Stephen P. Harbeck knows what it feels like to be under attack — in 1970, he served in Vietnam as a sniper with the fabled Seventh Cavalry, once led by Custer.
Stephen P. Harbeck, the president and chief executive of SIPC, said, “I'm feeling more like a piñata every day.”
Then, as a civilian in 1975 he began what promised to be an interesting but low-key legal career with the Securities Investors Protection Corporation, created by Congress in 1970 to provide some limited protection to customers of failed Wall Street brokerage firms.
He stayed on, and rose through the ranks of the obscure nonprofit to be tapped in 2003 as president and chief executive.
Now, Mr. Harbeck is once again under attack.
After decades largely spent shutting down no-name firms with a few hundred customers, Mr. Harbeck spent the last year overseeing the largest bankruptcy on record, the failure of Lehman Brothers, and the largest Ponzi scheme in history, run by Bernard L. Madoff.
It has been a year, he said, “sort of like a dog’s year — seven years in the space of one.”
Regular exercise? “Gained 10 pounds,” he said ruefully. The powerboat he shares with a friend? Forget it. His inbox and voice mail? “I’m feeling more like a piñata every day.”
His quiet life might have survived the Lehman bankruptcy, where the inevitable disputes have been polite and professional. But it did not stand a chance against the roars of indignation from some of Mr. Madoff’s victims, who say the policies of SIPC — pronounced SIP-ic — are compounding the financial catastrophe that began a year ago with Mr. Madoff’s confession and arrest.
On Wednesday, Mr. Harbeck is scheduled to appear before the House Financial Services subcommittee to explain why thousands of Mr. Madoff’s investors are not eligible for cash advances from his organization.
The subcommittee will also hear from some of those being left out — people who withdrew more than their original investment before the fraud collapsed and others who invested indirectly, through pension or feeder funds or other pooled investment vehicles.
Mr. Harbeck said he understood their outrage, but added that he had a statute to uphold and a finite amount of money to help eligible customers.
“Nobody likes to say no to people who are, without question, victims,” Mr. Harbeck said in an interview. “That’s been hard for me. That’s been hard for my staff. But this is a zero-sum game — a dollar we give to someone who is not eligible is a dollar we do not have for someone who is.”
Led by a board of seven political appointees, SIPC is financed by the nation’s brokerage firms, which pay an annual assessment to cover its budget and pay customer claims. Besides a reserve fund of $1.2 billion, down from $1.7 billion pre-Madoff, it can borrow up to $1 billion from the government.
By law, SIPC covers only customers of failed brokerage firms. Those with valid claims receive a cash advance of up to $500,000 and a pro rata share of whatever assets the Madoff bankruptcy trustee can gather.
But thousands of people who invested with Mr. Madoff indirectly through pension plans or feeder funds do not meet the SIPC definition of a customer that has evolved from the statute and subsequent court decisions, Mr. Harbeck explained.
In those cases, the eligible customer is the pension plan or feeder fund itself, not its beneficiaries.
“Those pensioners are sympathetic people who do not qualify as customers,” said Mr. Harbeck. “There are court rulings that I just can’t ignore.”
But at least some indirect investors will get something — a sliver of a cash advance and a share of whatever assets their feeder fund or pension plan receives from the bankruptcy estate.
That is not true for several thousand direct investors who withdrew at least their entire original investment before the Madoff fraud collapsed. They clearly are customers — but are they customers with valid claims?
In court filings, letters, e-mail messages and Web site postings, these victims insist the only valid measure of their loss is the amount shown on the final account statement they got before Mr. Madoff’s arrest last year — amounts that total $64.8 billion.
Mr. Harbeck is equally insistent that the courts have never allowed the losses in Ponzi schemes to be calculated that way — and will not do so now, despite the unprecedented scale of the Madoff fraud.
The courts will have to decide who is right.
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