(CN) - In a federal class action, three Madoff investors who took out more money than they put into the giant Ponzi scam say the Securities Investor Protection Corp. is cheating them by denying them "the prompt replacement of securities in their accounts, up to $500,000 in value, based upon their November 30, 2008 statements (their 'Statutory Balances')." The class objects that the SIPC and its trustee, Irving Picard, "refuse to pay SIPC insurance to any customer whose withdrawals exceeded his deposits, regardless of the amount of time the customer maintained the account."
The class says it's no fair that the SIPC has limited claims to the amount they deposited with Madoff - minus any withdrawals - rather than basing it on the phony account statements the jailed conman sent them days before his arrest - up to the limit of $500,000.
The class claims that Picard and the directors of the SIPC, who are charged with unwinding the case, conducted a "fraudulent investor's insurance scheme" causing them billions of dollars in damages, "to enrich SIPC and its members at the expense of the customers."
"The class members are Madoff customers who, as a result of SIPC's deliberate misrepresentation of the nature and scope of insurance provided to investors, have been denied their full SIPC insurance and have lost their entire investments (the 'Customers'). But for the promise of SIPC insurance, the customers would not have invested their funds with Madoff," the complaint states.
"In direct contradiction of their repeated representations to the customers and in violation of their statutory mandate, defendants have caused their designated trustee in the Madoff case, Irving H. Picard (the 'Trustee'), to refuse to pay SIPC insurance to any customer whose withdrawals exceeded his deposits, regardless of the amount of time the customer maintained the account. In addition, as to those customers who have received some payment from SIPC, the payment is not equal to the customers' statutory balances up to $500,000. Rather, in breach of the representations the defendants made to the customers and in defiance of the plain language of SIPA, the payment is based upon the customers' net investment over generations of account holders."
The named plaintiffs - Lissa Canavan, Leslie Goldsmith and Judith Kalman - say that in refusing to credit them with the account balances shown in Madoff's last statements, the eight directors of the SIPC are trying to "claw back" money the investors withdrew before Madoff's crimes were uncovered.
They contend SIPC president and chief executive Stephen P. Harbeck and his board of directors should be held personally liable for "cheating customers of their promised insurance" and payments of up to $500,000 each.
They accuse the SIPC board of fraud, bad faith failure to pay insurance claims and violations of the New Jersey Consumer Fraud Act.
In a written statement, Harbeck expressed disappointment that "certain attorneys" are "exploiting the plight of these victims to incorrectly direct their anger and frustration at SIPC."
"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," Harbeck said. "That being said, SIPC is not now and never was an FDIC-like 'insurance' entity. ...
"SIPC has filed two extensive briefs with the court, which explain our position in detail. At this time, we are awaiting the court's ruling on the matter."
Madoff is serving a 150-year federal prison sentence. The SIPC is pursuing a case against Madoff in U.S. Bankruptcy Court in Manhattan.
The plaintiffs are represented in New Jersey Federal Court by Helen Davis Chaitman with Becker & Poliakoff of Redbank.
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