Velvel on National Affairs

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W E D N E S D A Y , J U N E 2 2 , 2 0 1 1

AMICUS CURIAE BRIEF OF LAWRENCER. VELVEL ON THE APPLICATION HERE

OF THE SUPREME COURT CASES --FROM TUMEY v. OHIO TO CAPERTON v.MASSEY COAL -- THAT BARGOVERNMENTAL LEGAL DECISIONSFROM BEING MADE BY PERSONS WITHA FINANCIAL INTEREST IN THEDECISIONS.

STATEMENT

Lawrence R. Velvel is a victim of BernardMadoff. Velvel, who is a lawyer, hasparticipated in the briefing on the net equity

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question (and other questions) in theBankruptcy Court in the Madoff case, andhas filed two briefs on his own behalf on thenet equity question in the Second CircuitCourt of Appeals. In this amicus brief,

Velvel elaborates the question -- raised onpages 15-17 of the motion for a withdrawalof reference filed by Helen Chaitman onbehalf of James Greiff and others -- of theapplicability to the question of the Trusteesfees of the Supreme Courts line of casesrunning from Tumey v. Ohio, 273 U.S. 510(1927) to Caperton v. Massey Coal Co., Inc.,556 U.S. ___ (2009). The applicability ofthis line of constitutional law furthersupports the withdrawal of the referencesought by Ms. Chaitman.

ARGUMENT

1. Introduction: Due Process Requires ThatLegal Judgments Must Be Made By Officials

Who Do Not Benefit Financially From TheirDecisions.

It is a fundamental principle of due processthat, when a legal judgment is made by ajudicial, executive, administrative or quasi-governmental official, that official must notbenefit financially from the decision. Nor

can there be financial benefit to agovernmental institution or function underthe officials purview. This principle of dueprocess has been powerfully enunciated bythe Supreme Court in Tumey v. Ohio, 273U.S. 510 (1927); Ward v. Village of

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Monroeville, 409 U.S. 57 (1972); Gibson v.Berryhill, 411 U.S. 564 (1973); Aetna LifeInsurance 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). The principle of nofinancial benefit, the Court has repeatedlysaid, is necessary in order to ensure thatthe 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 at1218 (quoting Tumey v. Ohio).

In this case Irving Picard is the BankruptcyTrustee, the SIPC Trustee and a specialmaster appointed by the Department ofJustice to distribute billions of dollarsforfeited to it by Carl Shapiro and JeffryPicower. In these capacities he is an officerof the Bankruptcy Court (as has beenexplicitly held by the Supreme Court withregard to the position of Bankruptcy

Trustee) (Callaghan v. ReconstructionFinance Corp., 297 U.S. 464, 468 (1936)), afunctionary of the Department of Justice,and exercises governmental and quasi-governmental power to make and/orparticipate in legal decisions that affectthousands of people and involve literallybillions of dollars, e.g., initial decisions on

how net equity shall be defined and fromwhom clawbacks shall be demanded.

Unfortunately, it has recently beendiscovered that the Trustee, and perhapsalso his counsel, David Sheehan, with

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JP Morgan.
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whom he works very closely, may benefitpersonally and financially, to the tune ofmillions of dollars, perhaps scores ofmillions of dollars, from the decisions theTrustee makes and implements. (The

amounts of money involved here dwarf theamounts in the Supreme Courts cases.)Though it is already pretty certain (as willbe described below) that financial benefitswill accrue to the Trustee from the decisionshe makes (and may accrue to his colleagueDavid Sheehan also), the precise details ofthe relevant financial arrangements underwhich the Trustee will receive majorfinancial benefits are still not known. Theremust be discovery to flesh out the precisedetails of the arrangements; plaintiff willsubsequently discuss and request theneeded discovery.

2. The Supreme Court Cases Holding ThatLegal Decisions Cannot Be Made By

Persons Who Will Benefit Financially FromThem.

In Tumey v. Ohio, a village mayor had thepower to try and fine persons accused ofpossessing intoxicating beverages inviolation of state law. The mayor himselfreceived a portion of the fines; he received

$696 dollars in fees, compensation andcosts from such fines in an eight monthperiod. The Supreme Court ruled thissystem unconstitutional. Pointing out thatsuch a pecuniary interest rendered itunconstitutional for the mayor to decide on

A B O U T D E A N

V E L V E L

Name:LawrenceVelvelLocation:

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Dean Velvel, an

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the defendants liability, the Court also said,With his interest as mayor in the financialcondition of the village and hisresponsibility therefore, might not adefendant with reason say that he feared he

could not get a fair trial or a fair sentencefrom one who would have so strong amotive to help his village by conviction anda heavy fine? Tumey, supra, 273 U.S. at533.

In Ward v. Monroeville, supra, a villagemayor determined guilt or innocence incases of alleged traffic violations andimposed fines and costs on parties heconvicted. Roughly forty percent of thevillages annual income (or between$16,000 and $23,000 per year) came fromthe fines and costs he imposed. (Unlike inTumey, the mayor did not himself receiveany money; it all went to Monroeville.) TheSupreme Court ruled this system

unconstitutional too, saying that the factthe mayor in Tumey had a direct, personal,substantial pecuniary interest and shareddirectly in the fees and costs did not definethe limits of the principle forbidding legaldecisions from being made by interestedparties. Ward v. Monroeville, 409 U.S. at60. Rather, the Court said, there must be no

possible temptation to the average manthat might lead him not to hold thebalance nice, clear and true . . . . Ibid.Plainly, said the Court, that possibletemptation may also exist when themayors executive responsibilites [sic] for

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village finances may make him partisan tomaintain the high level of contribution fromthe mayors court. Ibid.

The Court also rejected the argument that

the arrangement at issue should be upheldbecause, after the mayors decision, anerroneous decision can be corrected onappeal and trial de novo in the CountyCourt of Common Pleas. 409 U.S. at 61-62.The Court said, Nor, in any event, may theStates trial court procedure be deemedconstitutionally acceptable simply becausethe State eventually offers a defendant animpartial adjudication. Petitioner is entitledto a neutral and detached judge in the firstinstance. 409 U.S. at 61-62. (Emphasisadded.)

In Gibson v. Berryhill, a state Board ofOptometrists, comprised exclusively ofoptometrists in private practice for their

own account, was going to hold hearingsagainst optometrists employed by acorporation. The charge was that Alabamalaw was violated when practicingoptometrists worked for a corporation. TheSupreme Court upheld a lower courtdecision that the Board members werebiased by personal self interest because half

the optometrists in the state were employedby corporations, so that success in theBoards efforts would possibly redound tothe personal benefit of members of theBoard (who were, as said, in privatepractice for their own account, and would

e c oo see s ogive these personsaccess to the societaladvancement that isavailable, in law andother fields, to people

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and immigrants. MSLalso serves middleclass people whoincreasingly havebeen shut out of legaleducation. MSL givesindividuals from allthese groups a

rigorous, useful,affordable legaleducation so thatthey can improvetheir lives and betterserve theircommunities.

