With such a major question at stake, it would seem plain that discovery should be had to shed factual light on the question. It equally would seem insufficient to rely on mere (unsworn) claims one way or the other. The factual truth, rather, should be established by document discovery and depositions.
True, there are those on the plaintiffs' side who believe that the plaintiffs' arguments based on legislative history, New Times, prior SIPC statements and SIPC actions regarding net equity, and the case law of legitimate expectations are all so strong that discovery of SIPC's motivation here is unnecessary and could not change the result no matter what is found -- could not change the result even if discovery were to show that SIPC did not adopt cash-in/cash-out because of a desire to save itself, save its management, and aid the brokerage community while sacrificing the interests and legitimate expectations of investors. Truth to tell, as a matter of personal belief, amicus agrees with that. Nevertheless, discovery is necessary in order to establish the truth about SIPC's motivation one way or another, and could be of aid not only to this Court, but to all reviewing courts, in understanding how and why SIPC and the Trustee came to eventually adopt cash-in/cash-out[3] and in understanding the impact of this on Congress' intent.
Discovery would also shed factual light on other relevant points. It would show, for example, how many of Madoff's victims will have their net equity wiped out by use of the cash-in/cash-out method, how many such victims could be considered to be among the less affluent ones because they only put in a few hundred thousand dollars or, over time, no more than one million dollars or so, how many Madoff victims whose net equity is not eliminated by cash-in/cash-out could be considered among the very wealthy (e.g., persons who put, say, fifteen or twenty million dollars or more into Madoff), and the extent to which the very wealthy, whose net equity will not be wiped out, will receive more from the estate because the net equity of the less affluent will be wiped out.
3. Visconsi v. Lehman Bros. Inc., 244 Fed. Appx. 708, 2007 WL 2258827 (C.A.6) (Ex.) involved a notorious fraud perpetrated by Frank Gruttadauria. Gruttadauria's fraud was very analogous to a Ponzi scheme, since he used investors' money for his own purposes instead of investing it as promised, and "When a client would request all or a portion of her investment funds, Gruttadauria would transfer money from one client to another" in order to meet the request. Ex., p2. ("Throughout this period, Plaintiffs made periodic withdrawals from their accounts amounting to 25.8 million, which Gruttadauria paid "using funds from other clients." Ex., p. 3 (emphasis added).)
Like Madoff, Gruttadauria "hid this extensive fraud by sending false account statements to his clients, which purported to summarize their respective investment portfolios." Ibid, p.2.
The investors in the case invested $21 million with Gruttadauria. Over the years they withdrew $31.3 million, but at the end their account statements, due to phantom profits, showed $37.9 million (when in reality their accounts had only a few thousand dollars.) Ibid., pp 3, 5, 6. Lehman Bros., which had been Gruttadauria's employer, argued for an "out-of-pocket theory of damages," a theory which the Sixth Circuit found to be "wholly without merit." Although the appeal sought to overturn an arbitration award, so that much of the court's opinion was therefore devoted merely to the usual statements about the difficulty of overturning such awards absent manifest disregard of law, the Court was declarative and definitive with regard to the impropriety of the out-of-pocket measure of damages with regard to the Ponzi-like fraud committed by Gruttadauria:
Lehman's out-of-pocket theory misapprehends the harm suffered by Plaintiffs and the facts of this case. Plaintiffs gave $21 million to Gruttadauria, not to hide under a rock or lock in a safe, but for the express purpose of investment, with a hope-indeed a reasonable expectation-that it would grow. Thus, the out-of-pocket theory, which seeks to restore to Plaintiffs only the $21 million they originally invested less their subsequent withdrawals, is a wholly inadequate measure of damages. Had Gruttadauria invested Plaintiffs' money as requested, their funds would have likely grown immensely, especially considering that Plaintiffs invested primarily throughout the mid-1990s, which, had they hired an honest broker or a watchful company that reasonably supervised its employees, would have placed their money in the stock market during one of the strongest bull markets in recent memory. In fact, the fictitious statements issued by Lehman, which were designed to track Plaintiffs' funds as if they had been properly invested, indicate that Plaintiffs' accounts would have grown to more than $37.9 million (even accounting for the withdrawal of more than $31.3 million). Plaintiffs thus could have reasonably believed that they were entitled to the full $37.9 million balance shown, regardless of the amounts of their previous deposits and withdrawals. We therefore reject Lehman's argument because it is founded on an improper-and wholly inadequate-measure of damages.
The question in Visconsi, of course, was the proper measure of damages and the question here is the proper measure of net equity. But the two questions are in reality the same because they both came down to what is the proper way to measure the amount remaining to an investor in a Ponzi or analogous scheme where the investor put in money, took out more than he put in, but thought he nonetheless had extensive amounts remaining in his account because he received statements showing this was the case due to purported earnings -- due to phantom profits. SIPC and the Trustee say you measure the amount remaining to an investor by an out-of-pocket calculation of the amount the investor put in minus the amount he took out. The Sixth Circuit has ruled that this measure is "wholly without merit", and is "improper and wholly inadequate," because the victim gave the culprit money "not to hide under a rock or lock in a safe, but for the express purpose of investment, with a hope -- indeed a reasonable expectation -- that it would grow." (Emphasis added.)
Respectfully submitted,
Lawrence R. Velvel
as
Amicus Curiae
MassachusettsSchool of Law
500 Federal StreetAndover, MA01810
Tel: (978) 681-0800
Fax: (978) 681-6330
