Judge Lifland's Opinion On Net Equity.

March 15, 2010

Judge Lifland’s Opinion On Net Equity.



Having spent time assessing Judge Lifland’s opinion of March 1st, I shall set forth some impressions of it. I shall not deal with the entire opinion, especially since so much of it is taken from the briefs of the Trustee and SIPC. Such points have thus been discussed here before. For the most part. I shall focus on points of especial import or importance (there can be a difference), on points I think should be given far more emphasis in our side’s appellate briefs than was given them in our briefs before Lifland, and on the question of whether it would be wiser to have taken an ordinary appeal to the District Court rather than have sought an appeal directly to the Court of Appeals for the Second Circuit, as the trustee and several of the victims’ lawyers have now done at the suggestion of Judge Lifland. (One knows that, because so many people are hurting badly, it seems to have always been assumed that our side will seek an immediate appeal to the Second Circuit. But the wisdom of that automatically assumed course is subject to debate; one thinks it at least possible that, for reasons I shall discuss, it might be better for our side if an appeal went first to the District Court.)

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Judge Lifland paid very little attention to the legislative history of SIPA (while claiming -- wrongly, to be polite about it -- that he was considering the legislative history). His opinion -- in reality one could rightly say his brief supporting all relevant positions of SIPC and the Trustee while denying all relevant positions of the victims -- contains only a few widely scattered lines regarding the legislative history. Instead, his opinion, or brief, extensively parrots the non-legislative-history arguments of SIPC and the Trustee.

Laymen may not understand that it is hardly rare for judges to simply crib the arguments of the side they choose, as Lifland did. (He even admits explicitly that much of his description of the facts is taken from the Trustee. Humorously, even if perversely, he also admits to cribbing from the allocations of Madoff and DiPascali, two notorious liars.)

When cribbing from and deciding entirely for one side, as Lifland did here, it also is not unheard of for judges to simultaneously claim, quite disingenuously, that they think both sides have done an excellent job and both have advanced “compelling arguments” (Op. p. 6), both of which are exactly what Lifland said here while accepting no argument made by the victims. And it has been known for decades that the opinions of most judges, except rare ones like Richard Posner (who has himself written on the subject) (as have I), are written not by the judges but by their young clerks who usually come straight out of law school. For various reasons, this would seem to be the case here -- although one of course cannot be certain -- so that an opinion sealing the fate of thousands of oft-elderly victims of fraud has likely been written -- unless and until this is specifically denied -- by people who are probably barely into adulthood, albeit they wrote it at Lifland’s order.


Here the Trustee and SIPC rarely mentioned the legislative history because it is very adverse to them. They focused instead on other arguments they had made up, or cribbed, which support them. Parroting the Trustee and SIPC, Lifland did the same. He basically ignored the legislative history, though under our form of government the Congressional intent reflected in the legislative history is supposed to govern (except in the eyes of a few outliers like Antonin Scalia).

There is a sense in which one could perhaps argue that this ignoring of legislative history is not all Lifland’s fault. It is a matter on which my own feelings are engaged. Because of the press of work which I had to do later in November 2009, I submitted my brief on November 6, 2009, seven days before the due date of November 13th . My brief was thus the first major one submitted on our side. It began with points that fifty years in the legal profession have taught me are of the essence in this society, even if not in others: it began with the intent of Congress and the results for Congressional intent of the other side’s position:

“The Securities Investor Protection Act of 1970 (SIPA) was enacted to provide to customers of securities broker-dealers protection against losses which might occur as a result of the financial failure of broker-dealers.” This is the very first substantive statement in the Senate Report on the 1978 amendments to SIPA. S. Rep. No. 95-763, at 1 (1978), reprinted in 1978 U.S.C.C.A.N. 764, 764. The House Report on the 1978 amendments says, “The bill would make SIPA more responsive to the reasonable expectations of public investors and would provide investors with greater protection against the financial failure of stockbrokers, thereby enhancing investor confidence in the securities markets.” H. Rep. No. 95-746, at 21 (1977).

These Congressional purposes are not much focused on, if focused on at all, by the briefs of SIPC and the Trustee. This is in a way “understandable,” since the purposes of Congress are deeply thwarted, perhaps even destroyed, by the position on net equity of SIPC and the Trustee. This destruction is not only true in the Madoff case itself, but far more widely. For, as occurred in Madoff itself, no investor with a broker-dealer can be certain that his investment is not part of a Ponzi scheme. After all, one cannot know that one has invested in a Ponzi scheme until after it is revealed. So no investor will be able to withdraw earnings from his investment with confidence that he will not later be told that the withdrawn monies never existed, that the withdrawals diminish his net equity, possibly making it a negative number, that he will lose SIPC protection if it is a negative number, that he will also lose claims against customer property and the estate, and that he is subject to clawbacks.


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Thus every investor with a broker-dealer will be at risk, will be threatened with potential economic disaster, if he takes out income from an investment, although taking out income to live, to pay expenses and taxes, and to make other investments is one of the main purposes people have when making an investment in the first place. Investors will have no guaranty of protection -- contrary to the purposes of Congress. They will know they have no protection and that their reasonable expectations, which Congress intended to protect, are irrelevant. Confidence in the securities markets -- another purpose of Congress -- will be vastly diminished. People will quickly realize that they might be much better off simply putting their money in a bank or splitting it among several or many banks, at lower rates of return but with assurance that the FDIC will pay them up to $250,000 for each separate account if a bank should prove fraudulent and bankrupt so that the money the depositors thought was in their accounts was not there in fact.

In my opinion, under our system of government the quotations from Congress should be the beginning and the end of the case. Congress wanted to protect investors and honor their reasonable expectations. The final statement method does. The cash-in/cash-out method does not. Therefore the final statement must prevail. End of story. End of case. Everything else is superfluous under our system.

