Monday, April 04, 2011

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 Oral Argument In The Court of Appeals
In The Madoff Case On March 3, 2011.


Next up was Helen Chaitman for rebuttal. Before detailing her argument, let me describe some events that preceded the oral argument.

As said at the beginning of this essay, the question of who would argue for us was very contentious. Roughly two or two and one-half weeks before the oral argument, Helen asked me whether I would give up to her any claim I possessed to time to argue. I said I would be happy to do so if, as part of her presentation, she would agree to give a short oral argument on legislative intent that I had drafted and, on February 4th, had sent to the controlling group of NYC lawyers who were running the show. Helen agreed to this, and I notified the NYC group of our agreement. And, since legislative intent has been spoken of so much here, let me now set forth the draft argument that I wrote on this subject. Barring interruptions, the argument takes between three and four minutes to deliver orally. (Our side had a total of 20 minutes.)

The legislative history is dispositive in favor of the appellants. For the hearings, the reports and, very importantly, the scores of floor statements on the 1970 Act and the 1978 Amendments reveal Congressional intent completely at odds with the use of CICO. These Congressional statements, particularly the scores of statements on the floor which the Trustee, SIPC and the Court below do not mention, repeatedly make clear:

• That the purpose of SIPC is to protect small investors -- who are here being devastated even when innocent;

• By protecting small investors, confidence and investment in markets were to be built;

• That the reasonable expectations of investors are to be satisfied;

• That account statements and confirmations are the measure of reasonable expectations and net equity, especially because the change to holding securities in street name left investors no other way to know their holdings;

• That investors are to be paid promptly, which is inherently impossible under CICO because of the need to reconstruct complex accounts over many years;

• That investors are to receive securities where they can be acquired in a fair and orderly market, as can be done here where the securities are S&P 100 stocks that can be acquired in blocs over time. SIPC ignores this requirement, though it was a “principal purpose” and “essential feature” of the 1978 amendments;

• That investors are to be protected against theft, which occurred here on a massive scale;

• That SIPA creates an insurance program modeled after the FDIC. Here counsel for the Trustee has stated that Senators who made this point did not know what they are talking about, saying “They are wrong . . . .”

The legislative history comprised of scores of statements on the floor revealing Congressional intent are nowhere cited by the Trustee, SIPC or the SEC. Yet the statements were by many of the leading Senators and Congressmen of the 1960s through the 1980s: by two men who ran for President, Senator Muskie and Congressman John Anderson, by legislators prominent with regard to economic, financial and tax matters, such as Senators Cranston, Harrison Williams, and Proximire, and Congressman Rostenkowski, and by other leading legislators such as Senators Hartke and Bennet and Representatives Staggers, Eckhardt, Moss and Boland. Identical statements were made by President Nixon and Secretary of the Treasury Kennedy.

The statements of the Senators and Representatives cannot be ignored without substituting the intent of SIPC and the Trustee for the intent of Congress. For the actions and desires of SIPC and the Trustee are antithetical to the points made by leading Senators and Congressmen (as well as by President Nixon and Secretary Kennedy). Little wonder SIPC and the Trustee never mention the statements of Senators and Representatives.

For the convenience of this Court, the relevant statements in the hearings, in the Congressional reports, and on the floor of the House and Senate are collected in the brief of Appellant Lawrence Velvel, with the relevant pages set forth in their entirety in the Addendum to his brief.

In conclusion, let me add that the decision below was a summary judgment on which no discovery from SIPC or the Trustee was allowed even when crucial discovery was requested and would have been followed by further crucial discovery. Examples are discovery on whether a deficiency of money in the SIPC fund was one reason for the use of CICO notwithstanding its ravaging of Congressional intent, and discovery on why investors’ accounts were not credited with at least half a billion dollars of earnings from short term Treasuries and money market funds. The decision below must be reversed because of a denial of all discovery even were the decision otherwise to be upheld.

As made clear many times in this essay, I think the foregoing argument on legislative intent is the key to this case. Others don’t, including, I believe, two of our oral advocates. The argument was not delivered.

