Re: Of Markopolos And Madoff, New Times And Conventional Wisdom, SIPC And Clawbacks, Equitable Estoppel And Declaratory Judgments.

February 23, 2009

Re: Of Markopolos And Madoff, New Times And Conventional Wisdom,
SIPC And Clawbacks, Equitable Estoppel And Declaratory Judgments.


The hearings before Congress on the Madoff scandal on February 4th put one in mind of some pertinent, hopefully salient, ideas.

There is, to begin with, Harry Markopolos’ claim that many people in the financial world -- dozens, maybe even hundreds -- either knew or suspected that Bernard Madoff was a fraud. Some, to whom Markopolos explained his ideas about Madoff in the course of his investigations, thereafter avoided investing with the man whom Markopolos chooses to call BM, an alphabetically correct appellation that likely is not based just on literal initials. Others figured it out for themselves for one reason or another. Some of these thought Madoff’s results could not be real, others worried because Madoff refused to give them information during the course of their due diligence examinations, still others suspected strongly that something illegal was going on -- the unlawful act of “front running,” for example -- but went ahead and invested anyway because there was money to be made.

Add to this widespread Wall Street knowledge two other factors: One is that Madoff, according to Markopolos, was in effect bribing investment managers to send him money. He did this by offering them an unheard of fee for doing so -- he gave them four percent annually of the amount of money they had sent him. Some investment managers, in addition, were charging their customers an additional one percent “management fee” annually -- for doing absolutely nothing -- plus 20 percent of the profits, again for doing nothing. At least one was, I gather, also arranging for bank loans enabling customers to invest 4 times what they could ordinarily invest -- to invest three dollars of loaned money, on which the customer paid interest -- for every one dollar of the customer’s own money. By arranging for this dangerous leverage -- the customer, who may have lost a fortune, now has to repay the bank 75 percent of what he invested in Madoff -- the investment manager quadrupled the amount he himself made in fees, since the customer was now investing, for example, $400,000 instead of $100,000.

But, though lots of Wall Streeters knew or suspected that Madoff was a fraud, plenty of Wall Streeters were making a boatload of money off of “BM,” and some of them suspected illegality, not a single one of the Wall Streeters went to the SEC. Not one (except, of course, Markopolos). Markopolos says this is due to the Wall Street code of silence. You don’t rat out the next guy. Instead you let him defraud the innocent. (Subprime mortgages, anyone?)

Now all of this is relevant to a question on which I expressed skepticism in a series of blogs posted in January. The question is whether the investment managers of funds, large banks, etc., may be liable to persons who didn’t invest with BM through them. That they are liable, for failure of due diligence or worse, to people who did invest through them, seems beyond doubt. But how about people who didn’t?

Until the February 4th hearing, my view was that there was no reasonable chance of legal liability to such people, regardless of the investment managers’ moral responsibility arising from having failed to blow the whistle on BM. The moral responsibility arises because, had enough of them -- not just Markopolos -- talked to the SEC, it might have felt compelled to act. This is, you know, much the same principle as the moral responsibility of nearly the entire German people in the 1930s and 1940s for failing to act against Hitler, and the moral responsibility of so many Americans for Viet Nam and now Iraq. But though the investment managers bear moral responsibility, do they also bear legal responsibility?

Until now, as said, one would have thought it very unlikely. The reason is the legal concept of duty. This is quite often kept a crabbed, narrow concept in the securities field. Supreme Court Justices, several of whom place little value on truth or honesty (e.g., Rehnquist (previously), Roberts, Alito, Scalia), keep both liability, and the associated concept of duty, narrow in the securities field lest, they say by way of excuse, a defendant be liable to many people. So here one would have thought the duty -- and therefore the liability -- of fund managers, for negligence or worse, would extend only to their funds’ investors. But when you listen to Harry Markopolos, one wonders about this limitation. Lots of the fund managers seem to have been bribed, in effect, to do no due diligence and to keep their mouths shut about deep-seated suspicions instead of blowing the whistle. The defacto bribe money seems, again defacto, to have turned them into coconspirators with BM -- or aiders and abettors of BM -- who would say nothing lest they end the incredible gravy train he was providing them. And as coconspirators, or aiders and abettors, they would be liable to everyone whom BM injured, not just to the people who invested in BM through their institutions.

