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The colloquy started with Judge Raggi commenting that our lawyer seemed to be saying that there could be no exceptions when calculating net equity; no flexibility when calculating it. (Tr. 9.) I would guess the reason she said this was that our lawyer had said the statute provides no exceptions for the size, nature or effect of the scam. Yet, said Judge Raggi, "New Times did treat two different forms of investment differently," so our argument might not be maintainable. (Tr. 9.) Our lawyer responded that victims here are in "the exact same situation as those New Times customers that received account statements," apparently referring to New Times investors who bought securities existing in the real world. (Tr. 10.) The lawyer continued, now apparently referring to New Times customers who bought securities that did not exist in the real world, that the Trustee in New Times could not purchase the pertinent securities, and there "was [therefore] no legitimate expectation on behalf of customers that they actually own those securities," whereas here the Trustee "could go out and buy IBM, Google, Microsoft," etc. (Tr. 10.) To which Raggi said that a difference between Madoff and New Times is that here there were fraudulent trades done in hindsight, and this was different from the customer "investing" in New Times, which I take to mean that the strategy of continuous trading in Madoff is different from the buy and hold strategy in New Times (it has been assumed by all, but never verified, that in New Times there was solely a buy and hold strategy). (Tr. 10-11.) A buy and hold strategy, of course, allows you to look at what happened in the real world in order to gauge what the customer should get. Our lawyer responded to this by saying there is no cognizable difference between giving a broker discretion to trade for you, discretion to determine when and what to buy or sell, and telling the broker what to buy. (Tr. 11.) Then Raggi put to our attorney one of the mathematical examples that tricked up the oral argument, and our attorney responded by saying "if you can go and look and see if your security increased in value, then you would have legitimate expectations in that increase in value." (Tr. 10-11.)
You got all that? It is perhaps more clear in import here, after I have in a sense "cleaned it up." After reading the transcript several times in hard copy and marking it up, I think I finally figured out what was going on, and here's my take on it.
The point of Judge Raggi's initial comment was that maybe you can, as was done in New Times and as the Trustee and SIPC desire here, determine net equity in different ways depending on the circumstances. Maybe you don't always have to use statements (at least where they exist). Our lawyer's reply, which didn't really respond to the point, was that the Madoff victims are in the same position as the New Times customers who got account statements, by which he must have meant the New Times customers who bought securities existing in the real world. Continuing on the theme of the situation of investors in New Times, he then switched implicitly to the New Times customers who bought securities that did not exist in the real world, and said that because the Trustee could not buy those securities, customers had no legitimate expectations regarding them, whereas here the securities could be bought in the real world -- so that here, he was saying implicitly, there are legitimate expectations. (Why there should not have been legitimate expectations for owners of non existing securities in New Times who received account statements showing ownership, is something that was not explained as far as I can see. The idea seems implicitly to rest on the fact that the securities could not be bought. Yet if, and because, account statements are the be all and end all, so to speak, it is hard to understand why the New Times investors in non existent securities shouldn't have been able to rely on such statements. So it may be, as Judge Jacobs later commented, that the investors who bought non existing securities in New Times might have been treated unfairly -- as I personally believe to be the case. Of course, from the standpoint of argumentation in the Court of Appeals, it was not desirable to tell the Court that it had been wrong in New Times with regard to persons who bought securities that did not exist in the real world, and that in this regard it had been sold a false bill of goods by the SEC and SIPC in New Times. Rather, our side tried to work within the dichotomy set up by New Times, even if that dichotomy was incorrect.)
Judge Raggi's response to the claim that Madoff investors are in the same position as New Times investors who bought securities existing in the real world rather than investors who bought securities that did not exist there, was, in effect, the claim of SIPC and the Trustee. To wit, here the trades did not exist in the real world, just as the securities did not exist in the real world in part of New Times. And because the trades did not exist here in the real world, you cannot measure what occurred in Madoff's fictional world against real world results, whereas you could do so in New Times with respect to investors who bought securities existing in the real world and who simply held them (as is assumed to have been the case with respect to existing securities in New Times). There is thus a difference for SIPA purposes between a strategy of repeatedly buying and selling (a so-called trading strategy) as was purportedly done in Madoff, and a strategy of merely buying and holding, as was purportedly done in New Times.
Our attorney responded that there cannot be such a difference for SIPA purposes because there is no cognizable difference (in law) between telling a broker to buy a particular stock and giving him discretion as to what to buy and sell and when. Either way (I think he was saying) you have legitimate expectations of an increase in value if you can observe such an increase in the real world. So therefore, the argument would run, it is of no moment whether you simply bought and held securities or they purportedly were bought and sold, bought and sold. The main point is that in either case you can see in the real world that the price shown on statements is correct.
So there you have it (I think). The argument seems to have been about whether, especially after New Times, net equity must always (or almost always) be determined in the same way, or whether a Trustee can have discretion to determine it differently if something fake is involved, and, if so, in what circumstances of fakery does the Trustee have such discretion. The whole argument makes me think, as I have previously said to people, that we have allowed the entire question of net equity to get too complicated instead of simply saying, as discussed above, that Congress had certain intents, CICO destroys them, the FSM preserves them, and that is the end of the story here and in nearly all cases (except, perhaps, in some of the bizarre hypotheticals posited by the Court where, contrary to Congress' intent, an investor is not protected, but harmed, by use of the statement in a case involving fraud).
Of course, in opposition to my sense of things, one could say the other side has put forth arguments and we must answer them even if this complicates matters. Yes -- but we should answer them in ways that do not further complicate matters, but which instead go back to our simple, fundamental arguments about what the statute is supposed to achieve and which say the other side's arguments destroy the desired statutory achievements, as they do.
And, before turning from the complex colloquy, let me also elaborate a little, in a discursive exercise, on the reasons why the Trustee was allowed not to use statements to determine net equity with regard to people who bought non existent securities in New Times. It involves a point I have put forth many times but that has gained no traction. In New Times SIPC and the Trustee told and convinced the Court that, since the securities under discussion did not exist in the real world, the Trustee couldn't determine their value, the fraudster could thereby give them whatever value he wanted to, and the SIPC fund would thus be endangered. The idea is one expressed by Judge Jacobs when he said Madoff would have been able to determine value by "chewing on his pencil and looking at the ceiling." (Tr. 18.) But the idea, while attractive to the instinct, is significantly untrue in fact. Some of the supposed victims are complicit, can be caught, and can be denied SIPC payments, all of which Picard himself has shown. For others, there are well established, oft-used financial techniques to judge and place limits on the fraudster's "generosity." One can rely, for example, as here, on measuring returns by comparison to the S&P 100, to mutual funds, or to other funds using the same financial strategies as Madoff. Indeed I have often thought exactly the same could have been done in New Times where, given the facts as I understand them, the nonexisting funds could appropriately have been assigned an ultimate increase in value not far from that of the funds which did exist in the real world. The claims made by the SEC and SIPC in New Times with regard to inability to know what the value of securities might have been are hooey. (This was covered in a memo sent to the lawyers on March 1st.)
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