Irving Picard’s Motion To Dismiss The Complaint Filed By Helen Chaitman.

July 28, 2009

Re: Irving Picard’s Motion To Dismiss The Complaint Filed By Helen Chaitman.



My last, four part post said I had been informed that Judge Lifland, who is presiding over the Madoff matter in the Bankruptcy Court, had rejected Helen Chaitman’s requested briefing schedule. Apparently, even if this is true, it is irrelevant as a practical matter. For a few days ago, I obtained a motion and brief filed by the Trustee on July 17th seeking dismissal of the complaint filed by Chaitman; the motion says a reply brief is due from Chaitman on August 17th and a hearing will be held on August 25th. This schedule is not terribly different from what Chaitman wanted, if I remember correctly. Something called “Objections,” the Trustee said, are due on August 10th; as best that our librarian and I can figure out, objections are filed by others than the Trustee or Chaitman (acting for her clients).

Some of what the Trustee’s brief says was contained in David Sheehan’s threatening letter to Chaitman discussed in the four-part prior post. I shall not reiterate those points, except briefly if and where necessary. What shall largely be done instead is to discuss, relatively briefly (at least for me), some additional points made by Picard in his brief.

Let me begin with a matter that leaps off the page. Picard’s brief does not so much as mention matters that should be the determinants of net equity: the legislative history showing the purpose of SIPA, Congress’ desire to protect legitimate expectations, the wording of the provisions of SIPA defining net equity, past statements by Harbeck and Wang that people will receive the securities shown on their statements -- even if the securities were never bought, or the New Times proceedings or opinions. The lack of any mention of these things is amazing to me.

One would like to leap to the conclusion that the absence of mention is because SIPC and Picard realize that all of the unmentioned matters are dead against them (which would mean they regard the unmentioned as unmentionable). But one is reluctant to take this leap, because lawyers can and do always find reasons to support their views.

Perhaps, then, the failure to mention Congressional purpose, legislative history, legitimate expectations, etc., has to do with the difference, in legal terms, between what lawyers call a motion to dismiss, which is what Picard filed, and a motion for summary judgment, which he did not file. Somehow I doubt this, however. Rather, it seems to me that the Trustee and his lawyers think it may be easier to win their motion, not by arguing the proper definition of net equity, but (i) by claiming Chaitman’s clients are trying to stop the Trustee from seeking to claw back alleged “preferences,” (ii) by pointing out that both Chaitman and her clients will personally make out better economically under the Trustee’s method of calculating net equity (cash in minus cash out) than by use of the November 30th statement to calculate net equity, and (iii) by blasting Chaitman for what she has written and said. My views are, it should be said, my personal speculations. But that doesn’t make them wrong.

It seems to me, however, that Picard is incorrect in claiming Chaitman is trying to stop him from clawing back preferences, and that the argument he is making in this regard is therefore an effort, to some extent, to pull the wool over the court’s eyes. Certainly Chaitman is not attempting to stop Picard form clawing back billions in preferences from the guilty -- or at least non-innocent -- whom he has sued because of their participation in the Ponzi scheme.

If Chaitman is trying to prevent a clawback of any preferences, it is, I would think, the clawbacks of “alleged” preferences from the innocent. But even here, if my understanding is correct (which I hope it is), monies received from Madoff by innocent investors cannot be obtained by Picard, except perhaps for monies received by the innocent within 90 days of December 11th.

Then there is also the question of what is a preference. Picard or Harbeck or bankruptcy lawyers should correct me if I am wrong, but I think you have not received a “preference” if you “gave value” for what you received (e.g., there is no “preference” if you got $250,000 from the debtor but sold him a house worth $250,000). My understanding is that it is not disputed that monies you previously gave to Madoff -- cash-in -- constitute the giving of value for monies taken out up to the same amount. So a preference, in Picard’s terms, can only be money you took out over and above what you put in, that is, your fictitious profits.

But are the fictitious preferences really preferences? -- shouldn’t that depend on whether your legitimate expectation was that the fictitious profits you took out were in reality real profits and were therefore monies that belonged to you -- i.e., were your monies, which you had previously “given” to Madoff by leaving them with him, just as you previously gave him, and left with him, cash-in monies that belonged to you and that you regarded as belonging to you? And if this is true, then doesn’t the question of preference depend on whether your net equity is the legitimate expectation represented by the amount shown on your account statement, so that amounts taken out that did not exceed that amount were not preferences, but rather were a return of your own monies under the legitimate expectations theory (unless you were one of the crooks who had no right to expect that the amounts shown in your accounts were true and legitimate).

The bottom line, then, is that Picard cannot justly evade the question of how to determine net equity by claiming Chaitman seeks to stop him from recovering preferences. For in the last analysis, the question of preference ought to be determined by the question of net equity.

Will Picard win his motion because Chaitman and her clients will personally be better off economically if his cash-in/cash-out method is used to determine net equity than if it is determined as they wish, i.e., by the November 30th statement? Without getting into all the legalistics, Picard is claiming that, because they will not be economically injured, but instead will receive more from the estate if his method of calculation is used, Chaitman’s clients have suffered no injury and seek only a so-called advisory opinion, which is a no-no.

What Picard is claiming comports with the normal view of the law and lawyers that loss of money or property is all that matters. This is one of the more despicable principles of the law, when one considers how much non-monetary, non-property matters can mean to people. Here, moreover, even if Picard did finally give one of Chaitman’s clients money he owed her after Chaitman filed the case (or at about the same time), thereby eliminating the monetary loss which she had suffered until then, there are nevertheless thousands of other investors who have not received but desperately need their money and who will not get it until and unless the net equity question is settled in their favor -- which argues for prompt rulings and, possibly, appeals.

Of course, Picard says Chaitman and her clients have no right to represent those other investors. One suspects -- it is just a speculation, but, again, that does not necessarily mean it’s wrong -- that what Picard and SIPC are really after here is that the case against their view should have to await a party who is not represented by highly knowledgeable lawyers such as Chaitman, Brian Neville or Jonathan Landers -- is instead represented by a lawyer who might be easier to beat. After all, the first decision is going to control all others, both in the Bankruptcy Court, and on appeal. So, if Picard and SIPC can have the net equity question decided in a case where the lawyer is not particularly knowledgeable, this could have great benefit for them.

Even if this is the game, however, it should not succeed. After all, Neville has already filed a fine and complete brief on the net equity question with the Bankruptcy Court, and he and others, like Chaitman and Landers, might be able to find a way to intervene in any other case where the net equity question is to be decided.

As for seeking to win by blasting Chaitman -- the Trustee’s brief even contains a long exhibit containing her allegedly “Objectionable Statements,” some of which hardly seem objectionable at all, I note -- I think it is fair to raise yet another speculation as well as to make a substantive point.

The speculation is this: the bankruptcy and SIPA bars are relatively small groups of people, many of whom have known each other for years. (This is nothing unusual; it is a phenomenon that has existed in given fields and in given geographic areas for years.) I don’t believe Chaitman is, shall we say, uniformly popular in this bar. By savaging her for statements she has made -- some or many of which may, however, be entirely true and might well be shown true by discovery from the files of Picard and SIPC -- Picard and SIPC may be trying to have a case that could affect thousands shaped by whatever a judge might think of Chaitman. As I say, this is only a speculation, but if it were true, it wouldn’t be the first time something like this has happened. In a career that encompassed litigation of several giant antitrust cases, I saw this happen more than once. I have seen analogous things happen elsewhere, too.

The substantive point is this. In goring Chaitman, Picard’s brief says various statements in Chaitman’s complaint are “a political statement at best -- a tabloid story, at worst”, are “a transparent public relations ploy, bent on persuading the press and the public that the Trustee is acting in bad faith, despite lacking a shred of evidence to that effect.” This statement in the Trustee’s brief is remarkable because so many of Chaitman’s assertedly objectionable statements go directly to or at minimum bear on the question of the proper definition of net equity, e.g., quotations from the legislative history of SIPA, quotations from the portion of SIPA defining net equity, quotations from New Times defining net equity statements, describing SIPC’s available lines of credit, and a statement pointing out that trade confirmations say the customer’s account is insured by SIPC. I have to say that, while much of Picard’s brief is perfectly respectable even though I disagree with it, the claim that statements like these are objectionable (and should be stricken from the complaint if the complaint is not entirely dismissed) does make one wonder about the legitimacy of the brief. The claim of objectionableness seems, in regard to such statements, to be a ruse intended to get the court to strike ideas that lie at the heart of Chaitman’s case -- and Neville’s, and Landers’, and everyone else’s who disagrees with Picard.