My own view obviously made little impact on colleagues. For, I think without exception, the other briefs on our side (if I remember correctly) -- just like the briefs of SIPC and the Trustee -- pretty much ignored Congressional intent. Though in other ways a truly outstanding collection of papers, on whose quality even Lifland commented at oral argument, they focused on, and on overcoming, the plethora of arguments made by our opponents, while basically ignoring a dispositive point for our side: the intent of Congress as reflected in the legislative history. Our side, in my opinion, pretty much got sucked into fighting the battle on the grounds chosen by our opponent, rather than on the ground which is our strongest, dispositive suit. The briefs on our side were akin, in a way, to a brilliant execution of Pickett’s charge. Or looked at from the other side, our briefs were akin to what the situation would have been had the Union defended against Pickett’s charge without using its most potent weapon, its artillery, to decimate the Confederate formations as they marched to the attack on Union lines.

I cannot overemphasize the importance of this point. It was only the more important because briefs were submitted by major Wall Street firms and, from everything I have seen in this case, Lifland seems to specially consider the work of such firms while paying far less attention to the work of small fry like myself, or the brilliant writer David Bernfeld, or the highly competent Lax & Neville. Lifland said in his opinion that he read every brief, but this does not change the impression I’ve received time and again in this case that he focuses on the work of the big boys. When the major firms’ briefs didn’t focus extensively on legislative history -- and, maybe they’ll prove me wrong, but I certainly don’t remember other briefs focusing on it -- the game was pretty much up.

I must say that, having been deeply involved in several huge antitrust cases during my career, never before do I recollect one side pretty much ignoring the argument which likely is the strongest one it had -- and here the legislative history was exactly that for our side, as evidenced by the fact that SIPC and the Trustee stayed as far away as they could from the legislative history. (They exemplified Tevye in “Fiddler On The Roof” singing “God bless and keep the Czar -- far away from us.”) I concede to having been very surprised, when reading our side’s briefs, that large firms, which have scores and hundreds of lawyers, gave no indication of having read the hearings or the floor speeches when SIPA was before Congress in 1970 and then again in the late 1970s. They barely gave much indication, if memory serves, of having read the legislative reports. The small fry -- the lawyers who were going it alone or who were in very small firms, had no time to read through this large amount of material -- not to mention that some of us, having never before worked with SIPA or even heard of it prior to Madoff -- were spending enormous amounts of time struggling just to learn the basics of it and doing one or two other day jobs.

What seems the failure of major firms with extensive manpower to go through the legislative history certainly should be corrected on appeal. I already know, because non lawyers have apparently found them, that there are powerful statements by Muskie when opening the floor debate on, and by Nixon when signing, the SIPA bill -- statements which should be quoted by our side. God knows what other powerful statements there may be on our side in the legislative history. Unless we find and use the statements in the history, we are the Union troops defending without firing their artillery; we are Pickett’s Confederates attacking over ground that our opponents want us to attack over because it is infinitely more favorable to them than ground of our own choice would be.

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I have recently been in discussions with a number of people regarding our position on net equity. (I prefer not to identify the people.) It is fair to say, I think, that some people, even many people, have trouble accepting our position. To them it seems natural that people who took out more than they put in should get nothing back, so that other people can get money back. As I believe I made clear to such discussants, I myself might even agree with them but for two points.

One is the legislative history, which is controlling. Congress desired to protect investors and build their confidence, and nobody -- and I mean nobody, not even Picard and Sheehan -- claims this can be done by changing after the fact of the fraud from the final statement method to the cash-in/cash-out method, which as far as I know has not been used in something like 319 of 321 prior SIPC cases. (It was used in Old Naples and in part of New Times.) As repeatedly said above, under our system, the will of Congress must govern, not what SIPC or Picard or Lifland think might be more fair.

The second point is the human reality of the situation. In his opinion cum brief, Lifland parrots a hypothetical example, given by the Trustee, of the difference between the results of the cash-in/cash-out method and the results of the final statement method when two investors each invested $15 million, albeit at different times and with large differences in the amounts taken out. Though complicated, the example, as you would expect, was deliberately structured to make the situation as horrible as possible under the final statement method. We all know that, by structuring examples for one’s own purposes -- by rigging the example in favor of one’s own position -- one can make numerical examples support almost anything. There is a reason for the expression that there are three kinds of lies: lies, damn lies, and statistics. If those on our side wished to, we could, and sometimes in fact have, created examples showing that the final statement method is infinitely more fair than the cash-in/cash-out method. For example, suppose someone put one million dollars into Madoff, over the course of fifteen or twenty years took out $1.2 million dollars to live, had a final statement showing $2 million, and had no other money so that he is now wiped out and has to live on welfare. Under the final statement method he will get an advance of $500,000 (because the net equity reflected in his final statement is $2 million) and will thus have at least some money on which to live. Under the cash-in/cash-out method, he will get nothing because he has a negative net equity of $200,000 (he put in $1 million but took out 1.2 million), will have to continue living on welfare or dumpster diving, and is even subject to clawback if you can get blood from a stone. So now which method is more fair, more just?

I repeat: there are lies, damn lies and statistics; and you can rig numerical examples to prove anything you want. That the judge -- or his young clerks, or both -- adopted lock, stock and barrel an abstract example given by the Trustee and rigged in his favor exemplifies the extent to which the judge’s supposed opinion was in reality just a brief in behalf of the other side and ignored the human reality of the situation.

The human reality is that while there were lots of very wealthy people who had money in Madoff and have tens or scores or hundreds of millions of dollars left, there also were many more people of modest means who have been wiped out, have no money left, and do not know where their next dollar will come from because under the Trustee’s cash-in/cash-out method they will get nothing. And -- and mark this because it is the crucial point here -- the Trustee, who has the information needed to make judgments on whether the cash-in/cash-out method or the last statement method would be more helpful to more people, has kept that information secret and will not provide it. The Trustee and SIPC know the information, or can find it out at the touch of a computer button. Thus, the Trustee and SIPC could readily tell the victims, and the courts, the crucial data with regard to determining the relative fairness of the two different methods of determining net equity, crucial data such as:

1. How many claims would be eligible for advances of up to $500,000 under the final statement method, and how many would be eligible for such advances under the cash-in/cash-out method.

