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Preview: Velvel on National Affairs

Velvel on National Affairs

This progressive blog sets forth the personal views of the Dean of the Massachusetts School of Law on national events. Occasionally, the responses to his views or other interesting articles are also posted.

Updated: 2014-10-07T00:34:18.612-04:00


It Appears That The Madoff Scam Was Not, Repeat Not, A Ponzi Scheme.


July 18, 2012It Appears That The Madoff Scam Was Not, Repeat Not, A Ponzi Scheme.From the time Bernie Madoff’s fraud was uncovered in December 2008 until today, a period of over 3½ years, his scam has been regarded as a Ponzi scheme.  I know of only one person, a brilliant lawyer named David Bernfeld, who did not concede it was a Ponzi scheme, but nobody accepted his view.  Victims, (very importantly) the media, and courts all thought and said Madoff was a Ponzi scheme.  Of enormous importance the Trustee in the Madoff case, Irving Picard, and his chief lawyer, David Sheehan, regularly insisted it was a Ponzi scheme because, they said, there were no securities transactions, and accordingly there were no securities, and no earnings (and could not have been any earnings).  Crucial legal and factual consequences, some of which are mentioned below, flowed from the fact that the scam was regarded as a Ponzi scheme.But now it is beginning to look as if Madoff was not a Ponzi scheme.  It was a huge fraud to be sure, but not the species of fraud called a Ponzi scheme, with the consequences attendant upon that species of fraud.As I have always understood matters (I think and hope correctly), in a Ponzi scheme the crook tells people that he will be investing their money in particular stocks or particular goods or what have you, and then fails to do so.  Instead he blows the money, uses it for other purposes, etc.  The key point, the central point, is that he does not purchase or acquire the investments that he told victims he would acquire in order to induce them to give him their money.  Along this line, in the Madoff case the Trustee has always insisted -- in court filings, in remarks, whenever and wherever -- that none of the securities that were shown in victims’ monthly account statements -- none of the securities that Madoff inducingly told victims he would buy and sell for them -- were ever bought or sold.  There were, the Trustee and his lawyer have told victims, the courts and the world, no transactions in these securities.  Ergo, a Ponzi scheme.But apparently there were purchases and sales of these securities -- untold and currently unknown billions of dollars of these purchases and sales.  On his books, however, Bernie Madoff did not, as he should have, credit the investor-victims with ownership of the billions of dollars in securities he was buying (and selling).  Instead, on his books he unlawfully kept ownership for himself.  There was a fraud alright, but the fraud was not the Ponzi fraud of failing to buy the very items the crook said he would buy.  The fraud, rather, was in failing to credit his investors with the ownership of the securities on Madoff’s books, as should have been done, and instead keeping the securities for Madoff himself.  The securities, that is to say, were bought and sold for what was called the proprietary trading arm of Bernie Madoff’s company, the arm which bought and sold securities, and attempted to thereby make a profit, for Bernie’s company.  They may also have been bought for the market making arm of his business.  The monies given to Madoff by his investor victims was used not to purchase the promised securities for them, but instead to purchase those securities for Madoff himself -- for his own account, as it is said, and, when necessary, to support another arm of his business, the market making arm.  (The monies were also used to fund the Madoff family’s extravagant life style.)  The account statements received every month by victims, and showing that theyowned the securities, were a lie, a fraud.It would be fair for the reader to ask at this point, “How do you know all this?  Can you be sure of it?”  Let me answer this way:  For reasons discussed below, and for other reasons too, we already know enough to be virtually positive that the foregoing is what occurred.  But we do not know enough to know certain of the details, e.g., what was the total value [...]

How The Current Situation In Legal Education Came To Pass. Part III


June 21, 2012How The Current Situation In Legal Education Came To PassPart III  In the mid 1990s the Department of Justice’s Antitrust Division threatened to bring a case against the ABA (after our school complained to the DOJ about the accreditors’ anticompetitive activities).  The ABA, which of course had high level contacts in the government, persuaded the Antitrust Division to enter a weak consent decree which solved very little, but which prevented the extensive damning evidence collected by the Government from being disclosed at a trial, and thereby enabled the ABA to keep that evidence -- thousands of pages of it -- secret.  After entering the weak consent decree, the ABA proceeded to violate even that weak decree, and, where the decree called for non faculty to fill committee positions, it appointed judges and lawyers who in previous lives had been faculty members, were imbued with the ABA orientation, and sometimes had even been ABA accreditors.              Perhaps the only thing really accomplished by the Antitrust Division’s case was that, under the consent decree, the accreditors had to stop demanding that law schools pay ever higher salaries.  Yet even this supposed accomplishment proved a failure because, ever increasing salaries having been baked into the cake indelibly, law schools just went right on increasing them.  This was furthered by the fact that the schools, being among the most elitist parts of a very elitist profession -- Brian Tamanaha, author of the new book entitled Failing Law Schools, calls the schools an “elite-drenched environment” and says “Law is an obsessively credential-focused profession -- have competed obsessively for well known researchers and writers, competition which has driven up salaries across the board even though most law professors -- being lazy? -- don’t write.             After the Antitrust Division fizzled, our law school began submitting papers to and appearing at meetings in Washington of the so-called National Advisory Committee of the Department of Education.  The NAC advises the Secretary as to which accrediting bodies should be federally recognized and with what conditions.  Our point was that the NAC should require the ABA’s Section of Legal Education to begin enforcing proper and legitimate accrediting standards instead of being the front man for standards designed to advance the economic and professional perquisites of the law professoriate.  Our effort went on for perhaps five or six years, but finally we quit the lists because it proved impossible to get DOE to do what should be done.  There were a few very good people on the NAC -- ultimately we even asked one, former Governor Salmon of Vermont (who also had been President of the University of Vermont), to join our Board of Trustees, which he did -- but there were also bureaucratic hacks on the NAC.  Even far more importantly, the DOE staff, which ran the show, was thoroughly incompetent -- this was Washington, you know -- and in the hip pocket of the ABA.  (Once the staff even claimed, with truly astonishing incompetence, that accrediting standards cannot be considered in light of student achievement.  Yet student achievement, I would venture, is the very touchstone of accreditation.)             There was also one other reform effort that failed.  In the mid 1990s, many deans were already disgusted with ABA accreditation.  The deans of 14 schools, often highly prominent ones such as Harvard, Chicago, Stanford, Pennsylvania, Virginia, Cornell and others wrote a letter highly critical of accreditation, formed the American Law Deans Association, which quickly rose to almost 110 members, and regularly criticized ABA accreditation.  To no avail.  They had no effect and, as was publicly conceded, were basi[...]

