Velvel on National Affairs

President O’Bomber Defends Acceptance Of NoBull Prize For Implementing Philosophy Of Peace Through War In Goniffstan.

2009-12-14T14:39:00.000-05:00

December 14, 2009

President O’Bomber Defends Acceptance Of NoBull Prize For Implementing Philosophy Of Peace Through War In Goniffstan.

In a wide ranging interview, President B. Rack O’Bomber defended his refusal to reject the NoBull Peace Prize. He had been urged to reject it by American militarists on the ground that sometimes the NoBull Prize had been awarded to people who had contributed to peace, and therefore the NoBull Committee was a bunch of hypocrites.

President O’Bomber began the interview by explaining his new post-campaign philosophy that, in order to reach peace, you must first have war. “The Pentagon and the right wing have persuaded me of this great truth by powerful historical arguments,” he said. “To have peace in 1918, nations first had to fight World War I. How could peace have broken out in 1918 without first fighting World War I? The same has been true many times in our history. How could peace have broken out in 1945 without first fighting World War II? How could peace have broken out in Viet Nam in 19, in19, well, wherever it was, if we had not first fought the Viet Namese War (which the Viet Namese, in a fit of anti-American viciousness, call the American War)? I understand all this,” he said, “so I am happy to accept the NoBull Prize even if the NoBull Committee is a bunch of hypocrites because they previously gave the NoBull Peace Prize to people who had not created war and therefore had made no contribution to peace. I prefer to think that they have now seen the light of American exceptionalism, that they now recognize the truth of the American theory of making peace as we continuously did with Native Americans, with the Philippines Insurrectionists, with Germany and Japan, with Viet Nam, and so forth.”

President O’Bomber said that he nevertheless feels very humble in accepting the NoBull Peace Prize because his accomplishments are so much less than those of deserving past recipients. “I am only fighting two wars and, more importantly by far, I have only been fighting wars for a brief amount of time,” he said. “Whereas Henry Kissinger and Le Duc Tho managed to implement the theory of peace through war by keeping the Viet Nam War going for four years or so. For an accomplishment like that they truly deserved the NoBull Peace Prize.” He added, “Didn’t they even argue over the shape of the table in order to keep the war going? That was genius, sheer genius. I wish I were able to do something like that. I fear that I won’t be able to. Good Lord, Goniffstan is so poor that there are only five tables in the whole country. So how could I get away with arguing over the shape of a table?”

“However,” he mused, “we are fighting to create an honest country, so maybe I can argue that we have to stay there until people in Goniffstan stop stealing. That will never happen. ‘Gonniff’ means thief in Yiddish, you know. Rahm Emanuel has told me that and Larry Summers verified it (like what’s his name, I trust but verify), and the country has warlords who steal, a government that steals, citizens who steal. No, stealing will never stop in Goniffstan, and therefore maybe it will be my ‘table,’ so to speak. We are fighting to create an honest country, and that will never happen, so I will be able to fight in Goniffstan for years and years. Ultimately I will be as deserving of the NoBull Peace Prize as Kissinger and Le Duc Tho.”

“You know,” he said to this reporter, “I’m really glad we had this interview. It has enabled me to think things through. Those damn people in the Pentagon don’t present me with the kind of clear, unassailable logic that I’ve reached today.”

President O’Bomber denied that in Cairo he had said that America had fomented the overthrow of Mossadegh in 1953. “I was misquoted,” he said, “viciously misquoted by all the left wing media -- and there is no other kind -- all over the world.” He would not, however, elaborate on how he had been misquoted. He would say only, “Look, it was all Mossadegh’s fault. Kermit Roosevelt had nuthin’ to do with nuthin’. The very idea -- that a descendant of Theodore Roosevelt could have anything to do with imperialism!! It’s offensive. Let’s face it: Mossadegh wanted the Iranians to benefit from Iranian oil -- he deserved whatever he got. And what he got was not oil.”

President O’Bomber commented on the allusion to Martin Luther King in his acceptance speech. “What did his non-violence ever accomplish?” asked the President. “I’ll tell you in one sentence. All it accomplished is that it got him shot. By some Hitlerite who did not believe in non violence, no less. The same is true for Gandhi,” he added. “All that non-violent crap just got him shot too. And nobody gave a damn about India anyway until it developed the atomic bomb. Then people started to listen to India. Including Pakistan, which listened so hard that it developed its own bomb, called the Kashmiri Special.”

To your reporter’s immense surprise, President O’Bomber criticized the Wall Street Journal of all papers for truncating a quotation, from his Cairo speech, that expressed his views of how to proceed in the world. The Journal, he said, had left off his all important last sentence when it set forth a quote from his Cairo speech in a heavily bolded special section next to his picture on Friday, December 11th. The full quotation, with the all important last sentence italicized, which the Journal omitted, he said, is:

There must be a sustained effort to listen to each other, to learn from each other; to respect one another; and to seek common ground. And then open fire.

The President found it especially puzzling that this sentence was omitted by a national newspaper that had moved heaven and earth to try to prove that he had been born in Kazakstan, not the United States, and had unearthed the previously well kept secret that his first name is the Gallicized (i.e., Frenchified) “Bom,” which in English is Bomb, so that his name, Anglicized, is Bomb Rack O’Bomber. (Some of his closest family members, who are southerners, and are used to double names that are run together, like Bobby Joe and Billy Bob, run his first and middle names together and call him Bombrack, so that his correct title and name are President BombRack O’Bomber.)

Irate at the Wall Street Journal, the President expressed great pleasure at what he called, off the record (but like a good reporter I am going to tell you anyway), “the completely thoughtless, vacuous, but wonderfully favorable editorial in the New York Times. The Times editorial,” he said, “had completely accepted his view, repeatedly expressed at the NoBull festivities, that it is “just war.” “It is true,” he said, “that while the Times’ editorial said ‘we agree that this war . . . is a necessary one,’ it was unable to give reasons for this view. “But that inability to give reasons is not the important point. The important point is that they support anything I say. I agree with Stephen Colbert. I am the decider. My press secretary tells the press what I’ve decided. And the job of the press is to write down and tell the public what I’ve decided. The Times carried out its function beautifully. Just like with WMDs.” “It was almost as great as the trumpets blaring in the hall where the NoBull Peace Prize was awarded,” Mr. O’Bomber added.

President Bombrack O’Bomber conceded in the interview that, because of American exceptionalism, it will be this country, and no other, which decides when and where wars shall be fought, who shall be killed, and so forth. “If that point of view is a criticism,” he said, “then, as FDR said of his wealthy capitalist opponents, ‘I welcome their enmity,’ or something on that order. Somebody has to decide who should be killed all over the world,” he said, “and, for my money, our record with regard to the Native Americans, the Filipinos, the Central Americans, the Viet Namese, the Iraqis, and now the Goniffs prove that America should be that somebody.”

“This is, after all, an evil world with many evil people,” he said, “and now modern technology allows a few small men with outsize rage to murder innocents on a horrific scale. So, thank God that modern technology also allows an even smaller number of us big men to decree the deaths of thousands or hundreds of thousands or even millions of innocent people.” “Us big men, they don’t call us predators or drones for nothing,” he added.

Mr. O’Bomber added that he would have no hesitation in invading what he called Yeahman if members of Al Qaeda congregated there, as is being reported. “Look,” he said, “they tell me that there are only 100 members of Al Qaeda left in Goniffstan. That’s good. It will enable us to destroy large swaths of the country without strong opposition. It will also enable us to invade Pakistan to kill the rest of the Al Qaedas without large numbers of American soldiers being tied down in Goniffstan. The government of Pakistan welcomes an invasion,” he said. “It has publicly made a statement saying “We welcome the U.S. invasion. Please bring in 50,000 heavily armed American troops with destructive artillery and fighter bombers.”

The President added that “they also tell me that lots of Al Qaedas are now going to Yeahman to regroup, instead of to Pakistan. Yeah man, that’s perfect. We will be able to invade both Pakistan and Yeahman. Yeah man, that’s great.”

Your reporter mentioned that, unlike the government of Pakistan, the government of Yeahman had not said it will welcome an invasion. “Look,” he replied, “that is no problem. We will simply give them a lot of money. It works in Chicago. It works with Congressmen. Why wouldn’t it work with the Yeahmanis.” (Subsequently, the government of Yeahman sent an official diplomatic protest at being compared to Chicago or Congressmen.)

President O’Bomber also commented on the (lightly reported) fact that he had told cadets at West Point that Viet Nam is a flawed historical analogy. When I asked him why he thought so, he forthrightly said, “Damned if I know.” But then he elaborated a bit on why there could be no analogy. “Look,” he said, “my military advisers, starting with General Cristol, tell me that Viet Nam and Goniffstan are thousands of miles from each other. So there obviously can be no analogy. What’s more, we were unable to create a government worthy of the name in South Viet Nam. The government there was so bad that we had to allow a coup in which the Diem brothers were killed. Ho, Ho, Ho. But now we are able to create stable, solid government in Goniffstan that all the citizens well love, like in Iraq. So there can be no analogy. Anyway, as I said, Viet Nam and Goniffstan are thousands of miles apart.”

Oh, I almost forgot,” he said, “there is another reason why the analogy between Viet Nam and Goniffstan is seriously flawed. In regard to Viet Nam, the American government made terrible, anti-historical mistakes without giving serious thought to the problem. Here we are making terrible anti-historical mistakes after thinking about the problem. We even thought about it extensively. These facts make all the difference. Look, it’s one thing to be idiotic without thinking about something. It’s another thing to be idiotic after thinking about it. So there can be no historical analogy.”

“Anyway,” he said, “although military men wanted to fight in Viet Nam, and military men want to fight in Goniffstan, they are different military men. So again there can be no analogy.”

Your reporter concluded the interview by asking President Bombrack O’Bomber what he was going to do with his NoBull Peace Prize. “Why, I’m going to put it right up there on the wall next to the three-foot high, two-foot wide, two-inch thick, solid gold award I got from the Wall Street World Class Talk Bureau for having -- and I quote -- ‘the most golden tongue in the last half century combined with the longest period of no, little, or inadequate actions. And also with deep gratitude for putting Larry Summers and Tim Geithner in power while pretending that you did not become President to bail out Wall Street banks that caused the financial crisis.’ I’m very proud of that award too -- although it is a little heavy when I wear it. Getting it made it completely worthwhile to screw the little people who lost their homes, to give hundreds of billions to Wall Street, to keep Guantanamo open, to strongly support the state secrets privilege, to insist on non-punishment for warmongers, and to adopt other Bushian positions which I untrustworthily criticized as a candidate. Now I will have two trophies on my wall, and so I am very grateful to the NoBull Committee for swallowing my bull.”*

This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm or www.youtube.com/user/mslawdotedu; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

*

2009-12-07T13:22:00.000-05:00

December 7, 2009

Re: Michigan Drops Football.

The decisions by Hofstra and Northeastern Universities to drop football had ramifications in the Midwest yesterday. Thus, the shocking headline on the front page of today’s New York Times, in two inch high black letters across the entire six columns of the front page, was “MICHIGAN DROPS FOOTBALL.” This was only the seventh page-wide headline in the New York Times in the last 68 years. The others were “JAPANESE BOMB PEARL HARBOR,” “GERMANY SURRENDERS,” “JAPAN SURRENDERS,” “KENNEDY ASSASSINATED,” “NIXON RESIGNS,” and “GEORGE W. BUSH READS BOOK.”

The subheadline to the two inch high, six column headline of “MICHIGAN DROPS FOOTBALL” was done in one inch high type. It said “But Nobody Knows Because It Continues To Play.”

Then came the lead paragraph, which read as follows:

“In a shocking development that stunned the entire sports world today, the President of the University of Michigan, Mary Sue Coleman, announced at a press conference that the school had dropped football. Nobody will know this, however,” she said, “because we shall continue to play. We are continuing to play so that we can continue to lose to Ohio State every year. It wouldn’t feel normal in Ann Arbor in the last ten days of November if we hadn’t just lost to Ohio State.”

The President then explained the history of Michigan’s decision to drop football, in answer to a reporter’s question of whether Michigan’s dropping football was in any way caused by the fact that its players kept dropping the football -- including dropping it out of the quarterback’s hand in the end zone against Ohio State. The President’s explanation was clear and to the point; she did not fumble around. “No,” she said, “The fact that our players continually dropped the football did not bear on why we dropped football. Rather, we began thinking about it in 1940 just after Robert Maynard Hutchins announced that the University of Chicago was dropping football. We began thinking that, if a school with a storied football history like Chicago could drop football, why couldn’t we? After all, our storied football history was similar to Chicago’s, which beat one of our point a minute teams 2 to nothing in 1905. Chicago had Stagg, we had Yost. Chicago had Jay Berwanger, who won the first Heisman Trophy and whose pose is captured in the Trophy itself, and we had Desmond Howard, whose pose was captured in the end zone by TV cameras. Chicago gave up football for Economics, while we could give it up for Ed. School or the Marching Band. Chicago’s field was turned into the site of a nuclear chain reaction, while ours can be turned into a forest, as we do at commencement when Birnam Wood is brought to the Big House. So everything was or could be the same. So we decided to do it.”

At the press conference the President pointed out that for decades Michigan had not improved, as indicated by the story about the aged alumnus of 1948. It is said that, after Michigan’s Rose Bowl victory over Southern California on January 1, 1948, its Coach, then Fritz Crisler (not the violinist, who spelled it Kreisler), found the alumnus crying in a hotel in Pasadena. Crisler asked what was wrong, and the alumnus is said to have replied, “I went to the first Rose Bowl game ever played, on January 1, 1902, when Michigan beat Stanford 49 to nothing. Today, it defeated Southern Cal 49 to nothing. Forty-six years and there has been no improvement.”

At her press conference, President Coleman went on to say that, after about a dozen horrible years in the 1950s and 1960s, “Michigan was coming close to dropping football until its plans to do so were sabotaged, were derailed, by the unfortunate decades-long victories of Glenn Schembechler. But now that that is past us,” she continued, “we have been freed-up to implement the decision to drop football while, unlike the University of Chicago, disguising what we have done by continuing to play. And, as I said,” she added, “to keep up this pretense, each year in late November we shall lie down on the tressel to be run over by Ohio State. For we at Michigan have great respect for tradition.”

Meanwhile, Michigan’s fans are in a stupefied state of shock that has caused nine out of every ten of them to walk around with their months agape -- that’s 2,502,330 people walking around with their mouths hanging open. (As Dave Barry says, I’m not making this up.) The head of the Michigan Alumni Association, the inaptly named Samuel Winner, has announced that something must be done. He said he had tried to arrange a straight-up trade with Notre Dame of Rich Rodriguez for Charley Weis, but Notre Dame had refused because it was not getting sufficient value. Winner now is spearheading an alumni drive to offer the University of West Virginia 65 million dollars and the entire city of Cincinnati if it will take back Rich Rodriguez. Winner said, “We are not proud; we are open to negotiation. We are willing to also throw in John Beilin, Michigan’s basketball coach, who came from West Virginia, the President of the University of Michigan, plus two Michigan vice presidents to be named later.” The Board of Trustees of the University of West Virginia is reportedly dubious because, like Notre Dame, it is concerned over whether it will be getting sufficient value. However, a spokesman for the Board did drawl, “weellll, mebbe if they throw in Rich Little and a ten year supply of the Amazing Vegematic . . . . . . . .”

Meanwhile, back in Ann Arbor a crowd announced at 110,001 gathered at the University of Michigan Stadium -- at the Big House -- to protest the 230 million dollar luxury box building that overlooks the field on which Michigan will no longer be playing football while it plays at playing football. For two hours the crowd chanted “President Coleman, tear down that building.”

During the entire two hours the jumbotrons at either end of the field played Michigan’s new fight song, which has replaced “Hail To The Victors.” The new song is the “Dead March” from “Saul."*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm or www.youtube.com/user/mslawdotedu; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

Let Us Now Seek Competent Men.

2009-11-23T14:33:00.000-05:00

November 23, 2009

Re: Let Us Now Seek Competent Men.

This is being written because of something said to me last week by a writer whom I respect. The writer was interviewing me for an article, or a column, and said I should return to writing about things other than Madoff -- or at least in addition to Madoff. My time for writing has been taken up extensively, and exclusively, by Madoff for the last ten months or so, and the interviewer very generously said that, although the Madoff writing was valuable in its own way, still it is a loss that I am not writing on the political, economic and other events of the day. I don’t know that I think it’s such a loss, since I don’t feel I have much of a voice, but the interviewer was pretty adamant and, as said, I do have great respect for the person. So I shall at least try to say things about non Madoff matters now and again. Ergo this posting.

The interviewer might not be all that pleased, however, at what looks on the surface to be the subject of my initial returning effort: one of my very favorite subjects to write about, Michigan football. In writing and talking about this phenomenally important topic in the past, I have often said that my friends, my wife and I attended Michigan during the worst period in the history of Michigan football. Most of us came to Ann Arbor in 1955 or 1956, stayed there for law or medical school, and were done there in 1962 and 1963. (I personally was there from 1956-1963.)

Now that (according to the TV announcers) Michigan just lost its sixth straight game to Ohio State and its eighth of nine to Jim Tressel, has lost 13 of its last 15 Big Ten games, with 13 also being the total number of Big Ten games it lost in the seven years before Rich Rodriguez, has had two straight losing seasons, for the first time ever has lost seven or more games for two straight seasons, and has finished last in the Big Ten (in a tie with Indiana) for the first time since 1962, the news media have trumpeted that the only other times Michigan had two straight losing seasons were 1958-59, 1962-1963 and, if I remember correctly, 1881 and 1883. (Michigan didn’t play in 1882, it was said.) So two of the three times Michigan previously had two straight losing seasons occurred during my seven years in Ann Arbor. Bo Schembechler’s greatest accomplishment, I wrote a few years ago, was to rescue Michigan football from the nadir to which it had fallen, a rescue begun in his very first season of 1969 when Michigan defeated one of Woody Hayes’ greatest teams in a game that was one of the greatest upsets in college football history and perhaps was the greatest upset until Appalachian State defeated Michigan itself 38 years later in Ann Arbor in the first game of 2007.

When Michigan was undergoing the years of its nadir from 1957-1968, it was coached by two men whom my friends and I considered not competent and even dumb. (Forget their names. I’ve mentioned their names before, why blast them by name yet again for being incompetent and stupid, and, anyway, the cognoscenti know who they were.) The horrid irony in this was that Michigan, then as now, paraded itself as, propagandized itself as, and elitistly drummed into its students’ heads the idea that, it was and is a phenomenal academic institution. Here was an institution which lived for proclaiming its high degree of collective intelligence, accomplishment and competence, but was willing to countenance serious incompetence in its football coaching even though it had a stupendous prior football history. It was not as if Michigan, like the University of Chicago under Robert Maynard Hutchins around 1940 or so, said to hell with big time college football because it’s assertedly inconsistent with being a great university, or like the Ivy League deemphasized football because of its adverse effect on education. No, indeed. Here was an institution which proclaimed itself academically elite, continued to think college football very important, but countenanced mediocrity in coaching that one at least hopes it would not have countenanced academically.

It seems to me that that is exactly what is happening now. Michigan, while proclaiming itself academically elite more than ever (if such is possible), is simultaneously countenancing incompetence and stupidity in its football coaching while continuing to proclaim football to be very important. In this regard, I cannot do better at explanation than I did about a year ago in a post dated November 3, 2008, and so I have simply appended that post. The mistakes, stupidity and lack of attention to fundamentals that it complained of almost all continue to exist.

I suppose I could add a few things to last year’s post, like hiring as the defensive coach a guy who did truly miserably at his last job, as head coach of Syracuse -- so nobody can really be shocked that the defense mainly sucked most of the time this year, as last. And I could make an addition to a sentence in last year’s post that mentioned “the fumbles, the simple dropping of the ball as if it were the proverbial hot potato,” a sentence that continued by saying that things like this bespeak that the coach “does not pay much attention to basics, to fundamentals.” The addition I would make to that sentence would revolve around the fact that last Saturday, against Ohio State, the Michigan quarterback simply dropped the ball out of his own hand when he was trying to run out of his end zone, resulting in an Ohio recovery for a touchdown. Can you believe it? -- just dropped the ball out of his own hand when running out of the end zone!

What, then, will the University of Michigan do about the situation? The smart money probably bets that the answer is, “Nothing” (and in fact today’s New York Times reports that Bill Martin, the Athletic Director who hired the coach, Rich Rodriguez, said Rodriguez will return again as head coach next year, so I imagine we should expect another miserable and incompetent season in 2010). All the expectable excuses will be made. It will be said that Rodriguez has only had two years. He should receive at least a third year, or maybe even a third and fourth year, to put his “program” into place. (In America we no longer have college football “teams.” The word “teams” lacks sufficient gravitas. It is not “heavy” enough to denote the world shaking importance of college football. So instead of having college football “teams,” now we have college football “programs.”) He needs more time to bring in his kind of players, and more of them. He has a six year contract, so it would cost too much money to buy him out. Etc., etc. (Whatever happened to the concept of firing someone without liability, of terminating someone’s contract without liability, due to his incompetence and consequent failure to live up to (an at least implicit) term of his contract?) And the fools who hired the guy in the first place, and who did so in a process that was highly questionable to put it as nicely as possible (see last year’s appended post), are not going to want to admit that they went and hired a guy who is incompetent. (Notre Dame admits its mistakes. Michigan does not.)

* * * * *

Now, remember that I said I have written this post because the writer who interviewed me insisted adamantly that I should go back to writing on things other than Madoff. Yet writing about Michigan football would hardly be what the interviewer had in mind. As an importantly related matter, the interviewer appeared to be struck by my explanation that the reason I generally put 50 or 60 hours of work into reading, taking notes on and outlining each book whose author I interview on MSL’s TV program called Books of Our Time, is that I have a dread of appearing or being incompetent -- a dread which, ironically enough, seven years at Michigan did no little to foster. Putting in the hours of work helps eliminate the possibility of incompetence as an interviewer on the book show. But -- and here is where the interviewer’s desires and an article about Michigan football come together -- a dread of being or seeming incompetent does not have widespread purchase in this society. Politicians blow off about anything and everything with almost no knowledge of what they are talking about: Good sound bites, and fluent sounding (Obamaesque) speech, are the desiderata, not competent opinions. Corporations (and their lobbyists) put out obvious bovine defecation to justify obscene profits, even more obscene paychecks, interest rates that are through the roof, etc. Much the same is true in spades of journalists, especially columnists, whose prior views are rarely scrutinized to determine the competence of prior views which they proclaimed or to expose the mistakes they incompetently made one after the other. (Are you listening, New York Times? (There is no chance.)) Universities and colleges have a zillion excuses for why higher education has become so unaffordable (and why university presidents need to be paid a million dollars or more). People do not know and do not care what history teaches and that in effect we are repeating unfortunate history that has occurred time and again since 1898 (and in some ways since Alexander the Great) in middle eastern wars. Many people do not know, and even fewer care, that the people in charge of the economy are those, or among those, who brought us economic disaster in the first place.

One does not hear it said that a fundamental problem with G.W. Bush -- as he had proven time and again as an adult even before he became President, and as he repeatedly proved again as President -- was that he is not competent: we elected as President someone who was not competent, and nobody cared about this. One rarely hears that the question about Obama today -- a question about a guy who speaks brilliantly and (far too) often, is whether he will prove competent in action too or will prove to be the opposite. There is no conception that the country -- just like Michigan, with its elitist braggadocio combined with incompetence at football -- proclaims itself to be the greatest country in the world now or ever -- and woe betide anyone who might publicly question this propaganda -- while in fact it lurches incompetently from military disaster to economic disaster to military disaster to economic disaster.

One does not usually hear in this country, in any field, a refrain of “Has she shown herself to be competent?” Nor does one hear its twin in importance, of which I have often written: “Has she shown herself to be honest?” These are the two questions which count more than anything else most of the time. Yet, they are the questions least heard.

With regard to Michigan football, there is thus far but little to indicate coaching competence. With regard to the economy and war, there is thus far but little to indicate competence. Rather, there are mainly indications that military and political leaders look to and intend to repeat the incompetent policies and mistakes of the past. In education, we are conditioned to expect more of the past -- with even higher costs but, it seems, even lower quality. Ditto for many things, even most things. And frankly, as with Michigan football, so too with the economy, war, education, and so many other fields: we are going to have big trouble, continuous trouble, unless and until there is a cultural sea change under which the question of competence of views and actions, and the question of honesty, become the questions that are asked in every field.

Don’t hold your breath.

November 3, 2008

Re: Bring Back Bump Elliott.

Bring back Bump.

Only readers who followed Michigan football under Coach Bump Elliott from 1958 through 1968, which probably was the worst single stretch in Michigan football history, can understand in their guts the depth of disappointment, frustration and even anger in that sarcastic remark. The remark is directed at the fact that Michigan may have made the mistake of a lifetime, so to speak, when it hired Rich Rodriguez as coach to replace the underachieving Lloyd Carr. Carr was an underachiever, even though he won about 75 percent of his games, because he should have done even better in view of the fantastic talent Michigan had, and because he was unable to beat Ohio State after it traded John Cooper for Jim Tressel. Yet right now Carr looks pretty good compared to Rodriguez.

Both before and after Michigan’s loss to Purdue last Saturday, which was its fifth straight, I believe, the three pre and post game announcers on the Big Ten Network were discussing the situation in a way that sounded a bit unusual to me. For it seemed to indicate at least the possibility of an underlying subtext critical of Rodriguez or of what he might or might not do now. It reminded me a bit of, though I think it was less overtly critical than, remarks made about the Michigan coaches last year by Lou Holtz, I think after the loss to Appalachian State which was the beginning of the end for Carr (who had previously been subject to criticism). When the announcers, who are supposed to be paid cheerleaders, instead speak critically or indicate a subtext of criticism, you’ve got a real problem, it seems to me.

As the entire college-football-following world must know, this is a remarkably disastrous year for Michigan. It will be its first losing season in over 40 years -- since 1967. It will be the first time since 1962 that it lost seven games -- which it has done only four times in its history. Worse, it is almost certain to lose eight, which it has never done before, and it is about equally likely to lose nine or even ten, since it still has to play some good to very good teams, including Minnesota, Northwestern and Ohio State. And this year will end a 33 year string of bowl game appearances. All this, in college football terms, is a total meltdown. It reflects a level of incompetence like that of the Federal government under George W. Bush.

Although they never foresaw a disaster of this magnitude, there are lots of people (pretty much everyone who is au courant, I gather) who foresaw a bad year for Michigan. After all, it lost three All-American or near All-American level seniors who joined the NFL (Long, Hart and Henne). It lost several other outstanding seniors. It lost some great juniors (Mannington and Arrington) who opted to go to the NFL, and, the Big Ten Network announcers said, it lost a total of seventeen players who had remaining eligibility.

Above and beyond all this, and I think perhaps far more important because Michigan always has, and I gather still has many terrific football players, it was known that the new coach would be bringing with him and would install a totally different offense, the spread formation, for which Michigan’s current personnel, it was feared, might not be suitable or which they might find it hard to learn -- as indeed seems to have proven the case -- so that it would take a few years for Rodriguez to attain the success at Michigan that he had achieved at West Virginia.

These facts would seem to inherently mitigate Rodriguez’s responsibility for the current disaster. Yet there are other factors which point in the opposite direction, i.e., which point to culpability. For example, though it was expected that the offense might find it difficult to learn and run its new system, it was also expected that the defense could be alright, even pretty good. But it stinks. It’s just lousy. It is unable to stop other teams for the full course of a game, and correlatively and worse, it seems unable to tackle. When did coaches stop teaching players to wrap their arms around runners’ legs and instead try to tackle them by wrapping their arms around the runners’ torsos -- their upper torsos, no less -- so that the runners’ legs can keep churning and they may well break the tackler’s grip, as has been occurring all the time against Michigan? (Can you imagine trying to stop Jim Brown this way? Well, you can’t stop far lesser runners, either, this way.) Incompetently tackling torsos instead of legs seems to be par for the course for Michigan these days. (So, incidentally, it is not surprising that Michigan tacklers too often get stiff armed (in the face, sometimes) and get knocked off their tackles.) Tackling torsos instead of legs is simply a result of bad coaching, if you ask me, and reflects badly on Rodriguez and his staff.

Then there is the question of fumbling. Michigan fumbles all the time. Too often, as well, and wholly aside from dropping any passes, Michigan’s players seem simply to drop the ball out of their hands even though they are not being tackled at the time. (The Big Ten Network announcers claimed, if I heard them correctly, that Michigan had fumbled away the ball 24 times in eight of its games, or three times per game, which, I think, doesn’t even count the times players simply dropped the ball out of their own hands but then picked it up.)

These fumbles and drops are simply nuts. They reflect horrible coaching. Good coaches won’t put up with it. They would take steps to train people not to do it, and will bench people who continue to do it. Can you imagine what Schembechler would have done if someone kept fumbling? It wouldn’t surprise me if minor physical violence could have resulted.

Then there are questions about Michigan’s kick off game and its quarterback. As for kick offs, it seems unable to kick the ball into or anywhere near the end zone. Sometimes it squibs the ball, which doesn’t even get into the air - - this is amazing. With regard to the quarterback, who transferred from Georgia Tech, he seems adroit at only two things: throwing a bullet pass directly into the ground three to five yards in front of an open receiver, and throwing the ball far over the head of a receiver who is wide open downfield. They should send him back to Georgia Tech. Of course, Michigan has nobody better, although one may question whether any other quarterback it has would be worse.

Frankly speaking, the horrendous defense, the tackling of torsos rather than legs, the fumbles, the simple dropping of the ball as if it were the proverbial hot potato, and even the apparent failure to train the kicker, and to train the quarterback to throw accurately, bespeak a certain and horrible possibility: that unlike Schembechler, and even unlike Carr, Rodriguez does not pay much attention to basics, to fundamentals, but is instead concerned mainly with trying to teach people the apparently difficult to learn spread offense (which he himself pioneered). If this possibility is true, if Rodriguez does not pay sufficient attention to basics, it is going to take a long time for things to get better, if they ever do.

These matters raise certain questions, to which I would love to learn the answers. (Maybe some sports journalist might make inquiries. Ah, I guess not, since it would require competence to do so.) How is it that Michigan decided to hire Rodriguez? True, he had a very good record at West Virginia, although one might want to consider that West Virginia is in a league, the Big East, which is pretty weak in football, however great it may be in basketball. Teams like Cincinnati, Syracuse, South Florida, Connecticut and even Pittsburgh are not exactly synonymous with the phrase perennial football powerhouses, and Louisville and Rutgers have usually been relatively weak even if they had a couple of decent to good years recently.

One gathers that Michigan hired him in a semi desperate situation because Carr quit after the regular season and, it seems, it was turned down by the highly successful coach of big time LSU, Les Miles, who had played and coached at Michigan, had been considered Schembechler’s protégé, and for a long while, it had been thought, had been groomed for the Michigan job. No outsider I’ve read seems to know exactly what transpired between Michigan and Miles, but there have been rumors that Miles was angry because Carr had treated him badly and had in effect nixed him for awhile or at least had tried to do so and had succeeded for awhile. I don’t know about the truth or lack of truth of this rumor, although it is public knowledge that a serious dispute had arisen over a recruit sought by both Michigan and LSU. (The details of the dispute are not pertinent here.) If the rumor about Carr’s effort to nix Miles is true, and if this caused Miles to get angry and to say the hell with Michigan if and when it finally decided it wanted him, then we would have the very ironic situation in which the underachieving Carr nixed the high achieving Miles, resulting in a new coach, Rodriguez, whose first year may prove the worst in Michigan football history.

Then there is also the question of didn’t Michigan consider that bringing on Rodriguez, with his new offensive system to which Michigan’s current personnel apparently is poorly adapted, would inevitably result in one or more bad seasons, maybe quite bad seasons, even if nobody could foresee the magnitude of the disaster that has occurred. If Michigan did not consider this possibility, its athletic big shots are incompetent. If it did but decided to go ahead with Rodriguez anyway, perhaps on the ground that he will succeed greatly after two or three years, when he has recruited his type of player, or perhaps because it found itself in a desperate situation, then one can say that a judgment of ultimate success can at least be questioned, although it could prove right in the end, and that acting out of desperation, if such occurred, is almost always a sure and stupid route to disaster.

One might also question why, if what somebody recently told me is correct, Michigan, in the face of the current disaster, recently finalized a contract of no less than six years with Rodriguez. Did it need to do this as a matter of good faith because it had made some kind of promise of six years to get him to leave West Virginia, or because he had been forced to fork over a large sum of money to West Virginia to settle the dispute which arose? Whatever the reason, unless Michigan’s football fortunes change drastically and quickly, it is likely to find itself spending many millions to buy out his contract and cure its mistake in two or three years. This is only the more true because Michigan is in the midst of building huge, very costly, fancy-and-high-priced-suites as a large addition to the Big House in order to attract big money from the wealthy and corporations. They won’t flock to pay a fortune for suites to see a team that loses seven or eight games a year each and every year. They wouldn’t do it anyway, they especially won’t do it in the disastrous economy we are facing, it serves Michigan right if the suites fail because, as so many professors and alumni objected, the whole deal is another Reaganesque/Bushesque sellout to the rich, and, in any event, the need to sell out the new addition is going to put a lot of pressure on Michigan to get a coach who will win if Rodriguez doesn’t.

Then there is the question of why did Rodriguez himself leave West Virginia? He claimed, if I remember correctly, that it had welshed on some promises to build new facilities, and he said that, even though Michigan was losing lots of people to the NFL, you can’t overlook the fact that Michigan is Michigan, which, I take it, is a way of saying he thought Michigan will “reload.” But he had to know, and I gather did know, that the inception at Michigan would be rough because of the difficulty of installing his system. Maybe this wasn’t enough to deter him, and maybe he wanted to play on a bigger stage and believed he would succeed there. Or, as indicated by the bitterness of West Virginians who considered him an already decently or well paid but now self-aggrandizing sellout who left the people of his home state in the lurch, maybe his character isn’t what it should be. He professes to be surprised, by the way, at the depth of West Virginians’ anger at his leaving suddenly and unexpectedly after bringing football glory where it had not existed before. Is he stupid? Did he not understand what college football glory means in America, especially in states like Nebraska and West Virginia which do not have all the same outlets as, say, New York or California?

As well, maybe he didn’t consider that, although the Big Ten is no longer the top of the heap as it was by far in the 1950s when I was growing up, and has now been vastly surpassed for decades by the SEC and the Big 12, nonetheless succeeding in the Big 10 against the likes of Paterno, Tressel, and now a bunch of others too like Dantonio, Ferenz, Fitzgerald, Bielema and others might be a lot harder than achieving success in the weakstick Big East. (I once knew a coach who, though he later became a huge success in the pros, found out how hard it can be to be successful when one goes from an “inferior” college football league to a far better one with lots of smart coaches.)

Nor I must say, do the interviews he gives seem to show much intellectual firepower, since all he seems able to say is we have to go back to work, we have to keep on working and trying to improve, we have to hope the better results we are getting in practice will show up on Saturday too. This was about all he said after the loss to Purdue and his sadness and depression were so visible that one had to feel sorry for him.

It is true, of course, that despite the current disaster, all is not lost yet for the long run. Rodriguez was 3 and 8 in his first year at West Virginia (just as Joe Gibbs lost his first five games when he took over the Redskins with whom he later won three Superbowls, and Jimmie Johnson was, I think, 1 and 15 in his first year in Dallas before later winning some Superbowls). As well, Michigan seems to be playing an inordinate number of freshmen this year, and will likely do so again in 2009, when Rodriguez will have recruited his type of player and the 2008 freshmen are sophomores. If Rodriguez is a good coach, there ought to be major improvement in 2009, and even more in 2010. If he is a good coach, he should be challenging for the Big Ten Title in 2010, if not in 2009, and by 2011, in his fourth year, his team should not only be challenging for the Big Ten Title, but, as in the “old” days, should be in contention for the national championship. If his record is still lousy in 2010, and only the more so if it is still lousy in 2011, Michigan had better cast him out, and do so in plenty of time to come up with a good coach instead of having to conduct a hurried search as it had to do this time. It better cast him out lest its vaunted tradition go down the drain, as it did before under Bump Elliott after almost sixty years of football excellence under Yost, Crisler and others, and lest those expensive luxury suites it is building be relatively unpopulated and a big financial loss.

* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm or www.youtube.com/user/mslawdotedu; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

The Recent Change In The Name Of Our Country.

2009-11-13T14:53:00.000-05:00

November 13, 2009

Re: The Recent Change In The Name Of Our Country.

My writing having been taken up entirely by l’affaire Madoff for almost a year, it is a pleasure to turn to a very short posting on another matter. Here it is: We now live in the United States of Goldman, Sachs.

That’s it. That’s the whole post. Explanation of its meaning is unnecessary for anyone who has read the newspapers for the last year (although reading the newspapers is an increasingly quaint idea, like Alberto Gonzalez’s view of the Geneva Conventions).

A Hebrew scholar, when challenged to recite the entire Talmud while standing on one foot, is said to have replied, “Do not do unto others what you would not have them do unto you. All the rest is explication.” So too here. We now live in the United States of Goldman, Sachs. All the rest is explication.

I shall not explicate. I shall, however, present some of the corollaries.

The song whose first line is “O beautiful for spacious skies,” has been renamed “Goldman, Sachs The Beautiful.” Some of the last lines have been changed to “Goldman, Sachs, Goldman, Sachs, God shed his grace on thee, And crown thy good, with brotherhood,” etc.

Another of our patriotic songs, this one written I think by Izzy Balin, er, Irving Berlin, now begins, “God bless Goldman, Sachs, Land that I love, Stand beside her, And guide her,” etc., etc.

The history books have been changed also. The name of the explorer who gave his first name to our nation and to two continents has been changed to Goldman, Sachs Vespucci. Accordingly, the two continents have been renamed North Goldman, Sachs and South Goldman, Sachs.

The English language has been changed too, due to a particular early bailout that saved Goldman, Sachs’ bacon (about 85 billion dollars worth of its bacon). To give assistance to a particular nation in order to pull it out of possible deep trouble is now to give it foreign AIG. To help a friend is to give him aig. To be a Senatorial assistant is to be a legislative aige. Meanwhile, the sickness formerly known as the ague is now the adue.

The names of our navy ships have been changed. We no longer have the USS Ronald Reagan or the USS Stennis, for example. We now have the USGSS Ronald Reagan and the USGSS Stennis.

People who live in and wish to escape despotic foreign countries no longer apply for visas to come to America. Now they apply for visas to come to Goldman, Sachs. And passports of American citizens now say, in large gold letters on the front, “The United States of Goldman, Sachs.”

