Thursday, March 31, 2011

Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011. Part 3

March 31, 2011

Discursive Comments On The Oral Argument In The Court of Appeals
In The Madoff Case On March 3, 2011.


The next to argue for our opponents was the Trustee’s Counsel, David Sheehan, who has made himself the bête noire of many victims by what they consider his pit bull attitudes, insults, and sometimes outlandish comments (such as that no legislator would think the FSM should be used).

Sheehan began by saying that by using CICO the Trustee had reasonably followed the statute in a reasonable exercise of discretion, since this was a Ponzi scheme with no profits. (Tr. 51.) The customer fund, he said, is “the money that went in,” i.e., the cash in. To which Judge Jacobs said, “The SIPC fund is not the customer fund,” and then said, perhaps very importantly, “the SIPC fund is what we’re talking about here today.” (Tr. 51.) At that point Sheehan, as best I can tell, began trying to say -- I think -- that the SIPC fund and the customer fund are at least intimately related because the payment from SIPC is “an advance. It’s an advance against the money owed to you by the broker.” (Tr. 52.) If the broker owes you nothing, said Sheehan, there is no advance. (Tr. 52.)

At that point Judge Raggi interjected the following incredulous comment. “Well, you don’t think the broker who told people over the course of 30 years that they had a statement that increased at the rate of 15 percent a year or whatever owes them only what they put in at the start of the 30-year investment? You think that’s all the broker owes these people?” (Tr. 52.) Sheehan’s answer to this question was, I believe, outlandish. “In a Ponzi scheme, yes. Absolutely. Why would he owe them anything more.” In short, Sheehan was saying that even Madoff himself, had he been sued by an investor at some point for the amounts shown on the investor’s statement, would have owed the investor only what the investor had put in, not what the statement showed.

Raggi then interjected. “But fraud.” (Tr. 52.) Sheehan replied that “Fraud is a general creditor claim.” (Tr. 52.) There are two funds, Sheehan said, one being the customer fund of property [which] is the cash and securities deposited with the broker. The broker has an obligation to pay that.” (Tr. 52-53.) The implication here was that the broker would not have the legal obligation to pay an investor the false profits shown on the statements the investor received. If this were the only argument the other side had, I would have to think they would be sure losers.

Judge Raggi seemed unable to accept Sheehan’s argument, saying that” Even the government of the United States, the SEC thinks it’s the current value of the money, not just what they put in 30 years ago.” (Tr. 53.) Sheehan contested this position, saying “I don’t know if I agree with that. I think it’s only what they put in. If in fact it was never invested, if in fact there’s no profits, no transaction, how did the fund grow? Where does it come from?” (Tr. 53.) Judge Raggi responded “That the injury from the fraud, is that if the individuals had known it wasn’t going to be invested, they would have put it somewhere else and hoped to profit from it.” (Tr. 53.) Sheehan’s response was that this is a general creditor claim. (Tr. 53.) The answer put him in the contradictory position of arguing on the one hand that the broker would not owe the victims, and would have no obligation to pay them, the fake profits, but that there is a claim for fake profits that should be leveled against the general estate.

Sheehan then undertook a more elaborate explanation of his position. He said the Trustee is trying “to recover the monies that belong in the [customer property] fund” because it had been “other people’s money.” (Tr. 53.) For example, from Picower they got “$5 billion . . . that wasn’t profits . . . . Mr. Picower had “$5 billion of other customers’ money, and he gave it back.” (Tr. 54.) Once the Trustee gets back about $20 billion and pays it out, everyone will have received their principal back and all will be on an “equal footing.” (Tr. 54.)

The Trustee, he said, has instituted suits to “recover not just the $20 billion but the damages” also. (Tr. 55.) The hope is that there will then be a “general creditor fund” and “then, but only then” “all of these appellants here will have the opportunity . . . to participate.” This, said Sheehan, “is the only reasonable construction of the statute, it’s the only reasonable exercise of discretion.” (Tr. 55.) “Anything short of that,” he said, “leads to the absurd result” Judge Raggi had alluded to. (Tr. 56.)

In the foregoing colloquy Sheehan took the position that the only reasonable position is to use CICO because it would be absurd for people who have already received back their principal or more to participate in customer property when there are those who have not yet gotten back what they put in. This position has in effect been extensively discussed and refuted previously in connection with what Congress intended, small investors’ necessities for living, and the fact that under CICO most of the money will go to the very rich. To me, as indicated before, it is Sheehan’s position that is ridiculous because ignores all the dynamics of life and economics except one -- how much cash did a person put in and take out -- and it thereby destroys Congressional intent.

Sheehan also argued -- amazingly, I think -- that Madoff himself would have owed defrauded investors nothing except repayment of their cash. But Sheehan contradicted himself by saying there would be a fraud claim against Madoff for the fake profits shown on the investor’s statement. At least one judge seemed to be incredulous at Sheehan’s claim that Madoff would have been obligated to victims only for their cash-in, and Sheehan appeared to me to backpedal defacto by admitting that victims would have a fraud claim against the broker for lost profits damages, a claim he says for some reason that they can recover here only out of the general estate, not customer property.

As well Sheehan took the position that all the trustee was seeking from people whom he has or will sue was the amount they received in other people’s money, not damages for failing to put a stop to a fraud they should have realized was occurring or which they should have been aware was possible and should have investigated. This strikes me -- and I think one or two others with whom I regularly discuss matters -- as possibly a bizarre false claim and, if a true claim, as very questionable. Though the Trustee has said he has sued some malefactors only for what they received in other people’s money, has he not also sued various huge institutions for damages for being complicit in a fraud because they ignored red flags? A lot of us think he has. This, if true, would make Sheehan’s explanation to the Court quite misleading. If we are wrong, and the Trustee hasn’t sued culpable institutions for damages, then shouldn’t he do so?

At this point Judge Leval asked Sheehan what SIPC would do in a hypothetical situation in which a broker gambled away some investors’ money, so it is no longer there, but other people’s money was legitimately invested and there are securities and cash in their accounts. Sheehan said the people with cash and securities in their accounts would get this back, and the others would get a SIPC advance. (TR. 57-58.) But in Madoff the whole thing is a Ponzi scheme, and people who did not get their principal out are getting advances and will receive customer property. They are getting “priority” but this is “not going to work” if money is also given to people who did withdraw more than their principal. (Tr. 59.) Why this would not work when the Trustee has recovered ten billion dollars already and may recover tens or scores of billions more was not explained. Nor was this question asked. To me Sheehan’s claim of nonavailability in the Madoff case sounds dubious.

Judge Leval then asked, “How do you reconcile it with the obligation of the debtor . . . if the debtor owes each customer what is on their statement, what the SIPA statute speaks of is the obligation of the debtor, that the Trustee shall promptly discharge all the obligations of the debtor.” (Tr. 59.) Sheehan’s reply was that this is “why there is the [books and records provision]. You can’t just use the statement.” (Tr. 59.) To which Judge Leval said, “But you don’t dispute that those statements represent the obligation of the debtor?” (Tr. 60.) Sheehan replied that “No, I do dispute that. I think they are one piece of evidence that evidences the obligation of the debtor. That’s it, one piece, one of many, all of which we have to look at. We have to look at the entire books and records. This Trustee is mandated by this statute to do a complete and thorough investigation. That’s what he’s done. And that complete and thorough investigation yielded the truth that what we have here is no trades, no profits.” (Tr. 60.)

Judge Jacobs then expressed doubt about Sheehan’s position, saying “I’m not sure I understand how the statement doesn’t represent the obligation of the debtor assuming, under the facts that we have here, that people were permitted to rely upon this and a defrauder undertook to pay them that and in reliance they left their money in his hands.” (Tr. 60.) Sheehan said, “I didn’t say it didn’t represent it. I said standing alone it’s not determinative. You cannot just take, as Your Honor said earlier -- ” (Tr. 60-61.) Judge Jacobs retorted that, “Standing alone it would work fine at a fraud trial, it seems to me.” (Tr. 61.) Sheehan admitted this. (Id.)

Judge Jacobs then said “the debtor would be Madoff Securities and at a fraud trial they would be a defendant and they would owe that.” (Tr. 61.) Sheehan tried to wriggle out of this by saying that at a fraud trial the victims would nonetheless end up with nothing because Madoff had no money left. Judge Raggi wouldn’t let him get away with this dodge, saying “No, no, but that’s a separate question.” (Tr. 61.)

Judge Raggi continued her thought by saying that Sheehan’s answer “avoids or doesn’t address our concern, that you are asking us to conclude that the obligation for SIPA purposes is different from the debtor’s obligation. And I speak only for myself, I’m having some trouble understanding why you think that is a different obligation.” (Tr. 61 (emphasis added).) Sheehan’s answer was that the statute supposedly “says” (Tr. 62) -- in fact it certainly does not “say” anything like what he claimed it supposedly “says” -- that “once you have a SIPA proceeding, these rules go by the board, and the reason is because the SIPA rules dominate that. They have to. It’s a salutary statute designed to provide certain relief under certain dire circumstances. It isn’t business as usual, it isn’t dealing with your broker on a daily basis. This is a catastrophe and it’s only in that catastrophe that the Trustee can operate the way he does, by not being bound by simply the statement itself, but by what the statute suggests, you look beyond that to the books and the records.” (Tr. 62.)