A R C H I V E S

May 2004

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benefit from elimination of competitionfrom optometrists employed bycorporations). 411 U.S. at 578. It issufficiently clear from our cases, continuedthe 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, 409 U.S. 57, 93 S.Ct. 80, 34L.Ed.2d 267 (1972), indicates that thefinancial stake need not be as direct orpositive as it appeared to be in Tumey. Ithas also come to be the prevailing view that(m)ost of the law concerningdisqualification because of interest applieswith equal force to . . . administrativeadjudicators. K. Davis, Administrative LawText 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 decisionfrom a higher Alabama body than the Board(from the state Supreme Court) did notwarrant a refusal by the lower court toadjudicate the case. 411 U.S. at 580.In the fourth of the cases, Aetna LifeInsurance Co. v. Lavoie, a state SupremeCourt Justice named Embry participated in

and wrote a per curiam opinion in aninsurance bad faith case whose outcomeaffected, and aided, a wholly separate casefiled by Justice Embry against Blue Cross.(Judge Embry later settled his ownlitigation for $30,000. (475 U.S. at 824.))

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The Supreme Court ruled that JusticeEmbrys work in the Aetna caseundoubtedly raised the stakes for BlueCross in Justice Embrys own suit, to thebenefit of Justice Embry. Thus, Justice

Embrys opinion for the Alabama SupremeCourt had the clear and immediate effect ofenhancing both the legal status and thesettlement value of his own case, and heunconstitutionally acted as a judge in hisown case. 475 U.S. at 824.

Whether Judge Embrys view and decisionin Aetna was actually influenced by his owncase was irrelevant. The Court said:

We conclude that Justice Embrysparticipation in this case violatedappellants due process rights as explicatedin Tumey, Murchison, and Ward. We makeclear that we are not required to decidewhether in fact Justice Embry was

influenced, but only whether sitting on thecase then before the Supreme Court ofAlabama would offer a possible temptationto the average judge to lead him to notto hold the balance nice, clear and true.Ward, 409 U.S., at 60, 93 S.Ct., at 83(quoting Tumey v. Ohio, supra, 273 U.S., at532, 47 S.Ct., at 444). (475 U.S. at 825.)

Finally, less than two years ago theSupreme Court decided Caperton v. MasseyCoal Co., Inc., 556 U.S. ____, 129 S. Ct. at2252, 173 L.Ed. 2d 1208 (2009). In thatcase the Chairman of Massey Coal

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contributed a major sum of money -- threemillion dollars -- to the campaign of acandidate running for a justiceship of theWest Virginia Supreme Court, BrentBenjamin. Benjamin won. Shortly

afterwards, a major appeal by Massey Coalwas heard in the West Virginia SupremeCourt. Massey won. Justice Benjamin votedin its favor.

Justice Benjamin said in several opinionsthat he had no direct or substantialfinancial interest in the case. 556 U.S. at___, 129 S. Ct. at 2262-63, 173 L.Ed. 2d at1221. The Supreme Court nonethelessreversed the decision below in favor ofMassey Coal.

The Court said that the rule againstpecuniary interest exists because no manis allowed to be a judge in his own causeand because his interest would certainly

bias his judgment, and, not improbably,corrupt his integrity. 556 U.S. ___, at 129S. Ct. at 2259, 179 L.Ed. 2d at 1217, 1218.There are circumstances, it continued, inwhich experience teaches that theprobability of actual bias on the part of thejudge or decisionmaker is too high to beconstitutionally tolerable. Ibid. (Emphasis

added.) The Court then canvassed, amongothers, the Tumey, Ward, Gibson and Aetnacases, among others, saying inter alia that itwas concerned not just with pecuniaryinterest, but also with adherence toneutrality (556 U.S. at ___, 129 S. Ct. at

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2261, 173 L.Ed. 2d at 1218) and that it wasnecessary to avoid even possibletemptation. (Ibid.) (Emphasis added.)Thus, it is not necessary to decide whetherinfluence is in fact present, because it is

enough that there could be possibletemptation. 556 U.S. at ___, 129 S. Ct. at2260, 173 L.Ed. 2d at 1218.

Turning to the facts of the case before it, theCourt did not question the assertions ofimpartiality and propriety in JusticeBenjamins opinions. 456 U.S. at ___, 129S. Ct. at 2263, 173 L.Ed. 2d at 1221. Ratherit asked whether, under a realisticappraisal of psychological tendencies andhuman weakness, the interest poses such arisk of actual bias or prejudgment that thepractice must be forbidden if the guaranteeof due process is to be adequatelyimplemented. 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 ofactual bias -- based on objective andreasonable perceptions -- when a personwith a personal stake in a particular casehad a significant and disproportionateinfluence in placing the judge on the case byraising funds or directing the judgeselection campaign when the case was

pending or imminent. 456 U.S. at ___, 129S. Ct. at 2263-64, 173 L.Ed. 2d at 1222.

The risk of possible bias, said the Court, is aquestion of the circumstances. The Courtrecognized that Not every campaign

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contribution by a litigant or attorney createsa probability of bias that requires a judgesrecusal, but this is an exceptional case. 456U.S. ___, 129 S. Ct. at 2263, 173 L.Ed. 2d at1222 The large size of the contribution

(three million dollars), the fact that it was300% larger than the amount spent byBenjamins campaign committee andeclipsed the amount spent by all otherBenjamin supporters, the fact that thecontribution was made when Masseysforthcoming appeal to the West VirginiaSupreme court would be before JudgeBenjamin if he were elected to that court,and the fact that Masseys Chairman had apersonal stake in the case caused there tobe a violation of due process when JudgeBenjamin sat on the case, even though therewould be no such violation in a run of themill case of contributions to a judgeselection campaign. Thus under all thecircumstances of the case -- which were

exceptional, as was also true in some priorcases where the Constitution requiredrecusal -- due process required the recusalof Judge Benjamin lest there be temptationnot to hold the balance nice, clear andtrue. 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. at2265, 173 L.Ed. 2d at 1224. The relevantstandards may also require recusalwhether or not actual bias exists or can beproved. Id. (Emphasis added.) There must


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be no possible temptation not to hold thebalance nice, clear and true. Id.

* * * * *

The Supreme Court has thus ruled thatdecisonmakers of many types, from judgesto members of boards to political figuresmaking legal decisions, can have nofinancial interest in their decisions. This isso whether the decisionmakers will receivemoney themselves, whether money will goto their agencies or towns, whether they willshed themselves of competition. It is trueacross the board. There need not be proof ofactual bias, for even possible temptation,possible bias, must be avoided. Nor needthere be giant sums of money involved. Farsmaller sums such as hundreds of dollars,or $20,000 dollars, are sufficient to involvethe principle of no financial interest.

3. The Trustee Appears To Have A VastFinancial Interest In His Legal Decisions.

A. For a couple of years very little ifanything was known about how IrvingPicard came to be the SIPC Trustee in theMadoff matter, or what his arrangementswith his law firm, Baker & Hostetler, might

be with regard to Madoff. It did becomeknown that Picard was SIPCs number oneTrustee, its go to guy so to speak, who hadbeen appointed the SIPC Trustee in ten orso cases over the years, including some ofSIPCs most important ones, and that he


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had been criticized by a federal court foroverzealousness in pursuing SIPCs interest.But the details of Picards arrangementswith Baker & Hostetler regarding theMadoff case remained in the dark.

In 2011 a New York Times financialreporter, Diana Henriques, published abook on the Madoff case in which she shedsome light on the hiring of Picard.Henriques, The Wizard of Lies, Henry Holt& Co., 216-218 (NY, 2011).

On December 11, 2008, the date Madoffwas arrested, Picard had been a partner formany years in the Gibbons Del Deo firm.One of his partners there had been DavidSheehan, with whom Picard had worked onmany brokerage liquidations but who hadrecently moved to Baker & Hostetler.Sheehan and Picard had discussed apossible move to Baker & Hostetler by

Picard, and planned to discuss it furtherafter January 1, 2009 (more than threeweeks after the Madoff fraud was disclosedon December 11, 2008). Ibid.

