Friday, October 23, 2009

The Briefs Of The Trustee And SIPC On The Net Equity Question.

October 23, 2009

Re: The Briefs Of The Trustee And SIPC
On The Net Equity Question.

Having read the opening briefs filed by the Trustee and by SIPC on the net equity question, I thought to set down a few of what I believe are my most important impressions. Admittedly, whether I correctly understand all parts of the briefs seems to me a question. Like most Madoff victims, and perhaps even like a large number of the army of lawyers now involved in cases and in advisory roles, less than one year ago I had not even ever heard the words SIPC or SIPA to the best of my knowledge. Like other victims, I have spent the months since December 11, 2008 trying to play catch-up with regard to this very complex statute, and with regard to other matters too, such as tax matters. In regard to SIPA and SIPC, the victims, often not even lawyers, struggle to play catch up while confronted by a SIPC management and a Trustee who not only are lawyers but who have spent about 34 years or so making their livings from this complex statute, and in some cases have written about it. (The briefs sometimes quote their own writings.) So it can be difficult for us Johnny-come-latelies to be sure we have things right or, with regard to the recent briefs, to be completely confident we understand aright all that is being said or claimed.

With this disclaimer of certainty, then, let me nonetheless set forth here some of what seem to me the most important underlying points of the briefs of the Trustee and SIPC. As implied, I shall not attempt to be catholic with a small c in my descriptions or comments, but rather shall focus on what appears to me most important. With but few exceptions, I shall not, for example, either here or in a brief to be filed in about three weeks, discuss the cases relied on by the Trustee and SIPC or the Congressional reports or other legislative history. For that kind of legal analysis, and for most other legal analysis of the kind usually contained in responsive briefs, I shall rely on the hoped-for efforts of excellent lawyers who already have shown, in prior briefs, that they are very knowledgeable on the pertinent matters, lawyers such as Helen Chaitman, Brian Neville and Jon Landers. My efforts, both here and in a forthcoming brief, will usually be of a more philosophical or “overall” cast.

Let me start with a feature of the briefs of the Trustee and SIPC that strikes me as being somewhat of a psychological ploy as well a legal argument. (In the 1940s, a Supreme Court Justice said of a case in which the Supreme Court reversed itself in just a year or two -- I think the comment was made in the second of the so-called flag statute cases decided during World War II -- that the second opinion would be of more interest to students of psychology than to lawyers. That comment strikes me as applicable to parts of the briefs of SIPC and the Trustee.) The feature in mind is that the briefs contain lengthy, up-front, page after page descriptions of all the things Madoff & Co. did to create a phony universe in which nothing was real, not the supposed purchases and sales of securities or options, not the profits that were credited to victims, not what was stated on the statements received by victims, etc. One’s reaction to all this is, in a way, the sarcastic reaction of “Thank you very much. You are spending page after page telling us what all already know, including the bankruptcy judge. What a waste of time and print, and what a trial of the reader’s patience.”

But, as indicated, there seems to me to be an underlying legal and psychological ploy for this seeming waste of space. It is to cause the court to treat the whole case, everything, from the standpoint of “Everything here was false. Therefore the victims should not receive any treatment of a type that might accrue if anything had been real.” By means of this underlying ploy, the Trustee and SIPC hope to get the court to ignore, for example, innocent victims’ legitimate expectations that they had what their statements showed. (One of the briefs even takes the truly amazing position that victims’ only legitimate expectation was that they owned securities, and not that they owned the dollar amount of securities shown on those statements. Do you know any innocent person who thought, from the monthly statements, that he or she owned securities, but not the dollar amount of securities shown on the statements?)

To take another example of the effect of the previously described ploy, by means of the underlying argument that everything was false, the briefs of the Trustee and SIPC also hope to persuade the Court to ignore the part of the New Times litigation that dealt with unbought but real securities, and instead focus exclusively on the part of the litigation that dealt only with unbought and unreal -- i.e, nonexistent -- securities. Once again the general underlying idea is, “Focus on the fact that everything Madoff did was fake and let that control everything you do -- regardless, by the way, of Congress’ desire to help investors, and regardless also, incidentally, of the fact that everything in New Times was also faked, but people whose unbought securities existed in the real world -- as did Madoff’s -- were given credit for what they would have made had the securities been bought. (The briefs pretend this is irrelevant because in New Times the existing but unbought securities increased in value in the real world, wherein Madoff profits existed only on his 17th floor computer. They ignore, however, the salient point that Madoff’s statements reflected prices in the real world, just as in New Times, and that this meant investors could check out the prices shown by Madoff (as some did), just as in New Times. (I gather that there were a few instances in which Madoff’s prices, or his names of securities, slipped up, and a tiny number of Wall Street experts were aware of this, as well as of the fact that he always appeared to buy and sell remarkably advantageously (i.e., had great “fills” in Wall Street parlance -- which the SEC was told of but ignored). But as a general matter that was almost always true, the phony prices he showed reflected observable reality.))

The briefs of SIPC and the Trustee also use another apparent ploy: They extensively present the history behind SIPA even though much of it seems irrelevant to the case. But my guess is that what they are attempting to do is to plant in the court’s mind, in this way, the idea that SIPA is in reality a part of bankruptcy law for virtually all purposes, that it should therefore be treated as just another part of bankruptcy law whenever and wherever SIPC says it should be (which, I believe, does not include the limits on Trustee compensation imposed by bankruptcy law -- surprise, surprise), that the people who have what they call a negative net equity on a cash-in/cash-out basis should not receive SIPC protection because they assertedly would not receive bankruptcy protection, and that, for these reasons, victims should not receive money from SIPC and will not receive monies from the estate, from the so-called “customer property” collected by the Trustee -- who is suing people for somewhere around 15 billion dollars in “customer property.” (I note that, for reasons which need not be elaborated here, if anything like this amount were to be recovered by the Trustee, then SIPC and some investors would make out like bandits under the theories espoused in the briefs of SIPC and the Trustee, while a host of investors would be victimized by receiving back nothing from SIPC and nothing from the bankruptcy estate.)

To try to further explain this very complex stuff (and assuming I have it right though I do not find the briefs’ explanations all that easy to understand), let me put it this way: The briefs say that SIPA is only a part of bankruptcy law, and that the amount of money given by SIPC to victims -- up to $500,000 per account -- is simply an advance on and a species of “customer property” that will ultimately be distributed from the bankruptcy estate, property in which a victim has no right to share unless, as under bankruptcy law, the victim’s actual cash-in exceeds his actual cash-out, with the statement of November 30th being completely irrelevant. Therefore, a victim who has a negative net equity on a cash-in/cash-out basis gets no advance from SIPC, since to give him an advance would be to give him “customer property,” in which he has no right to share.

