The latest version of the letter regarding the restitutionary bond proposal is as follows:
June 4, 2009
Dear :
Knowing how incredibly busy you are (and being aware of the importance of the work you are doing), I am particularly appreciative that you made time to call me on Tuesday.
As said on the phone, I am one of the victims of Bernard Madoff. I therefore have been studying and writing about the Madoff matter for many months now, and in consequence have created a proposal that would obviate the need for victims to receive tax relief or relief through the Securities Investors Protection Corporation (SIPC). The proposal would also put an end to almost all litigation, thereby preventing what has already started to become a lawyers' relief act that is likely to go on for ten years while many people will be hard pressed to obtain even the basic necessities of life.
As said on the phone, I hope you will find the proposal to be a potentially useful idea and will therefore pass on the idea, perhaps with a favorable comment, and possibly even with a copy of this letter, to people who could cause the proposal to be seriously considered and enacted. I am thinking of people such as Tim Geithner, Rahm Emanuel, Barney Frank and others like them.
Before describing the proposal, let me briefly detail an important prefatory matter. Most of Madoff's victims are not the billionaires, "centamillionaires," hedge funds, and banks that the celebrity-driven mass media has focused on, thereby causing the public to believe that the victims of Bernard Madoff are all wealthy plutocrats. Most Madoff victims are, instead, "small people." They are people who usually started with little or nothing, as members of the working class or lower middle class, as immigrants, as children of holocaust survivors. They are people who worked like dogs all their lives, finally saved up enough money to make an investment in Madoff, and now find themselves wiped out. Many -- perhaps even most -- are elderly, in their late 60s, 70s, or 80s. Many had no other savings or income except what they had in or received from Madoff. Many are completely devastated, financially and psychologically. They are selling their homes in order to obtain money to live. They are attempting to reenter the work force, sometimes in menial jobs, in their 60s, 70s and 80s, in order to obtain money for food and shelter. (There is one man in his 90s who took a job in a supermarket passing out fliers in order to sustain himself.) They are the victims of both a terrible crime and a terrible tragedy.
The crime and tragedy of which they are victims were caused by Bernard Madoff, but not by Bernard Madoff alone. They also were extensively caused by the government, beginning with a widely circulated 1992 public statement by a governmental body, the SEC, which was a contributing cause to the disaster. When it undertook an investigation in the early 1990s of two accountants who gathered and forwarded monies to Madoff, the SEC had initially expected to find a Ponzi scheme. But on December 1, 1992, in a statement that securities lawyers tell me is never made by the SEC, it publicly said through the Wall Street Journal that there was no fraud involved, i.e., no Ponzi scheme. That statement by the government, which placed the imprimatur of honesty on Bernard Madoff (who was disclosed two weeks later, in the WSJ of December 16th, to be the money manager for the two accountants), caused untold numbers of people to continue their investments in Madoff, to invest with Madoff for the first time, and/or to increase investments with Madoff over time. (It was a major reason why I myself invested initially and subsequently increased my investment.) The government -- the SEC -- never retracted its statement, not even after Harry Markopolos began warning it in 2000 that Madoff likely was a Ponzi scheme.
The SEC's remarkable, unique, and never retracted statement of December 1, 1992, and its failure to stop Madoff when warned to a fare-thee-well by Markopolos starting in 2000, were a major cause of the disaster which subsequently occurred. The SEC's 1992 statement was instrumental in the Ponzi scheme growing from about $450 million in 1992 to between three and seven billion dollars in 2000, and the 1992 statement, plus the SEC's ignoring of Markopolos, caused the scheme to grow from three to seven billion dollars in 2000 to $65 billion in 2008.
So the government, through the SEC, was a major cause of Madoff's success and of the enormous harm which has befallen thousands of "small people."
The "small people," of course, invested in Madoff through a variety of differing vehicles. Some were direct investors. Some invested through feeder funds. Some through IRAs. Some through pension funds. Some through partnerships. Because of the difference in investment vehicles, many are not eligible for tax recovery, e.g., those who invested through IRAs, charities, pension funds and feeder funds. Some are not eligible for SIPC recoveries, e.g., feeder fund investors or investors who were part of a single "group" investment. In addition, such restitution as is obtainable through tax recoveries or SIPC recoveries will often be but a small portion of the losses suffered. Many people still will find it very difficult or impossible to meet daily expenses.
In addition, litigation is likely to go on for the better part of a decade (as has occurred in other cases), while victims continue to lack resources to meet everyday expenses. No one can doubt that there will be, for example, long lasting litigation against SIPC on the questions of whether it is proper to exclude investors through feeder funds from the definition of customers, and whether the definition of net equity can be the restrictive and unusual cash in/cash out definition that has been adopted by the Trustee in order to deny recovery to thousands -- and that many think wholly illegal -- or whether SIPC must instead use the standard definition of net equity and thereby adhere to the well established securities law principle of honoring "legitimate expectations" of customers.
There is likewise sure to be a decade worth of litigation against the government on the question of liability arising from the prior causative actions and inactions of the SEC. Those litigations will revolve around such questions as the government's responsibility under the Federal Tort Claims Act for negligence or for intentional misconduct, responsibility arising from its extraordinary, and extraordinarily wrong, public statement in 1992 which caused the Ponzi scheme to grow by leaps and bounds and its failure to act against Madoff from 2000-2008 though warned time and again by Harry Markopolos.
There will also be extensive litigation against the IRS (i) because many people will not accept the "safe harbor" theft deduction provisions which it has created and which will be harmful to many even though the provisions are well intended, and (ii) because if people are not wealthy, they will not be much helped or even helped at all by the "safe harbor" provisions. The cases will involve such questions, which the government in its safe harbor provisions sought to elide, as claim of right, equitable estoppel, equitable tolling (in the present circumstances of governmental culpability), negative tax benefit, the constitutionality under the 16th Amendment of levying a tax, and now keeping the tax, on money that is now known not to have been income, even though the amendment explicitly permits only the taxation of money that is income, and whether the government can force people into giving up doctrinal rights, and rights to interest on refunds of unlawfully assessed taxes, in order to be allowed to use safe harbor theft deduction provisions.
There will also be litigation on the question of whether the government has a right to calculate theft losses in the particular way it has in its safe harbor provisions. In the latter regard, the questions to be litigated will include whether it was proper for the government to calculate theft losses in such a way that, if two persons invested the same amount of principal and earned at the same percentage rate, but one was wealthy enough to pay tax on Madoff income from other income while not withdrawing money from Madoff, but the other, less affluent investor had to withdraw money from Madoff in order to pay tax on Madoff income, the wealthier taxpayer will benefit far more from the IRS' safe harbor provision, thus creating serious inequality between the two investors to the detriment of the less affluent one. And there obviously will be litigation on the additional question of whether the government's action was the result of pressure from extraordinarily wealthy contributors to the Democratic Party who immediately placed pressure on the government and who will benefit to the tune of scores or even hundreds of millions of dollars from the safe harbor calculations promulgated by the government, while those who have little money and had to live off of their Madoff earnings over the years will get very little benefit and certainly not enough to live on.