On Thursday, December 11th SIPC calledPicard to ask whether he could be itsTrustee in the Madoff case if necessary.

Picard said he would check to see if theGibbons firm had any conflicts. Also, atsome point between Thursday, December 11and Sunday, December 14th (Henriquesdoes not make clear exactly when), SIPCasked Sheehan if he would be counsel to


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whomever was appointed Trustee. Ibid.

The Gibbons firm did have a potentialconflict because it had long represented thefamily and interests of Senator Frank

Lautenberg, who were Madoff victims, andit might represent them again in the Madoffcase. A statement by a Gibbons partner ledPicard to believe he had to choose betweenbecoming the Trustee in the Madoff caseand remaining at Gibbons. Ibid.

On Sunday afternoon, December 14, justthree days after Madoff had been arrestedon Thursday, December 11, a group of Baker& Hostetler partners interviewed Picard andimmediately offered him a job. On Monday,December 15, the next day, he acceptedBaker & Hostetlers offer, resigned fromGibbons, and was appointed Trustee byJudge Stanton. Ibid.

Thus, according to Henriques book, Baker& Hostetler made an instantaneous decisionto hire Picard after the Madoff fraud wasdisclosed and he had been given tounderstand that he might be the Trustee,and Picard instantly accepted Baker &Hostetlers offer and resigned from theGibbons firm.

B. Subsequent to Picards appointment asTrustee, he long gave people to believe thathe would not receive any portion of the feesawarded to Baker & Hostetler in the Madoffproceeding. Thus at the hearing on his first


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interim fee application, he said:

As noted at paragraph 33 of my applicationand contrary to the implication of certainobjections that have been filed with the

Court and before the press, the amountsthat will be awarded either today or atanother time are going to be turned over toBaker & Hostetler, the firm of which I am apartner. I want to emphasize I will notretain any portion of the award. Transcriptof August 6, 2009, p. 14, annexed as ExhibitI to Helen Chaitmans Declaration inSupport of her Motion of June 2, 2011for313 Defendants Seeking Withdrawal of theReference. App., infra, p. 6. (Emphasisadded.)

In recent weeks, however, it has becomeknown that Trustee Picard -- and perhapshis counsel David Sheehan also -- appearsto have reached an arrangement with Baker

& Hostetler under which he will obtain apercentage of the fees garnered in theMadoff case by Baker & Hostetler. Aprominent lawyer for Madoff victims, HelenChaitman, reported that a lawyer friendlywith Picard informed her that Picard saidhis deal with Baker & Hostetler was that hewould receive 50 percent of the fees taken

in by the firm in the Madoff case. To noavail Chaitman informed the BankruptcyCourt by letter of May 31, 2001 that Picardmight be receiving between 33 and 50percent of the fees obtained by Baker &Hostetler. (App., infra, p. 7.) The next day,


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at a hearing before Bankruptcy JudgeLifland, Mr. Sheehan lambasted Ms.Chaitman for raising the matter (Tr. ofHearing 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. ofHearing, pp. 28, 29, (App., infra, pp. 11-12.)) Trustee Picard then accused Ms.Chaitman of making an unfoundedallegation about my compensation andsaid She is way off the mark. I dont receiveany percentage near thirty-five or fiftypercent. (Tr. of Hearing, p. 32 (App., infra,p. 13.)) When Ms. Chaitman rose to addressthe Court, Judge Lifland lambasted Ms.Chaitman for raising the matter, and he didso again at the end of the hearing. (Tr. ofHearing, pp. 39, 46-48 (App., infra, pp. 15,16-18.))

Regardless of the criticisms levied at Ms.Chaitman by Sheehan, Picard and JudgeLifland, it appears that Picard implicitlyadmitted that he is receiving somepercentage of the fees obtained by Baker &Hostetler. That is the plain implication ofPicards statement to the Bankruptcy Judgethat Ms. Chaitmans claim that he receives

33 to 50 percent of Baker & Hostetlers feesis way off the mark. I dont receive anypercentage near thirty-five or fifty percent.Well, what percentage does he receive?Even a mere ten percent would be worthin nearly 18 million dollars already and


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likely would ultimately be worth severalscore of millions of dollars.

The percentage Picard receives, and thepercentage that Sheehan possibly receives,

are not known. There must be discovery todetermine such details of the arrangementsbetween Picard and Baker & Hostetler (andSheehan and Baker & Hostetler too). ForPicard, aided by Sheehan, is participating invery unusual governmental and quasi-governmental decisions that are denying atotal of billions of dollars to thousands ofpeople. He may even be making theseunusual decisions by himself if certainstatements made by the Chairwoman of theSEC and the President of SIPC (and cited inHelen Chaitmans Memorandum InSupport of Withdrawal of the Reference, atp.16) are to be believed. (Picard, of course,denies this.) The decisions he has beenmaking have already included such crucial

ones as the decision to measure net equityby cash-in/cash-out (CICO) instead of bythe final statement method (FSM) thoughthis has never or almost never been donepreviously in hundreds of SIPC cases, andthe decision to seek clawbacks fromhundreds or thousands of persons whomthe Trustee concedes are completely

innocent, even though this too apparentlyhas never been done before in SIPC cases.These two unusual decisions alone have andwill continue to produce scores of millionsof dollars in fees for Baker & Hostetlerbecause they reduce the money SIPC owes


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to innocent investors (by billions of dollars),increase the monies the Trustee will getfrom innocent investors (again by billionsof dollars), are therefore being fought toothand nail by innocent investors, some of

whom are employing major law firms, andare thus running up, by scores of millions ofdollars, the fees obtained by Baker &Hostetler in carrying out Picards decisionsand, accordingly, are likewise vastlyrunning up the amount of such fees to beturned over to Trustee Picard and perhapsto David Sheehan. Had the Trustee notdecided, very unusually, to use CICO anddemand clawbacks, the fees received byBaker & Hostetler, and thus by the Trusteeunder his agreement with Baker &Hostetler, would have been incomparablylower -- one might estimate as much as 60or 80 percent lower.

What we have here, then, is not a run of the

mill SIPC case in which a law firm for whicha Trustee has worked for years will makesomewhat more or somewhat lessdepending on the vagaries inherent in anySIPC liquidation. Rather, what we havehere, as existed in Caperton and in cases itcited on the point, is an exceptionalsituation. It is a situation in which the

Trustee changed law firms in order to getthe case, apparently receivedextraordinarily lucrative financialarrangements from his new firm, and thenmade or participated in making veryimportant and perhaps wholly novel legal


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decisions which have increased not only hisnew firms fees by scores of millions, butalso his own compensation too by,apparently, tens or scores of millions ofdollars that will be turned over to him by

the firm. In these exceptionalcircumstances, the fact that, in the run ofthe mill SIPC case, a firms fees willfluctuate with the vagaries of the case isirrelevant, just as in Caperton it wasirrelevant that in most cases there will benothing wrong with the fact that lawyerscontribute to judges election campaigns. Inan exceptional case like this one there is aviolation, in a wholesale way, of theprinciples, established in the Tumeythrough Caperton line of cases, that agovernmental decisionmaker should nothave a financial interest in his decisions;that even the possible temptation createdby such an interest cannot becountenanced, so that it is not necessary to

determine whether personal financialinterest was or was not the spring of action;and that the legal decisions made bypersons with such an interest cannot beallowed to stand lest adversely affectedindividuals believe they have beenvictimized by the decisionmakers -- whichis precisely what hundreds or thousands of

persons defrauded by Madoff believe hasbeen their fate at the hands of the Trustee.

