Friday, September 24, 2010

The Information Provided To Congress By SIPC. Part II.

September 24, 2010

The Information Provided To Congress By SIPC.

Part II.

D. SIPC was not asked, and nowhere does it say, how much money was earned in interest from Treasuries and money market funds into which Madoff put the money in the Chase/JPMC account, or how much, if any interest, was earned from Chase and JPMC themselves. To learn these numbers is essential because the interest, as explained above, is the equivalent of cash-in and must be credited to investors’ accounts under CICO, which Picard has not done. If the Second Circuit upholds the use of CICO, there should be attempts to obtain these numbers via discovery. If Lifland again denies discovery, as he denied it previously, this would form one basis for appeal from his next decision on the net equity question.

The amount of interest could, in toto, be a very significant sum. Though the chart of annual cash-in and annual cash-out provided by SIPC from 1992 onward gives rise to certain speculations discussed below, it nonetheless makes clear that there sometimes had to be many billions of dollars -- even tens and scores of billions of dollars -- in Madoff’s account, especially from 1995 onward. The total amount of interest earned could have been quite large (and was surely stupendous if Chase and JPMC were themselves paying interest on the account). If the Second Circuit decides in favor of SIPC and Picard on the net equity question, and Congress does not enact a provision that net equity must be gauged by the FSM, it will be essential to seek discovery on this question upon remand to Lifland’s court. If Lifland refuses discovery, which seems to be his want (he is after all deeply biased in favor of SIPC and Picard*), this could, as said, be a basis for appeal. (In fact, the interest earned from Treasuries, money market accounts, etc. should be added to investors’ accounts under the FSM too, because it was earned with their money. Victims could justifiably demand this money from customer property, and seek discovery about it, if the FSM is used, just as they can under CICO.)

E. SIPC says there were “90,000 disbursements totaling $18.5 billion made to Madoff investors in excess of their investments.” (P. 5.) Whether this means during the entire course of the scam, or only during the six year period prior to December 11, 2008 -- the maximum possible period for avoidance actions -- is not said. If the latter, this would mean that on average there were 15,000 such disbursements per year, or an average of 1,250 per month. If the former, it would mean there were on average about 5,300 per year, averaging about 450 per month. I find it hard to say which is more likely, and, if SIPC is referring only to the last six years before December 2008, there also would obviously be many disbursements above investment before the last six years.

Thus, regardless of which SIPC means, there are likely to be many current or prior Madoff investors who, by December 11, 2002 (six years before the fraud was disclosed) had taken out more than they put in. Yet, because of statutes of limitations this “excess” is beyond the reach of avoidance suits unless the investors were negligent or complicit -- and it is probable that only wealthy investors and/or institutions were negligent because they had sufficient money to do due diligence that would have uncovered the fraud, and therefore can be sued for “excess” monies they took out before December 11, 2002.

It is quite important to try to find out just how much in “excess withdrawals” were made before December 11, 2002 and are not subject to avoidance suits. For SIPC and the Trustee claim that “fairness” -- at least their crabbed, narrow-minded concept of it, under which fairness requires that advances and customer property be denied to people now living in poverty so that more from customer property can be given to the rich -- requires the use of CICO, which, as just indicated, denies advances and customer property to the small person so that more customer property will be available to wealthy persons and rich institutions. SIPC and the Trustee are thereby placing a major financial burden of the fraud on small innocent investors who withdrew more than they put in, while leaving untouched investors who did the same and got out of Madoff more than six years before December 11, 2008. In other words, their concept of “fairness” is that if you got out in time you’re safe, and if you didn’t get out in time you’re screwed -- and this in addition to their anti Robin Hood conduct of taking from the poor to give to the rich.

In combating this distortion of values arising from the use of CICO, it would be useful to learn how many investors took out all their money before December 11, 2002 and by how much did their withdrawals exceed the amounts they put in. If necessary -- if the Second Circuit rules for SIPA and Picard on net equity and Congress does not enact a statute mandating that net equity be determined by the FSM, the information should be sought in discovery.