This colloquy would seem to be revelatory and important, hopefully for our side. The judges appeared concerned with how to reconcile the statutory requirement that SIPC pay the obligations of the debtor -- which they seems to agree was the amount shown on the investor’s final statement and would be owed the investor in a fraud suit -- with the Trustee’s claim that cash-in was all that was owed. After first appearing to deny and dispute that what the statement says is owed is the obligation recoverable in a fraud suit, and apparently somehow claiming the support of the books and records provision in this connection, the books and records of which the statement is only one part -- Sheehan ultimately had to admit that the statement is the measure of the damages in a fraud trial. (Tr. 61.) At that point, confronted by Judge Raggi’s statement that he was asking the judges to say “that the obligation for SIPA purposes is different from the debtor’s obligation,” Sheehan was forced to admit the truth: that the Trustee’s (wholly invented) position is that the normal rules go by the board in a SIPA case. There the SIPA rules (as invented by SIPA and the Trustee) must predominate so relief can be provided in dire, unusual and catastrophic circumstances. Or, put differently, if the Trustee -- or any Trustee in any case -- decides a situation is dire, and that there is a catastrophe, the Trustee can do what he wants. This is the antithesis of being required to do what Congress intended. It is license, not law.

What Sheehan claimed the statute supposedly “says” (but in reality doesn’t say) puts SIPA and the Trustee in a position directly opposite of Congress’ intent to protect small investors, build confidence, insure prompt payment and so forth, all as discussed here previously. Unfortunately, this did not come up when Sheehan was arguing, nor was it presented at any point in the argument. This is sad. I shall say more about it later in this essay. But for the moment, let me merely reiterate that the Trustee’s claim is a claim of unfettered license (as some of us have thought for nearly two years).

Wednesday, March 30, 2011

Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011. Part 2

March 30, 2011

Discursive Comments On The Oral Argument In The Court of Appeals
In The Madoff Case On March 3, 2011.


As readers know, I had originally intended to do this essay in two parts. But it is proving so long and difficult to do that I shall divide it into more parts, and shall post them as I do them. This Part 2 will deal with the oral argument of the first opponent to argue, the General Counsel of SIPC, Josephine Wang.

Beginning by saying Madoff’s statements are fictitious, Wang was immediately interrupted by Judge Raggi’s comment that if victims had sued Madoff, he would have had to pay them what the statements showed they were owed. (Tr. 36.) Wang admitted this would have been true if Madoff had remained in business. The judge then asked why it should be different in regard to what SIPC has to pay. Wang said it is because SIPC is bound by a federal statute and that statute does not authorize a trustee to benefit certain customers at the expense of other customers; because the prices on the statements were back-dated; and because the profits or so-called profits, were fictitious. (Tr. 37.)

Judge Leval then asked “How is it at the expense of other customers when you’re talking about . . . the funds coming from SIPC that measure for each customer independently how much that customer is entitled to?” (Id.) Wang’s answer was that we’re not talking just about the money coming from the SIPC fund, but about “customers who are all eligible to share pro rata in a fund of customer property.” (Id.) Some withdrew their principal plus fake profits, which were other people’s money, and others did not withdraw their principal, which was used to pay other investors.

Judge Raggi then wanted to know “where is this customer property coming from.” (Tr. 38.) Wang said it’s “all [the] property that was held . . . for customers,” and includes what the Trustee initially found in the possession of Madoff and what he recovers by actions against third parties. (Tr. 38.) It is, said Wang, “shared pro rata among customers.” (Id.) This means, she said in a confused way, that people who did not yet recover their principal will be sharing with people who already recovered their principal and will be receiving fake profits, which is unfair. (Tr. 38-39.)

Judge Leval said that this “part is very clear. But it’s the part that relates to the money coming from SIPC” that needs clarification. (Tr. 39.) To which Wang responded that SIPC would have to advance far more because the cash-in is 17 to 20 billion dollars whereas the final statements showed approximately 64 billion dollars.

Judge Jacobs then expressed confusion, saying he thought Wang’s argument would be that, to the extent of its advances, SIPC would be subrogated to a claim against the estate. (Tr. 39.) Wang said SIPC is subrogated to the claim of any customer who is fully satisfied out of a SIPC advance, in order to avoid double recovery by the customer. (Tr. 40.) To which Jacobs replied that this suggests that SIPC advances can have an impact on other investors simply by virtue of the claims SIPC would have by subrogation. (Id.) Wang then said she wasn’t following Jacobs.

At that point they began going through the matter again. In the midst of it Raggi said that all this means that if a customer receives an advance from the SIPC fund, this will not affect the amount of an advance that is received from the fund by another customer. (Tr. 40-41.) Wang admitted this is true, but said that the fund of customer property is affected because of SIPC’s right of subrogation. (Tr. 41.) Leval responded by saying that it therefore is the case that if SIPC pays an advance to one customer because of his fictitious profits, this will reduce monies available to other customers from customer property because SIPC itself will have a claim against the estate via subrogation. (Tr. 42.) Wang said “That’s correct.” (Id.)

What, then, was the meaning of this colloquy? Well, the judges wanted to know why SIPC’s obligation shouldn’t be the same as Madoff’s and, in this connection, why using that obligation, expressed by the final statement, would cause some victims to benefit at the expense of others. Wang’s answer, first, was that the statute doesn’t authorize having some victims benefit at the expense of others and this is what would happen if the final statement is used, because people who took out more than they put into a Ponzi scheme would be sharing “pro rata” in a fund of customer property, would be sharing in customer property with people who have not yet received all their principal back. (Tr. 37.) Wang’s view of what the statute authorizes seems to me just another verbal formulization of the (wholly invented) position of the Trustee and SIPC, discussed and for many reasons rejected in Part 1, that fairness allegedly requires that all be paid in proportion -- that all be paid “pro rata,” Wang said.

Interestingly, the statute does not say that all must be paid “pro rata.” It says victims must be paid “ratably.” SIPC, the Trustee, and everyone else, including me, always seems to have assumed that paying victims “ratably” means paying them “pro rata.” The words “pro rata” and “ratably” sound and look as if they should mean the same thing. But “ratably” is not necessarily the same thing as “pro rata.” “Pro rata” means proportionally. “Ratably,” I gather from the dictionary, can mean proportionally but does not necessarily mean it. Instead, it can mean only that something is “capable of being rated, appraised or estimated,” as one of the dictionaries puts it.

Either meaning of “ratable” would seem to fit the statute, and I do not know which meaning Congress intended. In the legislative history, Congress paid infinitely more attention to the SIPC fund, which was a major subject of the statute, than to customer property, which received little attention. Yet, if Congress had intended that people necessarily should be paid proportionally, one wonders why it used the ambiguous word “ratably” instead of the plain, unambiguous words “pro rata” or “proportionally.” One also wonders whether there is anything in bankruptcy law which might shed light on this.

If one takes the position that the word “ratably” means, in the statute, only that a victim’s share can be appraised or estimated, then the position of SIPC and the Trustee largely collapses in favor of good judgment and sound policy, I would think. The door would be open for the Court to give differing orders of payment to victims who have different economic positions, even though the final statement is used as the measure of net equity and net equity establishes one’s ultimate share of customer property as well as one’s right to an advance from SIPC. One possibility, for example, would be that under the FSM victims would get advances from SIPC, but those who took out more than they put in would not get money from customer property until others who did not take out their principal received it back from customer property. This kind of an arrangement could be capable of estimation and appraisal in advance, and would thus fit a meaning of “ratably.” It would also enable the Court to provide differing treatments under the SIPC fund than under customer property, as a lot of people think it seems to want to do. The idea is also one that has in effect been put forth by the Trustee, though he would use it in connection with the so-called general estate. And the idea also, of course, whether founded on statutory definitions or for other reasons, could be part of the basis for an overall resolution of the Madoff problem.

Wang also in a sense let the cat out of the bag during the colloquy, in answer to a question from Judge Leval about the SIPC fund. She conceded that if the FSM were used, “SIPC would of course have to advance that much more.” (Tr. 39.) I literally know of no person who is not part of the Trustee’s or SIPC’s entourage who does not think that SIPC’s desire to pay out less from its fund, lest it have to raise billions of dollars more very quickly or face bankruptcy, was not the reason that CICO was used here in the face of nearly uniform use of the FSM in nearly 320 prior SIPC cases. Discovery on the question was vigorously resisted by SIPC and the Trustee, was refused by Lifland (who seems to do pretty much anything our opponents want), and was not discussed by the Second Circuit though the need for discovery on this matter lest Congressional intent be flouted with impunity was raised in briefs.

