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More On SIPC'S And The Trustee's Bubbe Meisse.

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Headlined to H3 2/19/10

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February 19, 2010

More On SIPC'S And The Trustee's Bubbe Meisse.

Plus: Can The Fact That SIPC And The Trustee Have Created A Bubbe Meisse

Be Put Before Judge Lifland At This Time?

On Wednesday, February 17th, I wrote of the underlying theory invented from whole cloth by SIPC and Trustee -- on Wednesday I wrote of their bubbe meisse. Yesterday, Thursday, February 18th, I posted an analogy that made it easier, even easy, to understand their bubbe meisse. Today I would like to add to that analogy a point that somehow escaped my mind but now has been pointed out to me by a Madoff victim.

The analogy previously given is this. Sam Smith has one million dollars in the bank and knows he may or may not receive ten million dollars from Jack Jones in somewhere between one and ten years. Smith gives you $10,000. Does the $10,000 come from the one million dollars Smith has in the bank, or from the ten million dollars he may or may not receive from Jack Jones in somewhere between one and ten years? In the Madoff victims' view, the ten thousand dollars, which is the analogical counterpart of payments to victims by SIPC of up to $500,000, comes from the one million dollars Smith has in the bank -- money which is the counterpart of the fund already held by SIPC. Under the bubbe meisse invented by SIPC and the Trustee, it comes from the ten million dollars that Smith may or may not receive from Jack Jones in somewhere between one and ten years, which is the counterpart of "customer property."

Now, here is the additional fact that had slipped my mind. SIPC's fund largely or exclusively comes from payments by the brokerage industry. Thus, to the analogy should be added the following fact. Sam Smith's one million dollars in the bank comes from payments to him by his family -- these payments are the analogy's counterparts to payments for SIPC's fund that are made by brokers.

So now the question raised by the bubbe meisse is this: Does Sam Smith's $10,000 payment to you come from Smith's money in the bank that was amassed by payments from his family, or does it come from the one to ten million dollars that Smith may or may not get in somewhere between one and ten years from Jack Jones? In the analogy, the payment of $10,000 to you is, as said, the counterpart of SIPC advances of up to $500,000, the one million dollars Smith has in the bank because of payments to him by his family is the counterpart of the SIPC fund, and the ten million dollars that Smith may or may not receive from Jack Jones is the equivalent of the "customer property" that the Trustee may or may not obtain after years of searching and litigation.

To me, at least, the answer in the analogy is crystal clear and makes clear the truth of the real situation under discussion: the ten thousand dollars Smith gives to you obviously comes from his one million dollars in the bank that was amassed by payments from his family, not from the ten million dollars that the may or may not receive from Jack Jones in somewhere between one and ten years. Likewise, payments to victims by SIPC of up to $500,000 come from SIPC's fund (amassed by payments from brokers), not from the entirely separate, so-called "customer property" that the Trustee may or may not recover from Madoff hiding places and from Madoff confederates after years of searching and litigation.

Let me add one other point. The idea of the analogy -- in fact, the whole idea that the underlying theory propounded by SIPC and the Trustee is an invention, a bubbe meisse -- largely came to me after reading, in mid February, the transcript of the February 2nd hearing and pondering what Sheehan was saying. Before that, apparently, SIPC and the Trustee kept the relevant underlying theory sufficiently opaque that I cannot remember anyone on our side speaking of it or writing of it in a brief (except, perhaps, for comments by Helen Chaitman which covered part of it by explicitly pointing out (if memory serves) that the payments of up to $500,000 come from a SIPC fund. That there is here an invention by SIPC and the Trustee, a bubbe meisse invented and now made clear by them, seems to me (and I know it seems to a few others) a relatively important idea. As far as I know, this idea of a bubbe meisse has never been put before Judge Lifland (because SIPC and the Trustee kept their theory opaque), and the Judge could conceivably be unaware that SIPC's and the Trustee's underlying theory is merely an invention. Could the bubbe meisse aspect of their supposed theory be put before Judge Lifland now? Could it be submitted in a letter responding to Sheehan's letter of February 9th replying to Helen Chaitman's letter. (Sheehan's letter is mentioned in the posting of Wednesday, February 17th and makes the underlying (bubbe meisse) theory of SIPC and the Trustee crystal clear, as did the transcript.) Because the matter is sure to be argued on appeal no matter who wins before Judge Lifland, might it even be only fair to present it to Judge Lifland before he rules? Or is there no way to put the idea before Judge Lifland at this date?

I wonder what the victims think, and what the lawyers who argued on February 2nd think about now putting the idea before Lifland, and what is thought by other lawyers who filed briefs but did not argue on February 2nd. I especially wonder because it has seemed to me in the past that the Trustee, SIPC and the SEC have filed papers before Judge Lifland whenever they please. Perhaps some of the victims who read this might want to ask their lawyers what they think about the propriety and possibility of telling Judge Lifland of a point that arose because of what the other side said at oral argument and in a subsequent letter of February 9th. Or, if any of the lawyers read this, perhaps they would let me know their view on the propriety and possibility of now informing Judge Lifland of an idea that crystallized because of the transcript of argument and a subsequent letter from Sheehan of February 9th. I would greatly appreciate hearing the views of both lawyers and non lawyers in this regard.

 

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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