Thursday, July 23, 2009

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

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.


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

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