When Wang said that the impact of the FSM meant SIPC would have to pay out more from its fund, Judge Jacobs was surprised because he thought Wang would have said the impact was that, if the FSM were used, SIPC would pay more from its fund, would therefore have more claims against customer property by virtue of subrogation, and this would lessen the amount available to other victims from customer property. Judge Leval, subsequently in the colloquy, made this point quite precisely, saying that “Then to the extent that SIPC pays one customer based on that customer’s inflated long-term position that grew much, much larger than the customer’s initial investment, notwithstanding withdrawals, SIPC’s payment of the full $500,000 to that customer will reduce another customer’s entitlement because SIPC then becomes a claimant against the estate.” (Tr. 41-42.) Wang’s answer to Leval was “That’s correct, Your Honor.” (Tr. 42.)

Wang’s answer to Judge Leval was seriously misleading, wholly aside from the fact that nothing forces SIPC to exercise any rights of subrogation it may have. Helen Chaitman has submitted a letter to the Court pointing out the misleading nature of Wang’s reply, our opponents have opposed her submission, and at this point there is no telling whether the Court will learn the truth either on its own or through submissions.

SIPC’s right of subrogation will not, under the statute, lessen the amount of customer property available for payment to victims. For the statutory order of allocating customer property -- after ignoring the first section, which is irrelevant here -- is that payment is allocated, second, to customers of the broker -- i.e., Madoff’s victims -- and third to SIPC as subrogee for customer claims that it paid. In other words, under the statute SIPC will get nothing from customer property until all the victims are fully paid off. Therefore SIPC’s payments from the SIPC fund to victims will not reduce any victim’s payments from customer property, because SIPC does not recover from customer property, via subrogation, until after all the claims of victims are paid off. The judges were trying to find out whether use of the FSM for SIPC advances will, due to SIPC’s subrogation rights, lessen the amount available for payments to victims from customer property. Wang told them the answer is yes. The answer in truth is no.

Of course, SIPC appears to have been doing something of dubious legality, appears to have been pulling a fast one, that would make the answer yes instead of no. It has been taking assignments from victims to whom it gives advances from the SIPC fund. While our side seems to have been unable to find out (or at least I haven’t found out), it appears that the assignments may put SIPC into the second statutory category of victims of the broker, i.e., by the assignments from victims SIPC recovers as part of the second category, which gives payments to victims, rather than recovering as part of the third category, in which SIPC gets money only after the victims are paid in full. If SIPC is taking assignments which do this, then its rights under the assignments, rights which arise because it advanced monies from the SIPC fund and took assignments of the victims’ rights, will lessen the monies available to other victims. But for SIPC to do this is probably illegal, is probably outrageously illegal. For it does lessen the amount of customer property (i.e., money) available to victims, whereas Congress’ intent was to help and provide money for victims, not to help and provide money for SIPC. SIPC, by assignments, is grabbing for itself money which Congress wanted victims to receive.

The next colloquy started with one of the bench’s semi bizarre, difficult mathematical hypotheticals, this one put by Judge Jacobs. It involved theft, account statements, actual market value, etc., and was not understood by Wang -- and to read it is to sympathize with her confusion. Jacobs’ question was what would SIPC say the customer should get in his hypothetical. Wang’s ultimate answer was that he gets “whatever his account statement shows that reflects market reality.” (Tr. 46.)

Wang further reiterated, in answer to a question from Judge Raggi, that SIPC’s obligation is to insure that the “statute is correctly enforced” -- by use of ideas that have been invented by SIPC and the Trustee, in my opinion. In this regard, she said it would have been error to use the account statements here because, I gather, they do not reflect reality as reflected in the books and records, which show that no trades occurred and therefore precludes the use of the fake FSM as the measure of net equity. (Tr. 48-51.)

According to Wang, in a statement widely belittled by victims, SIPC’s one and only concern is correct enforcement of the statute, not the extent of SIPC’s liability under the FSM, which “is probably the last of our concerns.” (Tr. 47.) Right, and we were all born yesterday. No doubt the reason that SIPC and the Trustee vigorously resisted discovery into the reasons they chose CICO is that SIPC’s potential liability under the FSM was the last of its concerns. Sure. Tell me more.

Unfortunately, there was no mention in the oral argument of the need for discovery, which would blow the lid off SIPC’s and the Trustee’s phony claim that concern for SIPC’s finances had nothing to do with choosing to use CICO.

Thursday, March 24, 2011

Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011. Part 1

March 24, 2011

Discursive Comments On The Oral Argument In The Court of Appeals
In The Madoff Case On March 3, 2011.


I was in Florida on March 3rd, when the oral argument was held in the Second Circuit, in the Madoff case, on the question of how to determine net equity. So I did not see the argument. I read the transcript on an IPod twice, but reading a complicated document on an IPod is, to me at least, next door to not reading it at all. After getting the hard copy of the transcript, I have now read it three times. So I didn’t write anything about the argument until after getting the transcript, reading it in hard copy, and marking it up.

The oral argument was, I think, the most complex one it has ever been my misfortune to have to read, but I feel I now have a reasonable, if imperfect, grasp of most of it. So I shall now set forth some views.

I should say preliminarily that, based on the transcript, it is hard to agree with those in attendance who felt the judges did not know the case. On the other hand, it does seem that the argument, for whatever reasons, generally focused on a relatively small number of points in comparison to the total picture, and that several points that should have been prominent received little or no attention (as I shall discuss below).

I also wish to say preliminarily that I hope this essay on what transpired is as inoffensive as possible. Unless you have done it yourself, or at least have worked closely on an oral argument with the advocate, it is hard to understand just how stressful an appellate oral argument is. Even a trial court oral argument is no picnic, and oral arguments in federal courts of appeal or the Supreme Court are very difficult. For they often, even usually, consist, as did the one on March 3rd, of a continuous barrage of questions designed to trip you up, questions often delivered in the hostile tone for which the legal profession is infamous. The courts, and professors, call this testing the limits of your argument to see how far it can be carried and what results it may lead to in a variety of differing circumstances. The advocate is confronted with question after question, some with ramifications that he or she may not have considered, and with the need to find ways to bring out the points he/she wishes to make in answer to an unending stream of questions, often hostile ones. So it is not easy, and there is a reason why great appellate advocates tend to be unusually smart men and women. And, of course, extensive preparation, including moot courts -- at which persons unconnected with the case should play a role and at which advocates should practice getting out their points in answer to questions, often hostile sounding questions, which do not obviously seem to call for the points the advocate wishes to make -- are essential preparation if there is to be excellent performance. (In case anyone is wondering, I emphatically do not think I am nor ever was a great or even a good oral advocate -- I have the wrong personality for it in a number of ways -- and in my old age I also reject the inhuman idea of facing a battery of hostile siege guns firing at me in rapid succession from the bench. That is for younger people (I am 71) who want to make a mark. But I do know a lot about appellate oral arguments because I spent a part of my life helping to prepare people for oral arguments in the Supreme Court and setting up moot courts for this purpose. (For reasons I will not get into here, I recently breached my “never again engage in oral argument” principle by appearing before Lifland -- this was my first oral argument in I don’t know how many years, though it was a lower court argument, not an appellate one, and after appearing before Lifland, I once again recognized the wisdom of the principle of “never again engage in oral argument,” lest one be savaged from the bench without any fair opportunity to reply.)

So, as said, appellate oral arguments are hard to do, and the oral argument here was, I think, particularly difficult to do. And I do wish to say that I think Helen Chaitman did an excellent job, a very good job.

Let me also say that this essay has been divided into two parts. There are several reasons. One is that it has taken a very long time to write, and will take me considerable additional time to finish, has proven to be godawful long in terms of numbers of words, and I have not been intelligent or perceptive enough to figure out in advance how to reduce it to a shorter string of essences, so to speak, without using organizational techniques that would themselves require extensive time to employ. Also, I now have to largely turn my attention to some other important, non Madoff matters for four or five days. So, in order to begin putting the essay’s views into the public forum for Madoff victims who might wish to know those views, I have divided the essay into two parts, am posting the first part now, and will finish and post the second part, I hope, in about ten days or two weeks from now. The first part deals with some general matters plus the oral arguments of our first two advocates. The second part will deal with the arguments of the three advocates who opposed us, plus the rebuttal argument of Helen Chaitman.

* * * * *

Let me cover some of the pre-oral argument maneuvering, insofar as I know it, before turning to the argument itself. (This essay, as you can see, is discursive rather than the tightly written, all-excrescences-removed work that a good brief should be. Once, about a year ago, a lawyer on our side called me on the phone to lambaste me for opposing a direct appeal to the Second Circuit. This person told me I was a lousy lawyer, incompetent, and merely an academic because I favor a discursive style when writing essays. The person was so rude that I have not spoken to him or her since, and don’t intend to in the future. And let us hope that we win in the Second Circuit, thus proving wrong the views I held about a direct appeal.) My knowledge of the pre-argument maneuvering is necessarily limited because I am not part of the relatively small group of New York City lawyers who seem to be in charge. Indeed, not being a part of that group -- two of whom, including the one who later called to tell me I am an incompetent, made clear on an early phone call that my presence was not desired -- I know little in advance about anything. Right now, for example, some among the NYC group are dealing with the Trustee in regard to which issues should be briefed as part of the so-called “omnibus briefing” of important issues this Spring, and I for one, and I know that some others too, are completely in the dark as to what is going on.