How The Current Situation In Legal Education Came To Pass. Part II


June 20, 2012How The Current Situation In Legal Education Came To Pass  Part II  The period 1923-1973 was preparation for developments of truly enormous importance in 1973 itself.  In that year leading legal educators were deeply concerned over the economic and professional status of law professors.  There accordingly was a meeting of eighteen prominent leaders to discuss the problem.  (Later they incorrectly (in two senses) became called the “Ten Wise Ones.”)  Their proceedings and conclusions were published in the Journal of Legal Education -- this was a few years before the Supreme Court ruled the professions subject to antitrust, so that one assumes the publication was not thought the danger it would have been after that ruling.  The report of the Ten Wise Ones said “many of us envision a more active role for the [AALS], both in defending the fiscal entitlements of legal education generally and in advancing the economic standards of law professors directly.”  (Emphasis added.)  They discussed using collective bargaining to do this, an idea which ultimately went nowhere, and, more to the point, “Some thought a possible goal might be to develop enforceable standards in support of entitlements of law faculty members as an alternative to trying to utilize the dynamics of labor-management bargaining.”  (Emphasis added.)             In pursuit of the goal of promoting the “fiscal entitlements” and “economic standards” of law professors, in 1973 a committee drafted ABA accreditation standards to achieve this.  These standards were approved by the ABA’s House of Delegates.  One negative comment was expressed by William Spann (not to be confused with Warren Spahn), who would soon become President of the ABA.  Spann said that if the ABA adopted the proposed accreditation standards, “we have sort of set ourselves up as a collective bargaining agent for law professors against the various Boards of Regents and other educational bodies of the state.”  The ABA should not, he said, “become a collective bargaining agent for the law professors and this [set of standards] looks very much like a labor contract drawn by a law professor to me.”  There was obviously little doubt as to the economic purposes of the new standards.             The other major development of 1973 was the appointment of a professor named James White to the position of ABA Consultant on legal education.  White ruled with an iron hand for the next 25 years, for the purpose of promoting the economic goals and professional perquisites of the law professoriate.  In 1992 an article in the National Law Journal said that he was “arguably the most powerful person in the field.”  (In truth there was no “arguably” about it:  he was the most powerful figure.)  The article also said that “[a]s the person in charge of accreditation of law schools for the ABA,” he could “decide almost single-handedly on the very existence of a law school, and the terms of that existence.”             In advancing the economic and professional perquisites of the professoriate, White employed a group of insiders -- mainly professors but also some practitioners who did his bidding.  Members of the group did not change much over time.  They enforced rules and practices that dramatically increased professors’ salaries, dramatically lowered their hours of teaching, vastly increased the size of full-time faculties, largely barred (comparatively inexpensive) part-time teachers (who were expert judges and lawyers), required highly expensive libraries to be vastly increased in size and personnel, demanded facilities costing scores of millions of dollars, promulgated and enforced rules whose effect was to keep minorities a[...]

How The Current Situation In Legal Education Came To Pass. Part I


June 19, 2012How The Current Situation In Legal Education Came To PassPart I             A prior post discussed the unhappy state of legal education today.  So I have thought to now set forth a brief historical overview of how this situation came to pass.  It is, perhaps, a classic story of the seizure of power and authority -- for the purpose of self interest, of course.  It is also, perhaps, one of only a few cases in America where power and authority were seized by persons who lacked and did not use big money to achieve their goal.  The seizure occurred, rather, through lawyerly verbalness and influence.               The beginning of the story can be placed at approximately the turn of the 20thCentury.  The legal profession was in bad odor.  Night law schools serving the immigrant poor were proliferating.  Nativist and racial attitudes were, shall we say, not uncommon.  Wanting to rid themselves and the profession of the  competition from the night schools and the immigrant poor, academics who were in the ABA’s Section of Legal Education (begun in 1893) created the Association of American Law Schools in 1900.  More stringent standards and practices for legal education were likewise created.  The men and the schools which led the cavalcade were academic in orientation, not practice oriented.  And ultimately, in the first 50 or 60 years of the 20th Century, many or most of the schools which were serving the poor were driven out of business.  A few -- I think it fair to say only a very few -- survived, in large part by adopting an academic orientation.              In 1923 there were two major developments.  The position now known as the “Consultant” to the ABA on legal education was created.  And the ABA’s Section of Legal Education -- whose leading personnel were interchangeable with AALS personnel (they were usually one and the same), began to accredit law schools.  The Consultant’s position grew into the most powerful one in legal education by the 1980s, when his word, as veritable dictator, determined which law schools would live and which would die.              ABA accreditation, run by the Consultant with the extensive assistance of the ABA Section/AALS academics, began to be used to run out of business the schools that did not do as the academics desired.  This exclusion of the nonconforming was achieved by persuading most state supreme courts not to allow law graduates to take the bar exam unless their law schools were accredited by the ABA.  If a school’s graduates could not take the bar exam, the school would be unable to continue in existence because its graduates would be unable to practice law.              The process of running the nonconforming schools out of business went from strength to strength one might say, until it achieved the apogee of near (but never complete) success in roughly the 1970s.  State supreme courts acceded to the ABA because, they have claimed, the ABA Section of Legal Education was supposedly a good accreditor; they could not themselves judge schools (and apparently did not want general accrediting bodies to judge law schools); the Section lobbied state judges extensively; and it made sure to honor state supreme court justices, especially chief justices, by putting them in high positions in its structure (and, of course, by paying their way to the fancier watering spots of the U.S. and the western world (e.g., Jackson Hole, Sarasota, London) where conferences and conventions were held.              Between 1923 and 1973 there were t[...]

Law School Should Remain Accessible to All


June 7, 2012Law School Should Remain Accessible to All            The legal profession and, in roughly the last 110 years or so, law schools have always been a route to advancement in America.  At the presidential level, lawyers include, among others, Jefferson, Madison, Monroe, Lincoln, Cleveland, Franklin D. Roosevelt, Nixon, Clinton and Obama.  The numbers of state and federal legislators who have been lawyers are legion.  The same for governors.  Many high corporate officials have been lawyers.  And none of this is even to mention that lawyers are prominent at professional and civic levels ranging from Wall Street to small firms.              So it is important that law schools and the law remain open to, remain a rite of advancement for, the middle and lower economic classes.  But such access is increasingly difficult to come by.  The reasons have to do with elitism, failure to teach students what they need to know in order to practice, and costs.  The elitism has been with us for scores of years.  The failure to teach the skills of practice have been with us almost as long.  The staggering costs (tuitions) are a more recent phenomenon.  All of this, and much more, is discussed in a new book by Brian Tamanaha, formerly a dean of the St. John’s Law School and now a law professor at Washington University of St. Louis.  Many of Tamanaha’s criticism and suggestions mirror the views and practices of the Massachusetts School of Law since its inception in 1988.            The criticisms made of law schools include the following:  law professors’ salaries are very high (sometimes ranging into the mid three hundred thousand dollar range or averaging over $250,000).  They are far higher than any other academic fields except medicine.  In part due to very high salaries, law school tuitions are very high -- often being between $35,000 and more than $50,000 per year.  Law professors teach few hours of class, making it necessary to have more professors in each school, which again pushes up tuitions.  Law professors are entirely research oriented (although their research is of little or no benefit to students); they have very little experience in practice, lack knowledge of the arts and skills of practice, and cannot teach such skills to students though most students wish to become practicing lawyers.  In pursuit of higher US News rankings, law schools seek students with, and give available financial assistance to, students with high LSAT scores.  This forces other, “lower ranked” students, who pay full tuitions, to in effect pay the way of the students with high LSATs.  Again in pursuit of high US News rankings, some law schools have told falsehoods about their students’ LSAT scores, undergraduate grade point averages, or starting salaries after graduation.  Law schools have failed to prepare students for bar examinations.  By increasing tuitions to astronomical levels, law schools have made it necessary for students to take on very high amounts of debt, often ranging between $100,000 and $135,000.  These amounts of debt play hob with students’ lives after they graduate.            A way to cure these problems, and to make legal education and its associated social and economic mobility available to middle class and lower class students, is to reverse the current practices (as our school has done).  Professors should have extensive, and often continuing, experience in practice, teach the arts and skills of practice to students.  Professors teach reasonable numbers of hours, not low amounts of hours.  They should focus on good teaching, rather than on research o[...]



