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.