Judge Jacobs then expressed doubt about Sheehan's position, saying "I'm not sure I understand how the statement doesn't represent the obligation of the debtor assuming, under the facts that we have here, that people were permitted to rely upon this and a defrauder undertook to pay them that and in reliance they left their money in his hands." (Tr. 60.) Sheehan said, "I didn't say it didn't represent it. I said standing alone it's not determinative. You cannot just take, as Your Honor said earlier -- " (Tr. 60-61.) Judge Jacobs retorted that, "Standing alone it would work fine at a fraud trial, it seems to me." (Tr. 61.) Sheehan admitted this. (Id.)
Judge Jacobs then said "the debtor would be Madoff Securities and at a fraud trial they would be a defendant and they would owe that." (Tr. 61.) Sheehan tried to wriggle out of this by saying that at a fraud trial the victims would nonetheless end up with nothing because Madoff had no money left. Judge Raggi wouldn't let him get away with this dodge, saying "No, no, but that's a separate question." (Tr. 61.)
Judge Raggi continued her thought by saying that Sheehan's answer "avoids or doesn't address our concern, that you are asking us to conclude that the obligation for SIPA purposes is different from the debtor's obligation. And I speak only for myself, I'm having some trouble understanding why you think that is a different obligation." (Tr. 61 (emphasis added).) Sheehan's answer was that the statute supposedly "says" (Tr. 62) -- in fact it certainly does not "say" anything like what he claimed it supposedly "says" -- that "once you have a SIPA proceeding, these rules go by the board, and the reason is because the SIPA rules dominate that. They have to. It's a salutary statute designed to provide certain relief under certain dire circumstances. It isn't business as usual, it isn't dealing with your broker on a daily basis. This is a catastrophe and it's only in that catastrophe that the Trustee can operate the way he does, by not being bound by simply the statement itself, but by what the statute suggests, you look beyond that to the books and the records." (Tr. 62.)
This colloquy would seem to be revelatory and important, hopefully for our side. The judges appeared concerned with how to reconcile the statutory requirement that SIPC pay the obligations of the debtor -- which they seems to agree was the amount shown on the investor's final statement and would be owed the investor in a fraud suit -- with the Trustee's claim that cash-in was all that was owed. After first appearing to deny and dispute that what the statement says is owed is the obligation recoverable in a fraud suit, and apparently somehow claiming the support of the books and records provision in this connection, the books and records of which the statement is only one part -- Sheehan ultimately had to admit that the statement is the measure of the damages in a fraud trial. (Tr. 61.) At that point, confronted by Judge Raggi's statement that he was asking the judges to say "that the obligation for SIPA purposes is different from the debtor's obligation," Sheehan was forced to admit the truth: that the Trustee's (wholly invented) position is that the normal rules go by the board in a SIPA case. There the SIPA rules (as invented by SIPA and the Trustee) must predominate so relief can be provided in dire, unusual and catastrophic circumstances. Or, put differently, if the Trustee -- or any Trustee in any case -- decides a situation is dire, and that there is a catastrophe, the Trustee can do what he wants. This is the antithesis of being required to do what Congress intended. It is license, not law.
What Sheehan claimed the statute supposedly "says" (but in reality doesn't say) puts SIPA and the Trustee in a position directly opposite of Congress' intent to protect small investors, build confidence, insure prompt payment and so forth, all as discussed here previously. Unfortunately, this did not come up when Sheehan was arguing, nor was it presented at any point in the argument. This is sad. I shall say more about it later in this essay. But for the moment, let me merely reiterate that the Trustee's claim is a claim of unfettered license (as some of us have thought for nearly two years).
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