4. The Trustees Arguments AgainstApplication Of The Tumey-Caperton LineOf Cases Are Invalid.


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There are a number of arguments theTrustee self evidently can be expected tomake in opposition to application of theTumey-Caperton line of cases. He

mentioned two of them in passing beforeBankruptcy Judge Lifland at the hearing onJune 1, when he said I am not adecisionmaker for SIPC. And I am not aquasi-governmental agency or act in aquasi-governmental capacity. (Tr. of June1, 2011, pp. 32-33 (App., infra, pp. 13-14.))

To begin with the Trustee is not just theSIPC Trustee but is conjointly theBankruptcy Trustee. His demands forclawbacks are made as Bankruptcy Trusteeunder provisions of the Bankruptcy Code.As Bankruptcy Trustee, Mr. Picard is not amere quasi-governmental body; he is,rather, an officer of the Court -- a fullfledged governmental figure. As ruled by

the Supreme Court, Trustees in bankruptcyare public officers and officers of a court.Callaghan v. Reconstruction FinanceCorporation, 297 U.S. 464, 468 (1936).

The same would appear to be true of theTrustee in his capacity as SIPC Trustee,under which he made or participated in the

extraordinarily unusual decision to definenet equity by the CICO method rather thanby the final statement method. For here toohe was appointed by the Court in exactlythe same way as he was appointedBankruptcy Trustee, at exactly the same


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time, to fulfill functions which, just like thebankruptcy provisions he enforces asBankruptcy Trustee, are imposed by federalstatute.

If the Trustee were not a full fledgedgovernmental officer, he would at minimumbe a quasi-governmental officer. For he wasselected by, is paid by, and works on behalfof a quasi-governmental body, SIPC. SIPCsquasi-governmental character was stressedin a report by the highly regardedCongressional Research Service.

The CRS explained several reasons whySIPC is a quasi-governmental body.Of the seven-member board of directors,one is appointed by the Secretary of theTreasury from among the Departmentsofficers and employees; one is appointed bymembers of the Federal Reserve Boardfrom among its officers and employees; five

directors are appointed by the Presidentsubject to the advice and consent of theSenate. The President designates thechairman, who is also the corporationschief executive officer.

(Report, p. 20 (App., infra, p. 20.)) The CRSfurther said in regard to SIPCs quasi-

governmental nature that SIPC iseffectively a subsidiary of the SEC. TheCorporations bylaws are subject to theSECs adoption or rejection . . . . [T]o theextent that the bylaws and rules of the SIPCare approved or disapproved by the SEC,


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they are subject to the AdministrativeProcedure Act (5 U.S.C. 551 et seq.). Thecorporation also has borrowing authorityand a line of credit from the Treasury. Id.

SIPC, said the CRS, is a hybridorganization created to implementgovernment policies and regulations.Ultimately, the SPIC (sic) and the PCAOBare agents of and accountable to thegovernment through the SEC. (Id.)(Emphasis added.)

Thus, the Trustee, who is selected by anagent of the government, paid by an agentof the government, works on behalf of thisagent, by his own repeated admission seeksto protect the finances of this agent of thegovernment, and makes or participates inmaking the legal decisions for this agent ofthe government, is at minimum a quasi-governmental functionary.

In further denial of quasi-governmentalstatus, the Trustee, as said, stated in opencourt on June 1 that I am not a decisionmaker for SIPC. (Tr. of Hearing, p. 32.(App., infra, p. 13.)) Given his exceptionallyprominent role for 2 years in the Madoffcase, his announcement and vigorous

implementation of highly unusual policies,and statements by SIPC and SEC officialsstressing the importance of his role, theidea that the Trustee does not make, or atminimum participate extensively andimportantly in, decisions which carry out


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SIPCs role appears ludicrous on its face. Ifthe Trustee seriously wishes to maintainthis facially ludicrous position, there mustbe discovery into the way that decisions(such as those involving net equity and

clawbacks) have actually been made in thiscase, and this Court should order thenecessary discovery.

The Trustee is also likely to claim that he isnot subject to the Tumey-Caperton line ofcases because others, particularly includingcourts, review his decisions. But thisreasoning has been rejected twice by theSupreme Court, in Ward v. Monroeville(409 U.S. at 61-62) and Gibson v. Berryhill(411 U.S. at 580). Thus, in Ward the Courtsaid that the fact the mayors decision onviolations can be corrected on appeal andtrial de novo in the County Court ofCommon Pleas did not make the system ofmayoral trials constitutional because the

State eventually offers an impartialadjudication. Rather, the defendant wasentitled in the first instance to adecisionmaker who was neutral anddetached. 409 .S. at 61-62.

In the Madoff case, decisions of the mostenormous consequence -- and often wholly

destructive financial consequence -- tothousands of individuals have been madeand implemented by the Trustee. Thesedecisions were not made by a person who isneutral and detached, but by a personwho stood to make tens or scores of


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millions of dollars because of the decisions.As the Supreme Court said, this cannot bejustified on the ground that erroneousdecisions could be corrected later by courts(after individuals have been devastated for

years -- sometimes rendered penniless -- bythe Trustees decisions).

Relatedly, the Trustee is very likely to claimthat the Tumey-Caperton line of cases mustbe confined to situations in which personsare acting as judges in some way, and thathe is not doing so. This is not a tenableposition. The essence of the SupremeCourts line of cases is that governmentallegal decisions must be made by personswho do not have a financial stake in thedecisions. That is why the Supreme Courthas repeatedly stressed that the principle ofno financial interest extends beyond directsharing in fees and costs, extends even toquite small financial interests, and is

intended to insure there is no possibletemptation to the average man that mightlead him not to hold the balance nice, clearand true. The principle of no financialinterest is a principle of clean government(of government that is different from manyof those we deal with elsewhere in theworld, e.g., the Middle East). Were the

principle confined to those acting as ajudge, then, for example, a city solicitorcould permissibly make a legal ruling (e.g.,a decision on real estate matters) becausehe or she would receive extensive financialbenefit from the ruling but not from a


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contrary one, or an attorney general, stateor federal, could take one legal positionrather than another because he or shewould benefit financially from the one takenbut not from the one rejected. This is

simply not an admissible interpretation ofthe Tumey-Caperton line of cases, since itwould allow governmental legal decisions tobe made by and in the interests of thefinancially interested, often to the detrimentof large numbers of citizens, as in theMadoff case.

CONCLUSION

Though discovery is needed to fully fleshout the Trustees financial arrangementswith Baker & Hostetler in regard to theMadoff case, enough is known already tomake it appear that the Trusteesarrangements put him in serious violationof the Tumey-Caperton line of cases.

Because of the violation, the Trustee cannotbe allowed to continue in the case, nor canthe law firm which fostered the violation forits own financial benefit remain in the case.(With regard to its financial benefit, onenotes that its fees thus far are between 175and 180 million dollars, and are expected toeventually total somewhere in the

neighborhood of a billion dollars.) TheTrustee and the firm are tainted by theviolations they fostered.

As well, the decisions of the Trustee mustbe revisited by a new and completely


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independent Trustee, so that the crucialdecisions in the case will be made by anofficial who does not have a financialinterest in them. The one exception torevisiting the decisions may ultimately be

the decision to use CICO. That decision wasargued in court by the Trustee mainly onthe basis that CICO was permissible, notthat it was mandatory. But at times therewere overtones of mandatoriness. If theSecond Circuit were to rule that either CICOor the FSM are mandatory, then theTrustees decision for CICO could not berevisited by a new Trustee. But if theappeals court were to rule that a Trustee isfree to use either CICO or the FSM at his orher discretion, then the decision for CICOshould be revisited by a new, independentTrustee because he or she might decidedifferently than did the present Trustee,who will benefit personally to the tune ofmillions or scores of millions of dollars

from the decision to use CICO.

