Leval then asked a question he and the other judges appear to be focused on: whether, with regard to the SIPC fund, "are any of the Madoff customers harmed by the last statement approach." (Tr. 28.) "They definitely are harmed," he continued, "in the division of the estate pie, the ones who are more recent investors are harmed because a larger percentage goes to the earlier investors whose accounts built up and built up over the years. But how are customers harmed with respect to the part that comes from SIPA?" (Tr. 28.)
Answering the obverse or converse question from the one put by Leval, our advocate said victims are harmed by CICO because CICO means they will get less from the SIPC fund by invalidating all the statements received by an investor.
This question of whether the use of the FSM lessens the return of some investors is one that the Court returned to when questioning our opponents. Suffice to say here that it appears to be very much on the Court's mind and conceivably could prove important in the case and in efforts to settle the entire Madoff matter outside of litigation. Some people think, as will be discussed later, that the Court is looking for a way to use the final statement for purposes of SIPC advances but, at least initially, not for purposes of distributing customer property. And, regardless of this, the idea is an obvious one for purposes of trying to work out an overall resolution of the Madoff matter, a resolution in which it could play at least some role.
Next Judge Raggi asked why the Trustee "did not have the discretion to proceed as he did under . . . the section that says he's obliged to discharge net equity claims only insofar as such obligations are ascertainable from the books and records of the debtor or are otherwise established to the satisfaction of the Trustee." Judge Raggi asked "Do you agree that that controls his determination here, that that is the relevant section or not?" (Tr. 30.) Our lawyer did not agree, and said the definition of net equity governs what the broker owes, which generally speaking is determined by the final statement (except, for example, where there are no statements). (Tr. 30-31.) Raggi responded that the statute says "you pay obligations only insofar as they are ascertainable from books and records of the debtor," that here the books and records show that purchases were never made and fake purchases were concocted after the fact, that the FSM therefore would not be a reliable way to calculate net equity, and why do we say the Trustee does not have discretion to make such a decision. (Tr. 31-32.) To which the lawyer responded, quite commendably, that "to go back to my first principle here, this should protect customers. That's the name of the statute and the customer should be the focus. (Tr. 32 (emphasis added).)
Judge Raggi then made a comment that induces apprehension, and that received an answer very surprising to me. She said "I understand we're interested in statutory purpose, but we are limited by statutory language." To which the lawyer replied, "Absolutely, absolutely." (Tr. 32.) I will say right now that the lawyer's answer should instead have been, "Yes, we must conform to statutory language, but the statutory language must be interpreted in the light of the Congressional intent."
Anyway, the attorney then answered that the statutory section does not allow the Trustee to ignore the statements, which are records of the broker. Again our lawyer correctly said that you must "look at it from the customer's perspective, and under the UCC and securities law the customer can sue the broker on the basis of the statement." (Tr. 33.)
Judge Raggi seemed unsatisfied by this answer, and among other things said, in effect, that the Trustee does not have to accept transactions which the books and records show never happened. The lawyer said a customer's rights derive from the statement under non SIPA law (which the Judge said she understood), and the situation is the same under SIPA, which is to protect the customer, since the "SIPC fund is there precisely for a situation in which the broker did not buy the securities he was supposed to buy." (Tr. 34.) [QED] The statement is the measure under other laws than SIPA, and SIPA law does not "reduce the customer's claim." (Tr. 35.)
This colloquy had some important points in it. To begin with, the judges appeared to understand that there are two different funds, the SIPC fund and the customer property fund, and seemed to think that it might make sense to use the final statement method for the first fund, but not the second. (As will be discussed in the second part of this essay, our opponents claim, in effect, that there is only one fund.) Also, and again as will be discussed in the second part of this essay, many think the judges are looking for some way to treat the two funds differently, so that, for example, even if the FSM governs payments from the SIPC fund, it might not govern, or might not exclusively govern, payments from the customer property fund. Whatever the judges might be thinking, it is plain that the idea of treating the two pools of money somewhat differently is one that a lot of people find attractive and that conceivably might be part of the basis of a non judicial solution to the Madoff mess.
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