COMMENTS ON THE SECOND CIRCUIT'S DECISIONAugust 23, 2011
I have been asked to state my views on the Second Circuit's decision on net equity in the Madoff case. Some of the matters I shall discuss are relevant to a request for rehearing en banc to the Second Circuit and/or a subsequent petition for certiorari to the Supreme Court.
1. The Court's decision is based on its acceptance of the statutory language relied on by the Trustee rather than the language relied on by the victims. The victims said they had a right to their "securities positions" as reflected in their final statements. The Trustee said he had to and should give them only what the "books and records" showed they had put in and taken out, so that a person who took out more than he put in had no net equity. In these regards (and others), the Court, like the Trustee as well as many people not connected with the Madoff affair, thought it overriding that everything Madoff did was a fake and the final account statements represented fakery, so it was better, and necessary, to look at the books and records rather than rely on the phony securities positions set forth in the final statements.
To me it seems self evident that, in a case where things were faked, and there is rival statutory language for the Court to choose from in determining net equity, it is essential to present a court with strong and repeated policy statements as to why it should choose the counter intuitive position of using the faked statements to determine net equity rather than the reality reflected in the books and records. Those policy reasons are found in the intent of Congress repeatedly stated in the legislative history. This author vigorously and repeatedly urged upon the New York lawyers who controlled the case for the victims' side that the policy arguments, found in the intent of Congress expressed in the legislative debates on the floor of the Senate and House at the beginning and near the end of the '70s, should be the linchpin of the case. For (with some relatively minor exceptions we can overlook here) true securities positions were zero, since Madoff did not buy or sell stocks for the victims.
This author's urgings were unsuccessful. It was decided early-on in New York that the dispositive point was that the statute said net equity was the securities positions reflected in statements from Madoff (less indebtedness to him). This writer disagreed, saying, as did judges at oral argument, that "securities positions" were zero because the whole deal was a fake in which securities were not purchased. This view was unpersuasive to the lawyers on our side, who said victims' securities positions were what was shown on the final statements: Such was required by state law, it was said, is admittedly what Madoff would have been obligated to pay victims had they sued him before December 11, 2008, and for all these reasons is the measure of net equity under the statute.
The foregoing argument about securities positions, an argument about which our side was warned, was, and proved, a loser because, as said, in reality the victims' securities positions were zero.
2. It was, as said, this writer's view, unsuccessfully pressed on the New York lawyers orally and in writing, that the only way to persuade a court to rule that the final statements should be the measure of net equity though they were faked was to rely extensively and repeatedly on the intent of Congress as reflected in floor statements, many of them made by the leading Senators and Congressmen of the 1970s. (President Nixon and Treasury Secretary Kennedy also weighed in.) Those extensive and repeated statements made plain that the Congressional intent would be vitiated if CICO were used instead of the FSM. It is not that the legislative history ever discussed net equity explicitly. It did not. It is, rather, that the floor statements repeatedly stated Congressional goals that will be vitiated by the use of CICO, goals such as protecting small investors, giving them confidence in markets, paying investors promptly, and protecting them against non purchase and/or theft of securities. And not to be forgotten is that it was known that investors would have to rely on their statements because the securities industry was switching, and SIPA was part of the switch, from giving physical securities to investors to holding securities in street name. (The Madoff scam could not have been done if Madoff had had to give physical securities to investors.)
As readers will know very well, and for reasons most readers will likewise know very well, the goals sought by Congress are stymied by CICO. The Second Circuit discussed Congress' goals only very scantily and paid no heed whatever to the abundant floor statements setting them forth. Fundamentally, the Circuit relied instead on what it thought the best reconciliation of the statutory provisions, with little regard to the goals shown on the floors of Congress. In this regard, it adopted the Trustee's position.