2. How much would the total advances be under the final statement method, and how much would total advances be under the cash-in/cash-out method.

3. How much would potential clawbacks be under the final statement method and how much would potential clawbacks be under the cash-in/cash-out method.

4. Information such as how many victims whose final statements showed one million dollars or less will be eligible for advances under the final statement method, how many will be eligible under the cash-in/cash-out method, and what will be the average potential clawback from these persons under the final statement method and under the cash-in/cash-out method.

The same information for people whose final statements showed between one and three million dollars. Ditto between three and five million dollars. Ditto between five and ten million dollars. Ditto between ten and twenty million dollars. And ditto over 20 million dollars.

These kinds of figures, which SIPC and the Trustee have not disclosed, will give us the reality of people’s economic situations and will reveal what is fair in reality -- what is fair when you take account of the economic situations of real people, as opposed to what might be argued to be fair under the abstract economic examples used by the Trustee and adopted by Lifland.

No doubt SIPC and the Trustee will object to providing these figures, claiming it will be too much work. Well, with modern computers, the figures can likely be compiled with literally the touch of a button. (And for obvious reasons it wouldn’t surprise me if SIPC and the Trustee already have compiled the figures.) Moreover, acquiring these figures is the only way in which the courts, or we, can measure whether cash-in/cash-out provides fairness -- in the context of the economic situations of real people -- especially when you consider that some people have had to engage in dumpster diving while others still have tens, scores, or hundreds of millions of dollars left.

Of course, the real reason SIPC and the Trustee don’t want to give courts, or us, the foregoing information is very likely that the actual information about the economic situations of real people will undermine SIPC’s and the Trustee’s completely abstract argument about fairness.

There are, then, two major reasons why our position is correct, notwithstanding the reflexive view of some people that cash-in/cash-out should be used so that people who have not taken out more than they put in will obtain more than they otherwise would. One reason is the Congressional intent and the other is the human reality of the situation, a reality reflected in data which SIPC and the Trustee keep locked away lest the actual facts of the possible unfairness of the cash-in/cash-out method be exposed in concrete terms.
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That SIPC and the Trustee have kept the facts of the situation locked away is par for the course here.

Throughout the case SIPC and the Trustee have kept important matters close to the vest. When this writer sought discovery of the reasons why SIPC and the Trustee used the cash-in/cash-out method instead of the final statement method, SIPC and the Trustee vigorously resisted all such discovery. Almost surely the discovery would have proven that cash-in/cash-out was used because early in the case, when its use was decided upon, SIPC and the Trustee were terrified that potential advances to victims would exceed the amounts of money available to SIPC by billions of dollars if the normal final statement method were used. Discovery would thus have shown that fear for SIPC’s finances, with concomitant disregard of Congress’ desire to protect investors and instill confidence in the market, was the driving force. So SIPC and the Trustee vigorously resisted discovery, and Judge Lifland, as always, did what they wanted. He also made clear more broadly, in my view, that he was not going to countenance discovery of any kind lest this delay Picard; his language was telling.

Subsequently, many of us think, SIPC and the Trustee found out that SIPC would not go broke if the final statement method was used to determine net equity. But if this is true, as several of us believe, SIPC again did not reveal the facts, this time perhaps because it did not want to disclose a serious mistake that caused havoc and/or it wanted to save money by using cash-in/cash-out.

It also turns out apparently -- at least it has been said by someone who should know -- that back around 2003, when the GAO and Congress were warning SIPC that its fund was too small to withstand the bankruptcy of a major brokerage house, SIPC somehow got some kind of approbationary actuarial assessment from some alleged experts. But who these people were, and what they said, is, as Churchill said of the Soviet Union, a mystery wrapped in an enigma. Having been kept secret all these years, nobody can yet know or question what the alleged experts actually said, what their reasons were, whether the reasons held water, etc.

I said above that “as always” Lifland did what Picard and SIPC wanted when he denied discovery of the reasons why they chose cash-in/cash-out. There were, you see, many other times when Lifland did whatever they wanted, often with many of us getting no advance notice. Much of this has been discussed here previously. When Helen Chaitman sought an earlier hearing and decision on how to calculate net equity, but Picard and SIPC objected to this, Lifland did as they wanted. When Picard and SIPC later sought a decision on net equity, Lifland did as they asked. When the question then was what should be considered a part of the net equity issue, Lifland eliminated what they wanted eliminated. When their briefs nonetheless brought up matters that had been eliminated, Lifland allowed this to be done. When a prominent victim’s lawyer then asked for extra time to file a brief because of the need to do research on the complex, previously eliminated points that Lifland nonetheless allowed to be emplaced in the briefs of SIPC and Picard, the request for more time was denied.

So, unless one insists on remaining resolutely naïve, it seems to go without saying that the victims’ chances of success in the Bankruptcy Court died with the appointment of Lifland to handle the case. Without getting into the whys and wherefores, and without mentioning how I may know their view, I believe there were people who knew we were dead under Lifland because they were familiar with the shall-we-say-odd reputation he had built up in the late 1980s and the 1990s. Be that as it may, however, it seems to me to be quite factual and quite right to say that the victims had no chance under Lifland. And, in his March 1st opinion, while maintaining a pretense of open-mindedness with regard to preference issues -- clawback issues -- that will arise in the future, he announced the dubiety of one argument made on this question by the victims, and I believe it is dollars to doughnuts he will ultimately deny all the arguments of the victims. My prognostication is that as long as Lifland is the judge, the victims are dead meat.

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I want to turn now to a point which constitutes an incredible irony, but which goes beyond irony to illustrate a fundamental weakness in what Lifland has done by simply parroting the points of the Trustee and SIPC. The point is this: despite all the resources available at Baker, Hostetler, other law firms Picard has hired, and Alix Partners, and despite the expenditure (if memory serves) of about a million dollars a week, the Trustee has made serious mistakes regarding facts -- even though the actual facts are readily available. Several of the mistakes are not crucial to the outcome of the case, though at least one is, but they are factual mistakes made although the truth is readily ascertainable. Lifland parroted the mistakes.