* * * * * *

I would like to make one last point before closing. It is related to Picard’s claim that Chaitman’s clients’ case should be dismissed because they are economically better off under Picard’s calculation of net equity than under their own.

I had always thought that, to determine how much one gets from the estate, one would engage in a simple calculation exemplified as followed. If your November 30th statement showed, say, 65 million dollars, this is one-tenth of one percent of the total amount of 65 billion dollars shown on all the November 30th statements collectively, and therefore you would get one-tenth of one percent of whatever Picard collects and distributes. Or if one uses Picard’s cash in/cash out, the simple calculation would be as follows. If your net equity is twenty million dollars on the cash-in minus cash-out basis, and the total amount of cash-in was $20 billion, then your personal cash in was one-tenth of one percent of the total cash-in and you would get one-tenth of one percent of whatever Picard collects and distributes.

I am no mathematician, believe me, but to me these kinds of calculations seemed simple, easy and right. If they are wrong, I hope someone will correct me. But I note that in his brief, in calculating why Chaitman and her clients would do better under his method of calculation than under their own, Picard uses fancy algebra-type calculations, or equations. I think they come out the same as mine do, but am not positive (and one knowledgeable person has said to me that Picard’s calculations contain mistakes). If my simple calculations are right, I have no idea why it’s necessary to use the method Picard uses, which, it seems to me, is far harder to understand.

Of course, Picard uses his (in my estimation) more difficult calculations to make the point -- as if the point is a huge deal that only the cognoscenti could understand -- that Chaitman and her clients are economically better off his way than theirs. My question, however, would be: what’s the big deal to understand? If the November 30th statements are used to calculate net equity, then everyone has a positive net equity, so everyone shares in the amount Picard collects and distributes. If Picard’s method is used, lots of people get knocked out because they took out more than they put in, they therefore have a negative net equity, and they therefore do not share in whatever Picard collects, so that the remaining people who do share in it each get more than otherwise. As said, what is the big deal in understanding this? It’s as simple as understanding that if 50 people share equally in one million dollars, each will get more than if 100 people share in it. Yet Picard did make it all a big deal in his brief. One wonders why. Could it conceivably have been to snow the judge, the victims, and the press with the supposed complexity of what he is doing, and thereby obtain their sympathy and agreement?

Of course, maybe I’m missing something here. Or maybe I’m missing a lot. If so, I would greatly appreciate being set right.*

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, you can, if you wish, 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.



*

Letter to Diana Henriques

July 27, 2009

Ms. Diana Henriques
New York Times
229 W. 43rd Street
New York, NY 10036-3959


Dear Ms. Henriques:

I congratulate you on your excellent article on custodians on Saturday, July 25th.

I do have one problem, however. When I wrote to you on April 21st to extensively explain that the IRS had improperly approved Madoff as a nonbank custodian in 2004 though he was in violation of several of the IRS’s own regulations, you replied on April 23rd that you wished to “pursue a number of topics, and this [the IRS’ approval of Madoff] is a good one. The litigation filed against Fiserv also raises this ‘nonbank trustee’ issue.” But in your article on July 25th, you cite an IRS spokesman as follows: “The Internal Revenue Service monitors only ‘nonbank’ custodians, while most custodians – including the units that Fiserv owned – technically are banks or trust companies, an I.R.S. spokesman explained.”

However, as extensively explained to you in the email of April 21st, the IRS apparently did not “monitor” nonbank custodians, either when they applied for approval or subsequently. For, again as explained on April 21st, the IRS approved Madoff as a nonbank custodian in 2004 even though he was in violation of several of its own regulations governing such custodians. Nor, as far as I know, did it ever revoke that approval prior to December 11, 2008 even though he remained in violation of its regulations. This conduct by the IRS cannot fairly be thought to be “monitoring.” Had the IRS truly “monitored” Madoff in accordance with its own regulations, it would have discovered, exposed and ended his fraud, especially since it would have learned that he never bought or sold securities or options. Your article analogously cites Professor Bullard on this point, when you say “When custodians do these basic chores – custody, record-keeping and compliance – it is difficult for crooks to steal their customers’ I.R.A. savings, said Professor Bullard.”

In view of the fact that the IRS’ performance of its duties with regard to nonbank custodians would have exposed the fraud, it is perhaps little wonder that the IRS has refused a freedom of information request seeking information on how Madoff secured its approval of his company as nonbank custodian. Nor is it surprising that the Commissioner of the IRS has not responded to a letter to him asking how such IRS approval was obtained.

I note in these regards that a number of people have said they had IRAs directly with Madoff, not through Fiserv or other middlemen. Madoff needed IRS approval to legally serve as the custodian for these people, which he did for many years. Also, given the failures of performance of putative custodians, whom you wrote about, to track or keep custody of securities, it is entirely possible -- I would even say certain -- that Madoff was at minimum serving as a co-custodian, or sub-custodian, on thousands of IRA accounts held by purported custodians such as Fiserv. As far as I know, Madoff would have required IRS approval to be a nonbank co-custodian or sub-custodian, as well as to be nonbank custodian.

As said, however, you cited the IRS spokesman as claiming the IRS monitors nonbank custodians, even though you had been given extensive information showing this is untrue. Your action leads me to this question: Especially since you cited the IRS’ claim of monitoring though you must know it is inaccurate, did you do this preparatory to writing -- and are you indeed currently researching and/or planning -- a follow up article on how the IRS came to negligently (or possibly even criminally?) approve the largest Ponzi scammer in history to be a nonbank custodian of IRAs -- on how the IRS came to do this when even the slightest “monitoring” before or after approval of Madoff would have exposed his Ponzi scheme?

Sincerely,

Lawrence R. Velvel

cc: Media
Legislators

The Never Discussed Impact Of Net Equity Question, Impact of Discovery on SIPC's Position. Part IV

July 25, 2009

Re: The Full And Never Discussed Impact Of The Net Equity Question,
The Potentially Devastating Impact Of Discovery On SIPC’s Position,
And Matters Of Argumentation And Morality.

PART IV.


In this fourth segment, let me discuss an argument made by Harbeck and Picard in support of their cash in/cash out position. They say that, if they don’t use cash in/cash out, but instead use what was on the November 30th statements, they will be permitting the fraudster to determine which investors would be preferred and which not.

Their argument has nothing to do with what Congress intended or with the governing principle of legitimate expectations which Congress itself cited. As someone recently said, is there any Madoff victim, who lacked knowledge that a fraud was in progress, whose expectation was that the amount he had in Madoff was less than what was shown on his statements? Who expected, for example, that the amount was only one-half or one-tenth of what was shown on the statements? Or, if one follows cash in/cash out, was possibly a negative number?

Picard and SIPC are trying to fasten an absurdity on thousands of people with regard to expectations, and discovery would show this as well, since victims too would be deposed. In fact, discovery or no discovery, I would urge lawyers to begin collecting affidavits from people saying the obvious: saying that their expectation was that the amount they had in Madoff was what was shown on their statements. Scores or hundreds of affidavits explicitly saying this would make it harder for courts and Congress to ignore the plight of victims even though the point is self evident even without affidavits.

