Madoff Help News & Assistance

As Madoff victims hang on tenterhooks awaiting Judge Lifland’s decision on “net equity”, I thought it to be a good time for some modest ruminations. For those of you too confused on this (or have spent too long in a cave) it boils down to this: are Madoff investors entitled to SIPC protection based on the values reflected on their final accounts and confirmation or on some arithmetic calculation that dismisses any validity to the investment statement . To those who care – and most everyone should – don’t get your hopes up, I’m sorry to say. But it’s also not a slam dunk for the Trustee, either.

From my vantage point in the third row seat in the courtroom, Judge Lifland gave little away. Injecting humor at appropriate times, and once sternly warning a few hecklers, the judge gave all appearances of empathy and lack of bias. What the Judge clearly articulated, however, was the importance of and irony that the New Times case, resolved in NY Appellate Court several years ago, was being strongly referenced by both sides as precedent, each to support their positions. What he also clearly indicated, was that he expected the NY Appellate Court to be the arbiter on this case as well. Which leads me to believe that Judge Lifland will seek to punt the ball upfield to the Appellate court. Both sides, in fact, have indicated clearly that they will immediately appeal any decision.

What this means is, that despite the potential importance of Judge Lifland’s ruling, it’s not the end game, and there’s a ways to go. That this is most likely headed to NY Appeals Court, and however quickly it might move there, Madoff victims may be playing a waiting game of a year or more (and if they lose there, fighting SIPC and clawback claims for far longer than that.) Unless, of course, the Trustee and SIPC see the sense of coming up with a settlement that can save victims tens of millions of dollars and countless hours of further aggravation and torture.

If you don’t know the New Times case… you probably should. It’s a fascinating story of a Long Island, NY Ponzi firm and artist – William Goren – who ran a broker-dealer (New Times) that engaged in the selling of securities that were both real (i.e. Vanguard mutual funds) and fictitious (New Age money market funds). Account statements and confirmations were conjured up which all reflected values of investments that were never made. Like the long running Madoff debacle, this long-running scheme had also escaped detection by NASD and FINRA. The NY Appellate Court essentially took the position, with help from the SEC, that the securities that were real but never purchased (real securities, fictitious trades) should enjoy the SIPC protection based on final account values on statements. However, those investments that represented securities that were fictitious with trades that were fictitious would be valued based on a cash in/cash out perspective. By the way, there were no clawback efforts in this case.

Again, in both cases the investment dollars were stolen, just like they were in the Madoff affair. However, the Madoff Trustee is taking the position that this situation is more akin to the New Times investors who purchased securities that did not exist. Now to you, me and just about any other investor who is crazy as a loon, this makes no sense whatsoever. When Madoff investors last looked, Ford, General Electric, IBM were real companies. Go figure the Trustee’s (and SEC’s) logic. Goren’s statements were conjured up after the fact. So were Bernie’s. (For more info about the New Times case, click here.)

Back to the hearing…. Overall, there were no surprises, aside from the abrasiveness of David Sheehan’s opening and closing arguments. Both sides presented in accordance with their briefs, and a stranger wandering into the court may have seen reason in all arguments. Clearly the SEC attorney was most challenged by Lifland, perhaps given the general weakness of the SEC’s position in the first place.

Crazy He Calls Me. “No one in their right mind (would rely on their investments statements)” were the words repeated by Baker and Hostetler attorney David Sheehan, on behalf of the trustee. My apologies to Billie Holliday aside, these kinds of comments – there were several others uttered by Sheehan and SIPC attorney Wang – that served to incite many in the crowd. Several victims came up to me thoroughly upset, not so much with what Sheehan said, but how he said it. Granted, attorneys can often be effective by taking a strongly impassioned approach, but as one attorney commented, “he went way overboard. Completely unnecessary.” Using words like “absurd” to describe the victims’ position, or implying victims are crazy, Sheehan appeared either insensitive to the pain many of the victims in the courtroom were experiencing, or simply cruel. As another victim commented, “he seemed to delight in taunting us!” Frankly, that’s when the sneers and hissing began.

And this is where Judge Lifland failed the sensitivity test. Rather than calming Sheehan, Lifland turned on the reaction of sneers and hisses, and excoriated the victims of Sheehan’s anger, rather than the source. Hopefully Lifland will show more backbone in challenging Picard and the SEC’s arguments.

Pretzel Logic. What strikes me as fascinating in all this, is the manner in which the SEC is tying itself into a pretzel in justifying the Trustee’s position. Claiming that the “fictitious profits” Madoff reported were concocted, their position is that it leaves no alternative but to use the cash in/cash out method established by the Trustee, with the minor modification of adding in a cost of living increment. What’s so nonsensical about this position is that it patently contradicts their reasoned position in the New Times case, where Goren, the fraudster, similarly concocted positions in securities.

Beyond that, however, the position defies fundamental reason. First, how could an investor know he or she was investing in a theft or Ponzi scheme? What investor in their right mind would willingly invest in such a scheme? Would it make sense for Congress to punish an investor for not being able to recognize the fraud being perpetrated? Of course not. Whether the dollars were stolen and given to another investor, or stolen by the fraudster is immaterial. In either case, the investor was unwittingly scammed. And as Dean Velvel pointedly makes clear, it’s not as if Congress never heard of Ponzi schemes when they created the SIPA legislation in 1970. And where in the SIPA language are Ponzi schemes specifically exempted from SIPC protection?

