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.

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