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Lawrence R. VelvelMassachusetts School of Law500 Federal StreetAndover, MA 01810Tel: (978) 681-0800
Fax: (978) 681-6330Email: velvel@mslaw.edu
UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK SECURITIES INVESTOR PROTECTION )CORPORATION, )
Plaintiff ) Adv. Pro. No. 08-1789(BRL)
v. )) SIPA LIQUIDATION
BERNARD L. MADOFF INVESTMENT )SECURITIES LLC. ) (Substantively Consolidated)
Defendant. ) )
)In re: )
)BERNARD L. MADOFF, )
Debtor. ) __________________________________________))
IRVING H. PICARD, Trustee for the )Liquidation of Bernard L. Madoff Investment ) Adv. Pro. No. 10-04357 (BRL)Securities LLC, )
Plaintiff )v. )
)JAMES GREIFF et al. ) Adv. Pro. No. 11-03775 (JSR)
Defendant. ) ______ _______________ _____________________)
AMICUS CURIAE BRIEF OF LAWRENCE R. VELVEL ON THE APPLICATIONHERE OF THE SUPREME COURT CASES --FROM TUMEY v. OHIO TOCAPERTON v. MASSEY COAL -- THAT BAR GOVERNMENTAL LEGAL
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DECISIONS FROM BEING MADE BY PERSONS WITH A FINANCIALINTEREST IN THE DECISIONS.
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TABLE OF CONTENTS
Table of Authorities i
Statement 1
Argument 1
1. Introduction: Due Process Requires That Legal JudgmentsMust Be Made By Officials Who Do Not Benefit FinanciallyFrom Their Decisions ..................................................................... 1
2. The Supreme Court Cases Holding That Legal DecisionsCannot Be Made By Persons Who Will Benefit FinanciallyFrom Them . 3
3. The Trustee Appears To Have A Vast Financial Interest InHis Legal Decisions 9
4. The Trustees Arguments Against Application Of TheTumey-Caperton Line Of Cases Are Invalid .. 14
Conclusion .. 18
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TABLE OF AUTHORITIES
Cases Page
Aetna Life Insurance Co. v. Lavoie, 475 U.S. 813 (1986) 1
Callaghan v. Reconstruction Finance Corp., 297 U.S. 464, 468 (1936) 2, 15
Caperton v. Massey Coal Co., Inc., 556 U.S. ___ (2009) 1, 2, 6
Gibson v. Berryhill, 411 U.S. 564 (1973) 1, 4, 17
Tumey v. Ohio , 273 U.S. 510 (1927) 1, 2, 3, 5, 6
Ward v. Village of Monroeville, 409 U.S. 57 (1972) 1, 3, 4, 5, 6, 17
Books
Henriques, The Wizard of Lies , Henry Holt & Co., 216-218 (NY, 2011) 9
Report
CRS Report for Congress, The Quasi Government: Hybrid OrganizationsWith Both Government and Private Sector Characteristics .Updated January 31, 2008 15
Transcript
Excerpts From Transcript of Hearing of August 6, 2009 BeforeJudge Burton Lifland, U.S. Bankruptcy Court 10-11
Excerpts From Transcript of Hearing of June 1, 2011 BeforeJudge Burton Lifland, U.S. Bankruptcy Court 11,14,16
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STATEMENT
Lawrence R. Velvel is a victim of Bernard Madoff. Velvel, who is a lawyer, has
participated in the briefing on the net equity question (and other questions) in the
Bankruptcy Court in the Madoff case, and has filed two briefs on his own behalf on the
net equity question in the Second Circuit Court of Appeals. In this amicus brief, Velvel
elaborates the question -- raised on pages 15-17 of the motion for a withdrawal of
reference filed by Helen Chaitman on behalf of James Greiff and others -- of the
applicability to the question of the Trustees fees of the Supreme Courts line of cases
running from Tumey v. Ohio , 273 U.S. 510 (1927) to Caperton v. Massey Coal Co., Inc. ,
556 U.S. ___ (2009). The applicability of this line of constitutional law further supports
the withdrawal of the reference sought by Ms. Chaitman.
ARGUMENT
1. Introduction: Due Process Requires That Legal Judgments Must Be Made
By Officials Who Do Not Benefit Financially From Their Decisions.
