Madoff: The Simple, Clean, Curative Bond Proposal That Has Been Completely Forgotten.

March 30, 2009

Madoff: The Simple, Clean, Curative Bond Proposal
That Has Been Completely Forgotten.



Permit me an observation about life. It is sometimes, perhaps even frequently, the case, when an unusual but reasonably complex situation arises, that people ignore the immediately obvious but rather simple solution in favor of complex possibilities that ultimately are recognized as either unlikely of success or overly difficult of accomplishment. Something like that may have happened in the financial disaster caused by subprime mortgages. The immediately obvious but simple solution would have been to provide the debtors with the money to pay the arrears on their mortgages, coupled with revamping the mortgages so that they reflected only reasonable interest rates instead of the insane rates which obtained after adjustable rates were reset far higher. But this simple solution, which would have nipped the crisis early on if not totally in the bud, was rejected for myriad reasons. There are those who think, and I am one of them, that this rejection, and the myriad reasons underlying it, were the work of what has been called the financial oligarchy (which is described brilliantly in an article by Simon Johnson in the April issue of the Atlantic). It is this oligarchy, including its minions in government, which first caused the meltdown and then engineered trillions in bailouts, plus obscene bonuses, almost all across Wall Street. In the end, even the oligarchy, and its highest ranking but financially-naïve aide, President Obama, has been driven to assist those who were victimized by the insane mortgages which the oligarchy perpetrated for its own vast enrichment for about a decade or more. But the assistance came way too late to avoid meltdown and is probably far too little as well.

I think a similar early phenomenon -- rejecting the simple and obvious in favor of the complex but ultimately difficult of accomplishment -- has been at work in the Madoff matter. Early on a gentleman named Eliot Kaye came up with a solution that involved providing government bonds to victims. But his solution was tossed on the scrap heap because it was afflicted with the dread word “bailout.” Americans being up in arms over the bailout of trillions given to the financial oligarchy that culpably, sometimes even criminally, caused the general economic disaster, it was claimed impossible to even consider what might possibly even be considered a bailout of the innocent victims of a fraudster -- a member of the financial oligarchy, no less -- whose empire crashed because of the meltdown caused by the guilty. In the words of a famous Harvard constitutional law professor of the mid 20th Century, Paul Freund, Americans were confusing the lightning with the lightning rod.

So instead of following Eliot Kaye’s idea, people began talking and arguing bitterly about how to calculate and/or obtain theft deductions, tax refunds, and SIPC recoveries. Persons who had IRAs or invested through pensions, feeder funds, or partnerships are angry because they feel their needs are being ignored. Some persons, intent on seeing their own views prevail no matter what, have engaged in public character assassination of intentionally named others. Groups and people who should have been working for the same end split apart. The entire matter is about to become -- to some extent has already become -- a lawyer’s relief act, as some of us warned early-on would happen if something on the order of Eliot Kaye’s proposal was not adopted. People may have to wait years to get monies, or they may instead be coerced by financial pressure -- they are having to sell homes to live, after all -- into accepting shortchanging amounts from the government in order to be able to live. It at least seems a certainty that lobbyists for the obscenely wealthy are feasting on actions taken behind the scenes. The whole thing is now something of a gigantic miasma, as some of us warned early-on would occur.

So I would like to go back to the simple and obvious solution advanced by Eliot Kaye, but which I have altered a bit to make even simpler. And I would also like to suggest that every victim -- whether he or she is a leader or part of the MadoffSurvivors web group, the Madoff Victims web group, some other web group, or no group at all, get behind this idea. I would like to suggest every victim write to Senators and Congressmen or their staffs to request implementation of the idea, that lobbying be heavily focused on this simple idea, and that nobody quit until Congress implements it.

Here is the simple idea which, even though it is simplicity itself, will greatly assist direct investors, feeder fund investors, IRA investors, pension fund investors, charities -- everyone. Forget about tax refunds. Forget about tax deductions. Forget about SIPC. Waive them all. Instead, the government should give all victims – at least all American victims and I would frankly think all victims, regardless of nationality -- government bonds whose principal is payable at the end of ten years, and whose interest rate, payable annually, is either approximately seven percent tax free or approximately ten percent taxable. The bonds’ principal would be for the amount shown in an investor’s November 30th statement (minus amounts already obtained in tax refunds or from SIPC). All litigation rights against the culpable will be transferred to the government, which is best situated to and can pursue them in court if it wishes and may be able to recover immense amounts by doing so. The victims, however, will simply get, as said, bonds whose principal will come due in ten years, with interest payable annually.

This is simple, clean, direct and would achieve crucial goals. Let us start with victims. Whether they were direct investors or investors through feeder funds, many of them, who are now wiped out, were literally living off of their Madoff earnings, which they would take out every year for living expenses. In recent years Madoff claimed to be earning, roughly speaking, about ten to twelve percent taxable, about eight or nine percent after taxes. Victims, whether direct investors or feeder fund investors, will continue to get roughly similar amounts (probably a bit less actually) under the bond proposal.

People with IRAs will not have to pay taxes except to the extent that they get interest from the government every year. Although even that income could remain tax free if they were allowed to roll over the money into another IRA.

Pension funds and charities will be able to continue to obtain money tax free, just as before. Partnerships and trusts will likewise receive the same treatment as before.

For those who do not want to hold on to their government bonds for ten years, there is likely to develop -- there almost surely will develop -- a secondary market, an over the counter market, on which the bonds can be sold, depending on the situation, for their appropriately discounted value or their appropriately higher-than-face-value value.

As for the government, it makes out pretty much like a bandit in comparison with the situation otherwise. The government has estimated the amount of loss shown in statements from Madoff at being $65 billion. It was also estimated early on that the government might have to pay out a total of 20 billion or more in tax refunds and SIPC recovery, though this estimate may now be far different and, if the government itself has made knowledgeable estimates, it is not telling anyone what they are -- although it should and Congress should demand to know. Under the bond proposal, at 7 percent tax free, the government, for ten years, will pay out only $4.55 billion a year (seven percent of $65 billion). It will not pay out a total of the previously estimated $20 billion for over five years -- not until the sixth year will the total reach $20 billion. Each year it will pay out, very roughly only about one-tenth of one percent of the total of nearly ten trillion dollars it is now estimated the government will provide, as an investor, lender, and/or insurer to the financial oligarchy who caused the meltdown. (It is not widely known that the total bailout is estimated to be nearly ten trillion dollars, but it is.)

In addition, the present value of annually receiving for 10 years either 7 percent ($70,000) or ten percent ($100,000) each year to someone who had an account of one million dollars is $430,120 at ten percent and $491,651 at seven percent. At the end of the ten years, the government will pay the 65 billion dollars in principal, but the present value of 65 billion dollars to be received ten years later is $33 billion and change at seven percent (or just half the amounts in investors’ accounts), or $25 billion and change at ten percent (or not much more than one-third of what was in the accounts). Those present values of the income and of the principal to be paid in ten years contrast rather dramatically, do they not, with the nearly $10 trillion or more to be paid in a very brief total time to the financial oligarchs who caused the current disaster and are bagging the trillions.

To me, the bond proposal, first suggested by Eliot Kaye and tweaked here, is by far the simplest, easiest, cleanest, quickest, most reasonable way of resolving the whole Madoff mess. It is also applicable, of course, to the far smaller Ponzi schemes that have more recently been unearthed and that, like Madoff’s, flourished because of governmental incompetence and irresponsibility. Not to mention that it will help restore confidence in markets by showing that the government will not allow innocent victims to suffer permanently and to a truly huge extent because of governmental ineptitude that was beyond description. I would urge everyone to get behind the bond idea and focus extensive efforts on it. I personally will try to focus on it, and I hope all Google groups, their leaders, their members, and others will likewise focus on it, will write and visit their legislators, etc. It is the clean, simple, restitutionary way to go. It is the way that will most quickly aid the innocent and help restore investors’ confidence in the market. And it will not require the trillion(s) being paid to the guilty architects of the meltdown.*


* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about­_LTV.htm.

