Judge Leval said that this "part is very clear. But it's the part that relates to the money coming from SIPC" that needs clarification. (Tr. 39.) To which Wang responded that SIPC would have to advance far more because the cash-in is 17 to 20 billion dollars whereas the final statements showed approximately 64 billion dollars.
Judge Jacobs then expressed confusion, saying he thought Wang's argument would be that, to the extent of its advances, SIPC would be subrogated to a claim against the estate. (Tr. 39.) Wang said SIPC is subrogated to the claim of any customer who is fully satisfied out of a SIPC advance, in order to avoid double recovery by the customer. (Tr. 40.) To which Jacobs replied that this suggests that SIPC advances can have an impact on other investors simply by virtue of the claims SIPC would have by subrogation. (Id.) Wang then said she wasn't following Jacobs.
At that point they began going through the matter again. In the midst of it Raggi said that all this means that if a customer receives an advance from the SIPC fund, this will not affect the amount of an advance that is received from the fund by another customer. (Tr. 40-41.) Wang admitted this is true, but said that the fund of customer property is affected because of SIPC's right of subrogation. (Tr. 41.) Leval responded by saying that it therefore is the case that if SIPC pays an advance to one customer because of his fictitious profits, this will reduce monies available to other customers from customer property because SIPC itself will have a claim against the estate via subrogation. (Tr. 42.) Wang said "That's correct." (Id.)
What, then, was the meaning of this colloquy? Well, the judges wanted to know why SIPC's obligation shouldn't be the same as Madoff's and, in this connection, why using that obligation, expressed by the final statement, would cause some victims to benefit at the expense of others. Wang's answer, first, was that the statute doesn't authorize having some victims benefit at the expense of others and this is what would happen if the final statement is used, because people who took out more than they put into a Ponzi scheme would be sharing "pro rata" in a fund of customer property, would be sharing in customer property with people who have not yet received all their principal back. (Tr. 37.) Wang's view of what the statute authorizes seems to me just another verbal formulization of the (wholly invented) position of the Trustee and SIPC, discussed and for many reasons rejected in Part 1, that fairness allegedly requires that all be paid in proportion -- that all be paid "pro rata," Wang said.
Interestingly, the statute does not say that all must be paid "pro rata." It says victims must be paid "ratably." SIPC, the Trustee, and everyone else, including me, always seems to have assumed that paying victims "ratably" means paying them "pro rata." The words "pro rata" and "ratably" sound and look as if they should mean the same thing. But "ratably" is not necessarily the same thing as "pro rata." "Pro rata" means proportionally. "Ratably," I gather from the dictionary, can mean proportionally but does not necessarily mean it. Instead, it can mean only that something is "capable of being rated, appraised or estimated," as one of the dictionaries puts it.
Either meaning of "ratable" would seem to fit the statute, and I do not know which meaning Congress intended. In the legislative history, Congress paid infinitely more attention to the SIPC fund, which was a major subject of the statute, than to customer property, which received little attention. Yet, if Congress had intended that people necessarily should be paid proportionally, one wonders why it used the ambiguous word "ratably" instead of the plain, unambiguous words "pro rata" or "proportionally." One also wonders whether there is anything in bankruptcy law which might shed light on this.
If one takes the position that the word "ratably" means, in the statute, only that a victim's share can be appraised or estimated, then the position of SIPC and the Trustee largely collapses in favor of good judgment and sound policy, I would think. The door would be open for the Court to give differing orders of payment to victims who have different economic positions, even though the final statement is used as the measure of net equity and net equity establishes one's ultimate share of customer property as well as one's right to an advance from SIPC. One possibility, for example, would be that under the FSM victims would get advances from SIPC, but those who took out more than they put in would not get money from customer property until others who did not take out their principal received it back from customer property. This kind of an arrangement could be capable of estimation and appraisal in advance, and would thus fit a meaning of "ratably." It would also enable the Court to provide differing treatments under the SIPC fund than under customer property, as a lot of people think it seems to want to do. The idea is also one that has in effect been put forth by the Trustee, though he would use it in connection with the so-called general estate. And the idea also, of course, whether founded on statutory definitions or for other reasons, could be part of the basis for an overall resolution of the Madoff problem.
Wang also in a sense let the cat out of the bag during the colloquy, in answer to a question from Judge Leval about the SIPC fund. She conceded that if the FSM were used, "SIPC would of course have to advance that much more." (Tr. 39.) I literally know of no person who is not part of the Trustee's or SIPC's entourage who does not think that SIPC's desire to pay out less from its fund, lest it have to raise billions of dollars more very quickly or face bankruptcy, was not the reason that CICO was used here in the face of nearly uniform use of the FSM in nearly 320 prior SIPC cases. Discovery on the question was vigorously resisted by SIPC and the Trustee, was refused by Lifland (who seems to do pretty much anything our opponents want), and was not discussed by the Second Circuit though the need for discovery on this matter lest Congressional intent be flouted with impunity was raised in briefs.
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