With regard to the pre-argument maneuvering about which my knowledge is limited, I have heard that the NYC lawyers exchanged memos, had conference calls, and had one or two moot courts, though I don’t really know how the moot courts were handled except that I’ve heard that in the last one all the non-arguing lawyers were collectively the judges (which, if true, is, in my experience, not the way to hold a moot court). During the period February 25-March 1, I did, however, send the lawyers’ group, in part at the invitation of one of its members, three memoranda of possible questions from the bench and possible answers, and one memo stressing the need for a short, persuasive opening argument of two or three minutes that would quickly tell the Court what our main points are before the Court got into the barrage of questions which many of you saw in person or read on the transcript. I included an example of such an opening argument. Though there is of course no guarantee, if you tell a Court at the beginning of your argument that you will begin with a brief listing of your points, the judges will sometimes let you do this because they know you will be brief (they will hold you to brevity), and in this way your major ideas will be set before the Court before the guns start firing at you. Such a short introductory opening argument briefly stating our major points was not attempted here.

Nonetheless, to my surprise, one of the group of NYC lawyers who are in charge told Dave Bernfeld that material I sent had been helpful. That was nice of him. But I do not really think my memos did much good or proved terribly helpful. The transcript shows that a large number of the points I stressed -- very important points, I think, which could be made in answer to questions if the argument proved a barrage, as it did -- received little or no mention. The points included that there were extensive statements of legislative intent in our favor, and the specific items of legislative intent that the statements established; that some of the leading legislators of the day -- not back benchers -- delivered these statements; that CICO has almost never been used before in nearly 320 SIPC cases; that the use of CICO utterly destroys Congress’ vigorously and repeatedly stated intent that victims receive money or securities promptly from SIPC because CICO necessitates years-long forensic accounting to establish whether a customer can receive anything from SIPC; that there are well established financial techniques which limit the extent to which a Bernie Madoff can just make things up; that there should be discovery into why Picard and SIPC chose to use CICO; and that while SIPC and the Trustee claim they are being fair, the truth, as SIPC’s letters to Congress reveal, is that almost all the money Picard is clawing back is going to the fabulously wealthy (at least in the short run) while the now newly impoverished will get little or nothing.

I should also say that the very first answer given to the Court by our advocates surprised me greatly. At the very beginning of the argument Judge Jacobs asked whether our three successive advocates were “going to divvy up issues in any way?” (Tr. 3.) The answer was “We’re not really, Your Honor.” (Tr. 3.) I have worked with advocates on lots of appellate cases in which more than one lawyer argued for my side: But I never have seen an instance where there was more than one lawyer arguing on a side and the lawyers did not divide up the argument by issues. The reasons for such division are obvious. With such division a lawyer can focus deeply on the issues he/she is responsible for, there will be less duplication of argument and therefore a larger number of important points can be covered, etc. Yet our side did not divide up the issues. (Perhaps I should add that an experienced appellate lawyer on our faculty was thunderstruck when told that the argument was not divided by issues.)

How did this occur? Well, I really don’t know but believe I can likely make a good guess. With regard to rebuttal, you can’t divide up the issues in advance because you cannot know in advance what points will be crying out for rebuttal when your rebutter rises to rebut. To select Helen Chaitman for rebuttal was in my view a good idea because, I would bet, she probably knows more about the case than anyone else. She would likely be best able of anyone to think of the best rebuttal points on many topics. And, proving the point, she did a good job on rebuttal.

But aside from rebuttal, where you can’t divide up the issues in advance because you don’t know what the rebuttal will have to focus on, why was there no division of issues to ensure deeper focus on crucial points and presentation of a larger number of points? My guess, which unhappily may sound harsh but for which I have a basis that I will partly keep to myself, is this: each of several lawyers thought they should do the oral argument, and would be best at it. This had an effect on cooperation -- I know, for example, that who would be the oral advocates was in contention, apparently bitter contention, until nearly the very end -- and at least possibly was a reason why the lawyers were perhaps unable to, and in any event did not, split up the argument by issues.

Ron Stein of NIAP, Dave Bernfeld and I discussed this question of who would argue for a couple of weeks, although Ron and I were wholly out of the loop and David was only somewhat knowledgeable about what was occurring. The reasons for our discussions were that we could sense what might occur and had qualms about the appellate experience and appellate expertise of the lawyers. Given my own prior experience with numerous expert Supreme Court advocates and given what is sometimes written on this subject in the Times or the National Law Journal, we knew that there are major league Supreme Court specialists who in the last ten to twenty years or so have headed, or who are part of, special appellate sections of major law firms, sections of law firms that specialize in both Supreme Court work and federal court of appeals work. The idea of trying to hire such a lawyer for the appeal (and then for later Supreme Court work that will arise) seemed a good one. But there wasn’t enough time left to do it and we believed the NYC group of lawyers were likely to object strongly to the very idea of being displaced on appeal by an appellate specialist, even one of (deserved) national reputation.

The idea we were discussing, however, should be resurrected. There are at least three reasons. First, if we lose in the Second Circuit, we might wish to seek a rehearing en banc, i.e., a rehearing from the entire Court, not just the three judges who heard the case on March 3rd. (The other side might do the same if it loses.) In seeking or opposing such a rehearing, and in orally arguing if rehearing is granted, it would be wise to have an appellate specialist of the type I’m discussing.

Second, regardless of which side wins in the Second Circuit, the loser will ask the Supreme Court to hear the case and the other side will oppose this. No one can doubt the wisdom of having our side represented in such proceedings by a high Court specialist who is expert in gaining and opposing Supreme Court review and, if a Supreme Court hearing is granted, in arguing cases before the high Court. This is only the more true when one considers that in Supreme Court proceedings the SEC may well be represented by, and likely will at minimum receive the advice of, the Solicitor General’s office, the U.S. Government’s highly expert office of Supreme Court lawyers. (Most, and maybe even close to all, of the Supreme Court experts in private practice spent time in the SG’s office.)

Finally, the entire problem is going to repeat itself -- beyond question. As said, there is soon going to be omnibus briefing before Lifland on vital issues. While I am not privy to the details of what the Trustee and the group in charge are determining those issues to be and what the schedule of briefing will be, on January 10 I did receive a preliminary memo about this and do believe the issues will include such crucial ones as whether the CICO calculation of net equity should incorporate the time value of money. My personal opinion is that the omnibus briefing should include certain other issues that I doubt will be included, such as whether victims should receive credit, in their net equity calculations under CICO, for the approximately half billion dollars (I believe it is) that Madoff admittedly earned on monies from the 703 Account that were invested every single night of the scam in short term instruments, Treasuries, money market funds, etc., and whether the Trustee can lawfully demand that victims repay him tax refunds they receive from the U.S. Treasury (an expert tells me that there is precedent against this, and I shall read the cases he cites as soon as possible). In any event, the omnibus issues will be important ones, and the losing side will appeal them -- perhaps to the district court (the trial court) and then to the Second Circuit, or perhaps directly to the Circuit -- and the losing side in the Circuit will seek Supreme Court review. The situation which existed with regard to the appeal on net equity will almost certainly affect us again with regard to the omnibus argument on appeal unless our side hires appellate experts of the kind discussed here. Tomorrow would not be too soon, so that whoever is hired will have ample time to acquaint him/her/their selves with the omnibus questions. Not to mention the need to acquaint him/her/their selves with the net equity part of the case for purposes of a possible en banc rehearing in the Second Circuit and requested Supreme Court review.

Writing discursively, before moving on let me briefly discuss the relationship to David Becker of a point adverted to above: the time value of money. Much probably remains to be learned about the Becker situation, but one thing I have not yet heard is what I consider the real conflict of interest from the standpoint of victims.

As far as we now publicly know, some of the victims’ lawyers -- including ones from large law firms -- wrote a memo asking the SEC to require use of the final statement method rather than CICO. The SEC could have done this because, as was said by the Second Circuit in the first New Times case, quoting the Supreme Court, Congress gave the SEC “plenary” authority to supervise SIPC, even though, as the Circuit also recognized, the SEC has failed to exercise the authority Congress gave it. (What else is new?) The memo the lawyers wrote to the SEC was very good -- I read it at the time; it was an apt forerunner of later briefs submitted to Lifland by the same lawyers, which also were very good. The lawyers then, I believe, met with Becker (as others did too). When they met with him, they were meeting with someone who would have had to be chary about requiring SIPC to use the FSM even had he agreed, honestly and on the merits, that use of the FSM was the only legitimate course. For, were he to push the FSM upon SIPC, he could have been accused of doing so to feather his own nest by possibly eliminating clawbacks against him and his family. (If the FSM is used, then the money he took out for his mother’s estate might well be considered real profits and not subject to clawbacks (though Picard later determined to deny this, and to say that monies taken out in excess of monies put in are “clawbackable” even if the FSM is used. This will be an issue if the Second Circuit rules in favor of using the FSM.)) Because he could rightly be accused of feathering his own nest if he forced the FSM upon Picard, Becker could not do so even if he had completely agreed that the FSM, not CICO, was proper. So, unbeknownst to them, the lawyers and others from our side who met with Becker were meeting with someone who was ethically disabled from implementing their view even if he thoroughly agreed with it. From our standpoint, that is where the appearance of conflict lies.