Is This Country Joseph Welch Or Joe McCarthy?

March 25, 2009

Re: Is This Country Joseph Welch Or Joe McCarthy?


“Until this moment, Senator, I think I never really gauged your cruelty, or your recklessness.” “I like to think I am a gentle man, but your forgiveness will have to come from someone other than me.” “. . . [A]nd if there is a God in heaven, it will do neither you nor your cause any good.” “Have you no sense of decency sir, at long last? Have you left no sense of decency?” (Emphasis added.)

These were some of the unforgettable things Joseph Welch said to Joe McCarthy during their famous interchange.

This country may now have arrived at a Joseph Welch moment, a moment when it must show it has a sense of decency and must declare itself to be on the side of decent men like Joseph Welch or it must show it has no decency and is on the side of bums like Joe McCarthy. This moment has arisen with regard to Bush, Cheney, Rumsfeld and the rest of that crowd, one of whom, Cheney, has now been called “evil” by the famous Colonel Lawrence Wilkerson, Colin Powell’s former assistant. Many of us have long known these people were evil personified; this writer even publicly said a few times that they were guilty of treason to the United States Constitution because they were attempting to destroy the constitutional plan. But I, at least, do not remember anyone prominent in public life, which this writer certainly is not, saying previously that any of those criminals are evil, as they surely are.

Two writings have brought us to a Joseph Welch moment. One is the leaked -- to Mark Danner anyway -- confidential, secret report of the Red Cross on the details of the American program of torture and abuse of detainees, a report that was written for the eyes of the CIA’s General Counsel, John Rizzo -- who was himself one of the criminals. This report, as Danner says, has to be true given the way it was compiled -- and, I would add, given that there have been so many other articles, books and official reports saying the same thing, albeit not in such detail. What Danner says is written in the Red Cross report was almost entirely, or entirely, contained in the Preliminary Report of the Robert Jackson Committee released three months ago. I must say, however, that the Red Cross’ description of using collars to swing detainees face first into walls is more graphic even than the description in the Jackson Preliminary Report.

Also more extensive than in the Preliminary Report is Danner’s description of the real time participation in the torture by senior CIA officials and high Administration officials. In FDR’s day there used to be a saying, “Clear it with Sidney,” a saying attributed to FDR himself, I believe. What it meant was that if someone was propounding an idea, they had to first run it by and get the approval of Sidney Hillman, a powerful labor leader of the day. In the 2000s, analogously, people on the ground who were perpetrating torture and abuse anywhere in the world had to first get approval in advance from the most senior CIA and Administration officials for every single action of torture and abuse, whether done by itself or, as was customary, as part of long lasting combinations of methods of torture and abuse (you beat him mercilessly, then you smash his face into walls, then you put him in a stress position for hours or literally days on end, then you waterboard him -- perhaps a few times in a single day, then you deprive him of sleep for days or weeks on end while in a freezing cell or a steamingly hot box half the size of a coffin, then you pour freezing water over him, etc., etc., rinse and repeat, rinse and repeat, rinse and repeat for weeks on end.

What was being done was, as said, well known in real time to high CIA officials, to members of the so-called Principals’ Committee including Cheney, Rice, Ashcroft and others whom George Tenet regularly briefed, to Bush, who publicly lied through his eye teeth about what was being done, and to others. They all knew of and signed off on what was being done.

That all of this is so has been known for some time, was all collected in Jane Mayer’s book albeit it was scattered in the book, is set forth, as indicated, in the Jackson Preliminary Report, and now has appeared in Danner’s article about the Red Cross report in the New York Review of Books. But the mainstream media has largely ignored -- not exclusively but largely ignored -- all of this. Whether this is due to the MSM’s typical incompetence or, at least equally likely, to complicity arising from a variety of indefensible reasons (e.g., false claims that the facts have all been known previously (though never considered in combination), a desire to be complicitous with the political powers that be in order to be seen as serious players and to preserve access to high ranking sources, warnings from corporate front offices worried about losing money if these matters are mentioned) is not something I shall discuss. One thing that one does know is that the MSM has largely avoided this stuff like the plague, just as it avoided casting doubts on the WMD claims that were used to produce war.

The Congress too has been running away from this stuff, and so has Obama. Were they not running from it, they would be calling for prosecutions of the criminals. Instead, however, we are hearing about possible, almost surely secret, Congressional investigations -- which will keep facts away from the American public -- in order to find out whether the Bush Administration kept information from Congress -- which we already have known for years it certainly did. And we are hearing about truth and reconciliation commissions, with immunity given to arch criminals in exchange for testimony, in order to find out the facts -- which already are largely known and, to the extent not known, would come out in criminal prosecutions.

Why are the politicians running, and using these dodges in order to do so? Well, in major part it is because many of them too are almost surely guilty, at least the gangs of four or eight who are or were leaders of the relevant intelligence committees and received briefings about what was going on. The word on the street is that Nancy Pelosi and Jay Rockefeller are especially terrified and are working behind the scenes to kill any possibility of prosecutions. Maybe somebody should ask them and a few others straight out about the word on the street to see if they deny it -- denials which could get the press involved full tilt to determine if the denials are true or untrue. If they are untrue, so much the better.

So the Danner article on the Red Cross report has presented us with a Joseph Welch moment: are this country and its politicians now so far beyond redeeming virtue that we will tolerate not prosecuting the obviously guilty who have disgraced this nation in the eyes of scores, maybe hundreds, of millions of citizens and in the eyes of almost every foreign nation. Have we decided that Robert Jackson’s unforgettable statement at Nuremberg that the proceedings there were not mere victor’s justice, but were an effort to establish rules to govern victor and vanquished alike, was just so much hot air?

Here is the second reason for the Joseph Welch moment. Last Tuesday the famous Colonel Lawrence Wilkerson, previously an aide to Secretary of State Powell, disclosed on the internet disgraceful information -- worse than disgraceful information -- that had largely been kept secret for years. As far as I know, the MSM has wholly disregarded what Wilkerson revealed, doubtlessly for the same reasons given earlier.

Wilkerson revealed that, almost from day one, the very highest American officials knew that almost all of the prisoners at Guantanamo were innocent, but decided to keep these innocent people at Guantanamo anyway for the duration -- for many, many years, for a period outlasting Bush’s term(s) in office -- because they were scared to death at being revealed yet again to be incompetent. So innocent people -- of no intelligence value in actuality -- were kept locked up for years for the self protective purposes of political men, just as was done in the worst dictatorships, just as was done under Hitler and Stalin.

Wilkerson says the capture and transportation to Gitmo of the innocent occurred because of the incompetent way we fought and arrested people -- too few soldiers (thank you, Mr. Rumsfeld), too few of them trained in the art of properly vetting captives, payment of bonuses to warlords to hand over people to us. The same mistakes, says Wilkerson, were reiterated in Iraq, and such mistakes resulted in the long detention of such supposedly hard core, unregenerate terrorists as a 13 year old boy and a man over 90 years old.

Desperately seeking an excuse to imprison for the (never ending) duration innocent people whom they had collected and brought to Gitmo, the Cheneys and Rumsfelds invented a theory for holding the innocent forever. It was the “mosaic philosophy,” and strikes me as exactly the same theory used to justify the NSA’s electronic spying on everyone. Under the mosaic theory, says Wilkerson, if a man were captured in or near areas of operations, he must know at least something (e.g., I suppose, whether Taliban were in the area, or what an Al-Qaeda commander might look like). When snippets from the innocent are combined with other snippets from other, often innocent, people held in custody for years, the result, the “mosaic,” might possibly be turned into useful intelligence. “Thus,” says Wilkerson, “as many people as possible had to be kept in detention for as long as possible to allow the philosophy of intelligence gathering to work. The detainees’ innocence was inconsequential. After all, they were ignorant peasants for the most part and mostly Muslim to boot.” (Emphasis in original.)