What happened, I at least believe, was this: It was finally decided who the advocates for our side were going to be. After hearing about a moot court held on March 1st, and that Helen was doing the rebuttal, I wrote the group to express my best wishes and to say that, although Helen told me she would make the points about the legislative history on rebuttal if at all possible, I knew that this might not prove possible due to the unforeseeable exigencies of rebuttal, and that I hoped the legislative history would be presented by one of our other two advocates. It wasn’t. And because of the exigencies of rebuttal, where she had to fill a lot of holes, Helen, who had only six minutes if I remember correctly, had no time to present it on rebuttal either.

So, in short, I agreed to a deal which was not carried out because other advocates were not, I think, enamored of the point and, Helen, being the “rebuttalist” and having to desperately try to fill holes, had no time to carry it out. If any of this is wrong, I am willing to stand corrected.

But what I do hope is wrong is my view that the legislative intent is the key to winning the case, a view I believe not shared by certain colleagues, and that was not presented to the Court. One can only hope that we win without having presented the legislative history to the Court (except for a very few comments made by Helen Chaitman on the run so to speak (because she lacked time).

Let me turn now to Chaitman’s rebuttal argument. She began by saying she represents roughly 500 victims, some of whom began investing with Madoff in the 1960s and some in the 1980s. The Trustee she said is “tak[ing] the position that no statement that my clients received over a period of up to 50 years is binding, because the Trustee, ignoring the Statute of Limitations, is netting out deposits and withdrawals going back 50 years. There is no basis in the law to do that.” (Tr. 72.) “If you look at New Times,” she continued, the Court there “recognized that the purpose of SIPA” was to protect investors -- who were giving up the right to obtain security certificates (because SIPA was part of the movement to holding securities in street name) -- by giving them up to $500,000 in insurance (from the SIPC fund). (Tr. 72-73.) The SIPC fund is thus different from the customer property fund, although “It was Congress that decided that a customer’s net equity claim would be determined for both purposes in exactly the same way.” (Tr. 73.) But “Congress didn’t say that any SIPC Trustee has the right in his discretion to determine whether that’s the fair way. It’s not a question of fair.” (Tr. 73.)

Helen’s brief opening was very important. It is a serious shame that her points were not developed previously and that she had no choice but to put them so quickly and with so little explication. She was pointing out that there are people who were Madoff investors for nearly 50 or nearly 30 years, but who woke up one day to find that the Trustee refused to honor statements they had received for over four decades or for three decades. That in itself is preposterous. It is only the more preposterous because time and again the SEC investigated Madoff, repeatedly gave him a clean bill of health, specifically made a public statement in the Wall Street Journal in 1992 that there was no fraud, and many people relied on the SEC’s repeated clean bills of health and its 1992 statement. Yet SIPC, the Trustee, and the SEC, all of whom are supposed to be protecting victims, are instead deeply injuring people who relied for decades on statements and on the SEC’s investigations. I repeat: This is preposterous, and the Trustee cannot have discretion to do such a thing. As for the Trustee’s claim that what he is doing is fair, in reality he is substituting his view for Congress’ view of what should be done, as Helen was saying.

Not to mention that customers were given insurance of up to $500,000 because they were surrendering the right to physically obtain their securities as proof of owning them, and would have to be able to depend on brokers’ statements to show ownership of securities held in street name. It has always been implicit in the street name argument, but I have never seen it actually said (maybe it goes without saying), that the Madoff fraud would not have been possible if Madoff had had to deliver stock certificates to investors. For he had no certificates to deliver and would have been exposed instantly. As a practical matter, SIPA made street name holdings possible, to the great benefit of Wall Street, but now the administrators of SIPA are trying to screw over those whose securities are necessarily held in street name.

Chaitman was then asked by Judge Jacobs whether, if we had cash claims here, not securities claims, the Trustee could permissibly consider what was withdrawn and what was deposited. Helen said no; the Trustee must still use the last statement because it is irrelevant whether the securities were ever purchased. The statute, she said, “was enacted precisely for a situation where the broker didn’t purchase the securities.” (Tr. 74.) She was right. The legislative history specifically says, in a number of places, that the statute covers the situation of theft or loss of securities. This point too should have been made earlier in our side’s argument, and often.

