Comments On SIPC’s Answers Of January 24th To Questions Asked By Congressman Garrett.

February 11, 2011


A couple of people have asked for my reactions to SIPC’s January 24th answers to questions posed to it by Congressman Garrett. Because SIPC’s answers have now been made public, I am posting some slightly redacted comments I sent on January 28th to colleagues who are in or are working with NIAP.

1. Pages 2, 13-14: In discussing Picard’s “compassion” and his hardship program, SIPC, as it often does, speaks in generalities (which courts, Congress, etc. too often accept without question). Here it is pretended that the hardship program is perfectly reasonable. Yet many victims, speaking of the information demanded of them, find the program deeply intrusive and violative of privacy. I think we should try to get an application to see for ourselves what is demanded and how intrusive the program is. Maybe some victims have and would give us “clean copies” of the applications that victims need to fill out.

2. The Trustee has reached settlements with some large institutions in which he has agreed to recognize their claims in return for payments to him of monies the institutions took out of Madoff. Yet these institutions would seem to be ones that at least “should have known” there was a fraud. Why did he agree to recognize claims of institutions which should have known something was wrong? Picard is implicitly saying that SIPA allows him to recognize the claims of the culpable, whose continuous shoveling of money to Madoff kept the fraud alive from 2000-2008 and thereby caused tremendous increased injury to a huge number of us. And why did Picard, conversely, refuse to recognize a claim on behalf of the Picowers? (I think it likely was because Picower himself was subject to criminal charges; also, his estate could have been sued under RICO.) And why did Picard not recognize a claim for Norman Levy, who, as the January 24th answers show, was a major Madoff player financially.

3. Page 2: Picard will need approval from Lifland to distribute funds to customers and an application is being prepared. We know, however, that the impoverished will get little or nothing from customer property (and indeed will be subjected to clawbacks), and that the customers who will get money are mainly the very wealthy and hedge funds -- while Picard and SIPC claim all the while that this is equity. We should try to find out who the funds and banks are who will be receiving money. Intimately related to the distribution of money is the question of when will enough money be in Picard’s coffers so that possibly he could declare that a certain amount of it exceeds the “needs” of customer property and can be considered part of the general estate and used to pay fraud damages to victims.

Also intimately related to the forthcoming request to distribute money, I am sorry to say, is the question of the identity of the judge. We should have every expectation that as long as Lifland remains the judge, anything Picard wants to do will be approved -- and quickly. He is, I think, totally biased in Picard’s favor -- Picard has, in fact, won everything in front of him as far as I know, except for some very minor aspects of major matters that Picard won, e.g., enlarging the number of potential mediators and removing Adele Fox’s name from an injunction that applies to her anyway. If Picard says it is equitable and legally required to claw money from the now-poor to give to the still-rich, and that this is equity, Lifland will agree. (My experience with Lifland last Tuesday only reconfirms my views about his unshakeable bias in Picard’s favor.) Similarly, Lifland will automatically rule in Picard’s favor on such crucial issues as the (lowest possible) interest rate to be used in calculating fraud damages, the Trustee’s demand for interest from the dates of withdrawals, which can double or triple the amount owed, defacto liens against monies refunded by the IRS, not crediting victims with earnings from short term investments, and other crucial issues. If Lifland continues to be the judge, it will almost certainly be deadly for our people.

In this regard, how did the case come to be assigned to Lifland? Was it a result of some completely random assignment process (of the kind used by District Courts)? Or, as Chief Judge of the Bankruptcy Court, did Lifland -- as we occasionally hear of in District Courts (with accompanying complaints) -- insist on taking the case himself? The answers to the question of how the case came to be assigned to him could be quite important.

4. In explaining why innocent investors are not usually the subject of avoidance in a SIPA case, SIPC -- as it has done since the beginning -- uses numerical examples carefully crafted to provide the answers it wants, while ignoring that the answers would be different if you use different numbers. This constitutes a form of lying with figures.

