The first of the new ideas is this: If SIPC uses cash-in/cash-out instead of the November 30th statements as the measure of net equity, under the former method it will be able to obtain from many victims monies (alleged preferences they received over and above the principal they put in) that it could not obtain if it used the latter method. In this way SIPC and the Trustee will be able -- very perversely -- to euchre, from many victims, monies they receive via theft deductions and refunds of taxes on phony profits (taxes to which the government never had any statutory or constitutional right), monies that many will need to escape impoverishment. It is utterly perverse for SIPC and the Trustee to have even a theoretical right to obtain money given back to victims by the IRS -- money often needed, as said, to escape poverty.
The excuse for this perverse result given in the Trustee's brief is that the result is permissible because two different bodies with two different statutes are involved, SIPC and the IRS. But that is no excuse. I know it has been common in Washington for decades for different agencies to each regard themselves as individual fiefdoms that need have no concern for and need not follow what other agencies are doing. But common or not, this view is dead wrong. There is still only one United States Government. Its differing agencies and quasi agencies cannot permissibly adopt and implement inconsistent views to the disadvantage of citizens. Thus, the Office of Solicitor General spends (much) time forcing reconciliation of differing agency views into a single governmental view for presentation to the Supreme Court. I can to this day remember a Justice of the Supreme Court and Solicitor General Archibald Cox agreeing with the point being made here at an oral argument as far back as the early or early-mid 1960s. The Supreme Court often demands reconciliation between differing fields of law -- e.g., regulatory and antitrust law. The idea that SIPC (a quasi governmental agency) and the Trustee (an officer of the Federal government's court system) are perfectly free to alter the rules heretofore prevailing under their governing statute, SIPA, in a way that nullifies or counterminds another agency, here the IRS, which is necessarily acting with the implicit or explicit approval of the Treasury -- is pure bovine defecation. SIPC and the Trustee must instead continue to follow the heretofore prevailing interpretation of their statute so that the government's position is consistent.
A second idea is this. A truly major prop of the argument of The Malefactors Three has from the beginning been, and still is, that everything was fictitious. The briefs of TMT have covered page after page with descriptions of the fake ways in which purchases and sales were manufactured, the fake statements were produced, the methods by which everything was done, etc. Because it was all fake, they say, the normal rules of net equity do not apply (and they are free to break the normal rules as they choose). The huge long descriptions of what Madoff and DiPascali did amount to saying that this wasn't a common garden variety fraud. Rather, it was a highly sophisticated fraud carried out by deeply unusual and sophisticated means. And it was that. Indeed, the fraud was so sophisticatedly done that the SEC didn't catch it in 16 years and five or six inspections, leading investors like James Simons' Renaissance Technologies invested in it, and so forth.
The question which arises from TMT's desire to use cash-in/cash-out rather than the final confirmation rule to measure net equity in what they themselves correctly portray as a sophisticated fraud, is this: how can it be -- isn't it exceptionally perverse to say -- that the victims of a highly sophisticated fraud that drove a broker into bankruptcy receive far less protection from SIPA than victims of a simple-minded, garden variety fraud that drives a broker into bankruptcy? How could Congress have intended that? How is that consonant with Congress' desire to protect investors in order to build confidence in markets? Under TMT's point of view, people know that their danger from investing has increased, not, as Congress desired, diminished, and that their protection, contrary to Congress' intent, has de creased, not in creased. For the more sophisticated the fraud, and the harder it is for the SEC, prosecutors, financial mavens and investors to detect it, the more likely it is that investors will receive diminished protection. This destruction of protection and confidence because something is sophisticated is certainly not what Congress intended.
The last idea to be discussed in this part of this posting is one which has been brought out in at least one brief (admittedly mine), and perhaps in some others though I don't recollect it, but which has slowly been gaining some traction with laymen. It is that the position of The Malefactors Three with regard to calculation of net equity in a Ponzi scheme will go far to destroy all confidence in investing through brokers. Instead of building confidence in the industry, as Congress desired, it will destroy confidence.
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