THE COMMITTEE ON FINANCIAL SERVICESTHE SECURITIES INVESTOR PROTECTION CORPORATION: PAST, PRESENT, AND FUTURE(PDF of transcript)WEDNESDAY, MARCH 7, 2012 9:30 A.M. INDEX EVENT PAGE PANEL I 20 THE HONORABLE DAVID VITTER 20 PANEL II 28 MR. STEPHEN HARBECK 28 MS. SHARON BOWEN 35 PANEL III 110 MR. JOE BORG 110 MR. STEVEN CARUSO 119 MR. IRA HAMMERMAN 121 MR. RON STEIN 126  [BEGINNING OF RECORDING]Mr. Garrett: This hearing is entitled “The Securities Investor Protection Corporation: the Past, the Present, and the Future”. This hearing will now come to order and I recognize myself for four minutes to give the opening statement. So, with regard to today’s hearing, today’s hearing is fashioned, as I just mentioned, in a broader oversight hearing of the, of Securities Investor Protection Corporation, SIPC. And it’s not meant entirely to be focused solely on a particular aspect of SIPC’s work. But, to me, the failure of SIPC in regards to the Madoff liquidation are so fundamental, relative to the protections that SIPC is supposed to provide to investors. And so, antithetical to the goals that SIPC and Congress set out to achieve at their beginning, that I would like to focus much of my time, and my thoughts, and my energy, and my comments on the circumstances surrounding that particular case.I also think that it’s worthwhile to hear today about SIPC’s work in regard to the Lehman bankruptcy. And also, what we -- examining the long-awaited and recently-released report of SIPC’s Modernization Task Force as well. And going through that task force and looking at it, unfortunately, is that it’s somewhat of a missed opportunity, if you will, and it seriously studies some of the shortcomings of SIPC exposed by the recent failures of the broker-dealer.So, let’s return now to the failure of the Madoff firm and let’s examine the facts of that case. As we’re all probably too familiar.The Madoff firm was regulated by both FINRA and the SEC. And they repeated received government stamps of approval that it was operating basically legally. The firm proudly displayed the SIPC logo, which again implies government backing since SIPC is backed by the US Treasury. Madoff investors paid taxes to the IRS, US Government, for years. Again, another government agency saying that its investors and profits were, well, real. Just around the same time SIPC was enacted, investors no longer held stock certificates. So, the only proof of ownership they have, or had, was the statement that they received from a government-regulated broker-dealer.So, what does it mean? So, the Federal Government both provided a stamp of approval and relied upon that stamp of approval and yet, innocent private citizens now, as investors, are being held to a higher standard than them. So, instead of being provided protection by SIPC, as Congress did intend in order to increase confidence in investment in our markets, innocent investors in this case are being sued by the very same Trustee chosen by SIPC.Now, am I the only one when you go down that whole litany of facts that are here to say that, “Well, something is simply not right here”? Now, an additional irony is that if the Trustee is successful in suing individual investors, who will go to, who will the money go to? It will largely go to pay off institutional investors. Now, this is the same class of investors that the Trustee has repeatedly tried to sue because he believes, well, that they should have known better. But they’ll be paid.It’s because of my concerns over these issues I’ve introduced H.R. 757, the Equitable Treatment of Investors Act. This legislation would reaffirm and clarify key protections for ordinary investors that were put in place when Congress passed and amended the SIPC. In particular, the bill aims to shield innocent individual inve[...]

Petition for Rehearing En Banc


UNITED STATES COURT OF APPEALSFOR THE SECOND CIRCUITPETITION FOR REHEARING EN BANCPRELIMINARY STATEMENT Petitioner, Lawrence R. Velvel, is a customer and victim of Bernard Madoff. Velvel was an appellant in the above-referenced appeal and seeks a rehearing of the Court’s August 16, 2011 decision, annexed hereto as Exhibit 1. Velvel joins in the arguments made in the two petitions for rehearing submitted by others under date of September 2, 2011, but writes because extraordinarily important information concerning the intent of SIPC, the Trustee and the SEC was disclosed on September 16, 2011 in a 118 page report issued that day by the SEC’s Inspector General, David Kotz. That just-disclosed, crucial information regarding the intent of SIPC, the Trustee and the SEC was denied to Petitioner when he sought it via discovery request in the Bankruptcy Court in September, 2009. The discovery request was vigorously fought by the Trustee, Irving Picard, and by SIPC, and, in accordance with their position, was denied by Bankruptcy Judge Lifland. Petitioner contested this prior denial of crucial information in his opening brief and his reply brief on appeal in the Second Circuit, but the Panel’s decision of August 16th does not deal with the matter. Now, however, the relevant crucial information sought via discovery was disclosed on September 16th in the Inspector General’s report, and Petitioner urges that there should be an en banc rehearing to consider the information. Though, as said, other petitions for en banc rehearing were filed under date of September 2, 2011, the allowable time for filing a petition is 45 days, not 14 days, under FRAP 40. That rule provides that, if an agency or officer of the United States is a party to a civil action, the time for filing for rehearing is 45 days after entry of judgment. (Judgment was entered here on August 16th.) Here the SEC, a government agency, is a party. Also, the Trustee, Irving Picard, is a Bankruptcy Trustee as well as a SIPC Trustee (and is clawing back monies as a Bankruptcy Trustee). The Supreme Court has ruled that “Trustees in Bankruptcy are public officers and officers of a court.” Callaghan v. Reconstruction Finance Corporation, 297 U.S. 464, 468 (1936). Because the SEC is a party, and the Trustee is a public officer, the time period for seeking rehearing to bring up the crucial information that was not disclosed publicly until September 16th is 45 days from August 16th, not 14 days.PROCEEDINGS BELOW As pointed out in the Petitions For Reconsideration filed under date of September 2, 2011, the appeal and the decision of August 16th, involved the question of how to define “net equity” under the Securities Investor Protection Act. From the beginning, SIPC and the Trustee have argued that net equity is to be defined by the cash-in/cash-out (“CICO” or “net investment”) method, while the appellants/petitioners have urged that the final statement method (“FSM”) must be used, as in every SIPC case in the nearly 40 year history of SIPA prior to Madoff. The panel held that SIPC and the Trustee could use the CICO method.ARGUMENT From the very beginning, there has been well-founded suspicion that, whatever legal rationalizations SIPC and/or the Trustee might assert to the courts as justification for using CICO, the real reason they used CICO rather than the FSM was fear that the SIPC fund did not have sufficient monies to make the legally required payments to victims if the FSM were used. For this reason, it was thought, SIPC and the Trustee (ultimately supported by the SEC) ignored Congress’ intent -- oft-stated on the floor of Congress by many of the leading Senators and Representatives of the 1970s -- that victims be compensated up to $500,000 and that they be compensated promptly. Rather than adhere to Congress’ intent, SIPC and the Trustee (ultimately supported by the [...]

Comments on the Second Circuit's Decision on Net Equity


COMMENTS ON THE SECOND CIRCUIT’S DECISION ON NET EQUITY August 23, 2011 I have been asked to state my views on the Second Circuit’s decision on net equity in the Madoff case. Some of the matters I shall discuss are relevant to a request for rehearing en banc to the Second Circuit and/or a subsequent petition for certiorari to the Supreme Court. 1. The Court’s decision is based on its acceptance of the statutory language relied on by the Trustee rather than the language relied on by the victims. The victims said they had a right to their “securities positions” as reflected in their final statements. The Trustee said he had to and should give them only what the “books and records” showed they had put in and taken out, so that a person who took out more than he put in had no net equity. In these regards (and others), the Court, like the Trustee as well as many people not connected with the Madoff affair, thought it overriding that everything Madoff did was a fake and the final account statements represented fakery, so it was better, and necessary, to look at the books and records rather than rely on the phony securities positions set forth in the final statements. To me it seems self evident that, in a case where things were faked, and there is rival statutory language for the Court to choose from in determining net equity, it is essential to present a court with strong and repeated policy statements as to why it should choose the counter intuitive position of using the faked statements to determine net equity rather than the reality reflected in the books and records. Those policy reasons are found in the intent of Congress repeatedly stated in the legislative history. This author vigorously and repeatedly urged upon the New York lawyers who controlled the case for the victims’ side that the policy arguments, found in the intent of Congress expressed in the legislative debates on the floor of the Senate and House at the beginning and near the end of the ’70s, should be the linchpin of the case. For (with some relatively minor exceptions we can overlook here) true securities positions were zero, since Madoff did not buy or sell stocks for the victims. This author’s urgings were unsuccessful. It was decided early-on in New York that the dispositive point was that the statute said net equity was the securities positions reflected in statements from Madoff (less indebtedness to him). This writer disagreed, saying, as did judges at oral argument, that “securities positions” were zero because the whole deal was a fake in which securities were not purchased. This view was unpersuasive to the lawyers on our side, who said victims’ securities positions were what was shown on the final statements: Such was required by state law, it was said, is admittedly what Madoff would have been obligated to pay victims had they sued him before December 11, 2008, and for all these reasons is the measure of net equity under the statute. The foregoing argument about securities positions, an argument about which our side was warned, was, and proved, a loser because, as said, in reality the victims’ securities positions were zero. 2. It was, as said, this writer’s view, unsuccessfully pressed on the New York lawyers orally and in writing, that the only way to persuade a court to rule that the final statements should be the measure of net equity though they were faked was to rely extensively and repeatedly on the intent of Congress as reflected in floor statements, many of them made by the leading Senators and Congressmen of the 1970s. (President Nixon and Treasury Secretary Kennedy also weighed in.) Those extensive and repeated statements made plain that the Congressional intent would be vitiated if CICO were used instead of the FSM. It is not that the legislative history ever discussed net equity [...]