Given what I at least found to be the difficulty of understanding the briefs on these matters, I can’t be sure I have it right. But I think I do, and, if I do, the matter seems to me to boil down to the view that SIPA is merely a part of bankruptcy proceedings, and that the ordinary rules of bankruptcy proceedings, as the briefs present them, are applicable. This view is, of course, quite convenient for SIPC in this case. But it does seem, at least to me, to ignore Congress’ intent to protect investors and thereby build crucial confidence in markets. For it ignores the Congressional desire to protect investors up to $500,000 for what they legitimately believed they were owed by a broker like Madoff, a belief long accepted in law as being based on written statements received by investors.

The legitimate question, I would think, is not, as the briefs would have it, whether SIPC investors should be treated as if a SIPC proceeding is just another bankruptcy case in which the ordinary rules of bankruptcy as presented in the briefs are applicable (ordinary rules which the briefs say include cash-in/cash-out) and therefore lots of Madoff victims should get screwed out of up to $500,000 by SIPC, and should likewise get nothing from the “customer property” collected by the Trustee, despite Congress’ clear intent to help them. Rather, the legitimate question is whether due to Congress’ intent to help investors, the rules of SIPA, under which so many have over $500,000 in net equity as shown by their November 30th statements, should govern not just in SIPA matters, but in the bankruptcy aspect of the case, too, i.e., should govern in the ultimate distribution of the estate after all recoverable “customer property” is recovered. In other words, if one has a positive net equity of, say, one million dollars for SIPA purposes on the basis of the November 30th statements and thus were to receive $500,000 from SIPC, but would have a negative net equity on the basis of cash-in/cash-out, does one therefore necessarily also have the same positive net amount based on the November 30th statements for purposes of sharing in the bankruptcy estate (the “customer property”) because of Congress’ desire to protect investors? In seeking to avoid payments to victims (I put it this way advisedly), the briefs take the position that one’s net amount is the same for both SIPC purposes and for bankruptcy purposes and is based on cash-in/cash-out. The briefs say, in other words, that bankruptcy rules govern both bankruptcy and SIPA -- while others believe Congress’ desire to protect investors means the normally applicable SIPA rules must govern both bankruptcy and SIPA in the special case of broker bankruptcy which Congress specifically covered in its SIPA statute. Frankly, it might be desirable if bankruptcy rules on net equity governed the bankruptcy side of a case and SIPA rules governed the SIPA side, but, having read the statutory provisions cited in the briefs, I believe the Trustee and SIPC are correct in claiming that a single rule must govern both sides. That currently being the case, it seems to me that the only legitimate way to look at the matter at this time is that unless you want to overthrow Congress’ intent to help investors, overthrowing it by fiat of SIPC approved by courts, the only way to look at the matter is that normal SIPC rules must govern both the SIPA and bankruptcy sides of the matter. If there is to be a change, it must come from Congress, not from SIPC fiat approved by courts.

Another theme of the briefs is the long standing claim that, if the November 30th statements are used to determine net equity, then the result will be to harm the later investors -- whose claims are mainly for real money, it is asserted -- while helping earlier investors -- whose claims are mainly for phony profits, it is asserted. This argument has been dealt with here before, and in the main I shall not reiterate the previously identified shortcomings such as its embrace of merely abstract legal principles of what allegedly constitutes equity and fairness, while it simultaneously ignores, and indeed implicitly rejects consideration of, economic realities when determining equity and fairness. But while not reiterating previous arguments, I do want to note two crucial points that have now surfaced.

The first is that the briefs offer no factual support whatsoever for the assertion that the claims of long term investors are mainly for false profits (while the claims of later investors are said to be for real money that they put in, which seems true only if they are very late investors, as of 2006 or later, for example). It is my impression that the claims of many long-term and mid-length investors are, to a significant extent, for the principal they put in. It would not surprise me if forty to sixty percent of the claims -- or more -- may be for principal. To be sure, this may be, likely is, due to the fact that fake profits were taken out over the years -- though often for the purpose of paying income tax to what appears to be the single largest beneficiary of Madoff’s fraud, the Internal Revenue Service. But the briefs, as said, provide no facts whatever in support of the claim they made regarding long term and short term investors, a dearth of factual evidence which is consonant with the general practice of the Trustee, SIPC, and prosecutors in this case of disclosing, one thinks, as little as they can get away with.

The other point may be more important. It is being argued that later investors will be harmed by use of the November 30th statements because, by resulting in recoveries of up to $500,000 for persons who would receive nothing if cash-in/cash-out is used, the use of the November 30th statements will lessen the monies available to the later investors. In fact, however, a recovery of up to $500,000 under SIPC will not cause later investors to lose dime one. For that money, as is admitted, will come from SIPC itself, not from the so-called “customer property” (or bankruptcy estate). What SIPC and the Trustee are and long have been worried about here seems obviously not to be that less money will be available to later investors if the November 30th statements are used, but that SIPC would be broke if it had to use the November 30th statements as the measure of net equity for SIPA purposes of giving victims up to $500,000. SIPC doesn’t have the necessary amount of money. Its shortfall in money is in large part due to failure to assess the securities industry more than a deminimus pittance for many years rather than assessing brokers enough to build up a sufficient fund. To meet its obligations and avoid bankruptcy, SIPC would have to seek more money from Congress or tap lines of credit, etc. All of this it would consider undesirable, but, in any event, the point is not that late investors would lose money, but that SIPC would be out a ton of money.

There is, however, one scenario under which SIPC and the Trustee could be right in claiming that late investors could be harmed, in addition to SIPC being out a lot of money due to its payments of $500,000. If the net equity shown on the November 30th statements controls not only what one receives from SIPC, but also one’s share in the bankruptcy estate, then people who have a positive net equity shown on the November 30th statement but a negative net equity on the basis of cash-in/cash-out will share in the bankruptcy estate though they otherwise wouldn’t. Their sharing in the estate would mean that less would go to others from the estate. In this way late investors who did not take money out of Madoff could be “harmed.” Of course, such harm wouldn’t be dramatic unless the Trustee recovers many billions of dollars for the estate, whereas the harm to persons denied $500,000 from SIPC often is very dramatic: it has caused many people to be in the poorhouse.

There is another aspect of the briefs which appears to indicate -- completely unintentionally -- that SIPC and the Trustee have always been concerned about SIPC’s coffers, not investors. The briefs make clear that, if securities lost by a victim can be purchased in a fair and orderly market, a SIPC Trustee is supposed to return to an investor the securities she lost because of a broker’s bankruptcy. If this is done, there is no need for SIPC to pay people up to $500,000 to cover their losses up to that amount. A return of their securities might prove financially better for victims or financially worse for them than paying them up to $500,000, but, as said, it is what must be done if possible.

