June 19, 2009

Re: SIPC’s Objections To The Posting Called “Irving Picard’s Three Percent Commission In The Madoff Case.”


To put it mildly, it is clear that SIPC has been the object of extensive criticism in the Madoff victims community. The criticism is, I suppose, only the stronger among those victims who are middle aged or elderly, were retired, were wiped out and have little or no money to live on, who have had to wait many months and may still be waiting for a recovery from SIPC, and who fear they may never receive a recovery. Recently, a Wall Street lawyer who has worked with the victims’ community filed a formal complaint in federal court saying explicitly, or in plain effect, that SIPC is looking out for Wall Street, not for victims.

Among the reasons SIPC and its Trustee, Irving Picard, have taken so much heat are (1) the amount of time they are taking; (2) the novel definition of net equity they are using, a definition which will cause lots of people to get nothing from SIPC, may result in clawbacks that otherwise would not occur, and is apparently causing much time to be consumed while SIPC calculates its version of net equity in what must be thousands of cases; (3) the assertion, apparently resulting from a decades-old decision, that I believe SIPC sought in the mid 1970s in the Morgan, Kennedy case, that persons who invested through groups such as pension funds, feeder funds or trusts are not individually eligible for recoveries; (4) a long held view, going back to before 2000 but lengthily written about on September 25th of that year by Gretchen Morgenson of the New York Times, that SIPC and its trustees pull out all the stops in trying to avoid providing recoveries to victims; (5) a concern that it is in the Trustee’s personal economic interest to use the novel definition of net equity because this could result in more being clawed back and distributed, thereby increasing the Trustee’s compensation up to, it is rightly or wrongly thought, a potential commission as high as three percent of the amount he distributes; and (6) yet other criticisms.

On Thursday, June 11th this author posted an article canvassing and presenting many of the criticisms that are raised. I don’t want to bore you by repeating the canvas, but nonetheless shall recapitulate some of the criticisms in summary fashion because this is important to a full understanding regarding a demand SIPC made to me that the entire article of June 11th be taken down -- or at least that an asserted mistake in it be corrected -- a demand for entire obliteration or at least correction made by phone by a SIPC public relations representative within two hours or so after the article was posted and that was then repeated the next day via emails from the PR representative plus accompanying emails from SIPC’s President, Stephen Harbeck.

Here is a brief summary of a number of the points made in the June 11th article:


• The Bankruptcy Code permits a court to grant the Trustee “reasonable compensation” not to exceed three percent on amounts distributed to victims in excess of one million dollars.

• Trustees generally seek compensation of the full amount allowable, and sometimes recover up to three percent of the amount distributed but sometimes don’t.

• The amounts allowable to Picard at a top level of three percent of the amount he distributes, would be obscene. They could be as much as 30 or 60 or 360 million dollars, depending on how much he recovers and distributes.

• The novel and niggardly definition of net equity adopted by SIPC and Picard will result in SIPC having to pay out less and in more being clawed back and distributed by Picard, and thus in more that Picard is eligible to be paid at a top limit of three percent.

• Picard is the main go-to guy for SIPC among a small coterie of people whom SIPC uses as trustees and for whom this is lucrative. He has handled more SIPC cases than anyone else, has handled its largest cases, and in one case gave recoveries to only 22 of 302 claimants.

• SIPC stands accused by lawyers of doing virtually anything and everything it can to insure that claimants do not recover, including using esoteric and/or technical agreements, making claimants run a gantlet of difficulties, and making arguments under which almost nobody could recover.

• A logical way for SIPC to minimize recoveries by claimants in the Madoff case is for it to define net equity in the novel and niggardly way it has. In this way it will avoid having to tap lines of credit or further and drastically increasing annual charges to the securities industry. Courts might uphold the novel and niggardly definition of net equity even though its legality is at best questionable.

• No one could expect Picard to oppose the novel definition put forth by SIPC, because to do so would be to bite the hand that feeds him. It is possible, indeed, and perhaps even probable, that the novel and niggardly definition of net equity was developed within SIPC and Picard “merely” went along with it.

• For various reasons, when Picard is involved in developing and enforcing a novel and niggardly definition of net equity that can result in him receiving more compensation, he is in a systemic position that is, or may be, or should be, impermissible under the law.