Still under consideration is the question of whether the motto on our coins should be changed to “In Goldman, Sachs We Trust.” Some people think that would be going too far. They say that it is one thing to change the name of the country, but quite another to equate the country with God. Their position is undercut, however, by the fact that they are religious fundamentalists. Secularists find nothing wrong with changing the motto on our coins. And economists who are monetarists, or who think well of what the Federal Reserve has done, are vociferously in favor of the change. They also want the head of the Federal Reserve to change his name to Ben Bankee. This would make him Ben Bankee, Chairman of the Federal Reserve Board of the United States of Goldman, Sachs.*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm or www.youtube.com/user/mslawdotedu; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

The Briefs Of The Trustee And SIPC On The Net Equity Question.

2009-10-23T14:24:00.001-04:00

October 23, 2009

Re: The Briefs Of The Trustee And SIPC
On The Net Equity Question.

Having read the opening briefs filed by the Trustee and by SIPC on the net equity question, I thought to set down a few of what I believe are my most important impressions. Admittedly, whether I correctly understand all parts of the briefs seems to me a question. Like most Madoff victims, and perhaps even like a large number of the army of lawyers now involved in cases and in advisory roles, less than one year ago I had not even ever heard the words SIPC or SIPA to the best of my knowledge. Like other victims, I have spent the months since December 11, 2008 trying to play catch-up with regard to this very complex statute, and with regard to other matters too, such as tax matters. In regard to SIPA and SIPC, the victims, often not even lawyers, struggle to play catch up while confronted by a SIPC management and a Trustee who not only are lawyers but who have spent about 34 years or so making their livings from this complex statute, and in some cases have written about it. (The briefs sometimes quote their own writings.) So it can be difficult for us Johnny-come-latelies to be sure we have things right or, with regard to the recent briefs, to be completely confident we understand aright all that is being said or claimed.

With this disclaimer of certainty, then, let me nonetheless set forth here some of what seem to me the most important underlying points of the briefs of the Trustee and SIPC. As implied, I shall not attempt to be catholic with a small c in my descriptions or comments, but rather shall focus on what appears to me most important. With but few exceptions, I shall not, for example, either here or in a brief to be filed in about three weeks, discuss the cases relied on by the Trustee and SIPC or the Congressional reports or other legislative history. For that kind of legal analysis, and for most other legal analysis of the kind usually contained in responsive briefs, I shall rely on the hoped-for efforts of excellent lawyers who already have shown, in prior briefs, that they are very knowledgeable on the pertinent matters, lawyers such as Helen Chaitman, Brian Neville and Jon Landers. My efforts, both here and in a forthcoming brief, will usually be of a more philosophical or “overall” cast.

Let me start with a feature of the briefs of the Trustee and SIPC that strikes me as being somewhat of a psychological ploy as well a legal argument. (In the 1940s, a Supreme Court Justice said of a case in which the Supreme Court reversed itself in just a year or two -- I think the comment was made in the second of the so-called flag statute cases decided during World War II -- that the second opinion would be of more interest to students of psychology than to lawyers. That comment strikes me as applicable to parts of the briefs of SIPC and the Trustee.) The feature in mind is that the briefs contain lengthy, up-front, page after page descriptions of all the things Madoff & Co. did to create a phony universe in which nothing was real, not the supposed purchases and sales of securities or options, not the profits that were credited to victims, not what was stated on the statements received by victims, etc. One’s reaction to all this is, in a way, the sarcastic reaction of “Thank you very much. You are spending page after page telling us what all already know, including the bankruptcy judge. What a waste of time and print, and what a trial of the reader’s patience.”

But, as indicated, there seems to me to be an underlying legal and psychological ploy for this seeming waste of space. It is to cause the court to treat the whole case, everything, from the standpoint of “Everything here was false. Therefore the victims should not receive any treatment of a type that might accrue if anything had been real.” By means of this underlying ploy, the Trustee and SIPC hope to get the court to ignore, for example, innocent victims’ legitimate expectations that they had what their statements showed. (One of the briefs even takes the truly amazing position that victims’ only legitimate expectation was that they owned securities, and not that they owned the dollar amount of securities shown on those statements. Do you know any innocent person who thought, from the monthly statements, that he or she owned securities, but not the dollar amount of securities shown on the statements?)

To take another example of the effect of the previously described ploy, by means of the underlying argument that everything was false, the briefs of the Trustee and SIPC also hope to persuade the Court to ignore the part of the New Times litigation that dealt with unbought but real securities, and instead focus exclusively on the part of the litigation that dealt only with unbought and unreal -- i.e, nonexistent -- securities. Once again the general underlying idea is, “Focus on the fact that everything Madoff did was fake and let that control everything you do -- regardless, by the way, of Congress’ desire to help investors, and regardless also, incidentally, of the fact that everything in New Times was also faked, but people whose unbought securities existed in the real world -- as did Madoff’s -- were given credit for what they would have made had the securities been bought. (The briefs pretend this is irrelevant because in New Times the existing but unbought securities increased in value in the real world, wherein Madoff profits existed only on his 17th floor computer. They ignore, however, the salient point that Madoff’s statements reflected prices in the real world, just as in New Times, and that this meant investors could check out the prices shown by Madoff (as some did), just as in New Times. (I gather that there were a few instances in which Madoff’s prices, or his names of securities, slipped up, and a tiny number of Wall Street experts were aware of this, as well as of the fact that he always appeared to buy and sell remarkably advantageously (i.e., had great “fills” in Wall Street parlance -- which the SEC was told of but ignored). But as a general matter that was almost always true, the phony prices he showed reflected observable reality.))

The briefs of SIPC and the Trustee also use another apparent ploy: They extensively present the history behind SIPA even though much of it seems irrelevant to the case. But my guess is that what they are attempting to do is to plant in the court’s mind, in this way, the idea that SIPA is in reality a part of bankruptcy law for virtually all purposes, that it should therefore be treated as just another part of bankruptcy law whenever and wherever SIPC says it should be (which, I believe, does not include the limits on Trustee compensation imposed by bankruptcy law -- surprise, surprise), that the people who have what they call a negative net equity on a cash-in/cash-out basis should not receive SIPC protection because they assertedly would not receive bankruptcy protection, and that, for these reasons, victims should not receive money from SIPC and will not receive monies from the estate, from the so-called “customer property” collected by the Trustee -- who is suing people for somewhere around 15 billion dollars in “customer property.” (I note that, for reasons which need not be elaborated here, if anything like this amount were to be recovered by the Trustee, then SIPC and some investors would make out like bandits under the theories espoused in the briefs of SIPC and the Trustee, while a host of investors would be victimized by receiving back nothing from SIPC and nothing from the bankruptcy estate.)

To try to further explain this very complex stuff (and assuming I have it right though I do not find the briefs’ explanations all that easy to understand), let me put it this way: The briefs say that SIPA is only a part of bankruptcy law, and that the amount of money given by SIPC to victims -- up to $500,000 per account -- is simply an advance on and a species of “customer property” that will ultimately be distributed from the bankruptcy estate, property in which a victim has no right to share unless, as under bankruptcy law, the victim’s actual cash-in exceeds his actual cash-out, with the statement of November 30th being completely irrelevant. Therefore, a victim who has a negative net equity on a cash-in/cash-out basis gets no advance from SIPC, since to give him an advance would be to give him “customer property,” in which he has no right to share.

Given what I at least found to be the difficulty of understanding the briefs on these matters, I can’t be sure I have it right. But I think I do, and, if I do, the matter seems to me to boil down to the view that SIPA is merely a part of bankruptcy proceedings, and that the ordinary rules of bankruptcy proceedings, as the briefs present them, are applicable. This view is, of course, quite convenient for SIPC in this case. But it does seem, at least to me, to ignore Congress’ intent to protect investors and thereby build crucial confidence in markets. For it ignores the Congressional desire to protect investors up to $500,000 for what they legitimately believed they were owed by a broker like Madoff, a belief long accepted in law as being based on written statements received by investors.

The legitimate question, I would think, is not, as the briefs would have it, whether SIPC investors should be treated as if a SIPC proceeding is just another bankruptcy case in which the ordinary rules of bankruptcy as presented in the briefs are applicable (ordinary rules which the briefs say include cash-in/cash-out) and therefore lots of Madoff victims should get screwed out of up to $500,000 by SIPC, and should likewise get nothing from the “customer property” collected by the Trustee, despite Congress’ clear intent to help them. Rather, the legitimate question is whether due to Congress’ intent to help investors, the rules of SIPA, under which so many have over $500,000 in net equity as shown by their November 30th statements, should govern not just in SIPA matters, but in the bankruptcy aspect of the case, too, i.e., should govern in the ultimate distribution of the estate after all recoverable “customer property” is recovered. In other words, if one has a positive net equity of, say, one million dollars for SIPA purposes on the basis of the November 30th statements and thus were to receive $500,000 from SIPC, but would have a negative net equity on the basis of cash-in/cash-out, does one therefore necessarily also have the same positive net amount based on the November 30th statements for purposes of sharing in the bankruptcy estate (the “customer property”) because of Congress’ desire to protect investors? In seeking to avoid payments to victims (I put it this way advisedly), the briefs take the position that one’s net amount is the same for both SIPC purposes and for bankruptcy purposes and is based on cash-in/cash-out. The briefs say, in other words, that bankruptcy rules govern both bankruptcy and SIPA -- while others believe Congress’ desire to protect investors means the normally applicable SIPA rules must govern both bankruptcy and SIPA in the special case of broker bankruptcy which Congress specifically covered in its SIPA statute. Frankly, it might be desirable if bankruptcy rules on net equity governed the bankruptcy side of a case and SIPA rules governed the SIPA side, but, having read the statutory provisions cited in the briefs, I believe the Trustee and SIPC are correct in claiming that a single rule must govern both sides. That currently being the case, it seems to me that the only legitimate way to look at the matter at this time is that unless you want to overthrow Congress’ intent to help investors, overthrowing it by fiat of SIPC approved by courts, the only way to look at the matter is that normal SIPC rules must govern both the SIPA and bankruptcy sides of the matter. If there is to be a change, it must come from Congress, not from SIPC fiat approved by courts.

Another theme of the briefs is the long standing claim that, if the November 30th statements are used to determine net equity, then the result will be to harm the later investors -- whose claims are mainly for real money, it is asserted -- while helping earlier investors -- whose claims are mainly for phony profits, it is asserted. This argument has been dealt with here before, and in the main I shall not reiterate the previously identified shortcomings such as its embrace of merely abstract legal principles of what allegedly constitutes equity and fairness, while it simultaneously ignores, and indeed implicitly rejects consideration of, economic realities when determining equity and fairness. But while not reiterating previous arguments, I do want to note two crucial points that have now surfaced.

The first is that the briefs offer no factual support whatsoever for the assertion that the claims of long term investors are mainly for false profits (while the claims of later investors are said to be for real money that they put in, which seems true only if they are very late investors, as of 2006 or later, for example). It is my impression that the claims of many long-term and mid-length investors are, to a significant extent, for the principal they put in. It would not surprise me if forty to sixty percent of the claims -- or more -- may be for principal. To be sure, this may be, likely is, due to the fact that fake profits were taken out over the years -- though often for the purpose of paying income tax to what appears to be the single largest beneficiary of Madoff’s fraud, the Internal Revenue Service. But the briefs, as said, provide no facts whatever in support of the claim they made regarding long term and short term investors, a dearth of factual evidence which is consonant with the general practice of the Trustee, SIPC, and prosecutors in this case of disclosing, one thinks, as little as they can get away with.

The other point may be more important. It is being argued that later investors will be harmed by use of the November 30th statements because, by resulting in recoveries of up to $500,000 for persons who would receive nothing if cash-in/cash-out is used, the use of the November 30th statements will lessen the monies available to the later investors. In fact, however, a recovery of up to $500,000 under SIPC will not cause later investors to lose dime one. For that money, as is admitted, will come from SIPC itself, not from the so-called “customer property” (or bankruptcy estate). What SIPC and the Trustee are and long have been worried about here seems obviously not to be that less money will be available to later investors if the November 30th statements are used, but that SIPC would be broke if it had to use the November 30th statements as the measure of net equity for SIPA purposes of giving victims up to $500,000. SIPC doesn’t have the necessary amount of money. Its shortfall in money is in large part due to failure to assess the securities industry more than a deminimus pittance for many years rather than assessing brokers enough to build up a sufficient fund. To meet its obligations and avoid bankruptcy, SIPC would have to seek more money from Congress or tap lines of credit, etc. All of this it would consider undesirable, but, in any event, the point is not that late investors would lose money, but that SIPC would be out a ton of money.

There is, however, one scenario under which SIPC and the Trustee could be right in claiming that late investors could be harmed, in addition to SIPC being out a lot of money due to its payments of $500,000. If the net equity shown on the November 30th statements controls not only what one receives from SIPC, but also one’s share in the bankruptcy estate, then people who have a positive net equity shown on the November 30th statement but a negative net equity on the basis of cash-in/cash-out will share in the bankruptcy estate though they otherwise wouldn’t. Their sharing in the estate would mean that less would go to others from the estate. In this way late investors who did not take money out of Madoff could be “harmed.” Of course, such harm wouldn’t be dramatic unless the Trustee recovers many billions of dollars for the estate, whereas the harm to persons denied $500,000 from SIPC often is very dramatic: it has caused many people to be in the poorhouse.

There is another aspect of the briefs which appears to indicate -- completely unintentionally -- that SIPC and the Trustee have always been concerned about SIPC’s coffers, not investors. The briefs make clear that, if securities lost by a victim can be purchased in a fair and orderly market, a SIPC Trustee is supposed to return to an investor the securities she lost because of a broker’s bankruptcy. If this is done, there is no need for SIPC to pay people up to $500,000 to cover their losses up to that amount. A return of their securities might prove financially better for victims or financially worse for them than paying them up to $500,000, but, as said, it is what must be done if possible.

Here, returning their securities to customers would have meant purchasing in the open market the securities shown on customers’ November 30th statements. This, however, generally seems never to have been considered. From the beginning the talk always was about the $500,000, and those of us who started out knowing absolutely nothing about SIPC -- which I believe was almost everyone -- were none the wiser. (It does turn out, however, that some people knew this, or quickly found out, because apparently some people have submitted claims for securities instead of for cash.)

Beyond this, to the extent any of us tyros heard early on that SIPC was supposed to return securities if this could be done, we assumed it could not be done in view of the size of the Ponzi scheme, so that cash of up to $500,000 was the only feasible alternative.

But the briefs unintentionally bring much of this into question by pointing out that the Trustee is supposed to return securities to customers if he can. A librarian has obtained for me information on the number of shares of stock in the S&P 100 (which are the stocks Madoff used) that are traded each day. It is in the range of three to five billion shares per day. Individual companies in the S&P 100 trade in the range of many millions of shares per day -- a sampling of some of them shows average daily volumes that can range from 10 to 50 million shares per day. Given these facts, why couldn’t the Trustee have gone into the market to acquire, in a fair and orderly market, the number of shares needed to be given to customers? He need not have bought the securities in a disruptive way, you know. Like persons acquiring large blocs often do, he could have had traders acquire the shares for him a bit at a time, spacing out purchases over weeks or months in order to avoid disrupting or even moving markets.

Perhaps it is noteworthy in this regard that, having read every word of the SEC Inspector General’s 557 page report, in which he discusses the views of a small number of major-league Wall Street experts who suspected something might be wrong, I do not recollect a single word from any of them to the effect that Madoff could not successfully acquire and sell the S&P 100 securities that he claimed to be trading -- and that he claimed to be trading in one fell swoop, not in stages as traders in large blocs often buy and sell the shares in those blocs. The most that I recollect being said was that a few of the experts were surprised that Madoff’s huge claimed trades did not move the market, were not “visible” in the market. None of them thought it could not be done. Well, if experts apparently thought it could be done in huge, one-fell-swoop trades of S&P 100 shares without untoward effects, why couldn’t the Trustee acquire such securities in the market slowly, having his traders buy a bit at a time so that there would be no untoward market effects? Personally, I know of no reason why this couldn’t be done successfully, and victims would have been far better off had it been done, as the briefs say is required if it can be done in a fair and orderly way.

But, as said, it was never publicly considered by SIPC and the naifs with whom SIPC and the Trustee were dealing -- myself included -- had little or no idea about any of this. SIPC, The Trustee, and their counsel -- the experts -- took advantage of the widespread ignorance of those who had never dealt previously with this very complex statute that the experts had spent up to 34 years or so of their lives dealing with. And why did they take advantage in this way? Isn’t the answer obvious -- aren’t you saying it to yourself as you read this, even before I tell you my opinion? My opinion -- the obvious opinion -- is that they did it because SIPC did not have the money to do what they now admit the statute requires. SIPC did not have the money to go into the market and purchase the securities that it should have purchased and returned to investors. Nor did it want to assess the brokerage industry for the necessary monies, nor did it wish to seek the money from Congress (which was or became busy bailing out culprits in the banking industry to the tune of up to ten trillion dollars, not the “mere” scores of billions it might have taken to assist SIPC to do what it now has said was its duty under Congress’ statute).

SIPC, as I’ve said, took advantage of the fact that most of us victims were (and are) mere tyros -- or less -- when it comes to the complex statute that SIPC and its lawyers have worked with for decades. Of course, I am willing to be dissuaded from my views of the matter -- views triggered by the briefs of SIPC and the Trustee themselves on the net equity question -- but unless and until dissuaded I feel that most of us have simply been bamboozled by the experts with regard to these matters. One cannot help wondering whether victims should investigate the question whether the statute of limitations on making claims for securities can be avoided in the kind of situation which exists here, so that novices who were bamboozled by the official experts could put in claims for the securities to which the novices had a right. (Perhaps the last sentence should be underlined and italicized.)

All of this moreover, supplies yet another reason why there should be discovery from SIPC and the Trustee on why they did what they did -- discovery that the Trustee’s counsel has informed me will not willingly be given when asked for in the context of why SIPC and the Trustee used cash-in/cash-out. (The bankruptcy judge has scheduled what is called a pretrial conference for next Tuesday on the question of discovery pertaining to the reasons for using cash-in/cash-out.) Discovery on the question of why SIPC and the Trustee did not seek to buy securities is a broader, related question than discovery merely on the question of cash-in/cash-out, though one would bet there are numerous documents that relate to both questions because the questions are linked by the financial problems they would cause SIPC. In any event, if there are future Congressional hearings on SIPC and what it and the Trustee have been doing, the entire broader question of why SIPC and the Trustee did not seek to acquire securities, as well as the narrower question of why they chose cash-in/cash-out, should be plumbed. I am perfectly willing to be dissuaded if I am wrong, but to me, as of now, the answer to all such questions most probably is that SIPC did not have the money, did not want to assess brokers for the money, and did not want to ask Congress for it.

There are a few other items of major import, and a few of lesser import, that should at least be briefly noted here.

One of the ideas which has surfaced over the months in connection with net equity is that, if cash-in/cash-out is used to establish net equity, then investors are entitled to interest on their investment. (I gather the applicable New York state interest rate is a very significant one.) And, in his memorandum decision holding that there should be briefing on the net equity question, the Bankruptcy Judge said that “it is in the best interests of all customers for this Court to limit the Net Equity Issue to the determination of net equity (cash-in/cash-out vs. account statement balance as of November 30, 2008 vs. cash-in plus interest minus cash out . . . in accordance with a . . . scheduling order . . . to be submitted to this Court . . . .” (Emphasis added.) The Court thereby made clear that the question whether interest should be added to the cash-in is before it on the net equity question. Yet, in its next to last paragraph, the Trustee’s brief says “Certain claimants have suggested that the Trustee include an interest factor when calculating a customer’s ‘cash-in/cash-out’ figure to reflect the various entry points of investors in Madoff’s lengthy scheme. Whether and to what extent such a calculation is appropriate is not before the Court in this briefing, nor are other particular nuances of the ‘cash-in/cash-out’ method.”

Thus, it would seem that the Trustee has taken it upon himself to revoke the Court’s ruling that the question of whether interest should be added to the amount of cash-in if the cash-in/cash-out theory were to prevail is before the Court. It is amazing if the Trustee has in fact taken it upon himself to in fact countermand the Judge. What I suspect happened, however, is this (though I surely don’t know for certain that my suspicion is correct): In accordance with the Judge’s above-quoted instruction for submission to him of a briefing schedule, the Trustee submitted a schedule which the Judge signed. (It is the schedule under which we are all operating.) The scheduling order submitted by the Trustee said that

The briefing to be submitted to the Court pursuant to the Order shall be limited to discussing the proper interpretation of Net Equity, specifically the following two issues:

1. Whether a customer’s Net Equity under SIPA is equal to “cash in/cash out”; or

2. Whether a customer’s Net Equity under SIPA is equal to the value of the securities positions and credit balance reflected in the customer’s last statement.

This statement in the scheduling order regarding the forthcoming discussion of net equity, as you can see, did not include the issue of interest on cash-in, which the judge’s opinion had said is part of the briefing. Not realizing the omission, the Judge signed the order. Now, relying on the order it submitted to the Court and he signed, the Trustee is claiming that the question of interest on net equity is not part of the briefing on net equity though the Judge’s opinion said it was.

If all this is what happened in fact, it is fair to say that, even if it did so unintentionally, which for various reasons is at least possible, the Trustee’s office has pulled a fast one on the Court, and has attempted to convert -- or subvert -- the Judge’s opinion that interest is part of the briefing to a situation in which it is not part of the briefing. I know but do not feel it necessary to elaborate what will be the reaction to this action by the Trustee of victims who already are very angry at him for what they believe is high handed, unfair treatment.

Another item of some significance is that, in trying to persuade the Court not to use the November 30th statements as the measure of net equity, the briefs point out that while those statements are one guide to what people had, there are numerous other books and records that also are guides, that show the whole deal was a fake, and that make clear that all that victims really had was what they put in less what they took out. The problem with this argument is not that its claims regarding what other records show are untrue. Rather, the problem is that victims had no way whatever of knowing anything of what the other records showed. To use the other records because they show the truth, even though victims knew nothing but what their statements showed, is to destroy SIPC protection for victims of Ponzi schemes who took out money they honestly thought they had -- destruction which is, in fact, the end result of all the arguments being made by SIPC and the Trustee.

I know of no legislative history indicating Congress wished to work such destruction on such victims. To the contrary, the legislative history, presented by various lawyers in various prior briefs, and doubtlessly to be presented again by them, indicates that Congress wanted to protect all innocent victimized investors up to $500,000 in order to maintain confidence in markets. To punish innocent victims here who took out monies they honestly thought they had seems especially harsh and improper, moreover, when one considers that the SEC, which repeatedly had far more information than it needed to uncover the Ponzi scheme, nonetheless didn’t uncover it and instead gave victims comfort that their investments were safe, and when one likewise considers that some of the greatest and most sophisticated investors in the world, such as those working with James Simons, did not uncover the Ponzi scheme and left money with Madoff -- despite certain red flags that caused them concern -- because they felt the SEC had placed an imprimatur of legitimacy and non fraudulence on Madoff.

There are a couple of matters of perhaps lesser concern which I would also like to mention before closing. One is that there is some hint of concern in one of the briefs that, if cash-in/cash-out is not used, and the November 30th statements are used instead, then money could be owed to accused coconspirators who made hundreds of millions or, like Picower, billions of dollars from the fraud. But one cannot believe such hints are serious. There is no way that SIPC or the Trustee thinks SIPC or the estate would have to pay money to coconspirators -- if they are judicially found to be coconspirators -- regardless of what their net equity might be according to their November 30th statements. Still less is such payment a possibility if it is true, as the Trustee has charged, that they often told Madoff what numbers to use in their accounts.

A second minor point is that, in lengthily detailing the workings of the fraud -- which all now know anyway to a very considerable extent -- as a psychological gambit to persuade the Court to uphold their relatively early-on decision to use cash-in/cash-out, the briefs of SIPC and the Trustee rely heavily on facts that they probably could not have known when they made the decision. One obvious example is their extensive description of what was done by DiPascali, which they are very unlikely to have known in full -- or even more than very partially -- relatively early-on when they made the decision for cash-in/cash-out. Though they could not have known very much about what DiPascali did at that early time, they rely on what he did to justify what they did before they could know much of what he did. Of course, they would argue that later revelations of what he did simply reinforced the correctness of their earlier decision. Anyway, it is not particularly unusual for courts to rely on facts that merely could exist, even if they are not known to exist, at the time a decision is made (and to do so even if the relevant facts never become known). Laymen might find this odd, and I too find it odd, but it’s the way it often is.

* * * * *

As mentioned here in a prior posting, Jon Landers once said to me that people would be outraged, and justifiably so, if a bank went bankrupt and then the FDIC refused to pay depositors because the bank had been insolvent for years and thus all the interest the depositors honestly thought had been accumulated in their accounts, and all such interest they had withdrawn from the bank, were nothing but completely improper book entries. But that is identical to what has happened here. SIPC has refused to pay people who honestly believed they had earned money in their accounts and who withdrew earnings, and SIPC has based its refusal on the fact that the earnings were fake, just as the monies credited to and/or withdrawn from the bank were improper in the bank example suggested by Landers.

It is absolutely the case that if SIPC succeeds -- no matter what argument it succeeds on -- then SIPC protection will always be at risk, and investors will have no right or ability to rely on SIPC protection. For if, God forbid, it should turn out that one has invested in what ultimately proves to be a fraud, then one will be SOL and will get nothing from SIPC if one has over the course of years taken out more than one put in, doing so in the honest belief that the money had accumulated, existed, and belonged to the person taking it out. This has to be considered a disastrous situation for the individual, directly contrary to Congress’ intent to protect innocent investors and to promote confidence in markets, and has to be considered no better than if the FDIC refused to pay innocent depositors because it turns out that their banks were insolvent and were defrauding them all along.*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm or www.youtube.com/user/mslawdotedu; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

More On Net Equity. Plus Picower.

2009-10-09T14:25:00.002-04:00

October 9, 2009

Re: More On Net Equity. Plus Picower.

In accordance with the briefing schedule set by the Bankruptcy Court, the Trustee’s brief on the question of net equity will be submitted shortly. A month later briefs opposing him will be filed. Briefs filed on net equity in the past by Picard’s opponents seem to me very good and, in toto, pretty complete. While one does not yet know what the Trustee will say, because his prior work generally has not focused on defending his definition of net equity (although he has discussed his position a bit on his website and in some briefs), one can expect that the opponents will reiterate the (very strong) points they have previously made and may add some new ones if they do come up with new ones. And they almost certainly will specifically retort to points the Trustee makes.

In reading what little the Trustee has said in the past to justify his cash-in/cash-out position on net equity, a couple of thoughts struck me that, as far as I can recollect, have thus far not been made by opponents. I shall set them forth here.

The Trustee has said from early-on that cash-in/cash-out is justified because persons who took out money from Madoff received money put in by other investors. True, but he neglects to mention that the money put in by persons who also took out money was likewise used to pay other investors. Some of those other investors were prior ones, but some might even have been subsequent ones because, up until the last year or so, Madoff appears to have had 17 to 20 billion dollars in his account at JP Morgan Chase. The meaning of all this is that, for example, if someone invested one million dollars in 2001, her money was used to pay off other investors, many or all of whom took out more than they put in, just as other people’s money was used to pay her when she later took out sums that could have been equal to or more than she put in.

What I am trying to say here is that Picard’s model is, in effect, simple minded because it neglects portions of the reality. His comments, you know, have the aura of blaming people who took out more than they put in, because, he says, they received other people’s money and therefore should get nothing. He does not mention that, correlatively, other people received their money -- and, if these others cashed out completely over six years ago, will never have to repay the money.

This brings me to the legitimate expectations of investors, denoted by the sums shown on their November 30th statements. Much has already been written about legitimate expectations in briefs and blogs, but let me add one point that has rarely if ever been explicitly mentioned, although often it has seemed implicit to me. The point in mind is this: even aside from the fact that Congress mandated it, why should the amounts shown as owing to her in statements received by an innocent investor be considered her legitimate expectation? The answer, though quintessentially simple, is overlooked by Picard and almost everyone else too. It is that the innocent investor, like anyone else, plans her life around the amounts of money that she justifiably believes she has, including the amount shown on her statement. Her purchases, her expenditures -- everything gets planned around the amount of money she thinks she has, including what is shown on her statements. That is why the amount shown in the statement must be considered the net equity of an innocent investor who never suspected fraud (this would not include the Picowers and Chaises) unless you are in the business of screwing people. The innocent person made her plans based on what she legitimately thought she had -- knowing of course that she is subject to market risk, as everyone is in investments, but never having any reason to suspect fraud -- a fraud which continued only because the government she relied on was so phenomenally negligent that its failure to catch Madoff was defacto intentional.

Just this week a lawyer explained to me a point which I shall use to further support my point. I don’t know that the lawyer has yet written the point in a brief -- the lawyer may or may not have. I am confident it will appear in future briefs, but don’t know if the lawyer wishes to be identified now, so I won’t identify the attorney and will say only that I thought the point most salient.

Suppose, said the attorney, you have put $100,000 into a bank, and over the years received statements saying that (because of interest) you now have $150,000 in your account. Then the bank declares bankruptcy, and the FDIC says it will only pay you $100,000 because the bank was insolvent the whole time and so the interest credited to your account was phantom interest, phantom profit. You would hear the screams from here to Washington, and you can pretty well rest assured that the FDIC would not be allowed to get away with this. Well, what the FDIC is attempting in this hypothetical example is what the Trustee is attempting here.

The situation would be even closer if the FDIC, in the example, were acting to save itself because it will run out of money, as may be -- and I think is -- what accounts for SIPC’s action here, as has been discussed in a prior post.

Let me make yet one other point regarding net equity. So far people -- including me -- seem to have been operating under the assumption that if you have a negative net equity for purposes of SIPC, which so many do under Picard’s cash-in/cash-out theory, then not only do you fail to get any money from SIPC, but you also have no right to any share of the estate, to any share of what I gather is called customer property by Picard and Harbeck. Put differently, what is net equity for SIPC purposes also controls for bankruptcy purposes: No net equity for SIPC purposes means no share in the bankruptcy estate. But reading some cases cited by Picard for his cash-in/cash-out theory makes me wonder whether this is necessarily true; makes me wonder whether what is net equity for SIPC purposes does control what one’s share of the bankruptcy estate is. The cases cited by Picard were not SIPC cases; they were bankruptcy cases. For bankruptcy law, cash-in/cash-out might make some sense, because legitimate expectations, which are a linchpin of net equity under SIPC pursuant to both Congressional intent and case law, conceivably seem not pertinent in bankruptcy. So I would think it at least conceivable that under the law someone might have a positive net equity under SIPC because her November 30th statement is the legitimate expectation and the measure of net equity, yet have little or no interest in the bankruptcy estate because she took out more from Madoff than she put in. It may be that all of us, Picard included, have wrongly been conflating two ideas that are not necessarily the same.

Perhaps it is also possible that Picard is conflating the two ideas deliberately because he knows, as one expert told me (I think I understand him correctly), that clawbacks in bankruptcy are limited to 90 days. By using cash-in/cash-out to arrive at a negative net equity, and by using that negative net equity as the measure of a person’s relationship to the estate, it is suggested (if I understand things rightly) that Picard is putting someone who received a nonfraudulent preference in the position of owing money to the estate. The money may not be collectible because of timing rules, I gather, but at least the investor won’t have to be paid money by the estate (if I understand right, which may be questionable).

Let me close with a brief point which is on a different subject than net equity, but which relates to the Trustee. For months I have wondered -- and have written of the wonderment -- why Madoff had given what apparently is more than seven billion dollars to a guy who put in only about $1.5 billion, Jeffry Picower. The only thing I could think of was that maybe Picower was fronting for the Mafia or for one or more secret services. But someone has now told me a different possible reason which has an immediate ring of truth, though one cannot yet know if it is true and can only hope that Picard, the FBI and the U.S. Attorney are all tracking it down.

Picower used to specialize in promoting tax shelters. Did his tax shelters, as many do, involve foreign countries or foreign institutions in some way? Did he, like so many involved with shelters, meet all kinds of persons who are in the business of sheltering funds here and abroad for wealthy taxpayers. For maybe, you see, Madoff was sending all this money to Picower to hide it overseas for him. That would make sense. If it happened, it may be hard to trace the money to its final destination. Or maybe not, since there are records of bank transfers. One can only hope that Picard, the FBI and the U.S. Attorney are all looking into this because the idea that Madoff was sending money to a former tax shelter expert to hide it for him overseas may be far and away the best conjecture on why Madoff would send over seven billion dollars to someone who put in only about $1.5 billion.*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm or www.youtube.com/user/mslawdotedu; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

The Report of SEC Inspector General Kotz.

2009-10-02T11:37:00.000-04:00

October 2, 2009

Re: The Report of SEC Inspector General Kotz.

As Ron Stein may have intimated in his excellent recent piece about the Kotz report, you cannot really get the full flavor of the SEC’s staggering malperformance in the Madoff situation unless you read the entire report. The Executive Summary alone, as excellent and shocking as it is, cannot give you the full flavor: relatively few such summaries do, and here there are just too many facts, too much staggering malpractice over too long a period, to get the full flavor from a summary. Those who litigate, and perhaps as well some of those who seek legislation, will likely master the whole report because that kind of mastery is what will really enable one to understand what happened and to effectively use such understanding.

In addition to Kotz’s nonetheless excellent Executive Summary, there have been a few other summaries which list some of the huge number of items of malpractice. They include Kotz’s written and oral testimony to Congress recently and some newspaper articles.

In this essay, I shall not attempt to summarize Kotz’s 457 page report. What shall be done instead is to discuss a particular perception the report induced in me, plus some points in the report that struck me forcibly and contributed to the perception but often seem not to have generally been picked up elsewhere or to have received only brief or minor mention elsewhere. I think the perception, and especially the points which induced it, will, like points that were widely picked up elsewhere, be valuable and important to know, both for litigation and for those who seek legislation.

* * * * *

It is striking to me that, if SEC personnel had deliberately set out to insure that Madoff would not be caught and halted, and had deliberately set out to sabotage the antifraud policy of the SEC’s own statute, they would have done many of the very things they in fact did. That is why I term their misconduct defacto intentional (as I told Ron Stein, who was kind enough to give me credit for the phrase).

You know, human thinking is often governed by words and phrases (except for geniuses like Einstein and Dirac who thought in pictures, and some other people like ones who see colors or other things when they hear music). For most of us, words limn our categories of thought.

In law there are words, and therefore categories of thought, related to negligence that could be relevant here. There is “negligent” conduct itself. There is conduct which is worse, and is called “willfully negligent” or “intentionally reckless” (exemplified by driving down side streets, on which kids play, at 50 miles an hour). Also, there is conduct which is not negligence, is beyond mere negligence of any type, and rather is “intentional.” But there seems to be no phrase which is meant to cover the situation where you don’t want something to happen but your negligence is so high that you act exactly as if you do want it to happen. (Maybe the phrase “intentionally reckless” conduct comes close). Yet that is what occurred here. And, since most people think in words and phrases, it would be helpful to the thought process to have a phrase which covers what happened here.

“Defacto intentional” strikes me as such a phrase. It is applicable here because, even though the SEC did not want a Ponzi scheme to succeed, its negligence and malperformance were so high that it acted exactly as if it did intend Madoff not to be caught and stopped, as if it did want him to succeed, and it did the very things one would do if one were trying to enable Madoff not to be caught and were thereby attempting to destroy the antifraud policy of the statute that the SEC is instead supposed to enforce. I suggest, therefore, that we use the phrase “defacto intentional” in future communications about the SEC’s misconduct because it will give people an apt way to think about the situation, and will better enable the media, the public and Congress to grasp what happened.

I note, by the way, that Senator Schumer seems to have caught on to what really happened at the SEC -- to the defacto intentional failures to stop Madoff. In a recent hearing he said: “It almost seems they had an attitude that they didn’t want to find things.”

Schumer also understood that it wasn’t inexperience that caused the disaster. It was negligence of a mind-blowing degree. At the hearing, he said, “The most rudimentary -- in other words, if you sent a 15-year-old, you know, a sophomore in high school, and said, ‘Here’s what’s going on. Figure out -- you know, just follow it through,’ as a homework assignment, they’d know to do some of these things” that the SEC didn’t do. Schumer later continued, “you don’t have to be Albert Einstein to figure out you ought to get some third-party verification and not accept the potential defrauder at their word.”

What, then, are some of the SEC’s acts or failures to act discussed in Kotz’s report (and often not picked up on generally by the media) that cause one to say the SEC acted as if its actions were defacto intentional because it did things you would do if you did not want Madoff to be caught and stopped and if you were deliberately trying to sabotage the statute’s anti-fraud policy.

• The failure to catch and stop Madoff is defacto intentional when it would take only a single phone call to the Depository Trust Company to learn that Madoff never held the securities positions he claimed to have held, but for sixteen years, through six complaints and five investigations, not a single member of the SEC, not a single one of its supposed investigators, ever made that single phone call. (It was made after Madoff was arrested, and it uncovered the truth almost immediately.)

• The failure to catch and stop Madoff is defacto intentional when you could request relevant records from the NASD and other organizations, records that would show that Madoff never did the trading he claimed to have been doing, but through 16 years, six complaints and five investigations not a single member of the SEC ever requested the records. The failure to catch and stop Madoff is equally defacto intentional when a request for records was once drawn up but was never signed or sent because it would be too much work [for the lazy SEC personnel] to inspect the records if they received them.

• The failure to catch and stop Madoff is defacto intentional when SEC personnel knew that Madoff had lied to them and had told them deeply inconsistent stories, but not a single investigator tried to learn the truth despite the knowledge of lies and important inconsistencies.

• The failure to catch and stop Madoff is defacto intentional when Madoff tells you he acts through Barclay’s Bank, but Barclay’s says there has been no activity in his account, and you make no effort to plumb this discrepancy. The failure to catch and stop Madoff likewise is defacto intentional when the Royal Bank of Scotland says it is willing to provide documents if Madoff agrees and you simply blow off RBS’ offer.

• The failure to catch and stop Madoff is defacto intentional when the SEC asks the NASD whether Madoff owned options on a particular date, the NASD says he did not, and the SEC then does nothing.

• James Simons is perhaps the most successful hedge fund manager of the 21st Century. Twice in the last few years he has made 2.5 billion dollars and once 1.7 billion dollars. The failure to catch and stop Madoff is defacto intentional when you find out that his company has deep suspicions about Madoff’s bona fides, but you do nothing -- you do not even bother to contact his firm to learn what it knows or believes, including why it says that it has knowledge that Madoff’s execution of trades is unusual.

• The failure to catch and stop Madoff is defacto intentional when the use of options is central to Madoff’s claimed method of trading, but he tells you he no longer uses options, yet you do nothing. The failure to catch and stop Madoff is defacto intentional again when you know his statement is at least partly a lie because you know that for some clients he is using options, yet again you do nothing.

• The failure to catch and stop Madoff is defacto intentional when experts let you know there are not enough options in the world to support Madoff’s claimed trading, yet, though the use of options is central to his strategy, you do nothing.

