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General News    H3'ed 4/21/09

Feeder Funds And The SIPC

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Message Lawrence Velvel

 

Speaking candidly, I am going to pursue this plan pretty much by myself for a few weeks, in order to see whether it initially gets a good or bad reception.  If it gets screwed up at the beginning, I want to be the one who screws it up, rather than having it screwed up by people with whom I am in disagreement, to put it gently.  Regardless of whether it initially meets with a good reception or a poor reception, I will eventually let people know about it, so that they can help if they wish. But at the beginning I shall pursue it alone, while urging readers to get behind Steve Breitstone’s efforts to obtain tax refunds, which would be enormously helpful, at least to those who have paid taxes on Madoff income for a considerable number of years.

 

            Now let me turn to numbers which may drive what can be accomplished with regard to obtaining recovery for feeder fund investors through SIPC. This problem of assessing the numbers is made more difficult because only Picard, SIPC, the IRS, perhaps the U.S. Attorney’s office and/or other governmental or quasi governmental bodies can currently know or even reasonably estimate actual numbers involved.  And, if they do know the relevant numbers, they generally are not talking.

 

            But let’s assume that whoever has opined that there are 50,000 victims if one includes feeder funds is right.  Let’s further assume that, if feeder fund investors were eligible for SIPC recoveries, only half of the 50,000, or 25,000, could recover $500,000 from SIPC under Picard’s crabbed definition of net equity.  Twenty-five thousand times $500,000 is $12,500,000,000 (twelve billion, five hundred million dollars). If SIPC recovery were raised to $1.5 million (people generally use the figure $1.6 million, but I am using $1.5 million to keep the multiplication really simple), the amount of SIPC recovery would be $37.5 billion dollars.

 

            If approximately two-thirds of the 50 thousand people -- for simplicity let’s call it 35,000 of them, which is just over two-thirds -- are eligible for a full SIPC recovery of $500,000, then the amount of recovery would be $17,500,000,000 (seventeen billion, five hundred million dollars).  If the recovery was raised to $1.5 million, the total would be $52,500,000,000, (52 billion, 500 million dollars, or just over 80 percent of the total government-claimed loss of $65 billion). 

 

            Now assume that only one quarter of the assumed 50,000 people, or 12,500 people, are eligible for a full SIPC recovery.  At a recovery of $500,000 per person, the SIPC restitution would be $6,250,000,000 (six billion, two hundred and fifty million dollars), and at a recovery of $1.5 million per account, the restitution would be $18,750,000 (eighteen billion, seven hundred and fifty million dollars).

 

            Now, these figures are all very rough, very approximate.  The number of people involved is totally an assumption.  The number eligible for full recovery is totally an assumption.  That some of these or others would be eligible for only partial recovery is ignored. But even though all the figures are mere assumptions, I think the figures nonetheless give you a sense of the orders of magnitude that are involved if feeder fund investors were eligible for SIPC recoveries (orders of magnitude which, as far as I know, nobody has tried to assess before, at least not publicly).  The orders of magnitude lend numerical backing to people’s instinctive thought that Picard and Harbeck are trying to restrict and lowball investors to the maximum extent possible.  One wonders what Picard and Harbeck think will be the total SIPC payout -- what they plan for the total SIPC payout to be.  If I had to make a sheer guess, albeit one based on Harbeckian statements regarding SIPC’s ability to meet the demands upon it, I would speculate that they intend to hold SIPC’s total outlay -- its payments to investors minus amounts received from clawbacks -- to somewhere in the neighborhood of one and one-half to two billion dollars. If one calls it two billion -- which may be generous -- and one assumes the number of direct investors is a number about half way between various estimates -- let’s say the number is 10,000 direct investors - - this comes out to $200,000 per investor on average.  ($200,000 times 10,000 investors is two billion dollars.)  To confine SIPC payments to an average of $200,000 per investor, Picard and Harbeck have to be very stingy, they have to use the illegal cash in/cash out method so as not to pay anything to people who lived on Madoff earnings, they have to refuse to consider providing restitution for people in feeder funds, they have to claw back (at least from those who are not plainly innocent), and they have to fight raising the top limit of recovery from $500,000 to $1.6 million.

 

            Indeed, you can rest assured in my judgment that Picard and Harbeck will fight to the last ditch in court against any effort to change any of what they are doing, e.g., any effort to force upon them a different definition of net equity than their illegal cash in/cash out basis, and any effort to change the judicially-created definition of customer so that it would include feeder fund investors instead of excluding them.

 

            With regard to the fight Picard and Harbeck will put up in court, I understand that some of the expert SIPC and SEC lawyers who were found by the Steering Committee are expressing concern that Picard is now turning down investors whose lawyers (if any?) will not be versed in the law of SIPC, of bankruptcy, of securities regulation.  The fear is that the first appeals will therefore be taken, and the governing precedents will be set, in cases which match highly experienced, very knowledgeable lawyers for SIPC and Picard against lawyers who are basically ignorant of the relevant fields of law. This is a serious matter.  It is not to be treated lightly. 

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Lawrence R. Velvel is a cofounder and the Dean of the Massachusetts School of Law, and is the founder of the American College of History and Legal Studies.
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