Now, we all know that, when it comes to the hard core terrorists of Al-Qaeda, when it comes to the men who planned 9/11, lots of American don’t care and will never care that they were tortured. This would likely be true even if no intelligence of any value has been obtained from them by torture, as a lot of people with relevant knowledge believe. But to hold innocent people for years on end -- at a facility (Gitmo) where there was regular torture and abuse, moreover? To keep people known to be innocent in jail for a significant chunk of their lives? This, one suspects, will strike lots of people as a horse of a different color entirely. Yet despite this -- or perhaps because of it? -- the mainstream media, as far as I can see, has largely ignored what Wilkerson said. It has ignored it though, in news that it happily carried, and which Wilkerson assailed, Cheney has taken to the airwaves to denounce Obama for planning to close down Guantanamo, has claimed that releasing the innocent from that prison will cause more attacks by releasing jihadists when those who will be released are mainly innocent (of course as Wilkerson says, maybe he too -- or you or I -- would become a jihadist if Cheney and Rumsfeld had done to us what they did to innocent Muslims), and has “unmistakabl[y] stok[ed] . . . the 20 million listeners of Rush Limbaugh, half of whom we could label, judiciously, as half-baked nuts.” (Emphasis in original.) Cheney and his like “are evil people,” says Wilkerson, and to that comment one can only say “Amen.” They are evil. They are traitors to the American Constitution.

Letting people like that go unprosecuted, letting them continue to walk free -- often as wealthy men, no less -- letting them continue to walk free even though they locked up innocent people for years in order to serve their own selfish political purposes, just as Hitler and Stalin did, is just as bad as it would be to let Bernard Madoff walk free, could even be considered worse than it would be to let Madoff walk free. Cheney, Rumsfeld and their ilk are at least as purely evil as he, are perhaps more evil than he.

Given all this we now face a Joseph Welch moment when the Congress, the Executive, including Obama, and the American people will stand revealed as either being on the side of decency, on the side of persons like Joseph Welch, or on the side of indecency, on the side of persons like Joe McCarthy. We must either choose prosecutions to uphold decency, or no prosecutions, which would reward indecency.*


* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about­_LTV.htm.

The Tax Views Of Deadeye, The SEC's Customary Action, And Losses of Non Madoff Investors.

March 24, 2009

Re: The Tax Views of Deadeye, The SEC's Customary Action,
And Losses Of Non Madoff Investors.



Last Friday I received a phone call from a friend of 45 years standing. I'll call him Deadeye. Deadeye is a brilliant fellow. He is a crackerjack bridge player, finished first in his class in a significant eastern law school, and has spent 47 years as a tax lawyer. Most important of all, in our youth Deadeye had one of the three best "sandlot" jump shots I ever saw. The form was beautiful, the shot was true, he made a tremendous percentage. Hence, Deadeye.

Before he went elsewhere for law school, Deadeye and I had been in college at the same time in Ann Arbor, in different Jewish fraternities which had a real sports rivalry going. So we have actually known each other for about 53 years though we have been good friends for only 45 years, starting with the time we both practiced tax law together in the Department of Justice in Washington, D.C. (I lasted only about four months in tax law, before giving it up for antitrust.) So, not having spoken for about a year, when he called, Deadeye and I engaged in some of the reminiscences and banter in which we find such pleasure, everything from people we knew, to touch football games on the mall in the mid 1960s, to all the guys and their wives from the old days whom he, luckily, unlike me, manages to see frequently even now, decades and decades later.

But reminiscences were not the reason he called. Deadeye wanted to talk about an aspect of my recent post on the guidance the IRS presented last week for victims of Ponzi schemes.

Deadeye's point was tax-profound, albeit simple -- so many great ideas are really very simple, yet are great because, simple though they are, they have long managed to go unrecognized.

I had used the following example in the post. An investor puts one million dollars into Madoff 20 years ago, had paid $900,000 in tax on phantom income, and on November 30th received a statement showing $2.5 million in his account. I had worked through what the investor lost in real economic terms, in arithmetic terms, and how much he "recouped" under the IRS' guidance ($875,000). But, said Deadeye the tax lawyer, shouldn't the matter be viewed as follows? The investor's actual investment was one million dollars. His actual amount of taxes paid was $900,000. In a just world, he would receive back $900,000 in tax paid on phantom income, and $350,000 from a theft deduction on the one million dollars of stolen principal. His total restitution via taxation would therefore be $1,250,000 -- whereas under the IRS' safe harbor provisions it is only, as said, $875,000.

I said to Deadeye that, putting aside the crucial idea that under the principle of legitimate expectations the theft deduction should be for the full two million dollars in the account on November 30th, I agreed with him. One million dollars of actually invested principal was stolen and should qualify for a theft deduction. Nine hundred thousand dollars of taxes was paid on income that never existed and should be returned. Simple. True. The way it should have been if one does not use the legitimate expectations principle. Deadeye is still shooting dead-on.

Which leaves a question. Why didn't the IRS use these simple ideas when giving guidance, instead of creating the cockamamie Rube Goldberg contraption it called guidance. Here one can only speculate. The answer surely cannot be that the people in the IRS were not aware of the simple, true propositions put forth by Deadeye.

If I had to make a guess -- and I suppose I do -- it is because using Deadeye's dead-on ideas would require the IRS to allow refunds of taxes paid on phantom income -- on non-income which the IRS has no constitutional right to tax -- all the way back to the beginning of the time when the investor began paying the unconstitutional tax on non income. Judging by the IRS' outright rejection in the guidance of use of the claim of right doctrine and its condition requiring that to use the safe harbor provisions one must give up all right to use the claim of right doctrine or the doctrine of equitable recoupment to recover prior taxes paid on the non income, and judging as well by the IRS' additional demand that one also must give up all right to claim a refund even for the three year period currently allowed by statute, a desire not to have to give up the tax it collected over the years on the phantom income, on the non income which it had no right to tax, coupled with a desire to do at least something to help the Ponzi victims, almost surely has to be the motivating force behind the IRS' Rube Goldberg scheme.

This is only the more true when one recognizes that the underlying motivation, both legislatively and judicially, for these rights the IRS is forcing investors to give up in order to use the safe harbor rule -- as also of the tax benefit rule which, in reverse, requires taxpayers to pay tax when something happens that makes a deduction taken in a prior year improper -- is to correct the situation so that it will reflect what the tax should have been rather than what it mistakenly was. It seems to me that the IRS is terrified that, whatever technical objections it might be able to throw up in court in order to argue that investors should not be allowed to use rules like the claim of right doctrine or equitable recoupment, the courts might allow those rules to be used because it has now been revealed to have been so wholly wrong in the end for the IRS to have collected an income tax -- an income tax on what turned out to be non income, an income tax on non earnings that never would have existed were it not for a fellow government body, the SEC.

You know, maybe it was neither ignorance nor oversight that caused the IRS, in its guidance, to not even mention a rule that I learned of only a day ago and would bet even most tax lawyers don't know (just as they knew very little on December 10th about what is beginning to be revealed to be a raft of tax rules that are extant but rarely used). There is a doctrine called the equitable tolling doctrine, which essentially means that, if serious consideration of justice and equity require it, the statute of limitations on seeking refunds will not apply. That doctrine would certainly seem to fit the Madoff matter, and would enable people to sue for refunds back to the beginning of their investment.

The IRS simply does not want to "open up" prior tax years back to the early 2000s, the 1990s or, for some people, even earlier, and this is true even though it had no constitutional right to collect the tax in the first place. If the prior years were opened, it would simply have to give up too much money that it had no right to collect, and whose collection was co-caused, co-enabled, by a fellow government agency. It has thus created a Rube Goldberg scheme to force people to give up their rights in return for at least some tax relief, particularly people who cannot afford to hold out and, perhaps, at the opposite pole, people so rich that they are willing to call it a day in return for scores of millions of dollars they will get back under the guidance, either immediately or in tax carry-forwards.

That, anyway would be my guess.

* * * * *

Now let me turn to the SEC's public statement in 1992 that "Right now, there is no evidence of fraud," a statement which sucked in thousands of people and billions of dollars to Madoff, a statement the SEC never retracted, not even after it began receiving extensive evidence of fraud.