Finally, this Court should order discoveryinto the financial arrangements between theTrustee and Baker & Hostetler, and, if theTrustee continues to deny hisdecisiomaking role, into the process ofdecisonmaking involving the Trustee and

SIPC.

Respectfully submitted,Lawrence R. Velvel, Esq.

Dated: June 17, 2011


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POSTED BY VELVEL AT 6/22/2011 10:32:00

AM LINKS TO THIS POST

M O N D A Y , A P R I L 0 4 , 2 0 1 1

Discursive Comments On The

Oral Argument In The Court of

Appeals In The Madoff Case

On March 3, 2011. Part 5.

April 4, 2011

Discursive Comments On The OralArgument In The Court of AppealsIn The Madoff Case On March 3, 2011.

PART 5

Next up was Helen Chaitman for rebuttal.Before detailing her argument, let medescribe some events that preceded the oralargument.

As said at the beginning of this essay, thequestion of who would argue for us was

very contentious. Roughly two or two andone-half weeks before the oral argument,Helen asked me whether I would give up toher any claim I possessed to time to argue. Isaid I would be happy to do so if, as part ofher presentation, she would agree to give a
http://velvelonnationalaffairs.blogspot.com/2011/06/amicus-curiae-brief-of-lawrence-r.html#linkshttp://velvelonnationalaffairs.blogspot.com/2011/06/amicus-curiae-brief-of-lawrence-r.html


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short oral argument on legislative intentthat I had drafted and, on February 4th, hadsent to the controlling group of NYClawyers who were running the show. Helenagreed to this, and I notified the NYC group

of our agreement. And, since legislativeintent has been spoken of so much here, letme now set forth the draft argument that Iwrote on this subject. Barring interruptions,the argument takes between three and fourminutes to deliver orally. (Our side had atotal of 20 minutes.)

The legislative history is dispositive in favorof the appellants. For the hearings, thereports and, very importantly, the scores offloor statements on the 1970 Act and the1978 Amendments reveal Congressionalintent completely at odds with the use ofCICO. These Congressional statements,particularly the scores of statements on thefloor which the Trustee, SIPC and the Court

below do not mention, repeatedly makeclear:

That the purpose of SIPC is to protectsmall investors -- who are here beingdevastated even when innocent;

By protecting small investors, confidence

and investment in markets were to be built;

That the reasonable expectations ofinvestors are to be satisfied;

That account statements and


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confirmations are the measure ofreasonable expectations and net equity,especially because the change to holdingsecurities in street name left investors noother way to know their holdings;

That investors are to be paid promptly,which is inherently impossible under CICObecause of the need to reconstruct complexaccounts over many years;

That investors are to receive securitieswhere they can be acquired in a fair andorderly market, as can be done here wherethe securities are S&P 100 stocks that canbe acquired in blocs over time. SIPC ignoresthis requirement, though it was a principalpurpose and essential feature of the 1978amendments;

That investors are to be protected againsttheft, which occurred here on a massive

scale;

That SIPA creates an insurance programmodeled after the FDIC. Here counsel forthe Trustee has stated that Senators whomade this point did not know what they aretalking about, saying They are wrong . . . .

The legislative history comprised of scoresof statements on the floor revealingCongressional intent are nowhere cited bythe Trustee, SIPC or the SEC. Yet thestatements were by many of the leadingSenators and Congressmen of the 1960s


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through the 1980s: by two men who ran forPresident, Senator Muskie andCongressman John Anderson, by legislatorsprominent with regard to economic,financial and tax matters, such as Senators

Cranston, Harrison Williams, andProximire, and CongressmanRostenkowski, and by other leadinglegislators such as Senators Hartke andBennet and Representatives Staggers,Eckhardt, Moss and Boland. Identicalstatements were made by President Nixonand Secretary of the Treasury Kennedy.

The statements of the Senators andRepresentatives cannot be ignored withoutsubstituting the intent of SIPC and theTrustee for the intent of Congress. For theactions and desires of SIPC and the Trusteeare antithetical to the points made byleading Senators and Congressmen (as wellas by President Nixon and Secretary

Kennedy). Little wonder SIPC and theTrustee never mention the statements ofSenators and Representatives.

For the convenience of this Court, therelevant statements in the hearings, in theCongressional reports, and on the floor ofthe House and Senate are collected in the

brief of Appellant Lawrence Velvel, with therelevant pages set forth in their entirety inthe Addendum to his brief.

In conclusion, let me add that the decisionbelow was a summary judgment on which


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no discovery from SIPC or the Trustee wasallowed even when crucial discovery wasrequested and would have been followed byfurther crucial discovery. Examples arediscovery on whether a deficiency of money

in the SIPC fund was one reason for the useof CICO notwithstanding its ravaging ofCongressional intent, and discovery on whyinvestors accounts were not credited withat least half a billion dollars of earningsfrom short term Treasuries and moneymarket funds. The decision below must bereversed because of a denial of all discoveryeven were the decision otherwise to beupheld.

As made clear many times in this essay, Ithink the foregoing argument on legislativeintent is the key to this case. Others dont,including, I believe, two of our oraladvocates. The argument was not delivered.

What happened, I at least believe, was this:It was finally decided who the advocates forour side were going to be. After hearingabout a moot court held on March 1st, andthat Helen was doing the rebuttal, I wrotethe group to express my best wishes and tosay that, although Helen told me she wouldmake the points about the legislative history

on rebuttal if at all possible, I knew that thismight not prove possible due to theunforeseeable exigencies of rebuttal, andthat I hoped the legislative history would bepresented by one of our other twoadvocates. It wasnt. And because of the


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exigencies of rebuttal, where she had to filla lot of holes, Helen, who had only sixminutes if I remember correctly, had notime to present it on rebuttal either.

So, in short, I agreed to a deal which wasnot carried out because other advocateswere not, I think, enamored of the pointand, Helen, being the rebuttalist andhaving to desperately try to fill holes, hadno time to carry it out. If any of this iswrong, I am willing to stand corrected.

But what I do hope is wrong is my view thatthe legislative intent is the key to winningthe case, a view I believe not shared bycertain colleagues, and that was notpresented to the Court. One can only hopethat we win without having presented thelegislative history to the Court (except for avery few comments made by HelenChaitman on the run so to speak (because

she lacked time).

Let me turn now to Chaitmans rebuttalargument. She began by saying sherepresents roughly 500 victims, some ofwhom began investing with Madoff in the1960s and some in the 1980s. The Trusteeshe said is tak[ing] the position that no

statement that my clients received over aperiod of up to 50 years is binding, becausethe Trustee, ignoring the Statute ofLimitations, is netting out deposits andwithdrawals going back 50 years. There isno basis in the law to do that. (Tr. 72.) If


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you look at New Times, she continued, theCourt there recognized that the purpose ofSIPA was to protect investors -- who weregiving up the right to obtain securitycertificates (because SIPA was part of the

movement to holding securities in streetname) -- by giving them up to $500,000 ininsurance (from the SIPC fund). (Tr. 72-73.)The SIPC fund is thus different from thecustomer property fund, although It wasCongress that decided that a customers netequity claim would be determined for bothpurposes in exactly the same way. (Tr. 73.)But Congress didnt say that any SIPCTrustee has the right in his discretion todetermine whether thats the fair way. Itsnot a question of fair. (Tr. 73.)