• The failure to catch and stop Madoff is defacto intentional when you start an investigation of Avellino & Bienes because you fear a Ponzi scheme, but, when the money invested with Avellino and Bienes is paid back (by Madoff), you never even ask where he got the money to pay back the Avellino and Bienes investors. The failure to catch and stop Madoff is again defacto intentional when you swallow, without extensive further investigation, the preposterous claim, and/or practice, of Avellino and Bienes that they never keep any records -- no records for 440 million dollars(!!) (which in today’s money is probably a billion dollars or more).

• The failure to catch and stop Madoff is defacto intentional when you -- the government’s then highly respected regulator and watchdog, the SEC -- suck people into investing or remaining in Madoff by announcing through the Wall Street Journal in 1992 -- by announcing as you otherwise never do -- that you have found no evidence of fraud -- by making a public announcement (based on a thoroughly negligent investigation) that inevitably would and did cause people to leave money in Madoff, to add money to Madoff, or to invest with Madoff for the first time.

• The failure to catch and stop Madoff is defacto intentional when an anonymous person, who obviously has some kind of inside knowledge judging by what he says, sends you a letter saying that Madoff has commingled Norman Levy’s money with Madoff’s, and tells you that Madoff keeps two sets of books, the more important of which are on his personal computer which is always on his person, but you almost wholly dismiss the tip from the obvious insider by doing no more than asking Madoff if he is an investment adviser for Levy and then fully accept his counsel’s false negative answer to the question without any further inquiries even Madoff is known to have lied to your agency previously about important matters. (In one of the recent books on Madoff, one of the Madoff company’s chauffeurs in effect verifies the commingling by discussing the multimillion dollar checks he regularly took to Levy (every day if I remember correctly). As for the computer, no doubt it was one that Madoff retained access to for many months after he was indicted -- and which he no doubt attempted (successfully?) to wipe clean, thereby impairing the search for funds to repay defrauded victims).

• The failure to catch and stop Madoff is defacto intentional when you require him to register as an investment advisor because you learn that, contrary to years of lies to you, he is acting as an investment advisor for more than 15 people, and newly registered investment advisors are supposed to be inspected within a short period of time but the SEC never undertakes the required inspections.

The foregoing list does not exhaust the items discussed in Kotz’s report which show that the SEC acted in a way that can and should be described as defacto intentional: i.e., the SEC did things it would have done if it didn’t want Madoff to be caught and stopped and if it wanted to destroy the antifraud policy of its statutes. Nor does the list give chapter and verse of each of the items on the list, giving only capsule summaries of them instead. But the list does make clear why the SEC’s misconduct was so horrid, its degree of negligence was so high, that it has to considered defacto intentional, has to be considered to be exactly the same as what the SEC would have done had it wanted Madoff to continue succeeding with his Ponzi scheme and wanted to destroy the antifraud policy of its own statute.

* * * * *

From the time Madoff was arrested on December 11th until today, and no doubt continuing on into the foreseeable future, there have been and will be those who say the victims were at fault for investing with Madoff. For one reason or another, the victims should have known better, is the attitude. This is in some ways curious, not just nasty, vengeful and wrong.

Just to take my own case as an example of what I think was typical of many people, I had no idea, and had no reason to think or understand, the things that gave pause to some Wall Street insiders who had the knowledge and capacity to do extensive due diligence, Wall Street insiders who were aware, as the average investor was not:

• that on Wall Street itself rumors were rife that something was not right at Madoff;

• that for various reasons it seemed quite possible to Wall Street insiders that Madoff was not buying and selling securities, as he claimed to be doing, and that his supposed trades and positions could not be “seen” in the markets, where they should have been “visible” if he was trading the huge volumes he claimed;

• that there were not enough options in the world to support his claimed trading, and people who traded options said they had not been doing business with Madoff;

• that his accountant was a one man shop;

• that there were other Wall Street firms which used the same strategy he claimed to be using (a strategy which, we now learn, is claimed to be a common garden variety strategy on Wall Street), but who could not replicate his results;

• that even though his strategy made sense in principle, and was said by some knowledgeable persons to be plausible in principle even after he was caught, Wall Street insiders who were mavens in mathematics and derivatives maintained that -- however plausible in principle -- his results were statistically impossible in practice and this could be (and was) shown by the spreadsheets of the experts.

• That many of us small fry victims, I would bet, like me, did not even know Madoff was running money for hedge funds and banks, but instead thought he was only investing for a relatively small number of persons who initially had been confined to some friends, relatives and long time investors -- just as ironically, and in reverse, even Harry Markopolos, if memory serves, did not know he was investing money for small fry, but thought he was investing only for hedge funds, investment banks, and some extraordinarily wealthy individuals. Such lack of knowledge is the result of the secrecy and non-transparency of companies like Madoff’s -- of so-called hedge funds (I insist, as I wrote early-on, that for a number of reasons Madoff’s was not truly a hedge fund but everyone else calls him that) -- which Congress and the SEC allowed to be secretive, a secrecy and consequent fraudulent disaster for which Congress too bears responsibility because it permitted the secrecy and nontransparency.

So there are a host of reasons -- including some I have not mentioned here but have previously discussed extensively, such as the understandable belief that Madoff was a conservative investment, a relatively low earning and a highly taxed investment when compared to the mutual funds, stocks and hedge funds so prevalent on Wall Street in the 1990s and 2000s -- why the small fry could have no idea that something might be rotten in the state of Denmark, as Shakespeare once said. Speaking for myself, but speaking for lots of other small fry too I’m sure, I can say that had I ever obtained any inkling that there were not enough options in the world to cover the huge trading in securities that Madoff supposedly was doing -- trading of an amount completely unknown to those of us who had no idea he was running money for huge funds and banks rather than just investing for relatively small circles of friends, relatives and long time investors -- then I would have been out of Madoff entirely, or at minimum would have drastically reduced my investment with Madoff, in the proverbial New York minute, after attempting to verify but being unable to verify that he was covering all his trades with options, as he claimed to be doing. For I (and others) understood -- as one can see from early writings here that quoted what I was personally told by Frank DiPascali -- that the options were central to the claimed strategy, and that without the options there was not a conservative strategy, but only non-conservative bets by Madoff on which way the S&P 100 would move.

If one could not verify the use of options to cover trades, the strategy that had attracted us was false, made no sense, and one should have, and I would have, fled or at minimum greatly reduced my investment, would have cut it by three-fourths or more, as soon as it became clear that the options were not being used. (The only reason for keeping any part of one’s investment in Madoff, as illustrated below in connection with James Simons, is that Madoff appeared to have a long track record of success whether he was covering all his trades with options or not, and he had been given a clean bill of health by the SEC -- although by the late 1990s one might have wondered whether at least the 1992 encomium from the SEC was out of date because Madoff could conceivably have secretly changed what he was doing somewhat since 1992.)

It should be needless to add that had any of us small fry had an inkling that Madoff was not even making the trades he claimed to be making, again many of us would have been out of Madoff in a New York minute, as soon as claimed trading proved unverifiable, because he not only was not doing all that he claimed to be doing (viz, he was not buying options), but he was not even buying and selling securities.

Now, what makes all this so piquant, what makes it so wrongheaded, vicious and, let’s face it, sometimes anti-Semitic for persons to blame the small fry victims for investing with Madoff, is that some of the world’s most sophisticated and greatest investors put money with him even though they knew much or all of this and even knew far more than the points described above. The case of James Simons’ company is instructive.

Simons, for reasons alluded to earlier, has to be considered one of the most brilliant and successful investors of recent years. And, as detailed extensively in Kotz’s report, Simons’ company developed deep suspicions about Madoff’s bona fides for many of the very reasons set forth above, plus several other, often very sophisticated, reasons as well. Yet despite its suspicions, Simon’s company left half its investment in Madoff until it later removed that half for (unstated) reasons that were unrelated to a possible fraud. Despite all its knowledge of things that didn’t add up, knowledge wholly outside the ken of innocent small fry and going far beyond points discussed above, Simons’ company (Renaissance Technologies) could not bring itself to believe Madoff was a fraud, because he had been inspected and given “a clean bill of health” by the SEC. As Kotz said (emphasis added):

Nat Simons, the portfolio manager for Renaissance’s Heritage fund, a hedge fund of funds, who held a Madoff managed investment in 2003 and whose e-mails triggered the 2005 NERO examination (as described in detail in Section IV above), cited their understanding that the SEC had looked at Madoff and given him a clean bill of health as a reason they did not initially divest themselves of their Madoff-related investment. Simons Testimony Tr. at p. 28. Renaissance understood from Madoff that the SEC had examined “the whole business.” Id. at p. 17. Renaissance research scientist Henry Laufer agreed, “What was also on our minds … was that Madoff had been investigated – and cleared” by the SEC.

Laufer Testimony Tr. at pgs. 35-36.

Renaissance also doubted Madoff could be engaged in fraud because he operated through highly regulated brokerage accounts, stating:

[B]ecause of the nature of the fact that these were brokerage statements, and he had a big broker dealer business and big market-maker and – you just assume that someone was paying attention to make sure that there was something on the other side of the trade. … I never, as the manager, entertained the thought that it was truly fraudulent. And it again was because … it would have been so easy to prove that it was fraud if it was just managed accounts that were set up. It would have been so – again, forgive me here, but you know, it would have been pretty straightforward. We felt that he was sufficiently in the eye of the regulators that it was just hard for us to envision that that was the case.

Simons Testimony Tr. at pgs. 28, 39-40.

Simons further explained that one reason they did not report their suspicions to the Commission directly was that they felt all of the information they were using in their analysis was readily available to the Commission.

So there you have it. Some of the greatest and most sophisticated investors in the world invested with Madoff, and continued to do so despite serious suspicions that something might be wrong there (suspicions discussed from pp. 145-161 of Kotz’s report), because the SEC had checked out Madoff, had access to the pertinent information, and had given Madoff a clean bill of health, a motivating factor for Renaissance Technologies which is discussed at several places in Kotz’s report.

When even Renaissance Technologies left money with Madoff because of the SEC, and did so despite extensive and highly sophisticated suspicions (which you really should read about in Kotz’s report), it is truly indecent -- it is absolutely vicious -- for people (like Joe Nocera, his investment guru buddy Jim Hedges, and lots of ignoramuses who write the kind of utter crap one often finds in comments on the internet) to blame the innocent, small fry victims for investing with Madoff; it is indecent and vicious to blame people who, unlike Renaissance, knew nothing that excited suspicion.

* * * * *

Let me make one last point, which does not come from Kotz’s report and has been written of before here, but which is very important in light of the SEC’s defacto intentional misconduct.

The SEC’s misconduct not only resulted in continuation of, and enormous growth over the years in the size of, Madoff’s Ponzi scheme, but also resulted in a dramatic reduction in the amounts of money available to victims when the fraud finally collapsed in December 2008. It has been claimed that, because of the market collapse that began in that year, twelve billion dollars was pulled out of Madoff by skittish investors in the last six months. Before that Madoff apparently never had to face waves of major redemptions, so that major percentages of the funds that he had taken in remained in his account. Some was taken out for his own use and that of his family members, some to float the market-making side of his firm, and some likely went to the Mafia, various secret services (American, British, Israeli or whatever) or to whomever else was a background part of the deal. (Why did Madoff pay out six billion dollars to a guy who invested only 1.5 billion dollars -- to Picower. Where did that money go and why? Was it for a secret service?) But the amount of invested money left in Madoff was apparently gigantic until close to the end, as will be shown by records now being kept secret by JP Morgan Chase, by Picard, by the FBI and by the U.S. Attorney’s Office. By defacto intentional conduct that resulted in Madoff’s Ponzi scheme staying alive until it collapsed due to billions upon billions of dollars being redeemed by investors due to the greatest economic collapse since the Depression, the SEC’s defacto intentional conduct resulted in investors losing repayments of many billions of dollars -- losing repayments of 12 or 17 billion dollars, or even 20 billion dollars or more, that would have been readily available to repay them from Madoff’s account in JP Morgan Chase had the Ponzi scheme been exploded by the SEC even as late as, say, 2004 or 2005 or 2006 or 2007, had it been exploded by the SEC before “the great redemption” caused by the economic disaster that began in 2008.

So the defacto intentional misconduct of the SEC resulted, as I say, not only in the growth of Madoff’s Ponzi scheme from “only” about 500 million or a billion dollars in 1992 to the 65 billion dollars reported on the November 30th statements, but also resulted in a fantastic reduction of billions of dollars in the amounts available to repay innocent defrauded victims. What is more, when you consider that a large amount of the redemptions in the final stages of the Madoff fraud appear to have been by people who were complicit in the fraud and who would therefore have had no right to any money after the fraud was discovered -- Picard is in toto going to sue them for something in the neighborhood of 12 or 15 billion dollars -- you can see that, if the SEC had ended the fraud, and had done so when it should have, the amounts available to repay innocent investors could very conceivably been close to, equal to, or even more than the amounts that they actually invested (their cash-in), could even have covered payments to innocent investors of portions of the income they thought they had earned from Madoff. For these reasons too, it is the SEC, and therefore the US Government, that is responsible for the dire poverty which now afflicts so many innocent Madoff victims.*

This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

*

Request For Production Of Documents

2009-09-29T15:35:00.001-04:00

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK

)
In re: ) SIPA LIQUIDATION
) no. 08-01789 (BRL)
BERNARD L. MADOFF INVESTMENT )
SECURITIES LLC, )
)
Debtor. )
)

NOTIFICATION TO THE COURT OF
REQUEST FOR PRODUCTION OF DOCUMENTS

Objector Lawrence R. Velvel is taking the unusual step of providing a brief notification to the Court of the filing of a short document request. Velvel is doing so because of the circumstances existing in this case -- a briefing and argument schedule has recently been established on the vital issue of net equity, with the briefing to begin two weeks from now, and appeals by one side or the other likely to be taken all the way to the Supreme Court. Normally, of course, one would simply file the document request and, when its recipients object to it, would then file a motion to compel. Here the recipients of the request, the SIPC Trustee Irving Picard and SIPC itself, are certain to object to the request. And, while a motion to compel will follow, it seemed wise, because of the compressed amount of time available on the net equity issue, to provide a brief notification to the Court of the request and the fundamental reasons for it.
The request seeks documents relating to whether SIPC and the Trustee, to any extent, decided to use the cash-in/cash-out method to determine net equity in order to advance or save SIPC’s economic position. There already is evidence of this possibility because SIPC’s President, Stephen Harbeck, testified in a prior case - - in the New Times case - - that victims would receive the full value of their purported securities positions even if the securities had never been bought for the victim, and SIPC’s General Counsel, Josephine Wang, is reported to have publicly asserted exactly the same position in mid December 2008, saying that SIPC would have to purchase securities which Madoff’s statements showed that a customer owned even if the securities had not in fact been purchased previously. Yet, when SIPC began to better understand the full scope of the huge amounts that it would owe victims under this traditional position if the November 30th statements were used to determine net equity, SIPC and the Trustee changed their tune and began to assert that cash-in/cash-out, not the November 30th statements, were the measure of net equity.
In addition, it seems obvious that using other methods than cash-in/cash-out to determine net equity (e.g., use of the November 30th statements) would result in SIPC having to pay out sums of money so large that they are in all likelihood far more than it possesses. This would require SIPC to have to request more money from Congress, to assess the investment industry, to draw down lines of credit, and/or to take other nonstandard steps to raise the needed monies (and avoid bankruptcy). Such consequences, of course, almost surely were deeply unwanted, and cash-in/cash-out could logically have been adopted - - is likely to have logically been adopted - - to avoid the consequences once it was realized that use of the November 30th statements would bring them on. This is only the more probable because the consequences of using the November 30th statements were so dire that they would probably have required the replacement of current management, which had failed to foresee and guard against the consequences and would therefore lose jobs paying several to many hundreds of thousands of dollars per year.
In sum, the question is whether a desire to save SIPC’s economic position, and conceivably the jobs of management, played any role in the decision to use cash-in/cash-out rather than the standard method, and to do so even though use of the cash-in/cash-out method would, for the benefit of SIPC, result in enormous hardship to victimized investors whom it was Congress’ purpose to help. (Congress’ intent, one notes, was to help injured investors, not to help SIPC.) If a desire to aid or save the economic position of SIPC, and conceivably the jobs of its management, played a role in the decision to use cash-in/cash-out, then this would make such use entirely inappropriate in this case. It would do so, moreover, even if one could envision extraordinarily unusual circumstances when cash-in, cash-out might otherwise be proper. For even if cash-in/cash-out could be proper in the appropriate circumstances, it cannot be used to benefit or save the economic position of SIPC, much less to benefit or save SIPC at the expense of investors -- whom Congress intended to be helped. If a desire to aid or save the economic position of SIPC (or its management) played a role here in the decision to use cash-in/cash-out, that should be the end of the question of whether it might have been lawful to use cash-in/cash-out.
On the other hand, if such a desire played no role in the decision to use cash-in/cash-out, then the Trustee and SIPC have nothing to fear from the requested discovery. For the documents would show that the improper purpose under discussion played no role in the decision to use cash-in/cash-out, and the question of the proper method of determining net equity in the Madoff proceeding could be decided on other grounds entirely.
In arguing in a memorandum of August 27th that the net equity question should be decided not in a case brought by only a few victims, but rather in a proceeding that includes all victims, the Trustee recently said, “Moreover, in resolving the Net Equity Dispute, the Court as well as all the parties would benefit from the submission of a full and complete record. Reply To Plaintiffs’ Opposition To Defendant Irving H. Picard, Trustee’s, Motion To Dismiss Complaint, Or In The Alternative To Strike, p. 6 (emphasis added). Though the Trustee doubtlessly did not think that, as would occur in a more standard case, “a full and complete record” would include information, on his and SIPC’s motive, that is obtained in discovery, his own statement nonetheless is applicable here. For the record here cannot be “full and complete” without discovery on the potentially dispositive question of the motives underlying the use of cash-in/cash-out. Such information is not only vital in this Court, but will be important in, and to, appellate tribunals.
Also, in an order dated September 10, 2009 establishing that there would be one overall procedure for all to participate in with regard to the question of net equity, (Memorandum Decision And Order Granting Trustee’s Motion To Dismiss Plaintiffs’ Complaint), this Court said, when speaking of the benefits of having all victims participate in the procedure rather than just a few, that this “will provide everyone involved with the benefits from a submission of a comprehensive and complete record on this issue.” (Id. at p. 13.) There cannot be a “comprehensive and complete record on this issue” of net equity without discovery of information on why SIPC and the Trustee decided to use cash-in/cash-out to determine net equity, including whether a reason for using it was to save the economic position of SIPC and, possibly, its management.
Respectfully submitted,

Lawrence R. Velvel
Massachusetts School of Law
500 Federal Street
Andover, MA 01810
Tel: (978) 681-0800
Fax: (978) 681-6330
Email: Velvel@mslaw.edu

Dated: September 29, 2009

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK

)
In re: ) SIPA LIQUIDATION
) No. 08-01789 (BRL)
BERNARD L. MADOFF INVESTMENT )
SECURITIES LLC, )
)
Debtor. )
)

REQUEST FOR PRODUCTION OF DOCUMENTS

1. Recipients Of Document Request.
This simplified and streamlined request for production of documents is directed to (a) the Securities Investor Protection Corporation and all of its officers, employees, directors, personnel, representatives, agents, and hired organizations or persons, and (b) the SIPC Trustee and all of his employees, personnel, representatives, agents, and hired organizations or persons.
2. Requested Documents.
All documents relating to any reason or reasons for or against using or not using, or relating to the decision on whether to use or not use, any of the following methods for determining an investor’s net equity in the Madoff case:
1. The cash-in minus cash-out method;
2. The amount shown owing to an investor on his/her November 30, 2009 statement from Madoff;
3. The cash-in plus interest minus cash-out method;
4. Any other method.

3. Definition.
“Documents" includes records; books; papers; emails; electronic messages of any kind; transcriptions; tapes; videotapes; disks; recordings; copies, drafts, reproductions no matter how produced or reproduced; contracts; memoranda; invoices; correspondence; notes; minutes of any meetings, including meetings with agents or employees; instructions; guides; compilations of rules, regulations, or policies; daybooks; calendars; photographs; telegrams; messages; drawings; charts; graphs; other writings; recording tapes; recording discs; mechanical or electronic information storage or recording elements; and any other "documents" as that word is defined in Rule 34 of the Federal Rules of Civil Procedure.
Respectfully submitted,

Lawrence R. Velvel
Massachusetts School of Law
500 Federal Street
Andover, MA 01810
Tel: (978) 681-0800
Fax: (978) 681-6330
Email: Velvel@mslaw.edu

Dated: September 29, 2009

CERTIFICATE OF SERVICE

I hereby certify that I have caused the foregoing Notification to the Court of Request for Production of Documents and a Request For Production of Documents to be served on persons listed below by first class mail, postage prepaid, on this 29th day of September, 2009.

_________________________________
Lawrence R. Velvel

Josephine Wang, Esq.
Securities Investor Protection Corp.
805 15th Street, N.W., Suite 800
Washington, DC 20005-2207

Stephen P. Harbeck
President
Securities Investor Protection Corp.
805 15th Street, N.W., Suite 800
Washington, DC 20005-2207

David J. Sheehan, Esq.
Baker & Hostetler, LLP
45 Rockefeller Plaza
New York, NY 10111

Helen Chaitman, Esq.
Phillips Nizer, LLP
666 Fifth Avenue
New York, NY 10103

Jonathan M. Landers, Esq.
Milberg LLP
One Pennsylvania Plaza
New York, NY 10119

Brian Neville, Esq.
Lax & Neville LLP
1412 Broadway, Suite 1407
New York, NY 10018

The Government’s Motion Of September 21, 2009 in the Criminal Case Against Madoff.

2009-09-24T11:25:00.000-04:00

TO: All Recipients Of This Email

FROM: Lawrence R. Velvel

DATE: September 24, 2009

RE: The Government’s Motion Of September 21, 2009 in the Criminal Case Against Madoff.

On September 21st, the Government made a motion for forfeiture and remission proceedings in the criminal case against Madoff. The motion plainly would result in serious injury to many victims of Madoff, and seemed to me highly objectionable. I had nearly completed a memorandum objecting to it when, at approximately 10:00 a.m. on Thursday, September 24th, I, like others, received notice that the Court had already granted the motion. The motion was granted in only three days, before objectors (like myself) could prepare and file objections.

The speed of the grant and the failure to give people who will be deeply harmed by the Government’s action, a chance to be heard, not only seem to me to be deeply improper, but are sure to stoke the suspicions of those who already harbor deep suspicions that, for years and years, throughout the Madoff matter, the fix has been in and includes the Government. The stoking of such suspicion is unfortunate (assuming as I do that the suspicion is wrong), but will be inevitable.

Because the Court’s actions in quickly granting the Government’s motion allowed no time for final preparation and submission of papers opposing the motion by persons who will be harmed, I am converting my memorandum from one opposing a grant of the motion to one requesting that the grant be withdrawn and a schedule of briefing and argument be established so that objectors will have an opportunity to be heard on the motion. And because of what I consider the gravity of what was done, and knowing that many people became deeply alarmed as soon as the motion was filed on September 21st, I shall take the unusual step of making my memorandum available on the internet even before it has formally been filed with the Court’s Clerk. The motion is likely to be completed and become available on the internet later this afternoon, Thursday, September 24th. Otherwise, it will be finished and become available tomorrow, Friday, September 25th.

Greater And Lesser Potpourri Regarding Madoff, Starting With The IRS And Then Moving To Other Matters.Part II.

2009-09-02T14:01:00.001-04:00

September 2, 2009

Re: Greater And Lesser Potpourri Regarding Madoff, Starting With The IRS And Then Moving To Other Matters.

PART II.

* * * * *

The SEC -- though it ironically is one of the governmental or quasigovernmental bodies most responsible for allowing Madoff to succeed -- has put together what one thinks the best description to date of the methods used by Madoff to fool victims, agencies, feeder funds, and huge organizations or immensely wealthy individuals who sought to do due diligence, and others. The description, which I think one Madoff victim said (correctly) is very well written, appears in the SEC’s August 11th complaint against DiPascali. (The description in the U.S. Attorney’s “Information” is not as good,, in my judgment.)

As the SEC’s complaint makes clear, Madoff and DiPascali did almost anything you can think of to fool people. False statements spit out by the infamous 17th floor computer, a hoked up phony computer system that made it seem like the Depository Trust Company held securities for Madoff’s investment business, telling American questioners that Madoff’s counterparties were European and telling European questioners that the counterparties were American because in each case this would make the questioners less likely to check with possible counterparties, refusing to give the names of claimed counterparties, hoking up extra trades at the end of the year for investors who were to receive more than others (doubtlessly co-participants, I think, in what they at least knew to be a fraud even if they did not know that the exact nature of the fraud was that it was a Ponzi scheme), purporting to make trades over several days rather than on one day alone when the amount purportedly traded would be so large as to arouse suspicion if the trades all took place on one day, making sure that claimed prices on a given day were within the actual price band on that day and claiming his statements showed an average price when this was necessary to avoid suspicion, refusing to describe his alleged methodology on the ground that it was proprietary, using only large cap stocks so that the trading volume in the market would be large enough that people wouldn’t question whether he had in fact made trades, creating special accounts for the purpose of fooling the SEC, claiming that securities were held by European financial institutions, creating false records of supposed trading -- Madoff and DiPascali did all these things. You name it, they did it.

We may hear a lot more about all this in future, because Madoff’s and DiPascali’s extraordinary, shrewd (and usually successful) efforts to hide their fraud are likely to come up by way of attempted defense in the hosts of lawsuits that will be brought against the SEC, FINRA (which so far, with but one exception that I know of, has received a free pass that is exceedingly unlikely to be permanent), the IRS, feeder funds that failed to do adequate due diligence, and others.

Of course, Madoff did not fool everyone who looked into what he was doing. Markopolos was not the only one who suspected fraud. There were large institutions and very wealthy people who looked into Madoff (or who because of their enormous wealth heard the word on Wall Street) and decided they wanted no part of this guy. There also were huge investment banking houses -- Goldman, Sachs, for example -- that refused to do business with him because they did not believe he could be for real. One lawsuit even alleges that, as of sometime in 2008, Madoff’s main bank, J.P. Morgan Chase, knew he was a fraud -- and consequently pulled out 250 million dollars from a Madoff fund even though Madoff was the only investment that wasn’t losing money.

The institutions and the wealthy -- who hired experts in due diligence -- that were wary of Madoff had several reasons, many of which have now been widely bruited, e.g., that he used a one man accounting shop, his refusal to discuss his investment strategy, the family nature of his business, the inability of experts to replicate his results, etc. All of these things should have been, in Markopolos’ words, red flags to all sophisticated, major institutions, feeder funds, due diligence experts working for wealthy individuals, and governmental and quasigovernmental bodies. But there were two things that government (and others as far as I know) should have done, but did not do, that would have blown the whistle on Madoff despite all his efforts at concealment and trickery. That government, and others who were expert, did not do these very simple things is inconceivable to me. They also seem to me to be of increasing importance as we learn more about Madoff’s vast efforts at concealment, because they are things that Madoff could not have controlled, could not have faked his way past, though they are quintessentially simple, and would only have required a few phone calls to initially carry out.

First, Madoff claimed that he bought and sold securities about four times a year and was in Treasuries. Many of the securities were supposedly held by the Depository Trust Company, which, as I understand it, performs this function for most or all of Wall Street. All that the SEC, the IRS or FINRA had to do was to get in touch with the DTC and inquire whether its records showed that Madoff heavily bought securities -- billions of dollars worth of them -- four times a year, held them for awhile, and then sold them (and replaced them for a period with Treasuries, if the Treasuries too were held by DTC, which I do not know). By this simple means, by the proverbial means of a phone call, the government would have found out that Madoff had been doing no such thing, and his fraud would have been exposed.

I believe I am correct in thinking that, ever since the Billy Sol Estes scandal, auditors have been required to check whether assets, goods, etc. that a company claims to have do in fact exist. No more empty tanks, please. But here the government did not do this elementary auditing check -- it did not even ask the purported holder of securities whether it had held the securities. Is it humanly possible to have been more negligent, more incompetent, than that?

You know, I’ll bet that most Madoff victims did not even know that there is a Depository Trust Company or what it does. I know I certainly didn’t. Most of us, after all, know very little about how Wall Street works as a “logistical” matter. We wouldn’t have known to make inquiries of DTC -- which perhaps would not have answered our inquiries had we made them -- even if we had suspicions about Madoff, which we didn’t. But the regulators, on whom we depended, surely knew about DTC and what it did, and DTC surely would have or could have been compelled to answer their questions. Yet the regulators did not even pick up the phone to call DTC.

The second matter is likewise pretty simple. Madoff claimed to be hedging with put and call options. Without these options his strategy made no sense. With them it made all the sense in the world (some of us think). But it turns out that apparently there were not enough put and call options or put and call option traders in the world, literally in the world, to hedge the amounts of S&P 100 securities that Madoff claimed to be dealing in.

Had the regulators so much as made a few phone calls, they would have learned this, and would have learned as well that nobody appeared to be dealing with Madoff with respect to any options. Some calls to the Chicago Board of Options Exchange would have elicited that nobody there was doing any options business with Madoff. Ditto if the regulators had made some calls to over the counter traders in options or to European institutions that might deal in options (and that Madoff was falsely telling people he used). Finding out that nobody said they were dealing in options with Madoff would have set the stage for regulators to compulsorily demand, by subpoena, that Madoff tell them whom he was buying options from and selling them to, so that his claim of trading options could be checked out with the supposed counterparties. But none of this was done, although it would only have taken some phone calls and ultimately drafting a subpoena -- and, in the words of Michael Bienes about making money via shilling for Madoff, would have been easy-peasy. Here again, then, the incompetence, negligence and plain laziness of the regulators beggars the imagination.

* * * * *

A last point for today:

The lawsuits are already flying and there will be lots more of them. In the course of some of them, defendants will claim that they can have no liability to plaintiffs because they weren’t doing business with them, had no legal duty to the particular persons who are plaintiffs, weren’t in so-called “privity” with the plaintiffs, the plaintiffs did not “rely” on the defendant, etc. All of these words, or ideas, or whatever they are, are simply legalistic ways of saying that X should not be liable to Y because to make X liable to Y is just too much. Maybe X should be liable to A or B, but that is enough, and he should not be liable to Y. Often opening the door to liability to Y is claimed by courts to be opening the door to liability that is just too widespread.

In the Madoff case, feeder funds will put forth this non-liability position if sued by people who did not invest with it. Giant institutions that sniffed out the truth or suspected it, and therefore refused to do business with Madoff but said nothing to the SEC or FINRA, will put forth the same position if sued because they warned nobody. And, in the current state of the law, they likely will succeed by using this defense.

But one wonders whether they should succeed: Or whether, on the other hand, the Madoff case, the cults of crookedness and silence on Wall Street, and the current American culture of dishonesty all counsel that there should be a change in the law in situations where big shots, the rich, those in the know, are aware of the truth or of what might very well be the truth, yet warn nobody and leave all others to twist in the wind. Writers like Joe Nocera, citing the actions of wealthy, sophisticated investment managers who had the knowledge and sophistication to suspect something was wrong, and the ability to investigate, like to pretend that, since these guys suspected something was wrong, all of us should have suspected something was wrong even though most of us lack even a fiftieth or a hundredth of the knowledge and due diligence capability of his wealthy Wall Street buddies. The argument would make a lot more sense if people like his buddies were required to share their suspicions, and the reasons for them, so that the rest of us could stand forewarned instead of ignorant.

Anyway, with so much crookedness going on, one thinks that all the old (very tired) arguments about why huge institutions have no duty or liability to people they, for example, were not doing business with, should be scrapped in favor of creating a duty of such institutions to warn -- at minimum a duty to privately warn government authorities -- when they have serious reason to suspect wrongdoing, and should have liability to the injured whose harm could have been avoided had an institution issued the needed warning (and had the government then acted if the duty to warn is limited to a duty to warn the government so that it can investigate).*
* * * * *

To Be Continued If Possible.

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

Greater And Lesser Potpourri Regarding Madoff, Starting With The IRS And Then Moving To Other Matters. Part 1.

2009-09-01T13:52:00.001-04:00

September 1, 2009

Re: Greater And Lesser Potpourri Regarding Madoff, Starting With The IRS And Then Moving To Other Matters.

PART 1.

Because of the press of other business -- running a law school, creating a new college of history that will open next year, sometimes dealing with the war crimes problem (although Madoff has deeply impinged on that, has virtually eliminated it for the time being) -- there are times when I simply can’t write on Madoff matters. And posting on the political situation, which I’ve done for years (to the tune of three books worth of on-line posts, actually), is simply impossible despite strong feelings on various things that have occurred.

In the realm of politics, I would dearly wish, for example, to have time to write on an idea that may underlie a matter which has many people deeply upset. That matter is Obama’s efforts to placate the right wing, at the cost of (increasing?, greatly increasing?) lack of support from his own base. Is it possible that the brilliant fellow who is President cannot grasp that there are people in this world with whom one cannot “make nice” because they will screw you every time, so you are better off hammering them and pleasing those who are on your side and will assist you instead of fruitlessly trying to placate and/or obtain the help of those who will never help you? With regard to multi billion dollar bailouts of guilty banks, failure to assist innocent people who were bamboozled into subprime mortgages by Wall Street, increasing the size of the war in Afghanistan instead of withdrawing from that Godforsaken war, prosecution for torture, health care, and who knows how many other disasters, Obama has tried to make nice to the right wing in hopes that the right wingers will help him.

No soap, Barack. What Obama got for his troubles -- ever more are saying for his spinelessness -- is bailed out banks that wouldn’t lend, huge bonuses paid to Wall Streeters, tens, scores or more thousands of people losing their homes, an ever bigger, ever more disastrous war, and solid, rocklike Republican opposition on health care.

You know, Obama says in regard to torture that he wants to move forward, not look back. He is a brilliant guy who, despite his brilliance, seems never to have learned the truth in Faulkner’s line that the past is not prologue; it is not even past. When those who do evil get away with it because nobody wants to think about what was done, and people instead want to focus on “moving forward,” the door is open, both ideologically and practically, for recurrence of the same evil in the future. Not for nothing was the desire to begin overlooking the Civil War followed, starting in 1876, by 90 years of Jim Crow -- the very Jim crow which made it a miracle that Obama could be elected as “early” as 2008. Not for nothing was the Philippines Insurrection succeeded by the Viet Nam War, which was succeeded by Iraq II, which has now given way to Afghanistan. Not for nothing was the waterboarding of the Philippines Insurrection followed by the waterboarding of the so-called War on Terror. It has all happened before and history shows it will all happen again if we put it all aside in the name of moving forward.

I will add here only that one wonders whether Obama’s brilliance and articulateness have now played him false. That is, one wonders whether his immense intelligence and skill enabled him to succeed and succeed without ever having to realize and act upon the fact that there are some people who simply will never be placated, who will always be bitter enders in opposition. One wonders whether it is possible that he has never before had to face this fact because, for his entire life, he was always able to persuade so many people by virtue of intelligence, grace and fluency, until he ran up against the hard case Republicans who seem to control that party in Congress and who seem intent on running this nation into the ground.

Well, these are the sort of political matters that I would like but have no time to write about (except for what I just wrote). And there is even much too little time to write about the all-consuming Madoff mess. Thus it is that sometimes, when I do find myself with some time to write about Madoff, I write a series of posts, published successively, on a variety of subjects. This is the situation I find myself in now and is what I shall attempt to do now, since there has been no time to write for awhile and there will be no ability to do so for at least most of the first half of September. After this post I shall write about as many more topics of a potpourri as I can before the ability to do more temporarily runs out, and may or may not be able to deal with more topics before it does run out. Topics left undone will hopefully be discussed later in September, although the truth is that I may never get to them then because so much else will then be pressing both in the Madoff matter and in other matters.

So . . . . something of a potpourri follows. But let it be said that the first item in the potpourri is very important, crucially important. For, courtesy of the Internal Revenue Service itself (to my vast surprise), I seem to have now sniffed out how it was that Madoff got approved by the IRS as a non-bank custodian of IRAs in 2004. For my money (pun not intended), the story is in one way even uglier than the story of the SEC’s incompetence and malfeasance regarding Madoff. For at various times the SEC at least attempted an investigation on the ground, although wholly incompetently. But, as you will see, the IRS apparently did not even attempt an investigation on the ground, but was instead content to rely on lies Madoff put on pieces of paper without doing anything to check out his statements.

* * * * *

Let us start with what the mainstream media likes to call the back story. This begins, for present purposes, with a lengthy essay that was posted here on April 17, 2009 after a Madoff victim alerted me to the fact that the IRS had approved Madoff as a so-called non-bank custodian of IRAs. The post was called Was The IRS As Culpable As The SEC In The Madoff Scam? (and appears at page 110 of Madoff: the first six months”). The essay discussed a large number of matters related to the IRS’ approval of Madoff as a non-bank custodian of IRAs. I shall merely advert here to a significant number of them, but, because they are so important, the post of April 17th is appended to this first installment of Greater And Lesser Potpourri so that a reader can get a fuller appreciation of the pertinent matters if he or she wishes.

In brief, some of the relevant points discussed in the post of April 17th were that Congress considered it vital to safeguard the life savings of people with IRAs so that they ‘“will have adequate incomes to meet their needs when they retire.’” Congress placed upon the IRS the duty of enforcing the “fiduciary standards” that would assure the desired safety of retirement incomes. Congress desired the IRS to insist on evidence that a nonbank had the appropriate capability to handle IRAs. Congress authorized appropriations of “$70 million per year” (emphasis added) to enable the IRS to create an office that would handle IRAs and other tax exempt matters; and in 1984 the IRS, saying it had reason to believe various non-bank custodians might not be in compliance with applicable regulations, insisted that it had the power to demand access to a non-bank’s books and records and proposed a program to verify compliance with the applicable standards.

The post went on to say that the IRS had approved of Madoff as a non-bank custodian in 2004 although he was in complete violation of regulations that had been established for non-bank custodians of IRAs, and it raised the possibility that the IRS had in effect not done a thing to carry out its duty to insure that the fiduciary standards it was supposed to enforce had in fact been adhered to. Set forth below are relevant portions of a few paragraphs from the post.

Alright, so here is a guy who comes to the IRS and says he wants to become an approved nonbank custodian of securities, and who gets approved by the IRS in 2004. How did that happen? Did the IRS simply ignore its own regulations? For instance, did it ignore its own requirement that he not own more than fifty percent of the company? Did it not check to see whether he had a separate trust division. Did it not check to see whether securities were kept in an adequate vault and not commingled, and whether there was a permanent record of assets put into and taken out of the vault? Did it not check to see whether fiduciary records were kept separate from other records? Did the IRS not examine Madoff’s books and records, as it had been claiming a right to do for two decades, since 1984?