Here, returning their securities to customers would have meant purchasing in the open market the securities shown on customers’ November 30th statements. This, however, generally seems never to have been considered. From the beginning the talk always was about the $500,000, and those of us who started out knowing absolutely nothing about SIPC -- which I believe was almost everyone -- were none the wiser. (It does turn out, however, that some people knew this, or quickly found out, because apparently some people have submitted claims for securities instead of for cash.)

Beyond this, to the extent any of us tyros heard early on that SIPC was supposed to return securities if this could be done, we assumed it could not be done in view of the size of the Ponzi scheme, so that cash of up to $500,000 was the only feasible alternative.

But the briefs unintentionally bring much of this into question by pointing out that the Trustee is supposed to return securities to customers if he can. A librarian has obtained for me information on the number of shares of stock in the S&P 100 (which are the stocks Madoff used) that are traded each day. It is in the range of three to five billion shares per day. Individual companies in the S&P 100 trade in the range of many millions of shares per day -- a sampling of some of them shows average daily volumes that can range from 10 to 50 million shares per day. Given these facts, why couldn’t the Trustee have gone into the market to acquire, in a fair and orderly market, the number of shares needed to be given to customers? He need not have bought the securities in a disruptive way, you know. Like persons acquiring large blocs often do, he could have had traders acquire the shares for him a bit at a time, spacing out purchases over weeks or months in order to avoid disrupting or even moving markets.

Perhaps it is noteworthy in this regard that, having read every word of the SEC Inspector General’s 557 page report, in which he discusses the views of a small number of major-league Wall Street experts who suspected something might be wrong, I do not recollect a single word from any of them to the effect that Madoff could not successfully acquire and sell the S&P 100 securities that he claimed to be trading -- and that he claimed to be trading in one fell swoop, not in stages as traders in large blocs often buy and sell the shares in those blocs. The most that I recollect being said was that a few of the experts were surprised that Madoff’s huge claimed trades did not move the market, were not “visible” in the market. None of them thought it could not be done. Well, if experts apparently thought it could be done in huge, one-fell-swoop trades of S&P 100 shares without untoward effects, why couldn’t the Trustee acquire such securities in the market slowly, having his traders buy a bit at a time so that there would be no untoward market effects? Personally, I know of no reason why this couldn’t be done successfully, and victims would have been far better off had it been done, as the briefs say is required if it can be done in a fair and orderly way.

But, as said, it was never publicly considered by SIPC and the naifs with whom SIPC and the Trustee were dealing -- myself included -- had little or no idea about any of this. SIPC, The Trustee, and their counsel -- the experts -- took advantage of the widespread ignorance of those who had never dealt previously with this very complex statute that the experts had spent up to 34 years or so of their lives dealing with. And why did they take advantage in this way? Isn’t the answer obvious -- aren’t you saying it to yourself as you read this, even before I tell you my opinion? My opinion -- the obvious opinion -- is that they did it because SIPC did not have the money to do what they now admit the statute requires. SIPC did not have the money to go into the market and purchase the securities that it should have purchased and returned to investors. Nor did it want to assess the brokerage industry for the necessary monies, nor did it wish to seek the money from Congress (which was or became busy bailing out culprits in the banking industry to the tune of up to ten trillion dollars, not the “mere” scores of billions it might have taken to assist SIPC to do what it now has said was its duty under Congress’ statute).

SIPC, as I’ve said, took advantage of the fact that most of us victims were (and are) mere tyros -- or less -- when it comes to the complex statute that SIPC and its lawyers have worked with for decades. Of course, I am willing to be dissuaded from my views of the matter -- views triggered by the briefs of SIPC and the Trustee themselves on the net equity question -- but unless and until dissuaded I feel that most of us have simply been bamboozled by the experts with regard to these matters. One cannot help wondering whether victims should investigate the question whether the statute of limitations on making claims for securities can be avoided in the kind of situation which exists here, so that novices who were bamboozled by the official experts could put in claims for the securities to which the novices had a right. (Perhaps the last sentence should be underlined and italicized.)

All of this moreover, supplies yet another reason why there should be discovery from SIPC and the Trustee on why they did what they did -- discovery that the Trustee’s counsel has informed me will not willingly be given when asked for in the context of why SIPC and the Trustee used cash-in/cash-out. (The bankruptcy judge has scheduled what is called a pretrial conference for next Tuesday on the question of discovery pertaining to the reasons for using cash-in/cash-out.) Discovery on the question of why SIPC and the Trustee did not seek to buy securities is a broader, related question than discovery merely on the question of cash-in/cash-out, though one would bet there are numerous documents that relate to both questions because the questions are linked by the financial problems they would cause SIPC. In any event, if there are future Congressional hearings on SIPC and what it and the Trustee have been doing, the entire broader question of why SIPC and the Trustee did not seek to acquire securities, as well as the narrower question of why they chose cash-in/cash-out, should be plumbed. I am perfectly willing to be dissuaded if I am wrong, but to me, as of now, the answer to all such questions most probably is that SIPC did not have the money, did not want to assess brokers for the money, and did not want to ask Congress for it.

There are a few other items of major import, and a few of lesser import, that should at least be briefly noted here.

One of the ideas which has surfaced over the months in connection with net equity is that, if cash-in/cash-out is used to establish net equity, then investors are entitled to interest on their investment. (I gather the applicable New York state interest rate is a very significant one.) And, in his memorandum decision holding that there should be briefing on the net equity question, the Bankruptcy Judge said that “it is in the best interests of all customers for this Court to limit the Net Equity Issue to the determination of net equity (cash-in/cash-out vs. account statement balance as of November 30, 2008 vs. cash-in plus interest minus cash out . . . in accordance with a . . . scheduling order . . . to be submitted to this Court . . . .” (Emphasis added.) The Court thereby made clear that the question whether interest should be added to the cash-in is before it on the net equity question. Yet, in its next to last paragraph, the Trustee’s brief says “Certain claimants have suggested that the Trustee include an interest factor when calculating a customer’s ‘cash-in/cash-out’ figure to reflect the various entry points of investors in Madoff’s lengthy scheme. Whether and to what extent such a calculation is appropriate is not before the Court in this briefing, nor are other particular nuances of the ‘cash-in/cash-out’ method.”

