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Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011. Part 5

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            Helen's brief opening was very important.   It is a serious shame that her points were not developed previously and that she had no choice but to put them so quickly and with so little explication.   She was pointing out that there are people who were Madoff investors for nearly 50 or nearly 30 years, but who woke up one day to find that the Trustee refused to honor statements they had received for over four decades or for three decades.   That in itself is preposterous.   It is only the more preposterous because time and again the SEC investigated Madoff, repeatedly gave him a clean bill of health, specifically made a public statement in the Wall Street Journal in 1992 that there was no fraud, and many people relied on the SEC's repeated clean bills of health and its 1992 statement.   Yet SIPC, the Trustee, and the SEC, all of whom are supposed to be protecting victims, are instead deeply injuring people who relied for decades on statements and on the SEC's investigations.   I repeat:   This is preposterous, and the Trustee cannot have discretion to do such a thing.   As for the Trustee's claim that what he is doing is fair, in reality he is substituting his view for Congress' view of what should be done, as Helen was saying.

 

            Not to mention that customers were given insurance of up to $500,000 because they were surrendering the right to physically obtain their securities as proof of owning them, and would have to be able to depend on brokers' statements to show ownership of securities held in street name.   It has always been implicit in the street name argument, but I have never seen it actually said (maybe it goes without saying), that the Madoff fraud would not have been possible if Madoff had had to deliver stock certificates to investors.   For he had no certificates to deliver and would have been exposed instantly.   As a practical matter, SIPA made street name holdings possible, to the great benefit of Wall Street, but now the administrators of SIPA are trying to screw over those whose securities are necessarily held in street name.

 

            Chaitman was then asked by Judge Jacobs whether, if we had cash claims here, not securities claims, the Trustee could permissibly consider what was withdrawn and what was deposited.   Helen said no; the Trustee must still use the last statement because it is irrelevant whether the securities were ever purchased.   The statute, she said, "was enacted precisely for a situation where the broker didn't purchase the securities."   (Tr. 74.)   She was right.   The legislative history specifically says, in a number of places, that the statute covers the situation of theft or loss of securities.   This point too should have been made earlier in our side's argument, and often.

 

            Judge Raggi responded that the Trustee says "the reality of a Ponzi scheme, for purposes of a payout that's going to be treating net equity the same whether it's the customer account or the SIPA fund, is that one customer's profits can only be a function of another customer's loss.   Do you want to respond to that argument and why you don't think it ought to inform our decision here today?"   Chaitman said, "I think it can't inform your decision because we have a statute which defines net equity as what is owed to the customer.   And 8B provides that the Trustee should look at the books and records to determine what is owed to the customer.   What is owed to the customer is the balance on the customer's account."   (Tr. 74-75.)   She continued that Charles Ponzi's scheme occurred in the 1920s, it was well known to Congress when it enacted SIPA, and "If they had wanted to make a Ponzi scheme exception, they would have put it in the statute.   There is no exception for a broker who decides to not buy securities for all of his customers.   There is no exception for a broker who buys and sells, rather than buys and holds.   The contemplation was to provide a limited amount of protection to a customer, just like FDIC insurance.   When President Nixon signed the statute into law, he said, I am signing a statute which will provide to securities customers the same kind of protection that the FDIC provides to bank depositers.   Can you imagine a liquidator of a bank coming into this Court and saying, I'm only going to pay up to $250,000 based on the net investment in a bank deposit going back 50 years?   I'm going to eliminate all interest on which that depositer has paid taxes?   That's the situation we have here."   (Tr. 75.)  

 

            These points were also very important.   That the statute defines net equity as what is owed to the customer has been discussed previously.   And the ideas that Congress knew all about Charles Ponzi, could have but did not make an exception for a Ponzi scheme or for a failure to buy securities, and could have made an exception for situations of buying and selling instead of buying and holding, are very important ideas which should have been brought up by our side much earlier.   So too -- and especially -- the idea that Nixon said SIPA provided "customers the same kind of protection that the FDIC provides to bank depositers," and that it would be unthinkable for the FDIC to act as SIPC is acting here.   I can only wonder (in amazement) that our attorneys did not stress all these things early and often, and one can only hope that the Court grasped their full import though Helen appeared to have to race through them because of the number of holes she had to plug on rebuttal in so little time.

 

            At that point Helen made the following comment.   "I would ask the Court to consider what SIPC is really doing is saving approximately $1 billion because the number of customers whose claims have not been allowed based on this net investment hearing, who coincidentally are all the people who were the long-term investors, like my 91-year-old client who retired in 1970 and took mandatory IRA withdrawals out of his account for 21 years.   Of course he took out more money than he put in.   But that's the purpose that people invest in the stock market."   (Tr. 76.)   It was trenchant to say that of course long term investors -- old people, sometimes in their 90s -- took out more than they put in, for that is the purpose of investing.   Implicit, but I hope clear to the Court, was the point that the Trustee and SIPC are vitiating one of the very purposes of being in the stock market.   It is hard to imagine what could be more contrary -- to Congress' desire to promote investing in the market -- than to vitiate a basic purpose of such investing.

 

            Judge Jacobs then asked Helen to respond to the Trustee's argument that "SIPA just provides you an advance on what you will be entitled to in the bankruptcy proceedings, and that in the bankruptcy proceedings there's not going to be any payday based on these hypothetical investments?"   (Tr. 76.)   Helen replied that the statute requires SIPC to "promptly replace the securities in a customer's account, not two years after $200 million have been spent on forensic accountants.   Promptly replace the securities.   The legislative history indicates the purpose is, get that investor right back in the stock market.   This is an investor who gave up the right to certificated securities which benefited the Wall Street firms which were funding the SIPC insurance.   It's not a question that SIPC doesn't have the obligation to make the advance unless and until it's satisfied that it will be repaid on its subrogation claim.   That's nowhere in the statute.   It's simply like any other insurance company to the extent that they pay, they stand in the shoes of the insured, once the insured is paid in full.   But that SIPC advance has to be made promptly.   That word is throughout the statute.   And this is what Congress intended.   This is a remedial statute to compensate victims who rely upon a broker's obligation to purchase securities reflected on his statement."   (Tr. 76-77 (emphases added).)  

 

            Helen's answer was both correct and clever, even if perhaps somewhat opaque (which was understandable in the hurried circumstances).   As I understand it, she was saying that because there must be prompt payment from the SIPC fund in order to accomplish the legislative purpose of getting the investor right back into the market, you cannot wait to see what will ultimately be available from customer property before paying victims their advance of up to $500,000 from the SIPC fund.   So in reality, the advance is not an advance on customer property.   The putative "advance" from the SIPC fund would have to be given, and given promptly, even if there ultimately proved to be not one dollar of customer property.   This is what Congress intended.   "This is a remedial statute to compensate victims who rely upon a broker's obligation to purchase securities reflected on his statement."   (Tr. 77.)  

 

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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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