It is a fundamental principle of due process that, when a legal judgment is made
by a judicial, executive, administrative or quasi-governmental official, that official must
not benefit financially from the decision. Nor can there be financial benefit to a
governmental institution or function under the officials purview. This principle of due
process has been powerfully enunciated by the Supreme Court in Tumey v. Ohio , 273
U.S. 510 (1927); Ward v. Village of Monroeville , 409 U.S. 57 (1972); Gibson v. Berryhill ,
411 U.S. 564 (1973); Aetna Life Insurance Co. v. Lavoie , 475 U.S. 813 (1986); Caperton
v. Massey Coal Co., Inc. , 556 U.S. ___, 129 S. Ct. Rep. 2252, 173 L.Ed. 2d 1208 (2009).
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The principle of no financial benefit, the Court has repeatedly said, is necessary in order
to ensure that the balance [is held] nice, clear and true. Tumey , 273 U.S. at 532;
Caperton , 556 U.S. at ___, 129 S. Ct. at 2260, 173 L.Ed. 2d at 1218 (quoting Tumey v.
Ohio) .
In this case Irving Picard is the Bankruptcy Trustee, the SIPC Trustee and a
special master appointed by the Department of Justice to distribute billions of dollars
forfeited to it by Carl Shapiro and Jeffry Picower. In these capacities he is an officer of
the Bankruptcy Court (as has been explicitly held by the Supreme Court with regard to
the position of Bankruptcy Trustee) ( Callaghan v. Reconstruction Finance Corp., 297
U.S. 464, 468 (1936)), a functionary of the Department of Justice, and exercises
governmental and quasi-governmental power to make and/or participate in legal
decisions that affect thousands of people and involve literally billions of dollars, e.g.,
initial decisions on how net equity shall be defined and from whom clawbacks shall be
demanded.
Unfortunately, it has recently been discovered that the Trustee, and perhaps also
his counsel, David Sheehan, with whom he works very closely, may benefit personally
and financially, to the tune of millions of dollars, perhaps scores of millions of dollars,
from the decisions the Trustee makes and implements. (The amounts of money involved
here dwarf the amounts in the Supreme Courts cases.) Though it is already pretty certain
(as will be described below) that financial benefits will accrue to the Trustee from the
decisions he makes (and may accrue to his colleague David Sheehan also), the precise
details of the relevant financial arrangements under which the Trustee will receive major
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financial benefits are still not known. There must be discovery to flesh out the precise
details of the arrangements; plaintiff will subsequently discuss and request the needed
discovery.
2. The Supreme Court Cases Holding That Legal Decisions Cannot Be Made ByPersons Who Will Benefit Financially From Them.
In Tumey v. Ohio , a village mayor had the power to try and fine persons accused
of possessing intoxicating beverages in violation of state law. The mayor himself
received a portion of the fines; he received $696 dollars in fees, compensation and costs
from such fines in an eight month period. The Supreme Court ruled this system
unconstitutional. Pointing out that such a pecuniary interest rendered it unconstitutional
for the mayor to decide on the defendants liability, 1 the Court also said, With his interest
as mayor in the financial condition of the village and his responsibility therefore, might
not a defendant with reason say that he feared he could not get a fair trial or a fair
sentence from one who would have so strong a motive to help his village by conviction
and a heavy fine? Tumey , supra, 273 U.S. at 533.
In Ward v. Monroeville , supra, a village mayor determined guilt or innocence in
cases of alleged traffic violations and imposed fines and costs on parties he convicted.
Roughly forty percent of the villages annual income (or between $16,000 and $23,000
per year) came from the fines and costs he imposed. (Unlike in Tumey , the mayor did not
himself receive any money; it all went to Monroeville.) The Supreme Court ruled this
1 Indeed, in analogous cases it is very clear that the slightest pecuniary interest of any officer, judicial or quasi judicial, in the resolving of the subject-matter which he was to decide, rendered the decisionvoidable. Tumey at 524.
There was at the common law the greatest sensitiveness over the existence of any pecuniary interesthowever small or infinitesimal in the justices of the peace. Tumey at 525.
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system unconstitutional too, saying that the fact the mayor in Tumey had a direct,
personal, substantial pecuniary interest and shared directly in the fees and costs did not
define the limits of the principle forbidding legal decisions from being made by
interested parties. Ward v. Monroeville, 409 U.S. at 60. Rather, the Court said, there
must be no possible temptation to the average man that might lead him not to hold
the balance nice, clear and true . . . . Ibid . Plainly, said the Court, that possible
temptation may also exist when the mayors executive responsibilites [sic] for village
finances may make him partisan to maintain the high level of contribution from the
mayors court. Ibid.
