Some time ago I suggested that, in order to avoid “turndowns” by Picard based on improper principles (like his definition of net equity), the lawyers found by the Steering Committee should bring what is called a declaratory judgment action seeking a judicial ruling that Picard could not do what he had plainly said he is going to do and what it seems he may now have begun doing. The suggestion was rejected on grounds I found at least reasonable even though I disagreed with them. But now it seems ultra clear that, no matter what, the knowledgeable lawyers had better start preparing what are called “friend of the court,” or “amicus curiae,” briefs that will be filed in any case of a “turndown” that is appealed to any court -- bankruptcy district, appellate or what not. As well, the lawyers should prepare motions to intervene in any such appeal. (I have filed both kinds of documents in my career, including amicus briefs by the dozens in the Supreme Court and papers seeking intervention in a gigantic governmental antitrust case in a federal district court). Whether done as an amicus paper, as a motion to intervene, or as both in the alternative, the paper should discuss the state of the relevant law generally, should discuss the New Times case in particular, and should elaborate the evidence, the actual evidence regarding the lawyers’ own clients and others, that the lawyers wish to present to the court for its consideration because the evidence bears on relevant matters.
To now go back to a main thread, however, it seems obvious that, because of the order of magnitude of the numbers that likely are involved, it will be impossible to get Picard or Harbeck to voluntarily change the definition of “customer” they follow so that it would include feeder fund investors instead of excluding them, or to voluntarily change the definition of net equity that they are using. On appeal, at least if the appeal is manned (or womanned) by good lawyers on the investors’ side, there is an excellent chance that Picard and Harbeck will lose on their definition of net equity. As lengthily discussed here before, their definition, in my judgment, flies in the face of the recent 2004 court of appeals decision in New Times; and Picard and Harbeck therefore could easily lose even though such a loss will cost SIPC a fair amount of money.
But it will be harder to defeat Picard and SIPC in court on the definition of customer, which presently excludes feeder fund investors, because this definition, even though it was established before there were feeder funds and is wholly inadequate for today’s world, nonetheless was established thirty-three years ago. Plus, Harbeck and Picard will play on courts’ always-present fear of costing governmental or quasi governmental bodies a lot of money. A new definition of customer that includes feeder fund investors would upset a case-law definition followed for 33 years (as opposed to following the New Times decision that is only five years old), could cost SIPC tens or even scores of billions of dollars, and therefore is not a definition a court may wish to embrace. Morality and decency probably won’t enter into it in court when it comes to departing from a long settled rule, even one that is out of sync with modernity. The courts are likely to say investors should go to Congress for relief on this particular point.
So . . . . to conclude: Much as I personally favor including feeder fund investors in SIPC recoveries, this is going to be a hard row because of the amounts of money this would cost SIPC. I suspect feeder fund investors may be better off putting extensive efforts into backing Steve Breitstone’s efforts regarding income tax refunds, seeking a legislative or regulatory change that makes them eligible for theft deductions under the (concededly inadequate) safe harbor procedure, seeking other changes from Congress (including increases in the amount recoverable from and the persons who can recover from SIPC), and backing a plan that I will be working on alone for awhile but will present publicly after initial contacts regarding it, whether those contacts prove promising or unpromising. *
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* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.
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