Little Relief for Madoff Victims

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Many former investors won't benefit even as a trustee found success recovering funds lost in Bernard Madoff's $65 billion fraud

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It's 4 a.m. and Stephanie Halio, a once-retired 67-year-old, is driving a van up and down the highways of South Florida. Why? Blame Bernie Madoff.

Shortly after learning almost all their investments were lost in Madoff's Ponzi scheme, Halio and her 70-year-old husband, Robert—retired since 2005—opened a transportation business, carting tourists to cruise ships and airports in Miami and West Palm Beach. Though they had no experience and the long days leave them exhausted, it was their only option, she says: "We're struggling to maintain some sort of lifestyle." The bank already foreclosed on their New York home, leaving them with a mortgaged house in Boca Raton. "We have no place else to go at this point."

Two years after Madoff's $65 billion fraud was revealed, its victims are trying to move on. It was good news indeed to hear over the holidays that Irving Picard, the trustee hired by the Securities Investor Protection Corp., or SIPC, has recovered $9.8 billion so far—much more than some had expected. Yet many of Madoff's neediest victims might never benefit from Picard's settlements, and in fact some are being sued to give back gains from the scheme, funds already spent on retirement or taxes.

One thing is certain: Little of the money survivors do recover is likely to find its way into the stock market. Several say their faith in the U.S. financial system has been shattered. One detail that irks Madoff investors: The SIPC, a quasi-governmental organization funded by brokerages that provides $500,000 protection in case of broker failure, isn't paying out as they expected. In the Madoff case, that protection is being applied only to initial investments, not to the final statement balances that included fictitious gains investors had been relying upon.

"I wouldn't invest a nickel in the stock market," Stephanie Halio says. "It's too dangerous, and the government is not there to protect us." All the Halios' remaining assets are in the bank, despite the fact they now offer miniscule interest rates.

Here are the stories of three families who lived through the Madoff fraud and now must deal with its aftermath.

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Peter Moskowitz may have survived, but he still believes the Madoff case could kill him. Within days of Madoff's arrest, he developed chest pains. Now the 68-year-old former dentist, who already couldn't work because of a disability, needs a serious bypass operation. The last statement from Bernard L. Madoff Investment Securities said his account had $1.15 million. Now it's all gone. Adding to his woes, he says, "I had to live in fear of somebody coming to sue me for two years."

That somebody is Picard, who, backed by a bankruptcy judge, is trying to recover money earned in the Ponzi scheme, even from innocent victims who thought those gains were real. An estimated $20 billion was initially invested with Madoff, but account statements in December 2008 showed balances of $65 billion. If, before the fraud, customers withdrew more from accounts than they put in, they are considered beneficiaries of the scheme. They won't get any recovered funds or any SIPC protection, an interpretation of the law that Madoff victim lawyers and some in Congress dispute. Of 16,444 claims on Madoff settlement money, Picard has recognized 2,372 as legitimate.

Moskowitz fell in this trap because he withdrew about two-thirds of his portfolio for a divorce settlement in 1997. Seeking to help out a daughter-in-law who works at a mutual fund company, he then withdrew another 30 percent of his account in 2007 and invested it with her employer.

He thought it was his money, to do with as he pleased. "I planned my life based on certain things and it was all phony," he says. He blames the SIPC for not coming through with even minimal, $500,000 protection. "Everybody should know there is no real protection of theft of your property if you have it with an SIPC broker," he says. (Most U.S. securities brokers are required to be SIPC members.) "The longer you have an account, the more dangerous it is."

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