But, as said, a key argument of Picard and SIPC is that if the amounts shown in the November 30th statements are the measure of net equity, this will enable the fraudster to set people’s return, and he might unfairly discriminate among the favored and less favored -- as Madoff did indeed discriminate by giving huge rates of returns to and creating backdated gains and losses upon request for feeders, who inevitably had to know and expect that this was all illegitimate, that something plainly illegal was occurring, and that their statements were not accurate and legitimate. But as Helen Chaitman has made clear in a paper she filed, out of thousands of Madoff investors, Picard and SIPC have been able to uncover only a tiny percentage on whose behalf Madoff cooked their accounts. As far as currently is known, there are perhaps a dozen feedermen and feederwomen, plus their immediate families, whose accounts were cooked and who, at minimum, were coconspirators -- and therefore should probably get nothing back from SIPC or the bankruptcy estate (but rather should have to pay over lots of money to the estate). As near as one can tell at this time, Picard and SIPC are using this tiny number of people as an excuse for screwing thousands of the rest of us.

Suppose, however, that the thousands of innocent investors did not all obtain exactly the same putative rates of return. Picard and SIPC will know the extent to which this is or is not true. My personal belief is that, for reasons having to do with the amount one had in Madoff, timing of alleged purchases and sales of securities by Madoff, and differences in “baskets of securities,” there were minimal differences -- tenths of a percent differences -- in investors’ putative rates of return. Discovery from Picard would show if my belief is correct. Yet, even if there were small differences in rates of return, I have not yet heard of anyone who is complaining that his rate of return, as evidenced on his statements, was too low in comparison to those of other innocent people. Thus, crediting people with their legitimate expectations, as shown on their November 30th statements, should not cause a problem in this connection.

If Picard were able to show that there were big unexplainable differences in innocent persons’ putative rates of return -- say three or four percent per year every year -- and if this were to justify not meeting people’s legitimate expectation of being credited with the amount shown on their November 30th statements though nobody is complaining about that amount, there would be simple ways of handling the problem. The amounts of return shown for accounts of the innocent over the years could be averaged and the average used as the appropriate rate of return. (The averages would be different depending on the year(s) one invested.) Or, as Jonathan Landers has suggested in a filing, appropriate rates of interest might be used. Or analogously to a suggestion I made many months ago in a post discussing New Times, rates of return over the years on the S&P 100 could be used.

By any of these or other very standard methods of calculations, differences in putative rates of return could be eliminated, the same rates would apply to everyone, and the situation would not be one in which the fraudster set different rates of return for different people. Of course, SIPC and Picard do not want to hear from this, so to speak, because their wish is to use cash in/cash out in order to enormously reduce payments to the defrauded by SIPC. The standard techniques being discussed here would not accomplish that, because the results would be close to what should be done anyway, i.e., would be close to the results that would obtain if the November 30th statements -- about which no innocent person has yet complained with regard to putative rates of return -- were treated as the measuring stick for net equity.

* * * * * *

I wish to close with two final points -- one very serious in import and the other humorous -- arising from Picard’s interim report.

In the report Picard discusses the procedure by which claims are passed upon, denied, or paid in whole or part, and the amounts of money involved to date. Madoff victims should read the relevant parts for themselves, starting with paragraph 65 of the Report. I shall discuss here only (parts of) the question of how claims are passed upon.

Picard, as we all know, has taken tremendous criticism because of the net equity question, delay in payments, denial or reduction of payments, and so on. But it looks like not just the cash in/cash out calculation may at bottom be attributable to SIPC rather than Picard (who perhaps just does as he is told because he has long made a ton of money from SIPC), but also delay and stinginess may likewise be attributable at bottom to SIPC.

Picard’s report says that, after Alix Partners makes sure that a claim contains all relevant information, the Trustee’s accountants review the claim and relevant information from Madoff’s records or submitted with the claim. Then the claim is sent to and reviewed by SIPC, where “a SIPC claims review specialist provides a recommendation to the Trustee regarding how each claim should be determined.” Then the Trustee’s office “review[s] the [SIPC] recommendation and legal or other issues . . . . Once the Trustee has decided upon a resolution of the claim,” he sends the victims a determination letter. (Paragraph 68.)

This all makes it seem pretty certain that SIPC itself makes the first recommendation regarding a claim, and Picard accepts or rejects SIPC’s recommendation. This is the first I’ve heard that SIPC itself makes a determination regarding a claim, and one is somewhat hard pressed to believe that Picard lightly or often rejects its recommendation -- SIPC has been a meal ticket for him, you know. So it seems likely that SIPC itself bears at least part of the responsibility for some of the problems for which Picard has been blamed. Incidentally, whether SIPC itself provided recommendations on how to treat individual claims in prior cases might be of import, though I have no idea what the answer is.

The humorous point is one of those things which you just couldn’t make up. (As Dave Barry would say, “I’m not making this up.”) A federal prison inmate at the Federal Medical Center in Kentucky (whom one suspects has mental problems), who has filed over 1,000 suits in federal courts, has taken to filing papers in cases all over the country, including the Chrysler bankruptcy. In his papers, this prisoner “has been identifying himself as ‘a/k/a Irving Picard’ and ‘d/b/a Irving Picard,’” and has referenced the Madoff case in papers he files. The prisoner’s last name is Riches, Jonathan Lee Riches. This is so wonderful an irony in the Madoff case that you couldn’t make it up. Picard drily says he has had to notify courts in various places that “he is not in anyway connected to Mr. Riches, a prisoner at the Federal Medical Center in Kentucky,” and that “Mr. Riches is not authorized to represent the Trustee.”

Jonathan Lee Riches d/b/a/ Irving Picard or a/k/a Irving Picard. Isn’t that rich?*


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, you can, if you wish, 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.

Re: The Never Discussed Impact Of The Net Equity Question, The Impact of Discovery on SIPC's Position, Argumentation And Morality. Part III

July 23, 2009 at 3:00 p.m.

Re: The Full And Never Discussed Impact Of The Net Equity Question,
The Potentially Devastating Impact Of Discovery On SIPC’s Position,
And Matters Of Argumentation And Morality.

PART III.



When David Sheehan attacked Helen Chaitman by a letter of June 12th, he accused her of making statements for which she could have no evidence. She responded, among other ways, by writing on June 16th that she would be able to prove various of her statements from SIPC’s own files after discovery. My personal view is that she was right on. Discovery, as many but probably not all readers know, is the process in which SIPC and Picard would be required to turn over all relevant documents from their files, and in which they and other pertinent persons would be examined under oath (would be deposed). In this process, it seems almost inevitable to me that, not only would there be extensive evidence that before the Madoff case SIPC always believed that statements from brokers were the measure of net equity, at least where those statements showed securities that existed in the real world even if the broker had lied about buying them, but also that evidence would be uncovered in droves that the reason SIPC and Picard developed the cash in/cash out definition of net equity for the Madoff case was because SIPC was appalled at the potential extent of its liability in the Madoff case under the standard, statutorily-demanded definition of net equity. I think the documentary and deposition evidence will show to a fare thee well that saving money was the motivation for the cash in/cash out definition of net equity, and that legislative history, principle and plain right had zip to do with it.

Although SIPC and Picard could not initially know how many claims there would be, they had to know from the get-go that the number could be fantastic, given the size and widespread nature of the fraud. It is thus no surprise that according to Picard’s interim July 9th report to the Court, by the close of business on July 2nd over 15,800 claims for recovery under SIPC had been filed. If “only” 10,000 of them were valid under the standard definition of net equity, and if each were valid for $500,000 under that definition, SIPC would be on the hook for five billion dollars. If one assumes 14,000 of them are valid for $500,000, the amount is seven billion dollars. If 5,000 are valid, the amount is $2.5 billion. If the average claim is valid for only $400,000, the amounts go down. But, no matter now you play with the numbers, the amounts are large. (The July 27th issue of Newsweek says that Picard has processed 561 claims of the more than 15,800 which have been filed, and that those 561 claims totaled over three billion dollars, averaging $5.4 billion apiece. (Newsweek doesn’t say whether the three billion dollars was calculated on the basis of the November 30th statements, Picard’s cash in minus cash out basis, or some of one and some of the other.) (Picard’s interim report says that as of July 2nd, three weeks before the date of the Newsweek article, the Trustee had “received at least 15,400 customer claims and had determined more than 543” of them.))