That these money mangers who were in effect bribed to go along and to keep their mouths shut may be considered coconspirators and/or aiders and abettors is a possibility enhanced by another instrumental role they played. From Markopolos’ testimony, it appears that, from about 1999 or 2000 onward, Madoff needed a continuing influx of really big money to keep his scam going. He got these needed large sums from the funds and institutions, whom he defacto bribed, in order to keep his fraud going and to grow it, according to Markopolos, from between three to seven billion dollars to perhaps fifty billion dollars. Without getting the needed money from large institutions that in effect accepted bribes to look the other way, BM’s Ponzi scheme would have collapsed eight or nine years ago. In those eight or nine years, thousands of new people were sucked in, older investors increased the amount of principal they put in, and people paid large, even huge, amounts of taxes on phantom earnings. None of this would have happened had the major feeder funds and feeder banks not accepted huge defacto bribes to ignore due diligence and look the other way. The culpable funds and banks were thus coconspirators with regard to, and aiders and abettors of, the entire scheme and everyone’s losses in the last ten years or so, not just the losses of those who invested through them. For they made possible the continuation of the scheme and the last ten years’ losses.

Over the course of the next year or two, a lot more is going to be learned about the feeders and their managers. Sometimes these institutions (like European banks) or persons still have gazillions of dollars despite Madoff; they are certain to be sued by their own investors (unless they make good the investors’ losses); they might very well be sued by others; and the prospect of such suits, and of all manner of victims being the plaintiffs in those suits, are likely to increase, perhaps to increase exponentially, as more and more facts come out showing that they were in effect bribed to such an extent, and in various ways, that they became defacto coconspirators and aiders and abettors.

Let me turn now to some of the remarks made at the hearing by Congressman Ackerman. If there can be humor to be found in such a disastrous situation, Ackerman’s bitterly critical comments and the SEC’s preposterous responses provide it. They also provide a lesson in the incompetence we have had in government not just for the last nine years since the imbecile became President in 2001, but since about 1965.

Seeing that once again members of the SEC were refusing to answer legislators’ questions and statements about what had happened, Ackerman said, “We’re talking to ourselves and you’re pretending to be here.” Now that is really funny when you think about it: “you’re pretending to be here.” What a line.

Just afterwards, Ackerman said to the SEC witnesses “one guy [Markopolos] with a few friends and helpers discovered this thing nearly a decade ago, led you to this pile of dung that is Bernie Madoff, and stuck your nose in it, and you couldn’t figure it out. You couldn’t find your backside with two hands if the lights were on.”

They couldn’t find their ass with two hands if the lights were on. Now that’s funny. Markopolos put the same point a bit differently. He said that, if you put the entire SEC into Fenway Park, they wouldn’t be able to find first base. The two analogies -- finding one’s derriere and finding a base -- used to be combined in Chicago in the 1950s, where an expression was that a person couldn’t tell his ass from third base. No matter which expression is used, the description previously has fit most of the federal government most of the time since 1965 or so. A lot of us thought the SEC was competent; I personally thought hard before turning down the offer of renowned SEC Chairman Manny Cohen to work for him, in 1964 or 1965, because the SEC was regarded so highly then; but we now have learned that for several years the SEC -- like the Department of Defense, the Department of Education, the CIA, the National Security Council and other federal bodies -- hasn’t been able to tell its ass from third base.