Thus, it would seem that the Trustee has taken it upon himself to revoke the Court’s ruling that the question of whether interest should be added to the amount of cash-in if the cash-in/cash-out theory were to prevail is before the Court. It is amazing if the Trustee has in fact taken it upon himself to in fact countermand the Judge. What I suspect happened, however, is this (though I surely don’t know for certain that my suspicion is correct): In accordance with the Judge’s above-quoted instruction for submission to him of a briefing schedule, the Trustee submitted a schedule which the Judge signed. (It is the schedule under which we are all operating.) The scheduling order submitted by the Trustee said that

The briefing to be submitted to the Court pursuant to the Order shall be limited to discussing the proper interpretation of Net Equity, specifically the following two issues:

1. Whether a customer’s Net Equity under SIPA is equal to “cash in/cash out”; or

2. Whether a customer’s Net Equity under SIPA is equal to the value of the securities positions and credit balance reflected in the customer’s last statement.

This statement in the scheduling order regarding the forthcoming discussion of net equity, as you can see, did not include the issue of interest on cash-in, which the judge’s opinion had said is part of the briefing. Not realizing the omission, the Judge signed the order. Now, relying on the order it submitted to the Court and he signed, the Trustee is claiming that the question of interest on net equity is not part of the briefing on net equity though the Judge’s opinion said it was.

If all this is what happened in fact, it is fair to say that, even if it did so unintentionally, which for various reasons is at least possible, the Trustee’s office has pulled a fast one on the Court, and has attempted to convert -- or subvert -- the Judge’s opinion that interest is part of the briefing to a situation in which it is not part of the briefing. I know but do not feel it necessary to elaborate what will be the reaction to this action by the Trustee of victims who already are very angry at him for what they believe is high handed, unfair treatment.

Another item of some significance is that, in trying to persuade the Court not to use the November 30th statements as the measure of net equity, the briefs point out that while those statements are one guide to what people had, there are numerous other books and records that also are guides, that show the whole deal was a fake, and that make clear that all that victims really had was what they put in less what they took out. The problem with this argument is not that its claims regarding what other records show are untrue. Rather, the problem is that victims had no way whatever of knowing anything of what the other records showed. To use the other records because they show the truth, even though victims knew nothing but what their statements showed, is to destroy SIPC protection for victims of Ponzi schemes who took out money they honestly thought they had -- destruction which is, in fact, the end result of all the arguments being made by SIPC and the Trustee.

I know of no legislative history indicating Congress wished to work such destruction on such victims. To the contrary, the legislative history, presented by various lawyers in various prior briefs, and doubtlessly to be presented again by them, indicates that Congress wanted to protect all innocent victimized investors up to $500,000 in order to maintain confidence in markets. To punish innocent victims here who took out monies they honestly thought they had seems especially harsh and improper, moreover, when one considers that the SEC, which repeatedly had far more information than it needed to uncover the Ponzi scheme, nonetheless didn’t uncover it and instead gave victims comfort that their investments were safe, and when one likewise considers that some of the greatest and most sophisticated investors in the world, such as those working with James Simons, did not uncover the Ponzi scheme and left money with Madoff -- despite certain red flags that caused them concern -- because they felt the SEC had placed an imprimatur of legitimacy and non fraudulence on Madoff.

There are a couple of matters of perhaps lesser concern which I would also like to mention before closing. One is that there is some hint of concern in one of the briefs that, if cash-in/cash-out is not used, and the November 30th statements are used instead, then money could be owed to accused coconspirators who made hundreds of millions or, like Picower, billions of dollars from the fraud. But one cannot believe such hints are serious. There is no way that SIPC or the Trustee thinks SIPC or the estate would have to pay money to coconspirators -- if they are judicially found to be coconspirators -- regardless of what their net equity might be according to their November 30th statements. Still less is such payment a possibility if it is true, as the Trustee has charged, that they often told Madoff what numbers to use in their accounts.

A second minor point is that, in lengthily detailing the workings of the fraud -- which all now know anyway to a very considerable extent -- as a psychological gambit to persuade the Court to uphold their relatively early-on decision to use cash-in/cash-out, the briefs of SIPC and the Trustee rely heavily on facts that they probably could not have known when they made the decision. One obvious example is their extensive description of what was done by DiPascali, which they are very unlikely to have known in full -- or even more than very partially -- relatively early-on when they made the decision for cash-in/cash-out. Though they could not have known very much about what DiPascali did at that early time, they rely on what he did to justify what they did before they could know much of what he did. Of course, they would argue that later revelations of what he did simply reinforced the correctness of their earlier decision. Anyway, it is not particularly unusual for courts to rely on facts that merely could exist, even if they are not known to exist, at the time a decision is made (and to do so even if the relevant facts never become known). Laymen might find this odd, and I too find it odd, but it’s the way it often is.

* * * * *

As mentioned here in a prior posting, Jon Landers once said to me that people would be outraged, and justifiably so, if a bank went bankrupt and then the FDIC refused to pay depositors because the bank had been insolvent for years and thus all the interest the depositors honestly thought had been accumulated in their accounts, and all such interest they had withdrawn from the bank, were nothing but completely improper book entries. But that is identical to what has happened here. SIPC has refused to pay people who honestly believed they had earned money in their accounts and who withdrew earnings, and SIPC has based its refusal on the fact that the earnings were fake, just as the monies credited to and/or withdrawn from the bank were improper in the bank example suggested by Landers.

It is absolutely the case that if SIPC succeeds -- no matter what argument it succeeds on -- then SIPC protection will always be at risk, and investors will have no right or ability to rely on SIPC protection. For if, God forbid, it should turn out that one has invested in what ultimately proves to be a fraud, then one will be SOL and will get nothing from SIPC if one has over the course of years taken out more than one put in, doing so in the honest belief that the money had accumulated, existed, and belonged to the person taking it out. This has to be considered a disastrous situation for the individual, directly contrary to Congress’ intent to protect innocent investors and to promote confidence in markets, and has to be considered no better than if the FDIC refused to pay innocent depositors because it turns out that their banks were insolvent and were defrauding them all along.*

*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

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Friday, October 09, 2009

More On Net Equity. Plus Picower.

October 9, 2009

Re: More On Net Equity. Plus Picower.

In accordance with the briefing schedule set by the Bankruptcy Court, the Trustee’s brief on the question of net equity will be submitted shortly. A month later briefs opposing him will be filed. Briefs filed on net equity in the past by Picard’s opponents seem to me very good and, in toto, pretty complete. While one does not yet know what the Trustee will say, because his prior work generally has not focused on defending his definition of net equity (although he has discussed his position a bit on his website and in some briefs), one can expect that the opponents will reiterate the (very strong) points they have previously made and may add some new ones if they do come up with new ones. And they almost certainly will specifically retort to points the Trustee makes.

