June 11, 2009
Re: Irving Picard’s Three Percent Commission In The Madoff Case.
On May 30th Time Magazine posted an online article about Irving Picard, the SIPC Trustee in the Madoff case. Time said that “Picard is considered the superstar of SIP[C] trustees, having handled the largest cases SIPC has managed”. Time also said that SIPC “Trustees are paid well, receiving personally 3% of anything over $1 million they recover for victims. For example, if $2 billion is ultimately recovered in the Madoff case, Picard stands to make personally $60 million in fees, provided the New York federal judge overseeing the case, the Hon. Louis Stanton agrees to it.”
Later Time said that Picard has sued various large feeder funds for ten billion dollars. Time did not, in this regard, carry out the logic of its prior statement. Were Picard to recover ten billion dollars in these suits and distribute it to Madoff victims, his personal share, at three percent, would be 300 million dollars. Nice work if you can get it.
Time’s article fuels a fire that has existed -- sometimes raging, sometimes damped -- within the Madoff victim community for many months. Picard and SIPC have insisted that the so-called “net equity,” for which each victim can be compensated by SIPC up to $500,000, must be computed in a way that is different from the way net equity has almost always -- or even always? -- been computed previously. If net equity is computed their way, many victims will get either nothing at all from SIPC or much less from it than if net equity is computed in the ordinary way. Also, on a separate but intimately-related point, many victims would also become subject to clawbacks by Picard of monies they took out of Madoff in the last six years, often monies they needed to live and/or to pay taxes on phantom income from Madoff.
These two matters -- getting less or nothing from SIPC and becoming subject to clawbacks by Picard -- have been extensively discussed and explained previously -- by many writers. So I shall not explain here the mechanics of how this works. Suffice to say here that, if the definition of net equity adopted by Picard and SIPC is upheld against the judicial attacks which already have begun, then Picard personally will make more money if Time’s description of how he is compensated was correct. For Picard will be able to claw back and distribute far more than otherwise -- who knows, conceivably even a billion or two more than otherwise -- which would yield Picard personally 30 million or 60 million dollars more at a compensation rate of three percent.
It is this fact -- that Picard will personally make a lot more money if he uses his and SIPC’s novel -- one might even say niggardly and quite possibly illegal -- definition of net equity that has caused outrage in the victim community. The victims feel Picard is denying them money that many of them desperately need to live on (they are often in their late 60s, 70s or 80s and have nothing to live on because they were wiped out) so that he personally can profit to the tune of millions of dollars, even tens of millions of dollars.
On important question, consequently, is this: Is Time right in indicating, as so many believe, that Picard will receive three percent of everything over one million dollars that he recovers and distributes to victims, so that use of his and SIPC’s novel definition of net equity, by enabling him to claw back and then distribute more money, will increase his personal take. This question is not completely the straightforward one it may seem.
I myself am concededly pretty ignorant in the premises. I knew nothing at all on the subject when the Madoff situation began, and of late have been trying to learn at least a little as I go along. Thus, as far as I know, it seems that there are two statutory sections that are relevant. One is Section 330 of the Bankruptcy Code (11 U.S.C. §330). It says that a trustee in bankruptcy can be awarded “reasonable compensation for actual, necessary services rendered,” and that in determining what compensation is reasonable, a court must consider the time spent, (hourly?) rates charged, the necessity of the services, whether they were performed within a reasonable time commensurate with the problem, the trustee’s skill and experience, and whether the amount of compensation is reasonable in comparison with what is charged by comparably skilled people. Section 330 also says that, in determining reasonable compensation, the court should treat it “as a commission, based on section 326.”
Section 326 of the Bankruptcy Code (11 U.S.C. §326) is the other relevant provision here. After stating the amounts or percentages allowable on sums distributed by the trustee that are less than one million dollars, §326 says that the court can award the trustee “reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, upon all monies disbursed or turned over in the case to parties in interest, excluding the debtor [i.e., excluding Madoff].”
So, in sum, under §330 the Trustee is to receive reasonable compensation for actual, needed services and under §326 such reasonable compensation, called a commission, cannot exceed three percent of all monies collected and distributed to the victims in excess of one million dollars.