Because of what it already had in its coffers, and the lines of credit it could tap, SIPC was capable of paying roughly $3.5 billion or somewhat more. But it surely didn’t want to do that, as discovery from its own files and depositions would almost certainly show. And what if the amounts for which it was on the hook were some number like five or seven billion dollars, not a “mere” $3.5 billion?

When the amounts are in the billions, SIPC is faced with a problem. It will have to assess the broker dealer industry, both to cover the shortfall and to replenish its treasury, even if it is able, through its existing $1.6 billion treasury plus tapping lines of credit for over two billion dollars, to obtain enough money to pay the billions it owes. But what if the amount it has to pay exceeds its coffers and its lines of credit? What then? Does it go to Congress for more billions of dollars to pay out? Does it assess large sums against the industry?

It is dollars to doughnuts that discovery will show that all of this was vetted within SIPC early in the game, with the result being a decision to use the cash in/cash out method in order to drastically reduce the amount SIPC may have to pay out: to reduce it to several hundred million or one or two billion dollars, with legislative history, Congressional motivation, principle, and simple right and justice all being irrelevant. SIPC is, you know, a form of insurance company; insurance companies are infamous for attempting in every way possible to screw people out of payments they have a right to; and such screwing of people has in fact been SIPC’s history, as discussed in prior posts and revealed as long ago as 2000 by Gretchen Morgenson.

There is also what could be called a human factor. Very early in the game I was knowledgeably told that the people who run SIPC (which is located in the Washington area) have an economically good, not terribly stressful life that they have enjoyed for years and would like to maintain. (Thus, even two “annual pay periods” ago, in 2007, Harbeck’s annual salary was $435,876, and his deferred compensation was $103,357, while Wang’s was $295,490 and $146,901. This is pretty good in the D.C. area for anyone who is not, say, a major partner in a major law firm or a big time lobbyist. And they probably make more now, in 2009.) They want to continue the cushy life, I was told -- who wouldn’t want to? -- and to do this they want to stay on the good side of SIPC’s membership, comprised of the brokerage industry. One stays on the brokers’ good side by minimizing payouts to victims and thereby, as has been the case for many years, minimizing the annual assessments on brokers, who for years had been paying only $150 per year even if the company was Goldman Sachs. So all of this could also have played into the decision to use cash in/cash out as the definition of net equity in the Madoff matter, and any competent interrogator should have a field day with it in depositions of such as Harbeck, Wang, Picard, SIPC’s Board of Trustees and so on.

So, to reiterate, I think Helen Chaitman was exactly right in saying she would be able to prove various claims through discovery. But then a funny thing happened on the way to the forum (so to speak). In early July, Chaitman proposed a rapid briefing schedule to the court, a schedule that left no time for discovery. It would be my speculation this likely was done for two reasons. One would be that she has clients, and there are also scores, hundreds or even thousands of others, who are hurting so badly that they had to get money from SIPC as quickly as possible; they cannot abide the delay that will be caused by discovery. I would estimate that the delay could be as long as six months or even a year. Lawyers make discovery a painful and time consuming process by a host of infamous stratagems, and that is what one could expect here from SIPC.

The other reason, I would speculate, is that Chaitman likely thinks the case against the Picardian/SIPCian version of net equity is so strong as what lawyers call a matter of law -- is so strong based on the legislative history, congressional motivations, past SIPC practice and pronouncements, and the New Times case -- that discovery is not needed to win, so let’s have the issue decided as soon as possible.

Now, I don’t really disagree with such assessment of the strength of the case, even though I recognize that certitude about the rightness of one’s own side of a case is forever an occupational hazard of lawyers (not to mention clients). Nonetheless, while I don’t disagree with the assessment of strength here, I do think it a major mistake to try to elide discovery. For, as indicated, I think discovery is going to hammer nail after nail in SIPC’s coffin, is going to show that a desire to escape huge payouts and brokerage industry wrath, not principle or justice or congressional intent, was the driving force behind the adoption of cash in/cash out. And, even though our side of the case is already very strong, you always want to have all the powerful facts you can adduce in order to fare as well as possible before trial courts and courts of appeal. Discovery will produce those facts -- I think discovery might even produce facts that could even cause SIPC’s purported legal position to be looked at derisively by the courts. Derision is deadly.

It turns out that just a few days ago, I am informed, Judge Lifland rejected the rapid briefing schedule proposed by Chaitman. I do not know why he did so, and some of the potential reasons which come to mind are not happy ones. But be this as it may, I would urge all the lawyers -- Brian Neville, Jonathan Landers and Helen Chaitman to demand discovery in this case. Just as I urged people not to forget the impact of net equity on recovery from the estate as well as from SIPC, so too I would urge people to be cognizant of the benefits that can wrought for our side by discovery, and the possible havoc it might wreak on the SIPCian/Picardian side. The results of discovery at least in my judgment, are likely to be very favorable to us, since I believe the cash in/cash out net equity position was used in Madoff -- but not with regard to people who thought they had bought securities which existed in the real world in New Times -- strictly in an effort to avoid massive payouts in Madoff.*


*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, you can, if you wish, 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 Never Discussed Impact Of The Net Equity Question, The Devastating Impact Of Discovery On SIPC's Position, And Argumentation And Morality. Part II

July 23, 2009 at 9:00 a.m.

Re: The Full And Never Discussed Impact Of The Net Equity Question,
The Potentially Devastating Impact Of Discovery On SIPC’s Position,
And Matters Of Argumentation And Morality.


PART II.


If readers remember not one other thing of what is written in this four-part posting, I urge them to remember -- and therefore am repeating yet again -- the possibility that Picard’s definition of net equity may deprive them not just of $500,000, but also of any share in the estate. This possibility should be cleared up, one way or the other, as quickly as possible.

There are also some matters of lesser practical import that I would like to discuss here. One is related to the three percent question.

Some may remember that, in my second posting on this matter (dated June 19, 2009), it was half jestingly suggested (but only half jestingly suggested) that perhaps the reason Harbeck reacted so strongly against any claim that a SIPC trustee gets three percent of what he collects and distributes was not because of concern that this would wrongly give people the idea that SIPC trustees earn huge sums of money. Rather, perhaps it was because SIPC did not want to be limited to paying Trustees only three percent of what they collect and distribute. Some further research persuades one that this half jest is probably correct.

Early on, Picard told a lawyer that, if the latter wants insight into what Picard will do in the Madoff case, he should read what was done in the (relatively recent) Park South case. Well, I’ve now read a couple of Picard’s reports to the court in Park South. And while I plainly confess to being unable to understand parts of the reports, it at least seems to me likely -- almost a certainty -- that Picard was paid a lot more than three percent of what he collected and distributed in that case. He was paid on an hourly basis, at a ten percent discount from his normal fees, and ultimately seems pretty clearly to have requested $1,046,557, plus up to a possible additional $50,000, in fees for his personal work. (The fees for his personal work went to his law firm, as did even larger amounts of fees (I think $2,654,714) for work done by others in his law firm.) The amounts he collected and distributed appear to me to be either $7,410,969 or that amount plus $1,414,149 and/or $817,5434. But, frankly, I am not sure I understand all relevant aspects of this side of the equation -- relevant to the question of how much he collected and distributed. (For example, I do not necessarily grasp the relevance, if any, of enabling a release of frozen accounts.)

In any event, for Picard’s total fees of (I think) $1,046,557, plus another possible $50,000, to have been no more than three percent of what he collected and distributed, the latter figure would have to be in excess of $35 million. Despite the shortcomings of my own comprehension, I think it is pretty clear he did not collect and distribute anywhere near that amount. If I am wrong about this, then, once again, I would appreciate it if Harbeck and Picard would correct my mistake and explain what the correct facts are.

Not to be misunderstood, I am not saying that Picard did not earn or did not deserve what he was paid. I am saying only that it seems certain he received far more than three percent of what he collected and distributed. And if it is common for brokerage assets not to be extensive in SIPC proceedings, so that relatively little can usually be recovered and distributed, it might be thought necessary to pay trustees more than three percent in order to get good work, and the three percent limitation of the bankruptcy code would therefore be claimed to be inconsistent with and non applicable to SIPC proceedings. Of course, if the argument that three percent is inadequate to get good work by a SIPC trustee were true, how is it that three percent is apparently sufficient to get good work by trustees in non-SIPC bankruptcies?