Had the IRS done these things to determine compliance with its own regulations regarding becoming an approved nonbank custodian for IRAs, had it done these things which it seems that it must not have done, it almost surely would have discovered Madoff was a fraud. Madoff’s game almost surely would have been up. The IRS would have found, for example, no vault with securities. It would not have found any securities. It would have found no separate trust division. It would have found no books and records of the kind needed to be a nonbank custodian of IRAs. It would have found that Bernie Madoff owned almost the whole damn business, not a “mere” 50 percent.

But since the IRS approved Madoff as a nonbank custodian in 2004, it must not have done these things.

The lengthy post of April 17th concluded with mention -- with warning -- of the possibility that the IRS’ apparent malfeasance might have occurred in other cases, too, in addition to Madoff:

And there is one other point, too, one that might be called earth shaking in its implication. If the IRS acted with the extreme negligence and incompetence, if not complicity, that seems all too possible here with regard to Madoff, did it do the same with regard to other Ponzi schemes or frauds in which companies might have sought to elide suspicion by becoming an approved nonbank custodian? Almost daily, it seems, we hear of more frauds and more Ponzi schemes. Did the perpetrators of those frauds likewise seek and obtain IRS approval to shield themselves from suspicion? The thought is almost too terrible to contemplate. But it cannot be ignored. Just how many Ponzi schemes and frauds, if any in addition to Madoff, may have hidden behind some form of negligent or complicitous IRS approval?

After the post of April 17th, I sent the IRS a freedom of information request on May 6, 2009. It was brief, identified me as being a victim, and simply requested “All documents relating to the IRS’ 2004 approval of Bernard L. Madoff Co. as an approved non-bank custodian for IRAs.”

By a letter dated only one week later, May 13th, the IRS refused the request. (No surprise there.) Its reason was priceless. It said,

Tax records are confidential and may not be disclosed unless specifically authorized by law. We must receive Mr. Madoff’s, or his authorized representative’s written consent before we can consider releasing the information you requested.

The consent must be a separate written document pertaining solely to the authorized disclosure. It must include the following . . . .

• Signature of the taxpayer and date signed

Can you beat that? Here is a guy and a company who were the largest frauds in history. The guy, Bernie Madoff, had already confessed and pleaded guilty. The company had ceased operating. But the records by which Madoff obtained IRS approval to hold victims’ IRAs must remain confidential, and the only way to overcome this is to get Madoff’s signature authorizing release of the records. This would be a complete joke, and very funny, were the IRS not absolutely serious, which makes it far worse than a joke. Does anyone wonder why millions of Americans apparently oppose Obama’s health plan because they figure you can rely on the government to be incompetent and to screw up a health plan just like it screws up so much else? Obtain Madoff’s authorization and signature, indeed!

Not being intelligent enough to take no for an answer in a hopeless situation, shortly after receiving the IRS’ May 13th rejection of the FOIA request, I wrote a two page letter to the Commissioner of Internal Revenue, Douglas Shulman, on May 22nd. The letter asked whether Shulman was aware of what the IRS had done in 2004 (long before his time there), described what Congress did in 1974, described the safeguarding regulations that Madoff had not met and the specific ways in which he failed to meet them, said his fraud would have been uncovered by the IRS if it had done its job, and asked Shulman to look into and publicly disclose how and why the IRS’ malfeasance had occurred -- e.g., was there mere rubber stamping, were there bribes or other criminal conduct, was the IRS influenced by the SEC? This letter is of sufficient importance to the story that it too has been appended to this first installment of Greater And Lesser Potpourri.

I did not expect to even hear back from Shulman or the IRS in response to the letter sent to him on May 22nd. But to my vast surprise I did receive a response three months later, under date of August 21st, from an official of the Internal Revenue Service named William Hulteng, whose response makes it virtually certain, if you ask me, that in the process of approving Madoff as a non-bank custodian of IRAs, the IRS did absolutely nothing except require him to submit pieces of paper -- on which he lied. I think the IRS’ letter makes it crystal clear that the IRS engaged in no on-the-ground verification of what Madoff said, did not examine his books and records although in 1984 it had correctly claimed that very power of inspection in order to insure against failure to adhere to regulations, and simply rubber stamped Madoff -- in other words, simply accepted vast lies he wrote down on pieces of paper without checking to see whether he was telling the truth or had lied like a rug (to use an old Chicago expression).

The letter from Hulteng is so important that, it too is appended to this post so that the reader can review it for himself/herself.

Here are some of the more important statements in the letter. It starts by reiterating the claim that “The rules of governing taxpayer privacy preclude us from discussing any specific nonbank trustee application.” In other words, it reiterates the absurd position that taxpayer privacy forbids it from telling victims or anyone else what was done by the now jailed perpetrator of the largest fraud in history and by the defacto defunct company (which has been bought for a relative pittance by somebody) through which he perpetrated his scam. But then comes a very large “but,” since the next sentence says “However, we can provide general information concerning the nonbank trustee application requirements and process.” The IRS will, in other words, give one the general drill followed by all applicants and therefore presumably followed by Madoff, especially since the very next sentence says “The IRS processes every nonbank trustee application under the same procedure.” (Emphasis added.)

Then, beginning with the just quoted sentence, the IRS’ letter sets forth two paragraphs making it plain that its review is entirely a paper review. Here are the two paragraphs:

The IRS processes every nonbank trustee application under the same procedures. The application must be submitted pursuant to Revenue Procedure 2009-4, 2009-1 I.R.B. 118. This Revenue Procedure sets forth the standard procedural requirements applicable to all private letter ruling requests involving employee plans matters, not just nonbank trustee applications. Thus, an applicant must submit complete information and documentation in support of its application. Importantly, the applicant must personally sign a statement under penalties of perjury which attests that the application “…contains all of the relevant facts relating to the request, and such facts are true, correct, and complete.”

The IRS reviews the application to ensure that it satisfies all of the requirements of the regulations. This review covers, for example, the applicant’s ownership structure to ensure that it has sufficient continuity and diversity to ensure that it will be able to continue in business after the death or change of its owners; the applicant’s certified financial statements to ensure that it meets the net worth standards in the regulations; and the applicant’s rules of fiduciary conduct. The IRS often asks for additional information and documentation during its review. If the applicant satisfies the regulatory requirements, the IRS issues a letter approving the application. If the applicant fails to satisfy these requirements, the IRS rejects the application.

It is obvious that there is no way to read those two paragraphs as meaning anything other than the IRS’ review is strictly a review of pieces of paper only. That is the inevitable meaning of statements saying that the applicant must provide “complete information and documentation,” that “Importantly, the applicant must personally sign a [sworn] statement . . . which attests that the application ‘contains all of the relevant facts . . . and such facts are true, and correct and complete,” and “The IRS reviews the application to ensure that it satisfies all of the requirements of the regulations” and “often asks for additional information and documents during its review.” (Emphases added.) All of these statements are typical, and symptomatic, of a government review only of submitted pieces of paper. There is not one word in the IRS’ letter about going into the field to verify the truth of what the pieces of paper say, or even of merely calling independent parties (counterparties in Wall Street lingo) to find out if they do the business with the applicant which the latter claims it is engaging in. (The whole deal smacks of the Billy Sol Estes situation, in which the tanks had no oil or soybeans or whatever it was.)

That the review is only of pieces of paper is also shown by another comment made in the paragraphs of the IRS letter quoted above. Referring to the relevant formal statement of procedures to be followed, the letter says “This Revenue Procedure sets forth the standard procedural requirements applicable to all private letter ruling requests involving employee plans matters, not just nonbank trustee applications. Thus, an applicant must submit complete information and documentation in support of its application.” The ordinary reader would have no idea about it, but having briefly been a tax lawyer 46 years ago, I seemed to remember, and verified with both an accountant and a tax lawyer, that “private letter ruling requests” are given strictly on the basis of facts set forth as allegedly true in the letter requesting the ruling. The ruling is good only for that taxpayer on those facts; there is no effort by the IRS to check the facts; and if the taxpayer has lied about the facts, well, it’s his tough luck because the ruling will be of no use to him, will be inapplicable, when the IRS later discovers the true facts.

So use by the IRS, when assessing an application to be a non-bank custodian, of the same regulations as it uses for all private letter rulings is another fact showing that the IRS’ review of non-bank custodian applications is strictly a review of pieces of paper.

But there is also more to it than just this. The point of giving a taxpayer a private letter ruling is emphatically not to determine whether he has lied to the IRS about the facts presented in his request for a ruling. It emphatically is not to catch him in, and to stop him from committing, a fraud. It is, rather, to provide him with the IRS’ view of the tax consequences attaching to the facts he has presented, so that he can proceed with his plans in safety if the IRS’ private ruling is satisfactory to his purposes. If the IRS later discovers he has lied about the facts, the private letter ruling he has obtained will provide him with no succor, since it pertains to different facts. All he will have done by lying about the facts is that he will have screwed himself over. In any event, the key here is that the point of issuing a private letter ruling is not to ensure against fraud. It has no such purpose.

But a key reason for the IRS’ Congressionally-mandated duty to apply fiduciary standards to applications to be a non-bank custodian is to ensure against fraud, peculation, and loss of monies. The IRS has been given the fiduciary duty to protect against them in order to protect the life savings, in IRAs, of persons who need the money for their old age. Yet the IRS is using the same paper-only-review method, that does not uncover fraud but is perfectly appropriate for private rulings, when it performs the very different duty of considering applications to be a non-bank custodian in order to uncover and insure against fraud, peculation or lies -- it is using a paper-only-review that will not catch fraud and peculation because the applicant can lie in the papers submitted as part of his application. That is what Madoff must have done, isn’t it? He must have lied on paper to the IRS (just as he lied to others) about his percentage of ownership of the company, he must have lied to it about the existence of a vault, he must have lied to it about non-commingling, he must have submitted false financial statements to the IRS, etc. Otherwise he could not have been approved by the IRS because in truth he failed to meet its regulations.

At this point in time, then, it seems pretty likely, almost dead certain, that the IRS, for which Congress had authorized appropriations of scores of millions of dollars per year to run the relevant office, used a horribly negligent, completely incompetent method that was an open invitation to crooks like Madoff to lie to it about their capacity and their right to be a non-bank custodian of IRAs. The IRS thereby opened the door to gigantic frustration of Congress’ intent that people’s life savings be protected for their old age by application of fiduciary principles. Just as there needs to be a major Congressional investigation of how the SEC came to act with thoroughgoing incompetency, or worse, in regard to Madoff, so too there needs to be a Congressional investigation of how the IRS decided to combat potential fraud by adopting a technique -- a paper review only -- that was unable to detect even the most serious fraud, and that was, indeed not designed to catch and stop lies and fraud, but only to enable the IRS to issue tax advice on the basis of whatever uncontested facts a taxpayer claimed to be true. IRS investigations on the ground, which did not take place, should have revealed the truth: that Madoff had no vault, that he did not segregate accounts and records, that he had 90 or 100 percent ownership, that no securities were bought, that no options were bought, that his books were crooked, etc., etc.

But there was no investigation on the ground, and one is left to wonder how many other crooks may, like Madoff, have taken advantage of the IRS’ malfeasance to become approved non-bank custodians in order to run scams that defraud people. The IRS list of approved non-bank custodians that our librarians found had approximately 260 names on it -- how many of those may prove not to be honest companies that met the regulations imposed to carry out Congress’ intent that people’s IRAs be protected, but lying crooks who used the IRS’ negligence -- the IRS’ paper-review-only program -- in order to be able to steal. Is Madoff possibly the canary in the coal mine on this score as well as others?

Aside from possibly being the canary in the mine, it is evident that the amount of money lost in the Madoff case because of the IRS’ incompetence is gigantic, even though it is not yet precisely measurable because only the government and Picard currently possess the facts needed for measurement. Had the IRS done its job in 2004 and exposed Madoff then, all the money put into Madoff and not withdrawn from it since then, and therefore lost as of December 11th, would have been saved. For all this principal would not have been put into Madoff in the first place had his scam been exposed in 2004.

As said, only Picard and the government know how much this is, but almost surely this principal is many, many billions of dollars, especially since -- unlike some of Madoff’s fellow crooks in large feeder funds such as the Fairfield family of funds, and unlike JP Morgan, Chase -- so many investors left all their money with Madoff until December 11th.

In addition to the loss of all principal put into Madoff, and not withdrawn, after early 2004, the losses include all appreciation on that principal since 2004. In terms of this case, those losses are called the appreciation shown on account statements from Madoff, and are in the mucho billions, although once again only Picard and the government know their amount. And, even if one follows Picard and says these were not truly losses because the appreciation was phony and losses therefore should not be measured by the legitimate expectations shown on the statements of November 30th, losses still exist in the billions of dollars because of what the economists call opportunity costs. Which is to say that, had the money not been invested in Madoff, it would likely have been invested elsewhere and earned interest and appreciation. (Since so many Madoff investors were essentially conservative investors, their market losses of principal in 2008-09 might not have been too bad because they might have been heavily in Treasuries or bonds that maintained their value. As well, any partial losses of principal would have been partially recouped in recent months and might be still further recouped in future. And, in any event, interest was lost -- my understanding is that a New York law sometimes sets interest in pertinent cases at nine percent – that’s a hell of a chunk of change over the years. Even interest at three to five percent would be a major chunk of money.)

Taxes were also lost. Take the question of federal income taxes paid on phony profits since 2004. According to the rules followed, or imposed, by the IRS, refunds can be obtained for those taxes for only three or five years, depending on the taxpayer’s circumstances. (I think I am right about five years.) So, as I understand it, according to the IRS, refunds can be obtained only for taxes paid on phantom profits from 2005 onward or 2003 onward. But suppose the IRS had exposed the scam in 2004. In that case, not only would one not have paid income taxes in phony profits from 2004 onward, but, even according to the IRS, refunds would have been obtainable for the years 2001-2003 or 1999-2003 -- refunds of doubtlessly billions of dollars which are not available now according to the IRS.

In addition, theft deductions could have been carried back for earlier years than are now available had the IRS blown the whistle on Madoff in 2004, and there are people who would not have paid huge sums in estate taxes from 2004 onward because large chunks of the supposed estate would have been known not to exist.

So, as said, the amount of tax money that was lost by investors, due to the IRS’ failure to catch and expose Madoff in 2004, must be gigantic even if not currently known to the public. Also, what this additionally means is that not only are losses since 1992 partially attributable to one government agency, the SEC, because of its moral and criminal incompetence then and later and because its unbelievable 1992 public statement that there was no fraud made it a co-cause with Madoff of sucking people into his scam, but a second government agency, the IRS, is partly responsible for all losses since 2004 because its malfeasance enabled Madoff to successfully continue his scam from then until nearly the end of 2008. And the fact that two government agencies, not just one, bear heavy responsibility for the success of the scam and the losses of investors makes it even more appropriate for the government to take action to relieve their plight, which it has not yet done for the most part. (Nor -- with only one exception that I know of (a complaint filed against FINRA which assails it for general incompetence or worse with regard to far more than Madoff) -- has anyone really considered in this regard that the malfeasance and incompetence of a body set up by a federal statute, FINRA, also was a contributing factor to the success of the scam from the very beginning of the fraud, whenever that was. Except for the one complaint which attacks it for a wide variety of failures in addition to its failure in Madoff, FINRA has thus far gotten pretty much a free pass in the Madoff disaster. It bears heavy responsibility, however, and most certainly should not get a free pass.

One must add that, even though the IRS bears responsibility for extensive losses, and a fellow government agency bears responsibility for all losses since 1992, the government -- the IRS -- wants to keep the lion’s share, in years, of the taxes which were paid to it but should not have been because they were paid on phantom income, on phony income -- on money the government does not even have the constitutional authority to tax because its constitutional power is only to tax real income, not phantom income. The IRS is allowing people to recover refunds for only three or five years, and, if people wish to use its safe harbor provision for theft deductions, they have to give up the right to assert various doctrines that would allow them to obtain refunds of income taxes paid before that, e.g., refunds on taxes wrongly paid at least back to the early 1990s when the scam is known to have already been in operation. So not only is the IRS one of the causes of investors’ losses, but it demands to keep more than a decade of taxes that should never have been paid (and it does so though it reserves the right to collect back to infinity if the shoe is on the other foot).

Given all these matters relating to the IRS -- given its malfeasant use of a paper-review-only process when approving Madoff, given this incredible misuse of a process designed for private letter rulings in which the goal is not to prevent fraud, given the IRS’ consequent flouting of Congress’ intent that it effectively enforce fiduciary standards to protect IRAs, given its consequent responsibility for the last four and one half years of the Madoff scam, given the possibility that the case is a canary in the coal mine -- given all this, the question arises of why did Doug Shulman have a letter written to me that disclosed how the IRS (malfeasantly) goes about approving non-bank custodians. The question is fascinating though one cannot presently know its answer. There are all kinds of possible speculations, with mine presupposing that Shulman and/or other high IRS officials saw the letter before it went out -- which seems to me likely when the matter is of such importance as the matter addressed in the letter of August 21st from Hulteng. My supposition that Shulman and other high officials saw the letter could be wrong, of course, and, if it is wrong, maybe they just didn’t realize that the game was explosive and thus gave my letter to Hulteng’s office to answer without the top guys like Shulman vetting the answer before it went out. But let us assume my speculation that the letter was vetted is correct. Why was the letter sent out?

My speculation begins with the fact that Shulman, as far as I know, is reputed to be a good guy. I am prone to believe this reputation on the theory that apples don’t fall far from trees. My wife and I have known his parents for 50 years (his mother and my wife roomed together in Ann Arbor one semester and his father was my classmate there in law school), they are good people, and it is therefore likely their son is too. Further to the point, he was nice enough to personally call me (unexpectedly) to tell me why he would be unable to write a response to a letter (not discussed in this post) that I sent him on March 3, 2009. Being a good person might well cause someone to be sympathetic to the disaster that has befallen so many Madoff victims and to therefore think that, even if privacy rules preclude discussion of Madoff’s case in particular, and even if that would justify a refusal to set forth any kind of answer to my inquiry (just as the IRS refused to answer my previous FOIA request), a response that at least sets forth the general process should be sent to an inquiry from a victim about how did the IRS come to approve Madoff.

There is also the possibility that, realizing how badly so many people have been hurt, Shulman, being a good guy, decided to give me information that did not on the surface seem damaging to the IRS, but which he knew might nonetheless be used by victims in efforts to recoup. Possibly knowing this, perhaps he even decided to give out the information as a vehicle for attempting to circumvent those in the IRS, or Treasury, or higher who don’t want to do anything to help Madoff’s victims. These latter speculations will be regarded as Machiavellian (though we all know it’s how Washington works). But they are not impossible, although one must keep in mind that they are only speculations.

Finally, before turning from the question of the IRS to another piece of this potpourri, let me say one last thing; let me echo a point I once made previously in a posting on a different subject. If readers do not remember anything else written in this post or in its continuations, I beseech them to remember this: the IRS now appears to have surely admitted, in the letter of August 21st, that its review of Madoff was a paper-only-review -- was a review that was an open invitation for any liar, any Madoff, to receive IRS approval as a non-bank custodian by means of egregious fraudulent misstatements, and to thereby receive aid from the IRS in defrauding victims. The IRS has admitted that it did no on the ground review and inspection, used a process that destroyed Congress’ powerfully expressed intent that it effectively impose and carry out fiduciary rules, and, for all we know, may have approved other fraudsters as well as Madoff. This is all crucial because (i) astounding, perhaps even criminal, government malfeasance was a major contributing cause to the huge losses suffered by Madoff victims; (ii) the government’s incredible and even criminal malfeasance is a major reason why the government should provide restitution to Madoff victims -- regardless of what it does in other cases; (iii) the mass media seem not to care a whit so far about what the IRS did -- although legislators or their aides are sometimes astonished when they hear about it; and (iv) it is crucial, at least in my judgment, that the victims make a continuous major point of the malfeasance of both the SEC and the IRS if they, the victims, are to receive appropriate restitution to any significant degree.

* * * * *

To Be Continued If Possible.

April 17, 2009

Re: Was The IRS As Culpable As The SEC In The Madoff Scam?

This posting raises the question whether the IRS may be as culpable as the SEC and FINRA for the continued success of Madoff’s Ponzi scheme. If the possibility raised here turns out to be true, as I suspect will be the case, this would be a disaster for the country. For it would mean that what is perhaps the one agency which above all others must be kept competent and clean as a whistle, the agency that collects taxes, was instead a witting or unwitting facilitator of the worst kind of fraud. The consequences of this might accurately be called incalculable.

It is unknown to most people that, as part of its extensive authority over pension plans of all types, the IRS has the authority to approve so called non-bank custodians for IRAs and various other kinds of accounts (e.g., medical health plans). This goes back to the Employment Retirement Income Security Act of 1974. Congress, greatly concerned over many aspects of pension plans -- it wanted them, for example, to vest and be portable -- passed the 1974 act because

One of the most important matters of public policy facing the nation today is how to assure that individuals who have spent their careers in useful and socially productive work will have adequate incomes to meet their needs when they retire. This legislation is concerned with improving the fairness and effectiveness of qualified retirement plans in their vital role of providing retirement income. In broad outline, the objective is to increase the number of individuals participating in employer-financed plans; to make sure to the greatest extent possible that those who do participate in such plans actually receive benefits and do not lose their benefits as a result of unduly restrictive forfeiture provisions or failure of the pension plan to accumulate and retain sufficient funds to meet its obligations; and to make the tax laws relating to qualified retirement plans fairer by providing greater equality of treatment under such plans for the different taxpayer groups concerned.

Congress had found that problems with pension plans had included, among others, “Inadequate coverage,” “Discrimination against the self-employed and employees not covered by retirement plans,” “Inadequate vesting,” “Inadequate funding,” “Misuse of pension funds and disclosure of pension operations.” Congress determined that “It is time for new legislation to conform the pension provisions [of prior legislation] to the present situation and to provide remedial action for the various problems that have arisen . . . .” (Emphasis added.) Congress provided “additional rules regarding fiduciary requirements,” and relied heavily on the IRS to enforce fiduciary standards:

Your committee believes that primary reliance on the tax laws represents the best means for enforcing the new improved standards imposed by the bill. Historically, the substantive requirements regarding nondiscrimination, which are designed to insure that pension plans will benefit the rank and file of employees, have been enforced through the tax laws and administered by the Internal Revenue Service. As a result, the Internal Revenue Service is already required to examine the coverage of the retirement plans and their contributions and benefits as well as funding and vesting practices in order to determine that the plans operate so as to conform to these nondiscrimination requirements. Also, the Internal Revenue Service has administered the fiduciary standards embodied in the prohibited transactions provisions since 1954.

Your committee believes that the Internal Revenue Service has generally done an efficient job in administering the pension provisions of the Internal Revenue Code. The very extensive experience that the Service has acquired in its many years of dealing with these related pension matters will undoubtedly be of great assistance to it in administering the new requirements imposed by the committee bill.

However, because the bill increases the administrative job of the Service in this respect, your committee believes that it is desirable to add to its administrative capability for handling pension matters. For this reason, the committee bill provides for the establishment by the Internal Revenue Service of a separate office headed by an Assistant Commissioner of Internal Revenue to deal primarily with pension plans and other organizations exempt under section 501(a) of the Internal Revenue Code, including religious, charitable, and educational organizations. In order to fund this new office, the bill authorizes appropriations at the rate of $70 million per year for such administrative activities. [That is $70 million per year in 1974 dollars, which is somewhere in the neighborhood of $250 million to $350 million today.] (Emphases added.)

Congress decreed that, although the trustee or custodian of an IRA account is usually a bank, a nonbank could also be a trustee or custodian if the nonbank provided “evidence,” or “substantial evidence,” that it met the necessary standards.

Under the governing instrument, the trustee of an individual retirement account generally is to be a bank (described in sec. 401(d)(1), [FN71]. In addition, a person who is not a bank may be a trustee if he demonstrates to the satisfaction of the Secretary of the Treasury that the way in which he will administer the trust will be consistent with the requirements of the rules governing individual retirement accounts. It is contemplated that under this provision the secretary of the Treasury generally will require evidence from applicants of their ability to act within accepted rules of fiduciary conduct with respect to the handling of other people’s money; evidence of experience and competence with respect to accounting for the interests of a large number of participants, including calculating and allocating income earned and paying out distributions to participants and beneficiaries; and evidence of other activities normally associated with the handling of retirement funds.

* * * * *

Although the bill generally requires that a trustee administer an individual retirement account trust, the bill also provides that a custodial account may be treated as a trust, and that a custodian may hold the account assets and administer the trust. Under the bill, a custodial account may be treated as a trust if the custodian is a bank (described in sec. 401(de)(1)) or other person, if he demonstrates to the satisfaction of the Secretary of the Treasury that the manner in which he will hold the assets will be consistent with the requirements governing individual retirement accounts. Again, it is contemplated that the Secretary will require substantial evidence (as described above) to determine if a person other than a bank may act as custodian. (Emphases added.)

Congress further required the trustee of an IRA to file annual reports:

The bill provides that the trustee of an individual retirement account (or issuer of a retirement annuity) is to report annually to the Secretary of the Treasury regarding contributions to the account or annuity and regarding other matters as prescribed by regulations. Your committee intends that the regulations will include a requirement that the trustee or issuer file annual information returns with the Internal Revenue Service (with copies to each individual for whose benefit a retirement account or a retirement annuity is maintained) on the amount of contributions to and distributions from the account or annuity.

So, it is clear beyond peradventure that Congress enacted the 1974 law in order to be certain that pensions, IRAs and similar kinds of arrangements are safeguarded -- that “individuals who have spent their lives in useful and socially productive work will have adequate incomes to meet their needs when they retire.” Subsequently, the IRS established regulations -- carrying out Congress’ purposes -- that had to be met for an institution to be approved as a nonbank custodian (NBC). Among the regulations are ones which ensure continuity of the NBC by providing “Sufficient diversity in the ownership of an incorporated applicant,” diversity requiring that any person who owns more than 20 percent of the voting stock in [an NBC] cannot own more than 50 percent of it. An NBC applicant also has to “demonstrate in detail its experience and competence with respect to accounting for the interests of a large number of individuals,” and must have a “separate trust division” in which “the investments of each account will not be commingled with any other property.” Also, “Assets of accounts requiring safekeeping will be deposited in an adequate vault” with “A permanent record . . . of assets deposited in or withdrawn from the vault.” As well, the NBC “must keep its fiduciary records separate and distinct from other records.”

In addition, by an IRS General Counsel Memorandum that was “Date Numbered: April 13, 1984” (but that also bears the date October 11, 1983), the IRS insisted that, in carrying out the duties Congress gave it, “The legal authority for the inspections of books and records of . . . [an] approved nonbank trustee for individual retirement accounts . . . is inherent in the language of the [statutory section] which allows substantive discretion to the Commissioner in the setting of standards for nonbank trustees as well as the method of enforcement of those standards.” Because the IRS had reason to believe that various nonbank trustees “may not be in compliance with the applicable requirements for nonbank trustees,” the Internal Revenue Service “propose[d] to institute a program to verify compliance of specific nonbank trustees with the applicable requirements of the regulations.”

Thus, to carry out Congress’ desire for the safeguarding of pension plans and IRAs, the IRS established rules limiting percentages of ownership in NBCs, requiring NBCs to show expertise in relevant accounting, requiring a separate trust division, requiring a separate vault and separate records, and demanding access to an NBC’s books and records.

All of this raises an overarching question with regard to Madoff, to wit, how in the hell did Madoff become an approved nonbank custodian for IRA accounts in 2004?

It has been widely believed, of course, that Madoff’s firm refused to handle IRA accounts itself -- that, if one desired an IRA account, one had to work through FISERV or its predecessors (like Retirement Accounts Incorporated). Lately, however, we are beginning to hear of people who say they had an IRA account directly with Madoff, not through FISERV. And, in any event, since FISERV and its predecessors never had in their custody any securities purchased by Madoff for customers (they couldn’t have had them, since Madoff never bought securities), Madoff was what I have heard referred to as a subcustodian for FISERV (at least he would have been a subcustodian had he actually bought securities for the accounts). So, one way or another Madoff was a nonbank custodian -- or at least would have been had he bought securities instead of faking it.

Alright, so here is a guy who comes to the IRS and says he wants to become an approved nonbank custodian of securities, and who gets approved by the IRS in 2004. How did that happen? Did the IRS simply ignore its own regulations? For instance, did it ignore its own requirement that he not own more than fifty percent of the company? Did it not check to see whether he had a separate trust division. Did it not check to see whether securities were kept in an adequate vault and not commingled, and whether there was a permanent record of assets put into and taken out of the vault? Did it not check to see whether fiduciary records were kept separate from other records? Did the IRS not examine Madoff’s books and records, as it had been claiming a right to do for two decades, since 1984?

Had the IRS done these things to determine compliance with its own regulations regarding becoming an approved nonbank custodian for IRAs, had it done these things which it seems that it must not have done, it almost surely would have discovered Madoff was a fraud. Madoff’s game almost surely would have been up. The IRS would have found, for example, no vault with securities. It would not have found any securities. It would have found no separate trust division. It would have found no books and records of the kind needed to be a nonbank custodian of IRAs. It would have found that Bernie Madoff owned almost the whole damn business, not a “mere” 50 percent.

But since the IRS approved Madoff as a nonbank custodian in 2004, it must not have done these things. Its approval of Madoff, moreover, raises additional questions. Why did Madoff seek IRS approval in 2004? What did he gain from it, especially since he was telling people that he would not accept IRA accounts (except through FISERV). (Was he afraid of lawsuits for being a nonapproved nonbank subcustodian?) And knowing in advance, as he must have, what the IRS regulations required, how did Madoff even dare to apply for approval as a nonbank custodian? Was the fix in somehow?

Or did the impetus for seeking approval from the IRS not come from Madoff, but from the IRS itself? Did the IRS, for example, learn that Madoff was acting as an unapproved nonbank custodian of IRAs, tell him this is not permissible, and tell him to apply for approval? And if this is what occurred, how did the IRS not know for 20 years that Madoff was acting as an unapproved nonbank custodian and how did the IRS approve Madoff despite his failure to follow its regulations? Also, if the IRS learned he was acting as an unapproved nonbank custodian and told him to apply for approval, then the IRS had to have known or at least have suspected that he had been acting as an unapproved nonbank custodian for years, yet all it did, apparently, was to require him to submit a few pieces of paper whose veracity it did not check, and it then approved him without even looking at his books and records apparently? (Just as the SEC, after finding out in 2006-2007 that he had been acting as an unregistered investment adviser for years, did nothing except require him to register.)

One bottom line on all this is that there seems to be a plausible case – maybe even an overwhelming case -- that the SEC is not the only government agency deeply at fault here. The IRS may also be deeply at fault. If so, the losses sustained by the thousands of small people, often in their 60s, 70s and 80s, who have been wiped out, who are having to sell their homes, who are trying to find even the most menial work in order to live, are due not just to the fault of one government agency (as well as to Madoff himself), but to the fault of two government agencies (as well as Madoff). This would make only the more compelling than it already is the case for extensive governmental restitution to compensate for the extensive governmental fault that wreaked disaster here.

Indeed, not only would the case for governmental restitution be even stronger than it already is, but the IRS’ restitutionary action to date will look even less generous than some of us already recognize to be the unhappy fact. When the IRS came out with its new revenue ruling and its safe harbor procedure, there was widespread approbation, a widespread feeling that it had been generous. This was in significant part due to sheer relief that the IRS would do something, and in part due to the traditional American unwillingness and inability to look facts in the face and to recognize what is right in front of one’s nose. For those of us of a certain age, this American unwillingness and inability have repeatedly been thrust in front of us since at least 1965 and the start of truly heavy American participation in the Viet Nam war. It was manifest in Viet Nam, in Nixon’s and Kissinger’s enlargements of that war, in Iraq, in the promotion of stock market and real estate bubbles (and in adjustable rate mortgages and their packaging, which fueled a bubble) that common sense and economics warned couldn’t last, in the still continuing unwillingness to look torture and its perpetrators in the face, in the belief, starting with Reagan, that greed can serve as a philosophy of life, in the failure to recognize, as people like Andrew Bacevich and Robert Kaiser have now started to write in marvelous books, that our public life is thoroughly and almost uniformly corrupt at the federal level (and often below that too). Paul Krugman has often made clear the American unwillingness to recognize reality, the drastic failure of intelligence in a democracy whose health requires intelligence.

So it was with the general reaction to the IRS’ action regarding Madoff. Largely lost in the handclapping for the IRS was recognition that its safe harbor procedure was the result of intense, immediate, behind the scenes lobbying by the superrich who were heavy donors to the Democratic party and who would benefit to the tune of deductions worth many score and even hundreds of millions of dollars, while small people (especially those who are older) who had had to take money out of Madoff every year to pay basic living expenses as well as to pay the tax on their very Madoff income itself would receive very little benefit and would instead continue to be subject to their “new- found inability” to afford food and shelter.

Largely lost was that the IRS’ tax relief, designed to greatly benefit the superrich while the small man and woman got screwed, did not provide any restitution for people who invested through IRAs, through pension funds, through feeder funds -- these emphatically were not the private investment vehicles of the superrich Democratic donors who strongly pressed behind the scenes for the IRS’ action.

Largely lost in the unconsidered gratitude and approbation was that, to take advantage of the IRS’ safe harbor theft deduction provision, one had to agree to give up all claims to refunds of taxes paid on phantom income -- on taxes that the government never had any right to -- neither under the constitution nor the statutes -- because there was no income, but which the government now was going to keep anyway.

Largely lost was that, if one were to use the safe harbor provisions -- as many would out of sheer desperation to get something back quickly in order to be able to pay everyday living expenses, at least for awhile -- one was required to give up the right to use legal doctrines that, if pressed in court, could conceivably result in refunds of taxes unconscionably being kept by the government: to give up the right to assert the claim of right doctrine, the equitable tolling doctrine, the equitable estoppel doctrine, the negative tax benefit doctrine.

All of this was lost in the cheers, cheers resulting from the typically American refusal to look facts in the face and possibly resulting here as well from an analog to what I believe is called the Stockholm syndrome.

And on top of all that, now it begins to look as if the IRS, which has done so little to help the small man and woman while kowtowing to the superrich who are heavy donors to the Democratic Party, may itself be one of the causes of the disaster, just like the SEC and Madoff himself. For it looks like the IRS, by ignoring Congress’ desire that it safeguard those who had IRAs, and by ignoring its own regulations on the subject as well, approved of Madoff as a nonbank custodian of IRAs when, had it carried out Congress’ desire and its own regulations, it would have discovered and thereby caused a stop to be put to the fraud which was occurring. And beyond this, for at least 20 years the IRS somehow ignored and/or did not learn that Madoff was acting as an unapproved nonbank custodian although, had it not ignored and/or failed to learn of this, and had it followed Congress’ wishes and its own regulations, it would have rung the bell on Madoff in the 1980s or 1990s.

Does it not go without saying that the IRS’ actions and inactions need to be extensively investigated by Congress, by the media, by Madoff investors, by litigants, by the FBI?

And there is one other point, too, one that might be called earth shaking in its implication. If the IRS acted with the extreme negligence and incompetence, if not complicity, that seems all too possible here with regard to Madoff, did it do the same with regard to other Ponzi schemes or frauds in which companies might have sought to elide suspicion by becoming an approved nonbank custodian? Almost daily, it seems, we hear of more frauds and more Ponzi schemes. Did the perpetrators of those frauds likewise seek and obtain IRS approval to shield themselves from suspicion? The thought is almost too terrible to contemplate. But it cannot be ignored. Just how many Ponzi schemes and frauds, if any in addition to Madoff, may have hidden behind some form of negligent or complicitous IRS approval?

Mr. Lawrence Velvel
Five Hundred Federal Street
Andover, MA 01910

Dear Mr. Velvel:

I write in response to your letter of May 22, 2009, concerning the IRS' process for approving businesses to act as nonbank trustees or custodians for individual retirement accounts.

The rules governing taxpayer privacy preclude us from discussing any specific nonbank trustee application. However, we can provide general information concerning the nonbank trustee application requirements and process.

As you know, a business that is not a bank may apply to the IRS for approval to act as a nonbank trustee. The applicant must demonstrate that it complies with the requirements set forth in section 1.408-2(e) of the Income Tax Regulations. These requirements are designed to ensure, among other things, that the applicant has the fiduciary capacity, skill, and resources to act as a nonbank trustee.

The IRS processes every nonbank trustee application under the same procedures. The application must be submitted pursuant to Revenue Procedure 2009-4, 2009-1 I.R.B. 118. This Revenue Procedure sets forth the standard procedural requirements applicable to all private letter ruling requests involving employee plans matters, not just nonbank trustee applications. Thus, an applicant must submit complete information and documentation in support of its application. Importantly, the applicant must personally sign a statement under penalties of perjury which attests that the application "...contains all of the relevant facts relating to the request, and such facts are true, correct, and complete."

The IRS reviews the application to ensure that it satisfies all of the requirements of the regulations. This review covers, for example, the applicant's ownership structure to ensure that it has sufficient continuity and diversity to ensure that it will be able to continue in business after the death or change of its owners; the applicant's certified financial statements to ensure that it meets the net worth standards in the regulations; and the applicant's rules of fiduciary conduct. The IRS often asks for additional information and documentation during its review. If the applicant satisfies the regulatory requirements, the IRS issues a letter approving the application. If the applicant fails to satisfy these requirements, the IRS rejects the application.

If you have any questions concerning this matter, please contact me (Identification Number 100091286) at (202)-283-9508.

Sincerely,

William Hulteng, Manager Employee Plans Technical

Irving Picard’s Motion To Dismiss The Complaint Filed By Helen Chaitman.

2009-07-28T10:31:00.000-04:00

July 28, 2009

Re: Irving Picard’s Motion To Dismiss The Complaint Filed By Helen Chaitman.

My last, four part post said I had been informed that Judge Lifland, who is presiding over the Madoff matter in the Bankruptcy Court, had rejected Helen Chaitman’s requested briefing schedule. Apparently, even if this is true, it is irrelevant as a practical matter. For a few days ago, I obtained a motion and brief filed by the Trustee on July 17th seeking dismissal of the complaint filed by Chaitman; the motion says a reply brief is due from Chaitman on August 17th and a hearing will be held on August 25th. This schedule is not terribly different from what Chaitman wanted, if I remember correctly. Something called “Objections,” the Trustee said, are due on August 10th; as best that our librarian and I can figure out, objections are filed by others than the Trustee or Chaitman (acting for her clients).

Some of what the Trustee’s brief says was contained in David Sheehan’s threatening letter to Chaitman discussed in the four-part prior post. I shall not reiterate those points, except briefly if and where necessary. What shall largely be done instead is to discuss, relatively briefly (at least for me), some additional points made by Picard in his brief.

