March 31, 2011
Discursive Comments On The Oral Argument In The Court of Appeals
In The Madoff Case On March 3, 2011.
The next to argue for our opponents was the Trustee's Counsel, David Sheehan, who has made himself the bÃªte noire of many victims by what they consider his pit bull attitudes, insults, and sometimes outlandish comments (such as that no legislator would think the FSM should be used).
Sheehan began by saying that by using CICO the Trustee had reasonably followed the statute in a reasonable exercise of discretion, since this was a Ponzi scheme with no profits. (Tr. 51.) The customer fund, he said, is "the money that went in," i.e., the cash in. To which Judge Jacobs said, "The SIPC fund is not the customer fund," and then said, perhaps very importantly, "the SIPC fund is what we're talking about here today." (Tr. 51.) At that point Sheehan, as best I can tell, began trying to say -- I think -- that the SIPC fund and the customer fund are at least intimately related because the payment from SIPC is "an advance. It's an advance against the money owed to you by the broker." (Tr. 52.) If the broker owes you nothing, said Sheehan, there is no advance. (Tr. 52.)
At that point Judge Raggi interjected the following incredulous comment. "Well, you don't think the broker who told people over the course of 30 years that they had a statement that increased at the rate of 15 percent a year or whatever owes them only what they put in at the start of the 30-year investment? You think that's all the broker owes these people?" (Tr. 52.) Sheehan's answer to this question was, I believe, outlandish. "In a Ponzi scheme, yes. Absolutely. Why would he owe them anything more." In short, Sheehan was saying that even Madoff himself, had he been sued by an investor at some point for the amounts shown on the investor's statement, would have owed the investor only what the investor had put in, not what the statement showed.
Raggi then interjected. "But fraud." (Tr. 52.) Sheehan replied that "Fraud is a general creditor claim." (Tr. 52.) There are two funds, Sheehan said, one being the customer fund of property [which] is the cash and securities deposited with the broker. The broker has an obligation to pay that." (Tr. 52-53.) The implication here was that the broker would not have the legal obligation to pay an investor the false profits shown on the statements the investor received. If this were the only argument the other side had, I would have to think they would be sure losers.
Judge Raggi seemed unable to accept Sheehan's argument, saying that "Even the government of the United States, the SEC thinks it's the current value of the money, not just what they put in 30 years ago." (Tr. 53.) Sheehan contested this position, saying "I don't know if I agree with that. I think it's only what they put in. If in fact it was never invested, if in fact there's no profits, no transaction, how did the fund grow? Where does it come from?" (Tr. 53.) Judge Raggi responded "That the injury from the fraud, is that if the individuals had known it wasn't going to be invested, they would have put it somewhere else and hoped to profit from it." (Tr. 53.) Sheehan's response was that this is a general creditor claim. (Tr. 53.) The answer put him in the contradictory position of arguing on the one hand that the broker would not owe the victims, and would have no obligation to pay them, the fake profits, but that there is a claim for fake profits that should be leveled against the general estate.
Sheehan then undertook a more elaborate explanation of his position. He said the Trustee is trying "to recover the monies that belong in the [customer property] fund" because it had been "other people's money." (Tr. 53.) For example, from Picower they got "$5 billion . . . that wasn't profits . . . . Mr. Picower had "$5 billion of other customers' money, and he gave it back." (Tr. 54.) Once the Trustee gets back about $20 billion and pays it out, everyone will have received their principal back and all will be on an "equal footing." (Tr. 54.)
The Trustee, he said, has instituted suits to "recover not just the $20 billion but the damages" also. (Tr. 55.) The hope is that there will then be a "general creditor fund" and "then, but only then" "all of these appellants here will have the opportunity . . . to participate." This, said Sheehan, "is the only reasonable construction of the statute, it's the only reasonable exercise of discretion." (Tr. 55.) "Anything short of that," he said, "leads to the absurd result" Judge Raggi had alluded to. (Tr. 56.)
In the foregoing colloquy Sheehan took the position that the only reasonable position is to use CICO because it would be absurd for people who have already received back their principal or more to participate in customer property when there are those who have not yet gotten back what they put in. This position has in effect been extensively discussed and refuted previously in connection with what Congress intended, small investors' necessities for living, and the fact that under CICO most of the money will go to the very rich. To me, as indicated before, it is Sheehan's position that is ridiculous because ignores all the dynamics of life and economics except one -- how much cash did a person put in and take out -- and it thereby destroys Congressional intent.
Sheehan also argued -- amazingly, I think -- that Madoff himself would have owed defrauded investors nothing except repayment of their cash. But Sheehan contradicted himself by saying there would be a fraud claim against Madoff for the fake profits shown on the investor's statement. At least one judge seemed to be incredulous at Sheehan's claim that Madoff would have been obligated to victims only for their cash-in, and Sheehan appeared to me to backpedal defacto by admitting that victims would have a fraud claim against the broker for lost profits damages, a claim he says for some reason that they can recover here only out of the general estate, not customer property.
As well Sheehan initially took the position that what the Trustee was seeking from people whom he has or will sue was simply the amount they received in other people's money (rather than) damages for failing to put a stop to a fraud they should have realized was occurring or which they should have been aware was possible and should have investigated). This strikes me -- and I think one or two others with whom I regularly discuss matters -- as possibly a bizarre false claim and, were it a true claim, as very questionable. Though the Trustee has said he has sued some malefactors only for what they received in other people's money, has he not -- as Sheehan subsequently explicitly admitted (Tr. 55) -- also sued various huge institutions for damages for being complicit in a fraud because they ignored red flags? This makes Sheehan's initial explanation to the Court quite misleading.