In reading what little the Trustee has said in the past to justify his cash-in/cash-out position on net equity, a couple of thoughts struck me that, as far as I can recollect, have thus far not been made by opponents. I shall set them forth here.

The Trustee has said from early-on that cash-in/cash-out is justified because persons who took out money from Madoff received money put in by other investors. True, but he neglects to mention that the money put in by persons who also took out money was likewise used to pay other investors. Some of those other investors were prior ones, but some might even have been subsequent ones because, up until the last year or so, Madoff appears to have had 17 to 20 billion dollars in his account at JP Morgan Chase. The meaning of all this is that, for example, if someone invested one million dollars in 2001, her money was used to pay off other investors, many or all of whom took out more than they put in, just as other people’s money was used to pay her when she later took out sums that could have been equal to or more than she put in.

What I am trying to say here is that Picard’s model is, in effect, simple minded because it neglects portions of the reality. His comments, you know, have the aura of blaming people who took out more than they put in, because, he says, they received other people’s money and therefore should get nothing. He does not mention that, correlatively, other people received their money -- and, if these others cashed out completely over six years ago, will never have to repay the money.

This brings me to the legitimate expectations of investors, denoted by the sums shown on their November 30th statements. Much has already been written about legitimate expectations in briefs and blogs, but let me add one point that has rarely if ever been explicitly mentioned, although often it has seemed implicit to me. The point in mind is this: even aside from the fact that Congress mandated it, why should the amounts shown as owing to her in statements received by an innocent investor be considered her legitimate expectation? The answer, though quintessentially simple, is overlooked by Picard and almost everyone else too. It is that the innocent investor, like anyone else, plans her life around the amounts of money that she justifiably believes she has, including the amount shown on her statement. Her purchases, her expenditures -- everything gets planned around the amount of money she thinks she has, including what is shown on her statements. That is why the amount shown in the statement must be considered the net equity of an innocent investor who never suspected fraud (this would not include the Picowers and Chaises) unless you are in the business of screwing people. The innocent person made her plans based on what she legitimately thought she had -- knowing of course that she is subject to market risk, as everyone is in investments, but never having any reason to suspect fraud -- a fraud which continued only because the government she relied on was so phenomenally negligent that its failure to catch Madoff was defacto intentional.

Just this week a lawyer explained to me a point which I shall use to further support my point. I don’t know that the lawyer has yet written the point in a brief -- the lawyer may or may not have. I am confident it will appear in future briefs, but don’t know if the lawyer wishes to be identified now, so I won’t identify the attorney and will say only that I thought the point most salient.

Suppose, said the attorney, you have put $100,000 into a bank, and over the years received statements saying that (because of interest) you now have $150,000 in your account. Then the bank declares bankruptcy, and the FDIC says it will only pay you $100,000 because the bank was insolvent the whole time and so the interest credited to your account was phantom interest, phantom profit. You would hear the screams from here to Washington, and you can pretty well rest assured that the FDIC would not be allowed to get away with this. Well, what the FDIC is attempting in this hypothetical example is what the Trustee is attempting here.

The situation would be even closer if the FDIC, in the example, were acting to save itself because it will run out of money, as may be -- and I think is -- what accounts for SIPC’s action here, as has been discussed in a prior post.

Let me make yet one other point regarding net equity. So far people -- including me -- seem to have been operating under the assumption that if you have a negative net equity for purposes of SIPC, which so many do under Picard’s cash-in/cash-out theory, then not only do you fail to get any money from SIPC, but you also have no right to any share of the estate, to any share of what I gather is called customer property by Picard and Harbeck. Put differently, what is net equity for SIPC purposes also controls for bankruptcy purposes: No net equity for SIPC purposes means no share in the bankruptcy estate. But reading some cases cited by Picard for his cash-in/cash-out theory makes me wonder whether this is necessarily true; makes me wonder whether what is net equity for SIPC purposes does control what one’s share of the bankruptcy estate is. The cases cited by Picard were not SIPC cases; they were bankruptcy cases. For bankruptcy law, cash-in/cash-out might make some sense, because legitimate expectations, which are a linchpin of net equity under SIPC pursuant to both Congressional intent and case law, conceivably seem not pertinent in bankruptcy. So I would think it at least conceivable that under the law someone might have a positive net equity under SIPC because her November 30th statement is the legitimate expectation and the measure of net equity, yet have little or no interest in the bankruptcy estate because she took out more from Madoff than she put in. It may be that all of us, Picard included, have wrongly been conflating two ideas that are not necessarily the same.

Perhaps it is also possible that Picard is conflating the two ideas deliberately because he knows, as one expert told me (I think I understand him correctly), that clawbacks in bankruptcy are limited to 90 days. By using cash-in/cash-out to arrive at a negative net equity, and by using that negative net equity as the measure of a person’s relationship to the estate, it is suggested (if I understand things rightly) that Picard is putting someone who received a nonfraudulent preference in the position of owing money to the estate. The money may not be collectible because of timing rules, I gather, but at least the investor won’t have to be paid money by the estate (if I understand right, which may be questionable).

Let me close with a brief point which is on a different subject than net equity, but which relates to the Trustee. For months I have wondered -- and have written of the wonderment -- why Madoff had given what apparently is more than seven billion dollars to a guy who put in only about $1.5 billion, Jeffry Picower. The only thing I could think of was that maybe Picower was fronting for the Mafia or for one or more secret services. But someone has now told me a different possible reason which has an immediate ring of truth, though one cannot yet know if it is true and can only hope that Picard, the FBI and the U.S. Attorney are all tracking it down.

Picower used to specialize in promoting tax shelters. Did his tax shelters, as many do, involve foreign countries or foreign institutions in some way? Did he, like so many involved with shelters, meet all kinds of persons who are in the business of sheltering funds here and abroad for wealthy taxpayers. For maybe, you see, Madoff was sending all this money to Picower to hide it overseas for him. That would make sense. If it happened, it may be hard to trace the money to its final destination. Or maybe not, since there are records of bank transfers. One can only hope that Picard, the FBI and the U.S. Attorney are all looking into this because the idea that Madoff was sending money to a former tax shelter expert to hide it for him overseas may be far and away the best conjecture on why Madoff would send over seven billion dollars to someone who put in only about $1.5 billion.*

*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

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

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: or; for conferences go to:; for The Long Term View go to:¬_LTV.htm.

Friday, October 02, 2009

The Report of SEC Inspector General Kotz.

October 2, 2009

Re: The Report of SEC Inspector General Kotz.

