor Henry T.C. Hu, who teaches securities regulation at the University of Texas. "To the extent that there is any ambiguity, I think you ought to clear it up."

Investors' lawyers also accuse SIPC of benefiting insiders in handing out liquidation business. In 1996, the bailout of Old Naples Securities in Florida went to Theodore Focht, the former SIPC president now living in that state.

Critics say Focht should not have been tapped. "It gives the appearance of impropriety and inherent bias,'' says Steven Caruso, a New York lawyer who has fought SIPC. "It's a rubber stamp, and no one's in a position to challenge them." Trustees are recommended to Bankruptcy Court judges by SIPC, and the agency's selections are rarely rejected.

Focht, who led the agency for a decade, denies favoritism. He says SIPC chose him because of his experience and the proximity of Old Naples litigation, adding that he is working for a relatively low hourly fee of $100.

Focht and plaintiffs attorneys have clashed in the Old Naples liquidation over about $1.3 million in claims that were denied because the investors did not qualify as customers under SIPC rules. The clients have fought back and won two interim court rulings, and the issue is before a federal appeals court.

SIPC officials say that even if they had the authority to cover fraud claims, the $1.1 billion fund is inadequate. Critics' answer to that: Require brokers to pay more than $150 each annually into the fund. "It's nothing," says Joe Borg, Alabama's chief securities regulator.

Some SIPC critics propose a penny assessment on every trade to bolster the fund, while some industry experts say a fund as big as $40 billion would be required to bail out defrauded customers. Critics say the figure is vastly overstated to kill any shakeup at SIPC.

Borg thinks SIPC ought to be recast to reflect today's Wall Street environment, a far richer, faster one than when SIPC began in 1970.

"The question is not whether SIPC is doing anything wrong. I think the way they're applying the rules and regulations are well within the law," Borg says. "But the question is whether the enabling statutes are incorrect in today's environment and I think that's where the problem is."