There is irony here, as said. The Trustee and Lifland could easily have learned the truth regarding the relevant facts yet suffer nothing for the mistakes they made despite the huge resources at the Trustee’s disposal. Yet ordinary investors, who had no way of learning the truth about Madoff, are being savaged for their mistakes through use of cash-in/cash-out, and thereby the controlling intent of Congress to protect investors and honor their legitimate expectations is being destroyed. Briefly put, Picard is free to make errors of readily checkable fact without penalty despite possessing huge resources, but investors who had no way of ascertaining the truth and few resources are punished for their mistakes.

Let me provide a remarkable example of the phenomenon. As many or most readers will know, our opponents, and Lifland, said we must lose because Madoff’s trades were fictitious. His trades being fictitious, it was said, the case is governed by the portion of New Times dealing with securities that never existed -- that were fictitious -- rather than the portion dealing with securities that existed in the real world but whose purchase was fictitious. (That is to say, the New Times analysis regarding securities which existed and were never bought, but whose performance in the real world could be tracked, was inapplicable here where real world securities also were not bought and also could be tracked, because here the unbought securities were also supposedly sold, with profits thus coming from the fictitious sale of the securities here whereas they came from the fictitious holding of the securities in New Times -- a strange dichotomy in law unless you are looking for a rationalization to use cash-in/cash-out).

Now, none of us denied that, as was the case in New Times, everything the fraudster did here was fictitious, although the real world securities both here and in New Times could be tracked. But, obviously pulling out every stop to try to deny that the securities here could be tracked, our opponents -- parroted by Lifland, quoting a sworn “declaration” submitted by a hireling of Picard -- said that one security appearing on statements did not even exist, “Fidelity Spartan U.S. Treasury Money Market Fund.” As Lifland (or his clerks) put it when parroting Picard’s hireling, “Fidelity . . . has acknowledged that it did not even offer opportunities in any such money market fund from 2005 onward.” (P. 14.) But by any realistic assessment, this parroting statement is flatly wrong.

In 2005, the name “Spartan U.S. Treasury Money Market Fund was changed to Fidelity U.S. Treasury Money Market Fund. As was said in a June 29, 2005 Supplement, “Effective August 15, 2005, Spartan U.S. Treasury Money Market Fund . . . will be renamed Fidelity U.S. Treasury Money market Fund.” That was the only change; the fund continued to exist.

Moreover, while at some point the fund became closed to new investors, Fidelity has confirmed to our library over the phone that the fund remained open for the addition of money by existing investors. So, as long as he had some money in the fund, Madoff could put in more.

Thus, the fund continued to exist, it underwent only a slight change of name, and it remained open for the addition of money by existing investors, yet I guess victims were supposed to know that everything Madoff did was fictitious because their statements used a minimally wrong name for the fund, calling it Fidelity Spartan U.S. Treasury Money Market Fund instead of just Fidelity U.S. Treasury Money Market Fund. Moreover, with all their resources and supposed smarts, the Trustee and FTI Consultants -- one of whose Senior Management Directors swore that the fund no longer existed (“from 2005 onwards, Fidelity did not offer participation in any such money market fund for investment” (Looby Decl. ¶ 57, emphasis added), when in fact it did exist, offered further investment opportunities to existing investors, and had merely undergone a slight name change; with all their resources they still could not get it right and instead claimed that the existing fund did not exist. (It gives one great confidence in the work of FTI, does it not?)

There was a similar point -- made by Picard and FTI and parroted by Lifland -- which may be dubious and for which evidence was not offered as far as I know. Again to prove the fictitiousness of Madoff’s actions -- fictitiousness that no one disputes -- Lifland (or his young clerks) copied Picard’s hireling by saying “the Trustee’s investigation revealed many occurrences where purported trades were outside the exchanges’ price range for the trade date.” (Op. pp. 14-15, emphasis added.) Except for omission of the words “low/high” before the words “price range,” this was a direct crib without quotation marks from the hireling’s Declaration. It was followed by a footnote which cribbed without quotation marks but which at least cited the Declaration: “”For example, in one instance, a monthly account statement for December 2006 reported a sale of Merck (“MRK”) with a settlement date of December 28, 2006. BLMIS records reflect a trade date of December 22, 2006 at a price of $44.61 for this transaction. However, the daily price range for MRK stock on December 22, 2006 was a low of $42.78 and a high of $43.42. See Looby Decl. at ¶ 106.” (Op. p. 15, fn. 20.)

Now, the point here is that, claiming that there were “many” occurrences of prices outside the exchange’s trading data, the Declaration and then Lifland give only one example. Is it really true that there were many? Or was use of the word “many” simply the kind of exaggeration one gets in litigation? There was no evidence given of “many.” As well, could the claimed price or prices have been obtained on days in question on a different exchange or over the counter? On these points there is nothing said, yet we apparently are supposed to simply accept that there were many instances. And, beyond that, is there conceivably an implicit indication that victims should have known something was wrong because of the Merck price gaffe, or other unidentified ones, on documents which we had no reason to disbelieve and which over the years gave information on what? -- thousands of trades? Tens of thousands of trades? Scores of thousands?

There were other claims made by Lifland (or, perhaps more likely, his young clerks) that puzzle me because, perhaps in my ignorance, I do not know where they came from, much less whether they’re true. For example, Lifland’s opinion says “Based on the Trustee’s investigation, it appears that BLMIS began to offer investment advisory services as early as the 1960s . . . .” (Op. p. 9.) Really? Probably I’m missing something, but I have no idea where the Trustee says that. Did Lifland or his clerks ferret this out by talking privately to the Trustee or his people, which would seem to me a serious no no but which also seems to have happened not infrequently shall we say?