How does this generally work in practice, and how may it work in the Madoff case? My understanding, after talking to a colleague who serves as a bankruptcy trustee and whom I think I understand correctly, and from what seems implicit in stuff I’ve read, is that the way it generally works in practice is pretty much what one might expect. Trustees in bankruptcy seek awards of the full amount of the commission allowable under §326, and courts sometimes award the full allowable commission. But sometimes courts award less than the full allowable commission because, for example, the trustee was able to accomplish a job in very few hours or the task was simple, etc.
Now, nobody has yet said the Madoff job is a simple one or one that will require but few hours. Distinctly the contrary. And it is always possible that Picard will seek the full three percent commission allowable under §326 on monies he distributes to victims in excess of one million dollars. Would the full commission be reasonable compensation? It does not seem so. If Picard were to distribute only the two billion dollars posited in one part of the TIME piece, the statutorily permitted commission at three percent could be, TIME said, sixty million dollars. If he was to collect and distribute ten or twelve billion dollars or more, which encompasses the amounts he either already has in hand or is seeking, the permitted commission would be 360 million dollars. These kinds of figures are nuts for a trustee in bankruptcy. Neither can be considered “reasonable” for a trustee. And remember, Section 330 says a trustee shall be paid a sum that is reasonable, while Section 326 not only explicitly echoes this but distinctly does not provide that three percent of everything over one million dollars necessarily is reasonable, but only that three percent is the top limit on what could be considered reasonable in appropriate circumstances. I reiterate that three percent for a trustee on two billion or twelve billion dollars -- i.e., $60 million or $360 million dollars for a trustee -- is not reasonable. (For those interested in such things, if Picard himself were to work, for example, 10,000 hours on the Madoff case, which would be four to five years of extensive annual work, his hourly fee at thirty million dollars would be $6,000 dollars per hour and at 360 million dollars would be $36,000 per hour. Such fees are insane.)
So, while one cannot know at this point how much Picard is likely to seek from the bankruptcy court by way of commission, the idea that he will seek the full three percent commission seems to accuse him of both phenomenal greed and lack of sense, although one cannot definitively say at this point that he won’t seek the full three percent.
But does all this necessarily mean that use of the novel and niggardly definition of net equity -- a definition which would enable Picard to pay out less of SIPC’s money and claw back more money to distribute to other victims -- is therefore irrelevant to his personal financial calculations? One doesn’t think so, although I personally believe, unless and until proven wrong by testimony or written evidence if there should ever be any on the question, that other matters (to be discussed below) were the motivation underlying use of the novel and niggardly definition. Yet the reason the novel definition is not necessarily irrelevant to Picard’s personal situation is precisely that the novel definition will result in more being clawed back and then distributed to victims. If such an amount is as “little” as one billion dollars more -- and the grapevine makes me think it could be a multiple of that -- this amounts, at three percent, to an additional permissible commission to Picard of 30 million dollars. That ain’t chicken feed baby. And even if one assumes that the court will not consider 30 million dollars to be reasonable compensation and will cut it down, the fact that Picard clawed back and distributed another billion dollars will almost surely count for a great deal in a court’s decision on what is a reasonable commission in the circumstances; it will cause a court to pick a number that is higher, probably much higher, than otherwise. Maybe -- in particular circumstances -- it won’t count for all that much, because it would be the small change if Picard recovers another ten billion dollars from the malefactors whom he has sued, but it will count for a lot if he does not recover much in the lawsuits. Moreover, he adopted and announced his decision to use a niggardly definition of net equity before he was aware, as far as we know, that various feeder funds could be sued for mucho billions. When he developed and announced his decision, the net equity question likely loomed a lot larger than it may loom today in calculations of what he personally stands to make from the Madoff affair.
What, then, does this writer think is the real reason Picard adopted the novel and niggardly definition of net equity? I have discussed before the ostensible reasons for this decision that were given by Picard and by the President of SIPC, Steven Harbeck. Those ostensible reasons do not hold water and my prior discussion of them will not be repeated here. Here I will deal only with what I think to be the (often recognized) real reasons.