I have wondered for a long time whether such statements by the SEC were as rare as I thought them to be. Somewhat neglectfully, I fear, I failed to inquire into the answer to this question. But now some of us have found out the answer in conversations with, or emails from, securities lawyers. Such statements are never made, the professionals tell us. Never. Oh, on rare occasions, when a party tells it that public knowledge (via leakage?) that he is being investigated is threatening to ruin his reputation, the SEC will give a no action letter to an investigated person and let him use it as he pleases. But that is as far as the SEC goes, and is itself rare. Usually the SEC simply closes its investigation.

So . . . . . . . why did a high SEC functionary announce in 1992 that there was no fraud, why did the SEC do this extraordinary thing? Two possible answers have been suggested. One is that dear old avuncular Uncle Bernie had been so good to the SEC, was such a buddy of the SEC, and was such a huge big deal at NASDAQ, that the SEC did him a special favor, and thereby sucked thousands of people and scores of billions of dollars into his Ponzi scheme. And that is the "innocent" explanation. The other explanation dovetails with the idea, held by many, that the existence and extent of drastic, years-long, continuing malfeasance by the SEC here could not conceivably have been the product of mere negligence or possible ineptitude. Such horrible conduct of such duration, they feel, had to be the result of corruption in high places, and the 1992 statement was the product of and reflects that corruption.

In regard to "mere" horrible negligence versus possible corruption, I recently was sent, as were others, the 1/24/2006 "Case Opening Narrative" from the SEC -- a narrative which explicitly reveals that it in fact was written well after the case was opened. For it talks about what already had been done (e.g., requesting voluntary production of documents), and about what conclusions had already been drawn (e.g., that Uncle Bernie himself had personally misled the staff about the strategy implemented for certain hedge funds and other customers' accounts, had withheld information about certain customers' accounts, and was active as an investment adviser to other hedge funds.)

But the real shocker in the putative "Case Opening Narrative" (emphasis added) was this: The complaint given to the SEC by the person who had complained, the "Narrative" said, the complaint given to the SEC by the person who obviously was Markopolos, "did not contain specific facts about the alleged Ponzi scheme." However, the staff "is trying to ascertain whether the "complainant's allegation that [Uncle Bernie] is operating a Ponzi scheme has any factual basis." The "Closing Recommendation Narrative," dated a year later, 1/21/2007, subsequently said "The staff found no evidence of fraud."

The complaint given to the SEC by Markopolos "did not contain specific facts about the alleged Ponzi scheme"? Are you kidding me? Markopolos told the SEC how Madoff was paying feeder funds outlandish fees. He told it that Madoff demanded utter secrecy from the feeder funds as to whom their investment manager was. He told it that rather than Madoff covering his trades with puts and calls, as he claimed to be doing, there were, by far, not enough puts and calls in the whole country to even begin to cover his claimed securities trades. He told it to check with firms with which Madoff supposedly was dealing in puts and calls to check out whether they had trade tickets verifying the dealings. He told it that Madoff did not allow outside performance audits by firms that wanted to perform due diligence. He told it that Madoff appeared to subsidize down months and to have incredibly perfect market timing. He told it that Madoff was giving up what would have been huge fees it would otherwise have made. He told it that Madoff's brother-in law was the auditor and that only Madoff's family knew what the strategy was. He told it that others who were using the split strike conversion strategy were unable to replicate Madoff's results, and he could not replicate the results on "retroactive" computer runs. He told it the names of high level Wall Street officials to talk to -- whom it never contacted. Yet, the SEC memo says that Markopolos' complaint "did not contain specific facts about the Ponzi scheme" (let alone about expert opinions regarding it)? Gimme a break. Plus, when the opening "Narrative" say Markopolos gave it no specific facts, is it any wonder that the closing "Narrative" says the staff "found no evidence of fraud."?

You know, all this seems to me to indicate something far worse than "mere" horrible negligence. Alleged negligence, alleged incompetence, of this magnitude fairly screams not "mere" negligence, not "mere" incompetence, but outright corruption of some type.

* * * * *

I want to conclude by assailing a point that is being taken for granted as true, but seems to me often not true.

It seems to be accepted, even among Madoff's victims, that they can get no empathy from others because even those others who could afford to and did invest elsewhere, including average working Joes who invested through pension vehicles of one type and another, lost half their money invested in the market in the last year. But, you know, things quite often -- not always, but quite often -- look quite different if you look, as investment soundness dictates, at longer time horizons than just the last year. For example, the Madoff investor who began with Uncle Bernie in 1978 (a time period when many did begin with him) had zero at the end of 2008. The Dow was at 805 at the end of 1978 and at 8776 at the end of 2008, over 1,000 percent higher even after the great collapse of 2008. If you use the year 1992, when the SEC became a co-cause of damages, the Dow was at 3301, with it again being 8776 at the end of 2008, or very roughly 240 percent higher. If you use the year 2000, when Markopolos sent his complaint to the SEC, the Dow was at 10786 at the end of December, so there is a loss of roughly 20 percent. But if you use 2002, when the Dow was at 8341, there is a small gain.

So, ceteris paribas as the economists say, and assuming in all cases that over the years, over time, you kept all your money in the investment instead of withdrawing principal or income, you generally did ok on the basis of the Dow, and you never even came close to losing all your money, as investors in Madoff did.

If you run the numbers against the S&P, the results are of the same type. The S&P stood at 277 at the close of 1978, at 435 at the close of 1992, at about 1320 at the close of 2000 and at a closing price of 903 the day after Madoff was arrested. So in two of the three cases you did fine.

If you look at a straight compound interest table, you find that someone who invested $1,000 at a mere 4 percent in 1988 had 2191 at the end of 2008. Those who invested at 4 percent at the end of 1992 or 2000, respectively, had $1,872 and $1,368 at the end of 2008 -- and did not lose half or so of their money in 2008, as people in the market did. If you invested $1,000 at 5 percent or 6 percent at the end of 1988, 1992 or 2000, at the end of 2008 you had, at 5 percent, $2,653, $2,182, and $1,447, and at 6 $3,207, $2,540, and $1,593. So you did fine and once again, you did not lose half your money in the meltdown of 2008.

The same holds true for mutual funds. The Morningstar 500 annual edition gives five, ten and fifteen year figures for mutual funds. The 2009 edition, which covers the year 2008, is not out yet, and I don't use a computer so I am not going to check things that way. But if you go to the 2008 edition which covers the year 2007, look up the five, ten and fifteen year dollar figures at the end of 2007, and then arbitrarily cut the 2007 figure in half to account for 2008, you will find that investors in good funds did fine over the long haul unto the end of 2008. And they did not, of course, have their investments wiped out in 2008, as Madoff investors did.

So the idea that other investors should have no sympathy for Madoff investors because the others lost half their money in 2008 is probably a good soundbite and therefore an attractive "political" statement, but, like so many soundbites and attractive "political" statements, does not stand up to analysis. Over longer terms than 2008 alone, others did fine and were, of course, not wiped out in 2008. Madoff victims were wiped out in 2008.*


* Thisposting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about­_LTV.htm.

The Serious Shortcomings Of The Guidance Issued On Tuesday By The IRS.

March 20, 2009

Re: The Serious Shortcomings Of The Guidance
Issued On Tuesday By The IRS.



Not being a tax lawyer, I am not sure that I understand all of the ins and outs of the revenue ruling and safe harbor procedure announced on Tuesday by Commissioner Shulman. (As an aside, my wife and I have known his parents since the period 1958-60, and he was nice enough to call me a few days ago to explain why he was not going to meet with me in response to a request I made. I appreciated his call.) But if, and to the extent, that I do understand things, I think the emotional exhilaration that greeted the IRS’ action is going to be replaced by disappointment and questions once there is an opportunity for sober analysis of the IRS’ action. And I am very afraid that I do understand things correctly, since, for vetting purposes, I sent this posting in advance to an accountant, three tax lawyers and a financial expert who is on the Steering Committee, with a request to notify me of any factual mistakes. Two of the five persons did notify me of errors, which I corrected, so I assume and fear that what I am saying is correct.