Amicus Curiae Brief of the Network For Investor Action and Protection


AMICUS CURIAE BRIEF OF THE NETWORK FOR INVESTOR ACTION AND PROTECTION STATEMENT The Network For Investor Action And Protection (“NIAP”) is a two year old organization with about 1,200 members which arose because of the Madoff debacle and seeks to protect against frauds that victimize investors. It especially seeks to protect small investors, who comprise almost its entire membership. During the course of its existence, NIAP has been active in both legislative and judicial matters, and was allowed to file amicus curiae briefs in the Second Circuit on the question of net equity. NIAP has had the benefit of study of extensive writings on the economic, financial, legal and political aspects of the Madoff fraud, including the role played by large financial institutions in enabling that fraud. In this amicus brief NIAP seeks to present its views regarding the question of red flags known to large financial institutions that facilitated Madoff’s Ponzi scheme. The question of red flags is before the Court in this case, and NIAP has a deep interest in the question because, if the Court decides the question, as it may, the decision could have a major impact on cases that will be brought by members of NIAP. ARGUMENT Large Financial Institutions, Like JPMC, Which Knew Of Red Flags But Ignored Them In Service Of Reaping Large Profits, Should Not Be Permitted To Escape Liability. It has long been understood that the Congressional purpose underlying the Securities Investor Protection Act is to protect the small investor and thereby build his confidence in markets. The protection of investors and of the integrity of securities markets was likewise the goal of the 1933 Securities Act and of the 1934 Securities Exchange Act. Congress’ repeated purpose of protecting investors and markets requires that frauds, including Ponzi schemes, be detected and stopped as early as possible, thereby lessening and at times even perhaps eliminating the losses caused by the frauds. As the Madoff and Stanford cases have taught yet again, we cannot rely solely on governmental and quasi-governmental agencies to detect fraud early-on. The failure of the SEC (once a premier governmental body) and FINRA to detect Madoff’s Ponzi scheme while it grew to be the largest fraud in financial history is proof enough that we cannot rely on government or quasi-government alone. The same is true with regard to the huge Stanford fraud. To stop fraud as early as possible, and thereby protect investors, we must, rather, as in so many other areas of economic and social life, enlist the cooperation and assistance of knowledgeable private professionals who discover the existence or possibility of fraud during the course of their professional work. Again as in so many areas of professional and economic life, we must marry those professionals’ economic interests to the stopping of fraud when they learn of its existence or possibility. To rely on knowledgeable private parties to root out illegality even though there also are governmental agencies devoted to the same purpose, and to marry the private parties’ economic interests to this, is nothing unusual. It is one of the purposes behind antitrust treble damage suits, behind suits for discrimination in the workplace, and behind whistleblower suits. The principle is as applicable here, in the securities fraud area, as it is there. The worst possible thwarting of Congress’ goal of protecting investors, especially small ones, would be to do the opposite of marrying professionals’ economic interests to the rooting out of fraud. For such opposite would be to permit professionals to take advantage of known or suspected frauds, including Ponzi schemes, by making large profits from frauds at the expense of unsuspecting innocent investors. When a financially expert inst[...]


AMICUS CURIAE BRIEF OF LAWRENCE R. VELVEL ON THE APPLICATION HERE OF THE SUPREME COURT CASES --FROM TUMEY v. OHIO TO CAPERTON v. MASSEY COAL -- THAT BAR GOVERNMENTAL LEGAL DECISIONS FROM BEING MADE BY PERSONS WITH A FINANCIAL INTEREST IN THE DECISIONS.STATEMENT Lawrence R. Velvel is a victim of Bernard Madoff. Velvel, who is a lawyer, has participated in the briefing on the net equity question (and other questions) in the Bankruptcy Court in the Madoff case, and has filed two briefs on his own behalf on the net equity question in the Second Circuit Court of Appeals. In this amicus brief, Velvel elaborates the question -- raised on pages 15-17 of the motion for a withdrawal of reference filed by Helen Chaitman on behalf of James Greiff and others -- of the applicability to the question of the Trustee’s fees of the Supreme Court’s line of cases running from Tumey v. Ohio, 273 U.S. 510 (1927) to Caperton v. Massey Coal Co., Inc., 556 U.S. ___ (2009). The applicability of this line of constitutional law further supports the withdrawal of the reference sought by Ms. Chaitman.ARGUMENT1. Introduction: Due Process Requires That Legal Judgments Must Be Made By Officials Who Do Not Benefit Financially From Their Decisions.It is a fundamental principle of due process that, when a legal judgment is made by a judicial, executive, administrative or quasi-governmental official, that official must not benefit financially from the decision. Nor can there be financial benefit to a governmental institution or function under the official’s purview. This principle of due process has been powerfully enunciated by the Supreme Court in Tumey v. Ohio, 273 U.S. 510 (1927); Ward v. Village of Monroeville, 409 U.S. 57 (1972); Gibson v. Berryhill, 411 U.S. 564 (1973); Aetna Life Insurance Co. v. Lavoie, 475 U.S. 813 (1986); Caperton v. Massey Coal Co., Inc., 556 U.S. ___, 129 S. Ct. Rep. 2252, 173 L.Ed. 2d 1208 (2009). The principle of no financial benefit, the Court has repeatedly said, is necessary in order to ensure that “the balance [is held] nice, clear and true.” Tumey, 273 U.S. at 532; Caperton, 556 U.S. at ___, 129 S. Ct. at 2260, 173 L.Ed. 2d at 1218 (quoting Tumey v. Ohio). In this case Irving Picard is the Bankruptcy Trustee, the SIPC Trustee and a special master appointed by the Department of Justice to distribute billions of dollars forfeited to it by Carl Shapiro and Jeffry Picower. In these capacities he is an officer of the Bankruptcy Court (as has been explicitly held by the Supreme Court with regard to the position of Bankruptcy Trustee) (Callaghan v. Reconstruction Finance Corp., 297 U.S. 464, 468 (1936)), a functionary of the Department of Justice, and exercises governmental and quasi-governmental power to make and/or participate in legal decisions that affect thousands of people and involve literally billions of dollars, e.g., initial decisions on how net equity shall be defined and from whom clawbacks shall be demanded. Unfortunately, it has recently been discovered that the Trustee, and perhaps also his counsel, David Sheehan, with whom he works very closely, may benefit personally and financially, to the tune of millions of dollars, perhaps scores of millions of dollars, from the decisions the Trustee makes and implements. (The amounts of money involved here dwarf the amounts in the Supreme Court’s cases.) Though it is already pretty certain (as will be described below) that financial benefits will accrue to the Trustee from the decisions he makes (and may accrue to his colleague David Sheehan also), the precise details of the relevant financial arrangements under which the Trustee will receive major financial benefits are still not known. There must be discovery to flesh out the precise details of the arrangements; plaintiff will subsequently discuss and requ[...]

Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011. Part 5.


April 4, 2011Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011.PART 5 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[...]

Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011. Part 4


April 1, 2011Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011.PART 4 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 legitima[...]

