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More On The Bubbe Meisse of SIPC and The Trustee

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February 18, 2010

More On The Bubbe Meisse of SIPC and The Trustee

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Lawrence R. Velvel

Yesterday I posted quite a long set of comments on the hearing of February 2nd. It subsequently seemed to me that some of the most important points are in the last third or so of the essay, which discusses the basic underlying theory of SIPC and Picard and some of the major flaws in their theory. (I called the underlying theory a bubbe meisse (with hopes that my very limited understanding of Yiddish is correct).)

The reasons these matters strike me as especially important is that, when the fallaciousness of the underlying theory is exposed, the Trustee and SIPC are fundamentally left with only their claim that what they wish to do is fair (and must therefore be done regardless of what Congress intended), and what the victims desire is supposedly un fair and therefore must not be done regardless of what Congress intended.

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Additionally, the underlying theory and its flaws are important because they are likely to be major subjects on appeal regardless of who wins before Judge Lifland, and because they could well prove to be very important in the lobbying of Congress, which to some extent has already taken place and which is about to be stepped up considerably. (I regard the lobbying of Congress to be so crucial that, without getting into dollar figures, I will say that I have pledged all that I can reasonably afford if necessary to support the lobbying through NIAP. I would urge and hope that others too contribute what they can, because it has long been my opinion that Congressional action is the best hope, and certainly by many years the quickest hope, for fairness and decency toward Madoff victims.)

Though the last part of yesterday's post discussed truly crucial matters, I recognize that the post was long and complex, and I therefore think it entirely possible, perhaps even likely, that even some or many of those who read it did not read the entirety of it, and therefore may never have gotten to the crucial discussion of and exposure of the flaws in the basic underlying theory of Picard and SIPC. This is my fault for putting such crucial matters at the end (for reasons I won't get into here), but it could nevertheless be the fact. I have therefore decided to repost below the last third or so of yesterday's post, and to put into this brief essay an analogy that may help make it simpler to understand the basic ideas elaborated in the reposting.

Here is the analogy: Suppose Sam Smith has one million dollars in the bank and knows that, in somewhere between one and ten years, Jack Jones may or may not give him ten million dollars more. Smith decides to give you ten thousand dollars. Does that ten thousand dollars come from the one million dollars Smith has in the bank, or does it come from the ten million dollars that Smith may or may not receive from Jones in somewhere between one and ten years? Under the victims' theory, the ten thousand dollars comes from the one million dollars Smith has in his bank account. Under the theory of SIPC and the Trustee, the ten thousand dollars comes from the ten million dollars that Smith may or may not receive from Jones in somewhere between one and ten years (and the $10,000 you receive is merely an advance from that possible ten million dollars).

This example, though simplified, is, I believe, a pretty exact representation of what is involved in the theory of SIPC and the Trustee, with the $10,000 playing the role of the SIPC advance of up to $500,000 from SIPC's fund, and the ten million dollars that may or may not be received in somewhere between one and ten years playing the role of "customer property." The only thing that needs be added in terms of the analogy is that, to insure that you will not get anything later from the ten million dollars that Jones may or may not give Smith if SIPC and Picard feel you don't deserve to get anything from it, SIPC and the Trustee are defining net equity in a way that ensures you receive neither the ten thousand dollars now nor anything later from the possible ten million dollars.

With the foregoing analogy set forth to try to make it simpler to understand things, here is a reprint of the relevant parts of yesterday's posting:


FEBRUARY 17, 2010

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I will conclude with two matters that are major: the interesting questions of (i) the relationship between net equity and customer property, and (ii) insurance. Sheehan's argument at the hearing on net equity and customer property, strike me as confusing, even deeply confusing. But I think I've got it right. The Trustee and SIPC are saying that all distributions to victims come out of so-called customer property, which the Trustee is looking for all over the world and is suing Madoff confederates to recover. (The question of estate property is irrelevant here). Therefore the $500,000 that a victim may get comes out of customer property; it is an advance on a victim's (ratable) share of customer property. It is therefore not insurance. Rather, it is, as said, an advance on one's share of customer property.

To determine one's share of customer property - - to determine what one should get from customer property - - you must determine one's net equity. So, if a person's net equity were one one thousandth of total net equity, one would get one one thousandth of the customer property.

Because your share of customer property is based on your net equity, it is unfair to use the amount shown in your final statement as your net equity, because this would result in a portion of the customer property being allocated to people who previously took out from Madoff more than they put in, while lessening the amount of customer property going to people who have never taken out a dime. (The amount going to the latter will necessarily be lessened because there will not be sufficient recovered customer property to pay off everyone in full on the basis of their final statements.)

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Lawrence R. Velvel is a cofounder and the Dean of the Massachusetts School of Law, and is the founder of the American College of History and Legal Studies.

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