When the SIPC public relations representative called me about the article to demand that it be entirely taken down immediately or at minimum that a claimed mistake be corrected immediately, the burden of her argument -- I made extensive notes immediately after the conversation -- appeared to be that it is incorrect to say that Trustee Picard is eligible for a three percent commission under Section 326 of the Bankruptcy Act. She seemed to feel -- as is again reflected in my notes -- that I got this idea from an article in TIME/CNN online, which, as she said, had been changed after SIPC complained. I declined to do her bidding immediately on her say so alone, and said SIPC should send me all necessary materials to demonstrate the correctness of its position on all points on which it thought me wrong, and I would then make any and all needed corrections and retractions at one time. She then sent me, the next day, two emails, each accompanied by an email from Harbeck and each, more or less imperiously in my view, demanding that my post be taken down or at least corrected. Set forth below, so that you can read SIPC’s view as set forth by Harbeck himself, are the two emails from the PR person with Harbeck’s accompanying emails. First the email that was sent to me at 3:33 p.m. on Friday, June 12th:


Dean Velvel:

Please see the below from SIPC President Stephen Harbeck. Since SIPC oversees the trustees, this could not be more definitive. When should I expect that you will take down or correct your blog and OEN posting?

Ailis Aaron Wolf
(703) 276-3265
aawolf@hastingsgroup.com


-------- Original Message --------
Subject: Velvel blog and OEN posting
Date: Fri, 12 Jun 2009 15:03:42 -0400
From: Stephen P. Harbeck
To: Ailis Aaron Wolf

References: <4A328E3A.7070802@hastingsgroup.com>



Picard cannot file a petition for a percentage. No trustee has ever done so in the 39 year history of this organization, in any of the 322 cases SIPC has initiated. That is definitive.

If he did so, SIPC would oppose it.

Dean Velvel is simply wrong, since his entire premise has no basis in fact or law.

Now the emails which were sent to me one hour and two minutes later on Friday, June 12th, at 4:35 p.m.:

Dean Velvel:

More from SIPC President Steve Harbeck. We look forward to seeing the correction/withdrawn blog posting.


-------- Original Message --------
Date: Fri, 12 Jun 2009 16:15:42 -0400
From: Stephen P. Harbeck
To: Ailis Aaron Wolf

CC: Josephine Wang



Dean Velvel bases his conclusions only on provisions of the Bankruptcy Code, but has apparently not read the provisions of the Securities Investor Protection Act which are applicable here. Under 15 U.S.C. §78eee(b)(5)(A), “the Court shall grant reasonable compensation for services rendered and reimbursement for proper costs and expenses incurred … by a trustee, and by the attorney for such a trustee….” Under 15 U.S.C. §78eee(b)(5)(E), allowances granted by the Court are paid out of any general estate of the debtor and if the general estate is insufficient, the allowances are paid with monies advanced by SIPC. Any recoveries by the trustee which are allocable to “customer property” cannot be used to pay administrative expenses. [Emphasis in original.]

Under 15 U.S.C. §78fff(b), enumerated provisions of the Bankruptcy Code apply to a SIPA liquidation, but only to the extent those provisions are consistent with SIPA. The “ 3% of recoveries concept” for compensation is inconsistent with SIPA That limitation appears in section 326(a) of the Bankruptcy Code which by its terms, applies to “a case under chapter 7 or 11.” Chapters 7 and 11 are part of the Bankruptcy Code which is contained in Title 11 of the United States Code. A SIPA liquidation proceeding is not a chapter 7 or 11 proceeding. It arises under SIPA which is contained in Title 15 of the United States Code. Furthermore, the 3% limitation on compensation to a trustee is inconsistent with SIPA and therefore, inapplicable, as mentioned above, under 15 U.S.C. §78fff(b).

SIPA allows a trustee to do a thorough and complete job, even where there is no general estate, with no diminution whatsoever in customer property. This is very different that a brokerage bankruptcy that SIPC is not involved with under Chapter 7, subchapter III. [Emphasis in original.]