The Court also rejected the argument that the arrangement at issue should be
upheld because, after the mayors decision, an erroneous decision can be corrected on
appeal and trial de novo in the County Court of Common Pleas. 409 U.S. at 61-62. The
Court said, Nor, in any event, may the States trial court procedure be deemed
constitutionally acceptable simply because the State eventually offers a defendant an
impartial adjudication. Petitioner is entitled to a neutral and detached judge in the first
instance . 409 U.S. at 61-62. (Emphasis added.)
In Gibson v. Berryhill , a state Board of Optometrists, comprised exclusively of
optometrists in private practice for their own account, was going to hold hearings against
optometrists employed by a corporation. The charge was that Alabama law was violated
when practicing optometrists worked for a corporation. The Supreme Court upheld a
lower court decision that the Board members were biased by personal self interest
because half the optometrists in the state were employed by corporations, so that success
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in the Boards efforts would possibly redound to the personal benefit of members of the
Board (who were, as said, in private practice for their own account, and would benefit
from elimination of competition from optometrists employed by corporations). 411 U.S.
at 578. It is sufficiently clear from our cases, continued the Court, that
those with substantial pecuniary interest in legal proceedingsshould not adjudicate these disputes. Tumey v. Ohio , 273 U.S. 510,47 S.Ct. 437, 71 L.Ed. 749 (1927). And Ward v. Monroeville , 409U.S. 57, 93 S.Ct. 80, 34 L.Ed.2d 267 (1972), indicates that thefinancial stake need not be as direct or positive as it appeared to bein Tumey . It has also come to be the prevailing view that (m)ostof the law concerning disqualification because of interest applies
with equal force to . . . administrative adjudicators. K. Davis,Administrative Law Text s 12.04, p. 250 (1972), and cases cited.(411 U.S. at 479.)
Here again the fact that the aggrieved parties could receive a favorable decision
from a higher Alabama body than the Board (from the state Supreme Court) did not
warrant a refusal by the lower court to adjudicate the case. 411 U.S. at 580.
In the fourth of the cases, Aetna Life Insurance Co. v. Lavoie , a state Supreme
Court Justice named Embry participated in and wrote a per curiam opinion in an
insurance bad faith case whose outcome affected, and aided, a wholly separate case filed
by Justice Embry against Blue Cross. (Judge Embry later settled his own litigation for
$30,000. (475 U.S. at 824.)) The Supreme Court ruled that Justice Embrys work in the
Aetna case undoubtedly raised the stakes for Blue Cross in Justice Embrys own suit,
to the benefit of Justice Embry. Thus, Justice Embrys opinion for the Alabama
Supreme Court had the clear and immediate effect of enhancing both the legal status and
ruling by appellate court of multiple judges
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the settlement value of his own case, and he unconstitutionally acted as a judge in his
own case. 475 U.S. at 824.
Whether Judge Embrys view and decision in Aetna was actually influenced by
his own case was irrelevant. The Court said:
We conclude that Justice Embrys participation in this case violatedappellants due process rights as explicated in Tumey, Murchison, and Ward . We make clear that we are not required to decidewhether in fact Justice Embry was influenced, but only whether sitting on the case then before the Supreme Court of Alabamawould offer a possible temptation to the average judge to lead him to not to hold the balance nice, clear and true. Ward ,
409 U.S., at 60, 93 S.Ct., at 83 (quoting Tumey v. Ohio, supra , 273U.S., at 532, 47 S.Ct., at 444). (475 U.S. at 825.)
Finally, less than two years ago the Supreme Court decided Caperton v. Massey
Coal Co., Inc. , 556 U.S. ____, 129 S. Ct. at 2252, 173 L.Ed. 2d 1208 (2009). In that case
the Chairman of Massey Coal contributed a major sum of money -- three million dollars
-- to the campaign of a candidate running for a justiceship of the West Virginia Supreme
Court, Brent Benjamin. Benjamin won. Shortly afterwards, a major appeal by Massey
Coal was heard in the West Virginia Supreme Court. Massey won. Justice Benjamin
voted in its favor.
Justice Benjamin said in several opinions that he had no direct or substantial
financial interest in the case. 556 U.S. at ___, 129 S. Ct. at 2262-63, 173 L.Ed. 2d at
1221. The Supreme Court nonetheless reversed the decision below in favor of Massey
Coal.
