AMICUS CURIAE BRIEF OF LAWRENCE R. VELVEL ON THE APPLICATION HERE OF THE SUPREME COURT CASES --FROM TUMEY v. OHIO TO CAPERTON v. MASSEY COAL -- THAT BAR GOVERNMENTAL LEGAL DECISIONS FROM BEING MADE BY PERSONS WITH A FINANCIAL INTEREST IN THE DECISIONS.
Lawrence R. Velvel is a victim of Bernard Madoff. Velvel, who is a lawyer, has participated in the briefing on the net equity question (and other questions) in the Bankruptcy Court in the Madoff case, and has filed two briefs on his own behalf on the net equity question in the Second Circuit Court of Appeals. In this amicus brief, Velvel elaborates the question -- raised on pages 15-17 of the motion for a withdrawal of reference filed by Helen Chaitman on behalf of James Greiff and others -- of the applicability to the question of the Trustee’s fees of the Supreme Court’s line of cases running from Tumey v. Ohio, 273 U.S. 510 (1927) to Caperton v. Massey Coal Co., Inc., 556 U.S. ___ (2009). The applicability of this line of constitutional law further supports the withdrawal of the reference sought by Ms. Chaitman.
1. Introduction: Due Process Requires That Legal Judgments Must Be Made By Officials Who Do Not Benefit Financially From Their Decisions.
It is a fundamental principle of due process that, when a legal judgment is made by a judicial, executive, administrative or quasi-governmental official, that official must not benefit financially from the decision. Nor can there be financial benefit to a governmental institution or function under the official’s purview. This principle of due process has been powerfully enunciated by the Supreme Court in Tumey v. Ohio, 273 U.S. 510 (1927); Ward v. Village of Monroeville, 409 U.S. 57 (1972); Gibson v. Berryhill, 411 U.S. 564 (1973); Aetna Life Insurance Co. v. Lavoie, 475 U.S. 813 (1986); Caperton v. Massey Coal Co., Inc., 556 U.S. ___, 129 S. Ct. Rep. 2252, 173 L.Ed. 2d 1208 (2009). The principle of no financial benefit, the Court has repeatedly said, is necessary in order to ensure that “the balance [is held] nice, clear and true.” Tumey, 273 U.S. at 532; Caperton, 556 U.S. at ___, 129 S. Ct. at 2260, 173 L.Ed. 2d at 1218 (quoting Tumey v. Ohio).
In this case Irving Picard is the Bankruptcy Trustee, the SIPC Trustee and a special master appointed by the Department of Justice to distribute billions of dollars forfeited to it by Carl Shapiro and Jeffry Picower. In these capacities he is an officer of the Bankruptcy Court (as has been explicitly held by the Supreme Court with regard to the position of Bankruptcy Trustee) (Callaghan v. Reconstruction Finance Corp., 297 U.S. 464, 468 (1936)), a functionary of the Department of Justice, and exercises governmental and quasi-governmental power to make and/or participate in legal decisions that affect thousands of people and involve literally billions of dollars, e.g., initial decisions on how net equity shall be defined and from whom clawbacks shall be demanded.
Unfortunately, it has recently been discovered that the Trustee, and perhaps also his counsel, David Sheehan, with whom he works very closely, may benefit personally and financially, to the tune of millions of dollars, perhaps scores of millions of dollars, from the decisions the Trustee makes and implements. (The amounts of money involved here dwarf the amounts in the Supreme Court’s cases.) Though it is already pretty certain (as will be described below) that financial benefits will accrue to the Trustee from the decisions he makes (and may accrue to his colleague David Sheehan also), the precise details of the relevant financial arrangements under which the Trustee will receive major financial benefits are still not known. There must be discovery to flesh out the precise details of the arrangements; plaintiff will subsequently discuss and request the needed discovery.
2. The Supreme Court Cases Holding That Legal Decisions Cannot Be Made By Persons Who Will Benefit Financially From Them.
In Tumey v. Ohio, a village mayor had the power to try and fine persons accused of possessing intoxicating beverages in violation of state law. The mayor himself received a portion of the fines; he received $696 dollars in fees, compensation and costs from such fines in an eight month period. The Supreme Court ruled this system unconstitutional. Pointing out that such a pecuniary interest rendered it unconstitutional for the mayor to decide on the defendants liability, the Court also said, “With his interest as mayor in the financial condition of the village and his responsibility therefore, might not a defendant with reason say that he feared he could not get a fair trial or a fair sentence from one who would have so strong a motive to help his village by conviction and a heavy fine?” Tumey, supra, 273 U.S. at 533.