Stephen P. Harbeck
President and CEO
Securities Investor Protection Corporation
805 15th St NW
Suite 800
Washington DC 20005
202 371-8300


Now it seems to me that a noteworthy point about the emails sent to me by SIPC peremptorily demanding complete obliteration, or at minimum correction, of the Thursday, June 11th posting is this: despite all the points damaging to SIPC made in the Thursday, June 11th posting, as far as I can see the Friday, June 12th emails from SIPC deny only one thing that I specifically said or am claimed to have said: Seeming to me to posit that my view is that a Trustee’s application would be couched in terms of three percent -- would say, for example, “Give me three percent of two billion dollars,” or “Give me three percent of ten billion dollars” -- the emails seem to me to deny only that Picard will or can specifically apply for a three percent commission. (Thus Harbeck’s first email says “Picard cannot file a petition for a percentage.” (Emphasis added.)) Seeming to me to say only that Picard’s application cannot be couched in terms of a percentage -- that he can’t say “give me three percent” - - Harbeck says that this can’t be done in a SIPC proceeding, has never been done in a SIPC proceeding, and SIPC would oppose it if it were done. That it has never been done is a fact within Harbeck’s knowledge (he has worked for SIPC for 34 years), not mine, so if he says it, it presumably is so. Ditto that SIPC would oppose it if it were attempted -- this is within Harbeck’s knowledge, not mine, so if he says it, it presumably is the case.

But could a trustee seek a total commission that would amount to three percent of monies recovered and distributed, even if he sought it not by specifically saying “Give me a three percent commission,” but rather via calculations made largely on an hourly fee basis plus, in the words of SIPC’s statute (in Section 78eee(b)(5)(C)), the “nature, extent and value of the services rendered?” And has a trustee ever done this? I at least don’t think Harbeck has answered these questions, questions which seem to me to merely present a simple backdoor method of obtaining a three percent commission. In his first email Harbeck, as mentioned, says only that “Picard cannot file a petition for a percentage.” (Emphasis added.) That would not seem to mean Picard could not file a petition seeking a sum that amounts to three percent, with the petition being couched in hourly fees plus “due consideration to the nature, extent and value of the services rendered,” phraseology which seems to me to allow for a possibly very hefty bonus in a case like Madoff. The statute does says the court “shall place considerable reliance on the recommendation of SIPC.” But might SIPC support rather than oppose a hefty bonus (for its go-to guy) in the Madoff case? Has it ever done so in other cases? Again, Harbeck does not seem to me to answer those questions. One notes, however, that a Bloomberg piece dated January 21st, which is still up and apparently has not been retracted, says that in another case involving “a $20 million fraud” (the Park South case), Picard received $1.05 million himself in a five year proceeding (while his law firm received $2.8 million). $1.05 million is not merely three percent, but is more than five percent of 20 million, assuming $20 million is what Picard collected and distributed. (Note that Picard claims that the 3 percent of recovery limitation on compensation is irrelevant in a SIPC case.) If Picard collected and distributed less than $20 million, his fee was higher than five percent of the amount distributed. If Picard collected and distributed a lot more than $20 million in Park South -- could that be possible? -- his fee was less than five percent, even less than three percent if he distributed about 34 million dollars or so.

Harbeck also says, in dense arguments that only a lawyer can love, that the three percent provision of the Bankruptcy Act cannot bear on Picard’s compensation because, as previously quoted:

Dean Velvel bases his conclusions only on provisions of the Bankruptcy Code, but has apparently not read the provisions of the Securities Investor Protection Act [SIPA] which are applicable here. Under 15 U.S.C. §78eee(b)(5)(A), “the Court shall grant reasonable compensation for services rendered and reimbursement for proper costs and expenses incurred . . . by a trustee, and by the attorney for such a trustee . . . .”

* * * * *

Under 15 U.S.C. §78fff(b), enumerated provisions of the Bankruptcy Code apply to a SIPA liquidation, but only to the extent those provisions are consistent with SIPA. The “ 3% of recoveries concept” for compensation is inconsistent with SIPA That limitation appears in section 326(a) of the Bankruptcy Code which by its terms, applies to “a case under chapter 7 or 11.” Chapters 7 and 11 are part of the Bankruptcy Code which is contained in Title 11 of the United States Code. A SIPA liquidation proceeding is not a chapter 7 or 11 proceeding. It arises under SIPA which is contained in Title 15 of the United States Code. Furthermore, the 3% limitation on compensation to a trustee is inconsistent with SIPA and therefore, inapplicable, as mentioned above, under 15 U.S.C. §78fff(b).