The Court said that the rule against pecuniary interest exists because no man is
allowed to be a judge in his own cause and because his interest would certainly bias
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his judgment, and, not improbably, corrupt his integrity. 556 U.S. ___, at 129 S. Ct. at
2259, 179 L.Ed. 2d at 1217, 1218. There are circumstances, it continued, in which
experience teaches that the probability of actual bias on the part of the judge or
decisionmaker is too high to be constitutionally tolerable. Ibid. (Emphasis added.) The
Court then canvassed, among others, the Tumey , Ward, Gibson and Aetna cases, among
others, saying inter alia that it was concerned not just with pecuniary interest, but also
with adherence to neutrality (556 U.S. at ___, 129 S. Ct. at 2261, 173 L.Ed. 2d at 1218)
and that it was necessary to avoid even possible temptation. ( Ibid. ) (Emphasis
added.) Thus, it is not necessary to decide whether influence is in fact present, because it
is enough that there could be possible temptation. 556 U.S. at ___, 129 S. Ct. at 2260,
173 L.Ed. 2d at 1218.
Turning to the facts of the case before it, the Court did not question the assertions
of impartiality and propriety in Justice Benjamins opinions. 456 U.S. at ___, 129 S. Ct.
at 2263, 173 L.Ed. 2d at 1221. Rather it asked whether, under a realistic appraisal of
psychological tendencies and human weakness, the interest poses such a risk of actual
bias or prejudgment that the practice must be forbidden if the guarantee of due process is
to be adequately implemented. 456 U.S. at ___, 129 S. Ct. at 2263, 179 L.Ed. 2d at
1222. The Court conclude[d] that there is a serious risk of actual bias -- based on
objective and reasonable perceptions -- when a person with a personal stake in a
particular case had a significant and disproportionate influence in placing the judge on
the case by raising funds or directing the judges election campaign when the case was
pending or imminent. 456 U.S. at ___, 129 S. Ct. at 2263-64, 173 L.Ed. 2d at 1222.
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The risk of possible bias, said the Court, is a question of the circumstances. The
Court recognized that Not every campaign contribution by a litigant or attorney creates a
probability of bias that requires a judges recusal, but this is an exceptional case. 456
U.S. ___, 129 S. Ct. at 2263, 173 L.Ed. 2d at 1222 The large size of the contribution
(three million dollars), the fact that it was 300% larger than the amount spent by
Benjamins campaign committee and eclipsed the amount spent by all other Benjamin
supporters, the fact that the contribution was made when Masseys forthcoming appeal
to the West Virginia Supreme court would be before Judge Benjamin if he were elected to
that court, and the fact that Masseys Chairman had a personal stake in the case caused
there to be a violation of due process when Judge Benjamin sat on the case, even though
there would be no such violation in a run of the mill case of contributions to a judges
election campaign. Thus under all the circumstances of the case -- which were
exceptional, as was also true in some prior cases where the Constitution required recusal
-- due process required the recusal of Judge Benjamin lest there be temptation not to
hold the balance nice, clear and true. 456 U.S. at ___, 129 S. Ct. at 2263-65, 173 L.Ed.
2d at 1222, 1223-1224.
The risk of actual bias, the Court reiterated, is not the test. 456 U.S. at ___, 129 S.
Ct. at 2265, 173 L.Ed. 2d at 1224. The relevant standards may also require recusal
whether or not actual bias exists or can be proved. Id. (Emphasis added.) There must
be no possible temptation not to hold the balance nice, clear and true. Id.
* * * * *
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The Supreme Court has thus ruled that decisonmakers of many types, from judges
to members of boards to political figures making legal decisions, can have no financial
interest in their decisions. This is so whether the decisionmakers will receive money
themselves, whether money will go to their agencies or towns, whether they will shed
themselves of competition. It is true across the board. There need not be proof of actual
bias, for even possible temptation, possible bias, must be avoided. Nor need there be
giant sums of money involved. Far smaller sums such as hundreds of dollars, or $20,000
dollars, are sufficient to involve the principle of no financial interest.
3. The Trustee Appears To Have A Vast Financial Interest In His LegalDecisions.
A. For a couple of years very little if anything was known about how Irving
Picard came to be the SIPC Trustee in the Madoff matter, or what his arrangements with
his law firm, Baker & Hostetler, might be with regard to Madoff. It did become known
that Picard was SIPCs number one Trustee, its go to guy so to speak, who had been
appointed the SIPC Trustee in ten or so cases over the years, including some of SIPCs
most important ones, and that he had been criticized by a federal court for
overzealousness in pursuing SIPCs interest. But the details of Picards arrangements
with Baker & Hostetler regarding the Madoff case remained in the dark.
