When Wang said that the impact of the FSM meant SIPC would have to pay out more from its fund, Judge Jacobs was surprised because he thought Wang would have said the impact was that, if the FSM were used, SIPC would pay more from its fund, would therefore have more claims against customer property by virtue of subrogation, and this would lessen the amount available to other victims from customer property. Judge Leval, subsequently in the colloquy, made this point quite precisely, saying that "Then to the extent that SIPC pays one customer based on that customer's inflated long-term position that grew much, much larger than the customer's initial investment, notwithstanding withdrawals, SIPC's payment of the full $500,000 to that customer will reduce another customer's entitlement because SIPC then becomes a claimant against the estate." (Tr. 41-42.) Wang's answer to Leval was "That's correct, Your Honor." (Tr. 42.)
Wang's answer to Judge Leval was seriously misleading, wholly aside from the fact that nothing forces SIPC to exercise any rights of subrogation it may have. Helen Chaitman has submitted a letter to the Court pointing out the misleading nature of Wang's reply, our opponents have opposed her submission, and at this point there is no telling whether the Court will learn the truth either on its own or through submissions.
SIPC's right of subrogation will not, under the statute, lessen the amount of customer property available for payment to victims. For the statutory order of allocating customer property -- after ignoring the first section, which is irrelevant here -- is that payment is allocated, second, to customers of the broker -- i.e., Madoff's victims -- and third to SIPC as subrogee for customer claims that it paid. In other words, under the statute SIPC will get nothing from customer property until all the victims are fully paid off. Therefore SIPC's payments from the SIPC fund to victims will not reduce any victim's payments from customer property, because SIPC does not recover from customer property, via subrogation, until after all the claims of victims are paid off. The judges were trying to find out whether use of the FSM for SIPC advances will, due to SIPC's subrogation rights, lessen the amount available for payments to victims from customer property. Wang told them the answer is yes. The answer in truth is no.
Of course, SIPC appears to have been doing something of dubious legality, appears to have been pulling a fast one, that would make the answer yes instead of no. It has been taking assignments from victims to whom it gives advances from the SIPC fund. While our side seems to have been unable to find out (or at least I haven't found out), it appears that the assignments may put SIPC into the second statutory category of victims of the broker, i.e., by the assignments from victims SIPC recovers as part of the second category, which gives payments to victims, rather than recovering as part of the third category, in which SIPC gets money only after the victims are paid in full. If SIPC is taking assignments which do this, then its rights under the assignments, rights which arise because it advanced monies from the SIPC fund and took assignments of the victims' rights, will lessen the monies available to other victims. But for SIPC to do this is probably illegal, is probably outrageously illegal. For it does lessen the amount of customer property (i.e., money) available to victims, whereas Congress' intent was to help and provide money for victims, not to help and provide money for SIPC. SIPC, by assignments, is grabbing for itself money which Congress wanted victims to receive.
The next colloquy started with one of the bench's semi bizarre, difficult mathematical hypotheticals, this one put by Judge Jacobs. It involved theft, account statements, actual market value, etc., and was not understood by Wang -- and to read it is to sympathize with her confusion. Jacobs' question was what would SIPC say the customer should get in his hypothetical. Wang's ultimate answer was that he gets "whatever his account statement shows that reflects market reality." (Tr. 46.)
Wang further reiterated, in answer to a question from Judge Raggi, that SIPC's obligation is to insure that the "statute is correctly enforced" -- by use of ideas that have been invented by SIPC and the Trustee, in my opinion. In this regard, she said it would have been error to use the account statements here because, I gather, they do not reflect reality as reflected in the books and records, which show that no trades occurred and therefore precludes the use of the fake FSM as the measure of net equity. (Tr. 48-51.)
According to Wang, in a statement widely belittled by victims, SIPC's one and only concern is correct enforcement of the statute, not the extent of SIPC's liability under the FSM, which "is probably the last of our concerns." (Tr. 47.) Right, and we were all born yesterday. No doubt the reason that SIPC and the Trustee vigorously resisted discovery into the reasons they chose CICO is that SIPC's potential liability under the FSM was the last of its concerns. Sure. Tell me more.
Unfortunately, there was no mention in the oral argument of the need for discovery, which would blow the lid off SIPC's and the Trustee's phony claim that concern for SIPC's finances had nothing to do with choosing to use CICO.
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