What Harbeck seems to me to mean in plain English instead of legalese is this: The three percent commission provision is in the Bankruptcy Code, not the Securities Investor Protection Act (SIPA). SIPA says there shall be reasonable compensation. Although SIPA admittedly says that Bankruptcy Code provisions do apply to a SIPA liquidation, this is not true when Bankruptcy Act provisions are inconsistent with SIPA provisions. The three percent provision of the Bankruptcy Code is inconsistent with SIPA because (i) the provision appears in a provision of that Code applying to cases under the so-called Chapters 7 and 11 of the Bankruptcy Code, and a SIPA proceeding is not under Chapters 7 and 11 of that Code but under SIPA, and (ii) simply because it just is inconsistent (i.e., it is inconsistent because it is inconsistent, due to the fact that it is inconsistent, because it is inconsistent, etc., so to speak).

Now, seven months ago I had probably never heard of SIPA or SIPC, and certainly I knew nothing about them. Whereas, Harbeck has been working for SIPC, and dealing with SIPA, for thirty-four years. So Harbeck should know all of this stuff a lot better than I, and I suppose I should therefore be disposed to take his word for things. Yet, I confess that I have difficulty understanding why what he says is right.

Why, for example, is the Bankruptcy Code provision containing the three percent limitation on compensation inconsistent with SIPA? Harbeck says, correctly, that SIPA (in §78eee(b)(5)(A), entitled “Allowances in General”), says a “court shall grant reasonable compensation for services rendered” by a trustee. But the two relevant Bankruptcy Code provisions -- Sections 326 and 330 -- also say that a trustee shall receive “reasonable compensation.” There seems nothing inconsistent there.

Of course, Section 326 of the Bankruptcy Code adds that reasonable compensation is “not to exceed three percent” of monies disbursed by a trustee in excess of one million dollars. Section 78e3ee(b)(5)(A) of SIPA has no such three percent limitation on what is reasonable. Are the two provisions inconsistent for that reason? Is it possible that Harbeck meant this? If he did mean this (and remembering that Picard may have made more than three percent of what he distributed in the Park South case), then it would appear that Harbeck might be trying to put one over on us by claiming inconsistency not because a SIPC Trustee cannot make up to three percent, as Harbeck at least seems to mean, but because a SIPC Trustee can make more than three percent, which on the face of matters Harbeck gives the impression of not seeming to mean.

So . . . . thus far I am at a loss to understand why Harbeck claims SIPA and the Bankruptcy Code are inconsistent with regard to the three percent idea. But my failure of understanding grows. Section 78eee(b)(5)(B) of SIPA, entitled “Application for Allowances,” says “Any person seeking allowances shall file with the court an application which complies in form and content with the provisions of Title 11 [the Bankruptcy Code] governing application for allowances under such title. (Emphasis added.) Doesn’t that seem clearly to mean that an application for compensation by the SIPC Trustee must adhere, “in form and content” with the three percent limitation contained in Section 326 of the Bankruptcy Code? Doesn’t it seem to mean that there is no inconsistency between SIPA and the three percent provision, but rather that the three percent limitation of Section 326 of the Bankruptcy Code is applicable and must be followed in a SIPC proceeding? This is what it seems to me to mean, and one wonders whether it conceivably has ever not been followed in a SIPC proceeding. (Was it at least conceivably not followed in Park South?)

But my failure of understanding grows still more. Section 78fff of SIPA, cited by Harbeck, says in §78fff(b), entitled “Application of Title 11” (i.e., application of the Bankruptcy Code), that “To the extent consistent with provisions of this chapter, a liquidation proceeding shall be conducted in accordance with, and as though it were being conducted under chapters 1, 3 and 5 and subchapters I and II of chapter 7 of title 11 (which, again, is the Bankruptcy Code). (Emphasis added.) The three percent provision is in the relevant part of the so-called chapter 3 of title 11. Since §78fff(b) of SIPA says a SIPA proceeding “shall be conducted” -- shall be conducted you notice -- in accordance with chapter 3 of the Bankruptcy Code, why is the three percent provision, which limits the amount of payment a trustee can get, supposedly inconsistent with SIPA?