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


March 31, 2011Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011.PART 3 The next to argue for our opponents was the Trustee’s Counsel, David Sheehan, who has made himself the bête noire of many victims by what they consider his pit bull attitudes, insults, and sometimes outlandish comments (such as that no legislator would think the FSM should be used). Sheehan began by saying that by using CICO the Trustee had reasonably followed the statute in a reasonable exercise of discretion, since this was a Ponzi scheme with no profits. (Tr. 51.) The customer fund, he said, is “the money that went in,” i.e., the cash in. To which Judge Jacobs said, “The SIPC fund is not the customer fund,” and then said, perhaps very importantly, “the SIPC fund is what we’re talking about here today.” (Tr. 51.) At that point Sheehan, as best I can tell, began trying to say -- I think -- that the SIPC fund and the customer fund are at least intimately related because the payment from SIPC is “an advance. It’s an advance against the money owed to you by the broker.” (Tr. 52.) If the broker owes you nothing, said Sheehan, there is no advance. (Tr. 52.) At that point Judge Raggi interjected the following incredulous comment. “Well, you don’t think the broker who told people over the course of 30 years that they had a statement that increased at the rate of 15 percent a year or whatever owes them only what they put in at the start of the 30-year investment? You think that’s all the broker owes these people?” (Tr. 52.) Sheehan’s answer to this question was, I believe, outlandish. “In a Ponzi scheme, yes. Absolutely. Why would he owe them anything more.” In short, Sheehan was saying that even Madoff himself, had he been sued by an investor at some point for the amounts shown on the investor’s statement, would have owed the investor only what the investor had put in, not what the statement showed. Raggi then interjected. “But fraud.” (Tr. 52.) Sheehan replied that “Fraud is a general creditor claim.” (Tr. 52.) There are two funds, Sheehan said, one being the customer fund of property [which] is the cash and securities deposited with the broker. The broker has an obligation to pay that.” (Tr. 52-53.) The implication here was that the broker would not have the legal obligation to pay an investor the false profits shown on the statements the investor received. If this were the only argument the other side had, I would have to think they would be sure losers. Judge Raggi seemed unable to accept Sheehan’s argument, saying that” Even the government of the United States, the SEC thinks it’s the current value of the money, not just what they put in 30 years ago.” (Tr. 53.) Sheehan contested this position, saying “I don’t know if I agree with that. I think it’s only what they put in. If in fact it was never invested, if in fact there’s no profits, no transaction, how did the fund grow? Where does it come from?” (Tr. 53.) Judge Raggi responded “That the injury from the fraud, is that if the individuals had known it wasn’t going to be invested, they would have put it somewhere else and hoped to profit from it.” (Tr. 53.) Sheehan’s response was that this is a general creditor claim. (Tr. 53.) The answer put him in the contradictory position of arguing on the one hand that the broker would not owe the victims, and would have no obligation to pay them, the fake profits, but that there is a claim for fake profits that should be leveled against the general estate. Sheehan then undertook a more elaborate explanation of his position. He said the Trustee is trying “to recover the monies th[...]

Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011. Part 2


March 30, 2011Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011.PART 2 As readers know, I had originally intended to do this essay in two parts. But it is proving so long and difficult to do that I shall divide it into more parts, and shall post them as I do them. This Part 2 will deal with the oral argument of the first opponent to argue, the General Counsel of SIPC, Josephine Wang. Beginning by saying Madoff’s statements are fictitious, Wang was immediately interrupted by Judge Raggi’s comment that if victims had sued Madoff, he would have had to pay them what the statements showed they were owed. (Tr. 36.) Wang admitted this would have been true if Madoff had remained in business. The judge then asked why it should be different in regard to what SIPC has to pay. Wang said it is because SIPC is bound by a federal statute and that statute does not authorize a trustee to benefit certain customers at the expense of other customers; because the prices on the statements were back-dated; and because the profits or so-called profits, were fictitious. (Tr. 37.) Judge Leval then asked “How is it at the expense of other customers when you’re talking about . . . the funds coming from SIPC that measure for each customer independently how much that customer is entitled to?” (Id.) Wang’s answer was that we’re not talking just about the money coming from the SIPC fund, but about “customers who are all eligible to share pro rata in a fund of customer property.” (Id.) Some withdrew their principal plus fake profits, which were other people’s money, and others did not withdraw their principal, which was used to pay other investors. Judge Raggi then wanted to know “where is this customer property coming from.” (Tr. 38.) Wang said it’s “all [the] property that was held . . . for customers,” and includes what the Trustee initially found in the possession of Madoff and what he recovers by actions against third parties. (Tr. 38.) It is, said Wang, “shared pro rata among customers.” (Id.) This means, she said in a confused way, that people who did not yet recover their principal will be sharing with people who already recovered their principal and will be receiving fake profits, which is unfair. (Tr. 38-39.) Judge Leval said that this “part is very clear. But it’s the part that relates to the money coming from SIPC” that needs clarification. (Tr. 39.) To which Wang responded that SIPC would have to advance far more because the cash-in is 17 to 20 billion dollars whereas the final statements showed approximately 64 billion dollars. Judge Jacobs then expressed confusion, saying he thought Wang’s argument would be that, to the extent of its advances, SIPC would be subrogated to a claim against the estate. (Tr. 39.) Wang said SIPC is subrogated to the claim of any customer who is fully satisfied out of a SIPC advance, in order to avoid double recovery by the customer. (Tr. 40.) To which Jacobs replied that this suggests that SIPC advances can have an impact on other investors simply by virtue of the claims SIPC would have by subrogation. (Id.) Wang then said she wasn’t following Jacobs. At that point they began going through the matter again. In the midst of it Raggi said that all this means that if a customer receives an advance from the SIPC fund, this will not affect the amount of an advance that is received from the fund by another customer. (Tr. 40-41.) Wang admitted this is true, but said that the fund of customer property is affected because of SIPC’s right of subrogation. (Tr. 41.) Leval responded by saying that it therefore is the case that if SIPC pays an adva[...]

Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011. Part 1


March 24, 2011Discursive Comments On The Oral Argument In The Court of Appeals In The Madoff Case On March 3, 2011.PART 1 I was in Florida on March 3rd, when the oral argument was held in the Second Circuit, in the Madoff case, on the question of how to determine net equity. So I did not see the argument. I read the transcript on an IPod twice, but reading a complicated document on an IPod is, to me at least, next door to not reading it at all. After getting the hard copy of the transcript, I have now read it three times. So I didn’t write anything about the argument until after getting the transcript, reading it in hard copy, and marking it up. The oral argument was, I think, the most complex one it has ever been my misfortune to have to read, but I feel I now have a reasonable, if imperfect, grasp of most of it. So I shall now set forth some views. I should say preliminarily that, based on the transcript, it is hard to agree with those in attendance who felt the judges did not know the case. On the other hand, it does seem that the argument, for whatever reasons, generally focused on a relatively small number of points in comparison to the total picture, and that several points that should have been prominent received little or no attention (as I shall discuss below). I also wish to say preliminarily that I hope this essay on what transpired is as inoffensive as possible. Unless you have done it yourself, or at least have worked closely on an oral argument with the advocate, it is hard to understand just how stressful an appellate oral argument is. Even a trial court oral argument is no picnic, and oral arguments in federal courts of appeal or the Supreme Court are very difficult. For they often, even usually, consist, as did the one on March 3rd, of a continuous barrage of questions designed to trip you up, questions often delivered in the hostile tone for which the legal profession is infamous. The courts, and professors, call this testing the limits of your argument to see how far it can be carried and what results it may lead to in a variety of differing circumstances. The advocate is confronted with question after question, some with ramifications that he or she may not have considered, and with the need to find ways to bring out the points he/she wishes to make in answer to an unending stream of questions, often hostile ones. So it is not easy, and there is a reason why great appellate advocates tend to be unusually smart men and women. And, of course, extensive preparation, including moot courts -- at which persons unconnected with the case should play a role and at which advocates should practice getting out their points in answer to questions, often hostile sounding questions, which do not obviously seem to call for the points the advocate wishes to make -- are essential preparation if there is to be excellent performance. (In case anyone is wondering, I emphatically do not think I am nor ever was a great or even a good oral advocate -- I have the wrong personality for it in a number of ways -- and in my old age I also reject the inhuman idea of facing a battery of hostile siege guns firing at me in rapid succession from the bench. That is for younger people (I am 71) who want to make a mark. But I do know a lot about appellate oral arguments because I spent a part of my life helping to prepare people for oral arguments in the Supreme Court and setting up moot courts for this purpose. (For reasons I will not get into here, I recently breached my “never again engage in oral argument” principle by appearing before Lifland -- this was my first oral argument in I don’t know how many years, though it was a lower [...]