As I’ve said to a few, were I one of the persons who met with Becker, and had I known he would benefit from the FSM, I would have been horrified and would have demanded that he recuse himself immediately. For, as said, he could not propound for our side without opening himself to charges of misconduct, and nobody wants to be trying to persuade an official who will be subject to ethical misconduct charges if he rules your way. Those who say that the conflict was no big deal because Becker decided against his own interests have not thought of or have failed to grasp the critical point discussed here. Yet would they want to be judged by a judge who cannot decide in their favor, no matter how right he may think they are, lest he be accused of serious ethical misconduct?

Of course, though the SEC claims it agreed with SIPC because it favors the use of CICO, it is also true that the SEC, apparently because of Becker, favors including the time value of money in some way when calculating net equity. Depending on how it’s calculated, the time value of money could amount to a considerable sum (e.g., if New York’s 9 percent interest rate is used). To this extent it could be said that Becker did act in his own interest (and other victims’ interest). In my mind this does not change the situation regarding the conflict, however. Lawyers and victims meeting with Becker were not seeking, and as far as I know had never at the time considered, using CICO augmented by the time value of money. They were seeking use of the FSM. Not to mention that, if Becker persuaded the SEC to use the time value of money, he was acting to feather his own nest, and he was engaging in an actual conflict, which cannot be good for the victims. And this is not even to mention that it might have been easier to persuade SEC staffers to include the time value of money in CICO than to persuade them to overturn an apparently already made decision in favor of CICO and substitute the FSM. For the time value of money is nothing but interest by a fancy name, and everybody understands the common garden variety appropriateness of paying interest. (Indeed, Picard is demanding interest from victims.)

So, to repeat, the real conflict from the standpoint of the victims is that Becker could not require the use of the FSM even if he had thoroughly agreed on the merits that it should be used, because he would have been accused of feathering his own nest by possibly evading clawbacks.

* * * * *

I have struggled unsuccessfully with how to present most of the details of the oral argument. The problem is that, prior to rebuttal, the argument seems to often consist of complex statutory and case exegeses, and mathematical examples that sometimes were difficult, all following each other in quick succession or strings, with the logical succession of ideas not always being apparent to a crystalline degree, and with all being designed to test or explain attorneys’ positions on the pertinent question of the case; whether an innocent victim’s net equity must be measured by his final account statement (under the section of the statute which defines net equity as being (in my own plain language) the obligation owed to the customer by the bankrupt broker, or whether the Trustee has discretion, because of the so-called books and records provision of SIPA, to look at the bankruptcy broker’s books and records to determine that the account statements are all wrong, and accordingly has discretion to determine that the statements therefore should not be the measure of net equity because they are fake (though the customer had no way to know this). Both the net equity provision and the books and records provision, it will be useful to add, speak in relevant part of securities. In plain language, net equity is defined in relevant part as what the broker would have owed the customer if, on the date of bankruptcy, the broker would have liquidated the “securities positions” of the customer (minus certain other amounts of money), while the books and records provision says the Trustee “shall promptly discharge” “all obligations” of the broker to “a customer relating to, or net equity claims based upon, securities or cash . . . insofar as such obligations are ascertainable from the books and records of the [broker] or are otherwise established to the satisfaction of the Trustee.”

Having sought unsuccessfully to think of a feasible better way to present the oral arguments on the ever present question, to present the to-ings and fro-ings on it, I shall, defeatedly, present the arguments “chronologically,” so to speak, and therefore shall present, in a dull and pedestrian manner, what I think are the more important aspects of the oral hearing. There are a lot of them.

Near the very beginning, our first advocate said that the way you calculate net equity is a matter of “simple statutory application.” (Tr. 3.) You “calculate[e] what would have been owed by the broker had the customers’ securities positions been liquidated on the “[bankruptcy] date.” To this Judge Jacobs immediately made a comment about which I have been unsuccessfully warning colleagues for a long time, and about which I wrote the NYC lawyers just prior to the argument. Jacobs commented that “Of course if the positions had actually been liquidated on the filing date, there would have been nothing there,” which is a way of saying no victim would have been owed anything. Very creditably, our lawyer came up with an excellent answer, telling Jacobs that the absence of securities is irrelevant because, if they are not there, the Trustee “is obligated to go into the market to try to purchase” them in accordance with the ownership of them shown in the customer’s statement. (Tr. 4.)

What our lawyer said was excellent, true, and shows that the absence of securities is irrelevant. But what was not said is that the legislative history specifically says, repeatedly, that securities which are missing or stolen -- which are not there -- must be bought and given to customers (something SIPC somehow gets away with never doing apparently, though its failure to do it is a serious, continuous violation of the statute).

The failure to insist that the legislative history says replacement securities must be obtained is symptomatic of a larger point. Early on most or all of the lawyers on our side in New York, and maybe even all the lawyers on our side except this ignorant writer, appear to have concluded that the language of the statute is dispositive in our favor. I have never understood this, precisely because of Jacobs’ comment: if you merely follow the abstract language of the statute and look at the actual “securities” or “securities positions,” there was, as Jacobs said, “nothing there.” So you must in actuality look at the abstract words of the statute in the light of the legislative intent and the overall Congressional purpose, or in light of the general meaning of those words in law, or both. If you do, an important answer to Jacobs’ comment, in addition to what our advocate said, was that you must use the final statement method to measure a customer’s net equity position because the legislative history shows that Congress intended investors to be protected and said so many times; that the statements they receive from brokers are usually the only way customers know what they have after introduction of the street-name-holding system in conjunction with the passage of SIPA, which was requested by Wall Street; that Congress wanted SIPC to pay investors promptly, but this is impossible under CICO due to the necessity of years-long forensic analysis to determine what each investor put in and what he or she has taken out, so that CICO necessarily destroys a main pillar of Congressional intent; that Congress wanted to build investors’ confidence in markets and protect investors’ reasonable expectations and this is impossible, nor will investors be protected, if investors cannot rely on the only information they get as to the nature of their holdings -- cannot rely on it, no less, because a Trustee can ignore the information they received whenever he thinks it is fair to do so. And, in addition to Congressional intent, it is widely accepted law that a broker owes a customer what is shown to be owed in the statements he sends the customer, and neither the Trustee nor SIPC has shown even a scintilla of evidence that Congress desired to change this.

If these points had been set forth, which would have taken between one and two minutes (or longer, of course, if the Court continuously interrupted), much of our case would have been stated in answer to the very first comment made by the Court. Such is among the kind of answers we used to coach inexperienced lawyers to give in the Supreme Court. It is the kind that I believe should have been extensively prepared in advance here. It also was the precise subject of the very first potential question and answer set forth in a memo emailed to the NYC lawyers on February 28th.

After the foregoing colloquy between them of our side’s view that the wording of the statute is all that matters, Judge Jacobs put to our attorney one of the bench’s complicated mathematical hypotheticals testing each side’s position. The point of this one was that, when our lawyers said the victim should get $20,000, the judge retorted that “that’s not what’s on the account statement. You just said the account statement is the beginning and the end of it.” (Tr. 5.) Our attorney then backed and filled a bit, finally saying that there are “certain circumstances where you could look behind account statements . . . . But that’s when the statutory framework doesn’t work, but the statutory framework works for Madoff victims’ (Tr. 6.) This, it seems to me, was a way of saying the statute requires the use of the FSM because it is good for us victims, but something else could be used if it is good for victims. Unfortunately, such one-sided application of a statute is generally not well thought of by lawyers and judges; they tend to say it is politics rather than law.

Yet there are reasons cognizable in law why the FSM should be used here. They are largely reasons discussed above. Congress wanted SIPA to protect and help investors, to insure innocent investors up to $500,000, to build investors confidence in markets and spur investing itself. As a statute intended for these purposes, SIPA’s fundamental reasons-for-being require use of the FSM here even if the final statement cannot be used in some hypothetical cases where, contrary to Congress’ intent, it would harm investors rather than help them, as in the hypothetical put forth by Judge Jacobs. This is the answer that I believe should have been given.

