Comments On The Hearing Of February 2nd Before Judge Lifland

As many will know, one day after the oral argument, Helen Chaitman wrote Judge Lifland a letter urging him to reach a compromise verdict that would, she said, accomplish Lifland's aim of not having customer property go to persons who had taken out of Madoff more than they put in. Let me quote her relevant two paragraphs.

I write on behalf of a very large group of investors in Bernard L. Madoff Investment Securities, LLC ("Madoff") to suggest a partial resolution of the "net equity" issue. Mr. Sheehan's rebuttal ended yesterday with the passionate argument that it is unfair to investors with a positive net investment that investors with a negative net investment should share in the fund of customer property. There is a large group of investors who have a negative net investment, and many who have a positive net investment, who would forego any distribution from the fund of customer property if they were promptly paid their $500,000 in SIPC insurance. Hence, we ask the Court to consider incorporating this proposal into Your Honor's decision on the "net equity" issue.

That is, if you are persuaded that SIPC is correct and that Ponzi scheme cases arising in non-SIPA liquidations are applicable here, before relieving SIPC of its entirely independent insurance obligation, you give investors the choice of foregoing any distribution from the fund based upon each customer's November 30, 2008 statement. This would provide incalculable relief to approximately 3,000 elderly Madoff investors whose lives have been decimated more by SIPC's denial of their insurance coverage than by Madoff's crimes. Neither SIPC nor the Trustee has provided the Court with a single authority for the proposition that a third party insurance entity like SIPC should be relieved of its insurance obligations to innocent third parties solely because the broker operated a Ponzi scheme.

Chaitman also set forth a long list of cases that had referred to the advances of up to $500,000 as insurance. Chaitman's proposal was joined on the same day by Brian Neville. Then on February 9^th, Sheehan wrote a letter claiming that, by her proposal, Chaitman has "essentially conceded the propriety of the Trustee's and SIPC's position with regard to net equity, recognizing the fundamental unfairness to permit "net winners' to share in the fund of customer property with those customers who have not yet been made whole."

That Chaitman conceded the legal correctness of the Trustee's and SIPC's position is so patently false on its face that one can only wonder that it was set forth. (Although it is all too symptomatic of SIPC's and the Trustee's method of litigating.) In fact, I for one suspect that Chaitman's letter could have been in part a ruse designed to enable her to get before the court a long list of cases describing the SIPA fund as insurance, the point Sheehan vigorously denied the day before. Be that as it may, Chaitman obviously understands that it will be years before any victim gets any customer property, and, conceivably pushed by desperate clients, she is asking the court to show what in Yiddish would, I think, be called rachmonis. (Do I have the word and the meaning right?) Of course, if I am correct, she probably should not have confined the offer to the situation of the court deciding for the Trustee, but also against the Trustee, since appeals would still take years, so would litigation to recover customer property,and her clients still will not see dime one for many years. In any event, the problem I see is that at one point she asked the court to incorporate her proposal into its legal decision. I find it hard or impossible to understand how this could be done, since the definition of net equity is what it is, and the definition controls both the advances from the fund and participation in customer property. (In my brief I said it would be nice if such advances and such participation could be determined separately but it seemed to me that the definition of net equity controlled both.) True, it is not unknown in law for the very same word or phrase to mean different things for different purposes. But I find it hard to think that that would be the ruling here. But maybe I'm wrong.

Of course, it is one thing to say that the judge will find it difficult or impossible to rule as a legal matter that the definition of net equity changes as between advances and later recovery of customer property, and it is quite another thing for the judge, before issuing any ruling, and at a time when he therefore holds a club over the heads of both sides, to call them in for a settlement conference and say, "This is what I want you to do. I want you to reach an out of court settlement under which people can elect to receive $500,000 (and not be subject to clawbacks) while agreeing to give up any future right to customer property. If you reach that settlement, great. If you don't, one of you is going to be hammered in the opinion I write." There are judges who do force those kinds of split-the-baby settlements on people. But whether Lifland would is something about which I have no idea.*

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