The SEC official who took the lead in trying to make excuses while saying nothing substantive tried to ward off Ackerman by saying the SEC now has a case pending against BM. To which Ackerman replied: “You took action after the guy confessed. He turned himself in. Don’t give yourself any pat on the back for that.” The fool official responded that she cannot talk about the Madoff case itself, but only in (meaningless) generalities. To which Ackerman replied, “You know, if anybody made the case better than Mr. Markopolos -- and I don’t think anybody could -- about you people being completely inept, you have made the case better than him.” The high SEC official he was talking to resigned her position a few days later. Does anyone not think she was pushed out? -- Deservedly.

Ackerman subsequently got after the SEC’s General Counsel, who was attempting to pull the wool over the Committee’s eyes as to why the SEC officials were refusing to discuss what happened on the Madoff matter. That jerk tried to seriously mislead the Committee as to the reasons the SEC witnesses wouldn’t talk. When he got blasted for giving one bullshit reason or another, he would then ignore that reason or repair to another. He apparently wasn’t claiming the 5th Amendment privilege against self incrimination. He wouldn’t say yes or no as to whether he was claiming Executive Branch privilege, other than to later claim it was one of the reasons for not answering questions. But he hadn’t put the question of executive privilege to the Department of Justice. But it wasn’t just his interpretation, it was the position of the agency. But the Commission, not he, makes decisions for the agency -- yet the Commission hadn’t considered specific reasons for taking the position here, although it somehow supposedly approved the refusals to answer.

The General Counsel was engaged in gobbledygook. Ackerman disgustedly ended by saying “. . . you came here and fumble through make believe answers that you . . . concoct and attribute it to executive privilege, that you’ve not consulted with the Executive Branch on.”

“Make believe answers.” “Concoct.” What a hoot. And how true, figuratively if not literally.

Congressman Kanjorsky, the head of the subcommittee holding the hearing indicated at various times that under the SEC’s position it can’t make disclosures now about what happened because the Madoff matter is under internal investigation and is in litigation, it won’t be able to make disclosures for years into the future because the matter will continue to be in litigation, and it thus will be of no help to Congress in determining what needs to be done. Kanjorski is absolutely right about the SEC’s position before Congress -- a position which, by the way, the SEC cannot continue unless it also intends for its Inspector General’s report to not be made public, to remain secret, thereby exacerbating the Madoff matter. The SEC’s current position is sheer hypocrisy, sheer self protectiveness -- as is true of all the (largely incompetent) federal agencies (the secrecy and self protectiveness of DOD and now the DOJ too are legendary). It also causes one to be even more certain than American experience in the last four decades already makes certain anyway that the Inspector General’s report will be a whitewash insofar as the SEC finds it possible to present a whitewash.

Let me now turn to the last two major topics of this posting, involving ideas not fired up by the February 4th hearing, but instead relating to a subject hanging over the heads of Madoff victims from December 11th onward. (September 11th and December 11th. What an unlovely symmetry. Does anyone remember that November 11th was the day the guns stopped in 1918? (Armistice Day.))

It has long been feared and the Trustee, Irving Picard, appeared to time and again confirm at a public meeting on February 20th, that the amount an investor will be credited with will not be the amount shown in his/her account on the November 30th statement. For that amount includes not only the principal the investor put (and left) in, but also the phantom income with which the investor was credited by Madoff. Thus, for example, suppose an investor put in principal of $475,000, was credited with phony income of $100,000 (for a total of $575,000), but took out $75,000. The amount shown on the November 30th statement will be $500,000 ($475,000 originally invested, plus $100,000 in phony income, minus $75,000 taken out.) If one is not credited with the phantom income of $100,000 (on which she paid taxes), the amount she has is only $400,000 (the $475,000 initially invested, minus the $75,000 taken out).

This is important with regard to SIPC, which can advance up to $500,000. If the investor’s holdings total $500,000, as is the case if the $100,000 of phantom income shown on the November 30th statement is included in his Madoff holdings, then he will recover $500,000 from SIPC: $475,000 in principal, plus $100,000 phantom income, minus $75,000 taken out equals $500,000, so SIPC will pay $500,000. But if the phantom income of $100,000 included in the statement is subtracted from the investor’s holding, the investor will get only $400,000 from SIPC. $475,000 in principal, plus zero for phantom income, minus $75,000 taken out equals $400,000, so SIPC will pay only $400,000.

