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The Never Discussed Impact Of The Net Equity Question, The Devastating Impact Of Discovery On SIPC's Position, And Argum

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Re: The Full And Never Discussed Impact Of The Net Equity Question,

The Potentially Devastating Impact Of Discovery On SIPC's Position,

And Matters Of Argumentation And Morality.

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This post is being published in four parts. Let me start it with some comments that will surprise a lot of people.

Irving Picard has taken a lot of heat. As readers know, this has occurred for many reasons, including: his novel, anti-statutory definition of net equity, which will likely injure thousands; his delay in making payments -- which violates the statutory requirement of "prompt" payment (and was made necessary by his definition of net equity); his possible threat of attempting to claw back money from the innocent but financially devastated -- from stones with little or no blood to give; from a refusal to offset the amount he claimed people owed, due to autumn 2008 withdrawals, by even greater amounts they put in during the same period; by a demand (which I think may now have been dropped) that people relinquish their rights to more money (by signing releases) if they are to get lesser amounts which are indisputably owed to them and which they desperately need to live; by making the kind of really obnoxious arguments which SIPC has become infamous for in decades of (often successful) efforts to deny money to the victimized; and, for all I know, by other misbegotten actions as well. All of these actions, it has long been my opinion, are designed to improperly diminish the amount of money SIPC has to pay out -- the net equity definition, in particular, diminishes SIPC's prospective payments by a truly huge amount -- and are favored by -- conceivably were even demanded of Picard by -- his "bosses" in SIPC.

So, given the rage Picard has inspired, it probably will surprise lots of people to hear me say that there is one fantastically important area in which, as near as I can tell at this point, Picard seems to be doing a really excellent job. As shown by Picard's July 9th Interim Report to the Bankruptcy Court, he has brought eight lawsuits against major Madoff players or clients, seeking a total of $13.7 billion. I have read four of the complaints filed by Picard, and think they are quite good. It seems to me not impossible (as lawyers would bassackwardly put it to avoid overoptimism) that Picard could end up with some number of billions from these suits to distribute to victims; I think some of the defendants in the suits may still have big bucks.

So, as a bottom line, Picard seems to be doing a good job in going after the movers and shakers who benefitted gigantically from Madoff's Ponzi scheme and, in several cases, were major aiders and abettors if not outright coconspirators. Of course, there is one small problem with Picard's otherwise laudable efforts to get money from the movers and shakers. It was the least affluent of Madoff's victims -- the small fry victims -- who had to take out money to live and to pay taxes, and who thereby reduced their net equity, as Picard and SIPC calculate it, to zero or a negative number. It is therefore these people -- the least affluent, often even non-affluent, small fry -- who will receive no benefit whatever from any recoveries Picard obtains in his lawsuits. For, as I understand it -- and I would love to be wrong, but fear I am only too right -- your net equity controls more than just whether you can get back some or all of the $500,000 that SIPC can give a "customer." It also controls what you can get back from what I believe can be called Madoff's bankruptcy estate or his "customer property" (a term which frankly confuses me much of the time).

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What Picard recovers in lawsuits against the movers and shakers -- or in other ways -- becomes, I believe, part of Madoff's estate, or the "customer property." So, if you have no net equity as Picard calculates it, or a negative net equity as he calculates it, I think you not only will get nothing from SIPC itself, but also nothing from any amounts Picard recovers in lawsuits from the movers and shakers whom he has sued for $13.7 billion.

If I am right about this -- and as strange as some may think it to say with regard to investors in Madoff -- Picard has created a sort of class war. The very rich, who didn't have to take anything out of Madoff to live or to pay taxes, will get the full $500,000 from SIPC, plus possibly large sums from Picard's recoveries in lawsuits or elsewhere, since they will have huge amounts of net equity. The far less affluent (who often are already elderly and desperate), who depended on Madoff to live and to pay taxes, and who sometimes had as little as $500,000 or so in Madoff, will get nothing from SIPC and nothing from the recoveries or other customer property, because they will have zero or negative net equity.

As said, I deeply hope my understanding of all this is wrong, but fear it is right. If it is wrong, one hopes that Picard or Harbeck will quickly set matters straight. They -- either alone or jointly -- have not hesitated to savagely attack people like Helen Chaitman or myself in the past (a letter to Helen Chaitman, to be discussed below, from Picard's lawyer, David Sheehan, was so far beyond the pale as to be unconscionable, even though it was a response to a "vigorously worded" (shall we say) paper filed by Chaitman), although I do note that the attack on me with regard to the 3 percent bonuses ceased after I posted a lengthy second article relating to it (and in SIPC's eyes, I imagine, corrected what it claimed to be mistakes). So I hope Picard and SIPC will correct my view of the overall impact of their net equity calculation if my view is wrong, and in the process will explain not just that it is wrong but also why it is wrong.

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Lawrence R. Velvel is a cofounder and the Dean of the Massachusetts School of Law, and is the founder of the American College of History and Legal Studies.

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