Many people are unhappy already since, it seems, the IRS has provided no help to those who invested through feeder funds, nor of course to non-taxpaying entities like charities, pension funds and IRAs. (Couldn’t some help have been provided to pensions and IRAs, with the help to become operative at the time people take out money from them and have to pay taxes on that money?(Or would have done this?)) But, if my analyses are right, I think that disgruntlement may spread upon reflection and sober analysis.

Let me start with an example that likely is reasonably typical -- not perfectly typical, but reasonably typical -- of many members of MadoffSurvivors and other investors in Madoff. For ease of comprehension, the example implicitly contains certain simplifying numerical assumptions to illustrate principles. For instance, the example ignores lost opportunity cost, and that tax rates used to be higher, both of which would make the situation even worse for victims. On the other side it ignores that sometimes people had an overall tax rate somewhat less than 35% because of certain kinds of non Madoff income. But I don’t think the simplifying assumptions invalidate the overall points I am trying to make.

So let’s assume that a person invested one million dollars in Madoff twenty years ago. On November 30th his account statement showed $2,500,000. Over the twenty years he paid $900,000 in taxes on his Madoff earnings. Because he could not afford to pay this tax from his non-Madoff income, he withdrew the $900,000 from Madoff to pay it.

Now, what has this investor actually lost? Forget tax argot. In American dollars and cents, in simple arithmetic, what has he lost? Well he obviously lost his one million dollars of initial investment. Under the well established principle of legitimate expectations -- which here serves as a substitute, as it were, for methods of computing lost opportunity cost that are used in finance and in litigation -- he has also lost the $1.5 million dollars of income and appreciation shown on his November 30th statement. And he has lost the $900,000 he withdrew from Madoff to pay his taxes, plus the “Madoff earnings” he would have made on that $750,000 had he not had to withdraw it to pay taxes (but for purposes of simplification I’m going to pretty much ignore those “earnings” except to note them where appropriate). So his total dollars and cents loss, his total arithmetic loss, is $3,400,000 (plus the earnings on $750,000 which I am ignoring): he has lost his initial investment of one million dollars, his appreciation of $1.5 million and the $900,000 he gave the IRS for taxes (plus, of course, the earnings on that $750,000, which I am ignoring).

So $3,400,000 is the investor’s dollars and cents loss. But what does Tuesday’s IRS guidance provide with regard to the loss? What can be taken as a theft loss deduction?

As I understand it, the initial investment of one million dollars is included in the theft loss deduction. So is the $1.5 million dollars of appreciation, because the investor paid tax on it. So now we’re up to a theft loss deduction of $2.5 million dollars. And as I and at least some others understand it, the $900,000 he withdrew to pay his taxes is also included, because he did pay tax on it. So now his theft loss is $3.4 million.

But from that $3.4 million dollars the investor must subtract his withdrawal of $900,000, which he used to pay his taxes. So his theft loss is now back to $2.5 million dollars. (The $900,000 became a wash because first it was added in calculating the theft loss and then it was subtracted. The results shown below for the investor would be worse if I am wrong in thinking that the $900,000 was included in one’s theft deduction before being subtracted. For that would mean that the theft loss is only $1.6 million - - $2.5 million minus $900,000, not $3.4 million minus $900,000).

This theft loss of $2.5 million can be taken in the 2008 tax year and can be carried back three years (not five, unless you are a small business) if it is not used up in 2008, and, if it is still not used up after the three year carryback, can be carried forward twenty years. But regardless of how many years it can be carried backwards or forward, it still is a theft loss deduction of $2,500,000, and a theft loss deduction of $2,500,000 will get you a total refund of roughly 35 percent of that amount, or $875,000. And the investor, whose real dollars and cents loss was $3,400,000, will get back only about 26 percent of his actual loss of that amount under the IRS’ guidance. ($875,000 is about 26 percent of $3.4 million.) (The percentage of recovery of one’s true loss would only be about 16 percent if you do not first add in the $900,000 when calculating the theft loss.)

The Investor will also get back $25,000 less than the tax he paid to which the IRS never had a right in the first place. Concomitantly, the IRS is not hurting since it gets to keep some of the tax money it never had a right to in the first place -- often money it would not have gotten from Madoff “earnings” if another governmental agency, the SEC, had not sucked people into Madoff by announcing in 1992 that there was no fraud. And in the time period during which it had the investor’s hundreds of thousands of dollars in tax payments, it defacto received an interest free loan of said hundreds of thousands of dollars -- and it had some part of the interest free loan for many years, for nearly two decades. (Those who say the IRS would have gotten the tax money from other earnings neglect, among other omissions, the fact that one paid tax on Madoff earnings of 35%, that other investment vehicles where income was taxed at this rate (e.g., CDs or Treasuries) earned far less than Madoff and the amount of tax therefore would have been far less, and that income from investments that earned as much as Madoff (e.g., stocks, mutual funds) was usually subject to the far lower tax rate of 15 percent -- not 35 percent.)

And the investor, who previously had the yearly income from 2.5 million dollars on which to live, will now have the yearly income from only $875,000 on which to live. His annual income on which to live could easily be as low as $26,200 at 3 percent interest on safe treasuries or CDs (the 75 year old needs safety above all else now). Not exactly a high income for someone living in New York City, South Florida or in the Los Angeles area.

(You know, the situation faced by my hypothetical member of MadoffSurvivors is worlds different from that faced by the super wealthy. Take someone who lost 100 million or 200 million (or more) in Madoff. (There, of course, were such people.) Assume that such persons had put in half the amount lost, that the other half was phantom income, and that they paid their tax on Madoff income with money from non-Madoff sources, as is likely the case for the superrich. Someone who lost 200 million dollars would have paid 35 million on taxes on the Madoff income of 100 million dollars. His theft loss deduction will be the full 200 million still in his account, which will net him 70 million dollars in tax refunds carried backwards (with his deduction perhaps being for five years, not three, because he in effect is a small business) and carried forward for 20 years. Although he doesn’t need the money, he could live pretty well on 70 million dollars of refunds. Moreover, I imagine it is possible that, although Madoff income was shown as part of his gross income on his tax return, he may in reality have paid no or little tax on it because most or all of his taxes may have been wiped out in prior years by the deductions and tax credits which the superrich and their tax lawyers know about and the superrich get. Even so, the 70 million dollar theft loss deduction will be available to our 200 million dollar man to be used to lower his taxes in the future, for twenty years. Given all this it wouldn’t shock me if the superrich, with their super political access, lobbied in favor of some such result as is provided in the IRS’ guidance. In fact, based on snippets that I’ve heard here and there, I would speculate this could well be likely. It is, however, only a speculation at this point.)

But, you say, the hypothetical small investor who belongs to MadoffSurvivors will also get back refunds of the income tax of $900,000 that he paid. Nope. Sorry. Not so under the IRS’ guidance if the investor opts to use the safe harbor provisions. Though Commissioner Shulman said that last Tuesday’s guidance did not deal with the treatment of refunds of taxes paid in prior years, in fact, as he also said, the guidance does deal with this question if you use the safe harbor provisions. If you use the safe harbor, you must pledge -- must swear -- to give up claims for income tax refunds. If you have already filed for such refunds -- as so many people have because the smart money said to send in your claim for refunds as early as possible - - you have to withdraw the filing defacto. Nor can you use the claim of right doctrine. The IRS has said in its guidance that that doctrine is not applicable to Ponzi schemes because one doesn’t have to “restore” the income to avuncular Uncle Bernie, and there is somehow some inexplicable metaphysical difference, for purposes of the claim of right doctrine, between not restoring to Madoff the money which you never physically got from him and, for example, reversing an account if you are an accrual basis taxpayer who likewise never physically got the money on which you paid tax.

And, not satisfied to rely on this total lack of logic, if you want to use the IRS’ safe harbor provisions in order to avoid the terrible hassle of possible IRS inquiry into and rejection of your claimed theft loss, the IRS requires you to pledge, to swear, that you will not seek to use the claim of right doctrine against it.