Moreover, SIPC’s examples depend upon (i) there being enough customer property for everyone to be paid off without an avoidance action (a situation which Lifland told me at the oral argument is not germane to whether there should be a stay of proceedings against small innocent victims -- can you believe that?), and (ii) ignoring that its examples work only because it habitually turns down most claims -- about 90 percent of them, perhaps? If it didn’t turn down most claims, there is no way, I believe, that it would have enough money to pay back all claims without avoidance actions. This is another example of SIPC failing to tell the real truth.

In this regard, SIPC should be asked to state what percentage of claims it has turned down over the years and what percentage it has granted.

5. SIPC’s explanation of the logic behind its claim that investors have unsecured creditors’ claims for fraud against the general estate is on pages 5-6.

6. On page 5 SIPC says if the Trustee is left “unfettered, he will be in the best position to help all of the victims.” Of course, in the meanwhile, he will be desperately hurting the small now-impoverished so-called “net winners” -- which seems not to bother him at all. And he will be hurting them even though clawbacks from them are not necessary to pay off people.

7. Page 6: The SIPC fund is currently $1.23 billion. That is shockingly low. It shows SIPC has learned nothing and is still not listening to Congress. It also shows that the strategy is to pay victims (if at all) with money from other victims.

8. Pages 7-8: Their explanations of why so much time was needed to calculate accounts does not mention that this, as oft remarked, was due to the fact that they used CICO rather than the FSM. In any but the simplest, smallest case CICO will require extensive time, thus frustrating Congress’ desire for prompt payments to victims. CICO is, in other words, a built in frustrater of Congressional intent. This is a powerful reason, I think, why CICO is inherently improper under SIPA.

9. The answers constantly use the phrase “fake profits.’ This is a legalistic and psychological ploy to try to make readers forget that to protect people against being harmed by theft by crooks like Madoff was a specific purpose of SIPA. In this regard, of course, the thieves will provide false statements showing fake profits -- how else would they prevent victims from learning what is happening? It is thus inherent in Congress’ explicitly expressed desire for SIPA to protect against theft that there will be phony statements showing false profits (as occurred, by the way, in Bayou and Visconti and, I would imagine, in New Times).

The continuous use of “fake profits” is also a psychological ploy to make people forget that Picard is taking money from the now-poor to give to the rich. The now-poor are being required to give up what SIPC’s answers continuously call their “fake profits,” so it supposedly is alright to take money from them to give to hedge funds and banks.

10. Pp. 11-12: The answers make claims about assignments, but we’ve never seen one and can’t judge the veracity of what the answers say.

11. P. 12: Their answers to the question on disbursements state the “Number of Disbursements in Excess of Deposits.” (Emphasis supplied.) But the question did not ask for the number of disbursements in excess of deposits (whatever that means), but rather for “the number of disbursements.” Why have they answered a different question than what was asked? What is their game here? Am I missing something?

12. On p. 11 they provide their justification -- in reality, their excuse -- for not crediting customers with short term earnings under CICO. Their excuse is pure balderdash, and, were it true, no fund or bank would have to credit customers with interest on funds the institution has “parked” in short term instruments, since it all would be considered the institution’s money, not the money of customers. I have discussed this matter in a lengthy footnote to a brief, as follows:

The only thing SIPC or the Trustee has publicly said about all of this to date is that Mr. Harbeck told NIAP that the short term earnings were not credited to victims because they are customer property. This is a transparently disingenuous answer which seeks to avoid the issue. The question is not whether such earnings, under SIPA, are customer property after the Madoff bankruptcy. For all Madoff property became customer property under SIPA after the bankruptcy, and under Harbeck’s transparently disingenuous, so-called logic, customer accounts should have been credited with nothing for SIPA purposes after the bankruptcy. The question, is not what is or is not customer property, but is, rather, how much should victims’ accounts have been credited with under SIPA after the bankruptcy.