In 2011 a New York Times financial reporter, Diana Henriques, published a book
on the Madoff case in which she shed some light on the hiring of Picard. Henriques, The
Wizard of Lies , Henry Holt & Co., 216-218 (NY, 2011).
On December 11, 2008, the date Madoff was arrested, Picard had been a partner
for many years in the Gibbons Del Deo firm. One of his partners there had been David
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Sheehan, with whom Picard had worked on many brokerage liquidations but who had
recently moved to Baker & Hostetler. Sheehan and Picard had discussed a possible move
to Baker & Hostetler by Picard, and planned to discuss it further after January 1, 2009
(more than three weeks after the Madoff fraud was disclosed on December 11, 2008).
Ibid.
On Thursday, December 11 th SIPC called Picard to ask whether he could be its
Trustee in the Madoff case if necessary. Picard said he would check to see if the Gibbons
firm had any conflicts. Also, at some point between Thursday, December 11 and Sunday,
December 14 th (Henriques does not make clear exactly when), SIPC asked Sheehan if he
would be counsel to whomever was appointed Trustee. Ibid.
The Gibbons firm did have a potential conflict because it had long represented the
family and interests of Senator Frank Lautenberg, who were Madoff victims, and it might
represent them again in the Madoff case. A statement by a Gibbons partner led Picard to
believe he had to choose between becoming the Trustee in the Madoff case and remaining
at Gibbons. Ibid.
On Sunday afternoon, December 14, just three days after Madoff had been
arrested on Thursday, December 11, a group of Baker & Hostetler partners interviewed
Picard and immediately offered him a job. On Monday, December 15, the next day, he
accepted Baker & Hostetlers offer, resigned from Gibbons, and was appointed Trustee
by Judge Stanton. Ibid.
Thus, according to Henriques book, Baker & Hostetler made an instantaneous
decision to hire Picard after the Madoff fraud was disclosed and he had been given to
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understand that he might be the Trustee, and Picard instantly accepted Baker &
Hostetlers offer and resigned from the Gibbons firm. 2
B. Subsequent to Picards appointment as Trustee, he long gave people to
believe that he would not receive any portion of the fees awarded to Baker & Hostetler in
the Madoff proceeding. Thus at the hearing on his first interim fee application, he said:
As noted at paragraph 33 of my application and contrary to theimplication of certain objections that have been filed with theCourt and before the press, the amounts that will be awarded either today or at another time are going to be turned over to Baker &Hostetler, the firm of which I am a partner . I want to emphasize I will not retain any portion of the award. Transcript of August 6,2009, p. 14, annexed as Exhibit I to Helen Chaitmans Declarationin Support of her Motion of June 2, 2011for 313 DefendantsSeeking Withdrawal of the Reference. App., infra , p. 6.(Emphasis added.)
In recent weeks, however, it has become known that Trustee Picard -- and perhaps
his counsel David Sheehan also -- appears to have reached an arrangement with Baker &
Hostetler under which he will obtain a percentage of the fees garnered in the Madoff case
by Baker & Hostetler. A prominent lawyer for Madoff victims, Helen Chaitman, reported
that a lawyer friendly with Picard informed her that Picard said his deal with Baker &
Hostetler was that he would receive 50 percent of the fees taken in by the firm in the
Madoff case. To no avail Chaitman informed the Bankruptcy Court by letter of May 31,
2001 that Picard might be receiving between 33 and 50 percent of the fees obtained by
Baker & Hostetler. (App., infra , p. 7.) The next day, at a hearing before Bankruptcy
Judge Lifland, Mr. Sheehan lambasted Ms. Chaitman for raising the matter (Tr. of
2 Some details given by Henriques were publicly known, e.g., that Picard and Sheehan had worked together at the Gibbons firm. Others had not been publicly known, e.g., the dates of phone calls and meetings thatled to Picard joining Baker & Hostetler.
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Hearing of June 1, 2011, pp. 28-29 (App., infra, pp. 11-12.)), said her allegations
reflected ignorance of law firm economics, and said that under her claims Baker &
Hostetler would be getting zero. (Tr. of Hearing, pp. 28, 29, (App., infra, pp. 11-12. ))
Trustee Picard then accused Ms. Chaitman of making an unfounded allegation about my
compensation and said She is way off the mark. I dont receive any percentage near
thirty-five or fifty percent. (Tr. of Hearing, p. 32 (App., infra , p. 13.)) When Ms.