Judge Raggi responded that the Trustee says “the reality of a Ponzi scheme, for purposes of a payout that’s going to be treating net equity the same whether it’s the customer account or the SIPA fund, is that one customer’s profits can only be a function of another customer’s loss. Do you want to respond to that argument and why you don’t think it ought to inform our decision here today?” Chaitman said, “I think it can’t inform your decision because we have a statute which defines net equity as what is owed to the customer. And 8B provides that the Trustee should look at the books and records to determine what is owed to the customer. What is owed to the customer is the balance on the customer’s account.” (Tr. 74-75.) She continued that Charles Ponzi’s scheme occurred in the 1920s, it was well known to Congress when it enacted SIPA, and “If they had wanted to make a Ponzi scheme exception, they would have put it in the statute. There is no exception for a broker who decides to not buy securities for all of his customers. There is no exception for a broker who buys and sells, rather than buys and holds. The contemplation was to provide a limited amount of protection to a customer, just like FDIC insurance. When President Nixon signed the statute into law, he said, I am signing a statute which will provide to securities customers the same kind of protection that the FDIC provides to bank depositers. Can you imagine a liquidator of a bank coming into this Court and saying, I’m only going to pay up to $250,000 based on the net investment in a bank deposit going back 50 years? I’m going to eliminate all interest on which that depositer has paid taxes? That’s the situation we have here.” (Tr. 75.)

These points were also very important. That the statute defines net equity as what is owed to the customer has been discussed previously. And the ideas that Congress knew all about Charles Ponzi, could have but did not make an exception for a Ponzi scheme or for a failure to buy securities, and could have made an exception for situations of buying and selling instead of buying and holding, are very important ideas which should have been brought up by our side much earlier. So too -- and especially -- the idea that Nixon said SIPA provided “customers the same kind of protection that the FDIC provides to bank depositers,” and that it would be unthinkable for the FDIC to act as SIPC is acting here. I can only wonder (in amazement) that our attorneys did not stress all these things early and often, and one can only hope that the Court grasped their full import though Helen appeared to have to race through them because of the number of holes she had to plug on rebuttal in so little time.

At that point Helen made the following comment. “I would ask the Court to consider what SIPC is really doing is saving approximately $1 billion because the number of customers whose claims have not been allowed based on this net investment hearing, who coincidentally are all the people who were the long-term investors, like my 91-year-old client who retired in 1970 and took mandatory IRA withdrawals out of his account for 21 years. Of course he took out more money than he put in. But that’s the purpose that people invest in the stock market.” (Tr. 76.) It was trenchant to say that of course long term investors -- old people, sometimes in their 90s -- took out more than they put in, for that is the purpose of investing. Implicit, but I hope clear to the Court, was the point that the Trustee and SIPC are vitiating one of the very purposes of being in the stock market. It is hard to imagine what could be more contrary -- to Congress’ desire to promote investing in the market -- than to vitiate a basic purpose of such investing.

Judge Jacobs then asked Helen to respond to the Trustee’s argument that “SIPA just provides you an advance on what you will be entitled to in the bankruptcy proceedings, and that in the bankruptcy proceedings there’s not going to be any payday based on these hypothetical investments?” (Tr. 76.) Helen replied that the statute requires SIPC to “promptly replace the securities in a customer’s account, not two years after $200 million have been spent on forensic accountants. Promptly replace the securities. The legislative history indicates the purpose is, get that investor right back in the stock market. This is an investor who gave up the right to certificated securities which benefited the Wall Street firms which were funding the SIPC insurance. It’s not a question that SIPC doesn’t have the obligation to make the advance unless and until it’s satisfied that it will be repaid on its subrogation claim. That’s nowhere in the statute. It’s simply like any other insurance company to the extent that they pay, they stand in the shoes of the insured, once the insured is paid in full. But that SIPC advance has to be made promptly. That word is throughout the statute. And this is what Congress intended. This is a remedial statute to compensate victims who rely upon a broker’s obligation to purchase securities reflected on his statement.” (Tr. 76-77 (emphases added).)

Helen’s answer was both correct and clever, even if perhaps somewhat opaque (which was understandable in the hurried circumstances). As I understand it, she was saying that because there must be prompt payment from the SIPC fund in order to accomplish the legislative purpose of getting the investor right back into the market, you cannot wait to see what will ultimately be available from customer property before paying victims their advance of up to $500,000 from the SIPC fund. So in reality, the advance is not an advance on customer property. The putative “advance” from the SIPC fund would have to be given, and given promptly, even if there ultimately proved to be not one dollar of customer property. This is what Congress intended. “This is a remedial statute to compensate victims who rely upon a broker’s obligation to purchase securities reflected on his statement.” (Tr. 77.)