So the question is: will the investor be credited with the $100,000 in phantom income (on which she paid taxes) when SIPC calculates how much to pay her? The conventional wisdom, based on the New Times case in the Second Circuit Court of Appeals, and Irving Picard, say no. But the New Times case said no on the facts of that case, in the context of those facts and none other. Are those facts the same as, and the holding therefore equally applicable to, the Madoff situation? Unthinkingly, yes. Thoughtfully, not at all. Not one little bit.

In the New Times situation there were two kinds of investors. One kind was those who were fraudulently induced to buy, through the fraudster, shares of mutual funds that actually existed, such as Vanguard and Putnam funds. After victims gave him their money, the fraudster never bought the mutual funds. Instead he stole the money. But he sent the investors account statements which tracked the actual funds (though he hadn’t bought them) and which enabled the victims, as the court said the Trustee noted, to “have confirmed the existence of those funds and [to have] tracked the funds’ performance against [the fraudster’s] account statements.”

People who were induced to purchase mutual funds that actually existed, and on which they could have checked, thus received, as I understand it, SIPC protection of up to $500,000 if the value of the real securities they thought they had purchased would have equaled $500,000 when the fraud was exposed.

But the investors who thought they had purchased real, existing mutual funds -- just as Madoff’s victims thought he was buying for their account real, existing stocks of Fortune 500 companies, real Treasuries, and real puts and calls -- were emphatically not the investors involved in the New Times appellate case. The investors in the New Times appellate case were in a wholly different position. They were people who invested in new mutual funds which were supposedly offered by the fraudster but which did not in fact exist. Let me repeat this: unlike the Vanguard and Putnam funds, which did exist, the funds bought by the claimants in the New Times appeal did not exist. This made all the difference in the case, for reasons I shall discuss.

Thus, the appellate court, early in its opinion, made the following statement:

To be clear -- and this is the crucial fact in this case -- the New Age funds in which the Claimants invested never existed. They were not organized as mutual funds, they were never registered with the SEC and they did not issue any of the requisite prospectuses for investors. [First and third emphases supplied, second emphasis in original.]

The first of the two specific issues decided by the court was whether the claimants in the case should be credited with owning securities, rather than merely having a claim for cash, even though the mutual funds they thought they invested in never existed, i.e., the securities never existed. After much legalistic mumbo jumbo, including extensive mumbo jumbo about whether it should defer to the opinion of SIPC, defer to the opinion of the SEC, and which it should defer to more, the court mumbojumboed its way to holding that the victims had claims for securities, a claim that creates $500,000 of SIPC protection rather than only the $100,000 of protection given to cash. When one cuts through all the legalistic mumbo jumbo, the fundamental reason for this ruling is that holding that the investors owned securities (not mere cash), even though they did not really own securities, better accomplishes the purposes of the Securities Investor Protection Act (SIPA) to “‘provide protection to customers of broker-dealers . . . to reinforce the confidence that investors have in the U.S. securities markets.’” The “statutory goals [are] promoting investor confidence and providing protection to investors,” and these are better achieved by holding that investors owned securities. They had “‘legitimate expectations’” of ownership of securities, expectations “based on written confirmation of transactions” that the fraudster sent them,” and investor protection and confidence, the goals of SIPA, were best served by honoring their “legitimate expectations,” as was urged by the SEC, to which the court deferred.

But when it came to the second issue in the case, the court’s tune changed because the mutual funds had never existed. Again the court deferred to the SEC (which agreed with SIPC on this issue though they had disagreed on the prior one). So deferring, the court ruled that the investors should be credited only with the amounts they invested, and not with the dividends and interest the fraudster had credited to their accounts. In other words, though the court did not mention its own inconsistency, and did not even appear to recognize that there was inconsistency, on the second issue the court frustrated investors’ expectations, failed to protect them, and harmed investor confidence. For the investors obviously must have expected that they had in their account the dividends and interest reflected in their account statements, just as they thought on the first issue that they had securities, not cash. But while the court honored their legitimate expectation that they had securities, it frustrated their equally legitimate expectation that they had amassed dividends and interest.

