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Enter your name and email address below: SIPC from 1992 onward gives rise to certain speculations discussed
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PREVIOUS POSTS
The Information Provided To
Congress By SIPC. Par...
September 23, 2010 The
Information Provided To Co...
Addendum to Post of September
21, 2010
The One (or Two) Dimensional
Coach.
SIPC Task Force
The Foreign And Domestic
FRIDAY, SEPTEMBER 24, 2010
The Information Provided To Congress By SIPC.
Part II.
September 24, 2010
The 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
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
GO 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
The Foreign And Domestic
Indirects.
Judge Lifland's Opinion On Net
Equity.
More On SIPC’S And The Trustee’s
Bubbe Meisse. Pl...
More On The Bubbe Meisse of SIPC
and The Trustee
Comments On The Hearing Of
February 2nd Before Jud...
ABOUT DEAN VELVEL
Name:Lawrence Velvel
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Dean Velvel, an honors graduate
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 out just how much in “excess
withdrawals” were made before December 11, 2002 and are not subject
to avoidance suits. For SIPC and the Trustee claim that “fairness” -- at
least their crabbed, narrow-minded concept of it, under which fairness
requires that advances and customer property be denied to people now
living in poverty so that more from customer property can be given to
the rich -- requires the use of CICO, which, as just indicated, denies
advances and customer property to the small person so that more
customer property will be available to wealthy persons and rich
institutions. SIPC and the Trustee are thereby placing a major financial
burden of the fraud on small innocent investors who withdrew more
than they put in, while leaving untouched investors who did the same
and got out of Madoff more than six years before December 11, 2008.
In other words, their concept of “fairness” is that if you got out in time
you’re safe, and if you didn’t get out in time you’re screwed -- and this
in addition to their anti Robin Hood conduct of taking from the poor to
give to the rich.
In combating this distortion of values arising from the use of CICO, it
would be useful to learn how many investors took out all their money
before December 11, 2002 and by how much did their withdrawals
exceed the amounts they put in. If necessary -- if the Second Circuit
rules for SIPA and Picard on net equity and Congress does not enact a
statute mandating that net equity be determined by the FSM, the
information should be sought in discovery.
F. There are a number of points in SIPC’S answers that relate to the
adequacy of its planning. To wit: SIPC says that since April 1, 2009 it
has been assessing members one-quarter of one percent per year to
build the SIPC fund. (This after a decade of assessing them only $150
per year -- even if they were Goldman Sachs or Merrill Lynch.) Its
“target” is to build the fund to $2.5 billion dollars, and “assessments
based upon a percentage of net operating revenue will remain in place
until” then. (P. 2.) When the fund is built to $2.5 billion, SIPC will have
access to $5 billion by combining the $2.5 billion fund with another
$2.5 billion line of credit available from the Government. Before March
1, 2009, SIPC had two revolving commercial lines of credit of $500
million dollars each (or a total of $1 billion) available from a
consortium of banks, but the banks, says SIPC, were “unwilling to
renew the credit lines, due to the developing financial crisis.” (P. 2.)
And SIPC says that “SIPC, under current law, has demonstrated that it
has sufficient resources for its statutory mission.” (P. 3.)
Many questions arise from this. Just how and why does SIPC calculate
that a $2.5 billion fund, combined with an equal sized Government line
of credit is enough? In 2003 some important Congressmen told SIPC,
after a GAO report, that it should think about increasing the funds
Dean Velvel, an honors graduate
of the University of Michigan Law
School, has practiced law in the
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been a law professor. He is the
author of the quartet Thine
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in the quartet are entitled: Misfits
In America, Trail of Tears, The
Hopes and Fears of Future Years:
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May 2004
June 2004
July 2004
August 2004
September 2004
October 2004
November 2004
December 2004
January 2005
February 2005
March 2005
available to it, but it declined to do so, claiming privately, as I gather it,
that actuaries had told them it had access to enough money. Did
actuaries tell it in 2009, after Madoff and Stanford, that $5 billion in
available money was enough? If so (or even if not), were the requisite
calculations based on a continuation of SIPC’s now 40 year old policy
of attempting -- successfully until now -- to screw investors by fighting
tooth and nail against paying them -- by pulling out all the stops in
negotiations and litigation to successfully avoid paying all but a small
percentage of claimants? What if SIPC is somehow forced by the courts
or Congress to change this fight-them-to-the-death policy which
destroys the intent of Congress? Will $5 billion still be enough?