F. There are a number of points in SIPC’S answers that relate to the adequacy of its planning. To wit: SIPC says that since April 1, 2009 it has been assessing members one-quarter of one percent per year to build the SIPC fund. (This after a decade of assessing them only $150 per year -- even if they were Goldman Sachs or Merrill Lynch.) Its “target” is to build the fund to $2.5 billion dollars, and “assessments based upon a percentage of net operating revenue will remain in place until” then. (P. 2.) When the fund is built to $2.5 billion, SIPC will have access to $5 billion by combining the $2.5 billion fund with another $2.5 billion line of credit available from the Government. Before March 1, 2009, SIPC had two revolving commercial lines of credit of $500 million dollars each (or a total of $1 billion) available from a consortium of banks, but the banks, says SIPC, were “unwilling to renew the credit lines, due to the developing financial crisis.” (P. 2.) And SIPC says that “SIPC, under current law, has demonstrated that it has sufficient resources for its statutory mission.” (P. 3.)

Many questions arise from this. Just how and why does SIPC calculate that a $2.5 billion fund, combined with an equal sized Government line of credit is enough? In 2003 some important Congressmen told SIPC, after a GAO report, that it should think about increasing the funds available to it, but it declined to do so, claiming privately, as I gather it, that actuaries had told them it had access to enough money. Did actuaries tell it in 2009, after Madoff and Stanford, that $5 billion in available money was enough? If so (or even if not), were the requisite calculations based on a continuation of SIPC’s now 40 year old policy of attempting -- successfully until now -- to screw investors by fighting tooth and nail against paying them -- by pulling out all the stops in negotiations and litigation to successfully avoid paying all but a small percentage of claimants? What if SIPC is somehow forced by the courts or Congress to change this fight-them-to-the-death policy which destroys the intent of Congress? Will $5 billion still be enough? (Personally, I think that, if there is to be a change in SIPC’s conduct, its entire management and Board must be replaced. They have all been complicit in SIPC’s conduct, and, without a clean sweep, one must fear that nothing the courts or Congress can do will cause those who have been part of SIPC for 35 years -- or have been associated with and influenced by such persons -- to dramatically change their mindset and conduct. Unfortunately, though, in Government or quasi government people don’t get fired for performing their jobs terribly or destroying Congressional intent.)

Moreover, if $5 billion is sufficient, why does half of it have to come from the Government, which already has lots of calls for money? Why shouldn’t it come entirely from the fabulously wealthy investment business, which may have benefitted to the tune of hundreds of billions or even many trillions of dollars from the existence of SIPC insurance -- for which industry members paid the farcical sum of only $150 per year per member for a decade or more? How big would the SIPC fund itself get if, say, investment houses were required to pay one half percent of net revenues into the fund, or one percent of net revenues into it, for, say, ten years?

And just how has SIPC “demonstrated” that it has “sufficient resources for its statutory mission”? Hasn’t any such demonstration been dependent upon the policy of screwing investors out of advances, so that relatively little money is paid out? Moreover, has SIPC told us the full story of why a consortium of banks refused to renew a line of credit to it? Did the banks possibly have concerns over what might happen in the markets and over SIPC’s ability to repay them if disaster struck?

G. Here are two quick “semi-logistical” points.

SIPC says the average time period between the filing of a claim and the determination of the claim, for the 13,189 claims that have been determined already (out of a total of 16,374) is 7.55 months. It then gives a bunch of excuses for taking 7½ months. But as you can see for yourself by reading the excuses (on pp. 6-7 of its answers), the lengthy time period, which contravenes Congress’ intent for prompt payment, is due to use of CICO. CICO requires extensive calculation and work that is unnecessary under the FSM.

Moreover, to a certain extent -- actually to a major extent -- SIPC is lying with figures here. It says it has determined 13,189 claims. But it also says later that there were 8,489 claims (of the 13,189) that were denied because the claimants had no accounts at Madoff, i.e., were indirects. It should have taken about one day to determine an indirect claim, since they are denied out of hand. Since the average period for a determination is 7½ months, and the indirect claims that are currently deniable out of hand -- in a day -- are roughly two-thirds of all the claims that have been determined, this further evidences how much delay there has been in determining direct claims -- even where they have been determined. And one would bet that most of the 3,185 claims remaining to be determined are directs’ claims.

Beyond this, SIPC’s answers give the average period between the filing of a claim and the determination of the claim, not the time between the filing of a claim on which SIPC admits it owes some amount and the payment of the claim. If we were to learn the average time between filing and payment, you can bet it would be more than 7½ months. Ultimately it is likely to be years. This is what Congress meant when it said it wanted SIPC’s payments to be prompt?