The next major questions were asked by Judge Raggi. She said that the lower Court’s decision was largely based not on statutory definitions, but rather on the assumption that net equity must be based on the totality of the circumstances. (Tr. 7.) She asked whether this assumption was flawed. Tr. 7.) Our lawyer’s very apt answer basically was that this assumption was flawed because the statute has no exceptions for Ponzi schemes or for the size, nature or effect of the scam. Thus, “The one issue is whether you can follow the definition of net equity, which this Trustee could have.” (Tr. 7-8.) To which Raggi replied that our lawyer was urging absurd results because people who had previously withdrawn money from Madoff would recover proportionally more than those who never had done so. And this, she indicated, would be an absurd result, whereas “the law abhors an absurd result.” (Tr. 8-9.) To which our lawyer responded, again quite aptly, that the result here is not absurd, and that what is absurd is that half of the Madoff victims of the worst SIPC liquidation in history didn’t receive SIPC protection. (Tr. 9.)

Now, I think, as said, that our advocate’s responses were good. Ponzi schemes had been known for about 45 years, since the mid ’20s, when SIPA was passed. Yet Congress made no exception in regard to how to treat them, and it is absurd that half of Madoff’s victims got no protection from the agency Congress set up to protect people who lost their securities. But there is so much more that could have been said. To wit: Congress intended not only to help investors, but, as the legislative history shows, to help small investors, who are suffering disproportionately here under CICO and associated clawbacks. Indeed, at the time SIPA was under consideration, President Nixon -- who was not famed for being on the side of the weak or poor -- said that he supported the bill because it helped the small investor. It therefore is the very opposite of absurd that small investors who had to take money out of Madoff to live could, because of that fact, end up recovering more (proportionately only) than wealthy hedge funds and banks which, speaking anthropomorphically, did not have to take money out to buy food, pay for their kids’ education, pay for houses, etc. Though I would not have said it to the judges lest they be offended, the idea that it is absurd for proportionally more to go to people who took out money to buy food and to live than to go to the fabulously wealthy, is a notion of absurdity that perhaps only lawyers and judges and bankers and SIPC Trustees could hold. But I would say to judges that it is an idea that is not followed, and distinctly does not resonate, in the real world. We have progressive taxation, don’t we, under which the wealthy pay more? We have welfare, don’t we, under which the poor get money and food, but the rich get nothing? The notion that equality and fairness demand that the newly poor, who could get up to a $500,000 advance under the FSM should instead get nothing because that advance plus their share of customer property would cause them to get proportionately more than a wealthy hedge fund which will get scores or millions of dollars strikes me as beyond the pale, strikes me as a bill of goods that the Trustee has sold to courts, media and others who have not given thought to this country’s long tradition symbolized by progressive taxation, welfare and the like.

We know, from answers in letters SIPC has sent to Congress, that the people who are recovering from the Trustee under CICO, at least in the short run, are mainly the fabulously rich -- hedge funds and banks who will be getting scores and hundreds of millions of dollars. As well, the Trustee has conceded that it was the investments of these huge entities, from about 1999 or 2000 onward which kept Madoff’s scam going, thereby increasing the losses and the amounts demanded by the Trustee from small people, who for years kept investing more money and kept taking out money to live, which they wouldn’t have been doing if the huge entities, which had the capacity to do but did not do the due diligence that would have caused the whistle to be blown on Madoff many years ago. Does fairness consist of giving the huge investors scores and hundreds of millions of dollars under CICO while not giving, say, one or two million dollars to people in their 70s or 80s who have been wiped out and have little or nothing to live on, and whose losses and assessed clawbacks would have been far smaller but for the incredible negligence of the big entities who will receive scores or hundreds of millions of dollars?

These are the answers which could have been added in response to the judicial claim of absurdity, a claim which was just a different method of expressing Picard’s and SIPC’s continuous and preposterous two year old refrain that they are doing what is fair. These answers could have been prepared in advance, and a memorandum emailed to the NYC lawyers on March 1 extensively discussed them.

After Judge Raggi’s comment about the law abhorring an absurd result, there was a colloquy which was hard to follow. It almost surely has to be one of the things that caused some attendees, some writers of web traffic, to think badly of the oral argument. The colloquy was somewhat unclear and reasonably long. Bear with me.

The colloquy started with Judge Raggi commenting that our lawyer seemed to be saying that there could be no exceptions when calculating net equity; no flexibility when calculating it. (Tr. 9.) I would guess the reason she said this was that our lawyer had said the statute provides no exceptions for the size, nature or effect of the scam. Yet, said Judge Raggi, “New Times did treat two different forms of investment differently,” so our argument might not be maintainable. (Tr. 9.) Our lawyer responded that victims here are in “the exact same situation as those New Times customers that received account statements,” apparently referring to New Times investors who bought securities existing in the real world. (Tr. 10.) The lawyer continued, now apparently referring to New Times customers who bought securities that did not exist in the real world, that the Trustee in New Times could not purchase the pertinent securities, and there “was [therefore] no legitimate expectation on behalf of customers that they actually own those securities,” whereas here the Trustee “could go out and buy IBM, Google, Microsoft,” etc. (Tr. 10.) To which Raggi said that a difference between Madoff and New Times is that here there were fraudulent trades done in hindsight, and this was different from the customer “investing” in New Times, which I take to mean that the strategy of continuous trading in Madoff is different from the buy and hold strategy in New Times (it has been assumed by all, but never verified, that in New Times there was solely a buy and hold strategy). (Tr. 10-11.) A buy and hold strategy, of course, allows you to look at what happened in the real world in order to gauge what the customer should get. Our lawyer responded to this by saying there is no cognizable difference between giving a broker discretion to trade for you, discretion to determine when and what to buy or sell, and telling the broker what to buy. (Tr. 11.) Then Raggi put to our attorney one of the mathematical examples that tricked up the oral argument, and our attorney responded by saying “if you can go and look and see if your security increased in value, then you would have legitimate expectations in that increase in value.” (Tr. 10-11.)

You got all that? It is perhaps more clear in import here, after I have in a sense “cleaned it up.” After reading the transcript several times in hard copy and marking it up, I think I finally figured out what was going on, and here’s my take on it.

The point of Judge Raggi’s initial comment was that maybe you can, as was done in New Times and as the Trustee and SIPC desire here, determine net equity in different ways depending on the circumstances. Maybe you don’t always have to use statements (at least where they exist). Our lawyer’s reply, which didn’t really respond to the point, was that the Madoff victims are in the same position as the New Times customers who got account statements, by which he must have meant the New Times customers who bought securities existing in the real world. Continuing on the theme of the situation of investors in New Times, he then switched implicitly to the New Times customers who bought securities that did not exist in the real world, and said that because the Trustee could not buy those securities, customers had no legitimate expectations regarding them, whereas here the securities could be bought in the real world -- so that here, he was saying implicitly, there are legitimate expectations. (Why there should not have been legitimate expectations for owners of non existing securities in New Times who received account statements showing ownership, is something that was not explained as far as I can see. The idea seems implicitly to rest on the fact that the securities could not be bought. Yet if, and because, account statements are the be all and end all, so to speak, it is hard to understand why the New Times investors in non existent securities shouldn’t have been able to rely on such statements. So it may be, as Judge Jacobs later commented, that the investors who bought non existing securities in New Times might have been treated unfairly -- as I personally believe to be the case. Of course, from the standpoint of argumentation in the Court of Appeals, it was not desirable to tell the Court that it had been wrong in New Times with regard to persons who bought securities that did not exist in the real world, and that in this regard it had been sold a false bill of goods by the SEC and SIPC in New Times. Rather, our side tried to work within the dichotomy set up by New Times, even if that dichotomy was incorrect.)

Judge Raggi’s response to the claim that Madoff investors are in the same position as New Times investors who bought securities existing in the real world rather than investors who bought securities that did not exist there, was, in effect, the claim of SIPC and the Trustee. To wit, here the trades did not exist in the real world, just as the securities did not exist in the real world in part of New Times. And because the trades did not exist here in the real world, you cannot measure what occurred in Madoff’s fictional world against real world results, whereas you could do so in New Times with respect to investors who bought securities existing in the real world and who simply held them (as is assumed to have been the case with respect to existing securities in New Times). There is thus a difference for SIPA purposes between a strategy of repeatedly buying and selling (a so-called trading strategy) as was purportedly done in Madoff, and a strategy of merely buying and holding, as was purportedly done in New Times.

Our attorney responded that there cannot be such a difference for SIPA purposes because there is no cognizable difference (in law) between telling a broker to buy a particular stock and giving him discretion as to what to buy and sell and when. Either way (I think he was saying) you have legitimate expectations of an increase in value if you can observe such an increase in the real world. So therefore, the argument would run, it is of no moment whether you simply bought and held securities or they purportedly were bought and sold, bought and sold. The main point is that in either case you can see in the real world that the price shown on statements is correct.

So there you have it (I think). The argument seems to have been about whether, especially after New Times, net equity must always (or almost always) be determined in the same way, or whether a Trustee can have discretion to determine it differently if something fake is involved, and, if so, in what circumstances of fakery does the Trustee have such discretion. The whole argument makes me think, as I have previously said to people, that we have allowed the entire question of net equity to get too complicated instead of simply saying, as discussed above, that Congress had certain intents, CICO destroys them, the FSM preserves them, and that is the end of the story here and in nearly all cases (except, perhaps, in some of the bizarre hypotheticals posited by the Court where, contrary to Congress’ intent, an investor is not protected, but harmed, by use of the statement in a case involving fraud).