The Effect Of The Garrett Bill On Indirects


Dear Colleagues: Allow me to make some points that, as far as I know, no one else has made with regard to the beneficial effect of the Garrett bill on indirects. These effects exist though the bill does not mention indirects. The indirects have, of course, invested through intermediaries - - through funds, banks, etc. Under Garrett’s bill, as I understand matters, those funds and banks are customers and will be as eligible as any other customer to get back money from customer property. That money, under the Garrett bill, will be calculated under the final statement method, if the funds, banks, etc. are innocent. If they are not innocent, Picard could, I think, choose to calculate it under CICO, though I wonder if he would do so if the funds, banks, etc. agreed in advance to return all the money to defrauded indirect investors, as they should. Thus, if the indirects’ funds are innocent, and the Trustee is anywhere near as successful as he claims he will be - - he claims he may recover $45 billion - - the indirects, under the consequences of the Garrett bill, would get [all] their money back from customer property, up to the amount of their final statements, even though they would not get advances. If the banks are not innocent, they may get back and distribute only their cash-in, unless investors can prevail upon Picard - - as I actually think may be possible for a variety of reasons - - to use the FSM for funds that agree in advance to return to defrauded indirects all the money the funds get from customer property. What if, however, a fund is potentially one of those which Picard claims is not innocent, i.e., the fund knew or should have known something was wrong. Well, if the fund took no money out (or took out less than is shown in its final statements), then, I believe, it will still get back money from customer property, although (i) the amount it receives may be based on CICO unless, as said, Picard can be persuaded to use the FSM if monies recovered by the fund will be forwarded to the indirects, and (ii) the fund likely will be subjected to clawbacks to the extent it took out money. In connection with such funds getting money back, it is my belief (not a recollected certainty, but only a belief) that Picard or his minion have said that the claims of funds against customer property will be recognized unless the fund was one of the truly egregious culprits in terms of aiding the fraud though it should have known there was a fraud. But what if a non innocent fund took out more money than is shown on its final statement? Well, assuming the fund was not one of the truly egregious ones, I believe that although Picard will seek to claw back from it, the fund will still have a claim against customer property. (This, as I remember (I am in Florida without access to the relevant papers), was what occurred in the settlement with UBP (or was it UBS?), where the claim Picard recognized was, as I recollect, about 250 million dollars greater on a CICO basis than the payment to Picard from the bank.) So, at least where the fund or bank is a large one with the resources to pay Picard (as many likely are), it will get back from customer property sufficient monies to pay back their Madoff losses, on a CICO basis and maybe on an FSM basis, to its indirect investors (who (unlike directs) would have lawsuits against it, in all likelihood, if they are not paid by it). But what if a non innocent fund or bank is one of the egregious ones? I suspect Picard may not recognize its claim for customer property, so its indirect investors will not be able to recover in this way. If my views are correct about the necessary eff[...]

Comments On SIPC’s Answers Of January 24th To Questions Asked By Congressman Garrett.


February 11, 2011 A couple of people have asked for my reactions to SIPC’s January 24th answers to questions posed to it by Congressman Garrett. Because SIPC’s answers have now been made public, I am posting some slightly redacted comments I sent on January 28th to colleagues who are in or are working with NIAP.1. Pages 2, 13-14: In discussing Picard’s “compassion” and his hardship program, SIPC, as it often does, speaks in generalities (which courts, Congress, etc. too often accept without question). Here it is pretended that the hardship program is perfectly reasonable. Yet many victims, speaking of the information demanded of them, find the program deeply intrusive and violative of privacy. I think we should try to get an application to see for ourselves what is demanded and how intrusive the program is. Maybe some victims have and would give us “clean copies” of the applications that victims need to fill out. 2. The Trustee has reached settlements with some large institutions in which he has agreed to recognize their claims in return for payments to him of monies the institutions took out of Madoff. Yet these institutions would seem to be ones that at least “should have known” there was a fraud. Why did he agree to recognize claims of institutions which should have known something was wrong? Picard is implicitly saying that SIPA allows him to recognize the claims of the culpable, whose continuous shoveling of money to Madoff kept the fraud alive from 2000-2008 and thereby caused tremendous increased injury to a huge number of us. And why did Picard, conversely, refuse to recognize a claim on behalf of the Picowers? (I think it likely was because Picower himself was subject to criminal charges; also, his estate could have been sued under RICO.) And why did Picard not recognize a claim for Norman Levy, who, as the January 24th answers show, was a major Madoff player financially.3. Page 2: Picard will need approval from Lifland to distribute funds to customers and an application is being prepared. We know, however, that the impoverished will get little or nothing from customer property (and indeed will be subjected to clawbacks), and that the customers who will get money are mainly the very wealthy and hedge funds -- while Picard and SIPC claim all the while that this is equity. We should try to find out who the funds and banks are who will be receiving money. Intimately related to the distribution of money is the question of when will enough money be in Picard’s coffers so that possibly he could declare that a certain amount of it exceeds the “needs” of customer property and can be considered part of the general estate and used to pay fraud damages to victims. Also intimately related to the forthcoming request to distribute money, I am sorry to say, is the question of the identity of the judge. We should have every expectation that as long as Lifland remains the judge, anything Picard wants to do will be approved -- and quickly. He is, I think, totally biased in Picard’s favor -- Picard has, in fact, won everything in front of him as far as I know, except for some very minor aspects of major matters that Picard won, e.g., enlarging the number of potential mediators and removing Adele Fox’s name from an injunction that applies to her anyway. If Picard says it is equitable and legally required to claw money from the now-poor to give to the still-rich, and that this is equity, Lifland will agree. (My experience with Lifland last Tuesday only reconfirms my views about his unshakeable bias in Picard’s favor.) Similarly, Lifland will automati[...]

Appellant Briefs and Addendums Filed in Second Circuit.


Below is the link to my appellant brief and reply brief and addendums which were filed in the Second Circuit.

Larry Velvel

The Trustee’s Complaint Against JP Morgan.


