Let me now continue this dull, pedestrian writing by turning to the oral argument of our second lawyer.
In an immediate colloquy with Judge Leval, the attorney said we are not relying on the provision requiring the Trustee to discharge obligations insofar as they are ascertainable from the bankrupt's books and records, but on the net equity definition, which, the attorney said, is consistent with the language of the books and records provision. (Tr. 12-13.) Aside from SIPA, it was said, in law your statement reflects what you own, and SIPA does not change this. So normally, as here, your statements control, except when the statement would result in the investor getting less than is proper.
Judge Leval then put forth one of the bench's mathematical hypotheticals testing the argument that the statement is all one looks at and, after the lawyer began to respond, quickly pointed out that the present situation "is whether peoples' accounts should be valued on the basis of fictitious trades that never occurred, on the basis of statements that were simply figments of the imagination and never involved any real securities whatsoever." (Tr. 15-16.) The lawyer's relevant response just a bit later was that Madoff's customers received statements showing ownership of securities "And under all nonbankruptcy law those statements give them ownership rights and I think SIPA also gives them ownership rights." (Tr. 16-17.) Otherwise, SIPA's protection does not work for the investors. The statement therefore controls "when the customer believes rationally that the statements that they're getting are consistent with what they own. And the reason . . . is because you never know when your broker is engaged in a Ponzi scheme or some other nontrading of securities. You don't have physical securities anymore in your possession. You have no idea what's going on behind the scenes. You must rely on your statements. (Tr. 17-18 (emphasis added).) At this point Judge Jacobs made his remark about Madoff chewing on his pencil and looking at the ceiling, while making up amounts, and the lawyer responded that "customers are entitled to rely on their statements and I believe the fund [the SIPC fund?] is obliged to honor their expectations unless it can be shown that . . . they actually knew something was going on." (Tr. 18.)
The colloquy had several significant points for our side. One is our claim that the situation under SIPA conforms to the non SIPA law. A second and very important one is that, in answer to the point that the statements were just figments of imagination -- a point which seems to have a magnetic attraction for judges -- our lawyer quite rightly made the crucial point that the innocent investor didn't know that Madoff was a Ponzi scheme, and therefore was entitled to rely on his/her statement if it conformed to the market. A third is that you have to rely on the statement, and SIPC must honor expectations arising from the statement, because you no longer receive physical securities, which are held in street name today (because this was more advantageous for Wall Street). So some crucial points were made, even if not always in a crystalline way.
Judge Jacobs next picked up on our lawyer's reference to legitimate expectations and said this refers to New Times' method of determining whether an investment "will be classified as one for cash or an investment in securities." (Tr. 18.) Every victim here has received the benefit of his investment being classified as one for securities, but he was "not sure legitimate expectations govern . . . the precise amount of money" a victim gets. The lawyer replied, surprisingly to me, that "I'm not sure it's legitimate expectations exactly either," but then said, in effect, that the statement determines what one would get in a non SIPA lawsuit (e.g., for fraud) and therefore must determine the amount you have for SIPC purposes too unless, for example, the customer was complicit. For again, as the attorney was quite right to emphasize, the statement is the only way an investor knows what he owns and "the whole system is dependent" upon the statements issued by the broker "saying this is what you own." (Tr. 19.)
The attorney's answer to Jacobs as to why you have to rely on your statement was good. It would have been even better if the lawyer had crisply said to Judge Jacobs that the legislative history shows that SIPA was to protect investors and giving effect to the statements they receive is the only way to carry out the legislative intent to protect them. I would add that I have never understood the idea that a statement saying you own X security which was bought at Y price gives you a legitimate expectation that you own X security but does not give you a legitimate expectation that its price was Y. Have you ever heard of someone who received such a statement and (barring a known or suspected mistake in price) thought that she owned X security but that its price had not been Y?
The next significant colloquy involved valuation. Judge Leval asked whether there was a challenge in New Times to the valuation of securities that existed in the real world. (Tr. 20.) The attorney correctly said no. (Id.) Leval then said that New Times therefore was not a precedent for using the account statement for determining valuation. (Id.) Our attorney responded that this is correct, but New Times means that the statute must be followed where it can be, as here. Judge Jacobs then chimed in that, as we've heard, and has been discussed above, in New Times it was not possible to determine the real value of the securities that never existed (so CICO was used), and isn't the analogy here that the transactions in Madoff were as fictitious as the non existing securities in New Times. (Id.) Our lawyer responded very aptly that the system is "set up to protect the customer, so . . . you need look at it from the customer's perspective . . . .The customer provided funds to a broker and said, please invest this, it's your discretion, you invest it. The broker kept issuing statements that looked like they were consistent with the market, that told the customer this is what you own. This went on for 30 years, it seemed to work pretty well for a pretty long time. The customer had every reason to assume that the protections of the securities laws of Article 8 and finally of SIPA would govern in this case." (Tr. 21-22.)
Judge Jacobs then said, "Well, then it does seem awfully unfair to the people who were credited with having fake securities in New Times that they shouldn't get the benefit of exactly the same expectations. After all, ordinary investors don't really have the ability to go out and find out whether, you know, Blue Sky Corporation actually exists or has a certain capitalization or is traded here or there. It just seems, under your argument, it seems to prove too much because then New Times is wrong. All of those people were unfairly treated, according to you. And they may indeed have been unfairly treated in the overall scheme of things. The question is were they unfairly treated under the statute?" (Tr. 22.)
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