Helen’s position receives further support in the legislative history, which was covered in a footnote at pages 15-16 of this writer’s brief-in-chief to the Second Circuit but which I do not recollect being covered elsewhere. (Am I wrong?) For simplicity’s sake I shall simply set forth the footnote from the brief:

Because SIPA established an insurance fund, the SIPC fund was intended to be separate from the fund of “customer property.” Thus, the 1977 House Report emphasized the distinction between customer property and the SIPC fund by saying that a customer “may file a claim against the general estate to the extent that his net equity exceeds his share of customer property plus SIPC protection, (Addnd., p. 65) (emphasis added). The Report quoted Chairman Owns of SIPC as follows: “In order to protect customers of failed broker/dealers against financial loss and, thereby, restore investor confidence in the securities markets, Congress passed the 1970 Act. That statute, which was signed into law on December 30, 1970, created SIPC and established a program whereby monies from the SIPC Fund would be available for the purpose of protecting customers of broker/dealer firms which encountered financial difficulty.” (Addnd., p. 66.) Chairman Owens of SIPC said, in the 1978 Senate Hearings, that “customer property, briefly explained, consists of all cash and securities (other than SIPC advances and customer name securities) available to the trustee for the satisfaction of customer claims.” (Addnd., p. 76 (emphasis added).) The 1978 Senate Report reiterated that “A customer may file a claim against the general estate to the extent that his net equity exceeds his share of customer property plus SIPC protection.” (Addnd., p. 81) (emphasis added).) The Senate Report also said the legislation “provides that all cash and securities, exclusive of SIPC advances . . . shall be deemed to be customer property.” (Addnd., p. 83 (emphasis added).)

The final colloquy of the oral argument began with Judge Raggi saying, “Let me ask you the question that we’ve dealt with with other counsel” (a statement which may in part reflect the fact, discussed at the very beginning of this essay, that our side did not divide up the argument by issues). (Tr. 77) Raggi continued that the books and records provision “says that you pay those obligations only to the extent they’re ascertainable from the books and records of the debtor or otherwise established to the satisfaction of the Trustee. When the Trustee goes into these books and records he finds out that there was never any transaction done on a particular day. Rather, it was post hoc representations that transactions had been done in order to relay profits that had never been realized, and that that is not really a securities transaction. So, to that extent it’s not finding a net equity position in that. Why isn’t that within the Trustee’s discretion?” (Tr. 77-78 (emphasis added).)

What Raggi was bringing up, at bottom, was the question of whether the Trustee has discretion to decide that CICO should be used instead of the FSM. Helen’s answer was that “the Trustee has an obligation to honor the net equity, which is the obligation of the broker . . . .” (Tr. 78 (emphasis added).) To which Judge Raggi responded that this is true only “insofar as these two things are satisfied” (Tr. 78), by which I think she meant that the obligation is ascertainable from the books and records or is otherwise established to the satisfaction of the Trustee. Chaitman’s trenchant reply was, “There’s nothing in the books and records of Madoff that indicates that he doesn’t owe to each investor the November 30th, 2008 account balance.” (Tr. 78 (emphasis added).) What Helen was alluding to, I believe, is that, as was established earlier in the oral argument, Madoff owed each investor what was shown in the statement and would have had to pay each investor that amount if sued for fraud. QED.

Raggi replied, however, that Madoff’s purported transactions were “reported after the fact and concocted because it was profitable.” (Tr. 78.) This is riskless and accordingly is different from the situation where “the customer takes a risk.” (Id.) Chaitman's answer was that the situation is exactly the same as in New Times, where there was “no evidence in the debtor’s books and records that the customers whose statement showed existing securities, that the debtor had ever purchased those securities. It’s exactly the same thing here. And there is nothing in this record which indicates that any of the prices for the securities were invalid. If someone in 1960 bought IBM stock and sold it and then bought it again and sold it and bought it again, it would have appreciated in value. There is no reason to disallow -- ” (Tr. 79.) I would add, with regard to risk, that, as said earlier, the victims didn’t know they had no risk: they thought they had risk.

