January 26, 2010
Some Important Ideas Regarding Madoff That May Not Have Been Picked Up On Yet, And Comments On The Mid January Briefs Of The Malefactors Three.
This posting was originally intended to deal with a few -- nothing like all -- of the arguments made by the SEC, SIPC and the Trustee in the briefs they filed in mid January 2010. The arguments to be dealt with were the ones I thought to be of greater importance. Yet, the more I considered the briefs, the more it seemed to me that many of even the most important arguments have been amply dealt with before in many places: in briefs filed by Helen Chaitman, Brian Neville, David Bernfeld, Davis Polk, Milberg, Goodwin Procter, Schulte Zabel, Sonnenschein, and others, in blogs posted here on October 23rd and December 21st of 2009, and in a brief I filed that was posted here on November 6, 2009.
So I decided not to deal with certain of the arguments that have already been amply handled, except perhaps -- and relatively briefly -- in instances where the arguments have been particularly stressed or some sort of new twist has been put on them in one or more briefs filed in January by the SEC, SIPC and the Trustee ("The Malefactors Three," or "TMT"). I also decided that before dealing with the arguments in the January briefs of TMT, I would make some general comments regarding the briefs, and regarding points which I think very important to our side but which I am not necessarily sure that the lawyers who will argue for us on February 2nd have yet picked up on.
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Let me start with some generalized comments on the mid January briefs of The Malefactors Three. I don't believe that in 47 years at the bar I have ever said that the brief of an opponent is dumb. This is both impolite and bad tactics. But given the terrible conduct of TMT towards victims, the time has now come to do what I've not done before.
There are parts of the SEC's brief that are just dumb -- a view shared by others who have given me their view, incidentally. That the SEC has written a dumb paper on such important matters is hugely unfortunate. For it is yet another illustration that the incompetence of this agency continues, to the vast detriment of American shareholders. Judging by the SEC's brief, the vaunted ascension of Mary Schapiro, in whom Congress is said to be reposing great (but some feel misplaced) confidence, has made no difference whatever.
As to all of the briefs of The Malefactors Three, their tune has been named by Marshall Krause. They all use whatever argument or factual slant comes to hand in order to try to defeat the victims. Truth, accuracy, or objectiveness of the argument appear to play little or no role. It is a pluperfect example of bad aspects of the lawyer's so-called "art." That the three organizations arguably are each supposed to further the public interest but are actually defeating it, only heightens the misfortune. (The Trustee, of course, falsely claims to be pursuing the public interest with regard to the latest investors, but he is helping them by screwing over the now-impoverished long term and mid length investors who for years took out monies from Madoff in order to live, now have little or nothing, and live with fear of attempted clawbacks of blood from a stone under the Trustee's supposedly "holistic" but actually exceptionally narrow, lawyerish, purely dollars driven, Wall Streetish analysis that, like much of what Wall Street has done, destroys the public interest rather than furthering it.)
And what, one may ask, underlies the dubious conduct represented by the January briefs and the prior briefs of The Malefactors Three? Well, as said in this space before, and as even cautious lawyers and other cautious types are finding it ever more acceptable to say, what underlies it is a desire to protect SIPC and its management from accountability for incompetence and worse -- incompetence and worse that caused SIPC not to build up a sufficient fund to cover the bankruptcy of a major broker even though Congress and the GAO warned SIPC about this the best part of a decade ago. One can only wonder what would have happened if one or more brokers that conceivably might each have scores of thousands of accounts had gone down, as Merrill almost did. It is obvious (i) that this -- SIPC's lack of sufficient funds due to malperformance and worse -- has driven everything, (ii) that this is why SIPC and the Trustee vigorously fought this lawyer's effort to obtain discovery of the reasons why they chose the cash-in/cash-out method (a fight by SIPC and its Trustee that was slavishly rewarded by the judge in a very brief opinion (if it can even be called an opinion) of a paragraph or two -- an opinion which was a joke), and (iii) that this is why SIPC and the Trustee will do everything they can to persuade Congress not to hold hearings into the performance and actuarial assumptions over the years of SIPC, its management, and its politically appointed Board members, into its relationships with Wall Street, and into the slavish adherence to its dictates of Trustees, whom a federal judge has called its "puppet[s]." (Trustees make extremely lucrative careers for themselves by puppetishly doing whatever SIPC wants, and (including Irving Picard) have therefore made a practice for decades of finding alleged reasons why huge percentages of investors -- up to 90 percent or more -- are supposedly ineligible for the relief Congress intended -- reasons (including ones given by Picard) that federal judges have simply excoriated.) No, you can bet your last farthing that SIPC wants no Congressional inquiry or judicial discovery into any of these matters, and will fight to the last ditch against any such investigation or discovery.
