In terms of general fairness, the Court's view -- its echoing of Picard -- is dubious. If one says that fairness is controlled solely by dollar figures (a very simpleminded view), than I suppose it makes sense to say that it is fair to insure that those who took out more than they put in (the net winners) should get nothing more unless and until there is complete recoupment by the others (the net losers). But is this fair if one considers more than just dollar figures, if one considers the complete situation? Those who took out more than they put in are, by and large I would think (pace Wilpons), the small people, the people who often are now remitted to poverty or something close to it. Those who didn't take out more than they put in are, by contrast, usually huge and wealthy institutions such as hedge funds (or wealthy individuals). They are, moreover, the particular institutions, and the kinds of institutions, whom the Trustee himself has said enabled Madoff to maintain his fraud for years longer than it otherwise would have lasted. They did this by investing many, many billions of dollars without which the scam would have collapsed -- and without doing the due diligence of which they were financially and professionally capable and which would have caused the whistle to be blown on the fraud. And, by keeping the scam going, these institutions caused the losses of the small people to continue and to increase as the small investors put in more money year after year, took out more year after year in order to live, and thereby increased their losses and the potential clawbacks against them year after year.
Now, when one considers the complete situation, does it still look like using CICO rather than the FSM is the fair method? Not to me it doesn't. I think it is no surprise that, unless he has sued them or entered a settlement with them which the Bankruptcy Court must approve, the Trustee has never been willing to identify the institutions (or very wealthy individuals) who have not taken out more than they put in, therefore have positive net equity under CICO, and will get SIPC advances and customer property. To reveal the identity of these institutions would be to disclose how unfair is the Trustee's method of determining net equity, now approved by the Second Circuit.
There is another and extraordinarily fundamental matter pertaining to the Court's claim that fairness requires use of CICO lest money given to net winners reduce, dollar for dollar, the funds available to net losers. The case in the Second Circuit involved two separate funds -- as the Court was aware because the matter of there being two separate funds was not only mentioned in briefs, but was discussed several times in the oral argument. One fund is the SIPC fund. That fund is created by contributions from the securities industry, and can be augmented by lines of credit obtained by SIPC and by requested appropriations from Congress. This fund is used to pay a customer up to $500,000, depending on her net equity, if a bankrupt broker's coffers, as is usually the case, are insufficient to pay off. The amount of up to $500,000 is an advance against the customer's share of the second fund, the customer property fund, but must be paid even if not one dollar of customer property is recovered. This further shows that, as I say, the SIPC fund is separate from the customer property fund, as Congress made clear -- though the Trustee and his counsel have tried, and in the Second Circuit have succeeded, in tricking this all up by their apparent claim that the SIPC fund is only a part of the customer property fund -- and that the SIPC fund must be used to pay up to $500,000 of net equity even if there is no fund of customer property because no such property is recovered.
As I say, the Court was aware that there were two funds. From reading the oral argument several times, I think the Court also knew that payments to victims from the SIPC fund did not subtract one dollar from payments that other victims would get from either the SIPC fund or the fund of customer property. Yet though there were two funds, the Court appears to have deliberately treated the case almost exclusively as if there were only one fund, the customer property fund, and as if the SIPC fund were nothing but a specific branch of customer property, since payments from the SIPC fund are advances against customer property.
The nearly exclusive treatment of the case as involving only one fund, a customer property fund, is inherent in a number of the Court's statements. Strikingly in this regard, the Court said that a dollar going to a net winner was a dollar denied to a net loser. That is simply untrue with regard to the SIPC fund, and I do not grasp how the Court could not have known it was untrue in regard to that fund. Yet the Court said it. I find this incomprehensible.
Maybe the Court thought the following, although it gave no indication of it. If net equity is measured by the Final Statement Method, then net winners will receive money from the SIPC fund and, having a positive net equity, will also be eligible for money from the customer property fund. Their eligibility for money from the customer property fund will take money that net losers would otherwise get from this fund, i.e., will take money from those who haven't yet recouped all the money they put in.
But if this is what the Court thought, it told nobody about it in its opinion and was mistaken. For money from the customer property fund must be distributed "ratably" in accordance with respective net equities. Though the word "ratably" may sound like it means proportionally, and can mean proportionally, it doesn't have to and doesn't always mean that. It can mean merely that something can be rated or appraised or estimated. So . . . . . . if the FSM were used, it would be consonant with ratability to deny net winners any share of money from the customer property fund until net losers have received back all the money that they put in. This would allow net winners, who, as I say, often had to take out money to live and are now often impoverished, to receive advances from the SIPC fund in order to live, and would insure that they thereafter get nothing more -- get nothing from the customer property fund -- until all -- even the wealthy banks and hedge funds -- get back all the money that they put in.
It is noteworthy, in regard to finding some way to get money to the small investors whom Picard and the courts ironically call net winners (though they are often impoverished while hedge funds with scores of billions of dollars and near-trillion-dollar banks are called the net losers), that in hundreds and hundreds of pages of legislative history, Congress almost never discussed customer property. Congress was deeply concerned, rather, with the SIPC fund. It was the SIPC fund that was to provide the protection small investors needed, not the customer property fund. Yet Picard and the courts have focused entirely on the customer property fund, and to insure that so-called net winners get none of that fund, which Congress cared little about, have defined net equity in a way that insures that many small investors, so-called net winners, will get nothing from the SIPC fund, which Congress cared everything about because it was the SIPC fund that was considered the main protection for investors. To say that this is a distortion of priorities by Picard and the courts is mild. It is a point which should be one of the foci for petitions for rehearing or certiorari, I think. And while I myself, being a lawyer, would feel constrained from putting the whole matter the way it was recently put by a woman whom I believe is a leading member of the victims' community, I think it is fair to quote to you what she recently wrote: "The court just rescued SIPC and Wall Street but condemned thousands of victims to poverty. You call that justice? These judges had the opportunity to come up with a little more creative solution to this problem but they chose the easy way out by regurgitating Picard's lies. They had an agenda and it's clear." The statement about an agenda may be might be right or wrong, but it is, I think, the way lots of people feel, and the rest of the quote strikes me as right even if a lawyer would feel constrained from using some of its language.
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
