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 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.