In Ward v. Monroeville, supra, a village mayor determined guilt or innocence in cases of alleged traffic violations and imposed fines and costs on parties he convicted. Roughly forty percent of the village’s annual income (or between $16,000 and $23,000 per year) came from the fines and costs he imposed. (Unlike in Tumey, the mayor did not himself receive any money; it all went to Monroeville.) The Supreme Court ruled this system unconstitutional too, saying that the fact the mayor in Tumey had “a direct, personal, substantial pecuniary interest” and “shared directly in the fees and costs did not define the limits of the principle” forbidding legal decisions from being made by interested parties. Ward v. Monroeville, 409 U.S. at 60. Rather, the Court said, there must be no “possible temptation to the average man” that “might lead him “not to hold the balance nice, clear and true . . . .” Ibid. “Plainly,” said the Court, “that ‘possible temptation’ may also exist when the mayor’s executive responsibilites [sic] for village finances may make him partisan to maintain the high level of contribution from the mayor’s court.” Ibid.
The Court also rejected the argument that the arrangement at issue should be upheld because, after the mayor’s decision, an erroneous decision “can be corrected on appeal and trial de novo in the County Court of Common Pleas.” 409 U.S. at 61-62. The Court said, “Nor, in any event, may the State’s trial court procedure be deemed constitutionally acceptable simply because the State eventually offers a defendant an impartial adjudication. Petitioner is entitled to a neutral and detached judge in the first instance.” 409 U.S. at 61-62. (Emphasis added.)
In Gibson v. Berryhill, a state Board of Optometrists, comprised exclusively of optometrists in private practice for their own account, was going to hold hearings against optometrists employed by a corporation. The charge was that Alabama law was violated when practicing optometrists worked for a corporation. The Supreme Court upheld a lower court decision that the Board members were biased by personal self interest because half the optometrists in the state were employed by corporations, so that “success in the Board’s efforts would possibly redound to the personal benefit of members of the Board” (who were, as said, in private practice for their own account, and would benefit from elimination of competition from optometrists employed by corporations). 411 U.S. at 578. “It is sufficiently clear from our cases,” continued the Court, that those with substantial pecuniary interest in legal proceedings should not adjudicate these disputes. Tumey v. Ohio, 273 U.S. 510, 47 S.Ct. 437, 71 L.Ed. 749 (1927). And Ward v. Monroeville, 409 U.S. 57, 93 S.Ct. 80, 34 L.Ed.2d 267 (1972), indicates that the financial stake need not be as direct or positive as it appeared to be in Tumey. It has also come to be the prevailing view that ‘(m)ost of the law concerning disqualification because of interest applies with equal force to . . . administrative adjudicators.’ K. Davis, Administrative Law Text s 12.04, p. 250 (1972), and cases cited. (411 U.S. at 479.)
Here again the fact that the aggrieved parties could receive a favorable decision from a higher Alabama body than the Board (from the state Supreme Court) did not warrant a refusal by the lower court to adjudicate the case. 411 U.S. at 580.
In the fourth of the cases, Aetna Life Insurance Co. v. Lavoie, a state Supreme Court Justice named Embry participated in and wrote a per curiam opinion in an insurance bad faith case whose outcome affected, and aided, a wholly separate case filed by Justice Embry against Blue Cross. (Judge Embry later settled his own litigation for $30,000. (475 U.S. at 824.)) The Supreme Court ruled that Justice Embry’s work in the Aetna case “undoubtedly ‘raised the stakes’” for Blue Cross in Justice Embry’s own suit, “to the benefit of Justice Embry. Thus, Justice Embry’s opinion for the Alabama Supreme Court had the clear and immediate effect of enhancing both the legal status and the settlement value of his own case,” and he unconstitutionally “acted as a ‘judge in his own case.’” 475 U.S. at 824.
Whether Judge Embry’s view and decision in Aetna was actually influenced by his own case was irrelevant. The Court said:
We conclude that Justice Embry’s participation in this case violated appellant’s due process rights as explicated in Tumey, Murchison, and Ward. We make clear that we are not required to decide whether in fact Justice Embry was influenced, but only whether sitting on the case then before the Supreme Court of Alabama” ‘would offer a possible temptation to the average … judge to … lead him to not to hold the balance nice, clear and true.’” Ward, 409 U.S., at 60, 93 S.Ct., at 83 (quoting Tumey v. Ohio, supra, 273 U.S., at 532, 47 S.Ct., at 444). (475 U.S. at 825.)