Relying on the Trustee, Lifland says (or his young clerks say) that investors did not even invest enough capital to pay for his initial fake purchases, supposedly because prices were “backdated and orchestrated.” (Op. p. 10, n. 15.) The investors didn’t even pay enough for their initial purchases? Really? The Trustee says this, even though such a discrepancy would almost certainly have shown up on customers’ initial statements and been a tipoff to every investor that something is wrong? This is pretty hard to believe, and perhaps I am once again missing something, but where did the Trustee say it? Or was it possibly said to Lifland in private?

Then there is Lifland’s claim that the so called “Net Winners,” persons who took out more than they put in, and who Lifland feels should not get money, in general “will be concentrated among early investors, while a critical mass of Net Losers [who took out less than they put in] will be found among later investors.” (Op. p. 18.) This claim is a critical one because the Trustee, SIPC, and Lifland all say a fundamental point here -- even the fundamental point here -- is (i) the final statement method unfairly benefits long term investors who over the years took out more than they put in (“net winners”), and harms later investors who did not (“net losers”), and the associated claim that “net winners” will be concentrated among the early investors and “net losers” among the later ones. This idea no doubt sounds intuitive to Lifland and his clerks, since there has been a focus on small people who invested early and over the years took out money to live and to pay taxes. Nor are Picard or SIPC, who have the pertinent data, giving out any information to disabuse judges of this idea.

But is this intuitive idea really true? In his new book, Harry Markopolos has a chart -- in the pictures section between pages 178 and 179 -- of the number of funds that invested with Madoff and that had “at least two years worth of returns data through March 2008.” According to Markopolos, over “339 funds of funds, and 59 asset management companies were invested with Madoff.” (See also p. 78.) Now, it is well known that Madoff’s Ponzi scheme collapsed because the big hitters, the huge hedge funds and funds of funds, for example, began pulling monies out of Madoff by the billions of dollars in the 2007-2008 time period to cover huge losses they were suffering elsewhere due to the economic debacle. It has been estimated, in fact, that $12 billion was pulled out of Madoff in the last six months before his collapse, leaving him with only about $17 or $18 million. I myself suspect the amount pulled out of Madoff in the last 18 months before his collapse could be as much as $17 billion or so.

It is a mathematical certainty that all the big hitters who emptied their Madoff accounts by pulling out billions upon billions of dollars were net winners, as the Trustee and Lifland call them. For, since Madoff had nearly no down months, and big hitters’ accounts were credited with profits each month, it is mathematically inevitable that the big hitters had more in their accounts, and pulled out more, than, at least over time, they put in. As well, it is generally thought that many of the big hitters, many of the hedge funds and funds of funds, came to the party relatively late, in the 2000s, many even in the mid and late 2000s, (whereas long term small fry who are so-called net winners often had invested with Madoff for 15, 20 or 30 years or more).

If all of this is true, then, at least on the basis of dollars invested as opposed to mere numbers of investors, it probably is seriously untrue for Lifland to have claimed that “Net Winners will be concentrated among early investors, while a critical mass of Net Losers will be found among later investors,” which is one of the major excuses given by Picard, the Trustee and Lifland to justify using the cash-in/cash-out method that is so harmful to so many average middle class investors in Madoff. The real “net winners,” rather, are the extremely wealthy funds who got all their money out in the last year or two, and often may have invested for only a relatively short time, and the real net losers are the average Joes who left money in and over the years had to take out more than they put in in order to live and pay taxes.

Only Picard and SIPC know the actual facts about all of this, however, and they certainly are not talking lest the truth harm their argument for cash-in/cash-out.

There is, finally, the question of what previously has been called here the bubbe meisse, the question of whether there is both a separate SIPC fund and a fund of customer property, so that if X gets money from the SIPC fund this will not cause Y to get less from that fund, or whether, as in the bubbe meisse peddled by Picard and SIPC, there is only one fund -- there is only customer property -- so that if X gets something, this will automatically mean Y gets less. Lifland, or his young clerks, appear to shift, opaquely, between the truth and the bubbe meisse. The opinion claims that “any dollar” paid to X to reimburse phony lost profit is a dollar less for reimbursement of Y’s loss of principal (so that there “is a zero-sum game”). (Op. 31.) But this claim is absolutely untrue with regard to advances from the SIPC fund, because advances to X and to Y from that fund are totally independent of each other, and if SIPC doesn’t have enough in its fund to cover all advances, it is supposed to tap lines of credit.

The opinion also claims correctly, however, that payments to X from recovered customer property will reduce the money available to pay Y from that property. This claim is accurate, as is Lifland’s statement that the determination of one’s net equity – which governs whether he gets an advance from SIPIC -- will also determine whether he shares in the fund of customer property. (Op. 20.) What Lifland did is that he adopted the position of SIPC and Picard that, to prevent people who took out more than they put in from getting any customer property, one should define net equity in a way that also denies them money from the SIPC fund, and, as part of this, he claimed wrongly that there is only one pot of money, one fund, even while explicitly recognizing elsewhere in his opinion (on p. 19) that there are two separate funds. (“SIPC is charged with establishing and administering a SIPC fund . . . . (Op. 19 (emphasis added).)

Also as part of this confusion, Lifland (or his clerks) denied that the SIPC fund constitutes insurance available apart from customer property, since net equity controls both receipt of money from SIPC’s fund and receipt of customer property. Well, technically speaking, monies from the SIPC fund may or may not be insurance, as one ordinarily conceives of insurance. The Trustee, SIPC and Lifland claim it is not insurance because of the net equity matter -- and, one might add, perhaps it is not insurance because for decades SIPC and its Trustees have made every argument imaginable, including ones denounced as frivolous by federal courts and lawyers, to deny SIPC payments to victims. (Or does this make it more like insurance?) To me, however, the point is not whether the SIPC fund is or is not insurance in the technical sense. Rather, the point is that the SIPC fund has been paraded as insurance; one might say it has been in a sense peddled to investors as insurance. The internet traffic on Madoff websites has often carried disclosures by victims that one and/or another document or statement from SIPC itself or from brokers whom SIPC covers called the SIPC fund insurance. Thus SIPC, and the brokerage community, have worked a fraud upon innocent investors, by claiming to them time and again that they are covered by insurance, when SIPC’s conduct in this and prior cases shows that it doesn’t think there is insurance here at all. This, to reiterate, is fraud upon investors, and SIPC and the Trustee should not be allowed to get away with this fraud by defining net equity here in a way that denies SIPC payments to innocent persons.