Chaitman rose to address the Court, Judge Lifland lambasted Ms. Chaitman for raising
the matter, and he did so again at the end of the hearing. (Tr. of Hearing, pp. 39, 46-48
(App., infra, pp. 15, 16-18 .))
Regardless of the criticisms levied at Ms. Chaitman by Sheehan, Picard and Judge
Lifland, it appears that Picard implicitly admitted that he is receiving some percentage of
the fees obtained by Baker & Hostetler. That is the plain implication of Picards
statement to the Bankruptcy Judge that Ms. Chaitmans claim that he receives 33 to 50
percent of Baker & Hostetlers fees is way off the mark. I dont receive any percentage
near thirty-five or fifty percent. Well, what percentage does he receive? Even a mere
ten percent would be worth in nearly 18 million dollars already and likely would
ultimately be worth several score of millions of dollars.
The percentage Picard receives, and the percentage that Sheehan possibly
receives, are not known. There must be discovery to determine such details of the
arrangements between Picard and Baker & Hostetler (and Sheehan and Baker & Hostetler
too). For Picard, aided by Sheehan, is participating in very unusual governmental and
quasi-governmental decisions that are denying a total of billions of dollars to thousands
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of people. He may even be making these unusual decisions by himself if certain
statements made by the Chairwoman of the SEC and the President of SIPC (and cited in
Helen Chaitmans Memorandum In Support of Withdrawal of the Reference, at p.16) are
to be believed. (Picard, of course, denies this.) The decisions he has been making have
already included such crucial ones as the decision to measure net equity by cash-in/cash-
out (CICO) instead of by the final statement method (FSM) though this has never or
almost never been done previously in hundreds of SIPC cases, and the decision to seek
clawbacks from hundreds or thousands of persons whom the Trustee concedes are
completely innocent, even though this too apparently has never been done before in SIPC
cases. These two unusual decisions alone have and will continue to produce scores of
millions of dollars in fees for Baker & Hostetler because they reduce the money SIPC
owes to innocent investors (by billions of dollars), increase the monies the Trustee will
get from innocent investors (again by billions of dollars), are therefore being fought tooth
and nail by innocent investors, some of whom are employing major law firms, and are
thus running up, by scores of millions of dollars, the fees obtained by Baker & Hostetler
in carrying out Picards decisions and, accordingly, are likewise vastly running up the
amount of such fees to be turned over to Trustee Picard and perhaps to David Sheehan.
Had the Trustee not decided, very unusually, to use CICO and demand clawbacks, the
fees received by Baker & Hostetler, and thus by the Trustee under his agreement with
Baker & Hostetler, would have been incomparably lower -- one might estimate as much
as 60 or 80 percent lower .
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What we have here, then, is not a run of the mill SIPC case in which a law firm
for which a Trustee has worked for years will make somewhat more or somewhat less
depending on the vagaries inherent in any SIPC liquidation. Rather, what we have here,
as existed in Caperton and in cases it cited on the point, is an exceptional situation. It is a
situation in which the Trustee changed law firms in order to get the case, apparently
received extraordinarily lucrative financial arrangements from his new firm, and then
made or participated in making very important and perhaps wholly novel legal decisions
which have increased not only his new firms fees by scores of millions, but also his own
compensation too by, apparently, tens or scores of millions of dollars that will be turned
over to him by the firm. In these exceptional circumstances, the fact that, in the run of
the mill SIPC case, a firms fees will fluctuate with the vagaries of the case is irrelevant,
just as in Caperton it was irrelevant that in most cases there will be nothing wrong with
the fact that lawyers contribute to judges election campaigns. In an exceptional case like
this one there is a violation, in a wholesale way, of the principles, established in the
Tumey through Caperton line of cases, that a governmental decisionmaker should not
have a financial interest in his decisions; that even the possible temptation created by
such an interest cannot be countenanced, so that it is not necessary to determine whether
personal financial interest was or was not the spring of action; and that the legal decisions
made by persons with such an interest cannot be allowed to stand lest adversely affected
individuals believe they have been victimized by the decisionmakers -- which is precisely
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what hundreds or thousands of persons defrauded by Madoff believe has been their fate at
the hands of the Trustee. 3
4. The Trustees Arguments Against Application Of The Tumey-Caperton Line
Of Cases Are Invalid.