Let me begin with a matter that leaps off the page. Picard’s brief does not so much as mention matters that should be the determinants of net equity: the legislative history showing the purpose of SIPA, Congress’ desire to protect legitimate expectations, the wording of the provisions of SIPA defining net equity, past statements by Harbeck and Wang that people will receive the securities shown on their statements -- even if the securities were never bought, or the New Times proceedings or opinions. The lack of any mention of these things is amazing to me.

One would like to leap to the conclusion that the absence of mention is because SIPC and Picard realize that all of the unmentioned matters are dead against them (which would mean they regard the unmentioned as unmentionable). But one is reluctant to take this leap, because lawyers can and do always find reasons to support their views.

Perhaps, then, the failure to mention Congressional purpose, legislative history, legitimate expectations, etc., has to do with the difference, in legal terms, between what lawyers call a motion to dismiss, which is what Picard filed, and a motion for summary judgment, which he did not file. Somehow I doubt this, however. Rather, it seems to me that the Trustee and his lawyers think it may be easier to win their motion, not by arguing the proper definition of net equity, but (i) by claiming Chaitman’s clients are trying to stop the Trustee from seeking to claw back alleged “preferences,” (ii) by pointing out that both Chaitman and her clients will personally make out better economically under the Trustee’s method of calculating net equity (cash in minus cash out) than by use of the November 30th statement to calculate net equity, and (iii) by blasting Chaitman for what she has written and said. My views are, it should be said, my personal speculations. But that doesn’t make them wrong.

It seems to me, however, that Picard is incorrect in claiming Chaitman is trying to stop him from clawing back preferences, and that the argument he is making in this regard is therefore an effort, to some extent, to pull the wool over the court’s eyes. Certainly Chaitman is not attempting to stop Picard form clawing back billions in preferences from the guilty -- or at least non-innocent -- whom he has sued because of their participation in the Ponzi scheme.

If Chaitman is trying to prevent a clawback of any preferences, it is, I would think, the clawbacks of “alleged” preferences from the innocent. But even here, if my understanding is correct (which I hope it is), monies received from Madoff by innocent investors cannot be obtained by Picard, except perhaps for monies received by the innocent within 90 days of December 11th.

Then there is also the question of what is a preference. Picard or Harbeck or bankruptcy lawyers should correct me if I am wrong, but I think you have not received a “preference” if you “gave value” for what you received (e.g., there is no “preference” if you got $250,000 from the debtor but sold him a house worth $250,000). My understanding is that it is not disputed that monies you previously gave to Madoff -- cash-in -- constitute the giving of value for monies taken out up to the same amount. So a preference, in Picard’s terms, can only be money you took out over and above what you put in, that is, your fictitious profits.

But are the fictitious preferences really preferences? -- shouldn’t that depend on whether your legitimate expectation was that the fictitious profits you took out were in reality real profits and were therefore monies that belonged to you -- i.e., were your monies, which you had previously “given” to Madoff by leaving them with him, just as you previously gave him, and left with him, cash-in monies that belonged to you and that you regarded as belonging to you? And if this is true, then doesn’t the question of preference depend on whether your net equity is the legitimate expectation represented by the amount shown on your account statement, so that amounts taken out that did not exceed that amount were not preferences, but rather were a return of your own monies under the legitimate expectations theory (unless you were one of the crooks who had no right to expect that the amounts shown in your accounts were true and legitimate).

The bottom line, then, is that Picard cannot justly evade the question of how to determine net equity by claiming Chaitman seeks to stop him from recovering preferences. For in the last analysis, the question of preference ought to be determined by the question of net equity.

Will Picard win his motion because Chaitman and her clients will personally be better off economically if his cash-in/cash-out method is used to determine net equity than if it is determined as they wish, i.e., by the November 30th statement? Without getting into all the legalistics, Picard is claiming that, because they will not be economically injured, but instead will receive more from the estate if his method of calculation is used, Chaitman’s clients have suffered no injury and seek only a so-called advisory opinion, which is a no-no.

What Picard is claiming comports with the normal view of the law and lawyers that loss of money or property is all that matters. This is one of the more despicable principles of the law, when one considers how much non-monetary, non-property matters can mean to people. Here, moreover, even if Picard did finally give one of Chaitman’s clients money he owed her after Chaitman filed the case (or at about the same time), thereby eliminating the monetary loss which she had suffered until then, there are nevertheless thousands of other investors who have not received but desperately need their money and who will not get it until and unless the net equity question is settled in their favor -- which argues for prompt rulings and, possibly, appeals.

Of course, Picard says Chaitman and her clients have no right to represent those other investors. One suspects -- it is just a speculation, but, again, that does not necessarily mean it’s wrong -- that what Picard and SIPC are really after here is that the case against their view should have to await a party who is not represented by highly knowledgeable lawyers such as Chaitman, Brian Neville or Jonathan Landers -- is instead represented by a lawyer who might be easier to beat. After all, the first decision is going to control all others, both in the Bankruptcy Court, and on appeal. So, if Picard and SIPC can have the net equity question decided in a case where the lawyer is not particularly knowledgeable, this could have great benefit for them.

Even if this is the game, however, it should not succeed. After all, Neville has already filed a fine and complete brief on the net equity question with the Bankruptcy Court, and he and others, like Chaitman and Landers, might be able to find a way to intervene in any other case where the net equity question is to be decided.

As for seeking to win by blasting Chaitman -- the Trustee’s brief even contains a long exhibit containing her allegedly “Objectionable Statements,” some of which hardly seem objectionable at all, I note -- I think it is fair to raise yet another speculation as well as to make a substantive point.

The speculation is this: the bankruptcy and SIPA bars are relatively small groups of people, many of whom have known each other for years. (This is nothing unusual; it is a phenomenon that has existed in given fields and in given geographic areas for years.) I don’t believe Chaitman is, shall we say, uniformly popular in this bar. By savaging her for statements she has made -- some or many of which may, however, be entirely true and might well be shown true by discovery from the files of Picard and SIPC -- Picard and SIPC may be trying to have a case that could affect thousands shaped by whatever a judge might think of Chaitman. As I say, this is only a speculation, but if it were true, it wouldn’t be the first time something like this has happened. In a career that encompassed litigation of several giant antitrust cases, I saw this happen more than once. I have seen analogous things happen elsewhere, too.

The substantive point is this. In goring Chaitman, Picard’s brief says various statements in Chaitman’s complaint are “a political statement at best -- a tabloid story, at worst”, are “a transparent public relations ploy, bent on persuading the press and the public that the Trustee is acting in bad faith, despite lacking a shred of evidence to that effect.” This statement in the Trustee’s brief is remarkable because so many of Chaitman’s assertedly objectionable statements go directly to or at minimum bear on the question of the proper definition of net equity, e.g., quotations from the legislative history of SIPA, quotations from the portion of SIPA defining net equity, quotations from New Times defining net equity statements, describing SIPC’s available lines of credit, and a statement pointing out that trade confirmations say the customer’s account is insured by SIPC. I have to say that, while much of Picard’s brief is perfectly respectable even though I disagree with it, the claim that statements like these are objectionable (and should be stricken from the complaint if the complaint is not entirely dismissed) does make one wonder about the legitimacy of the brief. The claim of objectionableness seems, in regard to such statements, to be a ruse intended to get the court to strike ideas that lie at the heart of Chaitman’s case -- and Neville’s, and Landers’, and everyone else’s who disagrees with Picard.

* * * * * *

I would like to make one last point before closing. It is related to Picard’s claim that Chaitman’s clients’ case should be dismissed because they are economically better off under Picard’s calculation of net equity than under their own.

I had always thought that, to determine how much one gets from the estate, one would engage in a simple calculation exemplified as followed. If your November 30th statement showed, say, 65 million dollars, this is one-tenth of one percent of the total amount of 65 billion dollars shown on all the November 30th statements collectively, and therefore you would get one-tenth of one percent of whatever Picard collects and distributes. Or if one uses Picard’s cash in/cash out, the simple calculation would be as follows. If your net equity is twenty million dollars on the cash-in minus cash-out basis, and the total amount of cash-in was $20 billion, then your personal cash in was one-tenth of one percent of the total cash-in and you would get one-tenth of one percent of whatever Picard collects and distributes.

I am no mathematician, believe me, but to me these kinds of calculations seemed simple, easy and right. If they are wrong, I hope someone will correct me. But I note that in his brief, in calculating why Chaitman and her clients would do better under his method of calculation than under their own, Picard uses fancy algebra-type calculations, or equations. I think they come out the same as mine do, but am not positive (and one knowledgeable person has said to me that Picard’s calculations contain mistakes). If my simple calculations are right, I have no idea why it’s necessary to use the method Picard uses, which, it seems to me, is far harder to understand.

Of course, Picard uses his (in my estimation) more difficult calculations to make the point -- as if the point is a huge deal that only the cognoscenti could understand -- that Chaitman and her clients are economically better off his way than theirs. My question, however, would be: what’s the big deal to understand? If the November 30th statements are used to calculate net equity, then everyone has a positive net equity, so everyone shares in the amount Picard collects and distributes. If Picard’s method is used, lots of people get knocked out because they took out more than they put in, they therefore have a negative net equity, and they therefore do not share in whatever Picard collects, so that the remaining people who do share in it each get more than otherwise. As said, what is the big deal in understanding this? It’s as simple as understanding that if 50 people share equally in one million dollars, each will get more than if 100 people share in it. Yet Picard did make it all a big deal in his brief. One wonders why. Could it conceivably have been to snow the judge, the victims, and the press with the supposed complexity of what he is doing, and thereby obtain their sympathy and agreement?

Of course, maybe I’m missing something here. Or maybe I’m missing a lot. If so, I would greatly appreciate being set right.*

This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

*

Letter to Diana Henriques

2009-07-27T13:43:00.000-04:00

July 27, 2009

Ms. Diana Henriques
New York Times
229 W. 43rd Street
New York, NY 10036-3959

Dear Ms. Henriques:

I congratulate you on your excellent article on custodians on Saturday, July 25th.

I do have one problem, however. When I wrote to you on April 21st to extensively explain that the IRS had improperly approved Madoff as a nonbank custodian in 2004 though he was in violation of several of the IRS’s own regulations, you replied on April 23rd that you wished to “pursue a number of topics, and this [the IRS’ approval of Madoff] is a good one. The litigation filed against Fiserv also raises this ‘nonbank trustee’ issue.” But in your article on July 25th, you cite an IRS spokesman as follows: “The Internal Revenue Service monitors only ‘nonbank’ custodians, while most custodians – including the units that Fiserv owned – technically are banks or trust companies, an I.R.S. spokesman explained.”

However, as extensively explained to you in the email of April 21st, the IRS apparently did not “monitor” nonbank custodians, either when they applied for approval or subsequently. For, again as explained on April 21st, the IRS approved Madoff as a nonbank custodian in 2004 even though he was in violation of several of its own regulations governing such custodians. Nor, as far as I know, did it ever revoke that approval prior to December 11, 2008 even though he remained in violation of its regulations. This conduct by the IRS cannot fairly be thought to be “monitoring.” Had the IRS truly “monitored” Madoff in accordance with its own regulations, it would have discovered, exposed and ended his fraud, especially since it would have learned that he never bought or sold securities or options. Your article analogously cites Professor Bullard on this point, when you say “When custodians do these basic chores – custody, record-keeping and compliance – it is difficult for crooks to steal their customers’ I.R.A. savings, said Professor Bullard.”

In view of the fact that the IRS’ performance of its duties with regard to nonbank custodians would have exposed the fraud, it is perhaps little wonder that the IRS has refused a freedom of information request seeking information on how Madoff secured its approval of his company as nonbank custodian. Nor is it surprising that the Commissioner of the IRS has not responded to a letter to him asking how such IRS approval was obtained.

I note in these regards that a number of people have said they had IRAs directly with Madoff, not through Fiserv or other middlemen. Madoff needed IRS approval to legally serve as the custodian for these people, which he did for many years. Also, given the failures of performance of putative custodians, whom you wrote about, to track or keep custody of securities, it is entirely possible -- I would even say certain -- that Madoff was at minimum serving as a co-custodian, or sub-custodian, on thousands of IRA accounts held by purported custodians such as Fiserv. As far as I know, Madoff would have required IRS approval to be a nonbank co-custodian or sub-custodian, as well as to be nonbank custodian.

As said, however, you cited the IRS spokesman as claiming the IRS monitors nonbank custodians, even though you had been given extensive information showing this is untrue. Your action leads me to this question: Especially since you cited the IRS’ claim of monitoring though you must know it is inaccurate, did you do this preparatory to writing -- and are you indeed currently researching and/or planning -- a follow up article on how the IRS came to negligently (or possibly even criminally?) approve the largest Ponzi scammer in history to be a nonbank custodian of IRAs -- on how the IRS came to do this when even the slightest “monitoring” before or after approval of Madoff would have exposed his Ponzi scheme?

Sincerely,

Lawrence R. Velvel

cc: Media
Legislators

The Never Discussed Impact Of Net Equity Question, Impact of Discovery on SIPC's Position. Part IV

2009-07-24T09:42:00.001-04:00

July 25, 2009

Re: The Full And Never Discussed Impact Of The Net Equity Question,
The Potentially Devastating Impact Of Discovery On SIPC’s Position,
And Matters Of Argumentation And Morality.

PART IV.

In this fourth segment, let me discuss an argument made by Harbeck and Picard in support of their cash in/cash out position. They say that, if they don’t use cash in/cash out, but instead use what was on the November 30th statements, they will be permitting the fraudster to determine which investors would be preferred and which not.

Their argument has nothing to do with what Congress intended or with the governing principle of legitimate expectations which Congress itself cited. As someone recently said, is there any Madoff victim, who lacked knowledge that a fraud was in progress, whose expectation was that the amount he had in Madoff was less than what was shown on his statements? Who expected, for example, that the amount was only one-half or one-tenth of what was shown on the statements? Or, if one follows cash in/cash out, was possibly a negative number?

Picard and SIPC are trying to fasten an absurdity on thousands of people with regard to expectations, and discovery would show this as well, since victims too would be deposed. In fact, discovery or no discovery, I would urge lawyers to begin collecting affidavits from people saying the obvious: saying that their expectation was that the amount they had in Madoff was what was shown on their statements. Scores or hundreds of affidavits explicitly saying this would make it harder for courts and Congress to ignore the plight of victims even though the point is self evident even without affidavits.

But, as said, a key argument of Picard and SIPC is that if the amounts shown in the November 30th statements are the measure of net equity, this will enable the fraudster to set people’s return, and he might unfairly discriminate among the favored and less favored -- as Madoff did indeed discriminate by giving huge rates of returns to and creating backdated gains and losses upon request for feeders, who inevitably had to know and expect that this was all illegitimate, that something plainly illegal was occurring, and that their statements were not accurate and legitimate. But as Helen Chaitman has made clear in a paper she filed, out of thousands of Madoff investors, Picard and SIPC have been able to uncover only a tiny percentage on whose behalf Madoff cooked their accounts. As far as currently is known, there are perhaps a dozen feedermen and feederwomen, plus their immediate families, whose accounts were cooked and who, at minimum, were coconspirators -- and therefore should probably get nothing back from SIPC or the bankruptcy estate (but rather should have to pay over lots of money to the estate). As near as one can tell at this time, Picard and SIPC are using this tiny number of people as an excuse for screwing thousands of the rest of us.

Suppose, however, that the thousands of innocent investors did not all obtain exactly the same putative rates of return. Picard and SIPC will know the extent to which this is or is not true. My personal belief is that, for reasons having to do with the amount one had in Madoff, timing of alleged purchases and sales of securities by Madoff, and differences in “baskets of securities,” there were minimal differences -- tenths of a percent differences -- in investors’ putative rates of return. Discovery from Picard would show if my belief is correct. Yet, even if there were small differences in rates of return, I have not yet heard of anyone who is complaining that his rate of return, as evidenced on his statements, was too low in comparison to those of other innocent people. Thus, crediting people with their legitimate expectations, as shown on their November 30th statements, should not cause a problem in this connection.

If Picard were able to show that there were big unexplainable differences in innocent persons’ putative rates of return -- say three or four percent per year every year -- and if this were to justify not meeting people’s legitimate expectation of being credited with the amount shown on their November 30th statements though nobody is complaining about that amount, there would be simple ways of handling the problem. The amounts of return shown for accounts of the innocent over the years could be averaged and the average used as the appropriate rate of return. (The averages would be different depending on the year(s) one invested.) Or, as Jonathan Landers has suggested in a filing, appropriate rates of interest might be used. Or analogously to a suggestion I made many months ago in a post discussing New Times, rates of return over the years on the S&P 100 could be used.

By any of these or other very standard methods of calculations, differences in putative rates of return could be eliminated, the same rates would apply to everyone, and the situation would not be one in which the fraudster set different rates of return for different people. Of course, SIPC and Picard do not want to hear from this, so to speak, because their wish is to use cash in/cash out in order to enormously reduce payments to the defrauded by SIPC. The standard techniques being discussed here would not accomplish that, because the results would be close to what should be done anyway, i.e., would be close to the results that would obtain if the November 30th statements -- about which no innocent person has yet complained with regard to putative rates of return -- were treated as the measuring stick for net equity.

* * * * * *

I wish to close with two final points -- one very serious in import and the other humorous -- arising from Picard’s interim report.

In the report Picard discusses the procedure by which claims are passed upon, denied, or paid in whole or part, and the amounts of money involved to date. Madoff victims should read the relevant parts for themselves, starting with paragraph 65 of the Report. I shall discuss here only (parts of) the question of how claims are passed upon.

Picard, as we all know, has taken tremendous criticism because of the net equity question, delay in payments, denial or reduction of payments, and so on. But it looks like not just the cash in/cash out calculation may at bottom be attributable to SIPC rather than Picard (who perhaps just does as he is told because he has long made a ton of money from SIPC), but also delay and stinginess may likewise be attributable at bottom to SIPC.

Picard’s report says that, after Alix Partners makes sure that a claim contains all relevant information, the Trustee’s accountants review the claim and relevant information from Madoff’s records or submitted with the claim. Then the claim is sent to and reviewed by SIPC, where “a SIPC claims review specialist provides a recommendation to the Trustee regarding how each claim should be determined.” Then the Trustee’s office “review[s] the [SIPC] recommendation and legal or other issues . . . . Once the Trustee has decided upon a resolution of the claim,” he sends the victims a determination letter. (Paragraph 68.)

This all makes it seem pretty certain that SIPC itself makes the first recommendation regarding a claim, and Picard accepts or rejects SIPC’s recommendation. This is the first I’ve heard that SIPC itself makes a determination regarding a claim, and one is somewhat hard pressed to believe that Picard lightly or often rejects its recommendation -- SIPC has been a meal ticket for him, you know. So it seems likely that SIPC itself bears at least part of the responsibility for some of the problems for which Picard has been blamed. Incidentally, whether SIPC itself provided recommendations on how to treat individual claims in prior cases might be of import, though I have no idea what the answer is.

The humorous point is one of those things which you just couldn’t make up. (As Dave Barry would say, “I’m not making this up.”) A federal prison inmate at the Federal Medical Center in Kentucky (whom one suspects has mental problems), who has filed over 1,000 suits in federal courts, has taken to filing papers in cases all over the country, including the Chrysler bankruptcy. In his papers, this prisoner “has been identifying himself as ‘a/k/a Irving Picard’ and ‘d/b/a Irving Picard,’” and has referenced the Madoff case in papers he files. The prisoner’s last name is Riches, Jonathan Lee Riches. This is so wonderful an irony in the Madoff case that you couldn’t make it up. Picard drily says he has had to notify courts in various places that “he is not in anyway connected to Mr. Riches, a prisoner at the Federal Medical Center in Kentucky,” and that “Mr. Riches is not authorized to represent the Trustee.”

Jonathan Lee Riches d/b/a/ Irving Picard or a/k/a Irving Picard. Isn’t that rich?*

This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

Re: The Never Discussed Impact Of The Net Equity Question, The Impact of Discovery on SIPC's Position, Argumentation And Morality. Part III

2009-07-23T15:18:00.004-04:00

July 23, 2009 at 3:00 p.m.

Re: The Full And Never Discussed Impact Of The Net Equity Question,
The Potentially Devastating Impact Of Discovery On SIPC’s Position,
And Matters Of Argumentation And Morality.

PART III.

When David Sheehan attacked Helen Chaitman by a letter of June 12th, he accused her of making statements for which she could have no evidence. She responded, among other ways, by writing on June 16th that she would be able to prove various of her statements from SIPC’s own files after discovery. My personal view is that she was right on. Discovery, as many but probably not all readers know, is the process in which SIPC and Picard would be required to turn over all relevant documents from their files, and in which they and other pertinent persons would be examined under oath (would be deposed). In this process, it seems almost inevitable to me that, not only would there be extensive evidence that before the Madoff case SIPC always believed that statements from brokers were the measure of net equity, at least where those statements showed securities that existed in the real world even if the broker had lied about buying them, but also that evidence would be uncovered in droves that the reason SIPC and Picard developed the cash in/cash out definition of net equity for the Madoff case was because SIPC was appalled at the potential extent of its liability in the Madoff case under the standard, statutorily-demanded definition of net equity. I think the documentary and deposition evidence will show to a fare thee well that saving money was the motivation for the cash in/cash out definition of net equity, and that legislative history, principle and plain right had zip to do with it.

Although SIPC and Picard could not initially know how many claims there would be, they had to know from the get-go that the number could be fantastic, given the size and widespread nature of the fraud. It is thus no surprise that according to Picard’s interim July 9th report to the Court, by the close of business on July 2nd over 15,800 claims for recovery under SIPC had been filed. If “only” 10,000 of them were valid under the standard definition of net equity, and if each were valid for $500,000 under that definition, SIPC would be on the hook for five billion dollars. If one assumes 14,000 of them are valid for $500,000, the amount is seven billion dollars. If 5,000 are valid, the amount is $2.5 billion. If the average claim is valid for only $400,000, the amounts go down. But, no matter now you play with the numbers, the amounts are large. (The July 27th issue of Newsweek says that Picard has processed 561 claims of the more than 15,800 which have been filed, and that those 561 claims totaled over three billion dollars, averaging $5.4 billion apiece. (Newsweek doesn’t say whether the three billion dollars was calculated on the basis of the November 30th statements, Picard’s cash in minus cash out basis, or some of one and some of the other.) (Picard’s interim report says that as of July 2nd, three weeks before the date of the Newsweek article, the Trustee had “received at least 15,400 customer claims and had determined more than 543” of them.))

Because of what it already had in its coffers, and the lines of credit it could tap, SIPC was capable of paying roughly $3.5 billion or somewhat more. But it surely didn’t want to do that, as discovery from its own files and depositions would almost certainly show. And what if the amounts for which it was on the hook were some number like five or seven billion dollars, not a “mere” $3.5 billion?

When the amounts are in the billions, SIPC is faced with a problem. It will have to assess the broker dealer industry, both to cover the shortfall and to replenish its treasury, even if it is able, through its existing $1.6 billion treasury plus tapping lines of credit for over two billion dollars, to obtain enough money to pay the billions it owes. But what if the amount it has to pay exceeds its coffers and its lines of credit? What then? Does it go to Congress for more billions of dollars to pay out? Does it assess large sums against the industry?

It is dollars to doughnuts that discovery will show that all of this was vetted within SIPC early in the game, with the result being a decision to use the cash in/cash out method in order to drastically reduce the amount SIPC may have to pay out: to reduce it to several hundred million or one or two billion dollars, with legislative history, Congressional motivation, principle, and simple right and justice all being irrelevant. SIPC is, you know, a form of insurance company; insurance companies are infamous for attempting in every way possible to screw people out of payments they have a right to; and such screwing of people has in fact been SIPC’s history, as discussed in prior posts and revealed as long ago as 2000 by Gretchen Morgenson.

There is also what could be called a human factor. Very early in the game I was knowledgeably told that the people who run SIPC (which is located in the Washington area) have an economically good, not terribly stressful life that they have enjoyed for years and would like to maintain. (Thus, even two “annual pay periods” ago, in 2007, Harbeck’s annual salary was $435,876, and his deferred compensation was $103,357, while Wang’s was $295,490 and $146,901. This is pretty good in the D.C. area for anyone who is not, say, a major partner in a major law firm or a big time lobbyist. And they probably make more now, in 2009.) They want to continue the cushy life, I was told -- who wouldn’t want to? -- and to do this they want to stay on the good side of SIPC’s membership, comprised of the brokerage industry. One stays on the brokers’ good side by minimizing payouts to victims and thereby, as has been the case for many years, minimizing the annual assessments on brokers, who for years had been paying only $150 per year even if the company was Goldman Sachs. So all of this could also have played into the decision to use cash in/cash out as the definition of net equity in the Madoff matter, and any competent interrogator should have a field day with it in depositions of such as Harbeck, Wang, Picard, SIPC’s Board of Trustees and so on.

So, to reiterate, I think Helen Chaitman was exactly right in saying she would be able to prove various claims through discovery. But then a funny thing happened on the way to the forum (so to speak). In early July, Chaitman proposed a rapid briefing schedule to the court, a schedule that left no time for discovery. It would be my speculation this likely was done for two reasons. One would be that she has clients, and there are also scores, hundreds or even thousands of others, who are hurting so badly that they had to get money from SIPC as quickly as possible; they cannot abide the delay that will be caused by discovery. I would estimate that the delay could be as long as six months or even a year. Lawyers make discovery a painful and time consuming process by a host of infamous stratagems, and that is what one could expect here from SIPC.

The other reason, I would speculate, is that Chaitman likely thinks the case against the Picardian/SIPCian version of net equity is so strong as what lawyers call a matter of law -- is so strong based on the legislative history, congressional motivations, past SIPC practice and pronouncements, and the New Times case -- that discovery is not needed to win, so let’s have the issue decided as soon as possible.

Now, I don’t really disagree with such assessment of the strength of the case, even though I recognize that certitude about the rightness of one’s own side of a case is forever an occupational hazard of lawyers (not to mention clients). Nonetheless, while I don’t disagree with the assessment of strength here, I do think it a major mistake to try to elide discovery. For, as indicated, I think discovery is going to hammer nail after nail in SIPC’s coffin, is going to show that a desire to escape huge payouts and brokerage industry wrath, not principle or justice or congressional intent, was the driving force behind the adoption of cash in/cash out. And, even though our side of the case is already very strong, you always want to have all the powerful facts you can adduce in order to fare as well as possible before trial courts and courts of appeal. Discovery will produce those facts -- I think discovery might even produce facts that could even cause SIPC’s purported legal position to be looked at derisively by the courts. Derision is deadly.

It turns out that just a few days ago, I am informed, Judge Lifland rejected the rapid briefing schedule proposed by Chaitman. I do not know why he did so, and some of the potential reasons which come to mind are not happy ones. But be this as it may, I would urge all the lawyers -- Brian Neville, Jonathan Landers and Helen Chaitman to demand discovery in this case. Just as I urged people not to forget the impact of net equity on recovery from the estate as well as from SIPC, so too I would urge people to be cognizant of the benefits that can wrought for our side by discovery, and the possible havoc it might wreak on the SIPCian/Picardian side. The results of discovery at least in my judgment, are likely to be very favorable to us, since I believe the cash in/cash out net equity position was used in Madoff -- but not with regard to people who thought they had bought securities which existed in the real world in New Times -- strictly in an effort to avoid massive payouts in Madoff.*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

The Never Discussed Impact Of The Net Equity Question, The Devastating Impact Of Discovery On SIPC's Position, And Argumentation And Morality. Part II

2009-07-23T09:02:00.001-04:00

July 23, 2009 at 9:00 a.m.

Re: The Full And Never Discussed Impact Of The Net Equity Question,
The Potentially Devastating Impact Of Discovery On SIPC’s Position,
And Matters Of Argumentation And Morality.

PART II.

If readers remember not one other thing of what is written in this four-part posting, I urge them to remember -- and therefore am repeating yet again -- the possibility that Picard’s definition of net equity may deprive them not just of $500,000, but also of any share in the estate. This possibility should be cleared up, one way or the other, as quickly as possible.

There are also some matters of lesser practical import that I would like to discuss here. One is related to the three percent question.

Some may remember that, in my second posting on this matter (dated June 19, 2009), it was half jestingly suggested (but only half jestingly suggested) that perhaps the reason Harbeck reacted so strongly against any claim that a SIPC trustee gets three percent of what he collects and distributes was not because of concern that this would wrongly give people the idea that SIPC trustees earn huge sums of money. Rather, perhaps it was because SIPC did not want to be limited to paying Trustees only three percent of what they collect and distribute. Some further research persuades one that this half jest is probably correct.

Early on, Picard told a lawyer that, if the latter wants insight into what Picard will do in the Madoff case, he should read what was done in the (relatively recent) Park South case. Well, I’ve now read a couple of Picard’s reports to the court in Park South. And while I plainly confess to being unable to understand parts of the reports, it at least seems to me likely -- almost a certainty -- that Picard was paid a lot more than three percent of what he collected and distributed in that case. He was paid on an hourly basis, at a ten percent discount from his normal fees, and ultimately seems pretty clearly to have requested $1,046,557, plus up to a possible additional $50,000, in fees for his personal work. (The fees for his personal work went to his law firm, as did even larger amounts of fees (I think $2,654,714) for work done by others in his law firm.) The amounts he collected and distributed appear to me to be either $7,410,969 or that amount plus $1,414,149 and/or $817,5434. But, frankly, I am not sure I understand all relevant aspects of this side of the equation -- relevant to the question of how much he collected and distributed. (For example, I do not necessarily grasp the relevance, if any, of enabling a release of frozen accounts.)

In any event, for Picard’s total fees of (I think) $1,046,557, plus another possible $50,000, to have been no more than three percent of what he collected and distributed, the latter figure would have to be in excess of $35 million. Despite the shortcomings of my own comprehension, I think it is pretty clear he did not collect and distribute anywhere near that amount. If I am wrong about this, then, once again, I would appreciate it if Harbeck and Picard would correct my mistake and explain what the correct facts are.

Not to be misunderstood, I am not saying that Picard did not earn or did not deserve what he was paid. I am saying only that it seems certain he received far more than three percent of what he collected and distributed. And if it is common for brokerage assets not to be extensive in SIPC proceedings, so that relatively little can usually be recovered and distributed, it might be thought necessary to pay trustees more than three percent in order to get good work, and the three percent limitation of the bankruptcy code would therefore be claimed to be inconsistent with and non applicable to SIPC proceedings. Of course, if the argument that three percent is inadequate to get good work by a SIPC trustee were true, how is it that three percent is apparently sufficient to get good work by trustees in non-SIPC bankruptcies?

The last question highlights what I think may be a characteristic of SIPC. While I am truly a newbie with regard to everything SIPC, I am getting the notion that, if a Bankruptcy Code provision is not something SIPC likes, SIPC claims the provision is inconsistent with SIPA. A claimed inadequacy of three percent “commission” in SIPC cases involving brokers, despite three percent being satisfactory for non-brokerage bankruptcies, could exemplify. Another example might be SIPC’s recent argument when a party moved early this year for a court order allowing it to sue (the Trustee, I gather) within 30 days after the Trustee wins, for example, a preference claim against that party subsequent to last July 2nd.

Apparently, such a victory by the Trustee could possibly itself give rise to some type of countering claim, called a springing claim (as in “it springs up”). If the Trustee’s victory came after July 2nd, the countering claim would be barred under SIPC law because July 2d was the last permissible day for a Madoff victim to file a claim. But the suit for a “springing claim” would not be barred under the Bankruptcy Code.

The moving party asked the Bankruptcy Court Judge, Burton Lifland, for a judicial order under which the springing claim would not have to be brought by July 2, when it did not yet exist, but only within 30 days of the Trustee’s subsequent victory which brings it into existence. One asks: how could this request be denied? If it were denied, the moving party will never be able to bring his springing claim, since he has no claim before the Trustee beats him in litigation after July 2nd that creates the “springing” claim. But after he is beaten, he cannot bring the springing claim since it will be barred because it was not filed by July 2nd.

But SIPC and Picard both said the request for an order giving 30 days after Picard’s victory to bring a springing claim should be denied because the SIPA provision under which the springing claim is barred is inconsistent with the Bankruptcy Code provision allowing the springing claim to be brought. SIPC and Picard did say that it is not necessary to decide the question now, since at present the problem can be elided by the filing of a so-called “protective” claim by the moving party: i.e., by the moving party filing what in effect could be called a reservation of the right to bring a “springing claim” if one arises later due to a Picard victory after July 2nd in, say, a preference suit. But, when such a claim is brought, judging by what their briefs say, it is sure-fire that Picard and SIPC will argue that it can’t be brought because it was brought after July 2nd and is therefore too late because it is inconsistent with SIPA. It is sure-fire that they will claim the springing claim was barred before it even arose because the Bankruptcy Code is inconsistent with SIPA and SIPA controls.

By the way, Judge Lifland seemed to mainly adopt the view of Picard and SIPC. He said the question of inconsistency is a serious one -- can you believe that in view of their heads they win, tails you lose position? -- and that he was going to postpone a decision since the moving party could file a protective claim.

In any event, this all shows how far SIPC and Picard will go in claiming inconsistency when such a claim accords with what they want.

Picard’s office seems to also have made another argument that was beyond the pale. Helen Chaitman filed what could be called -- tactfully -- a vigorously-worded complaint seeking, among other things, a judicial decision that one’s net equity is based on the November 30th statement, not on the cash in/cash out basis. Similar requests for decision have been filed by Brian Neville and Jonathan Landers. All the papers are, frankly, pretty good, though Neville’s strikes me as the most complete because he has by far the most citations to and quoted material from the legislative history of SIPA and from prior positions explicitly stated by or followed by SIPC and its officials such as Harbeck and Wang. (Harbeck told a court that people would get the value of securities their statements showed them as owning even if the securities were not there or had never been bought.) The historical material -- the legislative history and prior SIPC positions -- cited or quoted by Neville makes a simply overwhelming case. And while there are reasons I do not wish to predict that Judge Lifland will rule in our favor even though Neville’s position is overwhelming, it is hard to deny the enormous power of what Neville has written. I shall return to this in a bit.

More to the point immediately is that Picard -- or more accurately one of his lawyers, David Sheehan -- responded in kind -- more than in kind -- to Chaitman’s papers. He far out-vituperated the vituperative. He claimed Chaitman and her law firm were acting unethically, tried to threaten them with sanctions, attempted to force them to withdraw the papers, and, worst of all in my opinion, claimed that Chaitman could not represent persons who have net equity problems under the Picard/SIPC cash in/cash out method because Chaitman herself has no such problems. (He also accused her of acting improperly by representing both persons who have such problems and persons who don’t.) Sheehan also claimed that, because Chaitman herself has no net equity problem, she might not fully and completely represent those who do.

Now, as is known by some people who were on the Steering Committee, I hold no brief for Helen Chaitman, since she attacked me in writing and orally. But she has been of great service to victims of Madoff, especially in resisting illegitimate SIPCian/Picardian positions, and it was simply beyond the pale for Sheehan to argue that she should not represent persons with net equity problems because, since she herself does not have them, she might not fully and competently represent those who do. Chaitman had long made clear (and did so yet again in response to Sheehan) that, though she herself has no net equity or clawback problems, she believes that SIPC’s cash in/cash out method and threats to claw back from the innocent (and the often destitute) are immoral. Not just illegal; immoral. The community of victims has long had access to her views, and has been told -- I think (but am not sure) that she may even have required clients to sign waivers acknowledging -- that even if Picard’s net equity position and threatened clawbacks from the innocent would redound to the signer’s personal benefit, she is going to argue against such actions -- as a matter of moral belief, no less. Nobody, as far as I know, can legitimately argue that they did not know where she stood, and became her clients in ignorance of her intent. For Sheehan to argue that her own personal financial position vis a vis Madoff -- i.e., the fact that she has no net equity or clawback problem -- prevents her from representing those who do, is for Sheehan to argue that a lawyer in practice cannot take a moral position that he or she believes in if it does not also accord with his/her personal circumstances.

That position is an abomination. It is not, shall we say, made better by the suspicion, which will not down, that the Trustee’s office is taking that position and others because of a desire to, if possible, get rid of a lawyer who has been a real bone in their throat because of her powerful, even if sometimes (deservedly) vituperative representation of clients -- clients whose “newfound” destitution and continuous victimization -- this time by SIPC -- puts them in need of an advocate who will express things powerfully and colorfully (though there are very competent and thorough lawyers who think such mode of expression harmful rather than helpful. My own personal view is that it doesn’t hurt for one person to pull no punches when others are being more circumspect, i.e., there is a need for both styles.)

But, back to the question of arguing that Chaitman supposedly cannot represent people with problems that she does not have, although she regards what is being done to them as immoral. When one considers the argument beyond the confines of this case, its implications are shocking. Are criminal lawyers who think charges against their clients unjustified, frivolous, or so much the product of prosecutorial misconduct as to be immoral, to be barred from representing the clients because the lawyers are not in the same position as the clients -- are not themselves charged with crime? Should Darrow not have been allowed to defend Leopold and Loeb because Darrow didn’t kill anyone?

You know, whether a lawyer may choose not to represent someone because of a moral disagreement with the person’s position is one thing, and many is the commercial lawyer who for the money chooses to represent positions he or she may disagree with. But whether a lawyer must be barred from representing a position he or she agrees with, barred from this because he/she does not share the same circumstances, is quite a different thing, and Sheehan’s paper crosses a line here.*

This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

*

The Never Discussed Impact Of The Net Equity Question, The Devastating Impact Of Discovery On SIPC's Position, And Argumentation And Morality. Part I.

2009-07-22T14:10:00.004-04:00

July 22, 2009

Re: The Full And Never Discussed Impact Of The Net Equity Question,
The Potentially Devastating Impact Of Discovery On SIPC’s Position,
And Matters Of Argumentation And Morality.

PART I.

This post is being published in four parts. Let me start it with some comments that will surprise a lot of people.

Irving Picard has taken a lot of heat. As readers know, this has occurred for many reasons, including: his novel, anti-statutory definition of net equity, which will likely injure thousands; his delay in making payments -- which violates the statutory requirement of “prompt” payment (and was made necessary by his definition of net equity); his possible threat of attempting to claw back money from the innocent but financially devastated -- from stones with little or no blood to give; from a refusal to offset the amount he claimed people owed, due to autumn 2008 withdrawals, by even greater amounts they put in during the same period; by a demand (which I think may now have been dropped) that people relinquish their rights to more money (by signing releases) if they are to get lesser amounts which are indisputably owed to them and which they desperately need to live; by making the kind of really obnoxious arguments which SIPC has become infamous for in decades of (often successful) efforts to deny money to the victimized; and, for all I know, by other misbegotten actions as well. All of these actions, it has long been my opinion, are designed to improperly diminish the amount of money SIPC has to pay out -- the net equity definition, in particular, diminishes SIPC’s prospective payments by a truly huge amount -- and are favored by -- conceivably were even demanded of Picard by -- his “bosses” in SIPC.