SIPC also says, in an effort to show how caring it is towards people who are suffering greatly, that “Hundreds of customers filed hardship applications” seeking quick payments, and ‘many” of these were granted. (P. 7.) “Many” is a lawyer’s weasel word. (Twenty would be “many.”) SIPC does not say how many were granted. It does not give a specific number, which it obviously knows. Instead it weasels. This is a sign that the number of hardship applications it granted isn’t very high.

H. Finally, SIPC has set forth a chart showing the annual cash put in and the annual cash taken out for each year from 1992 through 2008. Most of the time the annual cash-in and cash-out are pretty close, although there were a few years when cash-out exceeded cash-in by (usually) a small amount, so that a certain amount of the cash-out had to come from “reserves” from prior years. But discrepancies between annual cash-in and cash-out appear to have become significant, sometimes in one direction and sometimes in the other, from 2003 onward, with about $2.8 billion more in cash-in in 2007 and $4.25 billion more in cash-out in 2008.

But eyeballing the chart as a whole (eyeballing, rather than carefully comparing all numbers), one gets the impression that much of the time the cash-in and the cash-out were reasonably close. This likely indicates that in the years of reasonable closeness Madoff was taking out for himself and his cronies -- Picower, Chais, probably Norman Levy -- an amount that was approximately equal to the difference between the year’s cash-in and the final total of cash-out for the year. Otherwise, could there have been the degree of correspondence which often existed between annual cash-in and annual cash-out?

I don’t know what this never-previously disclosed information in the chart tells us of importance about Madoff’s scam, except perhaps that it reinforces a point that is prevalent throughout the Madoff case, is very important, and is almost never remarked. It could well by my own ignorance, but I don’t ever remember another major crime as to which so little underlying information has been publicly disclosed and was publicly known nearly two years after the crime and over a year after the major culprit went to jail. The Trustee, SIPC, and the U.S. Attorney are keeping things secret as much as they can, sometimes claiming secrecy is necessary for their success, a bovine defecation claim that government and quasi government bodies often make, usually falsely. But victims are being really hurt by this common bovine defecation because they do not have access to information they need to further their efforts to recover lost funds -- as shown by the usefulness to victims of other information discussed here that was revealed only in SIPC’s (sometimes hide-the-ball) answers of September 7, 2010. I have written many times in blogs, books and elsewhere that secrecy (and associated falsity) is the most serious problem human beings face, since people are usually able to figure out what to do when they know the facts. It is no different here.

*Thus, Lifland instantly approved Picard’s staggeringly huge requests for fees and expenses. Fees are now up to somewhere around 88 or 90 million dollars as of four months ago (as of May 31, 2010).

Thursday, September 23, 2010

September 23, 2010

The Information Provided To Congress By SIPC.

Part I.

As many of you know, this lawyer asked for discovery before Judge Lifland in the Bankruptcy Court. Lifland denied the requested discovery in terms that made clear he would allow no discovery on anything, although a complete denial of any and all discovery on what lawyers call a “summary judgment” proceeding is, I think, unheard of -- literally unheard of. The purpose of discovery is, of course, to find out what the actual facts are, so that neither an opponent nor the court will have to depend upon a party’s self interested, unplumbed claims of what the facts are.

After making clear that there would be no discovery to learn what the actual facts are, Lifland then accepted and used versions of the facts put forth by SIPC and the Trustee. This too has been discussed in blogs and briefs, as has the fact that, even without discovery to learn the truth, we already know that various of the factual claims of SIPC and the Trustee are flat wrong and others are dubious, and that there is other vital information that we do not yet know because SIPC, the Trustee and the U.S. Attorney are keeping it secret.

To my embarrassment, however, I must say that I failed to identify what is one of the most important points yet mentioned in regard to matters that could have been brought out by discovery. Thankfully, David Bernfeld identified it. The monies that came in from his scam were in Madoff’s Chase (and then JP Morgan Chase (JPMC)) bank account. These monies were sometimes invested in Treasuries and money market funds, which earned interest. (They may have obtained interest from Chase and JPMC also -- I do not know.) The interest should have been credited to Madoff’s investors. Because these monies belonged to investors, they were defacto -- and even de jure, I think -- the equivalent of cash-in, of cash put into Madoff by investors. But in calculating investors’ cash-in, SIPC and Picard did not credit investors with these monies which they had a right to be credited with. To make it simple, think of it this way: had Madoff actually invested investors’ monies in stock which paid dividends and appreciated in value, the dividends and appreciation would have to be credited to investors. The same is true of earnings from Treasuries, money market funds, and interest from JPMC.

