March 15, 2010
Judge Lifland's Opinion On Net Equity.
Having spent time assessing Judge Lifland's opinion of March 1st, I shall set forth some impressions of it. I shall not deal with the entire opinion, especially since so much of it is taken from the briefs of the Trustee and SIPC. Such points have thus been discussed here before. For the most part. I shall focus on points of especial import or importance (there can be a difference), on points I think should be given far more emphasis in our side's appellate briefs than was given them in our briefs before Lifland, and on the question of whether it would be wiser to have taken an ordinary appeal to the District Court rather than have sought an appeal directly to the Court of Appeals for the Second Circuit, as the trustee and several of the victims' lawyers have now done at the suggestion of Judge Lifland. (One knows that, because so many people are hurting badly, it seems to have always been assumed that our side will seek an immediate appeal to the Second Circuit. But the wisdom of that automatically assumed course is subject to debate; one thinks it at least possible that, for reasons I shall discuss, it might be better for our side if an appeal went first to the District Court.)
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Judge Lifland paid very little attention to the legislative history of SIPA (while claiming -- wrongly, to be polite about it -- that he was considering the legislative history). His opinion -- in reality one could rightly say his brief supporting all relevant positions of SIPC and the Trustee while denying all relevant positions of the victims -- contains only a few widely scattered lines regarding the legislative history. Instead, his opinion, or brief, extensively parrots the non-legislative-history arguments of SIPC and the Trustee.
Laymen may not understand that it is hardly rare for judges to simply crib the arguments of the side they choose, as Lifland did. (He even admits explicitly that much of his description of the facts is taken from the Trustee. Humorously, even if perversely, he also admits to cribbing from the allocations of Madoff and DiPascali, two notorious liars.)
When cribbing from and deciding entirely for one side, as Lifland did here, it also is not unheard of for judges to simultaneously claim, quite disingenuously, that they think both sides have done an excellent job and both have advanced "compelling arguments" (Op. p. 6), both of which are exactly what Lifland said here while accepting no argument made by the victims. And it has been known for decades that the opinions of most judges, except rare ones like Richard Posner (who has himself written on the subject) (as have I), are written not by the judges but by their young clerks who usually come straight out of law school. For various reasons, this would seem to be the case here -- although one of course cannot be certain -- so that an opinion sealing the fate of thousands of oft-elderly victims of fraud has likely been written -- unless and until this is specifically denied -- by people who are probably barely into adulthood, albeit they wrote it at Lifland's order.
Here the Trustee and SIPC rarely mentioned the legislative history because it is very adverse to them. They focused instead on other arguments they had made up, or cribbed, which support them. Parroting the Trustee and SIPC, Lifland did the same. He basically ignored the legislative history, though under our form of government the Congressional intent reflected in the legislative history is supposed to govern (except in the eyes of a few outliers like Antonin Scalia).
There is a sense in which one could perhaps argue that this ignoring of legislative history is not all Lifland's fault. It is a matter on which my own feelings are engaged. Because of the press of work which I had to do later in November 2009, I submitted my brief on November 6, 2009, seven days before the due date of November 13th . My brief was thus the first major one submitted on our side. It began with points that fifty years in the legal profession have taught me are of the essence in this society, even if not in others: it began with the intent of Congress and the results for Congressional intent of the other side's position:
"The Securities Investor Protection Act of 1970 (SIPA) was enacted to provide to customers of securities broker-dealers protection against losses which might occur as a result of the financial failure of broker-dealers." This is the very first substantive statement in the Senate Report on the 1978 amendments to SIPA. S. Rep. No. 95-763, at 1 (1978), reprinted in 1978 U.S.C.C.A.N. 764, 764. The House Report on the 1978 amendments says, "The bill would make SIPA more responsive to the reasonable expectations of public investors and would provide investors with greater protection against the financial failure of stockbrokers, thereby enhancing investor confidence in the securities markets." H. Rep. No. 95-746, at 21 (1977).
These Congressional purposes are not much focused on, if focused on at all, by the briefs of SIPC and the Trustee. This is in a way "understandable," since the purposes of Congress are deeply thwarted, perhaps even destroyed, by the position on net equity of SIPC and the Trustee. This destruction is not only true in the Madoff case itself, but far more widely. For, as occurred in Madoff itself, no investor with a broker-dealer can be certain that his investment is not part of a Ponzi scheme. After all, one cannot know that one has invested in a Ponzi scheme until after it is revealed. So no investor will be able to withdraw earnings from his investment with confidence that he will not later be told that the withdrawn monies never existed, that the withdrawals diminish his net equity, possibly making it a negative number, that he will lose SIPC protection if it is a negative number, that he will also lose claims against customer property and the estate, and that he is subject to clawbacks.
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Thus every investor with a broker-dealer will be at risk, will be threatened with potential economic disaster, if he takes out income from an investment, although taking out income to live, to pay expenses and taxes, and to make other investments is one of the main purposes people have when making an investment in the first place. Investors will have no guaranty of protection -- contrary to the purposes of Congress. They will know they have no protection and that their reasonable expectations, which Congress intended to protect, are irrelevant. Confidence in the securities markets -- another purpose of Congress -- will be vastly diminished. People will quickly realize that they might be much better off simply putting their money in a bank or splitting it among several or many banks, at lower rates of return but with assurance that the FDIC will pay them up to $250,000 for each separate account if a bank should prove fraudulent and bankrupt so that the money the depositors thought was in their accounts was not there in fact.
In my opinion, under our system of government the quotations from Congress should be the beginning and the end of the case. Congress wanted to protect investors and honor their reasonable expectations. The final statement method does. The cash-in/cash-out method does not. Therefore the final statement must prevail. End of story. End of case. Everything else is superfluous under our system.
My own view obviously made little impact on colleagues. For, I think without exception, the other briefs on our side (if I remember correctly) -- just like the briefs of SIPC and the Trustee -- pretty much ignored Congressional intent. Though in other ways a truly outstanding collection of papers, on whose quality even Lifland commented at oral argument, they focused on, and on overcoming, the plethora of arguments made by our opponents, while basically ignoring a dispositive point for our side: the intent of Congress as reflected in the legislative history. Our side, in my opinion, pretty much got sucked into fighting the battle on the grounds chosen by our opponent, rather than on the ground which is our strongest, dispositive suit. The briefs on our side were akin, in a way, to a brilliant execution of Pickett's charge. Or looked at from the other side, our briefs were akin to what the situation would have been had the Union defended against Pickett's charge without using its most potent weapon, its artillery, to decimate the Confederate formations as they marched to the attack on Union lines.
I cannot overemphasize the importance of this point. It was only the more important because briefs were submitted by major Wall Street firms and, from everything I have seen in this case, Lifland seems to specially consider the work of such firms while paying far less attention to the work of small fry like myself, or the brilliant writer David Bernfeld, or the highly competent Lax & Neville. Lifland said in his opinion that he read every brief, but this does not change the impression I've received time and again in this case that he focuses on the work of the big boys. When the major firms' briefs didn't focus extensively on legislative history -- and, maybe they'll prove me wrong, but I certainly don't remember other briefs focusing on it -- the game was pretty much up.