(In preparing an appellate brief, I shall have my assistant go through our files to find the emails identifying the places where SIPC or brokers claimed there is insurance. But if those of you who have uncovered or know of these claims that SIPC provides insurance would email me now to say where the claims can be found, this would lessen our workload, and I would be grateful. Naturally, since Lifland claims there is no insurance, his opinion contained no discussion of all the places where the SIPC fund was called insurance, though Helen Chaitman presented him with a list of judicial cases that called it insurance. Nor, of course, was there any discovery regarding statements by SIPC and brokers that the SIPC fund is insurance.)

* * * * *

Normally the question of appeal would be discussed at the very end of this posting. But, because of matters just presented, I shall discuss the question at this point, for reasons that will become clear.

It has more or less been assumed since the beginning that, no matter which way Lifland ruled, there would be an effort to take an immediate appeal to the Second Circuit Court of Appeals. This would bypass the normal first appeal to the District Court -- more particularly, to the District Court judge “supervising” Lifland, Denny Chin (who sentenced Madoff). An immediate appeal to the Second Circuit was desired because many victims who have been denied SIPC payments under cash-in/cash-out, and therefore had little or no money, were suffering and, on the other side, many clawbacks depend on cash-in/cash-out being upheld. So on both sides there has been a desire to have the question of net equity decided with finality by means of an immediate appeal to the Second Circuit.

I also think that hubris had something to do with the matter on both sides. Each side thought it would win, especially at the Court of Appeals level. Lifland himself thought there should be an appeal to the Second Circuit because he believes the case depends on which part of the Circuit’s New Times decision is applicable, the part dealing with fictitious and thus unbought securities, or the part dealing with real but unbought securities.

And on both sides -- the victims’ side and the Trustee/SIPC side -- each side hubristically thought it would win in the Circuit Court, so let’s get on with it and get there as fast as possible. Speed was desired, and not much attention was given to the fact that, regardless of which side wins in the Second Circuit, the losing side will petition the Supreme Court, which will not even decide whether to take the case until probably, at best, about four to six months or so after the Second Circuit rules (which can itself require at least many months for briefing, oral argument, and opinion writing if the Circuit does a careful job of opinion writing (unlike Lifland, with his desire to turn out an opinion quickly and his consequent parroting of the Trustee and SICP and his ignoring of many important points (see below), such as the crucial legislative history).) And if the Supreme Court does take the case, another year or so will likely be consumed in briefing, oral argument, and opinion writing.

Most of this was ignored in a desire on all sides to rush to judgment. This desire had disastrous repercussions for the victims. Especially as a prior participant in major antitrust litigations in which there was extensive discovery in order to try to establish the actual pertinent facts, antitrust cases which had each taken many years, it seemed to me relatively early in the game that discovery of documents and depositions were needed here to determine the truth about crucial matters. As readers may know, my focus initially was on discovery of the reasons why Picard and SIPC adopted cash-in/cash-out. But when it was suggested to other lawyers on our side that a request for such discovery should be made, they demurred, basically for two reasons if I remember correctly. One was that Lifland wouldn’t grant the request, which turned out to be correct and was a measure of Lifland’s lack of concern to uncover the real truth of the situation. The other was that discovery would delay the case, thus further harming now-impecunious clients. Avoiding delay by avoiding discovery also seemed very important to Lifland when he denied my request for discovery on something as crucial as the reasons why SIPC and the Trustee turned -- most unusually -- to cash-in/cash-out, and when, in so doing, he implicitly made clear by strident language he would not welcome any discovery on anything by victims since discovery can delay resolution of a case (even if it helps insure truth). (Is it possible, as well, that discovery by victims, as opposed to discovery by Trustees, may be unusual in the Bankruptcy Court, though the rules plainly allow it?)

Seeking a relatively quick victory to aid victims, and foregoing even requests for discovery in search of a quick victory, our side has now, in the absence of crucial facts which discovery could have unearthed, suffered an initial defeat, one based in part on the absence of evidence on crucial facts and on Lifland’s desire, in the absence of the evidence, to accept claims made by SIPC and the Trustee that may very well be untrue. Of course, perhaps none of this would have been changed had requests for discovery been made, since Lifland might have denied them. But it would have been harder for him to do so if discovery requests had been made not just by some small fry, to-Lifland-unknown lawyer from northern Massachusetts/Southern New Hampshire, but by a large number of New York City firms including several prominent Wall Street outfits.

And consider the crucial facts which could be very helpful to our side but which we don’t know because of the absence of discovery -- crucial facts, moreover, as to which Lifland, when he dealt with the matters at all, could and readily did accept the other side’s unproven, unsupported word for things. There is, as said, no factual proof, developed through discovery, that cash-in/cash-out has almost never been used by SIPC, and was used here, despite its destruction of Congressional intent, solely because SIPC (i) was terrified early-on about the potential amount of money it might owe under the final statement method, (ii) feared bankruptcy if the normal final statement method were used (as it has been in a currently unknown number of other Ponzi cases, such as part of New Times and who knows how many other Ponzi cases or other cases where brokers went bust because of theft and securities were missing), and (iii) feared management would lose its very lucrative jobs.

There is also no factual proof, obtained through discovery or otherwise, that now, having eliminated a host of claims, SIPC and the Trustee know, as many of us believe, that SIPC’s fund, and the lines of credit to which it has access or can readily gain access, are sufficient (or nearly so) to cover SIPC advances to all direct investors who have a positive net equity under the final statement method.

There is here no evidence on what SIPC was told by alleged actuarial experts around 2003 about the sufficiency of its fund, or about why it did not seek to build up the fund to more appropriate amounts instead of giving Wall Street a pass by charging only $150 per year in premiums to gigantic houses that were doing tens, scores, or even hundreds(?) of billions of dollars worth of business each year.

