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.

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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.

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