The last question highlights what I think may be a characteristic of SIPC. While I am truly a newbie with regard to everything SIPC, I am getting the notion that, if a Bankruptcy Code provision is not something SIPC likes, SIPC claims the provision is inconsistent with SIPA. A claimed inadequacy of three percent “commission” in SIPC cases involving brokers, despite three percent being satisfactory for non-brokerage bankruptcies, could exemplify. Another example might be SIPC’s recent argument when a party moved early this year for a court order allowing it to sue (the Trustee, I gather) within 30 days after the Trustee wins, for example, a preference claim against that party subsequent to last July 2nd.

Apparently, such a victory by the Trustee could possibly itself give rise to some type of countering claim, called a springing claim (as in “it springs up”). If the Trustee’s victory came after July 2nd, the countering claim would be barred under SIPC law because July 2d was the last permissible day for a Madoff victim to file a claim. But the suit for a “springing claim” would not be barred under the Bankruptcy Code.

The moving party asked the Bankruptcy Court Judge, Burton Lifland, for a judicial order under which the springing claim would not have to be brought by July 2, when it did not yet exist, but only within 30 days of the Trustee’s subsequent victory which brings it into existence. One asks: how could this request be denied? If it were denied, the moving party will never be able to bring his springing claim, since he has no claim before the Trustee beats him in litigation after July 2nd that creates the “springing” claim. But after he is beaten, he cannot bring the springing claim since it will be barred because it was not filed by July 2nd.

But SIPC and Picard both said the request for an order giving 30 days after Picard’s victory to bring a springing claim should be denied because the SIPA provision under which the springing claim is barred is inconsistent with the Bankruptcy Code provision allowing the springing claim to be brought. SIPC and Picard did say that it is not necessary to decide the question now, since at present the problem can be elided by the filing of a so-called “protective” claim by the moving party: i.e., by the moving party filing what in effect could be called a reservation of the right to bring a “springing claim” if one arises later due to a Picard victory after July 2nd in, say, a preference suit. But, when such a claim is brought, judging by what their briefs say, it is sure-fire that Picard and SIPC will argue that it can’t be brought because it was brought after July 2nd and is therefore too late because it is inconsistent with SIPA. It is sure-fire that they will claim the springing claim was barred before it even arose because the Bankruptcy Code is inconsistent with SIPA and SIPA controls.

By the way, Judge Lifland seemed to mainly adopt the view of Picard and SIPC. He said the question of inconsistency is a serious one -- can you believe that in view of their heads they win, tails you lose position? -- and that he was going to postpone a decision since the moving party could file a protective claim.

In any event, this all shows how far SIPC and Picard will go in claiming inconsistency when such a claim accords with what they want.

Picard’s office seems to also have made another argument that was beyond the pale. Helen Chaitman filed what could be called -- tactfully -- a vigorously-worded complaint seeking, among other things, a judicial decision that one’s net equity is based on the November 30th statement, not on the cash in/cash out basis. Similar requests for decision have been filed by Brian Neville and Jonathan Landers. All the papers are, frankly, pretty good, though Neville’s strikes me as the most complete because he has by far the most citations to and quoted material from the legislative history of SIPA and from prior positions explicitly stated by or followed by SIPC and its officials such as Harbeck and Wang. (Harbeck told a court that people would get the value of securities their statements showed them as owning even if the securities were not there or had never been bought.) The historical material -- the legislative history and prior SIPC positions -- cited or quoted by Neville makes a simply overwhelming case. And while there are reasons I do not wish to predict that Judge Lifland will rule in our favor even though Neville’s position is overwhelming, it is hard to deny the enormous power of what Neville has written. I shall return to this in a bit.

More to the point immediately is that Picard -- or more accurately one of his lawyers, David Sheehan -- responded in kind -- more than in kind -- to Chaitman’s papers. He far out-vituperated the vituperative. He claimed Chaitman and her law firm were acting unethically, tried to threaten them with sanctions, attempted to force them to withdraw the papers, and, worst of all in my opinion, claimed that Chaitman could not represent persons who have net equity problems under the Picard/SIPC cash in/cash out method because Chaitman herself has no such problems. (He also accused her of acting improperly by representing both persons who have such problems and persons who don’t.) Sheehan also claimed that, because Chaitman herself has no net equity problem, she might not fully and completely represent those who do.

Now, as is known by some people who were on the Steering Committee, I hold no brief for Helen Chaitman, since she attacked me in writing and orally. But she has been of great service to victims of Madoff, especially in resisting illegitimate SIPCian/Picardian positions, and it was simply beyond the pale for Sheehan to argue that she should not represent persons with net equity problems because, since she herself does not have them, she might not fully and competently represent those who do. Chaitman had long made clear (and did so yet again in response to Sheehan) that, though she herself has no net equity or clawback problems, she believes that SIPC’s cash in/cash out method and threats to claw back from the innocent (and the often destitute) are immoral. Not just illegal; immoral. The community of victims has long had access to her views, and has been told -- I think (but am not sure) that she may even have required clients to sign waivers acknowledging -- that even if Picard’s net equity position and threatened clawbacks from the innocent would redound to the signer’s personal benefit, she is going to argue against such actions -- as a matter of moral belief, no less. Nobody, as far as I know, can legitimately argue that they did not know where she stood, and became her clients in ignorance of her intent. For Sheehan to argue that her own personal financial position vis a vis Madoff -- i.e., the fact that she has no net equity or clawback problem -- prevents her from representing those who do, is for Sheehan to argue that a lawyer in practice cannot take a moral position that he or she believes in if it does not also accord with his/her personal circumstances.

That position is an abomination. It is not, shall we say, made better by the suspicion, which will not down, that the Trustee’s office is taking that position and others because of a desire to, if possible, get rid of a lawyer who has been a real bone in their throat because of her powerful, even if sometimes (deservedly) vituperative representation of clients -- clients whose “newfound” destitution and continuous victimization -- this time by SIPC -- puts them in need of an advocate who will express things powerfully and colorfully (though there are very competent and thorough lawyers who think such mode of expression harmful rather than helpful. My own personal view is that it doesn’t hurt for one person to pull no punches when others are being more circumspect, i.e., there is a need for both styles.)

But, back to the question of arguing that Chaitman supposedly cannot represent people with problems that she does not have, although she regards what is being done to them as immoral. When one considers the argument beyond the confines of this case, its implications are shocking. Are criminal lawyers who think charges against their clients unjustified, frivolous, or so much the product of prosecutorial misconduct as to be immoral, to be barred from representing the clients because the lawyers are not in the same position as the clients -- are not themselves charged with crime? Should Darrow not have been allowed to defend Leopold and Loeb because Darrow didn’t kill anyone?

You know, whether a lawyer may choose not to represent someone because of a moral disagreement with the person’s position is one thing, and many is the commercial lawyer who for the money chooses to represent positions he or she may disagree with. But whether a lawyer must be barred from representing a position he or she agrees with, barred from this because he/she does not share the same circumstances, is quite a different thing, and Sheehan’s paper crosses a line here.*

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 Never Discussed Impact Of The Net Equity Question, The Devastating Impact Of Discovery On SIPC's Position, And Argumentation And Morality. Part I.

July 22, 2009

Re: The Full And Never Discussed Impact Of The Net Equity Question,
The Potentially Devastating Impact Of Discovery On SIPC’s Position,
And Matters Of Argumentation And Morality.

PART I.


This post is being published in four parts. Let me start it with some comments that will surprise a lot of people.

