Our lawyer replied that in New Times the owners of non existent securities were entitled under the statute to what their statements showed, but the problem was that the non existent securities didn't exist, and therefore couldn't be bought and couldn't be valued. Judge Raggi interjected that nobody "is going to give your client 20 shares of AT&T." Only money is involved here, so why does the money from phony transactions deserve SIPA protection any more than the money from phony securities in New Times? (Tr. 23.) Our lawyer replied that the fake securities in New Times could not be bought or valued and therefore SIPC would be "exposed to risk which there was no way to tether in any way to the market." (Tr. 23.) Whereas here there were "real securities that were traded, according to the statements, at prices you would expect in the markets." (Tr. 23.) To which Judge Raggi said, "But that assumes that the customer took risks in the market," though Madoff investors never did since everything was concocted by Madoff after the fact, "always to show gains." (Tr. 23-24.) (I frankly don't understand the logical relationship of Judge Raggi's comment to what came before, since the issue was can you determine price, not did you have actual market risk.) Our lawyer responded, quite aptly, that (once again) you must look at it from the standpoint of the customer, who does not know what the broker is doing except for what the broker tells him in the statement which he receives and who has relied on that information month after month and acted in accordance with it. (Tr. 24.) To which Raggi, replied that this is the same for both the non existent securities in New Times and the non existent trades in Madoff. (Tr. 24.) Our lawyer replied that the question is whether the statute can be applied. Our attorney agreed that "SIPC is not going to go out and buy the AT&T, but SIPC can tell you how much the AT&T was worth" on the pertinent date. This could not be done in New Times with regard to the non existent securities, our lawyer said. (Tr. 24.)
Whew! What is the meaning of all this extensive to-ing and fro-ing? What at least is the meaning of important parts of it. Well, it starts with the lack of challenge to valuation of existing securities in New Times, which Judge Leval said had no precedential value because there was no challenge. Our lawyer responded that you have to use the statements, which were consistent with the markets. Moreover, the fact of the matter is that the New Times Trustee used, or used the equivalent of, the final statement method in New Times for securities that existed in the real world -- and the question was whether buyers of non existent securities should be given the same treatment. This, I think, cuts against the claim of lack of precedential value, a point which is especially true since the Court in New Times, which was an appeal by the owners of non existent securities, said "To be clear -- and this is the crucial fact in this case -- the New Age funds in which the Claimants invested never existed." (First emphasis added, second emphasis in original.) So I think that, even if Judge Leval's point may be technically true, in reality it is a bit overmuch.
As for Judge Raggi's comment that Madoff victims experienced no risk, none of them knew they had no risk, since none of them knew Madoff was not actually in the market. They thought they had risk, and it seems quite wrong to deprive them of SIPA benefits on the ground that they had no risk when they did not know they had no risk and honestly thought they did have risk. And, as our lawyer said, the customer had to rely on the statements she received; she had no other information, after all.
Then the foregoing turned to our opponents' fundamental assertion, which has been the subject of previous discussions: that there is no difference between a situation of faked securities and a situation of faked transactions. Our lawyer's response was the very appropriate one that you must look at it from the customer's perspective, because "the whole system is set up to protect the customer." (Tr. 21.) Amen -- that is exactly what the all important legislative intent was.
Judge Jacobs noted that, looked at this way, the people who bought non existent securities in New Times had the same expectations and therefore our lawyer's argument proves too much because it means New Times was wrong and the investors there may have been treated unfairly. Exactly. They were treated unfairly, and New Times was wrong with regard to them, unless you say that in New Times they could at least have checked out whether the fake funds even existed -- and maybe they could have, though I don't really know and cannot remember ever reading anything about this. Our attorney said the people in New Times were entitled to what was on their statements, but the problem was that it couldn't be valued. Here, of course, as our lawyer repeatedly said, the securities could be valued in the market.
In the colloquy, Judge Raggi said the only question involved was money because "no one is going to give your clients 20 shares of AT&T." (Tr. 23.) This remark was not gainsaid. It reflects a SIPC invention that completely destroys Congressional intent, yet somehow has taken hold and is never even challenged. As I have written in essays and briefs, Congress amended SIPA in 1978 precisely so that SIPC would go into the market and acquire missing securities to give to victims. Congress considered it very important for people to get back into the market quickly, and knew that there were important investment and tax consequences involved. And here, as also explained in essays and briefs, the missing securities could have been obtained and given to victims; they were S&P 100 securities that constituted only a fraction of the number of shares of each issue that are traded each day or week. It would have made a huge difference for victims to get securities here, because the stocks have risen dramatically in value since Madoff went under on December 11, 2008.
This brings me to the last important colloquy involving our second advocate. Judge Leval, in words that seemed to gum things up though his meaning was clear enough, asked/said that our lawyer was saying there are two different pies, meaning the SIPC fund and the customer property. (Tr. 26.) He asked whether the size of "that pie [which pie?] will vary according to how this question [the question of net equity, one gathers] is determined?" (Tr. 26.) Our lawyer said no. The judge asked the relative sizes of the two funds. Our lawyer didn't know, but did know that the SIPC fund was big enough to cover everyone up to the $500,000 per individual that SIPC could be liable for. The lawyer didn't know (naturally) what the ultimate size of the customer property fund might prove to be. (Tr. 27.)
At that point Judge Leval presented an idea that subsequently has been the subject of much talk. Perhaps using incorrect words but with his meaning being unmistakable, he said. "It seems to me that the argument that you're making makes better sense in the SIPC application than it does in the division of the pie. As to the division of the estate pie, who gets more and who gets less would be entirely a function of, as Judge Jacobs was saying, Mr. Madoff's imagination." (Tr. 27.) Our advocate replied in part that "the question of who gets more and who gets less" is thought "the motivating factor in what the Trustee is doing." (Tr. 27.)
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