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The Impact of Net Equity Question, Impact of Discovery on SIPC's Position and Argumentation. Part II

By       Message Lawrence Velvel     Permalink
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Re: The Full And Never Discussed Impact Of The Net Equity Question,

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The Potentially Devastating Impact Of Discovery On SIPC's Position,

And Matters Of Argumentation And Morality.

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If readers remember not one other thing of what is written in this four-part posting, I urge them to remember -- and therefore am repeating yet again -- the possibility that Picard's definition of net equity may deprive them not just of $500,000, but also of any share in the estate. This possibility should be cleared up, one way or the other, as quickly as possible.

There are also some matters of lesser practical import that I would like to discuss here. One is related to the three percent question.

Some may remember that, in my second posting on this matter (dated June 19, 2009), it was half jestingly suggested (but only half jestingly suggested) that perhaps the reason Harbeck reacted so strongly against any claim that a SIPC trustee gets three percent of what he collects and distributes was not because of concern that this would wrongly give people the idea that SIPC trustees earn huge sums of money. Rather, perhaps it was because SIPC did not want to be limited to paying Trustees only three percent of what they collect and distribute. Some further research persuades one that this half jest is probably correct.

Early on, Picard told a lawyer that, if the latter wants insight into what Picard will do in the Madoff case, he should read what was done in the (relatively recent) Park South case. Well, I've now read a couple of Picard's reports to the court in Park South. And while I plainly confess to being unable to understand parts of the reports, it at least seems to me likely -- almost a certainty -- that Picard was paid a lot more than three percent of what he collected and distributed in that case. He was paid on an hourly basis, at a ten percent discount from his normal fees, and ultimately seems pretty clearly to have requested $1,046,557, plus up to a possible additional $50,000, in fees for his personal work. (The fees for his personal work went to his law firm, as did even larger amounts of fees (I think $2,654,714) for work done by others in his law firm.) The amounts he collected and distributed appear to me to be either $7,410,969 or that amount plus $1,414,149 and/or $817,5434. But, frankly, I am not sure I understand all relevant aspects of this side of the equation -- relevant to the question of how much he collected and distributed. (For example, I do not necessarily grasp the relevance, if any, of enabling a release of frozen accounts.)

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In any event, for Picard's total fees of (I think) $1,046,557, plus another possible $50,000, to have been no more than three percent of what he collected and distributed, the latter figure would have to be in excess of $35 million. Despite the shortcomings of my own comprehension, I think it is pretty clear he did not collect and distribute anywhere near that amount. If I am wrong about this, then, once again, I would appreciate it if Harbeck and Picard would correct my mistake and explain what the correct facts are.

Not to be misunderstood, I am not saying that Picard did not earn or did not deserve what he was paid. I am saying only that it seems certain he received far more than three percent of what he collected and distributed. And if it is common for brokerage assets not to be extensive in SIPC proceedings, so that relatively little can usually be recovered and distributed, it might be thought necessary to pay trustees more than three percent in order to get good work, and the three percent limitation of the bankruptcy code would therefore be claimed to be inconsistent with and non applicable to SIPC proceedings. Of course, if the argument that three percent is inadequate to get good work by a SIPC trustee were true, how is it that three percent is apparently sufficient to get good work by trustees in non-SIPC bankruptcies?

The last question highlights what I think may be a characteristic of SIPC. While I am truly a newbie with regard to everything SIPC, I am getting the notion that, if a Bankruptcy Code provision is not something SIPC likes, SIPC claims the provision is inconsistent with SIPA. A claimed inadequacy of three percent "commission" in SIPC cases involving brokers, despite three percent being satisfactory for non-brokerage bankruptcies, could exemplify. Another example might be SIPC's recent argument when a party moved early this year for a court order allowing it to sue (the Trustee, I gather) within 30 days after the Trustee wins, for example, a preference claim against that party subsequent to last July 2nd.

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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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