March 30, 2011
Discursive Comments On The Oral Argument In The Court of Appeals
In The Madoff Case On March 3, 2011.
As readers know, I had originally intended to do this essay in two parts. But it is proving so long and difficult to do that I shall divide it into more parts, and shall post them as I do them. This Part 2 will deal with the oral argument of the first opponent to argue, the General Counsel of SIPC, Josephine Wang.
Beginning by saying Madoff's statements are fictitious, Wang was immediately interrupted by Judge Raggi's comment that if victims had sued Madoff, he would have had to pay them what the statements showed they were owed. (Tr. 36.) Wang admitted this would have been true if Madoff had remained in business. The judge then asked why it should be different in regard to what SIPC has to pay. Wang said it is because SIPC is bound by a federal statute and that statute does not authorize a trustee to benefit certain customers at the expense of other customers; because the prices on the statements were back-dated; and because the profits or so-called profits, were fictitious. (Tr. 37.)
Judge Leval then asked "How is it at the expense of other customers when you're talking about . . . the funds coming from SIPC that measure for each customer independently how much that customer is entitled to?" (Id.) Wang's answer was that we're not talking just about the money coming from the SIPC fund, but about "customers who are all eligible to share pro rata in a fund of customer property." (Id.) Some withdrew their principal plus fake profits, which were other people's money, and others did not withdraw their principal, which was used to pay other investors.
Judge Raggi then wanted to know "where is this customer property coming from." (Tr. 38.) Wang said it's "all [the] property that was held . . . for customers," and includes what the Trustee initially found in the possession of Madoff and what he recovers by actions against third parties. (Tr. 38.) It is, said Wang, "shared pro rata among customers." (Id.) This means, she said in a confused way, that people who did not yet recover their principal will be sharing with people who already recovered their principal and will be receiving fake profits, which is unfair. (Tr. 38-39.)
Judge Leval said that this "part is very clear. But it's the part that relates to the money coming from SIPC" that needs clarification. (Tr. 39.) To which Wang responded that SIPC would have to advance far more because the cash-in is 17 to 20 billion dollars whereas the final statements showed approximately 64 billion dollars.
Judge Jacobs then expressed confusion, saying he thought Wang's argument would be that, to the extent of its advances, SIPC would be subrogated to a claim against the estate. (Tr. 39.) Wang said SIPC is subrogated to the claim of any customer who is fully satisfied out of a SIPC advance, in order to avoid double recovery by the customer. (Tr. 40.) To which Jacobs replied that this suggests that SIPC advances can have an impact on other investors simply by virtue of the claims SIPC would have by subrogation. (Id.) Wang then said she wasn't following Jacobs.
At that point they began going through the matter again. In the midst of it Raggi said that all this means that if a customer receives an advance from the SIPC fund, this will not affect the amount of an advance that is received from the fund by another customer. (Tr. 40-41.) Wang admitted this is true, but said that the fund of customer property is affected because of SIPC's right of subrogation. (Tr. 41.) Leval responded by saying that it therefore is the case that if SIPC pays an advance to one customer because of his fictitious profits, this will reduce monies available to other customers from customer property because SIPC itself will have a claim against the estate via subrogation. (Tr. 42.) Wang said "That's correct." (Id.)
What, then, was the meaning of this colloquy? Well, the judges wanted to know why SIPC's obligation shouldn't be the same as Madoff's and, in this connection, why using that obligation, expressed by the final statement, would cause some victims to benefit at the expense of others. Wang's answer, first, was that the statute doesn't authorize having some victims benefit at the expense of others and this is what would happen if the final statement is used, because people who took out more than they put into a Ponzi scheme would be sharing "pro rata" in a fund of customer property, would be sharing in customer property with people who have not yet received all their principal back. (Tr. 37.) Wang's view of what the statute authorizes seems to me just another verbal formulization of the (wholly invented) position of the Trustee and SIPC, discussed and for many reasons rejected in Part 1, that fairness allegedly requires that all be paid in proportion -- that all be paid "pro rata," Wang said.
Interestingly, the statute does not say that all must be paid "pro rata." It says victims must be paid "ratably." SIPC, the Trustee, and everyone else, including me, always seems to have assumed that paying victims "ratably" means paying them "pro rata." The words "pro rata" and "ratably" sound and look as if they should mean the same thing. But "ratably" is not necessarily the same thing as "pro rata." "Pro rata" means proportionally. "Ratably," I gather from the dictionary, can mean proportionally but does not necessarily mean it. Instead, it can mean only that something is "capable of being rated, appraised or estimated," as one of the dictionaries puts it.