Second, the Trustee and SEC are looking at the issue of account statements from an extraordinarily narrow angle. If the intent of Congress in creating SIPA was to provide greater trust in the US financial markets, in what way could the trustee’s interpretation – that the account statements have no credibility or basis — help build that trust? Particularly in a day and age when the account and confirmation statements are the only basis of representation of securities positions. No one receives hard stock certificates anymore. Imagine what would happen if they did — the entire brokerage industry with come to a grinding halt. You would, to coin a phrase, be out of your mind.

Finally, the SEC – here taking a deeply courageous path in going strongly against the Trustee (sarcasm intended) – says that investors in the Madoff fraud, many having been invested for years, do deserve some cost of living adjustment. Of course, they are reluctant to get into the details of this. To them I say, good luck with this calculation. But again, the lack of logic: how are you going to apply a cost of living adjustment to a string of payments into BLMIS? More importantly, if you’re going to discuss the term “constant dollars” why not talk to the dollars that would otherwise be earned had they been invested elsewhere – the “opportunity cost”? The dollars invested in Madoff in 1990 might otherwise have been invested in a vehicle that might have earned 5%, 10%, maybe 15% per year. The SEC argument simply does not make sense from any reasoned financial perspective. They think they’re tossing the long-term Madoff investor a bone, but what they’re really tossing is something even less than that.

What’s fair is fair, right? David Sheehan spent a good amount of time antagonizing the courtroom about “fairness” – that investors long into the scam receiving funds should not receive preferred treatment to those that just put funds in. The attorneys for the victims have argued against this point, but, the issue jumped out in the hearing given Sheehan’s barbs. Like beauty, “fairness” is in the eye of the beholder. In the same manner that Professor Coffee’s argument in the December Washington DC hearing hosted by Representative Paul Kanjorski did not stand to reason, neither does Sheehan’s. When the majority of investors are being cut off from the assets in a bankruptcy proceeding – as most Madoff victims are – “fair” takes on a different light. More than half of direct Madoff investors have taken out more than they have put in over the years. Not only is that disqualifying them for SIPC claims and customer fund claims, they are in real danger of clawback by the Trustee. So, for the benefit of the thousand to maybe fifteen hundred Madoff victims who stand to receive their SIPC claims plus a chunk of the recovery (the “net losers”), the two to three thousand direct investor Madoff victims who withdrew funds (what Picard calls the “net winners”) are getting tossed under the bus.

Again, all these long-term victims – who constitute the majority of victims — could have invested elsewhere. And all the other victims – who constitute mostly the very high net worth minority — who came in near the end either did so as a result of the fruits of investments held elsewhere or for other reasons. So, fair? Not on my planet.

Let’s also be fair. There are many hostile allegations being tossed about by various victims and others, and short of the necessary factual information, I’m not sure all of this is helpful. That SIPC conjured up this particular cash in/cash out system to avoid bankrupting the SIPC fund. That SIPC miscalculated on the high side the potential liability and pulled a two-step. That Trustee Irving Picard and David Sheehan, despite their claims to the contrary to the main stream press and others, are in reality insensitive and have no concern for Madoff victims. That Judge Lifland is up for reappointment, and with a longstanding relationship with Picard will undoubtedly side with him. That the SEC has been bullied by the far more experienced and adept attorneys at Baker & Hostetler and SIPC. That SIPC over the years has calcified as an institution, and that SIPC, whose board is comprised of Wall Streeters and others likely to pander to Wall Street interests, wants to minimize any additional costs to their constituents, even if it means at the expense of Madoff and other victims. As a great statesman once said, “etcetera, etcetera, etcetera.”

I want to be clear – I do not think it helpful to allege motives for all the actions. I don’t know Irving Picard. I don’t know the attorneys driving the show in SIPC. What I do know, is that not only do their arguments not make sense in the big picture of providing confidence in and orderly operations within the investment markets, I find it hard to believe that Wall Street – with all the public image problems it is experiencing — would want to be associated with this kind of “punish the victims” behavior. As someone who comes out of the financial community, I would rather see my brethren on the Street step up, fund a Victims’ Fund as has been suggested by a very compassionate attorney to help some of the struggling hardship victims of this fraud, and help right SIPC for the benefit of all.

In any case, Madoff victims must wait until Lifland brings on his opinion, which should be forthcoming soon. Already, an effort is underway by a group of victims to offer a settlement whereby the victims receive their SIPC claims under their preferred net equity definition in return for giving up their rights to the pot of customer claims – the $8-$10 billion that David Sheehan asserted could be collected. (By the way, Mr. Sheehan, just where do you expect to gather that $8-$10 billion from?).

Either side will appeal quickly however. And it is hoped that, along with this appeal, Judge Lifland will find a way to quickly stay what would otherwise be a mass mailing of clawback demand letters from the Trustee, and avoid the unnecessary carnage that would ensue. In any case, Madoff victims still have a long road ahead. Soldier on they must, and will. From my many contacts with Madoff victims I can honestly say this: they have incredible strength, energy and resolve. Investors and individuals everywhere would do well to take note of the courage and adaptability of this extraordinary group of Americans.

Peace,

Ron Stein