You know, it is a harsh thing to say, but although the IRS says it put out its guidance to help out investors in Ponzi schemes, and though one doesn’t doubt its sincerity (and I certainly don’t doubt Doug Shulman’s personal sincerity), at this point the IRS’ guidance nevertheless begins to look a trifle extortionate, in result if not in intent. The investor only gets back 26 percent of what he lost, and the IRS keeps a part of the tax payments to which it never had any right in the first place, which it might not have gotten but for the SEC’s complicity, and which constitute an interest free loan to it for many years. And, if you try to claw back (how’s that for an unhappy phrase) the tax payments you should never have had to make in the first place, you cannot use the safe harbor provisions to avoid being hassled and possibly having your claim rejected by the IRS regardless of whether you are attempting to use amendments to prior tax returns or the claim of right doctrine as the vehicle for seeking the clawback (that dread word again).

In addition to the safe harbor provisions requiring you to give up your claim for refunds if you want to avoid the horrible hassle of a potential IRS challenge and rejection, the provisions also have another requirement that is, to put it mildly, very onerous. You must deduct from your theft loss any potential SIPC recovery (which will of course increase the amount of ill gotten tax money the IRS will be able to keep). Well, right now many Madoff investors, maybe even most of them, cannot know whether they will get a SIPC recovery nor how much it would be. The position now occupied by so many Madoff investors is that they will get a greatly diminished or no SIPC recovery if the SIPC Trustee continues to follow his (illegal, I think) cash in/cash out basis of determining net equity, but will get a full SIPC recovery if the Trustee is ultimately required by litigation or legislation to follow the governing legal principle of “legitimate expectations,” under which investors’ net equity is calculated on the basis of the amounts shown on their November 30th statements. (This is discussed in a prior blog.)

And then there is this to cap off the onerous aspects of the IRS’ guidance - - guidance which provides the typical MadoffSurvivors investor with recovery of a relatively small percent of his losses, allows the IRS to keep some of its ill-gotten tax gains that were an interest free loan and are often attributable to the SEC’s complicity, and that imposes adverse requirements on the investor if he wishes to use the safe harbor provisions to avoid possible hassling and rejection by the IRS: Tax day is less than a month away. The investor therefore has less than a month to decide what to do -- to decide whether to use the onerous guidance -- unless he gets an extension for filing. Why do I think there could well be a lot of requests for extensions? -- at least there could be a lot of requests for extensions unless, as one tax expert has warned me, such a request will cut off one year of your carryback.

As said, I dearly hope to be wrong about lots or all of what has been written here. And what the hey, I read the materials closely, and wrote this, between two and six in the morning, thereby dramatically increasing the possibility of being mistaken. But my fear is that I’m not factually mistaken, especially since five tax experts were asked to tell me if they found errors, and I equally fear that the IRS’ guidance is really a sort of wolf in sheep’s clothing for the small man. And unless I am really, really wrong about some of what has been written here, the need for enactment of a bill like Congressman Ackerman’s, a bill allowing refunds of taxes paid on phantom income going back many years, preferably at least back to 1992 when the SEC became an aider and abettor of Madoff’s Ponzi scheme, is now more essential than ever, since the small man obtains only modest help, and suffers extensive adverse consequences, from the IRS’ supposedly helpful “guidance.”

Before I end this posting, let me make one additional comment, with regard to whether one should be allowed to recover income tax paid on phantom income. The comment is based on a thought which occurred to me at 1:30 a.m. on the night after I wrote everything preceding this.

When I was in my second year of law school in Ann Arbor in 1961-62, we had an unforgettable tax professor named L. Hart Wright (the father of the famous journalist Robin Wright.) Elhart (which is what the students called him among themselves then and now, 47 years later) had a remarkable teaching style. So I can still hear him, in response to students’ inadequate answers to some hypotheticals, boomingly quoting the 16th Amendment, which allows Congress to levy an income tax. An income tax, he would plangently say, can be levied on “all ‘incomes, from whatever source derived.’”

Think about that for a moment. The 16th Amendment to the Constitution gives Congress power to levy an income tax on all “incomes, from whatever source derived.” (Emphasis added.) It turns out that, to the extent that people did not physically withdraw appreciation in their accounts from Madoff, they never had any income from him. That is why the appreciation in one’s account is called phantom income. By not honoring claims for refunds of taxes paid on phantom income that turns out to never have existed, the government is continuing to levy a tax on non income rather than on income. The 16th Amendment does not allow this; it allows only a tax on income, not a tax on non income. To disallow refunds of taxes paid on non income is to violate the Constitution. (Thus, at least back in the day when I was teaching and was expert in constitutional law, in the 1960s and 1970s, the IRS’ demand that one give up the right to seek refunds of taxes paid on such non income as the price of using its safe harbor provisions would have been called an “unconstitutional condition.”)

Yes, there is a constitutional argument here, and I, at least, think it correct. So, nearly forty-eight years later I offer a belated thanks to Elhart -- who, ironically, did a lot of work for the IRS -- for plangently and therefore indelibly impressing on our feeble minds that an income tax lies only on “all ‘incomes, from whatever source derived.’” (Emphasis added.)*






* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about­_LTV.htm.

No Siree Nocera[h]. You Are Dead Wrong.

March 17, 2009

Re: No Siree Nocera[h]. You Are Dead Wrong.



On the weekend of March 7th and 8th, a conference on the ineptitude, inaccuracies, problems of and possible solutions for, the mass media was held at our law school, the Massachusetts School of Law. The panelists included famous names in American journalism, deans and professors at schools of journalism, reporters and others. Two of the speakers and attendees were famous ex-Timesmen, David Cay Johnston, the financial writer and author of impressive books, and Chris Hedges, the foreign and war correspondent and author of deservedly famous books.

I mention the conference and two great Times’ reporters like David and Chris because on Saturday I read a column in the Times that represents some of what is wrong with American journalism. The column, being in the Times, is written on a much higher plane than most of the crap that passes for written journalism in this country but is nonetheless an example of the genus (not genius).

The article is by Joe Nocera. Its title tells you everything you need to know: the title, which Nocera likely did not write but which bespeaks the column very well, is “Madoff Had Accomplices: His Victims.” Not his wife. Not his brother. Not his sons. Not his niece. Not his putative auditor. Not the dozens of Wall Streeters who suspected something was wrong but didn’t tell the SEC. Not the SEC, which publicly announced in 1992 that no fraud was involved and then ignored Harry Markopolos. No, none of these. Rather, his victims. They were his accomplices.

Now, Joe Nocera is often a pretty good financial writer. He is, however, no David Cay Johnston, because he doesn’t research matters as thoroughly or carefully, and instead partially shoots from the hip, as in Saturday’s article. But there is one thing at which he is much better than David. He is much better at wrapping a load of crap in a cloak of apparent even-handedness, a veneer of apparent objectivity, and in trying to get you to swallow bovine defecation because of the veneer with which he surrounds it while unfairly savaging people.

Let me describe some of Nocera’s tricks in last Saturday’s article before getting to the meat of his argument. Read the piece yourself and you will see these tricks in full flower.

Nocera starts by describing how he chatted up a man in line with him at the courthouse, waiting to see Madoff plead last Thursday. The man was “well dressed” but “looked a little haggard.” (So might you look, Joe, if you’d been through what this fellow obviously has been through for the last three months.) The man didn’t want to give his name, says Nocera, “‘unless there is some benefit for me,’ he said dourly, but ‘I haven’t had too many benefits lately.’”

Thusly Nocera establishes the picture of a haggard, dour, selfish victim who won’t cooperate with the prominent Timesman, Joseph Nocera.

But when Nocera asked him “what role he thought the government should be playing, it was as if I had flipped a switch. Suddenly, his reticence fell away.” He said the SEC “‘played a big role in the problem, had a lot to answer for.’” He thought “the tax code should be changed” -- now heed Nocera’s comment after the dash in what follows -- “so that Madoff victims can recoup profits that turned out to be illusory -- no matter how far in the past those taxes had been paid.”