So, given the rage Picard has inspired, it probably will surprise lots of people to hear me say that there is one fantastically important area in which, as near as I can tell at this point, Picard seems to be doing a really excellent job. As shown by Picard’s July 9th Interim Report to the Bankruptcy Court, he has brought eight lawsuits against major Madoff players or clients, seeking a total of $13.7 billion. I have read four of the complaints filed by Picard, and think they are quite good. It seems to me not impossible (as lawyers would bassackwardly put it to avoid overoptimism) that Picard could end up with some number of billions from these suits to distribute to victims; I think some of the defendants in the suits may still have big bucks.

So, as a bottom line, Picard seems to be doing a good job in going after the movers and shakers who benefitted gigantically from Madoff’s Ponzi scheme and, in several cases, were major aiders and abettors if not outright coconspirators. Of course, there is one small problem with Picard’s otherwise laudable efforts to get money from the movers and shakers. It was the least affluent of Madoff’s victims -- the small fry victims -- who had to take out money to live and to pay taxes, and who thereby reduced their net equity, as Picard and SIPC calculate it, to zero or a negative number. It is therefore these people -- the least affluent, often even non-affluent, small fry -- who will receive no benefit whatever from any recoveries Picard obtains in his lawsuits. For, as I understand it -- and I would love to be wrong, but fear I am only too right -- your net equity controls more than just whether you can get back some or all of the $500,000 that SIPC can give a “customer.” It also controls what you can get back from what I believe can be called Madoff’s bankruptcy estate or his “customer property” (a term which frankly confuses me much of the time).

What Picard recovers in lawsuits against the movers and shakers -- or in other ways -- becomes, I believe, part of Madoff’s estate, or the “customer property.” So, if you have no net equity as Picard calculates it, or a negative net equity as he calculates it, I think you not only will get nothing from SIPC itself, but also nothing from any amounts Picard recovers in lawsuits from the movers and shakers whom he has sued for $13.7 billion.

If I am right about this -- and as strange as some may think it to say with regard to investors in Madoff -- Picard has created a sort of class war. The very rich, who didn’t have to take anything out of Madoff to live or to pay taxes, will get the full $500,000 from SIPC, plus possibly large sums from Picard’s recoveries in lawsuits or elsewhere, since they will have huge amounts of net equity. The far less affluent (who often are already elderly and desperate), who depended on Madoff to live and to pay taxes, and who sometimes had as little as $500,000 or so in Madoff, will get nothing from SIPC and nothing from the recoveries or other customer property, because they will have zero or negative net equity.

As said, I deeply hope my understanding of all this is wrong, but fear it is right. If it is wrong, one hopes that Picard or Harbeck will quickly set matters straight. They -- either alone or jointly -- have not hesitated to savagely attack people like Helen Chaitman or myself in the past (a letter to Helen Chaitman, to be discussed below, from Picard’s lawyer, David Sheehan, was so far beyond the pale as to be unconscionable, even though it was a response to a “vigorously worded” (shall we say) paper filed by Chaitman), although I do note that the attack on me with regard to the 3 percent bonuses ceased after I posted a lengthy second article relating to it (and in SIPC’s eyes, I imagine, corrected what it claimed to be mistakes). So I hope Picard and SIPC will correct my view of the overall impact of their net equity calculation if my view is wrong, and in the process will explain not just that it is wrong but also why it is wrong.

There is a further point to make in connection with my view of the impact of the net equity calculation. Three lawyers -- Brian Neville, Helen Chaitman and Jonathan Landers -- have now filed papers requesting judicial decisions that Picard’s net equity calculation is wrong -- requesting judicial rulings that one’s net equity is not determined by Picard’s cash-in/cash-out calculation, but by what was shown on one’s November 30th statement. The three lawyers’ papers, which I will discuss to some extent below, are generally quite good. But there is one point which is missing from all of them. They all explain that the rival calculations of net equity -- the November 30th statements versus Picard’s cash-in/cash-out method -- control the issue of whether one gets some or all of $500,000 from SIPC. But none of them mentions the impact of the net equity calculation on whether and the extent to which one shares in Madoff’s estate, in “customer property.” I would think this is very important and, if my view is right, surely should be mentioned since a great deal of money could be involved if I am right in thinking that a diminished or negative net equity via Picard’s calculations will have a big impact on recovery of monies from the estate.

Finally, let me present one final point with regard to the impact of the method of calculating net equity: its potential impact on people who innocently withdrew all their money from Madoff in the six years before December 11th. Picard has indicated he may not seek to claw back monies from innocent investors who withdrew money in that six year period but still had accounts on December 11th (although Helen Chaitman has written of people who put in more than they took out in the last six months yet Picard tried to diminish their $500,000 payout by the amount taken out while not crediting them for the amount put in, which somehow seems to be cut from the same cloth as clawing back from the innocent). However, if Picard does decide to claw back from innocent persons who, during the last six years of Madoff, withdrew more than they put in but still had accounts on December 11th because they had been credited with fictitious profits, then doesn’t he also have to claw back all monies in excess of what they put in from innocent investors who, within the relevant statutory period of the last six years before December 11th, innocently withdrew all the money from their accounts, including fictitious profits, and thereby ended their investments in Madoff? For haven’t the latter people -- those who closed out their accounts by receiving what they put in plus all fictitious profits -- benefitted unlawfully under Picard’s cash in/cash out calculations, just the same as those who took out money but still had accounts on December 11th?

Picard and Harbeck constantly stress that justice and equity, and especially a desire not to let the fraudster determine who gets how much by way of returns, require the use of their cash in/cash out method, not the statements of November 30th, to determine a person’s net equity (albeit this is an untrue claim, as discussed later). Well, then, don’t justice and equity, plus a desire not to let the fraudster determine who gets what, require Picard to claw back all fictitious profits from those who took out all such profits and ended their investments in Madoff during the statutorily determined six year period before December 11th as well as from those who withdrew some fictitious profits before December 11th but still had an account then? And shouldn’t this point too be mentioned in papers filed by the lawyers who are litigating the net equity question?

One should add that innocent people who withdrew all their money form Madoff three or four or five years before December 11th would be justifiably shocked to learn that now, years later but within the statutorily determined period, they owe back everything in excess of what they put in. But as a matter of justice and equity there is, I think, no principled way to avoid this conclusion if Picard claws back from innocent people who still had an account on December 11th.

One would think that this additional impact too of the Picardian/SIPCian calculation of net equity should be mentioned in the briefs filed by the lawyers who are litigating the net equity question against the Trustee and SIPC.*

* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

Re: The Vast Amount That We Don’t Know About The Madoff Matter.

2009-07-08T14:43:00.001-04:00

July 8, 2009

Re: The Vast Amount That We Don’t Know About The Madoff Matter.

My memory may be faulty, but I do not remember a major crime in which, at the times of plea and sentencing of the lead culprit, the details of what happened, of what was done, were as little known publicly (and perhaps to investigators) as in Madoff. Consider:

We do not know when or why the Ponzi scheme started. The government has said it started at least as early as the 1980s. But does it go back even further -- does it go back to the 1970s or even the 1960s? Court papers filed by governmental or quasi governmental bodies say that Madoff was friends of (and used) certain co-culprits like Sonny Cohen and Stanley Chais since the 1970s and 1960s. Were they present at the creation, so to speak? Was the fraud a mutual plot? -- from the beginning? Was it conceivably even something hatched initially in the office of Madoff’s father-in law in the early 1960s, when Avellino and Bienes started funneling money to Madoff? Nobody knows about this, unless the government has learned the facts but isn’t disclosing them yet.

Why was the fraud undertaken? We don’t know that either. Madoff hinted at his sentencing hearing that it was undertaken because of some failed investment. He indicated that he thought he could work his way out of the problem but instead got into a deeper and deeper hole. (He had, I think, made similar comments about how frauds develop before his own fraud was discovered.) If his Ponzi scheme began because of some investment failure, what was the failure and when did it happen? Most of us probably think Madoff’s hint was a smokescreen meant to hide the fact that he was a crooked greed merchant in one way or another for decades. But the truth of why the fraud started is not known, at least not publicly.

It also is not yet known precisely who knew of the fraud and, of those, who knew that the nature of the fraud was that it was a Ponzi scheme. Unless and until the prosecutors affirmatively give clean bills of health to Ruth Madoff, Peter Madoff, Shana Madoff, and Madoff’s two sons, Mark and Andrew, an awful lot of people are going to think they had to know something was wrong. If I remember correctly, Ruth had seen or even kept the company’s books for awhile. Peter Madoff had, if I remember correctly, set up the company’s computer systems -- and an old computer on the 17th floor (which was not connected to the outside world, so there could be no slip ups and no hacking into it and it couldn’t make trades) was central to the fraudulent scheme. Shana Madoff must have known that Cohmad and BLMIS were paraded as being separate but really weren’t; as was said in a complaint, she was the compliance officer for both Cohmad and BLMIS. The sons -- and Peter and Shana too, I would think -- must have known (i) that Madoff told those who asked that he was content to make his money by the commissions from having his trading arm execute the trades for the investment management arm, but (ii) that in fact the trading arm made no trades for the investment arm. Some of these individuals must have known, or even participated in, lies told to the SEC, the NASD and FINRA when these organizations conducted inspections. So family members had to have known something was wrong. But the precise knowledge of each, and the degree of participation (if any) by each, is currently unknown.

Who on the 17th floor knew something was wrong and, possibly, that a Ponzi scheme was going on? One is tempted to say that DiPascale, people who researched stock prices, people who entered numbers in the computer and printed out numbers and statements, and Bongiorno, Buccellato and Jones must or at least were likely to have known everything, and that it is impossible for anyone on the 17th floor to have known nothing. These people all worked in the same place. They must have talked to each other every day. Aside from everything else, did nobody ever notice or mention that no actual trades were taking place? That anyone on that floor was wholly innocent is not believable. It is more believable that several of them knew everything. But, right now, who knows?

Then there is also the question of what was known by the major feeders. The complaints filed by Picard and the SEC against such as Chais, Cohmad, Fairfield and Picower make it clear that all of these knew something illegal was going on, but whether they specifically knew there was a Ponzi scheme is left unsaid. Instead, Picard and the SEC use the lawyer’s weasel language of saying that the defendants knew or should have known of illegality. This makes clear, of course, (or at minimum implies) that Madoff hasn’t told the government the relevant facts (and neither, of course, have the defendants in the various cases (some of whom have taken the 5th)), just as Picard told Judge Chin that Madoff had not cooperated and Judge Chin expressed the same view. Yet the SEC and Picard know enough to set forth facts showing that these various defendants knew very well that something was drastically wrong. Variously, some of them would tell Madoff what they wanted their accounts to “earn,” and he would by fiat do as they wished. Some had accounts that would “earn” 100 or 500 or even 950 percent. Some would order up backdated losses for their own purposes (one would think the purpose was to evade taxes), and Madoff would then create backdated securities transactions with the required losses. At least Cohmad, and perhaps others, was paid commission strictly on the basis of a customer’s cash in minus his cash out (the same way, I gather, that SIPC is calculating net equity), not on the basis of the total amount in the customer’s account, including profits, which is the customary basis on which mutual funds and hedge funds are paid. Cohmad (and others?) could not help but suspect, if it did not actually know -- which one suspects it surely did -- that the reason it was paid commission strictly on a cash in minus cash out basis, and not on profits too, as is customary, is that there were no profits -- that the whole deal was a Ponzi scheme. In this vein, two people from Cohmad, Marcia Cohn (who is Sonny Cohn’s daughter) and a guy I never heard of until recently named John Joseph Kelly, had keys to the 17th floor -- which, generally speaking, was off limits to everyone except those working on the fraud scheme. Marcia Cohn used her key a fair amount apparently, including on December 11, 2008.

The various players being discussed here took out hundreds of millions and billions of dollars more than they put in. Picower took out over five billion dollars more than he put in -- and it is not even clear, I think, that Picower, like others, was a feeder of anything but his own money. If all he fed was his own money (which at least seems to be the case), not money from other investors, why did Madoff give about 6½ billion dollars to this guy who put in only about 1½ billion?

All of these people had to know something was very, very wrong, and it seems to me likely that some of them, maybe even all of them, even knew that the whole deal was a Ponzi scheme. But is their level of knowledge and participation publicly known for a fact? Nope.

Where did all the money go? This is another unknown. It was said at the hearing that the Probation Office, which submitted a lengthy but confidential report prior to sentencing, claimed the money was used up in redemptions. But how can we be confident the Probationary Office knows anything. Its report was the same one that recommended Madoff be given only 50 years -- bah. More to the point, it also said, according to statements at the sentencing hearing, that only 13 billion dollars was lost -- even Judge Chin did not believe that. He said he thought the Probationary Office had ignored money invested through feeder funds.

So where did the money go? The government made clear last week its belief that over the years 170 billion dollars had moved through Madoff. This obviously is a staggering sum of money. Supposedly (at least according to the Probation Office), it was all redeemed, except for what Madoff kept for himself and what little was left at the end. Maybe that is what happened, but who is going to believe it until it is proven to be the case? If you ask me, it is more likely that there was someone else involved in the deal who got a lot of the money -- some think the American mafia, some think the Russian mafia, some think the Mossad and/or the CIA, some think others. Some think a lot of the money is still in banks overseas and one wonders about all the excess billions withdrawn by Picower -- where, or to whom, did that money go. The only fact currently known is that we don’t know what happened to all the money. And we are not going to know until a lot more information becomes public.

Then there are the questions of how did Madoff get the SEC and the IRS to play ball with him, not to mention FINRA and, before that, FINRA’s predecessors. The SEC not only ignored Markopolos, as well as warnings issued, we are learning, by some of its own lawyers, but, in an act which securities lawyers tell me it never commits, the SEC also announced publicly in 1992 that there was nothing to indicate fraud. Securities lawyers say the SEC never does this; rather it merely closes investigations and, if someone’s reputation has been harmed because the existence of an investigation leaked out, it may give the person a “no action” letter which he can then use as he wishes. So how and why did the SEC -- what did Madoff do to get the SEC -- to publicly say there is nothing to indicate fraud. That public statement sucked in people (myself included) ever afterwards: it sucked in people when they transferred money from Avellino and Bienes to Madoff in 1992 and 1993, when they subsequently invested with Madoff for the first time, when they added money to their accounts in later years, when people later decided to leave money in Madoff rather than investing at least part of it elsewhere (all of which is of no consequence to mainstream media anti-victim bigots like Joe Nocera). To some people, the SEC’s public statement was so important that, as they have said in affidavits being submitted to the SEC’s Inspector General, they marked up, kept and/or still have the 1992 newspaper articles detailing the clean bill of health given Madoff by the SEC. But how Madoff procured this false, unprecedented, unique, and crucially important statement of a clean bill of health from the SEC is something we do not know.

Nor do we know where Madoff, in 1992 (over a weekend, one gathers), got the money -- over 400 million dollars -- that he allegedly would return to customers of Avellino and Bienes if the customers ultimately wished the return of their money, nor how many of the customers did not wish this but instead, because of the SEC’s statement of a clean bill of health, transferred their accounts from Avellino and Bienes to Madoff himself.

Perhaps the SEC’s Inspector General’s Report will answer these questions. It remains to be seen.

Then there are the questions about the IRS. Why did it approve Madoff as a so called nonbank custodian for IRAs in June of 2004 when he was in serious violation of crucial regulations the IRS itself had established to insure that persons with IRAs will not lose their money because of misconduct by or unfortunate events occurring to nonbank custodians? How did Madoff get the IRS to approve his company as a nonbank custodian despite his serious violations of the IRS’ own regulations, and despite the fact that inspection of Madoff by the IRS to insure that its regulations were met would have disclosed the fraud? Was there criminal conduct on the part of the members of the IRS -- acceptance of bribes, for example? Was there “only” simple gross negligence, incompetence and gross dereliction of duty (as, perhaps, by failing to inspect Madoff to be sure he complied with the regulations)? Right now nobody knows -- and the mass media, though informed of the matter, doesn’t care about it and doesn’t investigate it. Imagine: the mass media neither cares nor investigates how the country’s federal tax service aided the commission of the biggest fraud in history.

And if you, Mr. or Mrs. Average citizen, make inquiries of the IRS as to how it came to assist the fraud, as I did, the answer you will likely get back, as I did, is that the IRS will give you no information because Madoff’s company was a taxpayer and the affairs of the taxpayer are confidential unless Madoff or his authorized representative consent to their release. Can you beat that? Madoff is literally the biggest crook by dollar figures in the history of the world, but you cannot be told how he obtained the cooperation of the IRS because his company was a taxpayer and therefore its IRS affairs are confidential.

You know, the IRS is quite a piece of work in the Madoff scandal. For decades it has gotten a total of untold billions of dollars in taxes paid on phantom income from victims of Madoff. It is not telling us how much it got, though I imagine this would not be very difficult to determine in this age of supercomputers. But I suspect that the total tax it received on phantom income must be in the tens or scores of billions of dollars over the years. If people paid tax over twenty or thirty years on “as little” as 30 billion dollars of phantom income, that would amount to approximately ten billion dollars in taxes. If 20 billion of the 65 billion dollars shown on the November 30, 2005 statements was principal (was “cash-in”), so that the remaining 45 billion was phantom profit, the income tax on the final numbers alone was about 15 billion dollars minus amounts not owed because the phantom profits went to tax-free entities or because money went to foreigners who may not have been liable for or may simply have evaded tax.

But one way or another, and even though it so far won’t disclose the amount, over the course of 20 or 30 years, or maybe even longer, the IRS received billions upon billions of dollars in taxes on phantom income -- taxes on money it had no constitutional right to tax because the Sixteenth Amendment allows it only to tax “income,” not “phantom income.” But now the IRS will give you a refund of only a few years of those taxes -- money which we now know you were cheated out of from the beginning, to put the matter candidly -- and the IRS relies on the courts and Congress to agree that you don’t have to be paid back the taxes you were cheated out of, since letting taxpayers get refunds of all such taxes might be hurtful to the federal fisc. Nor will you get back more than a small fraction of your losses by virtue of the IRS’ new theft deduction rule, which, as has been said here from the beginning (and as others are coming to agree), is quite inadequate for many people and will extensively benefit only the obscenely wealth, who will receive scores of millions of dollars worth of tax deductions (with the word on the street being, rightly or wrongly, that the IRS’ rule was initially drafted for the wealthy by a white shoe Wall Street law firm that has represented huge money for over a century). All in all, one might paraphrase the statement made with regard to the Barbary pirates 200 and some years ago by saying, “Trillions to bail out the bankers who brought down the economy, but not one cent, or at least very little, for average people who were cheated and defrauded by Madoff and governmental agencies who were his defacto accomplices.”

You know, when you look at the whole thing systemically, it is quite a picture. People got sucked into a Ponzi scheme by the affirmative 1992 statement of one federal agency, the SEC. They remained sucked in because of the SEC’s incompetence when it was told of the fraud in later years, and by the incompetency of FINRA and its predecessors too. Meanwhile the IRS benefitted to the tune of untold billions of dollars and, when the fraudster in effect asked it to help him by approving him as a nonbank custodian, the IRS did this even though he was in gross violation of its own regulations. Subsequently the IRS will give back only a fraction of the taxes you have been cheated out of -- unconstitutionally, no less. To put icing on the cake, SIPC, as all know, is screwing people out of money they have a right to. And when people seek to sue the SEC or the IRS for their horrendous misconduct that enabled Madoff to succeed for decades or for the billions in taxes to which the government had no right, the defrauded plaintiffs will be met with claims by the government -- which always makes these claims -- that you cannot sue the government, and/or that statutes of limitations have run regardless of how horrible the government’s misconduct was. Joe Nocera will love it since he thinks it was all the (stupid) victims’ fault anyway.

Then there are the twinned questions of who on Wall Street knew or had good reason to suspect that Madoff was perpetrating a fraud but did not report this to the SEC, and why didn’t they report it to the SEC? In his warning memos to the SEC, Markopolos identified four major companies or prominent individuals who were knowledgeable about derivatives and who, he said, were persuaded that Madoff could not be for real. They included “heads of equity derivatives trading at Morgan Stanley, Goldman Sachs, J.P. Morgan and CitiGroup.” In complaints he has filed, Picard has listed no less than seven prominent houses that he thinks refused to do business with Madoff because of “serious concerns” that his “operations were not legitimate.” They include “Société Générale, Goldman Sachs, CitiGroup, Morgan Stanley, Merrill Lynch, Bear Stearns, and Credit Suisse.” From their refusal to do business with Madoff, one deduces, as Picard has indicated, that they suspected Madoff’s bona fides. In addition, one has read of others who suspected or had reason to question Madoff’s bona fides, especially if they were rich enough to have expensive professionals assess Madoff for them (i.e., do due diligence for them) or were themselves wealthy professionals, sometimes obscenely wealthy professionals, who could do this for themselves. One even reads of wealthy persons who apparently were not financial professionals but who heard rumors that touted them off Madoff.

Did any of these people or institutions let the SEC know of their suspicions -- warning from the likes of Goldman, Sachs, CitiGroup, or Morgan Stanley, for example, might have forced the SEC to move, after all. If, as is apparently the case, they -- and other types whom Joe Nocera consorts with but to whom the rest of us have no access -- didn’t tell the SEC of their suspicions, why didn’t they? If memory serves, Markopolos, in his prior lengthy warnings to the SEC, and then in his testimony to Congress, implied that those experts’ silence was a product of concern that their lawyers, for some reason (natural lawyeresque caution and fear of slander suits, one supposes), would not let them talk openly to investigators, plus a Wall Street code of silence arising because everyone on Wall Street has skeletons. Whatever the reasons, these powerful Wall Street institutions and persons did a profound disservice to thousands upon thousands of people by not informing authorities of their suspicions and of the underlying reasons. But right now we know relatively little about the universe of people who held suspicions, their reasons (if different from red flags that Markopolos wrote of), why they failed to alert the authorities, or how, it appears, certain non professional but very wealthy people seemed to get the word that touted them off Madoff. Nor does the mass media seem to have an interest in tracking down any of this.

So. . . . . . . we are currently in a place (so to speak) where a simply fantastic amount about the Madoff scam remains unknown; more remains unknown than I can ever remember being true at the time of the plea and sentencing of the lead culprit in any other major fraud case. To a significant extent, one thinks, the present lack of knowledge is a result of the absence of a trial in the Madoff case -- Judge Chin did us no favors by letting Madoff plead instead of forcing a trial at which much would inevitably be revealed. Also responsible for the current lack of knowledge is the typical dearth of serious investigatory work by the mass media -- which steadfastly refuses to look into the IRS connection, among other important problems. The extent to which the dearth of knowledge will be rectified by ongoing investigations by prosecutors and Picard, by an investigation by a possible special prosecutor (Professor Elizabeth Warren’s name has been floated in this connection), by investigations by Congress, by future work by authors of books on the Madoff matter, or by future trials (which I doubt will occur because culprits are likely to cop pleas), is presently unknown. And I, for one, cannot think of any way -- not one -- in which this vast lack of knowledge is doing any good for anyone connected with the Madoff affair who is honest. That it is vitally helpful for many who were dishonest goes without saying, of course.*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

2009-06-19T10:06:00.000-04:00

June 19, 2009

Re: SIPC’s Objections To The Posting Called “Irving Picard’s Three Percent Commission In The Madoff Case.”

To put it mildly, it is clear that SIPC has been the object of extensive criticism in the Madoff victims community. The criticism is, I suppose, only the stronger among those victims who are middle aged or elderly, were retired, were wiped out and have little or no money to live on, who have had to wait many months and may still be waiting for a recovery from SIPC, and who fear they may never receive a recovery. Recently, a Wall Street lawyer who has worked with the victims’ community filed a formal complaint in federal court saying explicitly, or in plain effect, that SIPC is looking out for Wall Street, not for victims.

Among the reasons SIPC and its Trustee, Irving Picard, have taken so much heat are (1) the amount of time they are taking; (2) the novel definition of net equity they are using, a definition which will cause lots of people to get nothing from SIPC, may result in clawbacks that otherwise would not occur, and is apparently causing much time to be consumed while SIPC calculates its version of net equity in what must be thousands of cases; (3) the assertion, apparently resulting from a decades-old decision, that I believe SIPC sought in the mid 1970s in the Morgan, Kennedy case, that persons who invested through groups such as pension funds, feeder funds or trusts are not individually eligible for recoveries; (4) a long held view, going back to before 2000 but lengthily written about on September 25th of that year by Gretchen Morgenson of the New York Times, that SIPC and its trustees pull out all the stops in trying to avoid providing recoveries to victims; (5) a concern that it is in the Trustee’s personal economic interest to use the novel definition of net equity because this could result in more being clawed back and distributed, thereby increasing the Trustee’s compensation up to, it is rightly or wrongly thought, a potential commission as high as three percent of the amount he distributes; and (6) yet other criticisms.

On Thursday, June 11th this author posted an article canvassing and presenting many of the criticisms that are raised. I don’t want to bore you by repeating the canvas, but nonetheless shall recapitulate some of the criticisms in summary fashion because this is important to a full understanding regarding a demand SIPC made to me that the entire article of June 11th be taken down -- or at least that an asserted mistake in it be corrected -- a demand for entire obliteration or at least correction made by phone by a SIPC public relations representative within two hours or so after the article was posted and that was then repeated the next day via emails from the PR representative plus accompanying emails from SIPC’s President, Stephen Harbeck.

Here is a brief summary of a number of the points made in the June 11th article:

• The Bankruptcy Code permits a court to grant the Trustee “reasonable compensation” not to exceed three percent on amounts distributed to victims in excess of one million dollars.

• Trustees generally seek compensation of the full amount allowable, and sometimes recover up to three percent of the amount distributed but sometimes don’t.

• The amounts allowable to Picard at a top level of three percent of the amount he distributes, would be obscene. They could be as much as 30 or 60 or 360 million dollars, depending on how much he recovers and distributes.

• The novel and niggardly definition of net equity adopted by SIPC and Picard will result in SIPC having to pay out less and in more being clawed back and distributed by Picard, and thus in more that Picard is eligible to be paid at a top limit of three percent.

• Picard is the main go-to guy for SIPC among a small coterie of people whom SIPC uses as trustees and for whom this is lucrative. He has handled more SIPC cases than anyone else, has handled its largest cases, and in one case gave recoveries to only 22 of 302 claimants.

• SIPC stands accused by lawyers of doing virtually anything and everything it can to insure that claimants do not recover, including using esoteric and/or technical agreements, making claimants run a gantlet of difficulties, and making arguments under which almost nobody could recover.

• A logical way for SIPC to minimize recoveries by claimants in the Madoff case is for it to define net equity in the novel and niggardly way it has. In this way it will avoid having to tap lines of credit or further and drastically increasing annual charges to the securities industry. Courts might uphold the novel and niggardly definition of net equity even though its legality is at best questionable.

• No one could expect Picard to oppose the novel definition put forth by SIPC, because to do so would be to bite the hand that feeds him. It is possible, indeed, and perhaps even probable, that the novel and niggardly definition of net equity was developed within SIPC and Picard “merely” went along with it.

• For various reasons, when Picard is involved in developing and enforcing a novel and niggardly definition of net equity that can result in him receiving more compensation, he is in a systemic position that is, or may be, or should be, impermissible under the law.

When the SIPC public relations representative called me about the article to demand that it be entirely taken down immediately or at minimum that a claimed mistake be corrected immediately, the burden of her argument -- I made extensive notes immediately after the conversation -- appeared to be that it is incorrect to say that Trustee Picard is eligible for a three percent commission under Section 326 of the Bankruptcy Act. She seemed to feel -- as is again reflected in my notes -- that I got this idea from an article in TIME/CNN online, which, as she said, had been changed after SIPC complained. I declined to do her bidding immediately on her say so alone, and said SIPC should send me all necessary materials to demonstrate the correctness of its position on all points on which it thought me wrong, and I would then make any and all needed corrections and retractions at one time. She then sent me, the next day, two emails, each accompanied by an email from Harbeck and each, more or less imperiously in my view, demanding that my post be taken down or at least corrected. Set forth below, so that you can read SIPC’s view as set forth by Harbeck himself, are the two emails from the PR person with Harbeck’s accompanying emails. First the email that was sent to me at 3:33 p.m. on Friday, June 12th:

Dean Velvel:

Please see the below from SIPC President Stephen Harbeck. Since SIPC oversees the trustees, this could not be more definitive. When should I expect that you will take down or correct your blog and OEN posting?

Ailis Aaron Wolf
(703) 276-3265
aawolf@hastingsgroup.com

-------- Original Message --------
Subject: Velvel blog and OEN posting
Date: Fri, 12 Jun 2009 15:03:42 -0400
From: Stephen P. Harbeck
To: Ailis Aaron Wolf

References: <4A328E3A.7070802@hastingsgroup.com>

Picard cannot file a petition for a percentage. No trustee has ever done so in the 39 year history of this organization, in any of the 322 cases SIPC has initiated. That is definitive.

If he did so, SIPC would oppose it.

Dean Velvel is simply wrong, since his entire premise has no basis in fact or law.

Now the emails which were sent to me one hour and two minutes later on Friday, June 12th, at 4:35 p.m.:

Dean Velvel:

More from SIPC President Steve Harbeck. We look forward to seeing the correction/withdrawn blog posting.

-------- Original Message --------
Date: Fri, 12 Jun 2009 16:15:42 -0400
From: Stephen P. Harbeck
To: Ailis Aaron Wolf

CC: Josephine Wang

Dean Velvel bases his conclusions only on provisions of the Bankruptcy Code, but has apparently not read the provisions of the Securities Investor Protection Act which are applicable here. Under 15 U.S.C. §78eee(b)(5)(A), “the Court shall grant reasonable compensation for services rendered and reimbursement for proper costs and expenses incurred … by a trustee, and by the attorney for such a trustee….” Under 15 U.S.C. §78eee(b)(5)(E), allowances granted by the Court are paid out of any general estate of the debtor and if the general estate is insufficient, the allowances are paid with monies advanced by SIPC. Any recoveries by the trustee which are allocable to “customer property” cannot be used to pay administrative expenses. [Emphasis in original.]

Under 15 U.S.C. §78fff(b), enumerated provisions of the Bankruptcy Code apply to a SIPA liquidation, but only to the extent those provisions are consistent with SIPA. The “ 3% of recoveries concept” for compensation is inconsistent with SIPA That limitation appears in section 326(a) of the Bankruptcy Code which by its terms, applies to “a case under chapter 7 or 11.” Chapters 7 and 11 are part of the Bankruptcy Code which is contained in Title 11 of the United States Code. A SIPA liquidation proceeding is not a chapter 7 or 11 proceeding. It arises under SIPA which is contained in Title 15 of the United States Code. Furthermore, the 3% limitation on compensation to a trustee is inconsistent with SIPA and therefore, inapplicable, as mentioned above, under 15 U.S.C. §78fff(b).

SIPA allows a trustee to do a thorough and complete job, even where there is no general estate, with no diminution whatsoever in customer property. This is very different that a brokerage bankruptcy that SIPC is not involved with under Chapter 7, subchapter III. [Emphasis in original.]

Stephen P. Harbeck
President and CEO
Securities Investor Protection Corporation
805 15th St NW
Suite 800
Washington DC 20005
202 371-8300

Now it seems to me that a noteworthy point about the emails sent to me by SIPC peremptorily demanding complete obliteration, or at minimum correction, of the Thursday, June 11th posting is this: despite all the points damaging to SIPC made in the Thursday, June 11th posting, as far as I can see the Friday, June 12th emails from SIPC deny only one thing that I specifically said or am claimed to have said: Seeming to me to posit that my view is that a Trustee’s application would be couched in terms of three percent -- would say, for example, “Give me three percent of two billion dollars,” or “Give me three percent of ten billion dollars” -- the emails seem to me to deny only that Picard will or can specifically apply for a three percent commission. (Thus Harbeck’s first email says “Picard cannot file a petition for a percentage.” (Emphasis added.)) Seeming to me to say only that Picard’s application cannot be couched in terms of a percentage -- that he can’t say “give me three percent” - - Harbeck says that this can’t be done in a SIPC proceeding, has never been done in a SIPC proceeding, and SIPC would oppose it if it were done. That it has never been done is a fact within Harbeck’s knowledge (he has worked for SIPC for 34 years), not mine, so if he says it, it presumably is so. Ditto that SIPC would oppose it if it were attempted -- this is within Harbeck’s knowledge, not mine, so if he says it, it presumably is the case.

But could a trustee seek a total commission that would amount to three percent of monies recovered and distributed, even if he sought it not by specifically saying “Give me a three percent commission,” but rather via calculations made largely on an hourly fee basis plus, in the words of SIPC’s statute (in Section 78eee(b)(5)(C)), the “nature, extent and value of the services rendered?” And has a trustee ever done this? I at least don’t think Harbeck has answered these questions, questions which seem to me to merely present a simple backdoor method of obtaining a three percent commission. In his first email Harbeck, as mentioned, says only that “Picard cannot file a petition for a percentage.” (Emphasis added.) That would not seem to mean Picard could not file a petition seeking a sum that amounts to three percent, with the petition being couched in hourly fees plus “due consideration to the nature, extent and value of the services rendered,” phraseology which seems to me to allow for a possibly very hefty bonus in a case like Madoff. The statute does says the court “shall place considerable reliance on the recommendation of SIPC.” But might SIPC support rather than oppose a hefty bonus (for its go-to guy) in the Madoff case? Has it ever done so in other cases? Again, Harbeck does not seem to me to answer those questions. One notes, however, that a Bloomberg piece dated January 21st, which is still up and apparently has not been retracted, says that in another case involving “a $20 million fraud” (the Park South case), Picard received $1.05 million himself in a five year proceeding (while his law firm received $2.8 million). $1.05 million is not merely three percent, but is more than five percent of 20 million, assuming $20 million is what Picard collected and distributed. (Note that Picard claims that the 3 percent of recovery limitation on compensation is irrelevant in a SIPC case.) If Picard collected and distributed less than $20 million, his fee was higher than five percent of the amount distributed. If Picard collected and distributed a lot more than $20 million in Park South -- could that be possible? -- his fee was less than five percent, even less than three percent if he distributed about 34 million dollars or so.

Harbeck also says, in dense arguments that only a lawyer can love, that the three percent provision of the Bankruptcy Act cannot bear on Picard’s compensation because, as previously quoted:

Dean Velvel bases his conclusions only on provisions of the Bankruptcy Code, but has apparently not read the provisions of the Securities Investor Protection Act [SIPA] which are applicable here. Under 15 U.S.C. §78eee(b)(5)(A), “the Court shall grant reasonable compensation for services rendered and reimbursement for proper costs and expenses incurred . . . by a trustee, and by the attorney for such a trustee . . . .”

* * * * *

Under 15 U.S.C. §78fff(b), enumerated provisions of the Bankruptcy Code apply to a SIPA liquidation, but only to the extent those provisions are consistent with SIPA. The “ 3% of recoveries concept” for compensation is inconsistent with SIPA That limitation appears in section 326(a) of the Bankruptcy Code which by its terms, applies to “a case under chapter 7 or 11.” Chapters 7 and 11 are part of the Bankruptcy Code which is contained in Title 11 of the United States Code. A SIPA liquidation proceeding is not a chapter 7 or 11 proceeding. It arises under SIPA which is contained in Title 15 of the United States Code. Furthermore, the 3% limitation on compensation to a trustee is inconsistent with SIPA and therefore, inapplicable, as mentioned above, under 15 U.S.C. §78fff(b).

What Harbeck seems to me to mean in plain English instead of legalese is this: The three percent commission provision is in the Bankruptcy Code, not the Securities Investor Protection Act (SIPA). SIPA says there shall be reasonable compensation. Although SIPA admittedly says that Bankruptcy Code provisions do apply to a SIPA liquidation, this is not true when Bankruptcy Act provisions are inconsistent with SIPA provisions. The three percent provision of the Bankruptcy Code is inconsistent with SIPA because (i) the provision appears in a provision of that Code applying to cases under the so-called Chapters 7 and 11 of the Bankruptcy Code, and a SIPA proceeding is not under Chapters 7 and 11 of that Code but under SIPA, and (ii) simply because it just is inconsistent (i.e., it is inconsistent because it is inconsistent, due to the fact that it is inconsistent, because it is inconsistent, etc., so to speak).

Now, seven months ago I had probably never heard of SIPA or SIPC, and certainly I knew nothing about them. Whereas, Harbeck has been working for SIPC, and dealing with SIPA, for thirty-four years. So Harbeck should know all of this stuff a lot better than I, and I suppose I should therefore be disposed to take his word for things. Yet, I confess that I have difficulty understanding why what he says is right.

Why, for example, is the Bankruptcy Code provision containing the three percent limitation on compensation inconsistent with SIPA? Harbeck says, correctly, that SIPA (in §78eee(b)(5)(A), entitled “Allowances in General”), says a “court shall grant reasonable compensation for services rendered” by a trustee. But the two relevant Bankruptcy Code provisions -- Sections 326 and 330 -- also say that a trustee shall receive “reasonable compensation.” There seems nothing inconsistent there.

Of course, Section 326 of the Bankruptcy Code adds that reasonable compensation is “not to exceed three percent” of monies disbursed by a trustee in excess of one million dollars. Section 78e3ee(b)(5)(A) of SIPA has no such three percent limitation on what is reasonable. Are the two provisions inconsistent for that reason? Is it possible that Harbeck meant this? If he did mean this (and remembering that Picard may have made more than three percent of what he distributed in the Park South case), then it would appear that Harbeck might be trying to put one over on us by claiming inconsistency not because a SIPC Trustee cannot make up to three percent, as Harbeck at least seems to mean, but because a SIPC Trustee can make more than three percent, which on the face of matters Harbeck gives the impression of not seeming to mean.

So . . . . thus far I am at a loss to understand why Harbeck claims SIPA and the Bankruptcy Code are inconsistent with regard to the three percent idea. But my failure of understanding grows. Section 78eee(b)(5)(B) of SIPA, entitled “Application for Allowances,” says “Any person seeking allowances shall file with the court an application which complies in form and content with the provisions of Title 11 [the Bankruptcy Code] governing application for allowances under such title. (Emphasis added.) Doesn’t that seem clearly to mean that an application for compensation by the SIPC Trustee must adhere, “in form and content” with the three percent limitation contained in Section 326 of the Bankruptcy Code? Doesn’t it seem to mean that there is no inconsistency between SIPA and the three percent provision, but rather that the three percent limitation of Section 326 of the Bankruptcy Code is applicable and must be followed in a SIPC proceeding? This is what it seems to me to mean, and one wonders whether it conceivably has ever not been followed in a SIPC proceeding. (Was it at least conceivably not followed in Park South?)

