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).