Helens brief opening was very important. Itis a serious shame that her points were notdeveloped previously and that she had nochoice but to put them so quickly and with

so little explication. She was pointing outthat there are people who were Madoffinvestors for nearly 50 or nearly 30 years,but who woke up one day to find that theTrustee refused to honor statements theyhad received for over four decades or forthree decades. That in itself is preposterous.It is only the more preposterous because

time and again the SEC investigatedMadoff, repeatedly gave him a clean bill ofhealth, specifically made a public statementin the Wall Street Journal in 1992 that therewas no fraud, and many people relied onthe SECs repeated clean bills of health and


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its 1992 statement. Yet SIPC, the Trustee,and the SEC, all of whom are supposed tobe protecting victims, are instead deeplyinjuring people who relied for decades onstatements and on the SECs investigations.

I repeat: This is preposterous, and theTrustee cannot have discretion to do such athing. As for the Trustees claim that whathe is doing is fair, in reality he issubstituting his view for Congress view ofwhat should be done, as Helen was saying.

Not to mention that customers were giveninsurance of up to $500,000 because theywere surrendering the right to physicallyobtain their securities as proof of owningthem, and would have to be able to dependon brokers statements to show ownershipof securities held in street name. It hasalways been implicit in the street nameargument, but I have never seen it actuallysaid (maybe it goes without saying), that the

Madoff fraud would not have been possibleif Madoff had had to deliver stockcertificates to investors. For he had nocertificates to deliver and would have beenexposed instantly. As a practical matter,SIPA made street name holdings possible,to the great benefit of Wall Street, but nowthe administrators of SIPA are trying to

screw over those whose securities arenecessarily held in street name.

Chaitman was then asked by Judge Jacobswhether, if we had cash claims here, notsecurities claims, the Trustee could


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permissibly consider what was withdrawnand what was deposited. Helen said no; theTrustee must still use the last statementbecause it is irrelevant whether thesecurities were ever purchased. The statute,

she said, was enacted precisely for asituation where the broker didnt purchasethe securities. (Tr. 74.) She was right. Thelegislative history specifically says, in anumber of places, that the statute coversthe situation of theft or loss of securities.This point too should have been madeearlier in our sides argument, and often.

Judge Raggi responded that the Trusteesays the reality of a Ponzi scheme, forpurposes of a payout thats going to betreating net equity the same whether its thecustomer account or the SIPA fund, is thatone customers profits can only be afunction of another customers loss. Do youwant to respond to that argument and why

you dont think it ought to inform ourdecision here today? Chaitman said, Ithink it cant inform your decision becausewe have a statute which defines net equityas what is owed to the customer. And 8Bprovides that the Trustee should look at thebooks and records to determine what isowed to the customer. What is owed to the

customer is the balance on the customersaccount. (Tr. 74-75.) She continued thatCharles Ponzis scheme occurred in the1920s, it was well known to Congress whenit enacted SIPA, and If they had wanted tomake a Ponzi scheme exception, they would


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have put it in the statute. There is noexception for a broker who decides to notbuy securities for all of his customers.There is no exception for a broker who buysand sells, rather than buys and holds. The

contemplation was to provide a limitedamount of protection to a customer, justlike FDIC insurance. When President Nixonsigned the statute into law, he said, I amsigning a statute which will provide tosecurities customers the same kind ofprotection that the FDIC provides to bankdepositers. Can you imagine a liquidator ofa bank coming into this Court and saying,Im only going to pay up to $250,000 basedon the net investment in a bank depositgoing back 50 years? Im going to eliminateall interest on which that depositer has paidtaxes? Thats the situation we have here.(Tr. 75.)

These points were also very important. That

the statute defines net equity as what isowed to the customer has been discussedpreviously. And the ideas that Congressknew all about Charles Ponzi, could havebut did not make an exception for a Ponzischeme or for a failure to buy securities,and could have made an exception forsituations of buying and selling instead of

buying and holding, are very importantideas which should have been brought upby our side much earlier. So too -- andespecially -- the idea that Nixon said SIPAprovided customers the same kind ofprotection that the FDIC provides to bank


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depositers, and that it would beunthinkable for the FDIC to act as SIPC isacting here. I can only wonder (inamazement) that our attorneys did notstress all these things early and often, and

one can only hope that the Court graspedtheir full import though Helen appeared tohave to race through them because of thenumber of holes she had to plug on rebuttalin so little time.

At that point Helen made the followingcomment. I would ask the Court toconsider what SIPC is really doing is savingapproximately $1 billion because thenumber of customers whose claims havenot been allowed based on this netinvestment hearing, who coincidentally areall the people who were the long-terminvestors, like my 91-year-old client whoretired in 1970 and took mandatory IRAwithdrawals out of his account for 21 years.

Of course he took out more money than heput in. But thats the purpose that peopleinvest in the stock market. (Tr. 76.) It wastrenchant to say that of course long terminvestors -- old people, sometimes in their90s -- took out more than they put in, forthat is the purpose of investing. Implicit,but I hope clear to the Court, was the point

that the Trustee and SIPC are vitiating oneof the very purposes of being in the stockmarket. It is hard to imagine what could bemore contrary -- to Congress desire topromote investing in the market -- than tovitiate a basic purpose of such investing.


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Judge Jacobs then asked Helen to respondto the Trustees argument that SIPA justprovides you an advance on what you willbe entitled to in the bankruptcy

proceedings, and that in the bankruptcyproceedings theres not going to be anypayday based on these hypotheticalinvestments? (Tr. 76.) Helen replied thatthe statute requires SIPC to promptlyreplace the securities in a customersaccount, not two years after $200 millionhave been spent on forensic accountants.Promptly replace the securities. Thelegislative history indicates the purpose is,get that investor right back in the stockmarket. This is an investor who gave up theright to certificated securities whichbenefited the Wall Street firms which werefunding the SIPC insurance. Its not aquestion that SIPC doesnt have theobligation to make the advance unless and

until its satisfied that it will be repaid on itssubrogation claim. Thats nowhere in thestatute. Its simply like any other insurancecompany to the extent that they pay, theystand in the shoes of the insured, once theinsured is paid in full. But that SIPCadvance has to be made promptly. Thatword is throughout the statute. And this is

what Congress intended. This is a remedialstatute to compensate victims who relyupon a brokers obligation to purchasesecurities reflected on his statement. (Tr.76-77 (emphases added).)


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Helens answer was both correct and clever,even if perhaps somewhat opaque (whichwas understandable in the hurriedcircumstances). As I understand it, she wassaying that because there must be prompt

payment from the SIPC fund in order toaccomplish the legislative purpose ofgetting the investor right back into themarket, you cannot wait to see what willultimately be available from customerproperty before paying victims theiradvance of up to $500,000 from the SIPCfund. So in reality, the advance is not anadvance on customer property. The putativeadvance from the SIPC fund would haveto be given, and given promptly, even ifthere ultimately proved to be not one dollarof customer property. This is what Congressintended. This is a remedial statute tocompensate victims who rely upon abrokers obligation to purchase securitiesreflected on his statement. (Tr. 77.)

