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Comments On The Hearing Of February 2nd Before Judge Lifland

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Message Lawrence Velvel

One is that the Second Circuit explicitly said in New Times that the critical distinction was between investors who intended to buy securities that existed in the real world and those who intended to buy ones that did not. This was mentioned once, but one wishes it had been mentioned again and again. Of course, Lifland seems to be well aware that two kinds of investors were involved in the New Times scam, as evidenced by his aforementioned comment to Sheehan, and one may therefore hope and believe it is likely he is also well aware that the difference in investors was said to be the critical factor.

There is also the question of Congressional intent. My own view, and the view focused on at the very beginning of the brief I filed, is that this case should begin and end with Congress' desire to protect investors. Nothing else needs to be considered or discussed. Yet because the lawyers - - beginning with the desperate gambits of those on the other side to whose arguments our lawyers understandably felt the need to respond - - have thrown in the kitchen sink (as is typical of lawyers), there was discussion of a huge list of matters, and Congress' intent, though mentioned, did not get the repeated, repeated, repeated emphasis which I think it should have received from our side. This is the more unfortunate because, as will be discussed later in connection with insurance, it was the position of the other side, explicitly stated by Sheehan, that Congress did not know what it was talking about, and therefore its explicitly stated views should be ignored. Which I may say, is not the way our system works. When it comes to statutes, our system is not to say that Congress was ignorant in the premises, so ignore what it wanted and do what I say. Our system is to do what Congress desired. And hammering home Congress' desire, as explicitly expressed several times in the legislative history, should have been the order of the day, although the format the judge demanded for the argument tended to militate against this.

A third point I would have wished to receive continual repetition is that, if the view of SIPC and the Trustee were to prevail, then no investor through brokerage houses will ever be safe, with a comitant reduced willingness to invest in the first place. (I admittedly gave this argument pride of place in my own brief, so could be considered biased. Yet I believe the argument both right and powerful.) Nobody will be safe because one cannot know in advance that she has invested in a Ponzi scheme - - by definition one would not have made the investment had one known the deal was a Ponzi scheme, and one will not know the investment was a Ponzi until the fecal matter hits the fan. Unable to know until afterwards that the investment is a Ponzi, people will necessarily be reluctant to invest, and to take out earnings on which to live - - as is often the purpose of investments - - lest they later find they are victims of a fraud, will not receive the $500,000 they thought they would get from SIPC, and may be subjected to clawbacks. Nothing could be more calculated to destroy, instead of instilling, the confidence in markets desired by Congress.

Moreover, the unhappy outcome goes beyond Ponzi schemes because, were SIPC and the Trustee to prevail here, all will know that the rules of the game can be successfully changed after the fact by SIPC and the Trustee, a vastly destructive, all encompassing principle that need not and will not be confined to Ponzi schemes, but may instead be implemented wherever and in any way that it suits SIPC's purposes.

This point seems to have been excluded from the argument on our side, although a point quite similar in import was argued. It was said by Brian Neville that, now that securities are held in street name instead of being delivered to the purchasing investor, as is the nearly uniform case today, the confirmations received from the broker (and tax documents based on them) are the investor's only proof of what she owns, what her net worth is, what financial decisions are prudent, etc. The confirmations are the only thing the investor receives that she can rely on, and SIPC and the Trustee have not said what else the investor could rely on - - and of course cannot say what else the investor could rely on because there is nothing else. Let me quote part of what Neville said:

But what they cannot deny when a security is held by a broker firm for an investor in its street name, and virtually all are today, there is no tangible item, no ".certificate, no bond certificate to show ownership. . . .

So it is these confirmations, account statements and 1090s that let the investors know what they are, what they earn and what their net worth is, they make life altering decisions and many, many clients and customers in that instance chose to retire, to fund children's education, made large gifts to charity. They paid 30 years plus of income taxes based upon fees and documents from an SEC registered broker-dealer.

The most important financial decisions that thousands of Madoff victims made were based on these documents and their legitimate expectation. Yet the Trustee, SIPA and the SEC now argued with the full benefit of hindsight, ". [that] these confirmations... cannot be relied upon.

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Lawrence R. Velvel is a cofounder and the Dean of the Massachusetts School of Law, and is the founder of the American College of History and Legal Studies.
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