Why, then, did the court, deferring to the SEC and SIPC, rule that investors did not have interest and dividends in their accounts? What are the reasons for this ruling, are they valid, and, valid or not, do they apply in the Madoff matter?

The fundamental reasons for the court’s deferral and its ruling were that allowing investors to recover “fictitious amounts” that they were credited with by the fraudster “would allow the customer to recover arbitrary amounts that necessarily have no relationship to reality,” leaves the SIPC unacceptably exposed, the SEC and SIPC agreed that “such an approach is irrational and unworkable,” and the approach “would create potential absurdities” because the numbers would be “entirely artificial.” But this is all nonsense; it is all completely out of step with what is done every day in courts.

As a lawyer and professor who litigated very large antitrust cases involving up to many hundreds of millions of dollars back in the day when this was still real money, I can tell you that every day, in antitrust cases, airplane accident cases, and numerous other kinds of cases, the courts use various methods of finding out what profits would have been, what losses would have occurred, if things had been different. That is one of the things that expert economic witnesses are for. The same kinds of calculations could easily have been done in New Times. One could have chosen to say, for example, that the percentage of interest, dividends and appreciation for the mutual funds that did not exist should have been assumed to be the same as for those which did exist. Or they should have been assumed to be the same as the average over the relevant years for the type of mutual fund -- value fund, growth fund, etc. -- that the non-existent funds were advertised as being. Or investors could be credited with a rate of appreciation plus dividends that was reasonable in the economy during the time period, say 7.5 percent, for example. These kinds of simple calculations -- less sophisticated and much easier to make, I must say, than those involved in cases that I was in -- would mean that the interest and dividends that people were credited with in court were not arbitrary, would pose no threat to SIPC, would not be irrational or cause absurdity, would be grounded in reality and wholly rational. Otherwise, economic calculations taking place every day in courts all over the country are absurd, arbitrary, have no relationship to reality etc. That neither the SEC nor SIPC, nor the federal court whose location in New York causes it to be regarded as the premier federal court in the country in regard to the financial system, could think of such a simple solution, one used every day in all kinds of litigations all over the country, causes one to understand even more deeply the truth of Gary Ackerman’s statement that the two agencies could not find their backsides with two hands with the lights on. Or, as we expressed it equally colorfully in Chicago . . . . . . . . . . . . .

The stupidity of the SEC’s position, and the really horrendous results it will produce if it is followed by the SEC, SIPC and the Trustee in the Madoff case, as is the present intent, are an excellent reason for not following it in Madoff, and for not deferring again to the SEC and SIPC if they were to repeat it in Madoff. For the dumb position, by holding that people should not be credited with the interest, dividends and appreciation shown in their accounts nor with any reasonable substitute calculation, causes them to be denied their “legitimate expectations.”

And investors will be denied their legitimate expectations, rest assured of that. Not only did they legitimately expect that they had amassed appreciation and dividends, but many took action accordingly. They used the money to live, to pay taxes, to pay for children’s education. They took out loans against it that they must now repay somehow.

And just to add horrible insult to horrendous injury, now (1) SIPC and the Trustee will give many of them no SIPC recovery because, relying on the legitimate expectation that they had appreciation in their accounts, over the course of many years many investors took out more than they put in, and (2) the Trustee may try to claw back huge sums from those who took out what they legitimately expected was appreciation in their account.