Almost a year after Lifland, in serious violation of law, denied discovery, the Kanjorski Subcommittee submitted questions to SIPC. Many of those questions not only elicited what Congress needs to know, but also bore on what litigants wanted to know and to present to courts, since it is quite common for Congress and the courts to need and to seek the same information in order to properly perform their duties and make proper decisions. (Think Watergate.) The Subcommittee sent its questions to SIPC on August 30th. SIPC answered them on September 7th. SIPC’s answers, which also state the subcommittee’s questions can be accessed by clicking here:

As you will see by reading them, SIPC’s answers are filled with self justifying verbal explications -- often identical to what SIPC and the Trustee have said in briefs -- intended to put a gloss on facts it has presented. As well, the answers omit certain important information -- sometimes because the questions it received did not request it -- and make it clear that additional information is needed with respect to some of the answers SIPC gave. Nonetheless, the answers do provide significant, important, often previously undisclosed information that should be discussed in presentations to Congress, to the courts, and to the media.*

A. To begin with, SIPC’s answers show that it has, or has ready access to, nearly double the amount of money it would need to pay direct investors under the final statement method (FSM). SIPC’s fund, as of August 1 (the date as of which the subcommittee sought answers), stood at $1.2 billion. It also had access to a $2.5 billion line of credit. So its total available funds were $3.7 billion. Under the FSM it would have to pay $2.01 billion in advances. So it has access to $1.6 billion more than, or about 180 percent of, what it would have to pay in advances under the FSM.

Moreover, SIPC expects that during the remainder of 2010 and 2011 it will take in another $500 million for its fund from the industry. This will bring its available monies to a total of $4.2 billion, or precisely double what it would have to pay directs in advances.

When the imbroglio with SIPC and the Trustee began, some of us thought they were using cash-in/cash-out because of fear that otherwise SIPC would not have enough money for advances. Our view may or may not have been true, but in any event it has now been overtaken. SIPC already has and/or will have nearly twice the amount or twice the amount (depending on the date one uses) that it would need under the FSM to pay advances to all direct investors.

Moreover, by continuing to use cash-in/cash-out (CICO) even though it has way more than enough to cover directs under the FSM, SIPC is attempting to save itself another $1.130 billion. For the amount of advances to which it has already committed under CICO is $713 million, and it expects to pay another $175 million in advances for a total of $888 million. $888 million is $1.130 billion less than the $2.01 billion it would have to pay under the FSM. SIPC appears to be trying to enrich itself by this amount instead of paying it to devastated investors: as discussed in an email of August 26th, Picard said, on page 50 of his Third Interim report, that he is trying to recover money to give to SIPC. This is further discussed below.

(I do not know what the changes in the numbers would be if indirect investors received advances under the CICO or FSM. All I can say for sure is that SIPC’s answers say it disallowed 8,489 claims of “claimants who had no account at Madoff,” and an additional 2,094 claims (or a total of 10,583) are tentatively in this category, but conceivably could be recategorized. (Anybody wanna bet on that?) Since there were “only” 4,459 claims by direct investors, the changes in numbers would likely be dramatic if indirects are eligible for advances from SIPC. But the information needed to know the amounts of the changes was not asked for by the subcommittee nor given by SIPC.)

B. Although the celebrity-driven media has focused on the rich and famous who lost gazillions with Madoff, it is clear that a significant percentage of Madoff’s investors were small investors. Many of them are being hurt terribly. Under CICO, 1,204 of 2,319 accounts potentially eligible for a SIPC advance, or over half, are less than $1,000,000, with an average account value of about $318,000. (A combined value of $382 million divided by 1,204 accounts equals about $318,000 per account.) Another 626 of the 2,319 accounts, or another 25% of them, are between $1,000,000 and $3,000,000, with the average account value being approximately $1,751,640. (A combined value of $1.96 billion divided by 626 accounts.) There are only 138 potentially eligible accounts worth more than $10 million. So plainly, as said, most investors were small or reasonably small, with averaged figures showing that half are worth $318,000 or less.

