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If these points had been set forth, which would have taken between one and two minutes (or longer, of course, if the Court continuously interrupted), much of our case would have been stated in answer to the very first comment made by the Court. Such is among the kind of answers we used to coach inexperienced lawyers to give in the Supreme Court. It is the kind that I believe should have been extensively prepared in advance here. It also was the precise subject of the very first potential question and answer set forth in a memo emailed to the NYC lawyers on February 28th.
After the foregoing colloquy between them of our side's view that the wording of the statute is all that matters, Judge Jacobs put to our attorney one of the bench's complicated mathematical hypotheticals testing each side's position. The point of this one was that, when our lawyers said the victim should get $20,000, the judge retorted that "that's not what's on the account statement. You just said the account statement is the beginning and the end of it." (Tr. 5.) Our attorney then backed and filled a bit, finally saying that there are "certain circumstances where you could look behind account statements . . . . But that's when the statutory framework doesn't work, but the statutory framework works for Madoff victims' (Tr. 6.) This, it seems to me, was a way of saying the statute requires the use of the FSM because it is good for us victims, but something else could be used if it is good for victims. Unfortunately, such one-sided application of a statute is generally not well thought of by lawyers and judges; they tend to say it is politics rather than law.
Yet there are reasons cognizable in law why the FSM should be used here. They are largely reasons discussed above. Congress wanted SIPA to protect and help investors, to insure innocent investors up to $500,000, to build investors confidence in markets and spur investing itself. As a statute intended for these purposes, SIPA's fundamental reasons-for-being require use of the FSM here even if the final statement cannot be used in some hypothetical cases where, contrary to Congress' intent, it would harm investors rather than help them, as in the hypothetical put forth by Judge Jacobs. This is the answer that I believe should have been given.
The next major questions were asked by Judge Raggi. She said that the lower Court's decision was largely based not on statutory definitions, but rather on the assumption that net equity must be based on the totality of the circumstances. (Tr. 7.) She asked whether this assumption was flawed. Tr. 7.) Our lawyer's very apt answer basically was that this assumption was flawed because the statute has no exceptions for Ponzi schemes or for the size, nature or effect of the scam. Thus, "The one issue is whether you can follow the definition of net equity, which this Trustee could have." (Tr. 7-8.) To which Raggi replied that our lawyer was urging absurd results because people who had previously withdrawn money from Madoff would recover proportionally more than those who never had done so. And this, she indicated, would be an absurd result, whereas "the law abhors an absurd result." (Tr. 8-9.) To which our lawyer responded, again quite aptly, that the result here is not absurd, and that what is absurd is that half of the Madoff victims of the worst SIPC liquidation in history didn't receive SIPC protection. (Tr. 9.)
Now, I think, as said, that our advocate's responses were good. Ponzi schemes had been known for about 45 years, since the mid '20s, when SIPA was passed. Yet Congress made no exception in regard to how to treat them, and it is absurd that half of Madoff's victims got no protection from the agency Congress set up to protect people who lost their securities. But there is so much more that could have been said. To wit: Congress intended not only to help investors, but, as the legislative history shows, to help small investors, who are suffering disproportionately here under CICO and associated clawbacks. Indeed, at the time SIPA was under consideration, President Nixon -- who was not famed for being on the side of the weak or poor -- said that he supported the bill because it helped the small investor. It therefore is the very opposite of absurd that small investors who had to take money out of Madoff to live could, because of that fact, end up recovering more (proportionately only) than wealthy hedge funds and banks which, speaking anthropomorphically, did not have to take money out to buy food, pay for their kids' education, pay for houses, etc. Though I would not have said it to the judges lest they be offended, the idea that it is absurd for proportionally more to go to people who took out money to buy food and to live than to go to the fabulously wealthy, is a notion of absurdity that perhaps only lawyers and judges and bankers and SIPC Trustees could hold. But I would say to judges that it is an idea that is not followed, and distinctly does not resonate, in the real world. We have progressive taxation, don't we, under which the wealthy pay more? We have welfare, don't we, under which the poor get money and food, but the rich get nothing? The notion that equality and fairness demand that the newly poor, who could get up to a $500,000 advance under the FSM should instead get nothing because that advance plus their share of customer property would cause them to get proportionately more than a wealthy hedge fund which will get scores or millions of dollars strikes me as beyond the pale, strikes me as a bill of goods that the Trustee has sold to courts, media and others who have not given thought to this country's long tradition symbolized by progressive taxation, welfare and the like.
We know, from answers in letters SIPC has sent to Congress, that the people who are recovering from the Trustee under CICO, at least in the short run, are mainly the fabulously rich -- hedge funds and banks who will be getting scores and hundreds of millions of dollars. As well, the Trustee has conceded that it was the investments of these huge entities, from about 1999 or 2000 onward which kept Madoff's scam going, thereby increasing the losses and the amounts demanded by the Trustee from small people, who for years kept investing more money and kept taking out money to live, which they wouldn't have been doing if the huge entities, which had the capacity to do but did not do the due diligence that would have caused the whistle to be blown on Madoff many years ago. Does fairness consist of giving the huge investors scores and hundreds of millions of dollars under CICO while not giving, say, one or two million dollars to people in their 70s or 80s who have been wiped out and have little or nothing to live on, and whose losses and assessed clawbacks would have been far smaller but for the incredible negligence of the big entities who will receive scores or hundreds of millions of dollars?
These are the answers which could have been added in response to the judicial claim of absurdity, a claim which was just a different method of expressing Picard's and SIPC's continuous and preposterous two year old refrain that they are doing what is fair. These answers could have been prepared in advance, and a memorandum emailed to the NYC lawyers on March 1 extensively discussed them.
After Judge Raggi's comment about the law abhorring an absurd result, there was a colloquy which was hard to follow. It almost surely has to be one of the things that caused some attendees, some writers of web traffic, to think badly of the oral argument. The colloquy was somewhat unclear and reasonably long. Bear with me.
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