Let me acknowledge that there is a point of view which holds that, under the numbers released by the Trustee as to the number of Madoff accounts of one kind and another, SIPC, by use of its fund, and by drawing on its lines of credit, could nearly satisfy its obligations to Madoff victims under SIPA (obligations which, in this scenario are posited as being something over $2.5 billion, I believe). The burden of this view, if I understand it correctly, is that SIPC and the Trustee did not adopt cash-in/cash-out because of an inability to pay Madoff's victims. Rather they adopted it because they considered the Madoff circumstances to be propitious for changing the whole nature of SIPC's obligations regarding net equity.
I have to respectfully disagree with this viewpoint. I believe that, at the inception, and for many months afterwards, SIPC and the Trustee did not know the extent of SIPC's monetary obligations in the Madoff case under the final statements method -- or, perhaps more appropriately, the "final confirmations" method -- but they feared the worst since they knew Madoff had a huge number even of direct investors and they knew that paper losses were said to be in the 50-65 billion dollars range. If even 10,000 people each had a right under the final confirmation method to SIPC advances of only $400,000 on average (not $500,000), which is likely quite a lowball estimate of monetary rights under the final confirmation method of calculating net equity, SIPC would have been on the hook for four billion dollars. Change some of the assumptions and it might have been on the hook for five or six billion dollars or more. Early on it couldn't know the extent of its liability. But it certainly could, and I believe did, fear the worst. And even if it was on the hook for "only" $2.5 billion or somewhat more, which would wipe out its reserves and one or more lines of credit, etc., it certainly didn't want this to happen, with the concomitant huge hassles that would arise with Wall Street and with Congress -- which would demand to know how such a result could have come to pass. So SIPC had to find a way to drastically limit its liability to victims -- as it has done for decades, to the vast detriment of injured investors -- and it therefore settled on use of cash-in/cash-out.
Am I right about all this? Well, one cannot at this point know for sure because there has as yet been no discovery, and no Congressional investigation, into the matter. But I personally am likely to remain convinced I am right unless and until discovery in law cases or a Congressional investigation shows me wrong. I believe judicial discovery or a Congressional investigation would likely prove me right, not wrong, and that this is the real reason why SIPC and the Trustee raised holy hell when this lawyer sought relevant discovery on why cash-in/cash-out was used, discovery which was denied by the judge in a farcical "opinion" even though the Trustee has such an army of lawyers that there was no possibility that putting one or a few lawyers to work gathering the documents requested in discovery could materially delay the accomplishment of other work.
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Let me now turn, as previously said, to some points that I consider very important but that, as near as I can tell, have not necessarily been picked up on yet by the lawyers who will argue for the victims on February 2nd. Now, the lawyers for the victims have written a sensational set of briefs; as one who has spent significant parts of my career writing briefs in the U.S. Supreme Court, where briefing is generally much better than in lower courts, I would nonetheless have to say that the set of briefs submitted by lawyers for Madoff victims is the equal of, or better than, any set I have seen elsewhere in nearly 47 years at the bar. But this is a very complex case, all of us are constantly picking up new ideas and facts, and it is not possible, I should think, for the lawyers to be totally abreast of everything all the time. So I shall set down some new ideas that have surfaced relatively recently and that I think are important, and shall hope lawyers for the victims are made aware of them and use them. If the lawyers are already aware of the ideas, then I apologize to them for my ignorance of their knowledge.