But there is even more to it than this. Remember that the reason for deferral to and adoption of the SEC’s and SIPC’s dumb position in New Times was that the securities bought by the claimants never existed. Investors thus could never look them up and track them, could never determine whether their performance as reported in the financial press or as reported to the SEC matched the performance shown in the investors’ account statements. That is why it supposedly was arbitrary, irrational, not grounded in reality, etc. to give investors credit for the dividends and interest shown on their accounts. But in Madoff the fraudster claimed to be buying and selling, and the account statements showed, purchases and sales of real securities, Fortune 100 stocks no less. An investor, if suspicious, could, and we now know some did although most had no reason whatsoever to be suspicious, compare what was shown on account statements with actual purchase and sale prices of the same securities in the market at the same times. My understanding is that in most instances the match was perfection itself (although there apparently must have been some (few?) instances when -- due to slip-ups in Madoff’s offices, one would think -- this was not precisely so, a fact which did not become public knowledge when discovered by people hired by big shots to do due diligence).

So the very reason underlying New Times’ holding that fictitious appreciation on securities that never existed would not be credited to investors even though they would fictitiously be credited with securities, does not exist here, is inapplicable here. Here the securities were real, could be checked as to purchase and sale prices. Thus, under the very logic of New Times -- that because the securities never existed, the investors would not be credited with fictitiously-increased amounts that they thought they had, that they legitimately expected they had -- is completely inapplicable in Madoff. For in Madoff the securities did indeed exist.

Incidentally, if one asks the perfectly good question, as at least one person has, of whether the Trustee in New Times credited fictitious appreciation to those who owned Vanguard and Putnam funds, funds which did exist but were never bought by the fraudster (and whose performance in the real world could be looked up), the answer is this: while I don’t know for certain, based on statements in the New Times opinion I believe the answer is yes. For the account statements of those investors “‘mirrored what would have happened had the given transactions been executed,’” and those investors, as the court quoted the Trustee as noting, “could have confirmed the existence” of the relevant funds and could have tracked the performance of the actual mutual funds against the amounts shown in their account statements. And apparently, for these reasons, those investors received the actual value of their securities when the fraud was discovered -- actual value which would have included appreciation (or decline). If the answer is therefore yes, as I think, this is certainly unfavorable to the position taken by the Trustee in Madoff. For the investors in Madoff could have confirmed and tracked the performance of the real securities against the performance shown in their account statements, just as could be done by the investors who thought they had bought real mutual funds in New Times.

I shall turn now to one final issue: clawbacks.

Now maybe I’m all wet, but I thought that money withdrawn from Madoff in the last six years cannot be clawed back by the Bankruptcy Trustee if the investor had given equal value and had no knowledge that should have made him suspicious that a fraud might be occurring. This does not seem to enter the news media’s discussions, however, nor investors’ discussions. Rather, often it seems simply to be assumed, I think wrongly, that any monies withdrawn in the last six years can be clawed back. But if an innocent person did not withdraw more than she put in, then I think there cannot be a clawback (unless, perhaps, money was withdrawn within 90 days of December 11th), because the amount put in is “equal value” (or more) to the amount taken out. Picard seems to agree with this.

But let’s face it. There must be lots of people, including older people, who now have taken out more than they put in. These investors would include older people, in their mid to late 70s or 80s, for example, who have long been withdrawing money in order to live. They might include people who had to withdraw money in order to pay their income tax on their Madoff income -- unlike more privileged others, they couldn’t afford to pay their taxes on Madoff income without withdrawing money from Madoff. They might include people who withdrew money to pay for grandchildren’s schooling or to buy a house. Should people like this be subject to clawbacks?

The Trustee, if I understand him correctly, says yes. He says these people are subject to clawbacks although he may forego clawbacks in circumstances he declines to identify other than to indicate that the investor must be innocent and it will help if he/she is very old and poor.

My view is that innocent people should not be subject to clawbacks at all, and I think the Trustee should do a lot more to publicly disclose circumstances that he will regard as “non clawable.” (He already has been accused of saying little in this regard in order to preserve the ability to be arbitrary.) Take, for example, people in their mid to late 70s or 80s who depended on Madoff monies to live, are now wiped out, may lose SIPC recovery because they took out more than they put in, don’t know where their next dollar will come from or how they will buy food. You want to claw back money from people like this? You want blood from a stone? Why not flatly announce that you will leave such people alone if they had no knowledge of possible fraud?

