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Madoff investor suit aims to boost victims’ reimbursements

By David Voreacos and Erik Larson
Bloomberg News / February 25, 2010

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NEWARK - Three investors who lost money in Bernard Madoff’s Ponzi scheme filed a fraud lawsuit against the president and directors of the Securities Investor Protection Corp. to try to boost the amount of reimbursements to victims.

The complaint, filed yesterday in federal court in Newark, claims that SIPC president Stephen Harbeck and the directors are cheating victims of Madoff’s fraud by failing to reimburse investors up to $500,000 each.

SIPC, through its trustee Irving Picard, has said investors may claim only cash deposits minus withdrawals, not the amount reflected in phony account statements that Madoff’s firm sent days before his arrest on Dec. 11, 2008.

The complaint challenges that Picard policy and his efforts to “claw back’’ money from investors who withdrew more from Madoff accounts than they put in before the fraud came to light.

“By virtue of SIPC’s net investment policy, the defendants have perpetrated a fraud upon the customers,’’ according to the complaint.

A federal bankruptcy judge in New York, Burton Lifland, is considering a similar request by victims to determine whether they are entitled to claims in the amount of their final account statement or the net equity set by Picard. Lifland, who held a hearing on Feb. 2, hasn’t said when he will rule.

The complaint, which seeks to proceed as a group or class-action lawsuit, was filed by New Jersey residents Lissa Canavan, Leslie Goldsmith, and Judith Kalman.

They accuse Harbeck and the directors of fraud, bad faith failure to pay insurance claims, and violations of the New Jersey Consumer Fraud Act.

“We are disappointed to see that certain attorneys are exploiting the plight of these victims to incorrectly direct their anger and frustration at SIPC,’’ Harbeck said in a statement. “Sadly, this frivolous litigation will have the effect of making it harder for SIPC to focus all of its time and attention on aiding the Madoff victims.’’

SIPC, a government-chartered firm, pays up to $500,000 to customers when brokerages fail. SIPC operates with money raised through fees charged to more than 5,000 members firms.

Canavan, of River Vale, seeks reimbursement of $391,920, which she claims represents her 20 percent stake in Lapin Children LLC. Lapin had a value of $1.96 million on its final Madoff account statement, according to the complaint.

Goldsmith, of East Brunswick, is seeking return of $207,227. Picard denied her claim on Oct. 19 because she withdrew $261,004 after depositing $200,000 with Madoff, according to the complaint.

Kalman, of Monroe Township, sought $817,007 in a claim filed with Picard. On Sept. 10, Picard said she was entitled to only $133,675, according to the complaint.