Finally, less than two years ago the Supreme Court decided Caperton v. Massey Coal Co., Inc., 556 U.S. ____, 129 S. Ct. at 2252, 173 L.Ed. 2d 1208 (2009). In that case the Chairman of Massey Coal contributed a major sum of money -- three million dollars -- to the campaign of a candidate running for a justiceship of the West Virginia Supreme Court, Brent Benjamin. Benjamin won. Shortly afterwards, a major appeal by Massey Coal was heard in the West Virginia Supreme Court. Massey won. Justice Benjamin voted in its favor.
Justice Benjamin said in several opinions that he had no direct or substantial financial interest in the case. 556 U.S. at ___, 129 S. Ct. at 2262-63, 173 L.Ed. 2d at 1221. The Supreme Court nonetheless reversed the decision below in favor of Massey Coal.
The Court said that the rule against pecuniary interest exists because ‘“no man is allowed to be a judge in his own cause’” and “because his interest would certainly bias his judgment, and, not improbably, corrupt his integrity.” 556 U.S. ___, at 129 S. Ct. at 2259, 179 L.Ed. 2d at 1217, 1218. There are circumstances, it continued, “in which experience teaches that the probability of actual bias on the part of the judge or decisionmaker is too high to be constitutionally tolerable.” Ibid. (Emphasis added.) The Court then canvassed, among others, the Tumey, Ward, Gibson and Aetna cases, among others, saying inter alia that it was concerned not just with pecuniary interest, but also with adherence to neutrality (556 U.S. at ___, 129 S. Ct. at 2261, 173 L.Ed. 2d at 1218) and that it was necessary to avoid even “‘possible temptation.’” (Ibid.) (Emphasis added.) Thus, it is not necessary to decide whether influence is in fact present, because it is enough that there could be possible temptation. 556 U.S. at ___, 129 S. Ct. at 2260, 173 L.Ed. 2d at 1218.
Turning to the facts of the case before it, the Court did not question the assertions of impartiality and propriety in Justice Benjamin’s opinions. 456 U.S. at ___, 129 S. Ct. at 2263, 173 L.Ed. 2d at 1221. Rather it “asked whether, ‘under a realistic appraisal of psychological tendencies and human weakness,’ the interest ‘poses such a risk of actual bias or prejudgment that the practice must be forbidden if the guarantee of due process is to be adequately implemented.’” 456 U.S. at ___, 129 S. Ct. at 2263, 179 L.Ed. 2d at 1222. The Court “conclude[d] that there is a serious risk of actual bias -- based on objective and reasonable perceptions -- when a person with a personal stake in a particular case had a significant and disproportionate influence in placing the judge on the case by raising funds or directing the judge’s election campaign when the case was pending or imminent.” 456 U.S. at ___, 129 S. Ct. at 2263-64, 173 L.Ed. 2d at 1222.
The risk of possible bias, said the Court, is a question of the circumstances. The Court recognized that “Not every campaign contribution by a litigant or attorney creates a probability of bias that requires a judge’s recusal, but this is an exceptional case.” 456 U.S. ___, 129 S. Ct. at 2263, 173 L.Ed. 2d at 1222 The large size of the contribution (three million dollars), the fact that it was 300% larger than the amount spent by Benjamin’s campaign committee and “eclipsed the amount spent by all other Benjamin supporters,” the fact that the contribution was made when Massey’s forthcoming appeal to the West Virginia Supreme court would be before Judge Benjamin if he were elected to that court, and the fact that Massey’s Chairman had a personal stake in the case caused there to be a violation of due process when Judge Benjamin sat on the case, even though there would be no such violation in a run of the mill case of contributions to a judge’s election campaign. Thus “under all the circumstances” of the case -- which were exceptional, as was also true in some prior cases where the Constitution required recusal -- due process required the recusal of Judge Benjamin lest there be temptation ‘“not to hold the balance nice, clear and true.’” 456 U.S. at ___, 129 S. Ct. at 2263-65, 173 L.Ed. 2d at 1222, 1223-1224.