There is here no evidence of what the monetary effect on victims would be of the SEC’s suggestion that the time value of money be considered when determining net equity.

There is here no evidence of what the numerical monetary effects of clawback will be if the final statement method is used or if the cash-in/cash-out method is used.

There is here no evidence of record giving the lie -- as the lie should have been given -- to the claim that the Fidelity U.S. Treasury Money Market Fund did not exist.

There is here no evidence that statements showed other trades than the December 2006 Merck trade were made at erroneous prices.

There is here no evidence obtained through discovery of all the places in which SIPC and its brokers explicitly referred to the SIPC fund as insurance, thereby defrauding investors.

There is here no evidence put into the record via discovery that the responsible agency of government, the SEC, encouraged victims to invest in Madoff via its completely erroneous public statement of December 1992 and also by its contemporaneously well known, repeated failures to catch Madoff thereafter, while now the SEC and a quasi governmental agency over which it has supervisory authority, SIPC, are trying to screw over the innocent victims, whom the SEC itself sucked into Madoff, by use of cash-in/cash-out.

There is here no evidence, which could have been developed in depositions of experts and submission of materials by them, that it was and remains possible to obtain in an orderly way, and to give to victims, the securities which appeared on their final statements.

I must say that, as a lawyer who has participated in huge antitrust litigations involving hundreds of millions of dollars back in the day when that still was real money, I am somewhat astounded at this “non discovery” method of litigating a huge case involving billions of collars. Such method of litigating is almost a sure fire way of insuring that crucial facts do not come out and that false facts obtain -- of insuring, that is, that no facts or false facts obtain with regard to how one should define net equity if one does not focus on the only important question in this regard, the question of Congressional intent. In other words, once one ignores the only matter that should count, Congressional intent, which was ignored by SIPC and the Trustee, by most of the lawyers on our side, and by Lifland, then victims need a host of facts to best combat the Trustee and SIPC on the grounds they have chosen, but the absence of discovery, for whatever reason it was absent, insured that those facts were not introduced into the record and did not have to be taken account of by Lifland, who instead accepted everything the Trustee said in a rush to judgment in favor of the Trustee and SIPC.

Now, what does all of this have to do with an appeal? What does it have to do with the question whether it would be better to appeal to the District Court or to take an immediate appeal to the Second Circuit? Well, as you can see from the foregoing that right now we are missing many of the facts that would be very helpful to the victims’ side if the Courts continue, as they may, to not focus on what should be the sole dispositive point of the case, the legislative history. It would therefore be very desirable to obtain discovery to plumb these facts. One cannot obtain such discovery in the Second Circuit Court of Appeals, however. So a case there has to be fought with one and a half hands tied behind our backs, and our chances of a loss there are vastly greater than otherwise if the Court does not focus on the one thing it should focus on, the legislative history. A loss in the Second Circuit will not help the victims just because the case will be over quicker than otherwise, quicker than if the initial appeal went to the District Court.

Could one get discovery in the District Court if the appeal is initially heard there? Well, I really don’t know. Ordinarily, discovery is obtained in District Courts, but ordinarily a District Court is functioning as a trial court rather than as a court hearing an appeal (except in cases involving initial decisions by magistrate judges, bankruptcy judges and others who hear cases subject to the supervision of District Court). Could discovery be obtained in the District Court if one asked for it? As said, I don’t know, although I suspect that if a party asked for it, and the District Judge agreed it was necessary, he would at minimum remand it to the Bankruptcy Court (Lifland) for the taking of the discovery.

Of course, one could also argue to the Second Circuit that it should order the case remanded to the District Court and then to the Bankruptcy Court for the taking of the needed discovery. But somehow I think this would not be as effective, because once a Court of Appeals has a case there can be a sort of hydraulic pressure on the court to decide it. Moreover, here Lifland’s opinion may be one strike against us in the Court of Appeals, where we will lack a record of facts obtained through discovery to combat it. So, even though Judge Chin, the District Judge to whom the case is currently assigned (and who will keep it unless his nomination to the Second Circuit Court of Appeals is soon confirmed), has written an opinion that may be unfavorable to us (but which may also be distinguishable), it is possible that we would be better off appealing to him than to the Second Circuit. As the judge who sentenced Madoff, he at least is fully aware, from letters and statements made in Court, how much suffering has been undergone by impecunious victims to whom SIPC has denied advances under cash-in/cash-out. As well, even if Judge Chin is soon confirmed to the Court of Appeals, it should be possible if we wish, to at least ask him to sit by special designation on the SIPC matter in the District Court. Sitting on a case as a District Court Judge by special designation is not at all unusual for appellate judges -- even Supreme Court Justices do it.

* * * * *

Allow me to clear up a few minor odds and ends before closing:

1. That Lifland chose to parrot Picard and SIPC was not because he was unaware of our side’s arguments, but because he chose not to accept them though he knew of them. That he (or his clerks) knew of them was illustrated by a special appendix attached to his opinion in which he set forth a list of the arguments on both sides (a list obviously compiled by his clerks). Our arguments were pretty much there, except that the part on legislative intent was skimpy and, while giving some quotes from the legislative history, nonetheless ignored what I consider the most important legislative statements from the Congressional reports set forth above which show that the Congressional intent was to give investors protection against losses arising from the financial failure of broker-dealers. The omission of these statements was perhaps indicative of a dearth of understanding.

2. As partly mentioned above, and as discussed in prior postings and in the brief I filed, SIPC owes the victims the securities shown in their final statements, not mere cash, and those securities can be purchased in a fair and orderly market by buying them in reasonable sized blocs over time rather than trying to purchase them all at once. In discovery, experts would have been brought in to prove this by explaining how traders in huge blocs acquire millions upon millions of shares of particular stocks over time, in an orderly way, and how it could be done here. Such discovery should certainly be requested if we ever get a chance.

