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The Briefs Of The Trustee And SIPC On The Net Equity Question.

By       Message Lawrence Velvel     Permalink
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And, in his memorandum decision holding that there should be briefing on the net equity question, the Bankruptcy Judge said that "it is in the best interests of all customers for this Court to limit the Net Equity Issue to the determination of net equity (cash-in/cash-out vs. account statement balance as of November 30, 2008 vs. cash-in plus interest minus cash out . . . in accordance with a . . . scheduling order . . . to be submitted to this Court . . . ." (Emphasis added.) The Court thereby made clear that the question whether interest should be added to the cash-in is before it on the net equity question. Yet, in its next to last paragraph, the Trustee's brief says "Certain claimants have suggested that the Trustee include an interest factor when calculating a customer's 'cash-in/cash-out' figure to reflect the various entry points of investors in Madoff's lengthy scheme. Whether and to what extent such a calculation is appropriate is not before the Court in this briefing, nor are other particular nuances of the 'cash-in/cash-out' method."

Thus, it would seem that the Trustee has taken it upon himself to revoke the Court's ruling that the question of whether interest should be added to the amount of cash-in if the cash-in/cash-out theory were to prevail is before the Court. It is amazing if the Trustee has in fact taken it upon himself to in fact countermand the Judge. What I suspect happened, however, is this (though I surely don't know for certain that my suspicion is correct): In accordance with the Judge's above-quoted instruction for submission to him of a briefing schedule, the Trustee submitted a schedule which the Judge signed. (It is the schedule under which we are all operating.) The scheduling order submitted by the Trustee said that

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The briefing to be submitted to the Court pursuant to the Order shall be limited to discussing the proper interpretation of Net Equity, specifically the following two issues:

1. Whether a customer's Net Equity under SIPA is equal to "cash in/cash out"; or

2. Whether a customer's Net Equity under SIPA is equal to the value of the securities positions and credit balance reflected in the customer's last statement.

This statement in the scheduling order regarding the forthcoming discussion of net equity, as you can see, did not include the issue of interest on cash-in, which the judge's opinion had said is part of the briefing. Not realizing the omission, the Judge signed the order. Now, relying on the order it submitted to the Court and he signed, the Trustee is claiming that the question of interest on net equity is not part of the briefing on net equity though the Judge's opinion said it was.

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If all this is what happened in fact, it is fair to say that, even if it did so unintentionally, which for various reasons is at least possible, the Trustee's office has pulled a fast one on the Court, and has attempted to convert -- or subvert -- the Judge's opinion that interest is part of the briefing to a situation in which it is not part of the briefing. I know but do not feel it necessary to elaborate what will be the reaction to this action by the Trustee of victims who already are very angry at him for what they believe is high handed, unfair treatment.

Another item of some significance is that, in trying to persuade the Court not to use the November 30th statements as the measure of net equity, the briefs point out that while those statements are one guide to what people had, there are numerous other books and records that also are guides, that show the whole deal was a fake, and that make clear that all that victims really had was what they put in less what they took out. The problem with this argument is not that its claims regarding what other records show are untrue. Rather, the problem is that victims had no way whatever of knowing anything of what the other records showed. To use the other records because they show the truth, even though victims knew nothing but what their statements showed, is to destroy SIPC protection for victims of Ponzi schemes who took out money they honestly thought they had -- destruction which is, in fact, the end result of all the arguments being made by SIPC and the Trustee.

I know of no legislative history indicating Congress wished to work such destruction on such victims. To the contrary, the legislative history, presented by various lawyers in various prior briefs, and doubtlessly to be presented again by them, indicates that Congress wanted to protect all innocent victimized investors up to $500,000 in order to maintain confidence in markets. To punish innocent victims here who took out monies they honestly thought they had seems especially harsh and improper, moreover, when one considers that the SEC, which repeatedly had far more information than it needed to uncover the Ponzi scheme, nonetheless didn't uncover it and instead gave victims comfort that their investments were safe, and when one likewise considers that some of the greatest and most sophisticated investors in the world, such as those working with James Simons, did not uncover the Ponzi scheme and left money with Madoff -- despite certain red flags that caused them concern -- because they felt the SEC had placed an imprimatur of legitimacy and non fraudulence on Madoff.

There are a couple of matters of perhaps lesser concern which I would also like to mention before closing. One is that there is some hint of concern in one of the briefs that, if cash-in/cash-out is not used, and the November 30th statements are used instead, then money could be owed to accused coconspirators who made hundreds of millions or, like Picower, billions of dollars from the fraud. But one cannot believe such hints are serious. There is no way that SIPC or the Trustee thinks SIPC or the estate would have to pay money to coconspirators -- if they are judicially found to be coconspirators -- regardless of what their net equity might be according to their November 30th statements. Still less is such payment a possibility if it is true, as the Trustee has charged, that they often told Madoff what numbers to use in their accounts.

A second minor point is that, in lengthily detailing the workings of the fraud -- which all now know anyway to a very considerable extent -- as a psychological gambit to persuade the Court to uphold their relatively early-on decision to use cash-in/cash-out, the briefs of SIPC and the Trustee rely heavily on facts that they probably could not have known when they made the decision. One obvious example is their extensive description of what was done by DiPascali, which they are very unlikely to have known in full -- or even more than very partially -- relatively early-on when they made the decision for cash-in/cash-out. Though they could not have known very much about what DiPascali did at that early time, they rely on what he did to justify what they did before they could know much of what he did. Of course, they would argue that later revelations of what he did simply reinforced the correctness of their earlier decision. Anyway, it is not particularly unusual for courts to rely on facts that merely could exist, even if they are not known to exist, at the time a decision is made (and to do so even if the relevant facts never become known). Laymen might find this odd, and I too find it odd, but it's the way it often is.

* * * * *

As mentioned here in a prior posting, Jon Landers once said to me that people would be outraged, and justifiably so, if a bank went bankrupt and then the FDIC refused to pay depositors because the bank had been insolvent for years and thus all the interest the depositors honestly thought had been accumulated in their accounts, and all such interest they had withdrawn from the bank, were nothing but completely improper book entries. But that is identical to what has happened here. SIPC has refused to pay people who honestly believed they had earned money in their accounts and who withdrew earnings, and SIPC has based its refusal on the fact that the earnings were fake, just as the monies credited to and/or withdrawn from the bank were improper in the bank example suggested by Landers.

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It is absolutely the case that if SIPC succeeds -- no matter what argument it succeeds on -- then SIPC protection will always be at risk, and investors will have no right or ability to rely on SIPC protection. For if, God forbid, it should turn out that one has invested in what ultimately proves to be a fraud, then one will be SOL and will get nothing from SIPC if one has over the course of years taken out more than one put in, doing so in the honest belief that the money had accumulated, existed, and belonged to the person taking it out. This has to be considered a disastrous situation for the individual, directly contrary to Congress' intent to protect innocent investors and to promote confidence in markets, and has to be considered no better than if the FDIC refused to pay innocent depositors because it turns out that their banks were insolvent and were defrauding them all along.*

* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at

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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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