Irving Picard has taken a lot of heat. As readers know, this has occurred for many reasons, including: his novel, anti-statutory definition of net equity, which will likely injure thousands; his delay in making payments -- which violates the statutory requirement of “prompt” payment (and was made necessary by his definition of net equity); his possible threat of attempting to claw back money from the innocent but financially devastated -- from stones with little or no blood to give; from a refusal to offset the amount he claimed people owed, due to autumn 2008 withdrawals, by even greater amounts they put in during the same period; by a demand (which I think may now have been dropped) that people relinquish their rights to more money (by signing releases) if they are to get lesser amounts which are indisputably owed to them and which they desperately need to live; by making the kind of really obnoxious arguments which SIPC has become infamous for in decades of (often successful) efforts to deny money to the victimized; and, for all I know, by other misbegotten actions as well. All of these actions, it has long been my opinion, are designed to improperly diminish the amount of money SIPC has to pay out -- the net equity definition, in particular, diminishes SIPC’s prospective payments by a truly huge amount -- and are favored by -- conceivably were even demanded of Picard by -- his “bosses” in SIPC.

So, given the rage Picard has inspired, it probably will surprise lots of people to hear me say that there is one fantastically important area in which, as near as I can tell at this point, Picard seems to be doing a really excellent job. As shown by Picard’s July 9th Interim Report to the Bankruptcy Court, he has brought eight lawsuits against major Madoff players or clients, seeking a total of $13.7 billion. I have read four of the complaints filed by Picard, and think they are quite good. It seems to me not impossible (as lawyers would bassackwardly put it to avoid overoptimism) that Picard could end up with some number of billions from these suits to distribute to victims; I think some of the defendants in the suits may still have big bucks.

So, as a bottom line, Picard seems to be doing a good job in going after the movers and shakers who benefitted gigantically from Madoff’s Ponzi scheme and, in several cases, were major aiders and abettors if not outright coconspirators. Of course, there is one small problem with Picard’s otherwise laudable efforts to get money from the movers and shakers. It was the least affluent of Madoff’s victims -- the small fry victims -- who had to take out money to live and to pay taxes, and who thereby reduced their net equity, as Picard and SIPC calculate it, to zero or a negative number. It is therefore these people -- the least affluent, often even non-affluent, small fry -- who will receive no benefit whatever from any recoveries Picard obtains in his lawsuits. For, as I understand it -- and I would love to be wrong, but fear I am only too right -- your net equity controls more than just whether you can get back some or all of the $500,000 that SIPC can give a “customer.” It also controls what you can get back from what I believe can be called Madoff’s bankruptcy estate or his “customer property” (a term which frankly confuses me much of the time).

What Picard recovers in lawsuits against the movers and shakers -- or in other ways -- becomes, I believe, part of Madoff’s estate, or the “customer property.” So, if you have no net equity as Picard calculates it, or a negative net equity as he calculates it, I think you not only will get nothing from SIPC itself, but also nothing from any amounts Picard recovers in lawsuits from the movers and shakers whom he has sued for $13.7 billion.

If I am right about this -- and as strange as some may think it to say with regard to investors in Madoff -- Picard has created a sort of class war. The very rich, who didn’t have to take anything out of Madoff to live or to pay taxes, will get the full $500,000 from SIPC, plus possibly large sums from Picard’s recoveries in lawsuits or elsewhere, since they will have huge amounts of net equity. The far less affluent (who often are already elderly and desperate), who depended on Madoff to live and to pay taxes, and who sometimes had as little as $500,000 or so in Madoff, will get nothing from SIPC and nothing from the recoveries or other customer property, because they will have zero or negative net equity.

As said, I deeply hope my understanding of all this is wrong, but fear it is right. If it is wrong, one hopes that Picard or Harbeck will quickly set matters straight. They -- either alone or jointly -- have not hesitated to savagely attack people like Helen Chaitman or myself in the past (a letter to Helen Chaitman, to be discussed below, from Picard’s lawyer, David Sheehan, was so far beyond the pale as to be unconscionable, even though it was a response to a “vigorously worded” (shall we say) paper filed by Chaitman), although I do note that the attack on me with regard to the 3 percent bonuses ceased after I posted a lengthy second article relating to it (and in SIPC’s eyes, I imagine, corrected what it claimed to be mistakes). So I hope Picard and SIPC will correct my view of the overall impact of their net equity calculation if my view is wrong, and in the process will explain not just that it is wrong but also why it is wrong.

There is a further point to make in connection with my view of the impact of the net equity calculation. Three lawyers -- Brian Neville, Helen Chaitman and Jonathan Landers -- have now filed papers requesting judicial decisions that Picard’s net equity calculation is wrong -- requesting judicial rulings that one’s net equity is not determined by Picard’s cash-in/cash-out calculation, but by what was shown on one’s November 30th statement. The three lawyers’ papers, which I will discuss to some extent below, are generally quite good. But there is one point which is missing from all of them. They all explain that the rival calculations of net equity -- the November 30th statements versus Picard’s cash-in/cash-out method -- control the issue of whether one gets some or all of $500,000 from SIPC. But none of them mentions the impact of the net equity calculation on whether and the extent to which one shares in Madoff’s estate, in “customer property.” I would think this is very important and, if my view is right, surely should be mentioned since a great deal of money could be involved if I am right in thinking that a diminished or negative net equity via Picard’s calculations will have a big impact on recovery of monies from the estate.

Finally, let me present one final point with regard to the impact of the method of calculating net equity: its potential impact on people who innocently withdrew all their money from Madoff in the six years before December 11th. Picard has indicated he may not seek to claw back monies from innocent investors who withdrew money in that six year period but still had accounts on December 11th (although Helen Chaitman has written of people who put in more than they took out in the last six months yet Picard tried to diminish their $500,000 payout by the amount taken out while not crediting them for the amount put in, which somehow seems to be cut from the same cloth as clawing back from the innocent). However, if Picard does decide to claw back from innocent persons who, during the last six years of Madoff, withdrew more than they put in but still had accounts on December 11th because they had been credited with fictitious profits, then doesn’t he also have to claw back all monies in excess of what they put in from innocent investors who, within the relevant statutory period of the last six years before December 11th, innocently withdrew all the money from their accounts, including fictitious profits, and thereby ended their investments in Madoff? For haven’t the latter people -- those who closed out their accounts by receiving what they put in plus all fictitious profits -- benefitted unlawfully under Picard’s cash in/cash out calculations, just the same as those who took out money but still had accounts on December 11th?

Picard and Harbeck constantly stress that justice and equity, and especially a desire not to let the fraudster determine who gets how much by way of returns, require the use of their cash in/cash out method, not the statements of November 30th, to determine a person’s net equity (albeit this is an untrue claim, as discussed later). Well, then, don’t justice and equity, plus a desire not to let the fraudster determine who gets what, require Picard to claw back all fictitious profits from those who took out all such profits and ended their investments in Madoff during the statutorily determined six year period before December 11th as well as from those who withdrew some fictitious profits before December 11th but still had an account then? And shouldn’t this point too be mentioned in papers filed by the lawyers who are litigating the net equity question?

One should add that innocent people who withdrew all their money form Madoff three or four or five years before December 11th would be justifiably shocked to learn that now, years later but within the statutorily determined period, they owe back everything in excess of what they put in. But as a matter of justice and equity there is, I think, no principled way to avoid this conclusion if Picard claws back from innocent people who still had an account on December 11th.

One would think that this additional impact too of the Picardian/SIPCian calculation of net equity should be mentioned in the briefs filed by the lawyers who are litigating the net equity question against the Trustee and SIPC.*


* 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.

Re: The Vast Amount That We Don’t Know About The Madoff Matter.

July 8, 2009

Re: The Vast Amount That We Don’t Know About The Madoff Matter.



My memory may be faulty, but I do not remember a major crime in which, at the times of plea and sentencing of the lead culprit, the details of what happened, of what was done, were as little known publicly (and perhaps to investigators) as in Madoff. Consider:

We do not know when or why the Ponzi scheme started. The government has said it started at least as early as the 1980s. But does it go back even further -- does it go back to the 1970s or even the 1960s? Court papers filed by governmental or quasi governmental bodies say that Madoff was friends of (and used) certain co-culprits like Sonny Cohen and Stanley Chais since the 1970s and 1960s. Were they present at the creation, so to speak? Was the fraud a mutual plot? -- from the beginning? Was it conceivably even something hatched initially in the office of Madoff’s father-in law in the early 1960s, when Avellino and Bienes started funneling money to Madoff? Nobody knows about this, unless the government has learned the facts but isn’t disclosing them yet.