But my failure of understanding grows still more. Section 78fff of SIPA, cited by Harbeck, says in §78fff(b), entitled “Application of Title 11” (i.e., application of the Bankruptcy Code), that “To the extent consistent with provisions of this chapter, a liquidation proceeding shall be conducted in accordance with, and as though it were being conducted under chapters 1, 3 and 5 and subchapters I and II of chapter 7 of title 11 (which, again, is the Bankruptcy Code). (Emphasis added.) The three percent provision is in the relevant part of the so-called chapter 3 of title 11. Since §78fff(b) of SIPA says a SIPA proceeding “shall be conducted” -- shall be conducted you notice -- in accordance with chapter 3 of the Bankruptcy Code, why is the three percent provision, which limits the amount of payment a trustee can get, supposedly inconsistent with SIPA?

So . . . . here is what we seem to be left with at this juncture. Harbeck has claimed the three percent provision of the Bankruptcy Code is irrelevant to a SIPA proceeding. He has been at SIPC for 34 years and should know about this a lot better than I, who knew zero -- zip, nada, nothing -- about SIPA or SIPC before Madoff was busted last December 11th. Yet the reasons Harbeck gives for claiming the three percent provision of the Bankruptcy Code is inconsistent with SIPA do not seem to a newbie like me to hold water. Rather, to this newcomer, they seem wrong. Also, the first of Harbeck’s two emails even gives the impression that all he meant was that a SIPC Trustee cannot in terms request a certain percentage -- cannot couch his petition for compensation in language like “Please award me three percent” -- even if he conceivably may be able to request a sum which might amount to three percent or more due to hourly charges and “the nature, extent and value of [his] services.” But, as said, I’m new at this and Harbeck is an old hand. If he wishes to provide reasons why this newbie’s reasoning is wrong and Harbeck is right with regard to the three percent, he is free to do so and I am sure, based on his emails to date, will feel free to do so and will not hesitate to let me and others know I am wrong.

* * * * *

I wish to close by mentioning some points, or developments, which do not go precisely to the question of the three percent provision but which provide part of the broader weltanschauung in which the matter arises. As said above and in the posting of June 11th, as far back as the year 2000, and earlier, there has been widespread feeling that SIPC messes over victims by using every strategy it can to deny them recovery or to limit their recovery. It also is apparently true that, at least as of the time Morgenson wrote her article in 2000, lawyers for SIPC had received more from it in total than victims did in total. (Was this still true just before the Madoff case?)

The complaints about SIPC reached a boiling pitch in the Madoff case because of what victims perceived as unfair treatment, delay, an unjustifiable definition of net equity, the threat of clawbacks, and a harshly-expressed attitude. Most recently a Wall Street lawyer, Helen Chaitman, filed a complaint in federal court claiming (i) SIPC’s Trustee in the Madoff case, Irving Picard, has acted (through his counsel) towards victims named Peskin in a way which, if what Chaitman says is true, can only be described as unconscionable even if there are statutory provisions which assertedly support it; (ii) that Picard and SIPC have acted illegally; (iii) that in the Madoff case SIPC is taking a position contrary to the position it took in other proceedings; (iv) that unlawful actions by Picard are designed to save SIPC billions of dollars it would otherwise have to pay victims, and (v) that given actions by Picard are not for the benefit of defrauded investors, “but rather simply for the benefit of SIPC and the broker-dealers that SIPC represents.” “Congress did not enact SIPA to enrich Wall Street” (which I note has been enriched to a fare thee well by actions it took that nearly destroyed the economy), Chaitman added.

This is all part of the weltanschauung in which the issue of the three percent arises. Also part of it are extensive complaints by victims that the mass media has vastly misrepresented their plight, the economic position of victims -- who long were falsely portrayed in the MSM as all being billionaires and centamillionaires -- and the conduct and motivations of SIPC and Picard. Victims have extensively complained that Picard and SIC have a public relations machine that is highly active and ever active, and that puts wrong ideas into the heads of a willing mass media -- it is felt even a deeply complicit mass media -- that then disseminates these false ideas all over the country, with one of the major culprits being The New York Times. I have to admit that for a long time I felt that the complaints by victims with regard to the impact of what they thought to be the SIPC-Picard PR machine were wrong or overdrawn(even if understandable due to the terrible plight of victims). Now, after seeing what the SIPC PR machine vigorously and repeatedly attempted with regard to the June 11th posting, and that it even tried hard to get one nationally prominent site to remove the posting though I said publicly that I was writing and would soon post an article addressing the claims of SIPC’s flack and Harbeck, I’m not so sure that the claims of victims with regard to the impact of the SIPC-Picard PR machine are wrong or are overdrawn. It looks to me like the victims may well be right.

In any event, if Harbeck wishes to reply to my reasons for being dubious about the correctness of what he claimed in his emails regarding the three percent provision, I will be happy to read any reply he makes and to give the deepest consideration to what he says.*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

A Forthcoming Article Regarding A SIPC Objection To The Posting Entitled "Irving Picard's Three Percent Commission In The Madoff Case."

2009-06-16T14:58:00.001-04:00

June 16, 2009

Re: A Forthcoming Article Regarding A SIPC Objection To The Posting Entitled “Irving Picard’s Three Percent Commission In The Madoff Case.”

SIPC has objected to a point contained in my posting entitled Irving Picard’s Three Percent Commission In The Madoff Case. I am writing an article thoroughly discussing SIPC’s objection. The article will be finished and posted later this week. I have been asked to provide notification of this and am hereby doing so.

Irving Picard's Three Percent Commission In The Madoff Case.

2009-06-11T14:22:00.000-04:00

June 11, 2009

Re: Irving Picard’s Three Percent Commission In The Madoff Case.

On May 30th Time Magazine posted an online article about Irving Picard, the SIPC Trustee in the Madoff case. Time said that “Picard is considered the superstar of SIP[C] trustees, having handled the largest cases SIPC has managed”. Time also said that SIPC “Trustees are paid well, receiving personally 3% of anything over $1 million they recover for victims. For example, if $2 billion is ultimately recovered in the Madoff case, Picard stands to make personally $60 million in fees, provided the New York federal judge overseeing the case, the Hon. Louis Stanton agrees to it.”

Later Time said that Picard has sued various large feeder funds for ten billion dollars. Time did not, in this regard, carry out the logic of its prior statement. Were Picard to recover ten billion dollars in these suits and distribute it to Madoff victims, his personal share, at three percent, would be 300 million dollars. Nice work if you can get it.

Time’s article fuels a fire that has existed -- sometimes raging, sometimes damped -- within the Madoff victim community for many months. Picard and SIPC have insisted that the so-called “net equity,” for which each victim can be compensated by SIPC up to $500,000, must be computed in a way that is different from the way net equity has almost always -- or even always? -- been computed previously. If net equity is computed their way, many victims will get either nothing at all from SIPC or much less from it than if net equity is computed in the ordinary way. Also, on a separate but intimately-related point, many victims would also become subject to clawbacks by Picard of monies they took out of Madoff in the last six years, often monies they needed to live and/or to pay taxes on phantom income from Madoff.

These two matters -- getting less or nothing from SIPC and becoming subject to clawbacks by Picard -- have been extensively discussed and explained previously -- by many writers. So I shall not explain here the mechanics of how this works. Suffice to say here that, if the definition of net equity adopted by Picard and SIPC is upheld against the judicial attacks which already have begun, then Picard personally will make more money if Time’s description of how he is compensated was correct. For Picard will be able to claw back and distribute far more than otherwise -- who knows, conceivably even a billion or two more than otherwise -- which would yield Picard personally 30 million or 60 million dollars more at a compensation rate of three percent.

It is this fact -- that Picard will personally make a lot more money if he uses his and SIPC’s novel -- one might even say niggardly and quite possibly illegal -- definition of net equity that has caused outrage in the victim community. The victims feel Picard is denying them money that many of them desperately need to live on (they are often in their late 60s, 70s or 80s and have nothing to live on because they were wiped out) so that he personally can profit to the tune of millions of dollars, even tens of millions of dollars.

On important question, consequently, is this: Is Time right in indicating, as so many believe, that Picard will receive three percent of everything over one million dollars that he recovers and distributes to victims, so that use of his and SIPC’s novel definition of net equity, by enabling him to claw back and then distribute more money, will increase his personal take. This question is not completely the straightforward one it may seem.

I myself am concededly pretty ignorant in the premises. I knew nothing at all on the subject when the Madoff situation began, and of late have been trying to learn at least a little as I go along. Thus, as far as I know, it seems that there are two statutory sections that are relevant. One is Section 330 of the Bankruptcy Code (11 U.S.C. §330). It says that a trustee in bankruptcy can be awarded “reasonable compensation for actual, necessary services rendered,” and that in determining what compensation is reasonable, a court must consider the time spent, (hourly?) rates charged, the necessity of the services, whether they were performed within a reasonable time commensurate with the problem, the trustee’s skill and experience, and whether the amount of compensation is reasonable in comparison with what is charged by comparably skilled people. Section 330 also says that, in determining reasonable compensation, the court should treat it “as a commission, based on section 326.”

Section 326 of the Bankruptcy Code (11 U.S.C. §326) is the other relevant provision here. After stating the amounts or percentages allowable on sums distributed by the trustee that are less than one million dollars, §326 says that the court can award the trustee “reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, upon all monies disbursed or turned over in the case to parties in interest, excluding the debtor [i.e., excluding Madoff].”

So, in sum, under §330 the Trustee is to receive reasonable compensation for actual, needed services and under §326 such reasonable compensation, called a commission, cannot exceed three percent of all monies collected and distributed to the victims in excess of one million dollars.

How does this generally work in practice, and how may it work in the Madoff case? My understanding, after talking to a colleague who serves as a bankruptcy trustee and whom I think I understand correctly, and from what seems implicit in stuff I’ve read, is that the way it generally works in practice is pretty much what one might expect. Trustees in bankruptcy seek awards of the full amount of the commission allowable under §326, and courts sometimes award the full allowable commission. But sometimes courts award less than the full allowable commission because, for example, the trustee was able to accomplish a job in very few hours or the task was simple, etc.

Now, nobody has yet said the Madoff job is a simple one or one that will require but few hours. Distinctly the contrary. And it is always possible that Picard will seek the full three percent commission allowable under §326 on monies he distributes to victims in excess of one million dollars. Would the full commission be reasonable compensation? It does not seem so. If Picard were to distribute only the two billion dollars posited in one part of the TIME piece, the statutorily permitted commission at three percent could be, TIME said, sixty million dollars. If he was to collect and distribute ten or twelve billion dollars or more, which encompasses the amounts he either already has in hand or is seeking, the permitted commission would be 360 million dollars. These kinds of figures are nuts for a trustee in bankruptcy. Neither can be considered “reasonable” for a trustee. And remember, Section 330 says a trustee shall be paid a sum that is reasonable, while Section 326 not only explicitly echoes this but distinctly does not provide that three percent of everything over one million dollars necessarily is reasonable, but only that three percent is the top limit on what could be considered reasonable in appropriate circumstances. I reiterate that three percent for a trustee on two billion or twelve billion dollars -- i.e., $60 million or $360 million dollars for a trustee -- is not reasonable. (For those interested in such things, if Picard himself were to work, for example, 10,000 hours on the Madoff case, which would be four to five years of extensive annual work, his hourly fee at thirty million dollars would be $6,000 dollars per hour and at 360 million dollars would be $36,000 per hour. Such fees are insane.)

So, while one cannot know at this point how much Picard is likely to seek from the bankruptcy court by way of commission, the idea that he will seek the full three percent commission seems to accuse him of both phenomenal greed and lack of sense, although one cannot definitively say at this point that he won’t seek the full three percent.

But does all this necessarily mean that use of the novel and niggardly definition of net equity -- a definition which would enable Picard to pay out less of SIPC’s money and claw back more money to distribute to other victims -- is therefore irrelevant to his personal financial calculations? One doesn’t think so, although I personally believe, unless and until proven wrong by testimony or written evidence if there should ever be any on the question, that other matters (to be discussed below) were the motivation underlying use of the novel and niggardly definition. Yet the reason the novel definition is not necessarily irrelevant to Picard’s personal situation is precisely that the novel definition will result in more being clawed back and then distributed to victims. If such an amount is as “little” as one billion dollars more -- and the grapevine makes me think it could be a multiple of that -- this amounts, at three percent, to an additional permissible commission to Picard of 30 million dollars. That ain’t chicken feed baby. And even if one assumes that the court will not consider 30 million dollars to be reasonable compensation and will cut it down, the fact that Picard clawed back and distributed another billion dollars will almost surely count for a great deal in a court’s decision on what is a reasonable commission in the circumstances; it will cause a court to pick a number that is higher, probably much higher, than otherwise. Maybe -- in particular circumstances -- it won’t count for all that much, because it would be the small change if Picard recovers another ten billion dollars from the malefactors whom he has sued, but it will count for a lot if he does not recover much in the lawsuits. Moreover, he adopted and announced his decision to use a niggardly definition of net equity before he was aware, as far as we know, that various feeder funds could be sued for mucho billions. When he developed and announced his decision, the net equity question likely loomed a lot larger than it may loom today in calculations of what he personally stands to make from the Madoff affair.

What, then, does this writer think is the real reason Picard adopted the novel and niggardly definition of net equity? I have discussed before the ostensible reasons for this decision that were given by Picard and by the President of SIPC, Steven Harbeck. Those ostensible reasons do not hold water and my prior discussion of them will not be repeated here. Here I will deal only with what I think to be the (often recognized) real reasons.

Irving Picard was appointed to be its Trustee (the “SIPC Trustee”) in the Madoff case by SIPC. He is, as I understand matters both from reading articles and a conversation with a lawyer who knows about these things, one of a small coterie of lawyers who regularly get SIPC appointments, which are said to be lucrative. Picard apparently is SIPC’s “go to” guy among the coterie of regular SIPC trustees, “having handled the largest cases SIPC has managed” and also ‘“handling more SIPC liquidations than any other attorney,’ Harbeck said.” In the so-called Park South securities case, “Picard paid [only] 22 of 302 investors who requested recoveries, finding many didn’t have valid claims, according to his report to the U.S. Bankruptcy Court in Manhattan in October,” according to a January 21, 2009 article in Bloomberg. (Emphasis added.) It is my personal recollection -- I believe I am right -- that an experienced lawyer whom I was dealing with in regard to SIPC claims in the Madoff case told me that, when he contacted Picard about the Madoff matter to discuss it with him, Picard told him that, if he wanted to know how Picard was going to run the Madoff matter, he should read the Park South papers.

As someone who for years has been, and is, repeatedly appointed by SIPC to be its Trustee, and who must surely make a fair piece of change as the SIPC Trustee, it is dubious in the extreme that Picard would want to contravene SIPC’s wishes. What, then, would SIPC’s wishes be? As with everything else related to Madoff, I have no prior experience or knowledge of any of this and only know what I read or am told. But what I read and am told about SIPC is not good, as was pretty fully brought out as long ago as September 25, 2000 in a lengthy article by Gretchen Morgenson of the New York Times.

Here are some of the things Morgenson wrote:

Mr. Heebner figured wrong. For more than four years, the corporation [SIPC] maintained he was entitled to nothing -- even though three federal courts ruled that S.I.P.C. should pay him $87,000. Only last week, days after a reporter interviewed the lawyer representing the corporation about Mr. Heebner, did the investor receive a check in the amount of $87,000.
''I never got the sense that S.I.P.C. was in any way trying to help my client,'' said William P. Thornton Jr., a lawyer at Stevens & Lee in Reading Pa., representing Mr. Heebner against the corporation. ''They are very aggressive in attempting to prove that investors' claims do not come within certain legal definitions within the S.I.P.C. statute. And the loser is the investor.''
* * * *
But convincing the corporation [SIPC] to pay can be extremely difficult. The organization, requires investors to run a gantlet of legal technicalities that would challenge even those knowledgeable about securities law.
Some securities lawyers say this is because trustees overseeing the cases are chosen by, and paid by, the corporation. This differs from the independent trustees who are appointed by the court to handle corporate bankruptcy cases, and who are working for the people owed money.
Indeed, the trustees working for the investor protection corporation -- many of them from a coterie of lawyers who have made a lucrative specialty of such cases -- have received far more from representing the corporation than the corporation itself has paid to investors. Their critics say that trustees wanting repeat business from the corporation have an incentive to minimize payouts to investors. One trustee is the former president of the corporation. (Emphasis added.)
* * * *
''Although these legal arguments [by SPIC] may follow the letter of the investor protection act, S.I.P.C.'s reliance on them is reminiscent of a private insurance company trying to use every conceivable esoteric legal stratagem to avoid customer claims,'' said Lewis D. Lowenfels, a lawyer at Tolins & Lowenfels in New York and a leading authority in securities law.
* * * *
The investor protection corporation and the F.D.I.C. are vastly different. While the F.D.I.C. is an agency of the federal government and its insurance fund is backed by the full faith and credit of the government, the corporation is financed by the securities industry and can borrow from the government, with special approval, only in emergencies. It also maintains a $1 billion line of credit with a consortium of banks.
* * * *
Not long ago, brokerage firms paid much more to be members of the corporation. Between 1991 and 1995, firms were levied an amount based on their net operating revenues. In 1995, for instance, members were required to pay 0.095 percent of such revenues and the organization received $43.9 million. But when the S.I.P.C. fund reached $1 billion, the corporation cut the levy to $150 a member [including giant members like Goldman Sachs, Merrill Lynch, etc.].
* * * *

The corporation itself has paid investors $233 million over almost 30 years. But that amount is far less than the money received by the lawyers that act as trustees and the firms that help them shepherd the cases through the bankruptcy courts, trying to recover additional assets from the failed brokerage firms and assessing customer claims for validity. Since 1971, trustees have received $320 million, 37 percent more than has been paid to wronged investors. (Emphases added.)
The money the trustee receives comes from two sources: the assets of the failed brokerage firm and the corporation itself. As is typical in most bankruptcy cases, the corporation's trustees are paid first, customers second.
* * * *

Nevertheless, of the 3,368 customers who submitted claims for S.I.P.C. coverage in the failure [of the Stratton Oakmont brokerage house], as of last May only 34 had been deemed entitled, to a total of $2.1 million, according to the trustee overseeing the case. The corporation's executives and Weil Gotshal & Manges, the law firm representing the trustee in the case, argue that only 1 percent of the Stratton customers seeking remuneration from the corporation are entitled to payments. (Emphasis added.)
* * * *

A key problem with S.I.P.C. liquidations, some securities lawyers say, is that trustees overseeing the cases have allegiance to the corporation that appointed them [SIPC], rather than to wronged investors. To be truly in the corner of investors, these people say, trustees in brokerage firm liquidations should be completely independent of the corporation, which naturally wants to protect its assets. Trustees are indeed independent in corporate or personal bankruptcy cases because they are appointed by the bankruptcy court. (Emphases added)
* * * *

A coterie of bankruptcy lawyers does get repeat business from the corporation. Irving H. Picard, a partner at Gibbons, Del Deo, Dolan, Griffinger & Vecchione in New York, has been appointed trustee in four brokerage firm failures the last nine years, and J. William Holland of Holland & Holland in Chicago has overseen three liquidations since 1990. Five other lawyers have overseen two or more liquidations for the corporation the last decade. (Emphasis added.) [Picard recently moved from the Gibbons firm to Baker Hostetler.]
* * * *

Some securities lawyers and regulators say that the arguments used by the corporation to justify the denial of Mr. Heebner's claim for more than four years are characteristic of the corporation's approach to investor protection. ''It's part of the gantlet to make it as difficult as possible for an investor to make a recovery,'' said Mark Maddox, a former Indiana securities commissioner who is now a lawyer representing victims in the Stratton Oakmont case. (Emphasis added.)
Indeed, one argument used to deny many investors' claims in the Stratton Oakmont case, if applied to all brokerage firm failures, would disqualify millions of investors from S.I.P.C. coverage even though their brokerage firms are members of the organization.
Mr. Miller, the trustee at Weil Gotshal, has argued successfully to the bankruptcy court that Stratton customers do not qualify for S.I.P.C. coverage because their assets were not held physically at Stratton, they were held at the firm that cleared Stratton's trades. The act of Congress that created the corporation states that the coverage extends only to customers of firms that hold their assets. Customers of a failed broker that used another firm to clear its trades and conduct administrative duties do not qualify.
This delineation may have made sense in 1970, when most brokerage firms cleared their own trades. But today, most of the nation's brokerage houses use clearing firms to carry out their customers' transactions and administer accounts. Using Mr. Miller's argument, customers of these firms, were they to fail, could get no satisfaction from the corporation.
* * * *

Robert M. Morgenthau, the Manhattan district attorney, who has aggressively pursued fraudulent brokerage firms to help wronged investors recoup some of their losses, said: ''The investor protection act has to be revisited for two reasons. It doesn't cover a majority of investors' losses, such as those incurred by fraud or malfeasance, and the red tape that is involved for investors trying to recover is incredible.''
As I say, the news from Morgenson, as far back as September of 2000, was not good. And, as far as I can see, nothing has changed. So, if one is right in thinking nothing much has changed, in precisely what way would this have relevance today, by what mechanics, so to speak, would it have relevance today?

Well, today SIPC has something like 1.6 billion in its coffers. But the amount claimed to be owing the Madoff investors at $500,000 per claim is said to be in excess of four billion dollars (and one suspects could be a lot higher even than that). Therefore SIPC does not have enough to cover the amounts that are owing on the basis of the final, November 30th statements from Madoff. To cover those amounts, it would either have to tap and then repay a line of credit, borrow from and then repay the government, and/or increase the annual charges to the securities industry (which to some extent it already has, I believe). None of these possibilities does it consider desirable, one gathers.

How then, to avoid these undesirable alternatives? Well, one obvious way is to lessen the payout to victims so that SIPC will not have to pay out the full $1.6 billion in its coffers, and will only have to pay out far less. Avoiding payouts does seem to be its modus operandi historically, after all (even to the point of making ridiculous arguments). And since SIPC must pay out $500,000 (or lesser amounts) to people whose positive net equity reaches $500,000 (or the lesser amounts), an easy way to avoid paying out money is to define net equity in a way that is different from usual and (i) that results in negative net equity for many people so that they will get nothing from SIPC, or (ii) that results in a net equity that is positive but is nonetheless far below $500,000 so that victims will get only this lesser amount. This is an especially easy way to accomplish SIPC’s goal of non payment to victims because smart lawyers like SIPC’s, and like Picard, who works for SIPC, can come up with rationalization after rationalization for doing this. Even if, in the end, their numerous rationalizations are insupportable, and destructive of what Congress intended to accomplish when it passed the Securities Investor Protection Act to help protect investors, still they may persuade courts to rule as they request. Courts are not overly famous for doing the right thing, you know. They are often persuaded, or fooled, by rationalizations to rule quite differently.

Now, one would not expect Irving Picard to resist SIPC’s desire to greatly lessen its payout. As said, Picard has, after all, made what looks to be a lucrative career as SIPC’s go-to guy, and he cannot be expected to bite the hand that feeds him. And, if you ask me, it probably is even likely, or at minimum there is a good chance, that not Picard, but SIPC itself, developed the idea of using the novel and niggardly definition of net equity that is injuring Madoff’s victims and is being used to lessen SIPC’s payout, and that Picard “merely” went along with this. I know that, if I were a lawyer for Madoff victims in regard to SIPC, I surely would press actively for discovery on the question of how the niggardly definition came into being, a matter which I think is not subject to privilege as between SIPC and Picard.

So to sum up this part of the story, it seems to me that a desire on the part of SIPC to greatly lessen what it must pay to Madoff victims is almost surely the motivating force behind the novel and stingy definition of net equity currently being used by Picard and SIPC.

But just what, you should ask, does all this have to do with the three percent commission that could be paid to Picard under the bankruptcy code, not the law establishing SIPC. Well, the relationship is this: For reasons about which I know absolutely nothing (but which I wonder about, and wonder as well what their relationship to the niggardly definition might conceivably be), when SIPC gets involved in a bankruptcy case -- as when a broker-dealer such as Madoff goes bust -- the Trustee appointed by SIPC to be the SIPC Trustee also becomes the bankruptcy trustee. This is exactly what happened here, of course, when the originally appointed bankruptcy trustee, Lee Richards, was replaced as bankruptcy trustee just a few days later by Irving Picard, as soon as Picard became the SIPC Trustee. Picard began to immediately wear both hats, as is customary.

When Picard began to wear the customary two hats, he began, as the SIPC Trustee, to participate in decisions, in particular the decision on how net equity would be defined for SIPC purposes, that would affect his commission as bankruptcy trustee. Which is to say that, as discussed earlier, the niggardly definition of net equity, which will result in victims getting less or nothing from SIPC, will also result in more being clawed back from some victims to be distributed to other victims. And by resulting in more being clawed back and distributed, the niggardly definition of net equity will result in the permissible three percent commission under the bankruptcy act being a higher number than otherwise. As said, an extra billion being clawed back from some victims for distribution to other victims will result, at three percent, in an extra 30 million dollars in commission being permissible for Picard’s commission, and, even if a court thinks $30 million in commission is outrageous, will result in Picard’s fee award being higher than it otherwise would be. So, as the SIPC Trustee, Picard is affecting -- perhaps dramatically -- what he may be paid as the bankruptcy trustee.

There seems to me to be a good deal wrong with this as a systemic matter. SIPC is a quasi governmental entity in my opinion (it is set up under a complex statute, for example), although some, maybe many, would claim -- only the worse for Picard’s position here -- that it is a private company. So, as trustee for SIPC, Picard must be acting as a private, or, at best, quasi governmental officer, not a government official. The bankruptcy court, on the other hand, is a governmental body, and therefore the trustee in bankruptcy must be acting in a governmental capacity. So what you have here is a self-interested private or at best quasi governmental body and trustee (SIPC and Picard as SIPC’s trustee) making a crucial decision (the definition of net equity) that will play a major role in establishing the compensation of a governmental officer (Picard as bankruptcy trustee). That does not seem proper to me. Is there any other example of where it is done?

Even worse, conceivably, it is systemically the case that Picard is unavoidably, even if unintentionally, involved in self dealing. For as SIPC trustee he is involved in establishing and enforcing a rule that will affect his compensation as bankruptcy trustee. Maybe this could be thought bearable if all that was happening was that he was enforcing a standard definition of net equity, a definition that is commonly used. But this is not what is happening. What is happening, rather, is that Picard -- whether at SIPC’s direction or not -- has created and enforced a novel rule, a rule that is, to boot, greatly injuring the very people that Congress established SIPC to help: investors who have lost huge sums of money and in many cases have lost everything. How self dealing can possibly be allowed in such cases -- even if it results from a systemic problem rather than a perhaps unlikely Picardian venality regarding the three percent commission -- simply escapes me.

There is even a line of cases in this country which bears on the problem. They are the cases usually referred to as the Tumey v. Ohio line of cases. They began in the Supreme Court with Tumey in 1927, and the latest opinion in the Supreme Court was delivered just a few days ago, on June 8th, in what I will refer to, with total lack of reverence for the supposed niceties, as the West Virginia three million dollar judicial bribery case. (Caperton v. A.T. Massey Coal Co. Inc., No. 08-22 O.T. 2008, decided June 8, 2009.) The underlying idea is that, where a judge or administrator has a pecuniary interest in the outcome of a case, whether that interest be personal or on behalf of an institution he heads (e.g., a village of which he is mayor), he must not sit on the case as a judge. In the June 8th case, a three million dollar campaign contribution from a party meant that a West Virginia Supreme Court Justice should not have sat on the party’s case.

To be sure, Picard, as Trustee, is not a judge. And there will later be judges who rule on the matter, although it is equally true that there are (often already ruined) people who are so frightened of possible clawbacks arising from Picard’s novel and niggardly definition of net equity that they have not yet and may never file a claim, but instead will waive a SIPC claim and thus would not benefit from a later ruling against Picard by judges (assuming judges would have the courage to rule against SIPC, Picard, and their rationalizations). Also, one could argue on Picard’s behalf that something analogous to his situation has been permitted to exist, despite extensive criticism, in so-called forfeiture cases, where police forces can decide whether to seize property and then are permitted to keep (and sell) what they seize in order to help fund themselves this way. Yet one still thinks the Tumey rule should apply here. For the idea that an official can make a decision which can benefit him personally to the tune of tens or scores of millions of dollars, while injuring victims in the face of a statute whose passage was an expression of congressional solicitude for the victims and of a congressional desire to help them, is just too much. The West Virginia judge was forbidden to do this because of a campaign contribution of “only” three million dollars. Picard, even if only because of the system rather than personal venality, has done it in a matter that could mean tens or scores of millions of dollars in income for him personally. I really don’t think this should be allowed, whether systemically caused or caused by other reasons.*

* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

The Infestation of Government Values In Industry.

2009-06-02T12:12:00.000-04:00

June 2, 2009

Re: The Infestation of Government Values In Industry.

On Monday, May 18th, David Brooks had a column in the Times that seems to have attracted a lot of attention: three days later, on Thursday, May 21st, the Times ran no less than seven letters addressing Brooks’ points. Curiously -- one wonders if it’s pure coincidence, pure serendipity arising from events in the world around us -- two days after Brooks’ column, and one day before publication of the responding letters, the Wall Street Journal ran an op ed piece by John Steele Gordon on the same ultimate subject as Brooks’ column -- not entirely the same subject, but the same ultimate subject.

Discussing successful executive leadership in business, Brooks said that the research and writing shows that what is needed is not warmth, empathy, extroversion, agreeableness, team orientation, flexibility or other such aspects of what one might call our feel good culture. What is needed, rather, is attention to detail, analytical thoroughness, efficiency, persistence, relentlessness -- even unidimensionalness -- willingness to work long hours.

What is needed for topnotch executive leadership in business, said Brooks, is very different from what is needed in politics. Political leaders, he said, need “charisma, charm, [inter]personal skills.” In his own piece two days later, Gordon elaborated this by saying the politician’s job one is to get reelected (forever), which causes him/her to have a short term bias at the expense of foreseeably bad long term consequences, to favor “parochial interests over sound economic sense” (amen to that, brother), and to do things to get headlines “even when doing nothing would be the better option.”

In his very last paragraph, Brooks made clear where he was going -- made clear what the entire rest of his column was prelude to (which was also what Gordon’s entire piece unabashedly was all about from sentence one). Now that the government is in effect taking over major industries -- is “freely interposing itself in the management culture of industry after industry,” said Brooks -- “CEO’s are forced to adopt the traits of politicians. That is the insidious way that other nations have lost their competitive edge.” In short, corporate leaders will have to be smiling, charming, political glad handers, agreeable extroverted types, empathetic charismatic types who feel [y]our pain as Billy Bum used to say, instead of persons who live by diligence, analytic thoroughness, persistence, relentless pursuit of a goal, and horridly long hours of work.

Gordon is of the same view -- only more so -- regarding what will happen because of government’s intercession into management. His column is dedicated to the idea that government always and inevitably messes up when it tries to run businesses. To reasons that were mentioned above, he adds some others. To me, his most important addition is that government, unlike corporations, is always using other peoples’ money (the taxpayers’), rather than its own, regards cost cutting as alien, rarely faces competition, and is designed to be, and is, inefficient rather than being run efficiently, as he says businesses are by benevolent despots.

Of course, in opining (correctly, I think) of the dangers of government-run businesses, dangers arising from government value systems inappropriate to business and incompatible with values that they believe propel business, both Brooks and Gordon overlook the salient fact of present economic life. We are living through a disaster caused mainly by private businesses and their values. We are living through a disaster mainly caused by Wall Street and its value of uncabined greed, by the mortgage companies and banks, and by businesses like GM. True, government functionaries like Robert Rubin, Lawrence Summers and Alan Greenspan participated in causing the disaster, but Rubin and Greenspan were in reality from business (and, in Greenspan’s case, from the insane nation of Ayn Randism) and Summers might as well have been from Wall Street given who he apparently buddied around with and who he later joined. To say that danger lies in importing governmental values into business (as it does), while ignoring the disaster caused (and, in capitalist history, regularly caused) by the values of business, strikes me as more than a little ridiculous.

It was said earlier that seven responses to Brook’s piece were printed by the Times on May 21st. As often the case, the letters were sometimes pretty good. A couple of them said that the current Administration, as opposed to Brooks’ claims about government, had a number of level headed, methodical types, and that it was a business type -- the lifelong serial failure, “splashy product rollouts” type (remember “Mission Accomplished”?) -- who was responsible for the disasters we are in. (One should add other business types such as Greenspan and the 1990s business leaders Cheney and Rumsfeld.) It was also pointed out in the letters that vision, charisma and motivational ability can be combined with nuts and bolts competence, and that the greed so recently on display year after year in business had led to environmental disaster and rocketing costs of health care. The ideas in the letters were useful counterpoints to Brooks -- and to Gordon.

Now let me tell you what I think, as in part has already been done. My views come not just from reading, but from the extensive experience of myself and several other people in starting, running and expanding a law school -- a job at which some of us now have 21 years of experience.

It is absolutely true that the key to creating or running a private institution -- any kind of private institution, be it a business, a school, or what have you -- is, as Brooks says is characteristic of successful executives, unremitting attention to detail, thoroughgoing analysis, obsessive diligence, unending persistence and a thoroughgoing, never ending dedication to getting the job done -- the kind of dedication that causes one to create a to-do list with scores of items and, when they are accomplished, to already have in place a new to-do list of similar length. Nor does it hurt to have a high level of motivation and of motivational ability. Many of my colleagues who participated in starting the school possessed all these traits, and several of them are still with us and still exercising those traits.

One thing that strikes me as puzzling is that there are people who have a high order of ability to get things done -- the most essential quality in administration -- yet do not have a high regard for this ability which they possess. It’s as if the gift, because it comes from nature, not from endless “practice,” is therefore not thought a worthy one. This disregard for nature’s gift is a great mistake. I have often thought that the ability to get things done, which in an institution is, as I say, an essential one, is also the rarest one. People who have it but don’t think well of it or don’t use it are doing themselves an injustice.

It is also my judgment, after decades of dealing with academic and political bodies, that getting the job done is not high in the pecking order of values for these bodies. What generally matters most to them is talk. Talk, talk and more talk. Brooks is right when he says that “people in the literary, academic and media worlds rarely understand business. It is nearly impossible to think of a novel that accurately portrays business success. That’s because the virtues that writers tend to admire -- those involving self-expression and self-exploration -- are not the ones that lead to corporate excellence.”

In the academic, governmental and media worlds, continuous, undammed expression reigns supreme, and in the media world, the pundit world, one can, as we know, be continuously wrong, yet suffer no penalty. Lots of columnists and commentators owe their livings to this fact.

Yes, there are times in politics when a legislator or official is hell bent to get something done, but this usually occurs only when a major campaign donor insists on some bill or action. This hardly qualifies as an overall ethos of “get the job done.” It is only a bending to the powerful in order to accomplish job one -- the never ending job of seeking reelection after reelection after reelection.

Nor, looked at from the other side of the ledger, do I think that most CEO’s can be quite as despotic (even if benevolent) as Gordon indicates. The days of Harold Geneen are past. Largely ditto for Chainsaw Al. Despots who do as they wish regardless of the wishes of employees and Boards of Directors are likely these days to rather quickly find themselves ruling not over France, but only over Elba.

Yet, for all this, I do think that, from the ubiquitous earmarks that Congress now awards each year by the hundreds or thousands to private parties, to the potential running of major businesses, it will be very bad for the country if the values of politics increasingly infest the private sphere, as they already have to a significant extent and as will become more pronounced if government doesn’t rapidly get out of the business of business. Obama vigorously claims that government will not try to run businesses, and that it will get out as quickly as it can, but the media is filled today with reasons why this may not happen, and the truth is that when government gets involved with owning businesses, it often stays deeply involved for a long time, especially because so much money can be at stake, and gets involved in business decisionmaking. This would probably be very bad if now replicated in the next five to ten or twenty years. We do not need smiley-faced glad handers, those who go along to get along, the charismatic, non-working, lazy, personality boy, political types running huge businesses. We need the analytical, the workaholic, the detail oriented, the relentlessly goal oriented, the person who can combine these traits with fairness to employees and the public. You know, it is already the case that government is bought and sold by wealthy donors and by those who can deliver votes. This conduces not to competence and usually not to fairness, but instead, generally, to the rich getting richer, to favoritism to the nth degree, and to ordinary people getting left out. We don’t need more of this in politics -- we have way too much of it there already -- and we don’t need any of the values these traits represent in business.*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

Letter to Douglas Shulman

2009-05-22T12:48:00.000-04:00

May 22, 2009

Via Telecopier and Federal Express

The Honorable Douglas Shulman
Commissioner, Internal Revenue Service
1111 Constitution Avenue, N.W.
Department of Treasury
Washington, DC 20224

Dear Commissioner Shulman:

I do not know whether you are aware that in July of 2004, in the midst of Harry Markopolos’ revelations to the SEC that Bernard Madoff was operating a Ponzi scheme, the Internal Revenue Service placed its imprimatur on Madoff by approving his company as a non-bank custodian for IRAs. I am writing to request that you inquire into, inform me, and make public how this happened.

As you may know, when it enacted the Employment Retirement Income Security Act of 1974, Congress was deeply concerned over the safety of citizens’ retirement savings. It wished to insure that those who “participate in [retirement] plans actually receive benefits.” To insure that Americans’ retirement monies were safeguarded, Congress put the IRS in charge of insuring that fiduciary standards were met by custodians of retirement plans, IRAs and similar monies. Congress felt the IRS had previously done well in overseeing fiduciary standards, and this experience would aid it in future. To assist the IRS in doing this job in future, Congress authorized appropriations of 70 million dollars per year.

Congress further provided that the IRS could authorize non banks to be the custodian of IRAs and similar accounts if the non bank provided “substantial evidence” that “the way in which he will administer” accounts will be “within accepted rules of fiduciary conduct with respect to the handling of other people’s money.”

To carry out Congress’ intent, the IRS has regulations requiring that, to be an approved non-bank custodian of IRAs, a company has to have a separate trust department; the assets of different accounts cannot be commingled; continuity of the company has to be insured by diversified ownership under which no one individual can own more than fifty percent of its shares; the company has to keep customers’ assets in a vault; and the company’s fiduciary records have to be kept separate from other records. The IRS also ruled that, in order to carry out its function of safeguarding the owners of IRAs, pension funds and similar monies, it has a right to inspect the books and records of any company that wishes to become or already is an approved non-bank custodian.