As I say, note that last editorial comment after the dash. In Nocera’s mind, it seems, if you paid the taxes a long time ago, there is something wrong with seeking to get them back, and Joe’s victim is to be condemned for desiring refunds of taxes he never owed because the income paid on them never existed. It is of no moment to Joe that, if the shoe were on the other foot, and it were the government seeking payment of taxes the “haggard,” “dour” man owed but had failed to pay 20 or 30 years ago, the government could recover from him.

Nocera goes on to write that his victim said the Securities Investor Protection Corporation “should give victims more than the current $500,000 maximum.” Notice Nocera’s use of the word “give,” as if it were some kind of charity or bailout -- which is being “given” by the trillion(s) to the Wall Street ghouls who caused the current economic disaster. No mention here that SIPC restitution was deliberately set up by by Congress 40 years ago to try to maintain confidence in investing and thereby promote the investment needed for a healthy economy. No recognition here that the amounts for recovery were established in 1978, 31 years ago, but the cost of living has risen about 350 percent since then. Nope. Just a haggard, greedy guy who wants the SIPC to “give” him money. Nice painting, Leonardo, er, Joe.

That is how Leonardo Nocera initially set the stage for what he wants to say. But then, to paint a portrait of objectivity, of even-handedness, Leonardo proclaims Madoff to be the worst of the worst, and later says “It was hard not to feel sad” for a weeping woman named Sharon Lissauer, or “for all the victims of Mr. Madoff’s evil-doing.”

Leonardo’s major point about investors was, however, “what were they thinking?” “Just about anybody who initially took the time to kick the tires of Mr. Madoff’s operation tended to run in the other direction,” he says. He then quotes the head of an advisory firm, with the hysterically appropriate name of James R. Hedges IV (no sons or daughters of immigrants or holocaust survivors or working class parents here). The aptly named Hedges said “he spent two hours asking Mr. Madoff basic questions about his operation. (Would Madoff himself have given the average investor two hours?) “The explanation of his strategy, the consistency of his returns, the way he withheld information -- it was a very clear set of warning signs,” said Mr. Hedges. “When you look at the list of Madoff victims, it contains a lot of high-profile names -- but almost no serious institutional investors or endowments. They insist on knowing the kind of information Mr. Madoff refused to supply.”

Leonardo admits that “I suppose you could argue that most of Mr. Madoff’s direct investors lacked the ability or the financial sophistication of someone like Mr. Hedges.” “But it shouldn’t have mattered,” natters Nocera. For the first lesson of investment is to diversify so you can’t lose everything to one failed investment or to a crook -- a fair point.

Nocera then quotes a Columbia Business School Professor, Bruce Greenwald, and Hedges again for the propositions that people sought “no professional advice” and “people cannot abdicate personal responsibility” when investing. (The two points seem strangely inconsistent in one way, do they not?) Leonardo is painting a picture, so he finds no investment experts to quote who would point out all the many reasons why ordinary people might have gotten sucked into Madoff. I guess Leonardo never heard of Harry Markopolos. Such one-sided quoting of experts is, I note, something the Times does more generally. (Well, maybe it’s better than the idiotic he said/she said convention of journalism, though one wonders.)

Leonardo subsequently quotes a woman named Phyllis Molchatsky, whose broker advised her to invest with Madoff because that was “a safe place to put her money.” Her story Nocera said “is sure to rouse sympathy,” but due to the fraud plus the failure of the SEC “she felt the government owed her.” Note the pejorative phrase “owed her.” So did Elie Wiesel feel this way, since he too thought the government “should help the victims -- or at least charitable institutions” -- like his, one presumes. Nocera quotes Wiesel as previously saying “The government should come and say, ‘We bailed out so many others, we can bail you out, and when you will do better, you can give us back the money,’”

“But why?” should they be bailed out, then rhetorically asks Nocera. Here is his answer in the negative to his own rhetorical question:

What happened to the victims of Bernard Madoff is terrible. But every day in this country, people lose money due to financial fraud or negligence. Innocent investors who bought stock in Enron lost millions when that company turned out to be a fraud; nobody made them whole. Half a dozen Ponzi schemes have been discovered since Mr. Madoff was arrested in December. People lose it all because they start a company that turns out to be misguided, or because they do something that is risky, hoping to hit the jackpot. Taxpayers don’t bail them out, and they shouldn’t start now. Did the S.E.C. foul up? You bet. But that doesn’t mean the investors themselves are off the hook. Investors blaming the S.E.C. for their decision to give every last penny to Bernie Madoff is like a child blaming his mother for letting him start a fight while she wasn’t looking.

The last sentence of this preceding quote from Leonardo is, I must say, particularly offensive. To blame the SEC makes one like a child blaming its mother. That is a brutal, a nasty, thing to say about people who so often followed brokers’ advice, who accepted returns that often were so much lower than were being received from mutual funds, who paid taxes that were 200 to 250 percent higher than were paid by investors in mutual funds or stocks. It is offensive, it is nasty, and it is completely ignorant of what happened. As indicated earlier, Leonardo, unlike David Cay Johnston, doesn’t do his homework.

Leonardo doesn’t seem to know that the SEC was extensively responsible, was extensively the cause, starting in December 1992, for the misery on display at the courthouse last Thursday. For, as discussed here in a prior blog, in December 1992 the SEC made a nationally-circulated public announcement that there was no fraud involved in investments placed with Madoff. This announcement was made by the federal agency that was specifically set up to protect people against investment fraud. When such an agency made such an announcement, it caused people to feel Madoff must be strictly kosher. It caused them to leave money in Madoff, to put money in Madoff for the first time, to put more money in Madoff. Nor was the announcement ever retracted so that people could defend themselves against the fraud by possibly taking money out, or possibly not putting more money in, or possibly not putting money in for the first time. It was not retracted even after Harry Markopolos drew the SEC a map in 2000, a map which the blind men and women at the SEC could not see, a map which, to quote Gary Ackerman, they could not find with both hands with the lights on. While I did not put all of my money in Madoff and so am to some degree free of the Nocerian taint of failure to diversify, and while I did the due diligence of which I was capable as described in a prior blog (where I spoke of meeting with Madoff’s number two man to obtain an explanation of Madoff’s investment strategy), I must say that the SEC’s never-retracted 1992 statement was an important factor when I first put money in Madoff in April 1995 and when I put more money in Madoff in later years. But, not doing his homework -- perhaps because it might interfere with the picture he wishes to paint? -- Leonardo does not mention the SEC’s statement or its effect on huge numbers of people, and probably does not even know about it. (If he does know about it, but left it out anyway, such omission of such a crucial matters should be grounds for being fired from the Times because it would have been such a vicious effort to slant matters.)

As for investing in Enron, failed companies, and other non-Madoff Ponzi schemes, it is true that the government hasn’t bailed them out. But it is also true that most companies fail due to market risks, which Madoff victims likewise assumed, not fraud, and one suspects that the government should bail out the Ponzi victims, like it should bail out nonflipping homeowners who, acting honestly, got sucked into subprime mortgages by the piranhas, the financial ghouls, of Wall Street. But, accepting that the government hasn’t bailed out such people -- the less affluent of this society, who always get the short end of the stick while the economic giants who caused disaster in the interests of uncabined greed receive trillions in bailouts -- it is still true that Leonardo forgets to put into his picture an essential fact: Madoff’s was the only criminal scheme that was publicly blessed by the government, which thereby sucked people into it, by a nationally circulated statement that there was no fraud (i.e., no Ponzi scheme). Nor can it yet be said that the SEC was itself warned about these other scams -- let alone warned to the extent Markopolos warned it about Madoff -- yet did nothing about them as it did nothing about Madoff.