Why was the fraud undertaken? We don’t know that either. Madoff hinted at his sentencing hearing that it was undertaken because of some failed investment. He indicated that he thought he could work his way out of the problem but instead got into a deeper and deeper hole. (He had, I think, made similar comments about how frauds develop before his own fraud was discovered.) If his Ponzi scheme began because of some investment failure, what was the failure and when did it happen? Most of us probably think Madoff’s hint was a smokescreen meant to hide the fact that he was a crooked greed merchant in one way or another for decades. But the truth of why the fraud started is not known, at least not publicly.

It also is not yet known precisely who knew of the fraud and, of those, who knew that the nature of the fraud was that it was a Ponzi scheme. Unless and until the prosecutors affirmatively give clean bills of health to Ruth Madoff, Peter Madoff, Shana Madoff, and Madoff’s two sons, Mark and Andrew, an awful lot of people are going to think they had to know something was wrong. If I remember correctly, Ruth had seen or even kept the company’s books for awhile. Peter Madoff had, if I remember correctly, set up the company’s computer systems -- and an old computer on the 17th floor (which was not connected to the outside world, so there could be no slip ups and no hacking into it and it couldn’t make trades) was central to the fraudulent scheme. Shana Madoff must have known that Cohmad and BLMIS were paraded as being separate but really weren’t; as was said in a complaint, she was the compliance officer for both Cohmad and BLMIS. The sons -- and Peter and Shana too, I would think -- must have known (i) that Madoff told those who asked that he was content to make his money by the commissions from having his trading arm execute the trades for the investment management arm, but (ii) that in fact the trading arm made no trades for the investment arm. Some of these individuals must have known, or even participated in, lies told to the SEC, the NASD and FINRA when these organizations conducted inspections. So family members had to have known something was wrong. But the precise knowledge of each, and the degree of participation (if any) by each, is currently unknown.

Who on the 17th floor knew something was wrong and, possibly, that a Ponzi scheme was going on? One is tempted to say that DiPascale, people who researched stock prices, people who entered numbers in the computer and printed out numbers and statements, and Bongiorno, Buccellato and Jones must or at least were likely to have known everything, and that it is impossible for anyone on the 17th floor to have known nothing. These people all worked in the same place. They must have talked to each other every day. Aside from everything else, did nobody ever notice or mention that no actual trades were taking place? That anyone on that floor was wholly innocent is not believable. It is more believable that several of them knew everything. But, right now, who knows?

Then there is also the question of what was known by the major feeders. The complaints filed by Picard and the SEC against such as Chais, Cohmad, Fairfield and Picower make it clear that all of these knew something illegal was going on, but whether they specifically knew there was a Ponzi scheme is left unsaid. Instead, Picard and the SEC use the lawyer’s weasel language of saying that the defendants knew or should have known of illegality. This makes clear, of course, (or at minimum implies) that Madoff hasn’t told the government the relevant facts (and neither, of course, have the defendants in the various cases (some of whom have taken the 5th)), just as Picard told Judge Chin that Madoff had not cooperated and Judge Chin expressed the same view. Yet the SEC and Picard know enough to set forth facts showing that these various defendants knew very well that something was drastically wrong. Variously, some of them would tell Madoff what they wanted their accounts to “earn,” and he would by fiat do as they wished. Some had accounts that would “earn” 100 or 500 or even 950 percent. Some would order up backdated losses for their own purposes (one would think the purpose was to evade taxes), and Madoff would then create backdated securities transactions with the required losses. At least Cohmad, and perhaps others, was paid commission strictly on the basis of a customer’s cash in minus his cash out (the same way, I gather, that SIPC is calculating net equity), not on the basis of the total amount in the customer’s account, including profits, which is the customary basis on which mutual funds and hedge funds are paid. Cohmad (and others?) could not help but suspect, if it did not actually know -- which one suspects it surely did -- that the reason it was paid commission strictly on a cash in minus cash out basis, and not on profits too, as is customary, is that there were no profits -- that the whole deal was a Ponzi scheme. In this vein, two people from Cohmad, Marcia Cohn (who is Sonny Cohn’s daughter) and a guy I never heard of until recently named John Joseph Kelly, had keys to the 17th floor -- which, generally speaking, was off limits to everyone except those working on the fraud scheme. Marcia Cohn used her key a fair amount apparently, including on December 11, 2008.

The various players being discussed here took out hundreds of millions and billions of dollars more than they put in. Picower took out over five billion dollars more than he put in -- and it is not even clear, I think, that Picower, like others, was a feeder of anything but his own money. If all he fed was his own money (which at least seems to be the case), not money from other investors, why did Madoff give about 6½ billion dollars to this guy who put in only about 1½ billion?

All of these people had to know something was very, very wrong, and it seems to me likely that some of them, maybe even all of them, even knew that the whole deal was a Ponzi scheme. But is their level of knowledge and participation publicly known for a fact? Nope.

Where did all the money go? This is another unknown. It was said at the hearing that the Probation Office, which submitted a lengthy but confidential report prior to sentencing, claimed the money was used up in redemptions. But how can we be confident the Probationary Office knows anything. Its report was the same one that recommended Madoff be given only 50 years -- bah. More to the point, it also said, according to statements at the sentencing hearing, that only 13 billion dollars was lost -- even Judge Chin did not believe that. He said he thought the Probationary Office had ignored money invested through feeder funds.

So where did the money go? The government made clear last week its belief that over the years 170 billion dollars had moved through Madoff. This obviously is a staggering sum of money. Supposedly (at least according to the Probation Office), it was all redeemed, except for what Madoff kept for himself and what little was left at the end. Maybe that is what happened, but who is going to believe it until it is proven to be the case? If you ask me, it is more likely that there was someone else involved in the deal who got a lot of the money -- some think the American mafia, some think the Russian mafia, some think the Mossad and/or the CIA, some think others. Some think a lot of the money is still in banks overseas and one wonders about all the excess billions withdrawn by Picower -- where, or to whom, did that money go. The only fact currently known is that we don’t know what happened to all the money. And we are not going to know until a lot more information becomes public.

Then there are the questions of how did Madoff get the SEC and the IRS to play ball with him, not to mention FINRA and, before that, FINRA’s predecessors. The SEC not only ignored Markopolos, as well as warnings issued, we are learning, by some of its own lawyers, but, in an act which securities lawyers tell me it never commits, the SEC also announced publicly in 1992 that there was nothing to indicate fraud. Securities lawyers say the SEC never does this; rather it merely closes investigations and, if someone’s reputation has been harmed because the existence of an investigation leaked out, it may give the person a “no action” letter which he can then use as he wishes. So how and why did the SEC -- what did Madoff do to get the SEC -- to publicly say there is nothing to indicate fraud. That public statement sucked in people (myself included) ever afterwards: it sucked in people when they transferred money from Avellino and Bienes to Madoff in 1992 and 1993, when they subsequently invested with Madoff for the first time, when they added money to their accounts in later years, when people later decided to leave money in Madoff rather than investing at least part of it elsewhere (all of which is of no consequence to mainstream media anti-victim bigots like Joe Nocera). To some people, the SEC’s public statement was so important that, as they have said in affidavits being submitted to the SEC’s Inspector General, they marked up, kept and/or still have the 1992 newspaper articles detailing the clean bill of health given Madoff by the SEC. But how Madoff procured this false, unprecedented, unique, and crucially important statement of a clean bill of health from the SEC is something we do not know.

Nor do we know where Madoff, in 1992 (over a weekend, one gathers), got the money -- over 400 million dollars -- that he allegedly would return to customers of Avellino and Bienes if the customers ultimately wished the return of their money, nor how many of the customers did not wish this but instead, because of the SEC’s statement of a clean bill of health, transferred their accounts from Avellino and Bienes to Madoff himself.

Perhaps the SEC’s Inspector General’s Report will answer these questions. It remains to be seen.

