I was trying to understand if SIPC is going to protect me. Despite the higher limit, even for small investors, it can be a problem if I consider https://www.pbs.org/newshour/nation/why-brokerage-account-insurance-is-a-bigger-scam-than-madoff and https://www.forbes.com/sites/kotlikoff/2014/07/16/the-huge-sipc-risk-your-broker-isnt-disclosing/, which suggest that having a brokerage account is an unsafe thing to have.

What seems to be implied is that if a small investor bought securities worth $100K 10 years ago, and over the years has withdrawn $110K, and with growth the portfolio is still valued at $120k, then if the brokerage firm goes burst, the investor will not get his/her $120k. Is this true?

Edit: If a customer bought shares of some company or etf(qqq or brk-b for example), how he/she can make sure that the brokerage firm did really bought it or not. If the brokerage firm does a fraud, how can investor know. SIPC can simply say that the brokerage firm did a fraud and so it is not covered. Per comment "During the Madoff scandal, the SIPC ruled that securities purchases hadn't actually happened so there was nothing to protect"

If a brokerage commits fraud (by not separating customer funds), is there any SIPC protection?

I see there are multiple brokerage houses and everyone says that they are SIPC protected, but SIPC is saying that it protects from fraud and at same time saying "if securities purchases did not happen, SIPC protection does not apply". If a brokerage wants to do the fraud that is first thing they will do and small investor will have the problem. To answer some comments, I am not Kotlikoff" but a ordinary very small investor.

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    There's a big difference between holding shares of a proprietary hedge fund where the broker makes management (and valuation) decisions and holding publicly traded equities where the broker enacts the instructions of the investor, something that appears to have been lost. I'm not sure whether it's Kotlikoff or the SIPC officers he accuses who have missed this vital point.
    – Ben Voigt
    Feb 12, 2019 at 14:33
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    Actually I do know: It's Kotlikoff who is misdirecting -- "Madoff did not tell customers when to invest and when to withdraw funds. It was the customers who, for almost 50 years, made those investment decisions. Thus, it is absurd to say that we can’t allow the thief, Madoff, to decide who wins and who loses. Madoff didn’t decide; his customers did." It's not the moving money in and out of the account that is important, it is the selection of which equities to invest in. That is the investment decision, that was performed by Madoff, and that is where fraud (rewriting history) took place.
    – Ben Voigt
    Feb 12, 2019 at 14:41
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    Related: FDIC vs SIPC: Are they the same?
    – Ben Miller
    Feb 12, 2019 at 16:07
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    @DaveHarris Please do not answer questions in the comments.
    – Ben Miller
    Feb 13, 2019 at 12:42
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    Thanks for creating the tag sipc. I am new to StackExchange, so could not identify who created the tag, but please accept sincere thanks to the person and the community .
    – Neil
    Feb 13, 2019 at 16:38

2 Answers 2


Larry Kotlikoff, who wrote the two 2014 articles that you referenced, uses very strong rhetoric in describing the SIPC: "terrible risk," "financial fraud," and "bigger scam than Madoff." He advises you to "close your brokerage account," and "avoid spending any withdrawals" for six years, presumably the amount of time that the SIPC could confiscate those funds.

This advice is ridiculous, in my opinion.

Contrary to popular belief, the SIPC is not an unlimited source of funds to cover everyone's losses. It is there to address specific circumstances, mainly regarding financial firms that have gone bankrupt. And they also do not generally pay out everything a victim loses immediately. They pay out a portion of it, and then work to recover funds from the crook on behalf of the victim.

From the SIPC's website, the SIPC has a fund worth about $2.5 Billion, and has a line of credit with the Federal Reserve for another $2.5 Billion. In the case of Madoff, however, he had taken in about $19 Billion over the years and had not invested any of it. Much of that money had been taken out over the years by some of his "clients." Of course, his clients thought that there was much more money than that ($65 Billion), because they thought their money was invested and that it had grown over the years. But it was all a lie.

Imagine if the SIPC had simply paid out everything that everyone had thought they had invested, including all of the fake gains? Then Madoff truly would have manifested real money for his clients, and despite the fact that Madoff went to jail, he would have successfully been able to rob billions of dollars for his clients from the public.

Despite the fact that the SIPC did not personally pay back all $19 Billion that the victims had originally invested with Madoff, it turns out that most of them have eventually gotten most of their money back. Some of this money came from the SIPC, some came from Madoff and his partners, but much of this money has come from some of Madoff's victims themselves. Why? Because they had, perhaps unknowingly, profited from Madoff's crimes. They happened to be the ones who got their "profits" out early. So the government has made them pay this money back. This is what was so terrible about what Madoff did.

Kotlikoff has extrapolated this to say that your brokerage account is at risk and that the SIPC will arbitrarily take your money from you at any time they wish. This is ridiculous. The Madoff case is unusual. Steven Harbeck, CEO of SIPC, wrote a response to Kotlikoff at the time that explained the work that the SIPC is doing to get the victims their initial investments back. On the SIPC's website, they still list the Madoff case as an open case.

Even if you have a brokerage account that is a member of SIPC, it is important that you put your money in a broker that is trustworthy. In hindsight, we can see some of the warning signs that were there with Madoff. Victims describe Madoff as having a "reputation as a Wall Street genius." Articles were written skeptical of Madoff's results. It is important to know and understand how your money is invested. Investing in a nebulous fund without understanding what it actually is is risky on many levels, not only because of potential fraud. Go with a broker that you've heard of, and invest in things that you understand. Keep records of what you own, and if your well-known broker does run into financial trouble, the SIPC should be able to help recover your assets.

To answer your example, if you buy actual securities that you understand from a legitimate broker, and they are worth $100K, and they grow, and you sell some of them worth $110K, and the real securities that you still own are worth $120K, if the broker goes under, you would file a claim with the SIPC for the assets that you had with the broker, and they would work to help you recover those assets.

  • How does an ordinary investor knows that "securities purchases happened or not? He or she just has brokerage statements and has paid for it, he /she is simply having faith in brokerage that the security was bought"
    – Neil
    Feb 13, 2019 at 16:35
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    @Neil: Have records of how your money was invested before the gains. Read more about the Madoff symptoms to understand the difference between that and placing orders with a brokerage to buy specific things. Rewriting history Madoff-style assumes that an advisor is trading your account. No one told Madoff "Invest this money in QQQ and BRK-B", they said "you are the expert, invest this money for me according to your advice". Any time an advisor doesn't tell you what you own until after it makes a profit, it's a scam.
    – Ben Voigt
    Feb 14, 2019 at 1:57

Securities of customers are segregated from the firm's own assets, so should not be accessible to creditors in the event of insolvency.

SIPC has had a history of repaying customers where impropriety has occurred (i.e. funds not segregated) and indeed all brokerage firms today (including those who don't have any customers) are paying higher fees to SIPC while it replenishes its trust fund after the payouts SIPC were made to Madoff's clients.

Apart from some people who thought they would be able to keep their Madoff profits, the SIPC mechanisms have worked successfully through many situations in the past (MF Global, Lehman, etc.)

Will SIPC protect me?

Yes. That is what it is for.

How do I know the securities purchases did happen?

Obviously, since Madoff, the relevant regulatory bodies have tightened their review procedures and check for such situations. SEC and FINRA audits are checking this.

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