Nor -- when expounding his philosophy of it was her fault that she was raped because her skirt should have been longer than knee length -- does Nocera see any problem with the fact that nothing was said to the SEC by the kind of investment professionals whom he quotes -- the Hedges IV of the world -- who had the knowledge and skill to suspect something was wrong. More of these people seem to surface all the time, and before this is over we are likely to find out that there were scores of them. But not one of them other than Markopolos apparently said word one to the SEC. Had they done so, had Markopolos not been a lone voice crying in the wilderness, perhaps the SEC would have stopped the fraud a long time ago and Leonardo wouldn’t have had to be in line at the courthouse last Thursday. But the thought that extensive fault might lie with his own buddies, his own sources, the kinds of financial bigshots, the ghouls of Wall Street whom one knows Nocera regularly talks with if one regularly reads his column, never seems to cross Leonardo’s mind. He’d rather blame the haggard people who lost everything, the Sharon Lissauers, the Phyllis Molchatskis, the small people who relied on the SEC, which was supposed to protect them and instead helped suck them in.*



* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about­_LTV.htm.

Madoff Did Not Exactly Take It On The Chin Last Thursday.

March 16, 2009

Re: Madoff Did Not Exactly Take It On The Chin Last Thursday.



A few comments about last Thursday’s hearing before Judge Chin on the Madoff matter may be warranted.

Reading the transcript with a lawyer’s eye, it seems evident that Judge Chin had made up his mind as to what he was going to do before he walked into the courtroom. Giving people a right to speak was form, not substance. The transcript shows that it plainly affected nothing. The judge took no account of people’s comments or logic when rendering his decisions. Sic semper transcriptus.

For judges to walk into courtrooms with their minds already made up, so that whatever is then said to them is of no moment, is hardly unusual. If anything, the reverse. Allowing lawyers or, as here, others to speak is often just a pro forma way of fooling people into thinking courts are open minded and objective. To doubters, to the naïve, all I can say is “Sorry, but those are often the facts.” So too they plainly seem the facts here, notwithstanding that there were those who came thousands of miles to speak.

One of the judge’s decisions was to deny bail and have Madmanoff locked up. Nobody but Madmanoff’s lawyers objects to that. But it is curious that little has changed since another judge previously granted bail, and let Madoff stay in his penthouse, with access to his computer -- and to who knows how much or what information -- so that he could work for three months on keeping his money hidden, on keeping it beyond the reach of the feds (as by transfers and attempted transfers of money and property (remember the jewels?) to his wife and family.)

Judge Chin pointed out that Madoff has the motive and means to flee and therefore presented a risk of flight. This was all correct. But he had the same motive and means and presented the same risk three months ago, when a different judge merely put him in an ankle bracelet and under house surveillance, both of which could have been continued now if they in truth were sufficient. True, now he has pled guilty. But he had confessed to the FBI on December 11th. Am I wrong in thinking a confession is itself an admission of guilt, just like a plea of guilty is? Madoff knew in December that he would be going away for a long time. In fact, if you believe his allocution (his statement in court), he has known it for many years. So nothing about motive and means to flee and risk of flight had changed last Thursday. The only difference was that in December a judge, with the leniency typically extended to white collar criminals, let a man, who had 800 million dollars which he could use for fleeing from the jail time awaiting him, stay in his penthouse and use his computer to move and hide money, whereas Judge Chin said, defacto, enough already.

Judge Chin’s other decision was to accept Madoff’s guilty plea. The judge was in possession of at least one document showing that there were people who thought with good reason that accepting Madmanoff’s guilty plea was a very bad idea, and heard one person who had come thousands of miles to say that, very briefly, in court.

But as the transcript makes evident, Chin had made up his mind to accept the guilty plea. This was a bad decision, I think. Rejection of the plea would have put pressure on Madoff to disclose much more to the feds, with whom he apparently is being uncooperative, including being uncooperative as to where all the money went. If the guilty plea were rejected, and remained rejected, there would be a trial at which lots of evidence would come out about how the dirty deed was done and who was involved, evidence that would likely -- I personally think would certainly -- implicate family members whom Madmanoff is therefore trying to protect, if he can, by pleading guilty. If the pressure of a possible trial at which hordes of facts would become public were put on him, Madoff could prove more tractable to the feds in exchange for a reduction in the punishment to be meted out to his family members. Such tractability could include telling feds where all the money is, including the money set aside for his family.

In response to any and all such objections to accepting Madmanoff’s guilty plea, Judge Chin said only that “as the government has just said, it is continuing its investigation and this guilty plea certainly does not preclude the government from proceeding.” That putative answer is actually a non answer. Not only does everyone know the government is continuing its investigation, but Judge Chin did not even mention, let alone assess, the relative advantages to the government’s investigatory effort of accepting or rejecting the guilty plea at this time and thereby eliminating right now even the threat of a trial. This was bad. Very bad, in my estimation.

But there is, unfortunately, more.

I personally am not familiar with the law on whether a guilty plea should be accepted when the judge knows, suspects, or should know or suspect that the defendant is lying to him or holding back important information. But I’ll bet the law says the judge can, or maybe it conceivably even says he should, reject the guilty plea, especially since the lies or continuing concealment show the defendant is not accepting full responsibility for what he did. Lying and holding back information is what Madoff did in his allocution if one believes the government.

For example, Madmanoff says his best recollection is that his Ponzi scheme began in the early 1990s. Can you imagine that? The operator of what might be the world’s largest fraud ever, the man who probably had to keep huge amounts of relevant information in his head over fifteen or twenty years or so, claims he does not remember for certain when he started this fraud! He can only give his best recollection. Gimme a break!

Even more important, the government says the fraud started at least as far back as the 1980s, not as “late” as the early 1990s. What’s the chance that Madmanoff is not lying when he claims his best recollection is that he started his scheme in the early 1990s? Pretty low, if you ask me. Why is he lying about the starting date? That is an interesting question, is it not? But Judge Chin did not ask it, and seemed oblivious of the entire point.

Why did Madoff start the scheme, regardless of what the starting date was? He said the reason for starting it was that

I had received investment commitments from certain institutional clients and understood that those clients, like all professional investors, expected to see their investments out-perform the market. While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients’ expectations, at any cost.

Huh? He felt “compelled” to satisfy the clients’ expectations “at any cost”? Just who were these supposed institutional clients whose expectations he had to fulfill at any cost, and why? His statements resonate of leg breakers or worse, not of institutional clients. In any event, what clients -- and what kind of clients -- were so important that he had to fulfill their expectation by a massive fraud if he could not do so legitimately. The question fairly screams from the transcript, as I would think it must have screamed from Madoff’s allocution if one had been listening carefully and thinking about what was being said. Judge Chin was oblivious.

Another point, raised by the government in papers it filed prior to the hearing, so that Judge Chin could have read and absorbed the point at his leisure before the hearing, is similar in import. The government said Madoff had promised some people returns as high as 46 percent. Huh? Forty-six percent? Are you kidding me? Who were these people? Mafiosi with leg breakers or worse? People who knew what was going on and demanded such huge “earnings” in return for silence? Complete dummies who would believe you could make 46 percent year after year? -- it is inconceivable that anyone could be that stupid, could believe this could be done honestly and legitimately. So the questions of who were the people who were promised returns like 46 percent, and why were they promised this, scream for an answer. But Judge Chin was oblivious.

Madoff claimed his Ponzi scheme had zip to do with his legitimate broker-dealer business. The feds said it helped finance that business. Once again, Judge Chin should have known that, if the feds were telling the truth, then Madoff was lying to his face. Once again the Chin was oblivious. It never even quivered.

So, if you ask me, the judge acted badly in accepting Madoff’s guilty plea. He allowed Madoff to lie to his face and not to answer questions that cried out for answers. As well, by eliminating the possibility of a trial in which so much would come out, he potentially cloaked much or most of the facts in the non transparency for which the U.S. government and all its branches have been infamous since at least 1964, if not before. Now what we shall learn -- and, maybe more importantly, what is kept from us -- is totally within the discretion of the government, rather than almost inevitably being exposed at a trial due to the exigencies of trial. Bad. All very bad -- unless one takes the position that what this country needs, and what Madoff’s victims need, is more secrecy, not less.*


* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about­_LTV.htm.