As Ron Stein may have intimated in his excellent recent piece about the Kotz report, you cannot really get the full flavor of the SEC’s staggering malperformance in the Madoff situation unless you read the entire report. The Executive Summary alone, as excellent and shocking as it is, cannot give you the full flavor: relatively few such summaries do, and here there are just too many facts, too much staggering malpractice over too long a period, to get the full flavor from a summary. Those who litigate, and perhaps as well some of those who seek legislation, will likely master the whole report because that kind of mastery is what will really enable one to understand what happened and to effectively use such understanding.

In addition to Kotz’s nonetheless excellent Executive Summary, there have been a few other summaries which list some of the huge number of items of malpractice. They include Kotz’s written and oral testimony to Congress recently and some newspaper articles.

In this essay, I shall not attempt to summarize Kotz’s 457 page report. What shall be done instead is to discuss a particular perception the report induced in me, plus some points in the report that struck me forcibly and contributed to the perception but often seem not to have generally been picked up elsewhere or to have received only brief or minor mention elsewhere. I think the perception, and especially the points which induced it, will, like points that were widely picked up elsewhere, be valuable and important to know, both for litigation and for those who seek legislation.

* * * * *

It is striking to me that, if SEC personnel had deliberately set out to insure that Madoff would not be caught and halted, and had deliberately set out to sabotage the antifraud policy of the SEC’s own statute, they would have done many of the very things they in fact did. That is why I term their misconduct defacto intentional (as I told Ron Stein, who was kind enough to give me credit for the phrase).

You know, human thinking is often governed by words and phrases (except for geniuses like Einstein and Dirac who thought in pictures, and some other people like ones who see colors or other things when they hear music). For most of us, words limn our categories of thought.

In law there are words, and therefore categories of thought, related to negligence that could be relevant here. There is “negligent” conduct itself. There is conduct which is worse, and is called “willfully negligent” or “intentionally reckless” (exemplified by driving down side streets, on which kids play, at 50 miles an hour). Also, there is conduct which is not negligence, is beyond mere negligence of any type, and rather is “intentional.” But there seems to be no phrase which is meant to cover the situation where you don’t want something to happen but your negligence is so high that you act exactly as if you do want it to happen. (Maybe the phrase “intentionally reckless” conduct comes close). Yet that is what occurred here. And, since most people think in words and phrases, it would be helpful to the thought process to have a phrase which covers what happened here.

“Defacto intentional” strikes me as such a phrase. It is applicable here because, even though the SEC did not want a Ponzi scheme to succeed, its negligence and malperformance were so high that it acted exactly as if it did intend Madoff not to be caught and stopped, as if it did want him to succeed, and it did the very things one would do if one were trying to enable Madoff not to be caught and were thereby attempting to destroy the antifraud policy of the statute that the SEC is instead supposed to enforce. I suggest, therefore, that we use the phrase “defacto intentional” in future communications about the SEC’s misconduct because it will give people an apt way to think about the situation, and will better enable the media, the public and Congress to grasp what happened.

I note, by the way, that Senator Schumer seems to have caught on to what really happened at the SEC -- to the defacto intentional failures to stop Madoff. In a recent hearing he said: “It almost seems they had an attitude that they didn’t want to find things.”

Schumer also understood that it wasn’t inexperience that caused the disaster. It was negligence of a mind-blowing degree. At the hearing, he said, “The most rudimentary -- in other words, if you sent a 15-year-old, you know, a sophomore in high school, and said, ‘Here’s what’s going on. Figure out -- you know, just follow it through,’ as a homework assignment, they’d know to do some of these things” that the SEC didn’t do. Schumer later continued, “you don’t have to be Albert Einstein to figure out you ought to get some third-party verification and not accept the potential defrauder at their word.”

What, then, are some of the SEC’s acts or failures to act discussed in Kotz’s report (and often not picked up on generally by the media) that cause one to say the SEC acted as if its actions were defacto intentional because it did things you would do if you did not want Madoff to be caught and stopped and if you were deliberately trying to sabotage the statute’s anti-fraud policy.

• The failure to catch and stop Madoff is defacto intentional when it would take only a single phone call to the Depository Trust Company to learn that Madoff never held the securities positions he claimed to have held, but for sixteen years, through six complaints and five investigations, not a single member of the SEC, not a single one of its supposed investigators, ever made that single phone call. (It was made after Madoff was arrested, and it uncovered the truth almost immediately.)

• The failure to catch and stop Madoff is defacto intentional when you could request relevant records from the NASD and other organizations, records that would show that Madoff never did the trading he claimed to have been doing, but through 16 years, six complaints and five investigations not a single member of the SEC ever requested the records. The failure to catch and stop Madoff is equally defacto intentional when a request for records was once drawn up but was never signed or sent because it would be too much work [for the lazy SEC personnel] to inspect the records if they received them.

• The failure to catch and stop Madoff is defacto intentional when SEC personnel knew that Madoff had lied to them and had told them deeply inconsistent stories, but not a single investigator tried to learn the truth despite the knowledge of lies and important inconsistencies.

• The failure to catch and stop Madoff is defacto intentional when Madoff tells you he acts through Barclay’s Bank, but Barclay’s says there has been no activity in his account, and you make no effort to plumb this discrepancy. The failure to catch and stop Madoff likewise is defacto intentional when the Royal Bank of Scotland says it is willing to provide documents if Madoff agrees and you simply blow off RBS’ offer.

• The failure to catch and stop Madoff is defacto intentional when the SEC asks the NASD whether Madoff owned options on a particular date, the NASD says he did not, and the SEC then does nothing.

• James Simons is perhaps the most successful hedge fund manager of the 21st Century. Twice in the last few years he has made 2.5 billion dollars and once 1.7 billion dollars. The failure to catch and stop Madoff is defacto intentional when you find out that his company has deep suspicions about Madoff’s bona fides, but you do nothing -- you do not even bother to contact his firm to learn what it knows or believes, including why it says that it has knowledge that Madoff’s execution of trades is unusual.

• The failure to catch and stop Madoff is defacto intentional when the use of options is central to Madoff’s claimed method of trading, but he tells you he no longer uses options, yet you do nothing. The failure to catch and stop Madoff is defacto intentional again when you know his statement is at least partly a lie because you know that for some clients he is using options, yet again you do nothing.

• The failure to catch and stop Madoff is defacto intentional when experts let you know there are not enough options in the world to support Madoff’s claimed trading, yet, though the use of options is central to his strategy, you do nothing.