There are a number of arguments the Trustee self evidently can be expected to
make in opposition to application of the Tumey-Caperton line of cases. He mentioned
two of them in passing before Bankruptcy Judge Lifland at the hearing on June 1, when
he said I am not a decisionmaker for SIPC. And I am not a quasi-governmental agency
or act in a quasi-governmental capacity. (Tr. of June 1, 2011, pp. 32-33 (App., infra, pp.
13-14.))
To begin with the Trustee is not just the SIPC Trustee but is conjointly the
Bankruptcy Trustee. His demands for clawbacks are made as Bankruptcy Trustee under
provisions of the Bankruptcy Code. As Bankruptcy Trustee, Mr. Picard is not a mere
quasi-governmental body; he is, rather, an officer of the Court -- a full fledged
governmental figure. As ruled by the Supreme Court, Trustees in bankruptcy are public
officers and officers of a court. Callaghan v. Reconstruction Finance Corporation , 297
U.S. 464, 468 (1936).
The same would appear to be true of the Trustee in his capacity as SIPC Trustee,
under which he made or participated in the extraordinarily unusual decision to define net
equity by the CICO method rather than by the final statement method. For here too he
was appointed by the Court in exactly the same way as he was appointed Bankruptcy
3 Amicus does not know whether SIPC has been aware that Picard personally stands to make tens or scoresof millions of dollars from the Madoff case because of his arrangements with Baker & Hostetler. Veryserious questions would be raised if SIPC was aware of this but did nothing, i.e., allowed it.
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Trustee, at exactly the same time, to fulfill functions which, just like the bankruptcy
provisions he enforces as Bankruptcy Trustee, are imposed by federal statute.
If the Trustee were not a full fledged governmental officer, he would at minimum
be a quasi-governmental officer. For he was selected by, is paid by, and works on behalf
of a quasi-governmental body, SIPC. SIPCs quasi-governmental character was stressed
in a report by the highly regarded Congressional Research Service. 4
The CRS explained several reasons why SIPC is a quasi-governmental body.
Of the seven-member board of directors, one is appointed by theSecretary of the Treasury from among the Departments officersand employees; one is appointed by members of the FederalReserve Board from among its officers and employees; fivedirectors are appointed by the President subject to the advice andconsent of the Senate. The President designates the chairman, whois also the corporations chief executive officer.
(Report, p. 20 (App., infra , p. 20.)) The CRS further said in regard to SIPCs quasi-
governmental nature that SIPC is effectively a subsidiary of the SEC. The Corporations
bylaws are subject to the SECs adoption or rejection . . . . [T]o the extent that the bylaws
and rules of the SIPC are approved or disapproved by the SEC, they are subject to the
Administrative Procedure Act (5 U.S.C. 551 et seq.). The corporation also has borrowing
authority and a line of credit from the Treasury. Id.
SIPC, said the CRS, is a hybrid organization created to implement government
policies and regulations. Ultimately, the SPIC (sic) and the PCAOB are agents of and
accountable to the government through the SEC. ( Id.) (Emphasis added.)
4 CRS Report for Congress, The Quasi Government: Hybrid Organizations With Both Government and Private Sector Characteristics. Updated January 31, 2008.
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Thus, the Trustee, who is selected by an agent of the government, paid by an
agent of the government, works on behalf of this agent, by his own repeated admission
seeks to protect the finances of this agent of the government, and makes or participates in
making the legal decisions for this agent of the government, is at minimum a quasi-
governmental functionary.
In further denial of quasi-governmental status, the Trustee, as said, stated in open
court on June 1 that I am not a decision maker for SIPC. (Tr. of Hearing, p. 32. (App.,
infra, p. 13.)) Given his exceptionally prominent role for 2 ! years in the Madoff case,
his announcement and vigorous implementation of highly unusual policies, and
statements by SIPC and SEC officials stressing the importance of his role, the idea that
the Trustee does not make, or at minimum participate extensively and importantly in,
decisions which carry out SIPCs role appears ludicrous on its face. If the Trustee
seriously wishes to maintain this facially ludicrous position, there must be discovery into
the way that decisions (such as those involving net equity and clawbacks) have actually
been made in this case, 5 and this Court should order the necessary discovery.