Raggi responded to the last part of Helen’s statement with the cynicism that “That’s like my telling you today that ten years ago I bought Intel and then I would have a huge profit in it.” (Tr. 79.)

Chaitman replied by beginning a well taken defense of the victims’ conduct, saying “How can a customer -- the people standing before you invested in Madoff through seven investigations conducted by the SEC of Mr. Madoff over an 18-year period. If the SEC -- ” (Tr. 79.) Before Helen could present the horrendous negligence/incompetence of the SEC, the agency on which so many victims relied, Judge Raggi interjected that “There’s not a suggestion that your clients are in any way culpable for this. The question, though, is whether or not the Trustee in paying pursuant to this statute has some discretion about how to calculate net equity.” (Tr. 79.)

This interjection caused Helen to have to turn away from bringing out some or all of the very important points that the SEC missed Madoff’s fraud in approximately six investigations, that victims who are small people rather than being huge institutions with the resources to do extensive due diligence could not be expected to know or find out what the SEC missed, and that victims relied on the SEC, which time and again gave Madoff a clean bill of health, even saying publicly in 1992 that there was no fraud. Instead of being able to say some or all of these things, Chaitman had to answer Judge Raggi’s question whether the Trustee had discretion. She said he had none, and continued on with what I think are some of the more important points made by our side at the oral argument. She said the Trustee had no discretion “for purposes of the SIPC payment. The SIPC payment has to be based upon the last statement. There is a provision in SIPA which says that SIPC cannot change the definition of net equity. That’s how important this definition was to Congress. In order to induce confidence in the capital market so that people would give up the requirement of holding certificated securities. And there is nothing in the statute which says it only protects customers who have a buy and hold strategy or customers who fail to delegate to their manager or their broker the right to invest in his discretion. There is no limitation in the statute. So it covers every one of these Madoff investors who had a legitimate expectation that they owned the securities on their statements.” (Tr. 79-80.)

This statement, as indicated, made crucially important points -- points which should have been made early in our argument. Chaitman said that under a specific statutory provision, SIPC cannot change the definition of net equity, a definition of great important 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 side’s few allusions to all-important Congressional intent -- so that people would agree not to receive physical securities (and would instead agree to a street name system). She said the statute says nothing indicating that it protects only those investors who follow a buy and hold strategy instead of giving their brokers discretionary authority to buy and sell, an authority that so many do give to brokers. And she said the statute covers every Madoff investor who legitimately expected, as all innocent investors did, that they owned the securities shown on their statements.

Chaitman’s statement was the end of the oral argument.

* * * * *

Because this essay took a godawful long time to complete, and was therefore posted in installments, during the course of the posts a couple of victims emailed to ask what is my assessment of our chances of victory. It is very difficult to say. My assessment is that the oral argument was very close, perhaps 52-48 or 55-45 in our favor, but who can say really? The Court was plumbing what it considered the weaknesses in each side’s arguments, and who can really say how the judges feel about the explanations each side offered.

