Monday, February 21, 2011

The Effect Of The Garrett Bill On Indirects

Dear Colleagues:

Allow me to make some points that, as far as I know, no one else has made with regard to the beneficial effect of the Garrett bill on indirects. These effects exist though the bill does not mention indirects.

The indirects have, of course, invested through intermediaries - - through funds, banks, etc. Under Garrett’s bill, as I understand matters, those funds and banks are customers and will be as eligible as any other customer to get back money from customer property. That money, under the Garrett bill, will be calculated under the final statement method, if the funds, banks, etc. are innocent. If they are not innocent, Picard could, I think, choose to calculate it under CICO, though I wonder if he would do so if the funds, banks, etc. agreed in advance to return all the money to defrauded indirect investors, as they should. Thus, if the indirects’ funds are innocent, and the Trustee is anywhere near as successful as he claims he will be - - he claims he may recover $45 billion - - the indirects, under the consequences of the Garrett bill, would get [all] their money back from customer property, up to the amount of their final statements, even though they would not get advances. If the banks are not innocent, they may get back and distribute only their cash-in, unless investors can prevail upon Picard - - as I actually think may be possible for a variety of reasons - - to use the FSM for funds that agree in advance to return to defrauded indirects all the money the funds get from customer property.

What if, however, a fund is potentially one of those which Picard claims is not innocent, i.e., the fund knew or should have known something was wrong. Well, if the fund took no money out (or took out less than is shown in its final statements), then, I believe, it will still get back money from customer property, although (i) the amount it receives may be based on CICO unless, as said, Picard can be persuaded to use the FSM if monies recovered by the fund will be forwarded to the indirects, and (ii) the fund likely will be subjected to clawbacks to the extent it took out money. In connection with such funds getting money back, it is my belief (not a recollected certainty, but only a belief) that Picard or his minion have said that the claims of funds against customer property will be recognized unless the fund was one of the truly egregious culprits in terms of aiding the fraud though it should have known there was a fraud.

But what if a non innocent fund took out more money than is shown on its final statement? Well, assuming the fund was not one of the truly egregious ones, I believe that although Picard will seek to claw back from it, the fund will still have a claim against customer property. (This, as I remember (I am in Florida without access to the relevant papers), was what occurred in the settlement with UBP (or was it UBS?), where the claim Picard recognized was, as I recollect, about 250 million dollars greater on a CICO basis than the payment to Picard from the bank.) So, at least where the fund or bank is a large one with the resources to pay Picard (as many likely are), it will get back from customer property sufficient monies to pay back their Madoff losses, on a CICO basis and maybe on an FSM basis, to its indirect investors (who (unlike directs) would have lawsuits against it, in all likelihood, if they are not paid by it).

But what if a non innocent fund or bank is one of the egregious ones? I suspect Picard may not recognize its claim for customer property, so its indirect investors will not be able to recover in this way.

If my views are correct about the necessary effects of Garrett’s bill on indirects, the bill will prove beneficial to many of them even though it does not mention them. Many of them - - perhaps even most? - - would end up receiving either the full amount shown on their final statements or the amounts they actually invested. The questions which should be inquired into, therefore, are these: (1) Will Picard in fact recover 45 billion dollars so that he can pay everyone in full from customer property under the FSM? (I am assuming (and could be wrong) that $45 billion will do the trick, since I believe the Trustee claims the total ESM losses to now be only $45 billion because he has subtracted the no longer extant huge claims of persons and institutions with whom he has settled, e.g., the Picowers, the Shapiros, etc.) (2) When will the Trustee’s recoveries reach somewhere around $45 billion? (3) When will the Trustee start passing out money - - he has said, if I remember correctly, that he will be submitting a plan of payment this spring, but when will payments start under that plan? (4) Will Picard agree to use the FSM method for non innocent funds that agree to pass through to innocent defrauded indirects all recoveries from customer property? (5) What funds and banks will be regarded as so egregious that the Trustee will seek to avoid paying them anything - - i.e., he will refuse to recognize their claims against customer property - - so that their indirect investors will not be able to recover from customer property via their intermediary funds?

I think it would behoove everyone, especially including the indirects who presently are threatening to try to scuttle the Garrett bill, to focus on these questions rather than on trying to destroy the Garrett bill. For the consequences of the bill could be very favorable for the indirects even though it does not mention them.