The risk of actual bias, the Court reiterated, is not the test. 456 U.S. at ___, 129 S. Ct. at 2265, 173 L.Ed. 2d at 1224. The relevant “standards may also require recusal whether or not actual bias exists or can be proved.” Id. (Emphasis added.) There must be no “possible temptation” not to hold the balance nice, clear and true. Id.
* * * * *
The Supreme Court has thus ruled that decisonmakers of many types, from judges to members of boards to political figures making legal decisions, can have no financial interest in their decisions. This is so whether the decisionmakers will receive money themselves, whether money will go to their agencies or towns, whether they will shed themselves of competition. It is true across the board. There need not be proof of actual bias, for even possible temptation, possible bias, must be avoided. Nor need there be giant sums of money involved. Far smaller sums such as hundreds of dollars, or $20,000 dollars, are sufficient to involve the principle of no financial interest.
3. The Trustee Appears To Have A Vast Financial Interest In His Legal Decisions.
A. For a couple of years very little if anything was known about how Irving Picard came to be the SIPC Trustee in the Madoff matter, or what his arrangements with his law firm, Baker & Hostetler, might be with regard to Madoff. It did become known that Picard was SIPC’s number one Trustee, its “go to guy” so to speak, who had been appointed the SIPC Trustee in ten or so cases over the years, including some of SIPC’s most important ones, and that he had been criticized by a federal court for overzealousness in pursuing SIPC’s interest. But the details of Picard’s arrangements with Baker & Hostetler regarding the Madoff case remained in the dark.
In 2011 a New York Times financial reporter, Diana Henriques, published a book on the Madoff case in which she shed some light on the hiring of Picard. Henriques, The Wizard of Lies, Henry Holt & Co., 216-218 (NY, 2011).
On December 11, 2008, the date Madoff was arrested, Picard had been a partner for many years in the Gibbons Del Deo firm. One of his partners there had been David Sheehan, with whom Picard had worked on many brokerage liquidations but who had recently moved to Baker & Hostetler. Sheehan and Picard had discussed a possible move to Baker & Hostetler by Picard, and planned to discuss it further after January 1, 2009 (more than three weeks after the Madoff fraud was disclosed on December 11, 2008). Ibid.
On Thursday, December 11th SIPC called Picard to ask whether he could be its Trustee in the Madoff case if necessary. Picard said he would check to see if the Gibbons firm had any conflicts. Also, at some point between Thursday, December 11 and Sunday, December 14th (Henriques does not make clear exactly when), SIPC asked Sheehan if he would be counsel to whomever was appointed Trustee. Ibid.
The Gibbons firm did have a potential conflict because it had long represented the family and interests of Senator Frank Lautenberg, who were Madoff victims, and it might represent them again in the Madoff case. A statement by a Gibbons partner led Picard to believe he had to choose between becoming the Trustee in the Madoff case and remaining at Gibbons. Ibid.
On Sunday afternoon, December 14, just three days after Madoff had been arrested on Thursday, December 11, a group of Baker & Hostetler partners interviewed Picard and immediately offered him a job. On Monday, December 15, the next day, he accepted Baker & Hostetler’s offer, resigned from Gibbons, and was appointed Trustee by Judge Stanton. Ibid.
Thus, according to Henriques’ book, Baker & Hostetler made an instantaneous decision to hire Picard after the Madoff fraud was disclosed and he had been given to understand that he might be the Trustee, and Picard instantly accepted Baker & Hostetler’s offer and resigned from the Gibbons firm.
B. Subsequent to Picard’s appointment as Trustee, he long gave people to believe that he would not receive any portion of the fees awarded to Baker & Hostetler in the Madoff proceeding. Thus at the hearing on his first interim fee application, he said:
As noted at paragraph 33 of my application and contrary to the implication of certain objections that have been filed with the Court and before the press, the amounts that will be awarded either today or at another time are going to be turned over to Baker & Hostetler, the firm of which I am a partner. I want to emphasize I will not retain any portion of the award. Transcript of August 6, 2009, p. 14, annexed as Exhibit I to Helen Chaitman’s Declaration in Support of her Motion of June 2, 2011for 313 Defendants Seeking Withdrawal of the Reference. App., infra, p. 6. (Emphasis added.)