Of course, in opposition to my sense of things, one could say the other side has put forth arguments and we must answer them even if this complicates matters. Yes -- but we should answer them in ways that do not further complicate matters, but which instead go back to our simple, fundamental arguments about what the statute is supposed to achieve and which say the other side’s arguments destroy the desired statutory achievements, as they do.

And, before turning from the complex colloquy, let me also elaborate a little, in a discursive exercise, on the reasons why the Trustee was allowed not to use statements to determine net equity with regard to people who bought non existent securities in New Times. It involves a point I have put forth many times but that has gained no traction. In New Times SIPC and the Trustee told and convinced the Court that, since the securities under discussion did not exist in the real world, the Trustee couldn’t determine their value, the fraudster could thereby give them whatever value he wanted to, and the SIPC fund would thus be endangered. The idea is one expressed by Judge Jacobs when he said Madoff would have been able to determine value by “chewing on his pencil and looking at the ceiling.” (Tr. 18.) But the idea, while attractive to the instinct, is significantly untrue in fact. Some of the supposed victims are complicit, can be caught, and can be denied SIPC payments, all of which Picard himself has shown. For others, there are well established, oft-used financial techniques to judge and place limits on the fraudster’s “generosity.” One can rely, for example, as here, on measuring returns by comparison to the S&P 100, to mutual funds, or to other funds using the same financial strategies as Madoff. Indeed I have often thought exactly the same could have been done in New Times where, given the facts as I understand them, the nonexisting funds could appropriately have been assigned an ultimate increase in value not far from that of the funds which did exist in the real world. The claims made by the SEC and SIPC in New Times with regard to inability to know what the value of securities might have been are hooey. (This was covered in a memo sent to the lawyers on March 1st.)

Let me now continue this dull, pedestrian writing by turning to the oral argument of our second lawyer.

In an immediate colloquy with Judge Leval, the attorney said we are not relying on the provision requiring the Trustee to discharge obligations insofar as they are ascertainable from the bankrupt’s books and records, but on the net equity definition, which, the attorney said, is consistent with the language of the books and records provision. (Tr. 12-13.) Aside from SIPA, it was said, in law your statement reflects what you own, and SIPA does not change this. So normally, as here, your statements control, except when the statement would result in the investor getting less than is proper.

Judge Leval then put forth one of the bench’s mathematical hypotheticals testing the argument that the statement is all one looks at and, after the lawyer began to respond, quickly pointed out that the present situation “is whether peoples’ accounts should be valued on the basis of fictitious trades that never occurred, on the basis of statements that were simply figments of the imagination and never involved any real securities whatsoever.” (Tr. 15-16.) The lawyer’s relevant response just a bit later was that Madoff’s customers received statements showing ownership of securities “And under all nonbankruptcy law those statements give them ownership rights and I think SIPA also gives them ownership rights.” (Tr. 16-17.) Otherwise, SIPA’s protection does not work for the investors. The statement therefore controls “when the customer believes rationally that the statements that they’re getting are consistent with what they own. And the reason . . . is because you never know when your broker is engaged in a Ponzi scheme or some other nontrading of securities. You don’t have physical securities anymore in your possession. You have no idea what’s going on behind the scenes. You must rely on your statements. (Tr. 17-18 (emphasis added).) At this point Judge Jacobs made his remark about Madoff chewing on his pencil and looking at the ceiling, while making up amounts, and the lawyer responded that “customers are entitled to rely on their statements and I believe the fund [the SIPC fund?] is obliged to honor their expectations unless it can be shown that . . . they actually knew something was going on.” (Tr. 18.)

The colloquy had several significant points for our side. One is our claim that the situation under SIPA conforms to the non SIPA law. A second and very important one is that, in answer to the point that the statements were just figments of imagination -- a point which seems to have a magnetic attraction for judges -- our lawyer quite rightly made the crucial point that the innocent investor didn’t know that Madoff was a Ponzi scheme, and therefore was entitled to rely on his/her statement if it conformed to the market. A third is that you have to rely on the statement, and SIPC must honor expectations arising from the statement, because you no longer receive physical securities, which are held in street name today (because this was more advantageous for Wall Street). So some crucial points were made, even if not always in a crystalline way.

Judge Jacobs next picked up on our lawyer’s reference to legitimate expectations and said this refers to New Times’ method of determining whether an investment “will be classified as one for cash or an investment in securities.” (Tr. 18.) Every victim here has received the benefit of his investment being classified as one for securities, but he was “not sure legitimate expectations govern . . . the precise amount of money” a victim gets. The lawyer replied, surprisingly to me, that “I’m not sure it’s legitimate expectations exactly either,” but then said, in effect, that the statement determines what one would get in a non SIPA lawsuit (e.g., for fraud) and therefore must determine the amount you have for SIPC purposes too unless, for example, the customer was complicit. For again, as the attorney was quite right to emphasize, the statement is the only way an investor knows what he owns and “the whole system is dependent” upon the statements issued by the broker “saying this is what you own.” (Tr. 19.)

The attorney’s answer to Jacobs as to why you have to rely on your statement was good. It would have been even better if the lawyer had crisply said to Judge Jacobs that the legislative history shows that SIPA was to protect investors and giving effect to the statements they receive is the only way to carry out the legislative intent to protect them. I would add that I have never understood the idea that a statement saying you own X security which was bought at Y price gives you a legitimate expectation that you own X security but does not give you a legitimate expectation that its price was Y. Have you ever heard of someone who received such a statement and (barring a known or suspected mistake in price) thought that she owned X security but that its price had not been Y?

The next significant colloquy involved valuation. Judge Leval asked whether there was a challenge in New Times to the valuation of securities that existed in the real world. (Tr. 20.) The attorney correctly said no. (Id.) Leval then said that New Times therefore was not a precedent for using the account statement for determining valuation. (Id.) Our attorney responded that this is correct, but New Times means that the statute must be followed where it can be, as here. Judge Jacobs then chimed in that, as we’ve heard, and has been discussed above, in New Times it was not possible to determine the real value of the securities that never existed (so CICO was used), and isn’t the analogy here that the transactions in Madoff were as fictitious as the non existing securities in New Times. (Id.) Our lawyer responded very aptly that the system is “set up to protect the customer, so . . . you need look at it from the customer’s perspective . . . .The customer provided funds to a broker and said, please invest this, it’s your discretion, you invest it. The broker kept issuing statements that looked like they were consistent with the market, that told the customer this is what you own. This went on for 30 years, it seemed to work pretty well for a pretty long time. The customer had every reason to assume that the protections of the securities laws of Article 8 and finally of SIPA would govern in this case.” (Tr. 21-22.)

Judge Jacobs then said, “Well, then it does seem awfully unfair to the people who were credited with having fake securities in New Times that they shouldn’t get the benefit of exactly the same expectations. After all, ordinary investors don’t really have the ability to go out and find out whether, you know, Blue Sky Corporation actually exists or has a certain capitalization or is traded here or there. It just seems, under your argument, it seems to prove too much because then New Times is wrong. All of those people were unfairly treated, according to you. And they may indeed have been unfairly treated in the overall scheme of things. The question is were they unfairly treated under the statute?” (Tr. 22.)

Our lawyer replied that in New Times the owners of non existent securities were entitled under the statute to what their statements showed, but the problem was that the non existent securities didn’t exist, and therefore couldn’t be bought and couldn’t be valued. Judge Raggi interjected that nobody “is going to give your client 20 shares of AT&T.” Only money is involved here, so why does the money from phony transactions deserve SIPA protection any more than the money from phony securities in New Times? (Tr. 23.) Our lawyer replied that the fake securities in New Times could not be bought or valued and therefore SIPC would be “exposed to risk which there was no way to tether in any way to the market.” (Tr. 23.) Whereas here there were “real securities that were traded, according to the statements, at prices you would expect in the markets.” (Tr. 23.) To which Judge Raggi said, “But that assumes that the customer took risks in the market,” though Madoff investors never did since everything was concocted by Madoff after the fact, “always to show gains.” (Tr. 23-24.) (I frankly don’t understand the logical relationship of Judge Raggi’s comment to what came before, since the issue was can you determine price, not did you have actual market risk.) Our lawyer responded, quite aptly, that (once again) you must look at it from the standpoint of the customer, who does not know what the broker is doing except for what the broker tells him in the statement which he receives and who has relied on that information month after month and acted in accordance with it. (Tr. 24.) To which Raggi, replied that this is the same for both the non existent securities in New Times and the non existent trades in Madoff. (Tr. 24.) Our lawyer replied that the question is whether the statute can be applied. Our attorney agreed that “SIPC is not going to go out and buy the AT&T, but SIPC can tell you how much the AT&T was worth” on the pertinent date. This could not be done in New Times with regard to the non existent securities, our lawyer said. (Tr. 24.)