The same story is told if one looks at the numbers of accounts potentially eligible for an advance from SIPC under the FSM. Here 1,485 accounts out of a total of 4,450, or about one-third, are worth less than $1,000,000, with an average value of about $456,000. (A combined value of $670,889,986 divided by 1,485 accounts.) Another 1,372 accounts, or about another 30 percent, had a value between $1,000,000 and $3,000,000, with an average value of about $1,860,129 dollars. (A combined value of $2,552,097, 200 divided by 1,372 accounts.) Thus a total of 63 percent, or nearly two-thirds, were small or reasonably small investors, with one-third the accounts on an averaged basis being worth $456,000 or less. Only 499 accounts are larger than $10 million.

Thus it is plain, as said, that most accounts were those of investors who ranged from very small to what might be considered the upper edge of small ($3,000,000), with a reported average per all allowed claims, according to SIPC, of $375,671 -- which means that on average SIPC is not paying out even the full maximum of $500,000 per claim. Of the allowed claims under CICO, 1,330 were for more than the maximum payment of $500,000 and 845 were for less. The average allowed claim, as said, is $375,671, or over 20 percent less than the maximum allowed advance from the SIPC fund.

As well, the allowed claims number only 2,175 under CICO. Under the FSM they would number 4,459, or 2,284 more. So in addition to paying, under CICO, more than twenty percent less than the maximum allowable, by using CICO rather than the FSM SIPC has shed itself of over 50 percent of the otherwise allowable claims of direct investors.

C. SIPC says there were “approximately 90,000 disbursements totaling $18.5 billion made to Madoff investors in excess of their investments” (P. 5). It says the Trustee has brought 19 avoidance actions seeking to recover about $15 billion, and it then says, in answer to the subcommittee’s inquiry about future avoidance actions, that the Trustee (i) is considering “approximately 1,000 possible avoidance actions,” against persons who had no knowledge of the fraud, “that could result in the recovery of approximately $4,800,000,000.00 for the benefit of creditors who have yet to recover their principal,” and (ii) is considering another approximately “100 avoidance actions,” against persons who “had enough information to be on inquiry notice of the fraud,” “seeking the recovery of at least $2,000,000,000.00 for the benefit of customers who have yet to recover their principal.” (P. 5.)

These statements have some crucial implications. One is that, despite any past protestations indicating the possible contrary, the Trustee is thinking about going after small investors who had no idea that there could be a fraud here. For as said above, very large percentages of the accounts are small fry, and it was small fry who were most likely to not have a breath of suspicion that there could be a fraud. Also, although the Trustee’s figures play hide-the-ball on the question, I think it is possible that someone more adept at mathematics than I could pierce the ball-hiding and, by putting together various figures which appear in different places, could calculate how many of the 1,000 potential avoidance suits against innocent people would involve small investors. We can feel pretty confident it would be a lot.

Of course, it would be very valuable to have exact figures from SIPC, figures such as precisely how many of the 1,000 people who are innocent had accounts of less than one million dollars, how many had accounts of between one and three million dollars, how many had accounts of three to five million dollars, and ditto for five to ten million dollars and over ten million dollars. SIPC could produce this with the touch of a computer button, and it is probably a sure thing that the results would show that a major preponderance of the 1,000 persons are small fry.

As well, if the same exercise were performed for Congress by SIPC with regard to the possibly non innocent 100 who may have avoidance suits brought against them, it is dollars to doughnuts that the result would show that a large percentage of them are big investors: are hedge funds or banks or wealthy individuals with tens to scores of millions of dollars that were invested. It is after all, large players -- hedge funds, banks, etc. -- that had the capability to figure out that something must be wrong.

All of this brings up a curious point. SIPC says that from the 1,000 innocent people whom the Trustee may sue and who are likely to be small investors, he could recover $4.8 billion dollars; while from the 100 persons with possible knowledge, many of whom are likely to be large investors, he may recover at least $2 billion -- or only a bit over 40 percent of what he could get from the smaller investors. Even understanding that the Trustee’s 19 avoidance actions to date are mainly or exclusively against large investors, the imbalance between seeking another $4.8 billion from mainly small people but only another $2 billion from mainly large people, when coupled with the idea that very large investors were often so wealthy that they did not have to take cash out of Madoff to pay taxes, to live, etc., gives credence to those who have said in recent months that the Trustee, contrary to Robin Hood, is taking money from the poor to give to the rich.