In recent weeks, however, it has become known that Trustee Picard -- and perhaps his counsel David Sheehan also -- appears to have reached an arrangement with Baker & Hostetler under which he will obtain a percentage of the fees garnered in the Madoff case by Baker & Hostetler. A prominent lawyer for Madoff victims, Helen Chaitman, reported that a lawyer friendly with Picard informed her that Picard said his deal with Baker & Hostetler was that he would receive 50 percent of the fees taken in by the firm in the Madoff case. To no avail Chaitman informed the Bankruptcy Court by letter of May 31, 2001 that Picard might be receiving between 33 and 50 percent of the fees obtained by Baker & Hostetler. (App., infra, p. 7.) The next day, at a hearing before Bankruptcy Judge Lifland, Mr. Sheehan lambasted Ms. Chaitman for raising the matter (Tr. of Hearing of June 1, 2011, pp. 28-29 (App., infra, pp. 11-12.)), said her allegations reflected ignorance of law firm economics, and said that under her claims Baker & Hostetler would be “getting zero.” (Tr. of Hearing, pp. 28, 29, (App., infra, pp. 11-12.)) Trustee Picard then accused Ms. Chaitman of making an “unfounded allegation about my compensation” and said “She is way off the mark. I don’t receive any percentage near thirty-five or fifty percent.” (Tr. of Hearing, p. 32 (App., infra, p. 13.)) When Ms. Chaitman rose to address the Court, Judge Lifland lambasted Ms. Chaitman for raising the matter, and he did so again at the end of the hearing. (Tr. of Hearing, pp. 39, 46-48 (App., infra, pp. 15, 16-18.))
Regardless of the criticisms levied at Ms. Chaitman by Sheehan, Picard and Judge Lifland, it appears that Picard implicitly admitted that he is receiving some percentage of the fees obtained by Baker & Hostetler. That is the plain implication of Picard’s statement to the Bankruptcy Judge that Ms. Chaitman’s claim that he receives 33 to 50 percent of Baker & Hostetler’s fees “is way off the mark. I don’t receive any percentage near thirty-five or fifty percent.” Well, what percentage does he receive? Even a “mere” ten percent would be worth in nearly 18 million dollars already and likely would ultimately be worth several score of millions of dollars.
The percentage Picard receives, and the percentage that Sheehan possibly receives, are not known. There must be discovery to determine such details of the arrangements between Picard and Baker & Hostetler (and Sheehan and Baker & Hostetler too). For Picard, aided by Sheehan, is participating in very unusual governmental and quasi-governmental decisions that are denying a total of billions of dollars to thousands of people. He may even be making these unusual decisions by himself if certain statements made by the Chairwoman of the SEC and the President of SIPC (and cited in Helen Chaitman’s Memorandum In Support of Withdrawal of the Reference, at p.16) are to be believed. (Picard, of course, denies this.) The decisions he has been making have already included such crucial ones as the decision to measure net equity by cash-in/cash-out (CICO) instead of by the final statement method (FSM) though this has never or almost never been done previously in hundreds of SIPC cases, and the decision to seek clawbacks from hundreds or thousands of persons whom the Trustee concedes are completely innocent, even though this too apparently has never been done before in SIPC cases. These two unusual decisions alone have and will continue to produce scores of millions of dollars in fees for Baker & Hostetler because they reduce the money SIPC owes to innocent investors (by billions of dollars), increase the monies the Trustee will get from innocent investors (again by billions of dollars), are therefore being fought tooth and nail by innocent investors, some of whom are employing major law firms, and are thus running up, by scores of millions of dollars, the fees obtained by Baker & Hostetler in carrying out Picard’s decisions and, accordingly, are likewise vastly running up the amount of such fees to be turned over to Trustee Picard and perhaps to David Sheehan. Had the Trustee not decided, very unusually, to use CICO and demand clawbacks, the fees received by Baker & Hostetler, and thus by the Trustee under his agreement with Baker & Hostetler, would have been incomparably lower -- one might estimate as much as 60 or 80 percent lower.