The Trustee’s Complaint Against JP Morgan Chase.February 9, 2011 A few days ago, when I was just beginning to read the Trustee’s complaint against JP Morgan Chase, I posted the fairly dramatic introduction to the complaint. Having now read the entire complaint, I would like to add a few comments. The factual allegations of the complaint are essentially divided into three parts: facts related to JPMC’s sale of so-called “structured products” that would put investors’ monies into Madoff, facts related to the 703 account, which was the account into which and from which purported investment monies flowed, and loans made by JPMC. There were different JPMC groups and persons dealing with differing aspects, but the complaint says, and illustrates, that they were in touch with each other. Information, it seems, was not rigidly compartmentalized, but shared. Of course, due to the heavy redaction which still exists in the complaint, especially of names, it can sometimes be a bit challenging to track what is going on or who was talking to whom, but still it all seems fairly comprehensible. I shall not discuss the question of what was known by the developers and sellers of structured investment products, whose knowledge, if I understand the complaint, was at appropriate times passed on to JPMC people in charge of the 703 account and of loans. This knowledge was pretty much, or even entirely, of the same kinds of red flags first publicly revealed by Harry Markopolos and subsequently revealed to have been known by lots of people on Wall Street, though not to us innocent dupes. I speak here of such matters as concern, or potential concern, over the identity and competence of Madoff’s auditor, over Madoff’s refusal to be interviewed thoroughly or to permit thorough due diligence, over the fact that he self custodied and there was no way to know whether purported trades actually took place, over Madoff’s refusal to name counterparties and funds’ consequent lack of knowledge as to who their alleged counterparties were, over the fact that the business was operated at every level by members of Madoff’s family, over the lack of knowledge of how Madoff secured his results and the inability of any experts on Wall Street to “reverse engineer” those results, and over a possible connection of feeders to Colombian drug gangs. As well as the foregoing red flags that were widely known on Wall Street, there were some other points relating to Morgan’s structured investments business. A Morgan executive was specifically told at lunch that there was a large cloud over Madoff because he was suspected of a Ponzi scheme. There also was concern because other investment schemes -- Refco and Petters -- had been exposed as Ponzi schemes, and, as has been said elsewhere, JPMC got sufficiently concerned about Madoff that it redeemed the money from its structured investments, taking a loss that would not have made sense but for its concerns. It also sought secrecy for this redemption from funds involved with its structured products -- which cannot have been a good sign; notified a British regulatory agency about its suspicions that Madoff was a fraud; and warned off its private bank customers from Madoff -- while continuing to service and make gazillions off the 703 account into which and from which we dupes were putting money and withdrawing what we thought were legitimate profits. There equally are a raft of allegations regarding the 703 account, which started at Chemical Bank (my first checks went to Chemical), became part of Chase when C[...]

Trustee's Complaint on JP Morgan


February 4, 2011Dear Colleagues: I have begun to read the newly unsealed complaint filed by the Trustee against JP Morgan Chase. When finished, I may or may not write about it -- I haven’t yet decided. But I do think that all of you should be given an opportunity to read the complaint’s (fairly dramatic) introduction, especially since the media seems to have missed (as usual) some significant aspects of it. I have therefore appended the first five pages of the complaint.Larry VelvelIrving H. Picard (“Trustee”), as trustee for the substantively consolidated liquidation of the business of Bernard L. Madoff Investment Securities LLC (“BLMIS”) under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. (“SIPA”), and the estate of Bernard L. Madoff, by and through his undersigned counsel, as and for his Complaint against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities Ltd. (collectively, “JPMC” or “Defendants”), states as follows:NATURE OF THE ACTION“‘But the Emperor has nothing on at all!!!’ said a little child.”Hans Christian Andersen, The Emperor’s New Clothes“For whatever it[’]s worth, I am sitting at lunch with [JPMCEmployee 1] who just told me that there is a well-known cloud over thehead of Madoff and that his returns are speculated to be part of a [P]onzischeme.”[JPMC Employee 2], Risk Officer, InvestmentBank, JPMC, June 15, 20071. The story has been told time and time again how Madoff duped the best and thebrightest in the investment community. The Trustee’s investigation reveals a very different story—the story of financial institutions worldwide that were keen to the likely fraud, and decidedly turned a blind eye to it. While numerous financial institutions enabled Madoff’s fraud, JPMC was at the very center of that fraud, and thoroughly complicit in it.2. JPMC was BLMIS’s primary banker for over 20 years, and was responsible forknowing the business of its customers—in this case, a very large customer. JPMC is asophisticated financial institution, and it was uniquely situated to see the likely fraud. Billions of dollars flowed through BLMIS’s account at JPMC, the so-called “703 Account,” but virtually none of it was used to buy or sell securities as it should have been had BLMIS been legitimate. But if those large transactions that did not jibe with any legitimate business purpose triggered any warnings, they were suppressed as the drive for fees and profits became a substitute for common sense, ethics and legal obligations. It is estimated that JPMC made at least half a billion dollars in fees and profits off the backs of BLMIS’s victims, and is responsible for at least $5.4 billion in damages for its role in allowing the Ponzi scheme to continue unabated for years, with an exact amount to be determined at trial.3. In addition to being BLMIS’s banker, JPMC also profited from the Ponzi schemeby selling structured products related to BLMIS feeder funds to its clients. Its due diligence revealed the likelihood of fraud at BLMIS, but JPMC was not concerned with the devastating effect of fraud on investors. Rather, it was concerned only with its own bottom line, and did nothing but a cost-benefit analysis in deciding to become part of Madoff’s fraud: “Based on overall estimated size of BLM strategy, . . . it would take [a] . . . fraud in the order of $3bn or more . . . for JPMC to be affected.” JPMC also relied on the Securities Investor Protection Corporation (“SIPC[...]

The President Who "Makes Nice" And Lacks Judgment.


November 4, 2010The President Who “Makes Nice” And Lacks Judgment. For nearly two years the Madoff affair has made it very difficult for me to find time to write political blogs. That still remains true. But I shall write a short one here because of longstanding concerns, which can only become worse in view of the smashing victory for arch conservatism on November 2nd. Two years ago I thought Obama was one of the smartest men, and conceivably the best speaker, ever to enter the White House. Today my main impression is that, for all his intellectual smarts, he is horribly lacking in judgment. Crassly put, he is a fool. The conservative wing of the “national” Republican Party -- which today is a major share of that party if not all of it -- made clear early on that it had but one overarching goal: defeat Obama’s plans. To that end the national wing of the Party was willing to say and do almost anything. Obama’s response was to try to “make nice,” to say he wanted to work with and cooperate with people who did not give a fig for cooperation, but wanted only to savage him and his policies in order to get back into national power and who therefore said that failure to do what they wanted done on the national scene was ipso facto a failure to allow them to participate in structuring policies. Apparently being a prisoner of his own background, in which his golden tongue enabled him to overcome opposition and to get ahead at least from the time he entered law school at Harvard, Obama failed to understand the obvious, failed to understand what anyone who has ever faced bitter, unyielding opposition would understand immediately: there are people with whom it is profitless to try to “make nice” because they wish to fight you bitterly no matter what, no matter how much you wish to “make nice” with them and to compromise with them. Now that the national Republicans have handed him his head, Obama still wants to “make nice” with them. For all his intellectual smarts, Obama just didn’t get it and doesn’t get it. He lacks judgment. Of course, he and his acolytes will say he is simply trying to be politically cooperative and to achieve his ends that way. Forget it. The Republicans who lead the national Republican Party want his derriere out. They will savage him and his policies, and blame him and his policies for everything wrong in the country, until, as they just did for the last two years, they have the country angry at him (as at present) and are able to “diselect” him in 2012. That is their goal and all else -- including the good of the country -- is secondary to them, even if Obama doesn’t understand this. Then there are his policies, which too often lack good sense, although the points on which they lack good sense are usually not the ones on which the national leaders of the Republican Party assail him. I used to think that a lot of the opposition to him was pure racism, no matter how much people denied this. I still think that, with regard to a lot of his opponents, racism is deeply involved. But it is pretty plain that racism is a long way from being the whole story, because some of his most important policies simply lack sense. He has listened to fools like Summers and Geithner, to Wall Street and big business, and to the generals, instead of taking the obviously sensible courses. Take the bailouts, for example. Money has gone by the hundreds of billions and trillions to Wall Street and big business, where profits and bonuses are ag[...]

The Information Provided To Congress By SIPC. Part II.