Then there are the questions about the IRS. Why did it approve Madoff as a so called nonbank custodian for IRAs in June of 2004 when he was in serious violation of crucial regulations the IRS itself had established to insure that persons with IRAs will not lose their money because of misconduct by or unfortunate events occurring to nonbank custodians? How did Madoff get the IRS to approve his company as a nonbank custodian despite his serious violations of the IRS’ own regulations, and despite the fact that inspection of Madoff by the IRS to insure that its regulations were met would have disclosed the fraud? Was there criminal conduct on the part of the members of the IRS -- acceptance of bribes, for example? Was there “only” simple gross negligence, incompetence and gross dereliction of duty (as, perhaps, by failing to inspect Madoff to be sure he complied with the regulations)? Right now nobody knows -- and the mass media, though informed of the matter, doesn’t care about it and doesn’t investigate it. Imagine: the mass media neither cares nor investigates how the country’s federal tax service aided the commission of the biggest fraud in history.

And if you, Mr. or Mrs. Average citizen, make inquiries of the IRS as to how it came to assist the fraud, as I did, the answer you will likely get back, as I did, is that the IRS will give you no information because Madoff’s company was a taxpayer and the affairs of the taxpayer are confidential unless Madoff or his authorized representative consent to their release. Can you beat that? Madoff is literally the biggest crook by dollar figures in the history of the world, but you cannot be told how he obtained the cooperation of the IRS because his company was a taxpayer and therefore its IRS affairs are confidential.

You know, the IRS is quite a piece of work in the Madoff scandal. For decades it has gotten a total of untold billions of dollars in taxes paid on phantom income from victims of Madoff. It is not telling us how much it got, though I imagine this would not be very difficult to determine in this age of supercomputers. But I suspect that the total tax it received on phantom income must be in the tens or scores of billions of dollars over the years. If people paid tax over twenty or thirty years on “as little” as 30 billion dollars of phantom income, that would amount to approximately ten billion dollars in taxes. If 20 billion of the 65 billion dollars shown on the November 30, 2005 statements was principal (was “cash-in”), so that the remaining 45 billion was phantom profit, the income tax on the final numbers alone was about 15 billion dollars minus amounts not owed because the phantom profits went to tax-free entities or because money went to foreigners who may not have been liable for or may simply have evaded tax.

But one way or another, and even though it so far won’t disclose the amount, over the course of 20 or 30 years, or maybe even longer, the IRS received billions upon billions of dollars in taxes on phantom income -- taxes on money it had no constitutional right to tax because the Sixteenth Amendment allows it only to tax “income,” not “phantom income.” But now the IRS will give you a refund of only a few years of those taxes -- money which we now know you were cheated out of from the beginning, to put the matter candidly -- and the IRS relies on the courts and Congress to agree that you don’t have to be paid back the taxes you were cheated out of, since letting taxpayers get refunds of all such taxes might be hurtful to the federal fisc. Nor will you get back more than a small fraction of your losses by virtue of the IRS’ new theft deduction rule, which, as has been said here from the beginning (and as others are coming to agree), is quite inadequate for many people and will extensively benefit only the obscenely wealth, who will receive scores of millions of dollars worth of tax deductions (with the word on the street being, rightly or wrongly, that the IRS’ rule was initially drafted for the wealthy by a white shoe Wall Street law firm that has represented huge money for over a century). All in all, one might paraphrase the statement made with regard to the Barbary pirates 200 and some years ago by saying, “Trillions to bail out the bankers who brought down the economy, but not one cent, or at least very little, for average people who were cheated and defrauded by Madoff and governmental agencies who were his defacto accomplices.”

You know, when you look at the whole thing systemically, it is quite a picture. People got sucked into a Ponzi scheme by the affirmative 1992 statement of one federal agency, the SEC. They remained sucked in because of the SEC’s incompetence when it was told of the fraud in later years, and by the incompetency of FINRA and its predecessors too. Meanwhile the IRS benefitted to the tune of untold billions of dollars and, when the fraudster in effect asked it to help him by approving him as a nonbank custodian, the IRS did this even though he was in gross violation of its own regulations. Subsequently the IRS will give back only a fraction of the taxes you have been cheated out of -- unconstitutionally, no less. To put icing on the cake, SIPC, as all know, is screwing people out of money they have a right to. And when people seek to sue the SEC or the IRS for their horrendous misconduct that enabled Madoff to succeed for decades or for the billions in taxes to which the government had no right, the defrauded plaintiffs will be met with claims by the government -- which always makes these claims -- that you cannot sue the government, and/or that statutes of limitations have run regardless of how horrible the government’s misconduct was. Joe Nocera will love it since he thinks it was all the (stupid) victims’ fault anyway.

Then there are the twinned questions of who on Wall Street knew or had good reason to suspect that Madoff was perpetrating a fraud but did not report this to the SEC, and why didn’t they report it to the SEC? In his warning memos to the SEC, Markopolos identified four major companies or prominent individuals who were knowledgeable about derivatives and who, he said, were persuaded that Madoff could not be for real. They included “heads of equity derivatives trading at Morgan Stanley, Goldman Sachs, J.P. Morgan and CitiGroup.” In complaints he has filed, Picard has listed no less than seven prominent houses that he thinks refused to do business with Madoff because of “serious concerns” that his “operations were not legitimate.” They include “Société Générale, Goldman Sachs, CitiGroup, Morgan Stanley, Merrill Lynch, Bear Stearns, and Credit Suisse.” From their refusal to do business with Madoff, one deduces, as Picard has indicated, that they suspected Madoff’s bona fides. In addition, one has read of others who suspected or had reason to question Madoff’s bona fides, especially if they were rich enough to have expensive professionals assess Madoff for them (i.e., do due diligence for them) or were themselves wealthy professionals, sometimes obscenely wealthy professionals, who could do this for themselves. One even reads of wealthy persons who apparently were not financial professionals but who heard rumors that touted them off Madoff.

Did any of these people or institutions let the SEC know of their suspicions -- warning from the likes of Goldman, Sachs, CitiGroup, or Morgan Stanley, for example, might have forced the SEC to move, after all. If, as is apparently the case, they -- and other types whom Joe Nocera consorts with but to whom the rest of us have no access -- didn’t tell the SEC of their suspicions, why didn’t they? If memory serves, Markopolos, in his prior lengthy warnings to the SEC, and then in his testimony to Congress, implied that those experts’ silence was a product of concern that their lawyers, for some reason (natural lawyeresque caution and fear of slander suits, one supposes), would not let them talk openly to investigators, plus a Wall Street code of silence arising because everyone on Wall Street has skeletons. Whatever the reasons, these powerful Wall Street institutions and persons did a profound disservice to thousands upon thousands of people by not informing authorities of their suspicions and of the underlying reasons. But right now we know relatively little about the universe of people who held suspicions, their reasons (if different from red flags that Markopolos wrote of), why they failed to alert the authorities, or how, it appears, certain non professional but very wealthy people seemed to get the word that touted them off Madoff. Nor does the mass media seem to have an interest in tracking down any of this.

So. . . . . . . we are currently in a place (so to speak) where a simply fantastic amount about the Madoff scam remains unknown; more remains unknown than I can ever remember being true at the time of the plea and sentencing of the lead culprit in any other major fraud case. To a significant extent, one thinks, the present lack of knowledge is a result of the absence of a trial in the Madoff case -- Judge Chin did us no favors by letting Madoff plead instead of forcing a trial at which much would inevitably be revealed. Also responsible for the current lack of knowledge is the typical dearth of serious investigatory work by the mass media -- which steadfastly refuses to look into the IRS connection, among other important problems. The extent to which the dearth of knowledge will be rectified by ongoing investigations by prosecutors and Picard, by an investigation by a possible special prosecutor (Professor Elizabeth Warren’s name has been floated in this connection), by investigations by Congress, by future work by authors of books on the Madoff matter, or by future trials (which I doubt will occur because culprits are likely to cop pleas), is presently unknown. And I, for one, cannot think of any way -- not one -- in which this vast lack of knowledge is doing any good for anyone connected with the Madoff affair who is honest. That it is vitally helpful for many who were dishonest goes without saying, of course.*


*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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