So . . . . here is what we seem to be left with at this juncture. Harbeck has claimed the three percent provision of the Bankruptcy Code is irrelevant to a SIPA proceeding. He has been at SIPC for 34 years and should know about this a lot better than I, who knew zero -- zip, nada, nothing -- about SIPA or SIPC before Madoff was busted last December 11th. Yet the reasons Harbeck gives for claiming the three percent provision of the Bankruptcy Code is inconsistent with SIPA do not seem to a newbie like me to hold water. Rather, to this newcomer, they seem wrong. Also, the first of Harbeck’s two emails even gives the impression that all he meant was that a SIPC Trustee cannot in terms request a certain percentage -- cannot couch his petition for compensation in language like “Please award me three percent” -- even if he conceivably may be able to request a sum which might amount to three percent or more due to hourly charges and “the nature, extent and value of [his] services.” But, as said, I’m new at this and Harbeck is an old hand. If he wishes to provide reasons why this newbie’s reasoning is wrong and Harbeck is right with regard to the three percent, he is free to do so and I am sure, based on his emails to date, will feel free to do so and will not hesitate to let me and others know I am wrong.

* * * * *

I wish to close by mentioning some points, or developments, which do not go precisely to the question of the three percent provision but which provide part of the broader weltanschauung in which the matter arises. As said above and in the posting of June 11th, as far back as the year 2000, and earlier, there has been widespread feeling that SIPC messes over victims by using every strategy it can to deny them recovery or to limit their recovery. It also is apparently true that, at least as of the time Morgenson wrote her article in 2000, lawyers for SIPC had received more from it in total than victims did in total. (Was this still true just before the Madoff case?)

The complaints about SIPC reached a boiling pitch in the Madoff case because of what victims perceived as unfair treatment, delay, an unjustifiable definition of net equity, the threat of clawbacks, and a harshly-expressed attitude. Most recently a Wall Street lawyer, Helen Chaitman, filed a complaint in federal court claiming (i) SIPC’s Trustee in the Madoff case, Irving Picard, has acted (through his counsel) towards victims named Peskin in a way which, if what Chaitman says is true, can only be described as unconscionable even if there are statutory provisions which assertedly support it; (ii) that Picard and SIPC have acted illegally; (iii) that in the Madoff case SIPC is taking a position contrary to the position it took in other proceedings; (iv) that unlawful actions by Picard are designed to save SIPC billions of dollars it would otherwise have to pay victims, and (v) that given actions by Picard are not for the benefit of defrauded investors, “but rather simply for the benefit of SIPC and the broker-dealers that SIPC represents.” “Congress did not enact SIPA to enrich Wall Street” (which I note has been enriched to a fare thee well by actions it took that nearly destroyed the economy), Chaitman added.

This is all part of the weltanschauung in which the issue of the three percent arises. Also part of it are extensive complaints by victims that the mass media has vastly misrepresented their plight, the economic position of victims -- who long were falsely portrayed in the MSM as all being billionaires and centamillionaires -- and the conduct and motivations of SIPC and Picard. Victims have extensively complained that Picard and SIC have a public relations machine that is highly active and ever active, and that puts wrong ideas into the heads of a willing mass media -- it is felt even a deeply complicit mass media -- that then disseminates these false ideas all over the country, with one of the major culprits being The New York Times. I have to admit that for a long time I felt that the complaints by victims with regard to the impact of what they thought to be the SIPC-Picard PR machine were wrong or overdrawn(even if understandable due to the terrible plight of victims). Now, after seeing what the SIPC PR machine vigorously and repeatedly attempted with regard to the June 11th posting, and that it even tried hard to get one nationally prominent site to remove the posting though I said publicly that I was writing and would soon post an article addressing the claims of SIPC’s flack and Harbeck, I’m not so sure that the claims of victims with regard to the impact of the SIPC-Picard PR machine are wrong or are overdrawn. It looks to me like the victims may well be right.

In any event, if Harbeck wishes to reply to my reasons for being dubious about the correctness of what he claimed in his emails regarding the three percent provision, I will be happy to read any reply he makes and to give the deepest consideration to what he says.*


*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.

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