My own two major impressions are ones stated earlier. The first is that our side’s failure to stress, or even mention Congressional intent -- which the other side has for practical purposes never mentioned because the intent is so adverse to its position! -- was a mistake of the first magnitude. A close colleague, whose opinion I respect greatly, believes the failure to stress Congressional intent on oral argument will not matter. He feels the Court will read about it fully in the brief this writer filed. Because briefs filed by other lawyers were dealing so extensively with other matters, my brief took an unusual tack. It ignored other matters (except for the need for discovery into why SIPC and the Trustee chose CICO, discovery of whether this was done in defiance of Congressional intent in order to save SIPC from financial difficulties or even bankruptcy), and simply presented all the relevant statements in the Congressional history from 1970 to 1978, importantly including the floor statements by Senators and Congressmen. My colleague believes the Court, its clerks and its relevant staff members will read the brief (and presumably the attached addendum containing the relevant pages from the Congressional Record, from hearings, and from Congressional Reports). To my concern that this might not happen, he replies that it will happen because the Second Circuit, he says, is the nation’s most prestigious Court of Appeals, with the most competent law clerks and staff. This answer sounds to me like local New York provincialism, of exactly the same kind that one often reads of and hears of coming from Washington, D.C., where it is regularly proclaimed that the U.S. Court of Appeals for the District of Columbia is the most important federal Court of Appeals in the land, as shown by the fact that a number of its judges have been elevated to the Supreme Court (Ginsberg, Scalia, Roberts, Thomas. And Bork was nominated.) So parochialism about one’s local Court of Appeals (wherever it is) does not impress me. And I note, with regard to the claim that the Second Circuit will read and heed the Congressional intent, that the Circuit did not so much as mention the Congressional intent at the oral argument, that Judge Raggi made a remark implicitly disparaging its importance, and that it is hard to think that the Court will pay attention to it or properly think it crucial when our oral advocates did not think enough of it to mention it on oral argument (except for Helen’s brief allusion to it), and when it is the focus of only one party’s briefing, with that party not being one of the big shot New York City law firms but only a New England lawyer unknown to the Court. Maybe my colleague will prove correct, and maybe my skepticism will prove unfounded, as I surely hope, but I will 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 lawyer who also does extensive work in the federal courts of appeal -- to participate extensively in the writing of future appellate papers and to make the oral arguments on appeal. I extensively commented early-on in this essay on the terrible shortcomings that resulted when this was not done, and on the upcoming events for which it would be essential -- for a possible rehearing en banc sought by one side or the other on the net equity question, for a petition to the Supreme Court, by either side, for a hearing there on the net equity question, and for appellate arguments on other crucial issues (especially omnibus issues) which will be briefed and argued in the Bankruptcy Court this Spring and Summer. The hiring of a qualified, prestigious appellate counsel to represent us on Court of Appeals and Supreme Court matters seems to me to be a first order of business if the victims who have been reading this essay want to see their chances of success maximized rather than lessened.

Of course, maybe I’m all wrong. Maybe, despite the shortcomings I’ve alluded to, we will win on net equity in the Court of Appeals and/or, even without special, qualified appellate counsel, we will win on net equity in the Supreme Court too. And maybe, even without hiring special, qualified appellate counsel, we will win on other issues too in the Court of Appeals and the Supreme Court. All I can say is that after decades of observation and experience, including a stretch spent helping to prepare lawyers for oral arguments in the Supreme Court, I believe the victims’ chances will be much better if experienced, qualified appellate/Supreme Court advocates are hired. This is a matter which, I think, should concern every victim, because every victim (myself included) has so much at stake.

Friday, April 01, 2011

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 Oral Argument In The Court of Appeals
In The Madoff Case On March 3, 2011.


The final opponent to argue was Michael Conley of the SEC.

At inception Judge Jacobs asked him to distinguish the SEC’s position, to the extent it is distinguishable, from the position of SIPC or the Trustee. Conley replied that the SEC is in agreement with them with regard to whether you look solely at the account statement or to all the books and records, but believes you must value the net equity claim in “constant dollars.” (Tr. 63.) The Bankruptcy Court, he said, decided to consider the constant dollar issue after the “initial determination” of net equity is made. (Tr. 63.) Thus, in the words of Justice Leval’s question, “that issue of the constant dollars or the inflation adjusted dollars is not before us now.” (Tr. 64.) It could be something to subsequently be decided below depending on how the Circuit rules, but it has not been briefed or decided and the Court is not called upon to decide it now.