• The failure to catch and stop Madoff is defacto intentional when you start an investigation of Avellino & Bienes because you fear a Ponzi scheme, but, when the money invested with Avellino and Bienes is paid back (by Madoff), you never even ask where he got the money to pay back the Avellino and Bienes investors. The failure to catch and stop Madoff is again defacto intentional when you swallow, without extensive further investigation, the preposterous claim, and/or practice, of Avellino and Bienes that they never keep any records -- no records for 440 million dollars(!!) (which in today’s money is probably a billion dollars or more).

• The failure to catch and stop Madoff is defacto intentional when you -- the government’s then highly respected regulator and watchdog, the SEC -- suck people into investing or remaining in Madoff by announcing through the Wall Street Journal in 1992 -- by announcing as you otherwise never do -- that you have found no evidence of fraud -- by making a public announcement (based on a thoroughly negligent investigation) that inevitably would and did cause people to leave money in Madoff, to add money to Madoff, or to invest with Madoff for the first time.

• The failure to catch and stop Madoff is defacto intentional when an anonymous person, who obviously has some kind of inside knowledge judging by what he says, sends you a letter saying that Madoff has commingled Norman Levy’s money with Madoff’s, and tells you that Madoff keeps two sets of books, the more important of which are on his personal computer which is always on his person, but you almost wholly dismiss the tip from the obvious insider by doing no more than asking Madoff if he is an investment adviser for Levy and then fully accept his counsel’s false negative answer to the question without any further inquiries even Madoff is known to have lied to your agency previously about important matters. (In one of the recent books on Madoff, one of the Madoff company’s chauffeurs in effect verifies the commingling by discussing the multimillion dollar checks he regularly took to Levy (every day if I remember correctly). As for the computer, no doubt it was one that Madoff retained access to for many months after he was indicted -- and which he no doubt attempted (successfully?) to wipe clean, thereby impairing the search for funds to repay defrauded victims).

• The failure to catch and stop Madoff is defacto intentional when you require him to register as an investment advisor because you learn that, contrary to years of lies to you, he is acting as an investment advisor for more than 15 people, and newly registered investment advisors are supposed to be inspected within a short period of time but the SEC never undertakes the required inspections.

The foregoing list does not exhaust the items discussed in Kotz’s report which show that the SEC acted in a way that can and should be described as defacto intentional: i.e., the SEC did things it would have done if it didn’t want Madoff to be caught and stopped and if it wanted to destroy the antifraud policy of its statutes. Nor does the list give chapter and verse of each of the items on the list, giving only capsule summaries of them instead. But the list does make clear why the SEC’s misconduct was so horrid, its degree of negligence was so high, that it has to considered defacto intentional, has to be considered to be exactly the same as what the SEC would have done had it wanted Madoff to continue succeeding with his Ponzi scheme and wanted to destroy the antifraud policy of its own statute.

* * * * *

From the time Madoff was arrested on December 11th until today, and no doubt continuing on into the foreseeable future, there have been and will be those who say the victims were at fault for investing with Madoff. For one reason or another, the victims should have known better, is the attitude. This is in some ways curious, not just nasty, vengeful and wrong.

Just to take my own case as an example of what I think was typical of many people, I had no idea, and had no reason to think or understand, the things that gave pause to some Wall Street insiders who had the knowledge and capacity to do extensive due diligence, Wall Street insiders who were aware, as the average investor was not:

• that on Wall Street itself rumors were rife that something was not right at Madoff;

• that for various reasons it seemed quite possible to Wall Street insiders that Madoff was not buying and selling securities, as he claimed to be doing, and that his supposed trades and positions could not be “seen” in the markets, where they should have been “visible” if he was trading the huge volumes he claimed;

• that there were not enough options in the world to support his claimed trading, and people who traded options said they had not been doing business with Madoff;

• that his accountant was a one man shop;

• that there were other Wall Street firms which used the same strategy he claimed to be using (a strategy which, we now learn, is claimed to be a common garden variety strategy on Wall Street), but who could not replicate his results;

• that even though his strategy made sense in principle, and was said by some knowledgeable persons to be plausible in principle even after he was caught, Wall Street insiders who were mavens in mathematics and derivatives maintained that -- however plausible in principle -- his results were statistically impossible in practice and this could be (and was) shown by the spreadsheets of the experts.

• That many of us small fry victims, I would bet, like me, did not even know Madoff was running money for hedge funds and banks, but instead thought he was only investing for a relatively small number of persons who initially had been confined to some friends, relatives and long time investors -- just as ironically, and in reverse, even Harry Markopolos, if memory serves, did not know he was investing money for small fry, but thought he was investing only for hedge funds, investment banks, and some extraordinarily wealthy individuals. Such lack of knowledge is the result of the secrecy and non-transparency of companies like Madoff’s -- of so-called hedge funds (I insist, as I wrote early-on, that for a number of reasons Madoff’s was not truly a hedge fund but everyone else calls him that) -- which Congress and the SEC allowed to be secretive, a secrecy and consequent fraudulent disaster for which Congress too bears responsibility because it permitted the secrecy and nontransparency.

So there are a host of reasons -- including some I have not mentioned here but have previously discussed extensively, such as the understandable belief that Madoff was a conservative investment, a relatively low earning and a highly taxed investment when compared to the mutual funds, stocks and hedge funds so prevalent on Wall Street in the 1990s and 2000s -- why the small fry could have no idea that something might be rotten in the state of Denmark, as Shakespeare once said. Speaking for myself, but speaking for lots of other small fry too I’m sure, I can say that had I ever obtained any inkling that there were not enough options in the world to cover the huge trading in securities that Madoff supposedly was doing -- trading of an amount completely unknown to those of us who had no idea he was running money for huge funds and banks rather than just investing for relatively small circles of friends, relatives and long time investors -- then I would have been out of Madoff entirely, or at minimum would have drastically reduced my investment with Madoff, in the proverbial New York minute, after attempting to verify but being unable to verify that he was covering all his trades with options, as he claimed to be doing. For I (and others) understood -- as one can see from early writings here that quoted what I was personally told by Frank DiPascali -- that the options were central to the claimed strategy, and that without the options there was not a conservative strategy, but only non-conservative bets by Madoff on which way the S&P 100 would move.

If one could not verify the use of options to cover trades, the strategy that had attracted us was false, made no sense, and one should have, and I would have, fled or at minimum greatly reduced my investment, would have cut it by three-fourths or more, as soon as it became clear that the options were not being used. (The only reason for keeping any part of one’s investment in Madoff, as illustrated below in connection with James Simons, is that Madoff appeared to have a long track record of success whether he was covering all his trades with options or not, and he had been given a clean bill of health by the SEC -- although by the late 1990s one might have wondered whether at least the 1992 encomium from the SEC was out of date because Madoff could conceivably have secretly changed what he was doing somewhat since 1992.)