Here is another matter of consequence stemming from SIPC’s points about additional avoidance actions. Picard is currently seeking $15 billion in such actions and may seek another $6.8 billion (or a total, rounded off, of $22 billion). What would happen if he obtained all this? Or even if he obtained only half of it? -- he has said he thinks he’ll get 9 or 10 billion. Well, one thing that would happen is that SIPC might get filthy rich (or filthier rich). Picard has said that his working number of the amount of cash-in to Madoff from victims was, at the end, $19 or $20 billion. Let’s call it $20 billion for ease of figuring. SIPC’s answers say that the already allowed claims under (CICO) total 4.55 billion. (P. 3.) The Trustee, SIPC says, expects to ask SIPC to give him money to pay another $175 million in advances, but as near as I can see does not tell us the total amount of the claims for which he will seek $175 million for advances. But we know that 2,175 allowed claims had a total account value of $5,556,299,243, and involved a total of $713 million in advances. For horseback purposes we can figure that advances of $175 million will involve roughly $1.2 billion in total claims, since $175 million in advances is roughly one-fourth of $713 million in advances and 1.2 billion in total claims is roughly one-fourth of $5.55 billion in total claims. Thus, the total claims under CICO will be about $6.75 billion ($5.55 billion plus $1.2 billion).

$6.75 billion is considerably less than the nine or ten billion Picard said he expects to recover, and even considerably less to a far greater extent than the amounts he could recover under SIPC’s figures, amounts ranging up to $22 billion. What will happen to the extra money? Well, SIPC will get a bundle of it. Under the statute, customer property is allocated first to SIPC “in repayment of advances . . . to the extent such advances recovered securities which were apportioned to customer property.” I long thought SIPC was very dubiously interpreting this provision defacto to mean SIPC recovers advances even when the advances were not made “to recover securities,” but only to pay victims in cash. But SIPC’s brief in the Second Circuit does not interpret it this way, at least not now. If the first allocation provision were to be interpreted as I thought SIPC previously was doing, then, out of the recovered customer property that can range anywhere from about $6.75 billion to $22 billion, SIPC would get $888 million dollars that it will have paid in advances.

Next in line under the statute - - the beneficiaries of the second allocation provision - - are customers who have a positive net equity. Their claims will amount to $6.75 billion ($5.55 billion plus $1.2 billion) minus the amount they would already have received in advances (or $888 million), or $5.862 billion.

So, thus far $6.75 billion in customer property is accounted for ($888 million in advances plus another $5.862 billion to cover the remainder of the total value of the accounts having positive net equities). What about the remainder of the nine or ten billion dollars Picard expects to receive (or the amounts up to $22 billion that he could conceivably recover)? Well, I gather SIPC would obtain either $6.75 billion to cover all the money it paid to customers if it did not get money under the first allocation provision, or another $5.862 billion if it did (for a total of $6.75 billion). For under the statute, after the customers are repaid, SIPC now gets money as “subrogee for the claims of customers.” I assume this must mean the claims of customers who received money -- i.e., those with a positive CICO net equity -- because how could SIPC be a subrogee to a claim of someone who did not receive money? So SIPC will, as said, get either $6.75 billion or another $5.862 billion.

SIPC is also fourth in line, for allocations though this time its position seems meaningless. Here SIPC is reimbursed for delivering “customer name” securities (I presume as opposed to street name securities) to a customer. But SIPC hasn’t delivered any customer name securities to anybody as far as any of us know, so being fourth in line is irrelevant.

Any money remaining from customer property will then go into the general estate. Who will get this money from the general estate is unknown to me and, as far as I know, neither SIPC nor Picard have ever said. Customers (i.e., investor victims) can share in it only to the extent they have unsatisfied net equities. So the general estate is in this regard irrelevant to directs because they either have negative net equities under CICO or, if they have positive net equities, their entire claim will have been satisfied under CICO. So who will get the money?

I know no bankruptcy law, which I presume would govern the question, but, though admittedly ignorant in the field, would assume the money would go to creditors to the extent that there are creditors. Would the indirects have claims as creditors although they are not currently regarded as customers? Would directs have a claim as creditors even though they have a negative net equity? And if indirects or any or all directs have claims against the general estate as creditors, is the claim for the amount shown on their final statements? After all, Madoff owed them the amounts on their statements, as was shown by the fact that before the fall he would pay the amount shown on the statement to an investor who closed his account.

