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.