Liquidation of Bernard L. Madoff :
Investment Securities LLC, :
:
Defendant. :
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BRIEF OF AMICUS CURIAE
The briefs of the plaintiffs, and those of other plaintiffs filed in related cases, cover several crucial points relating to the proper definition of net equity. They elaborate, for example, the legislative history of SIPA, the views previously followed and/or expressed by SIPC, and the decision in the New Times case. There are, however, some points of consequence which either have not been brought to the Court's attention at all, or have been brought to its attention only cursorily. Three such matters shall be discussed here.
1. The first is the long term consequence, when distributing the monies collected for the estate by the Trustee, of the definition of net equity adopted by SIPC and the Trustee. As is well known, their method of calculating net equity -- cash-in minus cash-out -- wipes out the net equity of many victims of Madoff who would have a positive net equity if it were based on the November 30, 2008 statements. The number of persons whose net equity is eliminated by the unusual cash-in/cash-out method of determination is likely in the high hundreds or the thousands; only the Trustee and SIPC know, and they have not said.
The consequences of eliminating a victim's net equity has generally been discussed in connection with the fact that it will correlatively eliminate a victim's ability to obtain any part of the $500,000 that otherwise would be available from SIPC. But it has another consequence as well. The elimination of a victim's net equity will also eliminate the victim's ability to obtain a share in the monies which the Trustee collects for and distributes from the estate. If one has no net equity, one will not share in the estate. (Neither SIPC nor the Trustee has denied this although it was stated publicly by amicus in his writings and although they have demanded retraction and corrections when they were of the opinion that a statement by amicus in his writings was incorrect.)
The loss of any right to share in the monies recovered for and distributed from the estate by the Trustee is no light matter. The Trustee has brought lawsuits for amounts variously estimated as ranging from approximately ten billion to approximately thirteen billion dollars. He may bring more suits for more billions. Some of the defendants he sues could prove to have deep pockets, so that success on the Trustee's part would recover billions for the estate. But if SIPC and the Trustee have eliminated a victim's net equity by use of the cash-in/cash-out method, that victim will get nothing from the monies recovered for and distributed from the estate. The victim will not share in those monies.
Making this fact even more dubious is that the persons who will not share in the estate because of the absence of net equity -- just like they will not share in recovery from SIPC itself -- are almost certain to be those who can least afford it. They are unlikely to be the very wealthy who put twenty or fifty or 200 million dollars into Madoff and did not have to, and did not in fact, take money out of Madoff in order to live and in order to pay taxes on phantom profits from Madoff. The very wealthy are unlikely to be the persons who withdrew monies for these purposes and who therefore have a negative net equity under the cash-in/cash-out calculation. Rather, the people who will have no net equity under such calculation, and who will not share in distributions from the estate (or from SIPC) are almost certain to be those of far lesser means. They are almost certain to be those who were able to put in only a few hundred thousand dollars or perhaps a million dollars, who watched this grow over one or two decades (or more) until they began taking out money to live and pay taxes in their senior years, and who now are wiped out.
It is perhaps not irrelevant that the Trustee and SIPC are the only ones who can know, but they are not disclosing, the numbers of persons who will be desperately harmed by the cash-in/cash-out method because it wipes out their net equity. The Trustee and SIPC are likewise the only ones who know, but they again are not disclosing, the numbers of very wealthy persons who will not be harmed by cash-in/cash-out because the amounts they invested, as shown in the files to which the Trustee has access, were so huge, and who will in fact obtain a greater share of distributions from the estate because the less affluent will not share in distributions due to their net equity being eliminated by use of cash-in minus cash-out.
One could think the failure of the Trustee and SIPC to disclose these comparative numbers speaks volumes.
It is fair to ask whether use of a method of calculation -- cash-in/cash-out -- which is so harmful to so many comports with Congress' clearly expressed intent, discussed in other briefs, that SIPA help restore confidence in markets (rather than be used in a way which destroys confidence by dramatically injuring small investors).
2. There has been extensive dispute, in public writings and in briefs filed in this case, over the reasons for and the propriety of using the cash-in/cash-out method of calculating net equity. On the side of the Trustee and SIPC the major arguments appear to be that using the November 30th statements to determine net equity would allow the fraudster to determine individuals' returns and to do so with arbitrary favoritism, would open the door to arbitrary returns unhinged from reality, and that investors who took out all that they put in or more than they put in (so-called net winners) should not get more money when there are persons who left their money in Madoff and are so-called net losers. On the other side it has been argued:
- that persons who innocently took out monies had a legitimate expectation that the money was theirs and a legitimate expectation that the amounts they still had in Madoff were the sums shown on their monthly statements;
- that such persons are often the least affluent of Madoff's victims, therefore had to take out monies to pay living expenses and to pay income tax on phantom profits, are now often destitute, and should not be further victimized by denial of their legitimate expectations;
- that New Times set its face against use of cash-in/cash-out instead of brokerage statements where real securities were the ones the fraudster claimed to be buying;
- that SIPC officials told courts and the public that SIPC would credit a person with the amounts shown on his/her monthly statement even if securities had never been bought;
- that the Trustee has been able to identify only a miniscule number of people who benefitted from returns higher than those given the vast majority of investors and that the miniscule number of special beneficiaries were all culpable participants in the fraud in one way or another and should therefore receive nothing from SIPC;
- that rather than returns being arbitrarily different among the vast majority of investors, they appear to have been pretty much alike and, were it otherwise, there are standard measures of returns that could be used to avoid arbitrariness[1];
- and, of special importance to the question of discovery to be discussed below, that the real reasons SIPC and the Trustee adopted the cash-in/cash-out theory were that use of the November 30th statements would cause SIPC to have to pay out amounts of money far greater than it possessed or even had access to, and that this would have caused difficulties for SIPC, for its management (which might have been replaced), and for the Wall Street brokerage community that comprises the membership of SIPC and would have had to be assessed large sums of money.[2]
The question raised in the last bulleted point above -- the question of the real reason(s) why SIPC and the Trustee adopted the cash-in/cash-out theory to determine net equity in this case -- is of the first importance. For if SIPC and the Trustee did adopt cash-in/cash-out here in order to avoid huge problems for SIPC and its management that would arise from the standard practice of using amounts shown in brokerage statements, then this would show the following, conclusively or nearly so: it would show that, for the financial and business purposes of aiding SIPC, its management, and the brokerage community, cash-in/cash-out was used here even though its use frustrated Congress' intent to help investors obtain their legitimate expectations.