It should be needless to add that had any of us small fry had an inkling that Madoff was not even making the trades he claimed to be making, again many of us would have been out of Madoff in a New York minute, as soon as claimed trading proved unverifiable, because he not only was not doing all that he claimed to be doing (viz, he was not buying options), but he was not even buying and selling securities.

Now, what makes all this so piquant, what makes it so wrongheaded, vicious and, let’s face it, sometimes anti-Semitic for persons to blame the small fry victims for investing with Madoff, is that some of the world’s most sophisticated and greatest investors put money with him even though they knew much or all of this and even knew far more than the points described above. The case of James Simons’ company is instructive.

Simons, for reasons alluded to earlier, has to be considered one of the most brilliant and successful investors of recent years. And, as detailed extensively in Kotz’s report, Simons’ company developed deep suspicions about Madoff’s bona fides for many of the very reasons set forth above, plus several other, often very sophisticated, reasons as well. Yet despite its suspicions, Simon’s company left half its investment in Madoff until it later removed that half for (unstated) reasons that were unrelated to a possible fraud. Despite all its knowledge of things that didn’t add up, knowledge wholly outside the ken of innocent small fry and going far beyond points discussed above, Simons’ company (Renaissance Technologies) could not bring itself to believe Madoff was a fraud, because he had been inspected and given “a clean bill of health” by the SEC. As Kotz said (emphasis added):

Nat Simons, the portfolio manager for Renaissance’s Heritage fund, a hedge fund of funds, who held a Madoff managed investment in 2003 and whose e-mails triggered the 2005 NERO examination (as described in detail in Section IV above), cited their understanding that the SEC had looked at Madoff and given him a clean bill of health as a reason they did not initially divest themselves of their Madoff-related investment. Simons Testimony Tr. at p. 28. Renaissance understood from Madoff that the SEC had examined “the whole business.” Id. at p. 17. Renaissance research scientist Henry Laufer agreed, “What was also on our minds … was that Madoff had been investigated – and cleared” by the SEC.

Laufer Testimony Tr. at pgs. 35-36.

Renaissance also doubted Madoff could be engaged in fraud because he operated through highly regulated brokerage accounts, stating:

[B]ecause of the nature of the fact that these were brokerage statements, and he had a big broker dealer business and big market-maker and – you just assume that someone was paying attention to make sure that there was something on the other side of the trade. … I never, as the manager, entertained the thought that it was truly fraudulent. And it again was because … it would have been so easy to prove that it was fraud if it was just managed accounts that were set up. It would have been so – again, forgive me here, but you know, it would have been pretty straightforward. We felt that he was sufficiently in the eye of the regulators that it was just hard for us to envision that that was the case.

Simons Testimony Tr. at pgs. 28, 39-40.

Simons further explained that one reason they did not report their suspicions to the Commission directly was that they felt all of the information they were using in their analysis was readily available to the Commission.

So there you have it. Some of the greatest and most sophisticated investors in the world invested with Madoff, and continued to do so despite serious suspicions that something might be wrong there (suspicions discussed from pp. 145-161 of Kotz’s report), because the SEC had checked out Madoff, had access to the pertinent information, and had given Madoff a clean bill of health, a motivating factor for Renaissance Technologies which is discussed at several places in Kotz’s report.

When even Renaissance Technologies left money with Madoff because of the SEC, and did so despite extensive and highly sophisticated suspicions (which you really should read about in Kotz’s report), it is truly indecent -- it is absolutely vicious -- for people (like Joe Nocera, his investment guru buddy Jim Hedges, and lots of ignoramuses who write the kind of utter crap one often finds in comments on the internet) to blame the innocent, small fry victims for investing with Madoff; it is indecent and vicious to blame people who, unlike Renaissance, knew nothing that excited suspicion.

* * * * *

Let me make one last point, which does not come from Kotz’s report and has been written of before here, but which is very important in light of the SEC’s defacto intentional misconduct.

The SEC’s misconduct not only resulted in continuation of, and enormous growth over the years in the size of, Madoff’s Ponzi scheme, but also resulted in a dramatic reduction in the amounts of money available to victims when the fraud finally collapsed in December 2008. It has been claimed that, because of the market collapse that began in that year, twelve billion dollars was pulled out of Madoff by skittish investors in the last six months. Before that Madoff apparently never had to face waves of major redemptions, so that major percentages of the funds that he had taken in remained in his account. Some was taken out for his own use and that of his family members, some to float the market-making side of his firm, and some likely went to the Mafia, various secret services (American, British, Israeli or whatever) or to whomever else was a background part of the deal. (Why did Madoff pay out six billion dollars to a guy who invested only 1.5 billion dollars -- to Picower. Where did that money go and why? Was it for a secret service?) But the amount of invested money left in Madoff was apparently gigantic until close to the end, as will be shown by records now being kept secret by JP Morgan Chase, by Picard, by the FBI and by the U.S. Attorney’s Office. By defacto intentional conduct that resulted in Madoff’s Ponzi scheme staying alive until it collapsed due to billions upon billions of dollars being redeemed by investors due to the greatest economic collapse since the Depression, the SEC’s defacto intentional conduct resulted in investors losing repayments of many billions of dollars -- losing repayments of 12 or 17 billion dollars, or even 20 billion dollars or more, that would have been readily available to repay them from Madoff’s account in JP Morgan Chase had the Ponzi scheme been exploded by the SEC even as late as, say, 2004 or 2005 or 2006 or 2007, had it been exploded by the SEC before “the great redemption” caused by the economic disaster that began in 2008.

So the defacto intentional misconduct of the SEC resulted, as I say, not only in the growth of Madoff’s Ponzi scheme from “only” about 500 million or a billion dollars in 1992 to the 65 billion dollars reported on the November 30th statements, but also resulted in a fantastic reduction of billions of dollars in the amounts available to repay innocent defrauded victims. What is more, when you consider that a large amount of the redemptions in the final stages of the Madoff fraud appear to have been by people who were complicit in the fraud and who would therefore have had no right to any money after the fraud was discovered -- Picard is in toto going to sue them for something in the neighborhood of 12 or 15 billion dollars -- you can see that, if the SEC had ended the fraud, and had done so when it should have, the amounts available to repay innocent investors could very conceivably been close to, equal to, or even more than the amounts that they actually invested (their cash-in), could even have covered payments to innocent investors of portions of the income they thought they had earned from Madoff. For these reasons too, it is the SEC, and therefore the US Government, that is responsible for the dire poverty which now afflicts so many innocent Madoff victims.*

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

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

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:; for conferences go to:; for The Long Term View go to:¬_LTV.htm.