Helens position receives further support inthe legislative history, which was covered ina footnote at pages 15-16 of this writersbrief-in-chief to the Second Circuit butwhich I do not recollect being coveredelsewhere. (Am I wrong?) For simplicityssake I shall simply set forth the footnote

from the brief:

Because SIPA established an insurancefund, the SIPC fund was intended to beseparate from the fund of customerproperty. Thus, the 1977 House Report


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emphasized the distinction betweencustomer property and the SIPC fund bysaying that a customer may file a claimagainst the general estate to the extent thathis net equity exceeds his share of customer

property plus SIPC protection, (Addnd., p.65) (emphasis added). The Report quotedChairman Owns of SIPC as follows: Inorder to protect customers of failedbroker/dealers against financial loss and,thereby, restore investor confidence in thesecurities markets, Congress passed the1970 Act. That statute, which was signedinto law on December 30, 1970, createdSIPC and established a program wherebymonies from the SIPC Fund would beavailable for the purpose of protectingcustomers of broker/dealer firms whichencountered financial difficulty. (Addnd.,p. 66.) Chairman Owens of SIPC said, in the1978 Senate Hearings, that customerproperty, briefly explained, consists of all

cash and securities (other than SIPCadvances and customer name securities)available to the trustee for the satisfactionof customer claims. (Addnd., p. 76(emphasis added).) The 1978 Senate Reportreiterated that A customer may file a claimagainst the general estate to the extent thathis net equity exceeds his share of customer

property plus SIPC protection. (Addnd., p.81) (emphasis added).) The Senate Reportalso said the legislation provides that allcash and securities, exclusive of SIPCadvances . . . shall be deemed to becustomer property. (Addnd., p. 83


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(emphasis added).)

The final colloquy of the oral argumentbegan with Judge Raggi saying, Let me askyou the question that weve dealt with with

other counsel (a statement which may inpart reflect the fact, discussed at the verybeginning of this essay, that our side didnot divide up the argument by issues). (Tr.77) Raggi continued that the books andrecords provision says that you pay thoseobligations only to the extent theyreascertainable from the books and records ofthe debtor or otherwise established to thesatisfaction of the Trustee. When theTrustee goes into these books and recordshe finds out that there was never anytransaction done on a particular day.Rather, it was post hoc representations thattransactions had been done in order to relayprofits that had never been realized, andthat that is not really a securities

transaction. So, to that extent its notfinding a net equity position in that. Whyisnt that within the Trustees discretion?(Tr. 77-78 (emphasis added).)

What Raggi was bringing up, at bottom, wasthe question of whether the Trustee hasdiscretion to decide that CICO should be

used instead of the FSM. Helens answerwas that the Trustee has an obligation tohonor the net equity, which is the obligationof the broker . . . . (Tr. 78 (emphasisadded).) To which Judge Raggi respondedthat this is true only insofar as these two


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things are satisfied (Tr. 78), by which Ithink she meant that the obligation isascertainable from the books and records oris otherwise established to the satisfactionof the Trustee. Chaitmans trenchant reply

was, Theres nothing in the books andrecords of Madoff that indicates that hedoesnt owe to each investor the November30th, 2008 account balance. (Tr. 78(emphasis added).) What Helen wasalluding to, I believe, is that, as wasestablished earlier in the oral argument,Madoff owed each investor what was shownin the statement and would have had to payeach investor that amount if sued for fraud.QED.

Raggi replied, however, that Madoffspurported transactions were reported afterthe fact and concocted because it wasprofitable. (Tr. 78.) This is riskless andaccordingly is different from the situation

where the customer takes a risk. (Id.)Chaitman's answer was that the situation isexactly the same as in New Times, wherethere was no evidence in the debtorsbooks and records that the customerswhose statement showed existing securities,that the debtor had ever purchased thosesecurities. Its exactly the same thing here.

And there is nothing in this record whichindicates that any of the prices for thesecurities were invalid. If someone in 1960bought IBM stock and sold it and thenbought it again and sold it and bought itagain, it would have appreciated in value.


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There is no reason to disallow -- (Tr. 79.) Iwould add, with regard to risk, that, as saidearlier, the victims didnt know they had norisk: they thought they had risk.

Raggi responded to the last part of Helensstatement with the cynicism that Thatslike my telling you today that ten years ago Ibought Intel and then I would have a hugeprofit in it. (Tr. 79.)

Chaitman replied by beginning a well takendefense of the victims conduct, sayingHow can a customer -- the people standingbefore you invested in Madoff throughseven investigations conducted by the SECof Mr. Madoff over an 18-year period. If theSEC -- (Tr. 79.) Before Helen couldpresent the horrendousnegligence/incompetence of the SEC, theagency on which so many victims relied,Judge Raggi interjected that Theres not a

suggestion that your clients are in any wayculpable for this. The question, though, iswhether or not the Trustee in payingpursuant to this statute has some discretionabout how to calculate net equity. (Tr. 79.)

This interjection caused Helen to have toturn away from bringing out some or all of

the very important points that the SECmissed Madoffs fraud in approximately sixinvestigations, that victims who are smallpeople rather than being huge institutionswith the resources to do extensive duediligence could not be expected to know or


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find out what the SEC missed, and thatvictims relied on the SEC, which time andagain gave Madoff a clean bill of health,even saying publicly in 1992 that there wasno fraud. Instead of being able to say some

or all of these things, Chaitman had toanswer Judge Raggis question whether theTrustee had discretion. She said he hadnone, and continued on with what I thinkare some of the more important pointsmade by our side at the oral argument. Shesaid the Trustee had no discretion forpurposes of the SIPC payment. The SIPCpayment has to be based upon the laststatement. There is a provision in SIPAwhich says that SIPC cannot change thedefinition of net equity. Thats howimportant this definition was to Congress.In order to induce confidence in the capitalmarket so that people would give up therequirement of holding certificatedsecurities. And there is nothing in the

statute which says it only protectscustomers who have a buy and holdstrategy or customers who fail to delegate totheir manager or their broker the right toinvest in his discretion. There is nolimitation in the statute. So it covers everyone of these Madoff investors who had alegitimate expectation that they owned the

securities on their statements. (Tr. 79-80.)

This statement, as indicated, made cruciallyimportant points -- points which shouldhave been made early in our argument.Chaitman said that under a specific


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statutory provision, SIPC cannot change thedefinition of net equity, a definition of greatimportant to Congress. She said this was so-- at least as I understand the transcript --because Congress wanted to create

confidence in markets -- one of our sidesfew allusions to all-importantCongressional intent -- so that people wouldagree not to receive physical securities (andwould instead agree to a street namesystem). She said the statute says nothingindicating that it protects only thoseinvestors who follow a buy and holdstrategy instead of giving their brokersdiscretionary authority to buy and sell, anauthority that so many do give to brokers.And she said the statute covers everyMadoff investor who legitimately expected,as all innocent investors did, that theyowned the securities shown on theirstatements.

Chaitmans statement was the end of theoral argument.

* * * * *

Because this essay took a godawful longtime to complete, and was therefore postedin installments, during the course of the

posts a couple of victims emailed to askwhat is my assessment of our chances ofvictory. It is very difficult to say. Myassessment is that the oral argument wasvery close, perhaps 52-48 or 55-45 in ourfavor, but who can say really? The Court


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was plumbing what it considered theweaknesses in each sides arguments, andwho can really say how the judges feelabout the explanations each side offered.