3. In the New Times case, the Second Circuit gave deference to the SEC when deciding how to treat the differing classes of victims. That the Second Circuit, if intelligent, as one hopes, would again give deference to what the SEC says, strikes me as dubious. For the SEC has now been revealed as a horribly, horribly incompetent, and even stupid, regulatory body. Nor can it even begin to compete with firms like Baker Hostetler in the quality of its thinking and lawyering.

So were the SEC to continue insisting that the time value of money should be taken account of, and should the Trustee and Baker oppose this as they certainly will, I would not bet all my marbles that the SEC will prevail. Who knows if it would even prevail on the question of the retroactive rightness of using the final statement method in New Times for investors who had real but unbought securities? I do not regard that, either, as a sure thing, although both sides have argued the case before Lifland on the assumption that it is a sure thing that the dichotomy of New Times will continue to prevail.

It seems to me possible, therefore, that on appeal SIPC may try to roll back that part of New Times. It will at minimum of course continue to claim, and the Court will obviously be very interested in whether, the other aspect of New Times is correct, whether the dichotomy of New Times should continue to exist, and which aspect of the dichotomy is applicable here. One major issue will thus be whether, because the final statement method was not used in New Times where the securities were fictitious, it also should not be used here, where the trades were fictitious.

Given these various issues, relating to New Times, that will be involved in an appeal to the Second Circuit, my view is that our position should be, first, that the Madoff victims come under the part of New Times dealing with real but unbought securities, and that it is proper to use the final statement method in such instance because that is the only way to protect investors, to honor their legitimate expectations and to build confidence in markets, i.e, to fulfill the intent of Congress. Nor can it be appropriately argued, ala Picard, SIPC and Lifland, that more fulsome books and records should prevail over the final statement, because the investors have no access to the books and records, therefore cannot know they are facing a fraud, have no protection, depending on their circumstances, if the final statement method is not used, and inherently and legitimately believe and expect that they have the assets shown in their statements.

As well, if the existence of real securities in Madoff is ignored because the trading was fictitious, and the part of New Times dealing with fictitious securities is therefore applicable, we should argue -- and it is true -- that that part of New Times was decided incorrectly, with deference being given to two agencies -- SEC and SIPC, one of which is incompetent and the other of which is venal -- even though their arguments were contrary to longstanding, continuous practice in both finance and litigation. In both finance and litigation, long established techniques are used to estimate what would have occurred in the past had given events or illegality not occurred, and what will happen in the future. Financial experts and economists make the relevant calculations and do the relevant studies literally every day. They have been done in cases I personally have participated in, and are done widely.

Thus in New Times the profits that would have been realized by persons who bought the nonexistent securities could have been measured by the gains of the securities which existed, or by some reasonable surrogate such as the performance of the S&P 500, the S&P 100, the Dow Jones, a bond index, or whatever was close to those securities in style and purpose. That kind of measurement by surrogates is common. Here the profits that would have been made by the Madoff investor could be measured by the performance over time of the S&P 100, from which Madoff took the securities he allegedly was using. Or the profits could be measured by an index of hedge funds that, as Madoff claimed to do, sought reasonable growth with stability through buying and selling securities just as Madoff claimed to do. Or the profits could be measured by a comparison with the profits made from use of the split strike conversion strategy by other funds that actually used that strategy, as some did.

In every case where something is fictitious, there are appropriate surrogates that can be used to measure what would have occurred, as occurs daily in finance and litigation. The unwillingness of SIPC and the SEC to use them reflects pure greed on SIPC’s part, and on the part of the SEC reflects the incompetence, stupidity and complete lack of financial sophistication that Harry Markopolos has regularly said are hallmarks of the SEC, and that he has been dining out on. The failure to use these surrogates is also just a method of cheating defrauded investors out of monies they legitimately believe they should get from SIPC, failing to give them the protection Congress intended them to have, and screwing over their legitimate expectations. Frankly, I am quite surprised that a smart, sophisticated Circuit like the Second did not realize in New Times that surrogates could and should be used, and instead accepted a bunch of hooey from the SEC and SIPC.

* * * * *

I shall close by very briefly restating, and adding just a bit to, some of the points made above that I consider the most important. I wish they would have an impact on my fellow lawyers, but doubt that they will for reasons having to do with decades of experience.

One of the points is that the legislative history is far and away the most important aspect of the case from our standpoint. It should be dispositive for us and everything else should be irrelevant. The trustee and SIPC understandably ignored it because it is so favorable to us, and, being sucked into fighting on grounds of their choosing, our side pretty much ignored it also. This was a mistake and contributed to an opinion which represents something which is wholly improper in our system: a decision implementing what one side and the Court think fair instead of carrying out the will of Congress -- what Congress deemed fair. Let us hope that our side proves and extensively presents the legislative intent in the next go round, whether in the District Court or the Court of Appeals.

Second, in the absence of focus on the intent of Congress, and with focus instead on points of our opponents’ choosing, the lack of discovery was an absolute killer for us. In the absence of discovery, the other side got away with hiding its motivation and with various crucial claims that might very well be wrong and would have been disproven by discovery. As an antitrust lawyer, I simply fail to grasp how one can litigate big cases without significant discovery. Is this how it’s done in the Bankruptcy Court?

Discovery should be demanded. It should be demanded if the appeal goes to the District Court, and, if the appeal goes to the Second Circuit, that Court should be warned that the absence of all discovery renders conclusions uncertain and highly disputable.

Third protecting Congress’ intent is at stake here, not just in this case, but in any number of potential cases. For years SIPC always used the final statement method and issued publications saying that the final statement is used. Now, however, there are three cases where it has not used this method, Old Naples, part of New Times, and Madoff. Given the greed, hard-guy conduct, and decades of efforts by SIPC to thwart victims who simply seek to obtain monies they legitimately thought they had a right to, if SIPC succeeds here, if it is not slammed hard here, it likely will be only a question of time -- and not much time at that -- until SIPC extends, to other cases and other situations and other victims, its efforts to illicitly avoid payments that Congress intended it should make to 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 Velvel@VelvelOnNationalAffairs.com.

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