The "small people," of course, invested in Madoff through a variety of differing vehicles. Some were direct investors. Some invested through feeder funds. Some through IRAs. Some through pension funds. Some through partnerships. Because of the difference in investment vehicles, many are not eligible for tax recovery, e.g., those who invested through IRAs, charities, pension funds and feeder funds. Some are not eligible for SIPC recoveries, e.g., feeder fund investors or investors who were part of a single "group" investment. In addition, such restitution as is obtainable through tax recoveries or SIPC recoveries will often be but a small portion of the losses suffered. Many people still will find it very difficult or impossible to meet daily expenses.
In addition, litigation is likely to go on for the better part of a decade (as has occurred in other cases), while victims continue to lack resources to meet everyday expenses. No one can doubt that there will be, for example, long lasting litigation against SIPC on the questions of whether it is proper to exclude investors through feeder funds from the definition of customers, and whether the definition of net equity can be the restrictive and unusual cash in/cash out definition that has been adopted by the Trustee in order to deny recovery to thousands -- and that many think wholly illegal -- or whether SIPC must instead use the standard definition of net equity and thereby adhere to the well established securities law principle of honoring "legitimate expectations" of customers.
There is likewise sure to be a decade worth of litigation against the government on the question of liability arising from the prior causative actions and inactions of the SEC. Those litigations will revolve around such questions as the government's responsibility under the Federal Tort Claims Act for negligence or for intentional misconduct, responsibility arising from its extraordinary, and extraordinarily wrong, public statement in 1992 which caused the Ponzi scheme to grow by leaps and bounds and its failure to act against Madoff from 2000-2008 though warned time and again by Harry Markopolos.
There will also be extensive litigation against the IRS (i) because many people will not accept the "safe harbor" theft deduction provisions which it has created and which will be harmful to many even though the provisions are well intended, and (ii) because if people are not wealthy, they will not be much helped or even helped at all by the "safe harbor" provisions. The cases will involve such questions, which the government in its safe harbor provisions sought to elide, as claim of right, equitable estoppel, equitable tolling (in the present circumstances of governmental culpability), negative tax benefit, the constitutionality under the 16th Amendment of levying a tax, and now keeping the tax, on money that is now known not to have been income, even though the amendment explicitly permits only the taxation of money that is income, and whether the government can force people into giving up doctrinal rights, and rights to interest on refunds of unlawfully assessed taxes, in order to be allowed to use safe harbor theft deduction provisions.
There will also be litigation on the question of whether the government has a right to calculate theft losses in the particular way it has in its safe harbor provisions. In the latter regard, the questions to be litigated will include whether it was proper for the government to calculate theft losses in such a way that, if two persons invested the same amount of principal and earned at the same percentage rate, but one was wealthy enough to pay tax on Madoff income from other income while not withdrawing money from Madoff, but the other, less affluent investor had to withdraw money from Madoff in order to pay tax on Madoff income, the wealthier taxpayer will benefit far more from the IRS' safe harbor provision, thus creating serious inequality between the two investors to the detriment of the less affluent one. And there obviously will be litigation on the additional question of whether the government's action was the result of pressure from extraordinarily wealthy contributors to the Democratic Party who immediately placed pressure on the government and who will benefit to the tune of scores or even hundreds of millions of dollars from the safe harbor calculations promulgated by the government, while those who have little money and had to live off of their Madoff earnings over the years will get very little benefit and certainly not enough to live on.
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