Despite Congress’ intent that it safeguard retirement monies, and despite its own regulations, in 2004 the IRS approved Madoff as a non-bank custodian of IRAs even though he was fraudulently stealing retirement monies from IRAs and even though he was in violation of the IRS’ own regulations. Among the violations of the IRS’ regulations were these: Madoff had no separate trust department. One man, Bernard Madoff, owned 90 to 100 percent of the company rather than less than fifty percent. (The Trustee, Irving Picard, has said in a complaint that Bernard Madoff’s company was “wholly owned” by him.) There was no vault -- and an inspection would have shown there also were no securities to put in a vault. All the customers’ assets were commingled since Madoff stole them all for his own use instead of keeping securities in separate accounts. And had the IRS done its job, it also would have learned that, for at least fifteen years or so, Madoff had previously operated as a non-approved non-bank custodian for tens or scores of IRAs and as a non-approved non-bank subcustodian for hundreds of others. These discoveries would have necessarily caused the IRS to uncover and blow the whistle on Madoff’s fraudulent conduct instead of approving him as a non-bank custodian of IRAs in 2004.

The question which arises, of course, is how did this occur. How did the IRS come to approve Madoff in 2004? Did it conduct no investigation, but simply rubber stamp his application to be a non-bank custodian? Were there bribes or other criminal conduct involved? Was the IRS influenced somehow or other by the SEC. It seems inconceivable that the IRS could have approved Madoff. Yet it did. How did this happen?

As said, I request that you conduct an investigation of this, let me know the answer(s), and make the answer(s) public. It is no trifling matter when the Internal Revenue Service seems to have abetted the largest fraud in history by approving Madoff to be a non-bank custodian of retirement monies. It is no trifling matter when the IRS did this in violation of the intent of Congress and its own regulations. Those who lost money, the Congress, and the entire country have a right to be told the answer(s) to the question of how did this awful thing happen.

Sincerely yours,

Lawrence R. Velvel

The Four Torture Memos, Eichmann, And The Obama Administration. Part III

2009-05-18T14:29:00.001-04:00

May 18, 2009

Re: The Four Torture Memos, Eichmann, And The Obama Administration.

This post has been written and posted in three installments that were significantly separated in time. The first, consisting of an invented Nazi legal opinion, was posted on April 23rd, the second, dealing with the new book “Hunting Eichmann,” was posted on May 7th, and the third is being posted on May 18th. Because of the separations between postings, I am reposting the first two with the third on May 18th. Those of you who have read and remember the first two might want to skip directly to the third. (Or you might want to reread or skim the first two to readily get a sense of the progression of ideas.)

PART I

I have read the four memoranda that were recently released by the DOJ and authorized torture. Permit me to invent a similar but short memo that will allow the reader, without reading the approximately 120 densely packed pages of the four memos, to grasp their style, their character, their techniques, their aims, and, inherently and unavoidably, the nature of the people who wrote or signed off on them: John Yoo, Jay Bybee and Steven Bradbury.

To: Reinhard Heydrich

From: Joseph Alstotter, Chief of Section of Legality

Re: Transportation

Date: February 1, 1942

You have asked the legal opinion of the Section of Legality on a matter related to transportation.

You have informed us that the trains containing persons being taken to Auschwitz, mostly Jews, have cars in which the transportees are so numerous that they are forced to stand for the entire trip, which takes five days and eleven hours. Because of the close packing of standing bodies within the cars, there is a lack of air: the conditions are suffocating. Although the transportees are allowed out of the car for fifteen minutes once every eight hours, when they are each fed half a bowlful of thin gruel by the side of the tracks, the conditions of transportation cause some of them to weaken so greatly that they suffocate inside the cars. Or by somehow sliding to the floor (even though the close packing of the bodies causes some of their bodies to be held vertical for a period after they have already died), they become trampled to death. Old women, old men, and young children, you inform us, are the ones most susceptible to dying by suffocation or by being trampled after sliding to the floor.

You further inform us that, when the trains stop once every eight hours and people get off to eat, there usually are a number of transportees who are too weak to get back on the train or who feign such weakness. These individuals are quickly examined by a doctor who accompanies the train for this purpose. If the examination shows them to be too weak to continue, they are shot and left by the side of the tracks. Medical officers attest that the shootings cause no unnecessary or long lasting pain because the people are shot by pressing the muzzle of a pistol directly against the back of the head so that death is instantaneous.

You have informed us that the train cars are packed as tightly as they are because of military necessity. Our armies are fighting the Bolsheviki in a life and death struggle on the eastern front. If we lose the war on the Bolsheviki front, Germany will be laid waste and will cease to exist as a nation. There is therefore an overwhelming military necessity to use the railroad, one of Poland’s few, to move a continuous stream of tanks, artillery, small arms, ammunition, food, etc. to our eastern armies. Engines and cars are thus employed exclusively for that purpose, with the sole exception that once each week an engine and ten cars are used to transport Jews to Auschwitz. This movement of the Jews is essential because they, like the Bolsheviki, are a bone in the throat to the German people and must be eliminated for Greater Germany to survive and prosper. (Not surprisingly, they often are the leaders of the Bolsheviki.) Transporting Jews to Auschwitz carries out a major policy decision of the Fuhrer and his advisers established at the Wannsee Conference in 1941 and set forth in appropriate prior memos from this office.

As you have explained to us, this railroad transportation of the Jews, as essential as it is, must be done in a way that minimizes interruption of, or interference with, the movement of supplies to our eastern armies. The cars are therefore packed as tightly as they are, since otherwise three trains per week would be required instead of just one, with a corresponding adverse impact on the movement of supplies to our armies and a correspondingly enhanced risk of losing the war against the Bolsheviki, with the accompanying destruction of Germany.

** * * *

You have asked us, in light of these facts, to opine on whether the transportation of Jews to Auschwitz in this way is a crime against international law in violation of the rule laid down in the 1921 case of Van Devent v. Hohenzollern. Our opinion on this question is required because, now that the United States, under the Rooseveltian Jewish cabal, has entered the war against us, a few officers and soldiers who are involved in the transportation of Jews have asked for assurance that this is legal, lest they be subject to punishment as war criminals should Germany unexpectedly lose the war. You recognize that this kind of defeatism could be handled in the usual way, by shooting the offender or hanging him from a lamppost, but you think it would be better if it were possible to obtain an opinion from the Section of Legality holding that no crime is being committed and there can therefore be no punishment for any supposed violation of international law.

It is our judgment that the transportation to Auschwitz, as you have described it to us, is not a crime, is completely lawful, and cannot be punished. In Van Devent v. Hohenzollern, German soldiers had been fired on by partisans, who were not in uniform, as the Kaiser’s armies moved through Belgium in 1914. (The partisans would fire from roofs, windows, etc.) In consequence, when the Kaiser’s army would enter a Dutch town, it began to shoot three or four of the leading citizens -- the mayor and town councilmen, for example -- as a warning to other partisans of what would happen if German soldiers were killed by nonuniformed partisans. This expedient worked very well, since the shooting of German soldiers by partisans ceased.

Nonetheless, the Dutch court ruled in 1921 that the shooting of town leaders as a warning to potential partisans constituted a crime under international law. The court’s reasoning was that an army going through enemy territory cannot shoot innocent people, or anyone under its control whether innocent or not. The court said that the shooting of innocents, or even of guilty parties without some form of suitable trial to establish guilt, cannot be part of state or military policy under international law, and necessarily is, instead, a crime, under international law.

As we have stated previously, however, the German government does not accept that the tribunals of foreign governments can establish the rules governing what it is legal or not legal for the German government to do. Therefore, the decision in Van Devent v. Hohenzollern cannot govern German soldiers in the performance of their duty. In the present case, moreover, and regardless of what the Dutch court said can or cannot be part of state policy, it is clear that transporting Jews to Auschwitz is the state policy of the German Reich, in accordance with the will of the Fuhrer and the decisions of the Wansee Conference, which he has approved. It is equally clear, as stated in our memorandum of December 15, 1941, that it is Germany’s state and military policy to fight a war of annihilation against the Bolsheviki on the eastern front.

The mode of transportation to Auschwitz melds the two state policies: it transports enemies of the German people (the Jews) to Auschwitz for annihilation, sometimes after a suitable period of working in mines and factories for the Third Reich, while minimizing interference with the transportation of tanks, guns, ammunition, food, etc. to German troops fighting a desperate war against the Bolsheviki on the eastern front.

Because war against the Bolsheviki and annihilation of the Jews are both high state policies, and the transportation of the Jews is done in a way that carries forward that policy while minimizing interference with the policy of war against the Bolsheviki, it is our opinion that the transportation, as carried out, cannot and does not violate any rule of law.

Our opinion is limited to the facts as you have described them to us, and is not intended to cover any different or altered facts.

Please let us know if we can be of further assistance.

Joseph Alstotter
Chief of Section of Legality

From the foregoing short invention, whose style, character, techniques and aims mimic many a legal memo and in particular mimic the four torture memos, one can readily grasp a lot. The short invented memo exemplifies the kind of language used in the four Department of Justice memos: formal, legalistic, bloodless, designed to camouflage the most horrible conduct in abstract formulations. It mimics the acceptance, use, and non-questioning of facts and arguments that have been provided by the persons who seek the legal opinions for their own protection. It mimics the torture memos’ use of legal materials to approve monstrous actions, which is done at phenomenal length in the four torture memos (as if extreme long windedness can substitute for rightness). It mimics the transparent goal of trying to clothe the most awful actions in high sounding reasons of state in order to justify such actions under the law. It mimics the four memos’ (obviously guilt-caused) effort to escape responsibility as much as possible by saying it is confined to the facts given to the writer. It mimics the self referential technique of referring to prior memos from the same office which say the same things. It mimics the four memos’ claim that the most horrible acts are performed in a way that supposedly causes no pain -- which the authors of the torture memos have no real way of knowing since they were not themselves subjected to the techniques nor even present to see their effects. It mimics the claim that acts are overseen by medical personnel. It shows how, as in the four memos, the techniques of writing and law can be used to justify the most horrific conduct while pretending to be an exercise in legitimate lawyering. It shows why the New York Times said, on Sunday, April 19th (as has been said here in part in previous postings):
These memos are not an honest attempt to set the legal limits on interrogations, which was the authors’ statutory obligation. They were written to provide legal immunity for acts that are clearly illegal, immoral and a violation of this country’s most basic values.
It sounds like the plot of a mob film, except the lawyers asking how much their clients can get away with are from the C.I.A. and the lawyers coaching them on how to commit the abuses are from the Justice Department. And it all played out with the blessing of the defense secretary, the attorney general, the intelligence director and, most likely, President Bush and Vice President Dick Cheney.
And it mimics the transparent fact, or at least it would if it had been written “for real” instead of only to enable readers to understand the nature of the torture memos, that the authors of the torture memos are monsters disguised as human beings.

PART II

I recently read the 2009 book by Neal Bascomb called Hunting Eichmann. I learned a lot I had not previously known; the lack of knowledge was due both to my own failure to read (or to remember if I did read) and to the failure of the mass media to focus on or write about matters it should focus on and write about (or broadcast).

So it was all news to me that after World War II the Church participated in sneaking Nazis out of Europe -- getting them to Argentina, for example -- via so-called “ratlines.” The very worst of the worst, like Eichmann and Mengele, escaped Europe this way. The idea that the Vatican was involved in this is mind boggling, hardly believable. Yet it happened apparently.

It was also news to me that there was a large, a huge, number of Germans in Argentina after the war, many apparently being Nazis and many apparently being involved in hiding Nazis or helping them to hide. From reading Bascomb’s work, it seems obvious, moreover, that lots of the Germans in Argentina knew Eichmann was there and exactly who he was. Eichmann even had weekly meetings for awhile with one fellow, a Dutch writer who had been in the SS, to extensively relate (and, where necessary, dredge up) his recollections for purposes of an eventual biography and magazine series.

One sort of understood previously that there were a lot of fascists in Peronista Argentina, but one did not know that the Argentine government was aware of but denied that Mengele was there.

Being weaned on a diet of propaganda about the greatness and value of Konrad Adenauer and his West German Government, one did not know that former Nazi officials were one-third of his cabinet, a quarter of the legislature (the Bundestag), much of the civil service, the judiciary and the foreign ministry, numbered eight ambassadors, included Hans Globke, who was Adenauer’s national security adviser, a major figure in West German intelligence, and it’s chief liaison with the CIA, but who had also been the writer of the Nazi interpretation of law that had “stripped German Jews of their citizenship,” and also included Theodore Oberlander, a former Waffen SS officer “who had once demanded the extermination of the Slavic people” but (ironically) was now Adenauer’s minister for refugees.

Perhaps it is little wonder that there had been an outbreak in anti-Semitic acts in Germany in the late 1950s and a party with pro-Nazi sympathies was gaining ground then.

Naturally, Adenauer, and Germany had no interest in revelation of the Nazi pasts of so many German officials. So, though one hadn’t known it until now, the German government had no interest in catching Eichmann or in seeing him brought to trial. For this might have caused all the German Kurt Waldheims to be revealed (if you remember Waldheim).

Nor did one know that the United States had absolutely no interest in catching Eichmann. During the 1950s the U.S. was completely absorbed in the Cold War and in stopping the Russians. Many former Nazis who had worked for Eichmann were spying for us, the CIA had ties to Globke, and though Bascomb doesn’t mention it, we were using the Nazis’ rocket scientists, like Wernher von Braun, to build our ICBMs. (One wonders what future historians will one day say about this. Do you, by the way, remember Tom Lehrer’s lines: “I just send them up. It’s not my business where they come down, says Wernher von Braun.) There was no American desire to catch a horrendous Nazi war criminal whose arrest and trial might put a spotlight on America’s ties to Nazis.

Nor, remarkably enough, did Israel have much of an interest in trying to find Eichmann. Its clandestine service, the now feared Mossad, was at the time relatively new and tiny. It could not check out every rumor which arose -- there were many, mostly wrong -- about the alleged whereabouts of Eichmann, Mengele, Bormann and other Nazi criminals. Israel faced existential threats from Egypt and other Arab countries; the state and the intelligence service had to deal with those. The Holocaust was a subject too painful to discuss for the quarter of the population who were survivors; they rarely spoke of it and did not want to focus on it.

That a few people -- Simon Wiesenthal, German prosecutor Fritz Bauer (who was Jewish) and some others -- persevered in looking for Eichmann in the face of the disinterest of various countries is a fairly remarkable story. But they did persist, and eventually word reached Israel’s Prime Minister, David Ben Gurion, of a solid tip that Eichmann was in Argentina and of precisely where he was located. Ben Gurion authorized the Mossad to capture him and bring him back to Israel to stand trial.

Ben Gurion knew that it was necessary not to allow the world, or the Israelis themselves, especially the young, to forget what the Nazis had done, and to remind the world to be on guard against future repetitions. “The world,” as Bascomb puts it, “would be forced to remember the assembly line of death that the Jews had faced -- and it would be reminded that such horrors must never be allowed to be repeated.”

When the Israelis had Eichmann in captivity, he made some points (as he had to the Dutch writer) that stick with one. As has become proverbial for the Nazis, he insisted he had done the right thing because he was simply following orders. He did not himself make the decisions for death, he insisted, but was commanded to carry them out and did as he was ordered. ‘“[A]s a recipient of orders, I had no choice but to carry [them] out.”’ He had thereby served the cause of the German people, and was proud that he had done his job well. As he told his Dutch biographer with regard to Holland: “‘I sent my boxcars to Amsterdam and most of the 140,000 Dutch Jews were directed for the gas chambers at Bergen-Belsen, Sobibor and Auschwitz . . . . It went beautifully!’”

Eichmann’s trial had various effects, some perhaps foreseen by Ben Gurion. Let me quote from Bascomb:

David Ben-Gurion had achieved his ambition. The trial had a profound impact on Israel. It unified the country in a way it had not been unified since the 1948 war. It educated the Israeli public, particularly the young, on the true nature of the Holocaust. And, after sixteen years of silence, it allowed survivors to openly share their experiences. The trial also reinforced to Israelis that a sovereign state for Jews was essential for their survival.

As for the rest of the world, the Eichmann affair rooted the Holocaust in the collective cultural consciousness. The intensive coverage and the wave of Eichmann biographies and fantastic accounts of his capture contributed to the process.

* * * * *

The Holocaust was finally anchored in the world’s consciousness -- never to be forgotten -- by the outpouring of survivor memoirs, scholarly works, plays, novels, documentaries, paintings, museum exhibits, and films that followed in the wake of the trial and that still continues today. This consciousness, in Israel and throughout the world, is the enduring legacy of the operation to capture Adolf Eichmann.

* * * * *

Bauer and his fellow West German prosecutors arrested a host of former Nazis implicated in the atrocities, including several of Eichmann’s deputies. Right up to his death in 1968, the Hesse attorney general cracked down on German fascist groups and campaigned vigorously to unseat former Nazis from power, including Globke. He continued to prosecute war crimes, most famously in the 1963 Auschwitz trials.

I would add my understanding (which is correct, is it not?) that the Eichmann trial caused German youth to begin asking their elders the now proverbial question “What did you do during the war?” i.e., began the questioning, of prior actions, which helped importantly in making Germany the free, peaceful and democratic nation it is today.

In America the Eichmann trial seems to have had an enduring legacy, comprised of vastly increased attention to the Holocaust by both Jews and non-Jews. This is captured in the second of the two quotes above, the one which begins “The Holocaust was finally anchored in the world’s consciousness.” Perhaps it has not been sufficiently anchored in the world’s consciousness, because we have since had other mass slaughters in the former Yugoslavia, Darfur and Rwanda. And those who oppose Israel for going too far seem not cognizant that the “race memory” of destruction -- for millennia, actually -- is likely one of the things driving Israel (at least in my (perhaps limited) opinion). But notwithstanding that its memory was not sufficient to stop later holocausts in Yugoslavia, Darfur and Rwanda, the Holocaust is lodged deeply in much of the world’s memory now, as is the idea that the Eichmannesque justification, the Naziesque justification, that one was just following orders is not permissible, is no justification, when people do evil.

Thus, one of the lessons of Hunting Eichmann is that much that was valuable occurred when something was done which several nations had had no desire to see done - - neither Germany, nor the US, nor even Israel had had much of an interest in catching and trying Eichmann and, in some instances, as Bascomb discusses, had resisted or declined efforts to pursue him because leaders or officials of the nations had thought pursuit, trial and punishment of Eichmann would not fit national interests. History has shown, I believe, that the leaders and officials who thought this, who resisted or declined efforts to bring this evildoer to justice, were wrong.

PART III

When these posts were initially conceived, I thought to write solely about what is happening with regard to torture. But it has become clear in the last few weeks that the points relate not only to torture itself, but also to the decision not to release the pictures of it and to the question of the ever larger war we are fighting in Afghanistan. This became especially obvious as I reread, took notes on, and created an outline of questions for what became a two hour television interview about, and conducted the interview about, a recent book entitled Lessons In Disaster, by Gordon Goldstein: the book focuses on the life and disastrous conduct of McGeorge Bundy during the period 1961-1966, when he was the National Security Adviser first to John Kennedy and then to Lyndon Johnson. It also discusses, of course, Kennedy and Johnson themselves as well as other advisers, e.g., Robert McNamara and George Ball. (The interview will be shown on Comcast and on other TV outlets and will be streamed on the web.)

It seems to me clear beyond peradventure, as they say, that what Obama is doing with regard to torture, the pictures and Afghanistan is that he is temporizing, is playing both ends against the middle, is trying to ward off opposition from the conservative to right wing side of the political spectrum as much as possible. In a sense, one might be thought hard pressed to blame him for temporizing. His domestic agenda seems the most ambitious since Johnson or even FDR. Much or most of it -- e.g., healthcare, economic regulation, the environment -- is long overdue and of enormous importance. So why do anything that could gain him more enemies? To avoid that, placate the CIA, the military, the right wing, by announcing that persons who committed and participated in torture will not be prosecuted because they were doing as instructed. Eschew all investigations -- on the claim that we must look onwards, not backwards -- insofar as you can get away with this. Don’t release the pictures. (The defacto governmental admission being that they cast us in so bad a light -- we have pictures worse than those from Abu Ghraib, Rumsfeld said a few years ago -- that they will (understandably) enrage the world against our soldiers, so we had better hide them.) Increase the number of men we have in Afghanistan (and bomb it more (so that more civilians will be killed).) Welcome -- enlist? -- the efforts of Democratic legislators who are willing to foster delay, perhaps leading to ultimate complete dropping of the issue, by saying nothing should be done about the torture until various additional investigations are completed many months (or even years?) from now. In general, do everything you can to keep torture off of the national agenda, or at least tamped down as much as possible in the national mind. (Meanwhile, give trillions to the culprits who caused the present national economic disaster.)

Obama’s mindset here, his Administration’s mindset here, his and its problem in these regards and the mindset and problem of various Democratic leaders would seem to be the prototypically American one. They do not know, do not care to know, and don’t give a damn about history. What we are seeing here has all happened before, if in even worse ways. No knowing or caring that it has all happened before, and is likely to happen again unless culprits are punished, not knowing history, is what facilitates ignoring the problem now.

In Nazi Germany and Stalin’s Russia, men (and women) did what they were told, just like the Administration claims CIA people did. Need one say that the results of this in both countries were too horrible to contemplate. At Nuremberg the defense of such people -- the Eichmannesque “I was just following orders” -- was rejected, was adjudicated to be no defense in the face of horrendous unlawfulness. Yet here is Obama, or his Administration, saying CIA types will get off scot free because they were just following orders. And if they get off, its dollars to doughnuts that the ultimate meaning of this is that the higher-ups and the lawyers will get off too.

You know, it’s not as if CIA people and others didn’t know that what they were doing was dead wrong. It was precisely such knowledge of illegality and immorality that led FBI people and the FBI as an organization to say they wouldn’t participate in the torture. Ditto David Brant and his NCIS. Ditto all the lawyers and others who warned the criminals and their superiors right up to Rumsfeld, Cheney and Bush that what was being done was wrong and illegal.

One did not have to be a genius to know that what was being done was torture and abuse and wrong. Nor does one have to be a genius to know now that the people who still defend it as possibly not being torture are only people of malevolent and evil mind, are Cheneyesque, are lawyers of the kind who will try to legally justify anything bad so long as it is done by government or the wealthy or the powerful. Training which disposes Americans to treat arguments seriously because put forth by supposedly reputable people like this sometimes gets in the way of recognizing these people’s arguments for what they are: sheer evil, sheer drivel no matter how legalistically launched or formulated (like John Yoo’s memos).

People also forget that the Nazis and Stalin not only committed evil, and not only enlisted lawyers and judges in their crimes, but also enlisted doctors. So did the American torturers.

People like Cheney and Yoo and so many others defended and often still defend torture on the basis of what they think are good reasons of national security. Cheney and Yoo are particularly vehement about this currently. (Personally, I would favor releasing the memos that Cheney claims we should see.) But people forget that the Nazis had what they thought were excellent reasons for their actions (as shown in Parts I and II of this post.) So did Stalin and his minions. So for that matter did Johnson and McNamara and Bundy and Rusk and Nixon and Kissinger. But the claim of good reasons for evil does not change evil into good. Nor did the supposed good reasons justify what any of these people did.

People forget -- most never knew -- that in the absence of prosecution and punishment of American wrongdoers, and in the presence of an extraordinary amount of domestic propaganda supporting them, Americans have been perpetrating crimes of one type and another from the Philippines Insurrection through the Mossadegh and Arbenz affairs, through Viet Nam, through the Chilean affair, through Iraq II. People forget that Germans were punished, even hung (so too Japanese), and those nations then stopped doing what they were doing, even came to revile aspects of their past, and became peaceful countries. Americans have never been tried and convicted for what they did except for a few like Calley and Iran Contra types, so we never stopped doing what we have been doing.

Americans forget -- most have never even recognized, I would wager -- that the pardon of Richard M. Nixon (as well as the soft treatment of the Calleys and Iran Contra types), and the failure to prosecute war criminals of Viet Nam like Johnson, McNamara, Bundy, Rush, Rostow, Nixon and Kissinger, set the stage for repetitions of their crimes by future American leaders, who could rest assured that they could do these things without fear of prosecution and could always claim, if surprisingly confronted by a prospect of prosecution, that their opponents are trying to legalize politics although the truth is exactly the reverse, the truth is that people like Cheney are trying to politicize law. (Whereas German and Japanese leaders -- people who lead countries whose heads had been prosecuted and hung or jailed for their crimes, would never dare to try to repeat the actions of the past.)

And, when one sees what we are attempting to do in Afghanistan -- for over 2,000 years the graveyard of empires from Alexander to the British to the Russians and, one would fear, in future the Americans -- one cannot help suspecting that, like the people who took us into Viet Nam, the Johnsons, Bundys, McNamaras and Rusks, our current leaders have no plan, but only an insupportable hope that doing more of something or other will gain us victory, the same kind of insupportable, analysis-free hope that cost us 58,000 dead in Viet Nam when Johnson began to listen to the military -- as Obama seems to be doing but Kennedy after the Bay of Pigs refused to ever do again, as Goldstein points out.

And, people forget -- I think most have never realized or understood -- that as shown by Viet Nam, by 9/11 and its aftermath including the war on terror, by torture and by Iraq II, leaders use torture and war as substitutes for competence. Lacking competence -- lacking relevant knowledge and intelligent analyses that would enable them to resolve problems peacefully (e.g., lacking relevant knowledge of the Viet Namese, of Al Qaeda’s plans, of the situation in Iraq, etc.) -- leaders resort to war and torture instead. They are too ignorant or dumb to do the right thing, so they resort to the wrong thing.

So . . . . . . . one understands that Obama is temporizing in the hope that, by thereby reducing opposition on the right, and by keeping the focus strictly on his domestic agenda and off of torture and Afghanistan, he will achieve his domestic goals. But temporizing will not work. In the long run it leads to people doing ever worse things in the future, because they know they will not be prosecuted. Thus, first Viet Nam and then torture and Iraq II. And in the short run it is likely that Obama -- who frankly seems like a naïf in this respect, perhaps once again because of a lack of knowledge of or concern for history -- will learn that his enemies will remain his enemies, and his opponents will remain his opponents, because there is an ideological gulf that they do not care to cross. We have already seen this, of course, and continue to see it, on the stimulus, on war in Afghanistan, on abortion, on the upcoming Supreme Court nomination, and we are certain to see it again and again and again on issues yet to come.

In regard to ideological opposition, Obama’s experience arising from a unique ability to unite blacks and whites of good will may have left him totally unprepared to deal with bitter ideological opponents who lack good will and who, rather than wishing to be persuaded, ardently wish not to be persuaded. (Those who have had a different life experience than Obama when it comes to this sort of thing may understand it a lot better than he, although it would be better if he were right and they wrong, which seems to me sadly unlikely.) All that Obama is likely to accomplish by his efforts to placate his opponents by temporizing is to aggravate his own base and thereby lose support he strongly needs to enact the programs he is pushing for, and to overcome the bitter opposition he already is facing and which his enemies will seek to grow, are already and ardently seeking to grow. Obama, frankly, should be far more concerned about not alienating the people who are on his side by fighting wars and not going after torturers, who have disgraced us both legally and morally.

You know, people my age have been compelled to live through war after war fought by, and invasion after invasion launched by, this falsely-thought-peace-loving country: Viet Nam, Cambodia, the Dominican Republic, Granada, Panama, Lebanon, Gulf I, Gulf II, Afghanistan. We have had to watch as the right wing and its fellow travelers, often successfully, fought civil rights, fought health care, fought regulation, controlled the Congress, packed the Supreme Court, made getting rich the supreme desideratum of this country, and enshrined uncabined greed as its major cultural goal. We are sick of all this. People younger than us have themselves seen much of the same stuff and likewise are sick of it. People who want to see change for the better in this country are the core of Obama’s base. When facing the kind of bitter end opposition that he is going to face on so many issues -- because there is so much he wants to change -- it is unwise in the extreme to alienate the core of the people who want to help you. The last thing Obama needs (or the country needs) is for his temporizing, his efforts to placate the conservative bitter enders in one field after another, to result in his core supporters saying “To hell with him. We are going to sit on our hands, because he is no better than, no different from, the other politicians whom we have come to despise over the decades because they have for decades taken the country downhill in so many ways and for their own selfish, hypocritical purposes.”*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

The Concept of Net Equity Being Used by the Trustee and SIPC

2009-05-15T11:27:00.001-04:00

May 15, 2009

Re: The Concept Of Net Equity Being Used By The Trustee And SIPC.

I have read the descriptions by Helen Chaitman and Richard Shapiro of their meeting with Thomas McGowan of the SEC, Picard’s written statement published in Dealbook, and various comments by members of the Google groups about the oral statements by Picard and Harbeck (which I did not hear but which, one gathers, pretty much tracked the written statement in Dealbook). Having read these things, permit me to make a few comments.

The Trustee seems to be relying heavily on the 85 year old decision in Cunningham v. Brown. A number of us don’t understand this. That decision, in relevant part, held only that, in the circumstances existing there, some payments were unlawful preferences. Why that reasoning supports Picard’s definition of net equity escapes us. Beyond that, it is entirely possible, I would think almost a certainty, that the legislative history of SIPA, enacted for specific purposes 46 years after the Cunningham case, would override any tortuous logic about that case on which Picard may be relying. I myself have not read the legislative history of SIPA, but there are persons who have, and I would bet they have found statements showing that the legislative history is inconsistent with and overrides whatever Picard’s and Harbeck’s tortuous reading of Cunningham may be.

One can also see, quite readily, that the concepts of preferences and net equity are not necessarily related. Net equity is a SIPA concept, preferential payments are a bankruptcy concept. Moreover, even when numbers are brought into the matter, the two concepts can remain unrelated. You can have a positive net equity no matter how it is calculated and yet be liable to clawbacks of preferential payments. You can have a negative net equity no matter how it is calculated and yet be liable to clawbacks of preferential payments. You can have either a huge positive or a negative net equity no matter how calculated and not have received preferential payments, etc. etc.

It thus seems pretty clear that, to the extent Picard and Harbeck are relying on the 85 year old Cunningham case, they are to this extent intellectually bereft. It is, moreover, completely illegitimate to distort the concept of net equity for the purpose of increasing potential clawbacks, which is what Picard seems to be doing here, as extensively discussed below.

This is not to say that Picard and Harbeck necessarily are totally bereft of prior judicial precedents. My recollection is that, elsewhere than in the Second Circuit, which is governed by New Times (a case Picard treats as a nonperson, so to speak), there are a few district court cases (in Florida and California if memory serves) which have not awarded phantom profits. But those cases are inapplicable in the Second Circuit, because New Times controls there.

To get to the underlying nitty gritty of the matter, it seems that the following must be Picard’s and Harbeck’s real reasons for defining net equity as they do: (i) Their definition minimizes the extent to which SIPC has to pay money, since it means far fewer people than otherwise will be eligible for a full $500,000 (because, for example, their November 30th statements may exceed their “cash out” by a million dollars, while their “cash in” may exceed it by only $100,000, thus lowering their SIPC payment from $500,000 to $100,000). And (ii) their definition of net equity enables Picard to claw back more, especially from smaller accounts. A small investor may, for example, have put in $500,000, had a November 30th account showing $1,150,000, and before 2008 have taken out $600,000. (The six month bankruptcy preference won’t reach the $600,000 because it was taken out before 2008.) Under the legitimate expectations argument, the investor is not subject to clawback because his November 30th statement showed $550,000 more than he took out prior to 2008. ($1,050,000 minus $600,000 equals $550,000.). Under Picard’s cash in, cash out theory the investor is subject to clawback of $100,000 because he took out $600,000 but put in only $500,000.

It seems obvious that it is illegitimate in the extreme for Picard and Harbeck to use a rigged definition of net equity in order to lessen the amount people receive from SIPC and to create clawbacks where they otherwise would not exist. This is obvious as a matter of logic and fairness, and one suspects the legislative history of SIPA shows this as well.

Let me make a final set of points. Having read Picard’s statement in Dealbook, being familiar with some prior comments he has made, and believing that his legal logic and his reliance on Cunningham are at best very weak, it seems to me Picard and Harbeck ultimately will be driven to rely on the following argument in discussions with the SEC and in arguments in court. (The quotes are from Picard’s statement in Dealbook): The Madoff Ponzi scheme is “the largest and most complex securities fraud in history.” It “presents many unique difficulties rarely encountered.” It therefore requires a different definition of net equity that will allow Picard to claw back as much as possible in order to assure (his definition of) fairness.

To achieve fairness when calculating net equity, “simple logic suggests that it would not be advantageous to include fictitious profits.” For “all that would be achieved is [to] increase[e] the amount of the claims being divided into the fund . . . ., thereby diminishing the percentage of recovery that all customers would receive.”

Even more importantly in regard to fairness, cash in / cash out should be used in calculating net equity because those “who withdrew more than they put in and withdrew fictitious profits, even unknowingly, actually received someone else’s money.” In this vein “allowing fictitious profits . . . . will benefit early investors but penalize later ones.” For the claims of the later investors “will largely be for real dollars” but their money “will be used to pay the earlier investors whose claims will largely be based on fictitious profits.”

To put it in brief, especially because New Times is against him (as is the legislative history also, I hope), Picard will ultimately be driven to claim that his definition of net equity, and the clawbacks which arise solely because of that definition, are the only fair way to proceed because otherwise some people will receive other people’s money and later investors are at a disadvantage. I also note that, given his views, Picard logically should and may in fact feel compelled to claw back as much as possible from everyone, except possibly a few cases where he would be seeking blood from a stone. Otherwise, by his logic, some people will be paid with other people’s money and late investors will be injured, both of which he says are precluded by his version of fairness. Picard’s current, repeated “make nice” comments, even if he really means them (which could be entirely possible, though cynics deny this), could nonetheless prove, because of his own logic, to have been merely a disguise of the ultimate course of action to which his own logic drives him, and, by such disguise, to have been merely a method of lessening the current outpouring of criticism.

Picard’s logic is not wholly unappealing if one considers it solely in the abstract. For in the abstract -- and entirely ignoring New Times, legitimate expectations, and hopefully legislative history -- who would say that a person should be paid with someone else’s money or that latecomers should be unfairly penalized? Yet when one descends from the abstract to the concrete -- and even ignoring New Times, legitimate expectations and, hopefully, legislative history -- the matter of fairness is not so simple as Picard would have it. For example, people and institutions who had scores or even hundreds of millions in Madoff, and who will get scores of millions of dollars worth of tax deductions, probably never took out money from Madoff and certainly did not take out more than they put in. They remain eligible for $500,000 in payments under Picard’s net equity formula, with the $500,000 being pocket change to them. But someone who put $500,000 into Madoff and whose November 30th account showed $1.3 million (his entire savings), but who over the years had taken out $750,000 to live and to pay the taxes on Madoff money, will get nothing even though he is in need of the money. Is it fair when the centamillionaire or billionaire gets back $500,000 and is not subject to clawback, but a person who has been wiped out gets nothing and, on top of that, may be subject to clawback?

Nor need the contrast be as stark as this example to raise the question of whether Picard’s abstract fairness translates into concrete fairness. Even if somebody had as much as two or five or even ten or more million dollars in Madoff, and now has at least enough non Madoff money to live, the contrast between Picard’s abstract version of fairness and a more thorough examination of fairness can be startling when one compares the numbers of such an individual to the numbers for the mega rich.

Nor is it necessarily true that the claims of earlier investors will not involve large amounts of what Picard calls real dollars -- money they put in. A host of early investors are making significant claims for real dollars even if part of their claims involves profits shown on their statements.

Moreover, by not including their phantom profits, Picard is in practical effect denying the fruits of their way of (so to speak) “fulfilling opportunity cost” (by investing for a long time in Madoff), whereas he is granting late investors their way of “fulfilling opportunity cost” (by investing elsewhere until recently). Why is it fair to grant the late investor the fruits of his opportunity cost strategy while denying it to the earlier investor? (I think this point has been made by a few members of the Google groups.)

There is also another fundamental question regarding Picard’s view of fairness. He says net equity must be defined without regard to phantom profits because otherwise the real money of late investors will be used to pay the fictitious profits of earlier ones. But just what does he think happened to the real money invested by the earlier ones? In fact their real money was used to pay the fictitious profits of still earlier ones. Fair and equal treatment would mean recognition that the real money of all investors (except those who invested back in the 1960s perhaps) was used to pay fictitious profits of earlier ones, and that if this is true of late investors, it is equally true of prior ones. What Picard and Harbeck are doing by using their cash in-cash out method of calculating net equity is not insuring fair treatment to late investors. Rather, they are insuring that late investors get better treatment than everyone else because the late investors’ money will not be used to pay others, whereas everyone else’s money was used to pay others -- others from whom, incidentally, there can be no clawback if they received their money over six years ago. (This was pointed out to me -- to give credit where it’s due -- by Harry Markopolos’ attorney.)

And all of this is not even to mention that late investors, unlike earlier ones, are not as likely to have taken out more than they put in, so Picard’s cash in-cash out method treats the late investors better than earlier ones on the clawback score as well.

Finally, Picard claims that if phantom profits were to be used when calculating net equity, this would permit Madoff himself to have been the arbiter of what one receives. Well, apart from Madoff’s coconspirators, who would get annual returns of 46 and 900 percent, who should get zip from SIPC and who should instead be prosecuted, most people got roughly the same percentage of phantom return each year. Also, if Picard wanted to assign all the innocent people the same percentage of compounded return each year consonant with what most got each year (a job that would be child’s play with modern computers), no one is going to object very much. But assigning an average return to all each year is far different from screwing everyone by saying that no one gets a nickel of the profits shown on their November 30th statements.

All of this, incidentally, leads back to a point discussed earlier. What are the real reasons why Picard and Harbeck are defining net equity as they are. Many think the real reasons are, as discussed earlier, to save SIPC money and to thereby enable it not to have to go to Congress for more money and not to have to further increase its assessment on the broker dealer community. I would bet that if Picard, Harbeck and their minions are deposed, and if their documents are obtained in discovery -- all of which may be entirely possible notwithstanding improper claims of attorney-client and work product privilege that will be raised by persons (e.g., Picard and Harbeck) who were not acting as lawyers but as CEOs, Trustees and other officers even though they happen to also be lawyers -- there will be extensive evidence that a desire not to go to Congress and not to levy still higher assessments on broker dealers lies at the root of what Picard and Harbeck are doing. Some who should be in a position to know have told a number of us that SIPC has a corps of “permanent Trustees” so to speak. These persons are often called upon by SIPC to be Trustees and they, as well as the officials of SIPC itself, have, it is said, a very nice life that ranges from economically comfortable to very lucrative. They want nothing to upset the applecart, which could well occur if SIPC has to go to Congress for money or has to further assess the industry.

But a desire to avoid having to go to Congress or the industry for more money, and a desire to continue a nice life, are not good reasons for defining net equity as Picard and Harbeck are doing, or for failing to seek more money from Congress and the industry in order to provide succor to people who have been badly injured and for whom the SIPA was intended to provide succor. Still less are these legitimate reasons when they harm innocent people who have already been crushed by the failures of governmental bodies such as the SEC and IRS, or quasi governmental bodies like FINRA.