Helen's position receives further support in the legislative history, which was covered in a footnote at pages 15-16 of this writer's brief-in-chief to the Second Circuit but which I do not recollect being covered elsewhere. (Am I wrong?) For simplicity's sake I shall simply set forth the footnote from the brief:
Because SIPA established an insurance fund, the SIPC fund was intended to be separate from the fund of "customer property." Thus, the 1977 House Report emphasized the distinction between customer property and the SIPC fund by saying that a customer "may file a claim against the general estate to the extent that his net equity exceeds his share of customer property plus SIPC protection, (Addnd., p. 65) (emphasis added). The Report quoted Chairman Owns of SIPC as follows: "In order to protect customers of failed broker/dealers against financial loss and, thereby, restore investor confidence in the securities markets, Congress passed the 1970 Act. That statute, which was signed into law on December 30, 1970, created SIPC and established a program whereby monies from the SIPC Fund would be available for the purpose of protecting customers of broker/dealer firms which encountered financial difficulty." (Addnd., p. 66.) Chairman Owens of SIPC said, in the 1978 Senate Hearings, that "customer property, briefly explained, consists of all cash and securities (other than SIPC advances and customer name securities) available to the trustee for the satisfaction of customer claims." (Addnd., p. 76 (emphasis added).) The 1978 Senate Report reiterated that "A customer may file a claim against the general estate to the extent that his net equity exceeds his share of customer property plus SIPC protection." (Addnd., p. 81) (emphasis added).) The Senate Report also said the legislation "provides that all cash and securities, exclusive of SIPC advances . . . shall be deemed to be customer property." (Addnd., p. 83 (emphasis added).)
The final colloquy of the oral argument began with Judge Raggi saying, "Let me ask you the question that we've dealt with with other counsel" (a statement which may in part reflect the fact, discussed at the very beginning of this essay, that our side did not divide up the argument by issues). (Tr. 77) Raggi continued that the books and records provision "says that you pay those obligations only to the extent they're ascertainable from the books and records of the debtor or otherwise established to the satisfaction of the Trustee. When the Trustee goes into these books and records he finds out that there was never any transaction done on a particular day. Rather, it was post hoc representations that transactions had been done in order to relay profits that had never been realized, and that that is not really a securities transaction. So, to that extent it's not finding a net equity position in that. Why isn't that within the Trustee's discretion?" (Tr. 77-78 (emphasis added).)
What Raggi was bringing up, at bottom, was the question of whether the Trustee has discretion to decide that CICO should be used instead of the FSM. Helen's answer was that "the Trustee has an obligation to honor the net equity, which is the obligation of the broker . . . ." (Tr. 78 (emphasis added).) To which Judge Raggi responded that this is true only "insofar as these two things are satisfied" (Tr. 78), by which I think she meant that the obligation is ascertainable from the books and records or is otherwise established to the satisfaction of the Trustee. Chaitman's trenchant reply was, "There's nothing in the books and records of Madoff that indicates that he doesn't owe to each investor the November 30th, 2008 account balance." (Tr. 78 (emphasis added).) What Helen was alluding to, I believe, is that, as was established earlier in the oral argument, Madoff owed each investor what was shown in the statement and would have had to pay each investor that amount if sued for fraud. QED.
Raggi replied, however, that Madoff's purported transactions were "reported after the fact and concocted because it was profitable." (Tr. 78.) This is riskless and accordingly is different from the situation where "the customer takes a risk." (Id.) Chaitman's answer was that the situation is exactly the same as in New Times, where there was "no evidence in the debtor's books and records that the customers whose statement showed existing securities, that the debtor had ever purchased those securities. It's exactly the same thing here. And there is nothing in this record which indicates that any of the prices for the securities were invalid. If someone in 1960 bought IBM stock and sold it and then bought it again and sold it and bought it again, it would have appreciated in value. There is no reason to disallow -- " (Tr. 79.) I would add, with regard to risk, that, as said earlier, the victims didn't know they had no risk: they thought they had risk.
Raggi responded to the last part of Helen's statement with the cynicism that "That's like my telling you today that ten years ago I bought Intel and then I would have a huge profit in it." (Tr. 79.)
Chaitman replied by beginning a well taken defense of the victims' conduct, saying "How can a customer -- the people standing before you invested in Madoff through seven investigations conducted by the SEC of Mr. Madoff over an 18-year period. If the SEC -- " (Tr. 79.) Before Helen could present the horrendous negligence/incompetence of the SEC, the agency on which so many victims relied, Judge Raggi interjected that "There's not a suggestion that your clients are in any way culpable for this. The question, though, is whether or not the Trustee in paying pursuant to this statute has some discretion about how to calculate net equity." (Tr. 79.)
This interjection caused Helen to have to turn away from bringing out some or all of the very important points that the SEC missed Madoff's fraud in approximately six investigations, that victims who are small people rather than being huge institutions with the resources to do extensive due diligence could not be expected to know or find out what the SEC missed, and that victims relied on the SEC, which time and again gave Madoff a clean bill of health, even saying publicly in 1992 that there was no fraud. Instead of being able to say some or all of these things, Chaitman had to answer Judge Raggi's question whether the Trustee had discretion. She said he had none, and continued on with what I think are some of the more important points made by our side at the oral argument. She said the Trustee had no discretion "for purposes of the SIPC payment. The SIPC payment has to be based upon the last statement. There is a provision in SIPA which says that SIPC cannot change the definition of net equity. That's how important this definition was to Congress. In order to induce confidence in the capital market so that people would give up the requirement of holding certificated securities. And there is nothing in the statute which says it only protects customers who have a buy and hold strategy or customers who fail to delegate to their manager or their broker the right to invest in his discretion. There is no limitation in the statute. So it covers every one of these Madoff investors who had a legitimate expectation that they owned the securities on their statements." (Tr. 79-80.)