This question leads in turn to the question of why did SIPC and the Trustee not credit the victims’ accounts with the “cash-in” accruing from interest on short term instruments -- interest which is credited to customers who hold earnings-bearing accounts by every financial institution in the country. Is the answer to the last question that SIPC and the Trustee did not credit interest to the victims because they knew that SIPC did not have the money to pay all the advances which would be required even under CICO if the interest was credited to victims and thereby gave many or most victims a positive net equity? (The interest, whose total amount neither SIPC nor the Trustee has disclosed, could amount to many hundreds of millions or even billions of dollars over the twenty or so years during which the fraud is known to have been ongoing, and thus could easily have made the difference between a positive and a negative net equity under CICO for hundreds or thousands of people.) Is part of the answer to the question that SIPC and the Trustee knew the failure to credit victims with the interest, thereby causing them to have a negative net equity under CICO, would fly in the face of Congressional intent to protect victims, especially small ones, but SIPC and the Trustee decided to do this anyway because otherwise SIPC did not have enough money to pay advances to victims? Is the answer that SIPC and the Trustee simply made a mistake and then refused to own up to it when victims learned and pointed out that there had been short term interest earnings which should have been credited to them?

Whatever the answers to these questions, it is obvious -- obvious -- that the answers (i) can make all the difference in this case as to what customers’ net equity should be even under CICO – can be material and controlling on that score, (ii) can make all the difference on whether victims are subject to clawbacks since properly crediting customers with the interest earned on their accounts -- interest which is defacto cash-in for customers -- may cause customers not to have taken out more than they put in, and (iii) should be subject to discovery, including discovery via deposition of the two people who likely best know the answers, Messrs. Picard and Harbeck.

13. They estimate on page 22 that another $1.1 billion will be spent on lawyers and consultants. Wow!! This, of course, is SIPC money that would otherwise be available to victims.

14. P. 24: They say they in part gave effect to the final statement method -- so that customers would be eligible for advances of up to $500,000 rather than advances being limited to $100,000 (where a customer has only cash at the brokerage) -- because customers had a “reasonable expectation that securities were being held for them.” ($500,000, not $100,000, is the limit for securities.) But they didn’t use the FSM “beyond that” -- i.e., to measure net equity -- because the profits were fake. Yet it is preposterous to say (as they have said explicitly in briefs) that customers had a reasonable expectation that they owned securities because they got statements saying this, but did not simultaneously have a reasonable expectation that the value of the securities was as shown on the same statements. Has anyone ever heard of a customer saying, for example, “I expect I own securities because my statement shows this, but I don’t expect the value of the securities are as shown in the very same statement.”

15. Pp. 24-26: they list cases in which, they say, the final statement method has not been used to determine net equity. Based on my recollection of what was said in briefs filed on the net equity question in the Bankruptcy Court and in the Second Circuit, I think that some of these cases are not SIPA cases. They are, if memory serves, “straight bankruptcy” (i.e., non SIPA) cases. This should be checked out with lawyers who have focused on some or all of the cases in their briefs. They would include attorneys like Karen Wagner of Davis Polk and Jon Landers of Milberg. To the extent that I am right -- to the extent that these cases are not SIPC cases -- the answers provided on pages 24-25 are deliberately misleading because the question asks for cases in which SIPC used the CICO method, and the answer does not tell you that it lists cases which are not SIPC cases (and indeed implies falsely that the listed cases all are SIPC cases).

16. Pp. 25-26: On these pages they list four cases out of more than 314 (or about 1.3 percent) in which, they say, SIPC trustees brought avoidance actions. The number is tiny yet, necessarily, implicitly hearkens back to their prior assertions, discussed above, as to why there are few avoidance actions under SIPA -- assertions which depend on the fact that the reason they have enough money to pay off all claims in a given case without avoidance actions is because they deny most claims, so that there is only a small percentage of claims that they need to pay off. As far as I know -- and in reality I don’t claim to really know -- they are right in claiming that avoidance actions were used in 1.3 percent of SIPC’s cases, but again the accuracy of their claim that the listed cases involved avoidance actions should be checked with the lawyers who discussed the listed cases in their briefs, especially Wagner and Landers. (Such lawyers distinguished the cases and said they are inapplicable here, though inapplicability here would not seem to change the fact, if it is a fact (which should be checked), that trustees used avoidance actions in the cases.)



Larry Velvel