September 24, 2010The Information Provided To Congress By SIPC.Part II. D. SIPC was not asked, and nowhere does it say, how much money was earned in interest from Treasuries and money market funds into which Madoff put the money in the Chase/JPMC account, or how much, if any interest, was earned from Chase and JPMC themselves. To learn these numbers is essential because the interest, as explained above, is the equivalent of cash-in and must be credited to investors’ accounts under CICO, which Picard has not done. If the Second Circuit upholds the use of CICO, there should be attempts to obtain these numbers via discovery. If Lifland again denies discovery, as he denied it previously, this would form one basis for appeal from his next decision on the net equity question. The amount of interest could, in toto, be a very significant sum. Though the chart of annual cash-in and annual cash-out provided by SIPC from 1992 onward gives rise to certain speculations discussed below, it nonetheless makes clear that there sometimes had to be many billions of dollars -- even tens and scores of billions of dollars -- in Madoff’s account, especially from 1995 onward. The total amount of interest earned could have been quite large (and was surely stupendous if Chase and JPMC were themselves paying interest on the account). If the Second Circuit decides in favor of SIPC and Picard on the net equity question, and Congress does not enact a provision that net equity must be gauged by the FSM, it will be essential to seek discovery on this question upon remand to Lifland’s court. If Lifland refuses discovery, which seems to be his want (he is after all deeply biased in favor of SIPC and Picard*), this could, as said, be a basis for appeal. (In fact, the interest earned from Treasuries, money market accounts, etc. should be added to investors’ accounts under the FSM too, because it was earned with their money. Victims could justifiably demand this money from customer property, and seek discovery about it, if the FSM is used, just as they can under CICO.) E. SIPC says there were “90,000 disbursements totaling $18.5 billion made to Madoff investors in excess of their investments.” (P. 5.) Whether this means during the entire course of the scam, or only during the six year period prior to December 11, 2008 -- the maximum possible period for avoidance actions -- is not said. If the latter, this would mean that on average there were 15,000 such disbursements per year, or an average of 1,250 per month. If the former, it would mean there were on average about 5,300 per year, averaging about 450 per month. I find it hard to say which is more likely, and, if SIPC is referring only to the last six years before December 2008, there also would obviously be many disbursements above investment before the last six years. Thus, regardless of which SIPC means, there are likely to be many current or prior Madoff investors who, by December 11, 2002 (six years before the fraud was disclosed) had taken out more than they put in. Yet, because of statutes of limitations this “excess” is beyond the reach of avoidance suits unless the investors were negligent or complicit -- and it is probable that only wealthy investors and/or institutions were negligent because they had sufficient money to do due diligence that would have uncovered the fraud, and therefore can be sued for “excess” monies they took out before December 11, 2002. It is quite important to try to find ou[...]


September 23, 2010The Information Provided To Congress By SIPC.Part I. As many of you know, this lawyer asked for discovery before Judge Lifland in the Bankruptcy Court. Lifland denied the requested discovery in terms that made clear he would allow no discovery on anything, although a complete denial of any and all discovery on what lawyers call a “summary judgment” proceeding is, I think, unheard of -- literally unheard of. The purpose of discovery is, of course, to find out what the actual facts are, so that neither an opponent nor the court will have to depend upon a party’s self interested, unplumbed claims of what the facts are. After making clear that there would be no discovery to learn what the actual facts are, Lifland then accepted and used versions of the facts put forth by SIPC and the Trustee. This too has been discussed in blogs and briefs, as has the fact that, even without discovery to learn the truth, we already know that various of the factual claims of SIPC and the Trustee are flat wrong and others are dubious, and that there is other vital information that we do not yet know because SIPC, the Trustee and the U.S. Attorney are keeping it secret. To my embarrassment, however, I must say that I failed to identify what is one of the most important points yet mentioned in regard to matters that could have been brought out by discovery. Thankfully, David Bernfeld identified it. The monies that came in from his scam were in Madoff’s Chase (and then JP Morgan Chase (JPMC)) bank account. These monies were sometimes invested in Treasuries and money market funds, which earned interest. (They may have obtained interest from Chase and JPMC also -- I do not know.) The interest should have been credited to Madoff’s investors. Because these monies belonged to investors, they were defacto -- and even de jure, I think -- the equivalent of cash-in, of cash put into Madoff by investors. But in calculating investors’ cash-in, SIPC and Picard did not credit investors with these monies which they had a right to be credited with. To make it simple, think of it this way: had Madoff actually invested investors’ monies in stock which paid dividends and appreciated in value, the dividends and appreciation would have to be credited to investors. The same is true of earnings from Treasuries, money market funds, and interest from JPMC. Almost a year after Lifland, in serious violation of law, denied discovery, the Kanjorski Subcommittee submitted questions to SIPC. Many of those questions not only elicited what Congress needs to know, but also bore on what litigants wanted to know and to present to courts, since it is quite common for Congress and the courts to need and to seek the same information in order to properly perform their duties and make proper decisions. (Think Watergate.) The Subcommittee sent its questions to SIPC on August 30th. SIPC answered them on September 7th. SIPC’s answers, which also state the subcommittee’s questions can be accessed by clicking here: you will see by reading them, SIPC’s answers are filled with self justifying verbal explications -- often identical to what SIPC and the Trustee have said in briefs -- intended to put a gloss on facts it has presented. As well, the answers omit certain important information -- sometimes because the questions it received did not request it -- and make it clear that additional information is needed with respe[...]

Addendum to Post of September 21, 2010


SEPTEMBER 21, 2010

I have just received, from the Syracuse Athletic Department, the figures on the points scored by and against Syracuse in 2008, the last year Greg Robinson, who now coaches Michigan’s defense, was Syracuse’s head coach. The awful tally is 217 points scored by Syracuse and 392 scored against it.

As I keep saying, oh God.

Larry Velvel

The One (or Two) Dimensional Coach.


September 21, 2010The One (or Two) Dimensional Coach. Here is a trick question: How many Michigan quarterbacks are starters this year? The answer is at least three. There is, of course, the fabulous Dennard Robinson. But Steven Threet (speaking of three), who left Michigan after being a starter some of the time in Rich Rodriguez’s first year if memory serves, starts for the Arizona State team that just lost to Wisconsin by only one point, and the strong armed Ryan Mallett, who left Michigan as soon as Rodriguez was named its coach, starts for the Arkansas team that just defeated Georgia. Their presence on these other teams is a tribute to the havoc caused by Rodriguez when he took over Michigan. (Some major lineman whose name escapes me also left and became a starter for Ohio State -- not exactly a small time team.) But so what, you say. It took Rodriguez awhile to recruit his kind of players, now he has done so, and look at the results. Well, the results are a marvelous offense, at least so far, and I would think that success likely to continue even when Michigan starts playing Big Ten teams. But the defense, oh my God, the defense. Perhaps the best way to describe the defense is to ask, what defense? Not to mention what appears to be the complete absence of any kickers whatever. The defense has been awful ever since Rodriguez began at Michigan, and it remains awful. One has to believe that, notwithstanding its offense, Michigan is going to lose a number -- even a lot -- of Big 10 games because of the sheer horribleness of its defense. Even given the likely continued excellence of the offense, how can Michigan beat, say, Iowa, Ohio State, Wisconsin, Penn State or perhaps Michigan State, with a defense that stops nobody. And what if, heaven forefend, Dennard Robinson were to be injured and unable to play, so that there might be little offense because his backups are not nearly as capable as he, at least not at this point and maybe never. If that were to happen, Michigan might be lucky to win any Big Ten games. And who did Rodriguez hire to run his defense. Greg Robinson, a guy who compiled such a bad record as head coach at Syracuse that he got fired after four years there. Now the defense is in its second year under Robinson and should have learned something, but apparently is worse than ever. If you want to really grasp the unbelievable coaching ineptitude of the guy hired to run Michigan’s defense, listen to this: Robinson was the head coach at Syracuse from 2005-2008. His wins and losses, and the points scored by and against Syracuse, are posted on the Syracuse Athletic Department’s website from 2005-2007. (For some reason 2008 is not posted but we found the 2008 won/lost record elsewhere.) Robinson’s record was one win and ten losses in 2005, four and eight in 2006, two and ten in 2007, and three and nine in 2008, for a total of ten wins and 37 losses. Equally to the point since this coach with such a terrible record was hired to be Michigan’s defensive coach was the record of points scored by Syracuse compared to the points scored against it. Here the totals from the website in 2005, 2006, and 2007 respectively were 152 by Syracuse and 295 (almost double) against in 2005, 219 by Syracuse and 285 against in 2006, and 197 by Syracuse and 418 (more than double) against in 2007. And Robinson is the guy who is in charge of Michigan’s defen[...]