Conley then reiterated the oft-made point that the Trustee must “discharge all obligations” of Madoff to a customer and said “that’s exactly what the Trustee did” here after an extensive investigation. (Tr. 65.) In so saying, Conley was necessarily adopting the position, first advanced by Sheehan, that Madoff had no “obligation” to pay victims the fake profits that his own statements showed he owed them (and which Sheehan ultimately admitted would be recoverable in a fraud suit). It strikes me that it is nothing short of amazing for the SEC -- which was created to protect investors -- to take the position -- deeply injurious to investors -- that the crook does not owe investors what the statements he gave them showed they were owed (and what Madoff did give to people who closed out their accounts). For the agency created to protect investors to instead injure them in this way is further evidence of what has now been known for over two years: the SEC has abdicated its responsibilities, is incompetent, and is completely under the thumb of SIPC instead of supervising it as Congress intended. It is completely understandable that some people -- actually quite a few people, I believe -- think that Mary 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 saying that “I don’t mean to scare anyone by suggesting that this should be treated as cash, but on the one hand that does seem to be what you’re calculating and concluding that you can’t decide what the value of the security positions is. All you can decide is what’s the cash they put in and took out. Then why isn’t this a cash position?” (Tr. 66.) Conley’s response was that there is a securities position here because the Court had held in New Times “that when a customer gives cash for the purpose of buying securities and then receives confirmations and account statements that suggest that that’s what happened, the customer has a legitimate obligation to believe that that’s how the cash was being invested.” (Tr. 66-67.) Judge Raggi then asked “If that’s the case, why isn’t the receipt of each account statement something that the customer could reasonably rely on? I mean, to use the old maxim, a decision to hold is a decision to buy. So, you know, if you get told you hold x number of shares in this account statement worth such and such and you don’t tell the broker to do anything, you’ve got that reasonable expectation. Why isn’t that this case?” (Tr. 67.) Judge Raggi’s question goes back to a point made earlier in this essay: if receipt of a statement creates a legitimate expectation that an investor owns the securities shown in the statement, why doesn’t it simultaneously create a legitimate expectation that the securities were purchased at the price shown in the statement? After all, except in the case of a suspected mistake in price, have you ever heard of anyone who thought she owned the securities shown in her statement but that they had been acquired at a different price than shown in the statement?

Conley’s answer essentially was that this was done in New Times (where people who bought non existent securities and received statements and confirmations had claims for securities, but there was no basis or evidence for valuing them, so the relevant investors received only their cash-in). To which Judge Raggi said the SEC was “not suggesting that any account holder didn’t rely in good faith on what the statement said,” and if the statement said a victim owned 200 shares of AT&T, “why isn’t that a securities position that can be valued?” (Tr. 68-69.) Conley’s response was that it can’t be valued because it’s the result of fake trades: it cannot be valued because “it’s completely divorced from any reality of market trading.” (Tr. 69.)

In reply Raggi asked whether the investor would be credited with the amounts shown in his statement if he had bought and held, so that the statement reflected not profits from trades, but profits from the market increase in share price of the stock plus reinvestment of dividends. (Tr. 69.) Conley’s answer was that this was “quite akin to the folks in New Times” who had bought securities existing in the real world. (Those investors were not parties to the New Times case -- the parties were the persons who bought securities which did not exist in the real world.) SIPC and the Trustee recognized that the value of the real world securities which people invested in but which the fraudster did not actually buy, plus reinvestments of dividends, could be valued (by looking at real world prices). (Tr. 70.)

Judge Jacobs then said “So the distinction you draw between New Times and the circumstances of this case is in New Times with respect to some of the people who were put into real stocks, you can, looking at folks’ records, account statements and market prices, you can actually calculate -- a real number for them.” (Tr. 70-71.) Conley’s answers were “Precisely,” and “That’s right.” (Tr. 70-71.) Jacobs then said, in further explication of Conley’s position, “Whereas if you have a fake stock that never had any value, or if you had real stock that’s put through machinations and transactions that are impossible, then you can’t calculate that value, and you’re in the same situation as the people in New Times who couldn’t recover because they had -- their holding of securities was impossible to calculate.” (Tr. p. 71.) Conley replied, “That’s exactly our position in this case, Your Honor.” (Tr. 71.)

Judge Leval then added that in New Times there was no manipulation of account values, and, no “imaginary profits” for those who bought and held, for the duration, securities existing in the real world. (Tr. 71-72.)

As obvious, Conley is maintaining that New Times, and ability or lack of ability to value securities in the market, are controlling. He also maintained that a strategy of fictitious trading must be distinguished from a strategy of buying and holding. These positions are contrary to Congress’ oft-previously-stated intent to protect investors, they take no account of Judge Jacobs’ comment that perhaps New Times was not fair to the investors who bought the non existent securities to which Conley is comparing non existing trades in Madoff, and they deny protection to and thereby punish persons who give their broker discretion to trade for them instead of merely buying and holding -- even though so many investors do give in fact brokers such discretion and there is not a scintilla of evidence that Congress did not want to protect those investors just as much as those who buy and hold.