December 21, 2009
The SEC's Brief Filed Before Judge Lifland In Madoff.
To begin my career after graduating from law school in 1963, I joined the Honors Program of the Department of Justice in Washington. In those days, when Kennedy was still President, we pretty much thought that the Department did high level work, and it was also thought that the SEC was a premier, a very high quality, government agency.
Early-on, we new DOJ lawyers were taken around by some DOJ mucky muck who explained notable features of the DOJ building to us. At one place he stopped and pointed to an engraving on a wall which said "The Government wins when justice is done." That meant the Government was a winner, even if it lost a case, if justice was the result of the decision. It did not take long, however, to begin to understand that the engraving had the Government's view exactly backwards. It should have read, "When justice is done, the Government wins," meaning that if the government does not win a case, justice has not been done. I have now seen the latter philosophy in operation for 46 years, in numerous fields of law, most publicly including all aspects of supposed national security law from illegal wars to illegal wire tapping to illegal torture to illegal whatever-you-want-to-talk-about, and now that philosophy has pervaded the Madoff case too.
Just as the statement of philosophy engraved on the wall had the government's view exactly backwards, so too has competence taken a long, long holiday. I need not mention what happened in the DOJ's Office of Legal Counsel starting in the Fall of 2001, need I? Nor, I presume, need I mention the fantastic, utterly unbelievable, long running incompetence and negligence of the SEC in Madoff and other fraud matters. What I will mention, though, is a tiny matter -- a matter so small as to be of absolutely no consequence, yet one which is symptomatic because sometimes it is the smallest matter which can reveal intellectual incompetence, mental sloth, lack of knowledge, lack of concern for accuracy.
On December 11th the SEC filed its brief on net equity. Two days before, on December 9th, the SEC made the same fundamental points as are in its brief at the hearing of Kanjorski's committee. The SEC was represented by its Deputy Solicitor, a fellow named Michael Conley. As is customary, Conley submitted written testimony before appearing in person. Given the SEC's concern that members of Kanjorski's committee have blasted it up, down and seven ways from Sunday, it's a safe bet that the written testimony was vetted -- was read and approved in advance -- by a host of SEC personnel, probably up to and including Mary Schapiro. If it wasn't, there is something very wrong.
The written testimony discussed the New Times Ponzi scheme. It said that in New Times "the money was never invested, but converted by the firm's principal, Charles Goren, for his own use."
Charles Goren? Charles Goren? The fraudster in New Times was not Charles Goren. It was William Goren. Charles Goren was a leading bridge player and writer on bridge for decades in the 20th Century.
Now, we lawyers tend to make a big deal over a horrible mistake like that, a lot bigger deal, possibly, than laymen might, and maybe too big a deal on some abstract scale. But to lawyers, especially ones of a certain training, this kind of a mistake is unforgivable. To us it denotes intellectual sloppiness, lack of care, lack of concern with accuracy, lack of paying attention. And ask yourself: here we have testimony that must have been -- and certainly should have been -- vetted in advance by a large number of people at the SEC. And nobody caught the mistake? Nobody realized that the name that was used was Charles Goren? Nobody wondered about this even if they did not specifically know that the fraudster's first name was actually William? Nobody wondered about it even though the SEC's brief, filed in court only two days later, gave the fraudster's name correctly as William Goren? It seems to me that this mistake, as small and inconsequential as it was when looked at one way, is a sign that the SEC is still as incompetent-ridden as it was before Mary Schapiro. And why not -- what makes her so competent? She, after all, was in charge of FINRA (making three mill a year, no less, I believe) when it continued to miss the Madoff fraud just like the SEC did.
Let's turn now to what the SEC did and how it did it. Put briefly, the SEC said it agrees with SIPC and the Trustee that cash-in/cash-out must govern, but it disagrees with them that that is the sum of the matter. Rather, the cash-in must be calculated in "constant dollars by adjusting for the effects of inflation (or deflation)." This "treats all investors fairly by taking into account the economic reality that a dollar invested in 2008 has a different value than a dollar invested twenty years earlier." (SEC Brief, p. 1.) ("[T]he Commission believes" that "calculation of the claim in constant dollars, adjusting for the effects of inflation, . . . is the appropriate method of determining net equity in this case." (Id., p. 9.))
Now, before getting into substantive pros and cons of this approach, let me comment on the procedure by which it was brought up, insofar as I understand it.