The bottom line is that who may get what from the general estate is unknown. But, with regard to recipients of money in categories that come before the general estate, SIPC will get a bundle while penurious, wiped out small investors will get, as it is said, bupkis.

Of course, if the FSM were used instead of CICO, then SIPC would have to pay $2,010,467,854 in advances, and might recoup that as first in line for customer property if SIPC can recover for advances not used to recover securities. If this assumption, which I thought was previously indulged by Picard and SICP is wrong, as SIPC’s brief seems to implicitly admit, then SIPC might very well get nothing rather than two billion dollars. For the customer property would go to victims – at least it would go to direct investors; the direct investors may represent a very large dollar amount of the $57 billion that SIPC’s analysis says is the total amount owed to customers (which “excludes the potential results of settlements”); and there might therefore be nothing left for SIPC. (P. 6, n.1.) So SIPC’s situation would be far less favorable to it under the FSM than under CICO, a fact which you can bet has not escaped either Harbeck or Picard.**

*Parts I and II of this posting were both completed before the Kanjorski Subcommittee hearing of September 23rd. If that hearing requires any additions or changes to the post, I will try and discuss such points in a later posting after receiving the transcript of the hearing.

**SIPC’s figure of 57 billion dollars in potentially eligible claims under the FSM does not in terms include indirects. For the claims of indirects are not currently eligible for SIPC benefits. The questions asked of SIPC by the subcommittee inquired as to how many claims were disallowed because they were indirect (Question 9), but did not ask what the aggregate size of those claims is. On the other hand, to the extent that claims were submitted to Picard by the banks, hedge funds, pension plans, etc., in which the indirects invested, the indirects’ claims are part of the 57 billion dollars because the claims submitted by each of the investment vehicles (each fund, bank, etc.) would presumably include all the indirect monies invested in the vehicle, turned over to Madoff, and lost when the Ponzi scheme collapsed.

Wednesday, September 22, 2010

Addendum to Post of September 21, 2010

SEPTEMBER 21, 2010

I have just received, from the Syracuse Athletic Department, the figures on the points scored by and against Syracuse in 2008, the last year Greg Robinson, who now coaches Michigan’s defense, was Syracuse’s head coach. The awful tally is 217 points scored by Syracuse and 392 scored against it.

As I keep saying, oh God.

Larry Velvel

Tuesday, September 21, 2010

The One (or Two) Dimensional Coach.

September 21, 2010

The One (or Two) Dimensional Coach.

Here is a trick question: How many Michigan quarterbacks are starters this year? The answer is at least three. There is, of course, the fabulous Dennard Robinson. But Steven Threet (speaking of three), who left Michigan after being a starter some of the time in Rich Rodriguez’s first year if memory serves, starts for the Arizona State team that just lost to Wisconsin by only one point, and the strong armed Ryan Mallett, who left Michigan as soon as Rodriguez was named its coach, starts for the Arkansas team that just defeated Georgia. Their presence on these other teams is a tribute to the havoc caused by Rodriguez when he took over Michigan. (Some major lineman whose name escapes me also left and became a starter for Ohio State -- not exactly a small time team.)

But so what, you say. It took Rodriguez awhile to recruit his kind of players, now he has done so, and look at the results. Well, the results are a marvelous offense, at least so far, and I would think that success likely to continue even when Michigan starts playing Big Ten teams. But the defense, oh my God, the defense. Perhaps the best way to describe the defense is to ask, what defense? Not to mention what appears to be the complete absence of any kickers whatever.

The defense has been awful ever since Rodriguez began at Michigan, and it remains awful. One has to believe that, notwithstanding its offense, Michigan is going to lose a number -- even a lot -- of Big 10 games because of the sheer horribleness of its defense. Even given the likely continued excellence of the offense, how can Michigan beat, say, Iowa, Ohio State, Wisconsin, Penn State or perhaps Michigan State, with a defense that stops nobody. And what if, heaven forefend, Dennard Robinson were to be injured and unable to play, so that there might be little offense because his backups are not nearly as capable as he, at least not at this point and maybe never. If that were to happen, Michigan might be lucky to win any Big Ten games.