Whew! What is the meaning of all this extensive to-ing and fro-ing? What at least is the meaning of important parts of it. Well, it starts with the lack of challenge to valuation of existing securities in New Times, which Judge Leval said had no precedential value because there was no challenge. Our lawyer responded that you have to use the statements, which were consistent with the markets. Moreover, the fact of the matter is that the New Times Trustee used, or used the equivalent of, the final statement method in New Times for securities that existed in the real world -- and the question was whether buyers of non existent securities should be given the same treatment. This, I think, cuts against the claim of lack of precedential value, a point which is especially true since the Court in New Times, which was an appeal by the owners of non existent securities, said “To be clear -- and this is the crucial fact in this case -- the New Age funds in which the Claimants invested never existed.” (First emphasis added, second emphasis in original.) So I think that, even if Judge Leval’s point may be technically true, in reality it is a bit overmuch.

As for Judge Raggi’s comment that Madoff victims experienced no risk, none of them knew they had no risk, since none of them knew Madoff was not actually in the market. They thought they had risk, and it seems quite wrong to deprive them of SIPA benefits on the ground that they had no risk when they did not know they had no risk and honestly thought they did have risk. And, as our lawyer said, the customer had to rely on the statements she received; she had no other information, after all.

Then the foregoing turned to our opponents’ fundamental assertion, which has been the subject of previous discussions: that there is no difference between a situation of faked securities and a situation of faked transactions. Our lawyer’s response was the very appropriate one that you must look at it from the customer’s perspective, because “the whole system is set up to protect the customer.” (Tr. 21.) Amen -- that is exactly what the all important legislative intent was.

Judge Jacobs noted that, looked at this way, the people who bought non existent securities in New Times had the same expectations and therefore our lawyer’s argument proves too much because it means New Times was wrong and the investors there may have been treated unfairly. Exactly. They were treated unfairly, and New Times was wrong with regard to them, unless you say that in New Times they could at least have checked out whether the fake funds even existed -- and maybe they could have, though I don’t really know and cannot remember ever reading anything about this. Our attorney said the people in New Times were entitled to what was on their statements, but the problem was that it couldn’t be valued. Here, of course, as our lawyer repeatedly said, the securities could be valued in the market.

In the colloquy, Judge Raggi said the only question involved was money because “no one is going to give your clients 20 shares of AT&T.” (Tr. 23.) This remark was not gainsaid. It reflects a SIPC invention that completely destroys Congressional intent, yet somehow has taken hold and is never even challenged. As I have written in essays and briefs, Congress amended SIPA in 1978 precisely so that SIPC would go into the market and acquire missing securities to give to victims. Congress considered it very important for people to get back into the market quickly, and knew that there were important investment and tax consequences involved. And here, as also explained in essays and briefs, the missing securities could have been obtained and given to victims; they were S&P 100 securities that constituted only a fraction of the number of shares of each issue that are traded each day or week. It would have made a huge difference for victims to get securities here, because the stocks have risen dramatically in value since Madoff went under on December 11, 2008.

This brings me to the last important colloquy involving our second advocate. Judge Leval, in words that seemed to gum things up though his meaning was clear enough, asked/said that our lawyer was saying there are two different pies, meaning the SIPC fund and the customer property. (Tr. 26.) He asked whether the size of “that pie [which pie?] will vary according to how this question [the question of net equity, one gathers] is determined?” (Tr. 26.) Our lawyer said no. The judge asked the relative sizes of the two funds. Our lawyer didn’t know, but did know that the SIPC fund was big enough to cover everyone up to the $500,000 per individual that SIPC could be liable for. The lawyer didn’t know (naturally) what the ultimate size of the customer property fund might prove to be. (Tr. 27.)

At that point Judge Leval presented an idea that subsequently has been the subject of much talk. Perhaps using incorrect words but with his meaning being unmistakable, he said. “It seems to me that the argument that you’re making makes better sense in the SIPC application than it does in the division of the pie. As to the division of the estate pie, who gets more and who gets less would be entirely a function of, as Judge Jacobs was saying, Mr. Madoff’s imagination.” (Tr. 27.) Our advocate replied in part that “the question of who gets more and who gets less” is thought “the motivating factor in what the Trustee is doing.” (Tr. 27.)

Leval then asked a question he and the other judges appear to be focused on: whether, with regard to the SIPC fund, “are any of the Madoff customers harmed by the last statement approach.” (Tr. 28.) “They definitely are harmed,” he continued, “in the division of the estate pie, the ones who are more recent investors are harmed because a larger percentage goes to the earlier investors whose accounts built up and built up over the years. But how are customers harmed with respect to the part that comes from SIPA?” (Tr. 28.)

Answering the obverse or converse question from the one put by Leval, our advocate said victims are harmed by CICO because CICO means they will get less from the SIPC fund by invalidating all the statements received by an investor.

This question of whether the use of the FSM lessens the return of some investors is one that the Court returned to when questioning our opponents. Suffice to say here that it appears to be very much on the Court’s mind and conceivably could prove important in the case and in efforts to settle the entire Madoff matter outside of litigation. Some people think, as will be discussed later, that the Court is looking for a way to use the final statement for purposes of SIPC advances but, at least initially, not for purposes of distributing customer property. And, regardless of this, the idea is an obvious one for purposes of trying to work out an overall resolution of the Madoff matter, a resolution in which it could play at least some role.

Next Judge Raggi asked why the Trustee “did not have the discretion to proceed as he did under . . . the section that says he’s obliged to discharge net equity claims only insofar as such obligations are ascertainable from the books and records of the debtor or are otherwise established to the satisfaction of the Trustee.” Judge Raggi asked “Do you agree that that controls his determination here, that that is the relevant section or not?” (Tr. 30.) Our lawyer did not agree, and said the definition of net equity governs what the broker owes, which generally speaking is determined by the final statement (except, for example, where there are no statements). (Tr. 30-31.) Raggi responded that the statute says “you pay obligations only insofar as they are ascertainable from books and records of the debtor,” that here the books and records show that purchases were never made and fake purchases were concocted after the fact, that the FSM therefore would not be a reliable way to calculate net equity, and why do we say the Trustee does not have discretion to make such a decision. (Tr. 31-32.) To which the lawyer responded, quite commendably, that “to go back to my first principle here, this should protect customers. That’s the name of the statute and the customer should be the focus. (Tr. 32 (emphasis added).)

Judge Raggi then made a comment that induces apprehension, and that received an answer very surprising to me. She said “I understand we’re interested in statutory purpose, but we are limited by statutory language.” To which the lawyer replied, “Absolutely, absolutely.” (Tr. 32.) I will say right now that the lawyer’s answer should instead have been, “Yes, we must conform to statutory language, but the statutory language must be interpreted in the light of the Congressional intent.”

Anyway, the attorney then answered that the statutory section does not allow the Trustee to ignore the statements, which are records of the broker. Again our lawyer correctly said that you must “look at it from the customer’s perspective, and under the UCC and securities law the customer can sue the broker on the basis of the statement.” (Tr. 33.)

Judge Raggi seemed unsatisfied by this answer, and among other things said, in effect, that the Trustee does not have to accept transactions which the books and records show never happened. The lawyer said a customer’s rights derive from the statement under non SIPA law (which the Judge said she understood), and the situation is the same under SIPA, which is to protect the customer, since the “SIPC fund is there precisely for a situation in which the broker did not buy the securities he was supposed to buy.” (Tr. 34.) [QED] The statement is the measure under other laws than SIPA, and SIPA law does not “reduce the customer’s claim.” (Tr. 35.)

This colloquy had some important points in it. To begin with, the judges appeared to understand that there are two different funds, the SIPC fund and the customer property fund, and seemed to think that it might make sense to use the final statement method for the first fund, but not the second. (As will be discussed in the second part of this essay, our opponents claim, in effect, that there is only one fund.) Also, and again as will be discussed in the second part of this essay, many think the judges are looking for some way to treat the two funds differently, so that, for example, even if the FSM governs payments from the SIPC fund, it might not govern, or might not exclusively govern, payments from the customer property fund. Whatever the judges might be thinking, it is plain that the idea of treating the two pools of money somewhat differently is one that a lot of people find attractive and that conceivably might be part of the basis of a non judicial solution to the Madoff mess.

The colloquy was also concerned with whether the Trustee has discretion to calculate net equity on the basis of what Madoff actually did as shown in hindsight by the books and record section but was unknown to innocent victims when it was happening, or whether the Trustee must use the final statement method in order to carry out the purpose of protecting innocent victims. And, though our lawyer surprisingly agreed that Congressional purpose was not pertinent when in fact it is crucial and when the language of statute must be interpreted in light of Congressional intent, she did say, very importantly, that the purpose of protecting victims has to be honored and that SIPA cannot be thought to treat the customer’s financial rights less favorably than other law -- such less favorable treatment, I note, would be antithetical to Congress’ intent to protect investors.