A second point is the alleged concern -- the bill of goods sold to the Second Circuit by the SEC and SIPC in New Times and repeated in Madoff -- that, unless CICO is used, the fraudster will dictate who gets what; in particular he will dictate huge sums for his cronies and will break the SIPC fund. The Madoff case is in itself proof that this is untrue. Madoff's cronies -- e.g., Levy, Picower, Chais -- have been caught and have been forced already to disgorge huge sums or have been sued for huge sums. Moreover, as I've said many times before (but as the Circuit did not care), it has been customary in the financial world for decades to use surrogate measurements to determine what would have been or will be made -- here what would have been made if the deal had been honest.
7. Finally, it must be noted that the Trustee is seeking huge sums from large institutions that should have known Madoff was a fraud because they knew of serious red flags but ignored them in order to reap profits from the Madoff fraud. If the courts allow the Trustee to sue for those sums, and if he wins them at trial or by settlement, then the victims will ultimately be made whole because they will recoup fraud damages from the general estate. The Trustee's and the Circuit's denial of net equity, and therefore of a share of customer property, to small victims who have a negative net equity under CICO, will ultimately not deny full recovery to the victims. But, and it is a very big but, for this to occur the courts will have to allow the Trustee to sue the huge institutions for the damages they caused, which at least currently is not looking all that likely after Judge Rakoff's recent decision on the matter in the HSBC case. Also, the courts would have to agree that the huge banks will be liable if they, as charged, knew of but ignored red flags in service of making profits. How the courts will rule on this question is unknown. And finally, ultimately might be a long time -- it could possibly be years before the Trustee defeats or settles with the large banks (though one hopes for faster results).
[1] At an early point, before the legislative history had been researched, one of the major New York City lawyers told me definitively that it contained nothing helpful. The subsequent research showed the contrary to be true, but the New York lawyers stuck with the doomed statutory argument they had selected early on.
[2] Some such possibly rare cases are currently in litigation.
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