And who did Rodriguez hire to run his defense. Greg Robinson, a guy who compiled such a bad record as head coach at Syracuse that he got fired after four years there. Now the defense is in its second year under Robinson and should have learned something, but apparently is worse than ever.

If you want to really grasp the unbelievable coaching ineptitude of the guy hired to run Michigan’s defense, listen to this: Robinson was the head coach at Syracuse from 2005-2008. His wins and losses, and the points scored by and against Syracuse, are posted on the Syracuse Athletic Department’s website from 2005-2007. (For some reason 2008 is not posted but we found the 2008 won/lost record elsewhere.) Robinson’s record was one win and ten losses in 2005, four and eight in 2006, two and ten in 2007, and three and nine in 2008, for a total of ten wins and 37 losses. Equally to the point since this coach with such a terrible record was hired to be Michigan’s defensive coach was the record of points scored by Syracuse compared to the points scored against it. Here the totals from the website in 2005, 2006, and 2007 respectively were 152 by Syracuse and 295 (almost double) against in 2005, 219 by Syracuse and 285 against in 2006, and 197 by Syracuse and 418 (more than double) against in 2007. And Robinson is the guy who is in charge of Michigan’s defense? Oh, my God!!

A few years ago, when the underperforming Lloyd Carr was still head coach, I heard the panelists on ESPN’s college football show -- particularly the highly accomplished ex-coach Lou Holtz -- do something that such panelists rarely do. I heard them criticizing a head coach, in this case Carr. But that may have been as nothing compared to what Holtz and the adroit Mark May (didn’t he play at Notre Dame?) said about Michigan’s defense this Sunday, right after the UMass game. They both savaged Michigan’s defense, which they found abominable, with Holtz saying, among other things, that this is not the Michigan defense he used to warn his teams about. And it was May, I believe, who specifically blamed Greg Robinson for the problem, saying he had installed a new defense -- if, as I say, Michigan’s defense can even be given that name. (Maybe it should be called “Michigan’s non defense,” or “Michigan’s porous”).

And who is it that hired Robinson after he was fired at Syracuse because he had performed so ineptly -- and had so many more points score against his team than it scored -- and who is it that put him in charge of the Michigan defense? Well, it was the West Virginia genius, Rich Rodriguez, who now has a great offense but no defense -- and is likely to pay the price in the Big Ten for having only half a team in his third year. And who allowed Rodriguez to hire Greg Robinson? Why the Michigan athletic department, of course, thereby showing no sign of competent thinking.

So Michigan’s football future does not look too bright in the Big Ten this year, unless a miracle happens and Greg Robinson somehow teaches Michigan’s porous to play defense within, say, less than two weeks, when Michigan plays Michigan State.

And lest one forgets, let me reiterate that Michigan has no kickers. It simply cannot make field goals and, perhaps with some exaggeration, I would say it seems hard pressed to kick kick-offs more than two thirds of the way to the end zone. How could Rodriguez have failed in three years to recruit even one player who can kick off and kick field goals? You can bet your sweet bippy, as I think Artie Johnson or somebody or other used to say on Laugh-In forty years ago, that in the Big Ten Michigan will pay the price for this ineptitude at kicking.

Humorously enough, Michigan’s best kicking play of the season was a pooch kick on a punt, (not, of course, on a kick off or field goal attempt) that ended up on the opponent’s five or seven yard line if I remember correctly. Although, few media personnel commented on this marvelous play in view of his running and passing, will it surprise you to learn that the pooch punter was Dennard Robinson? He must be Michigan’s best all around player since Tom Harmon (or at least Ron Kramer or Charles Woodson).

So, considering everything, it has to be said that Rich Rodriguez has thus far proven himself the one dimensional man, or maybe the two dimensional man. In his first two years he proved that he excels at losing. Michigan never before had a coach so successful at losing, not even Chalmers (Bump) Elliot, God help us. Now he’s proven that, given time, he can build a terrific offense, at least if he gets a smashingly great running and passing quarterback like Pat White at West Virginia or Dennard Robinson at Michigan. But so far at least, he also has shown that he knows nothing about and cares not a whit about defense, kicking or hiring competent assistants. And all he ever seems able to come up with when reporters ask him about his team’s deficiencies on television is “We have to work harder.”

Oh boy. It could end up being another long season for Michigan fans.*

*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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