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."
Picard had until last month to file lawsuits. Moskowitz hasn't heard anything; he assumes he hasn't been sued, but the slightest uncertainty still weighs heavily. He suspects a ruling against him would have cost him his home in Corona, Calif. The trustee does have a hardship program to exempt customers from giving back gains under certain circumstances, such as advanced age and inability to pay living and medical expenses. A spokeswoman for Picard declined to comment.
Moskowitz's remaining assets remain with his daughter-in-law's employer, though he worries it's impossible for amateur investors to tell which companies are honest. "You have no way of knowing what any of these companies are doing because it's not transparent," he says. "Is the whole stock market a Ponzi scheme? I don't know. It may be."
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The family of Boyer Palmer, an 88-year-old Swedish immigrant who built a successful drywall business, is being sued by Picard for more than $5 million, despite the fact that Palmer, his wife, and 16 other family members lost $12 million in the fraud.
The lawsuit was filed in December, Palmer's son-in-law Tim Murray says. At Palmer's age, "it's tragic to see him have to go through this," Murray says, adding: "He came from nothing. He had some money, but didn't live like he did. He watched every dollar."
Unfortunately the oldest and poorest victims are those most likely to have received no SIPC protection, says Ron Stein, a financial planner who is president of Network for Investor Action and Protection, a nonprofit founded by Madoff victims. The least wealthy investors often needed to withdraw money to pay taxes on their gains, and the oldest investors—many now in their 80s and 90s—often cashed out to pay for retirement. "Innocent victims are now being forced to return assets which most cannot afford without tremendous additional financial shock," Stein says, noting wealthy individuals and hedge funds were most able to preserve their original principal investments by staying fully invested with Madoff.
Murray assumed that after the fraud they would get more than $3 million in SIPC coverage on various accounts, based on statements from Madoff that they "relied on in good faith," he says. Instead they're being asked to refund more than $5 million in withdrawals above their initial principal. Where did the money go? Murray says the withdrawals funded "ordinary living expenses" during retirement for Palmer and his wife, who recently celebrated their 70th wedding anniversary. Palmer donated to charities, including $500,000 in 2007 to fund an addition to the American Swedish Institute in Minneapolis. Also, money was taken out to pay taxes on their Madoff account's fictitious gains, often at higher short-term, capital-gains rates.
Murray says it's unclear whether the 18 family members, who range in age from 16 to 88, could scrape together $5 million even if they thought the trustee's calculations were fair. "What we've got left we've got mostly in the bank," Murray says. The funds are carefully arranged so deposits are covered by FDIC insurance, making them safe even in case of bank failure.
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Stephanie Halio won't get specific but says the couple lost "practically everything" in the Madoff fraud. They had cashed in her husband's life insurance policy and invested it with Madoff, and didn't buy long-term-care insurance "because we felt we had enough money to insure ourselves."
When they realized Madoff's firm was a Ponzi scheme, they each went looking for jobs—but couldn't find anything in the depths of the recession in late 2008 and early 2009. So they decided to start the transportation business. By one measure, it has been a success, with rides booked at all hours of the day and night. The problem is the two primary drivers are senior citizens. Robert Halio already had a long career, running a process-serving company, and Stephanie helped out. "We're very tired," she says. "We never thought we'd be doing this at this stage of our lives."
The Halios did get some money refunded by the SIPC, but "far less" than they think they deserve. They asked Picard to recalculate their settlement. "We can't afford to hire an attorney," she says of the dispute. "So we sit and wait for what his decision will be." She is angry not just with the SIPC but with the governmental agencies that failed to spot Madoff's fraud earlier, even as the couple paid taxes on "false profits."
"You live your life according to what you've saved," she says. "I don't want anyone else's money. I want my money returned to me."