What we have here, then, is not a run of the mill SIPC case in which a law firm for which a Trustee has worked for years will make somewhat more or somewhat less depending on the vagaries inherent in any SIPC liquidation. Rather, what we have here, as existed in Caperton and in cases it cited on the point, is an exceptional situation. It is a situation in which the Trustee changed law firms in order to get the case, apparently received extraordinarily lucrative financial arrangements from his new firm, and then made or participated in making very important and perhaps wholly novel legal decisions which have increased not only his new firm’s fees by scores of millions, but also his own compensation too by, apparently, tens or scores of millions of dollars that will be turned over to him by the firm. In these exceptional circumstances, the fact that, in the run of the mill SIPC case, a firm’s fees will fluctuate with the vagaries of the case is irrelevant, just as in Caperton it was irrelevant that in most cases there will be nothing wrong with the fact that lawyers contribute to judges’ election campaigns. In an exceptional case like this one there is a violation, in a wholesale way, of the principles, established in the Tumey through Caperton line of cases, that a governmental decisionmaker should not have a financial interest in his decisions; that even the possible temptation created by such an interest cannot be countenanced, so that it is not necessary to determine whether personal financial interest was or was not the spring of action; and that the legal decisions made by persons with such an interest cannot be allowed to stand lest adversely affected individuals believe they have been victimized by the decisionmakers -- which is precisely what hundreds or thousands of persons defrauded by Madoff believe has been their fate at the hands of the Trustee.
4. The Trustee’s Arguments Against Application Of The Tumey-Caperton Line Of Cases Are Invalid.
There are a number of arguments the Trustee self evidently can be expected to make in opposition to application of the Tumey-Caperton line of cases. He mentioned two of them in passing before Bankruptcy Judge Lifland at the hearing on June 1, when he said “I am not a decisionmaker for SIPC. And I am not a quasi-governmental agency or act in a quasi-governmental capacity.” (Tr. of June 1, 2011, pp. 32-33 (App., infra, pp. 13-14.))
To begin with the Trustee is not just the SIPC Trustee but is conjointly the Bankruptcy Trustee. His demands for clawbacks are made as Bankruptcy Trustee under provisions of the Bankruptcy Code. As Bankruptcy Trustee, Mr. Picard is not a “mere” quasi-governmental body; he is, rather, an officer of the Court -- a full fledged governmental figure. As ruled by the Supreme Court, “Trustees in bankruptcy are public officers and officers of a court.” Callaghan v. Reconstruction Finance Corporation, 297 U.S. 464, 468 (1936).
The same would appear to be true of the Trustee in his capacity as SIPC Trustee, under which he made or participated in the extraordinarily unusual decision to define net equity by the CICO method rather than by the final statement method. For here too he was appointed by the Court in exactly the same way as he was appointed Bankruptcy Trustee, at exactly the same time, to fulfill functions which, just like the bankruptcy provisions he enforces as Bankruptcy Trustee, are imposed by federal statute.
If the Trustee were not a full fledged governmental officer, he would at minimum be a quasi-governmental officer. For he was selected by, is paid by, and works on behalf of a quasi-governmental body, SIPC. SIPC’s quasi-governmental character was stressed in a report by the highly regarded Congressional Research Service.
The CRS explained several reasons why SIPC is a quasi-governmental body.
Of the seven-member board of directors, one is appointed by the Secretary of the Treasury from among the Department’s officers and employees; one is appointed by members of the Federal Reserve Board from among its officers and employees; five directors are appointed by the President subject to the advice and consent of the Senate. The President designates the chairman, who is also the corporation’s chief executive officer.
(Report, p. 20 (App., infra, p. 20.)) The CRS further said in regard to SIPC’s quasi-governmental nature that SIPC is “effectively a subsidiary of the SEC. The Corporation’s bylaws are subject to the SEC’s adoption or rejection . . . . [T]o the extent that the bylaws and rules of the SIPC are approved or disapproved by the SEC, they are subject to the Administrative Procedure Act (5 U.S.C. 551 et seq.). The corporation also has borrowing authority and a line of credit from the Treasury.” Id.
SIPC, said the CRS, is “a hybrid organization” created “to implement government policies and regulations. Ultimately, the SPIC (sic) and the PCAOB are agents of and accountable to the government through the SEC.” (Id.) (Emphasis added.)
Thus, the Trustee, who is selected by an agent of the government, paid by an agent of the government, works on behalf of this agent, by his own repeated admission seeks to protect the finances of this agent of the government, and makes or participates in making the legal decisions for this agent of the government, is at minimum a quasi-governmental functionary.