The Trustee is also likely to claim that he is not subject to the Tumey-Caperton
line of cases because others, particularly including courts, review his decisions. But this
reasoning has been rejected twice by the Supreme Court, in Ward v. Monroeville (409
U.S. at 61-62) and Gibson v. Berryhill (411 U.S. at 580). Thus, in Ward the Court said
that the fact the mayors decision on violations can be corrected on appeal and trial de
novo in the County Court of Common Pleas did not make the system of mayoral trials
5 In the fall of 2009 the Trustee and SIPC vigorously opposed discovery on net equity that would inevitablyhave shed light on the decisionmaking process. The discovery was denied, as they desired. Any discoverynow needed to determine the Trustees role in making crucial decisions should be ordered by this Court.
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constitutional because the State eventually offers an impartial adjudication. Rather,
the defendant was entitled in the first instance to a decisionmaker who was neutral and
detached. 409 .S. at 61-62.
In the Madoff case, decisions of the most enormous consequence -- and often
wholly destructive financial consequence -- to thousands of individuals have been made
and implemented by the Trustee. These decisions were not made by a person who is
neutral and detached, but by a person who stood to make tens or scores of millions of
dollars because of the decisions. As the Supreme Court said, this cannot be justified on
the ground that erroneous decisions could be corrected later by courts (after individuals
have been devastated for years -- sometimes rendered penniless -- by the Trustees
decisions).
Relatedly, the Trustee is very likely to claim that the Tumey-Caperton line of
cases must be confined to situations in which persons are acting as judges in some way,
and that he is not doing so. This is not a tenable position. The essence of the Supreme
Courts line of cases is that governmental legal decisions must be made by persons who
do not have a financial stake in the decisions. That is why the Supreme Court has
repeatedly stressed that the principle of no financial interest extends beyond direct
sharing in fees and costs, extends even to quite small financial interests, and is intended
to insure there is no possible temptation to the average man that might lead him not to
hold the balance nice, clear and true. The principle of no financial interest is a principle
of clean government (of government that is different from many of those we deal with
elsewhere in the world, e.g., the Middle East). Were the principle confined to those
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acting as a judge, then, for example, a city solicitor could permissibly make a legal ruling
(e.g., a decision on real estate matters) because he or she would receive extensive
financial benefit from the ruling but not from a contrary one, or an attorney general, state
or federal, could take one legal position rather than another because he or she would
benefit financially from the one taken but not from the one rejected. This is simply not
an admissible interpretation of the Tumey-Caperton line of cases, since it would allow
governmental legal decisions to be made by and in the interests of the financially
interested, often to the detriment of large numbers of citizens, as in the Madoff case.
CONCLUSION
Though discovery is needed to fully flesh out the Trustees financial arrangements
with Baker & Hostetler in regard to the Madoff case, enough is known already to make it
appear that the Trustees arrangements put him in serious violation of the Tumey-
Caperton line of cases. Because of the violation, the Trustee cannot be allowed to
continue in the case, nor can the law firm which fostered the violation for its own
financial benefit remain in the case. (With regard to its financial benefit, one notes that
its fees thus far are between 175 and 180 million dollars, and are expected to eventually
total somewhere in the neighborhood of a billion dollars.) The Trustee and the firm are
tainted by the violations they fostered.
As well, the decisions of the Trustee must be revisited by a new and completely
independent Trustee, so that the crucial decisions in the case will be made by an official
who does not have a financial interest in them. The one exception to revisiting the
decisions may ultimately be the decision to use CICO. That decision was argued in court
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by the Trustee mainly on the basis that CICO was permissible, not that it was mandatory.
But at times there were overtones of mandatoriness. If the Second Circuit were to rule
that either CICO or the FSM are mandatory , then the Trustees decision for CICO could
not be revisited by a new Trustee. But if the appeals court were to rule that a Trustee is
free to use either CICO or the FSM at his or her discretion, then the decision for CICO
should be revisited by a new, independent Trust ee because he or she might decide
differently than did the present Trustee, who will benefit personally to the tune of
millions or scores of millions of dollars from the decision to use CICO.
Finally, this Court should order discovery into the financial arrangements between
the Trustee and Baker & Hostetler, and, if the Trustee continues to deny his
decisiomaking role, into the process of decisonmaking involving the Trustee and SIPC.
Respectfully submitted,
Lawrence R. Velvel, Esq.
Massachusetts School of Law500 Federal StreetAndover, MA 01810Tel: (978) 681-0800Fax: (978) 681-6330Email: Velvel@mslaw.edu
Dated: June 17, 2011
Brief.DistrictCourt
mailto:Velvel@mslaw.edumailto:Velvel@mslaw.edumailto:Velvel@mslaw.edu