Initially, the briefing was ordered by Judge Lifland to include the questions of cash-in/cash-out, versus the November 30th statement, plus the question of interest if cash-in/cash-out is used. But after Judge Lifland said that the briefing would include the question of interest, the Trustee and SIPC somehow got him to change his mind and to say that cash-in/cash-out versus the November 30th statements would be the only matters briefed. The briefing, he said, must be "limited" to those matters. How this happened was a puzzlement to me until, during conversations over the question of discovery, I asked one of the Trustee's lawyers how it happened, and he forthrightly told me that his side went to Lifland and asked him to narrow the briefing. I don't want to say, I cannot with knowledge say, that this was done like sneak thieves in the night. All I know is that I didn't hear of it until after it was a done deed, and there seem to be a number of things happening that some of us don't know about. And those of us who have practiced for decades know and have seen that in specific areas of law where there are a relatively small coterie of governmental or quasi-governmental lawyers who practice before a small coterie of judges, there often can be behind the scenes maneuvering, not to mention favoritism. I personally, of course, am acutely aware of the possibility of a questionable situation in this case because of the judge's cursory -- some (accurately) describe it far less charitably -- smack-down of a request for very pertinent discovery from SIPC and the Trustee, a request for discovery on matters that go to the heart of why SIPC and the Trustee are doing what they are doing and would have been deeply relevant to recent Congressional hearings of December 9th as well.
So . . . . what happened after Lifland changed course at the suggestion of the Trustee and SIPC, and said that the only pertinent issues to be briefed were cash-in/cash-out versus the November 30th statement. Well, SIPC and the Trustee submitted briefs that also discussed preferences and the Trustee's right to claw them back. This upset several of the victims' lawyers because they considered that the question of preferences goes way beyond cash-in/cash-out versus the November 30th statements, and involves important questions of law not involved in those matters. One of the prominent lawyers for victims thus asked for more time to file a brief so that his office could research the questions raised by the preference issues. His request was denied. Fortunately, some large firms had the resources to do the necessary research in time, so they were able to create responses. The point remained, however, that victims' lawyers believed that, for their own purposes, SIPC and the Trustee, in their briefs, went well beyond what Lifland's order -- at their request -- said should be briefed, and the judge then denied an understandable request for more time made by a prominent lawyer for victims.
Then, two months after the briefs of SIPC and the Trustee came the SEC's brief. It too has gone way beyond the order allowing briefing only on cash-in/cash-out versus the November 30th statement. For it has introduced the entire question of adjusting cash-in to account for inflation. Why introducing this subject is different in principle from discussing interest -- which the lawyers were not to discuss in their briefs -- escapes me entirely. In fact, in principle it is not different at all, since discussing an inflation adjustment is, like interest, a way of attempting to compensate for the time value of money and to provide compensation for the fact that someone else has been using your money. But, as we have seen across the board since about 1965, following the law, or proper procedure, is something that the government and quasi-governmental bodies feel no need to do when it does not suit their purposes. The Madoff case, you know, while in some ways sui generis, is distinctly not sui generis when it comes to governmental and quasi-governmental bodies screwing over law, procedure and citizens if it suits their purposes. In that regard there is nothing new here.
Related to this, and of real importance, is this: the SEC's action -- i.e., its filing of its brief not when SIPA and the Trustee whom it supports on the question of cash-in/cash-out filed theirs, but two months afterwards and one month after the victims filed their major briefs -- gives the SEC -- and SIPA and the Trustee too -- two real advantages. For it reinforces the idea, which at least conceivably could be important to Lifland, especially after receiving the victims' collection of excellent briefs, that it is possible to alleviate victims' plight a bit even if he rules in favor of cash-in/cash-out, and it concomitantly lets Lifland know he will be supported by the SEC if he follows the SEC's method of partial alleviation. It does these things while the victims have only a limited time to respond because, unlike the rest of the briefing schedule, which has approximately one month intervals between opposing briefs, the victims have only ten days, until December 21st, to respond to the SEC -- just when the Christmas season is beginning, no less, and people are heavily engaged in other things. So the victims' lawyers have only a brief chance to respond in writing on a major question, and will have to try to overcome this disadvantage at the oral argument on February 2nd -- although most judges say that good briefing on a question is usually crucial. So the SEC's conduct has put the victims at a significant disadvantage. (What else is new?)
Moreover, the SEC's conduct helps SIPA and the Trustee. Not only does it support cash-in/cash-out, albeit with a modification for inflation, but SIPC and the Trustee do have a chance to respond, in briefs that are not due until mid January, over one month (not a mere ten days) after the SEC filed its brief (which I'll bet they saw even before it was filed).