In further denial of quasi-governmental status, the Trustee, as said, stated in open court on June 1 that “I am not a decision maker for SIPC.” (Tr. of Hearing, p. 32. (App., infra, p. 13.)) Given his exceptionally prominent role for 2½ years in the Madoff case, his announcement and vigorous implementation of highly unusual policies, and statements by SIPC and SEC officials stressing the importance of his role, the idea that the Trustee does not make, or at minimum participate extensively and importantly in, decisions which carry out SIPC’s role appears ludicrous on its face. If the Trustee seriously wishes to maintain this facially ludicrous position, there must be discovery into the way that decisions (such as those involving net equity and clawbacks) have actually been made in this case, and this Court should order the necessary discovery.
The Trustee is also likely to claim that he is not subject to the Tumey-Caperton line of cases because others, particularly including courts, review his decisions. But this reasoning has been rejected twice by the Supreme Court, in Ward v. Monroeville (409 U.S. at 61-62) and Gibson v. Berryhill (411 U.S. at 580). Thus, in Ward the Court said that the fact the mayor’s decision on violations “can be corrected on appeal and trial de novo in the County Court of Common Pleas” did not make the system of mayoral trials constitutional “because the State eventually offers’” an impartial adjudication.” Rather, the defendant was entitled “in the first instance” to a decisionmaker who was “neutral and detached.” 409 .S. at 61-62.
In the Madoff case, decisions of the most enormous consequence -- and often wholly destructive financial consequence -- to thousands of individuals have been made and implemented by the Trustee. These decisions were not made by a person who is “neutral and detached,” but by a person who stood to make tens or scores of millions of dollars because of the decisions. As the Supreme Court said, this cannot be justified on the ground that erroneous decisions could be corrected later by courts (after individuals have been devastated for years -- sometimes rendered penniless -- by the Trustee’s decisions).
Relatedly, the Trustee is very likely to claim that the Tumey-Caperton line of cases must be confined to situations in which persons are acting as judges in some way, and that he is not doing so. This is not a tenable position. The essence of the Supreme Court’s line of cases is that governmental legal decisions must be made by persons who do not have a financial stake in the decisions. That is why the Supreme Court has repeatedly stressed that the principle of no financial interest extends beyond direct sharing in fees and costs, extends even to quite small financial interests, and is intended to insure there is no “possible temptation to the average man” that “might lead him not to hold the balance nice, clear and true.” The principle of no financial interest is a principle of clean government (of government that is different from many of those we deal with elsewhere in the world, e.g., the Middle East). Were the principle confined to those acting as a judge, then, for example, a city solicitor could permissibly make a legal ruling (e.g., a decision on real estate matters) because he or she would receive extensive financial benefit from the ruling but not from a contrary one, or an attorney general, state or federal, could take one legal position rather than another because he or she would benefit financially from the one taken but not from the one rejected. This is simply not an admissible interpretation of the Tumey-Caperton line of cases, since it would allow governmental legal decisions to be made by and in the interests of the financially interested, often to the detriment of large numbers of citizens, as in the Madoff case.
Though discovery is needed to fully flesh out the Trustee’s financial arrangements with Baker & Hostetler in regard to the Madoff case, enough is known already to make it appear that the Trustee’s arrangements put him in serious violation of the Tumey-Caperton line of cases. Because of the violation, the Trustee cannot be allowed to continue in the case, nor can the law firm which fostered the violation for its own financial benefit remain in the case. (With regard to its financial benefit, one notes that its fees thus far are between 175 and 180 million dollars, and are expected to eventually total somewhere in the neighborhood of a billion dollars.) The Trustee and the firm are tainted by the violations they fostered.
As well, the decisions of the Trustee must be revisited by a new and completely independent Trustee, so that the crucial decisions in the case will be made by an official who does not have a financial interest in them. The one exception to revisiting the decisions may ultimately be the decision to use CICO. That decision was argued in court by the Trustee mainly on the basis that CICO was permissible, not that it was mandatory. But at times there were overtones of mandatoriness. If the Second Circuit were to rule that either CICO or the FSM are mandatory, then the Trustee’s decision for CICO could not be revisited by a new Trustee. But if the appeals court were to rule that a Trustee is free to use either CICO or the FSM at his or her discretion, then the decision for CICO should be revisited by a new, independent Trustee because he or she might decide differently than did the present Trustee, who will benefit personally to the tune of millions or scores of millions of dollars from the decision to use CICO.
Finally, this Court should order discovery into the financial arrangements between the Trustee and Baker & Hostetler, and, if the Trustee continues to deny his decisiomaking role, into the process of decisonmaking involving the Trustee and SIPC.
Lawrence R. Velvel, Esq.
Dated: June 17, 2011