My own two major impressions are onesstated earlier. The first is that our sidesfailure to stress, or even mentionCongressional intent -- which the other sidehas for practical purposes never mentionedbecause the intent is so adverse to itsposition! -- was a mistake of the firstmagnitude. A close colleague, whoseopinion I respect greatly, believes thefailure to stress Congressional intent onoral argument will not matter. He feels theCourt will read about it fully in the brief thiswriter filed. Because briefs filed by otherlawyers were dealing so extensively withother matters, my brief took an unusualtack. It ignored other matters (except forthe need for discovery into why SIPC and

the Trustee chose CICO, discovery ofwhether this was done in defiance ofCongressional intent in order to save SIPCfrom financial difficulties or evenbankruptcy), and simply presented all therelevant statements in the Congressionalhistory from 1970 to 1978, importantlyincluding the floor statements by Senators

and Congressmen. My colleague believesthe Court, its clerks and its relevant staffmembers will read the brief (andpresumably the attached addendumcontaining the relevant pages from theCongressional Record, from hearings, and


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from Congressional Reports). To myconcern that this might not happen, hereplies that it will happen because theSecond Circuit, he says, is the nations mostprestigious Court of Appeals, with the most

competent law clerks and staff. This answersounds to me like local New Yorkprovincialism, of exactly the same kind thatone often reads of and hears of comingfrom Washington, D.C., where it isregularly proclaimed that the U.S. Court ofAppeals for the District of Columbia is themost important federal Court of Appeals inthe land, as shown by the fact that anumber of its judges have been elevated tothe Supreme Court (Ginsberg, Scalia,Roberts, Thomas. And Bork wasnominated.) So parochialism about oneslocal Court of Appeals (wherever it is) doesnot impress me. And I note, with regard tothe claim that the Second Circuit will readand heed the Congressional intent, that the

Circuit did not so much as mention theCongressional intent at the oral argument,that Judge Raggi made a remark implicitlydisparaging its importance, and that it ishard to think that the Court will payattention to it or properly think it crucialwhen our oral advocates did not thinkenough of it to mention it on oral argument

(except for Helens brief allusion to it), andwhen it is the focus of only one partysbriefing, with that party not being one ofthe big shot New York City law firms butonly a New England lawyer unknown to theCourt. Maybe my colleague will prove


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correct, and maybe my skepticism willprove unfounded, as I surely hope, but Iwill believe it when I see it.

My second major impression is of the dire

need to hire a true appellate expert --presumably a major Supreme Court lawyerwho also does extensive work in the federalcourts of appeal -- to participate extensivelyin the writing of future appellate papers andto make the oral arguments on appeal. Iextensively commented early-on in thisessay on the terrible shortcomings thatresulted when this was not done, and on theupcoming events for which it would beessential -- for a possible rehearing en bancsought by one side or the other on the netequity question, for a petition to theSupreme Court, by either side, for a hearingthere on the net equity question, and forappellate arguments on other crucial issues(especially omnibus issues) which will be

briefed and argued in the Bankruptcy Courtthis Spring and Summer. The hiring of aqualified, prestigious appellate counsel torepresent us on Court of Appeals andSupreme Court matters seems to me to be afirst order of business if the victims whohave been reading this essay want to seetheir chances of success maximized rather

than lessened.

Of course, maybe Im all wrong. Maybe,despite the shortcomings Ive alluded to, wewill win on net equity in the Court ofAppeals and/or, even without special,


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qualified appellate counsel, we will win onnet equity in the Supreme Court too. Andmaybe, even without hiring special,qualified appellate counsel, we will win onother issues too in the Court of Appeals and

the Supreme Court. All I can say is thatafter decades of observation andexperience, including a stretch spenthelping to prepare lawyers for oralarguments in the Supreme Court, I believethe victims chances will be much better ifexperienced, qualified appellate/SupremeCourt advocates are hired. This is a matterwhich, I think, should concern every victim,because every victim (myself included) hasso much at stake.

POSTED BY VELVEL AT 4/04/2011 01:05:00

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F R I D A Y , A P R I L 0 1 , 2 0 1 1

Discursive Comments On The

Oral Argument In The Court of

Appeals In The Madoff Case

On March 3, 2011. Part 4

April 1, 2011

Discursive Comments On The OralArgument In The Court of AppealsIn The Madoff Case On March 3, 2011.
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PART 4

The final opponent to argue was MichaelConley of the SEC.

At inception Judge Jacobs asked him todistinguish the SECs position, to the extentit is distinguishable, from the position ofSIPC or the Trustee. Conley replied that theSEC is in agreement with them with regardto whether you look solely at the accountstatement or to all the books and records,but believes you must value the net equityclaim in constant dollars. (Tr. 63.) TheBankruptcy Court, he said, decided toconsider the constant dollar issue after theinitial determination of net equity ismade. (Tr. 63.) Thus, in the words ofJustice Levals question, that issue of theconstant dollars or the inflation adjusteddollars is not before us now. (Tr. 64.) It

could be something to subsequently bedecided below depending on how theCircuit rules, but it has not been briefed ordecided and the Court is not called upon todecide it now.

Conley then reiterated the oft-made pointthat the Trustee must discharge all

obligations of Madoff to a customer andsaid thats exactly what the Trustee didhere after an extensive investigation. (Tr.65.) In so saying, Conley was necessarilyadopting the position, first advanced bySheehan, that Madoff had no obligation to


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pay victims the fake profits that his ownstatements showed he owed them (andwhich Sheehan ultimately admitted wouldbe recoverable in a fraud suit). It strikes methat it is nothing short of amazing for the

SEC -- which was created to protectinvestors -- to take the position -- deeplyinjurious to investors -- that the crook doesnot owe investors what the statements hegave them showed they were owed (andwhat Madoff did give to people who closedout their accounts). For the agency createdto protect investors to instead injure themin this way is further evidence of what hasnow been known for over two years: theSEC has abdicated its responsibilities, isincompetent, and is completely under thethumb of SIPC instead of supervising it asCongress intended. It is completelyunderstandable that some people -- actuallyquite a few people, I believe -- think thatMary Schapiro, on whose watch this

position was taken, should be dismissed.

None of this came up in the argument,however.

Judge Raggi responded to Conley by sayingthat I dont mean to scare anyone bysuggesting that this should be treated as

cash, but on the one hand that does seem tobe what youre calculating and concludingthat you cant decide what the value of thesecurity positions is. All you can decide iswhats the cash they put in and took out.Then why isnt this a cash position? (Tr.


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66.) Conleys response was that there is asecurities position here because the Courthad held in New Times that when acustomer gives cash for the purpose ofbuying securities and then receives

confirmations and account statements thatsuggest that thats what happened, thecustomer has a legitimate obligation tobelieve that thats how the cash was beinginvested. (Tr. 66-67.) Judge Raggi thenasked If thats the case, why isnt thereceipt of each account statementsomething that the customer couldreasonably rely on? I mean, to use the oldmaxim, a decision to hold is a decision tobuy. So, you know, if you get told you hold xnumber of shares in this account statementworth such and such and you dont tell thebroker to do anything, youve got thatreasonable expectation. Why isnt that thiscase? (Tr. 67.) Judge Raggis question goesback to a point made earlier in this essay: if

receipt of a statement creates a legitimateexpectation that an investor owns thesecurities shown in the statement, whydoesnt it simultaneously create a legitimateexpectation that the securities werepurchased at the price shown in thestatement? After all, except in the case of asuspected mistake in price, have you ever

heard of anyone who thought she ownedthe securities shown in her statement butthat they had been acquired at a differentprice than shown in the statement?

Conleys answer essentially was that this


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was done in New Times (where people whobought non existent securities and receivedstatements and confirmations had claimsfor securities, but there was no basis orevidence for valuing them, so the relevant

investors received only their cash-in). Towhich Judge Raggi said the SEC was notsuggesting that any account holder didntrely in good faith on what the statementsaid, and if the statement sa

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