Or take people who withdrew money to pay income tax on phantom Madoff “earnings” because, unlike far wealthier people, they could not pay the tax on such phantom income without withdrawing money. The money those people took out was to pay tax on income that was phony, on income that would never have existed, and on which tax therefore would never have been paid, but for the government’s fantastic negligence -- or worse -- going all the way back to 1992. Yet these people’s withdrawals to pay tax should be clawed back, while the wealthier suffer no such penalty, and should be clawed back for six years although refunds for phony tax payments only go back three years? Gimme a break, as it is said. Why not announce that money used to pay taxes on phony income, taxes which would not have been owed but for the government’s fantastic incompetence, will not be clawable if the victim had no knowledge of Madoff’s fraud?

I think there is a point of view, however - - one which, if I heard him correctly, the Trustee defacto is taking -- which holds that the Trustee is legally obligated by the language of the bankruptcy statute to seek clawbacks. I don’t know if this is true of the statutory language -- somebody should check it out -- but I will assume that it is true. Nonetheless, its presumed truth settles nothing. For the Trustee, like any litigant, like any prosecutor, can always exercise discretion about whom to seek money from, or whom to prosecute and whom to let off the hook, or with whom to settle a matter for a song or with little or no penalty. All this is inherent in our legal system and to claim lack of discretion to take account of important facts is pure “bovine defecation,” as Norman Schwarzkopf so delicately put some matters. Indeed, at his public meeting, the Trustee claimed discretion not to seek clawbacks in cases or in circumstances which he would not elaborate. So here the Trustee should exercise judgment and discretion and not seek clawbacks from the small, injured and innocent and should say he won’t seek them. Focus on the big boys -- the gazillion dollar banks and funds which, it seems, were in some cases both culpable and withdrawing gazillions in the last four to five years.

Unless and until he changes his mind, however, the Trustee apparently will not pledge to lay off small folks who are harmed, are innocent, and were withdrawing monies for understandable purposes like obtaining money needed to live, or to pay tax on the phony income that would not have arisen but for fantastic governmental negligence or complicity, or to pay for kids’ education. If so, I have two suggestions for the injured. First, assert the principle of equitable estoppel against efforts to claw back money -- and efforts to reduce SIPC recoveries. Under that principle, the government -- and here the bankruptcy court trustee and SIPC are the government -- is not permitted to make claims whose assertion is made unjust and inequitable because of its own conduct and statements. Here the conduct of the SEC, governmental conduct of unimaginable horrificness as discussed in prior blogs and as blasted by legislators in hearings, is a co-cause of the disaster that has befallen so many. Here the government is a defacto coconspirator, an aider and abettor, a joint tortfeasor, call it what you will. And here, therefore, the government, the co-cause of the disaster, should be estopped from trying to further screw people by clawing back monies from the innocent or reducing their SIPC recoveries. Justice demands this.

The use of equitable estoppel is my first suggestion. My second is: bring declaratory judgment suits. A declaratory judgment is a type of action used to prevent injury from actions that are almost certain to occur unless a court declares them illegal before they take place, declares them illegal before the fact, as it were. In view of the circumstances of this case, if the Trustee and SIPC do not quickly agree to reverse course and not take the kind of unjust actions under discussion, then I suggest injured investors bring declaratory judgment actions against them. Courts don’t always grant declaratory judgments when asked, and a court that granted one might of course rule against the investors despite the awful circumstances. But it is worth a shot: courts might rule in favor of the investors in advance; investors’ bargaining position would be enhanced, if a court were simply to refuse to rule in advance, by letting the trustee know he is in for a battle royal after he takes the unjust actions; and, were a court to rule against the investors, this would be more grist for the mill of trying to get Congress to act.*



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