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 bête 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.