(Personally, I think that, if there is to be a change in SIPC’s conduct, its
entire management and Board must be replaced. They have all been
complicit in SIPC’s conduct, and, without a clean sweep, one must fear
that nothing the courts or Congress can do will cause those who have
been part of SIPC for 35 years -- or have been associated with and
influenced by such persons -- to dramatically change their mindset and
conduct. Unfortunately, though, in Government or quasi government
people don’t get fired for performing their jobs terribly or destroying
Congressional intent.)
Moreover, if $5 billion is sufficient, why does half of it have to come
from the Government, which already has lots of calls for money? Why
shouldn’t it come entirely from the fabulously wealthy investment
business, which may have benefitted to the tune of hundreds of billions
or even many trillions of dollars from the existence of SIPC insurance -
- for which industry members paid the farcical sum of only $150 per
year per member for a decade or more? How big would the SIPC fund
itself get if, say, investment houses were required to pay one half
percent of net revenues into the fund, or one percent of net revenues
into it, for, say, ten years?
And just how has SIPC “demonstrated” that it has “sufficient resources
for its statutory mission”? Hasn’t any such demonstration been
dependent upon the policy of screwing investors out of advances, so
that relatively little money is paid out? Moreover, has SIPC told us the
full story of why a consortium of banks refused to renew a line of credit
to it? Did the banks possibly have concerns over what might happen in
the markets and over SIPC’s ability to repay them if disaster struck?
G. Here are two quick “semi-logistical” points.
SIPC says the average time period between the filing of a claim and the
determination of the claim, for the 13,189 claims that have been
determined already (out of a total of 16,374) is 7.55 months. It then
gives a bunch of excuses for taking 7½ months. But as you can see for
yourself by reading the excuses (on pp. 6-7 of its answers), the lengthy
time period, which contravenes Congress’ intent for prompt payment,
is due to use of CICO. CICO requires extensive calculation and work
that is unnecessary under the FSM.
Moreover, to a certain extent -- actually to a major extent -- SIPC is
lying with figures here. It says it has determined 13,189 claims. But it
also says later that there were 8,489 claims (of the 13,189) that were
denied because the claimants had no accounts at Madoff, i.e., were
indirects. It should have taken about one day to determine an indirect
claim, since they are denied out of hand. Since the average period for a
determination is 7½ months, and the indirect claims that are currently
deniable out of hand -- in a day -- are roughly two-thirds of all the
claims that have been determined, this further evidences how much
delay there has been in determining direct claims -- even where they
have been determined. And one would bet that most of the 3,185
claims remaining to be determined are directs’ claims.
March 2005 Beyond this, SIPC’s answers give the average period between the filing
April 2005 of a claim and the determination of the claim, not the time between the
filing of a claim on which SIPC admits it owes some amount and the
May 2005 payment of the claim. If we were to learn the average time between
June 2005 filing and payment, you can bet it would be more than 7½ months.
Ultimately it is likely to be years. This is what Congress meant when it
August 2005 said it wanted SIPC’s payments to be prompt?
September 2005
SIPC also says, in an effort to show how caring it is towards people who
October 2005 are suffering greatly, that “Hundreds of customers filed hardship
November 2005 applications” seeking quick payments, and ‘many” of these were
granted. (P. 7.) “Many” is a lawyer’s weasel word. (Twenty would be
December 2005 “many.”) SIPC does not say how many were granted. It does not give a
January 2006 specific number, which it obviously knows. Instead it weasels. This is a
sign that the number of hardship applications it granted isn’t very high.
February 2006
March 2006 H. Finally, SIPC has set forth a chart showing the annual cash put in
and the annual cash taken out for each year from 1992 through 2008.
April 2006
Most of the time the annual cash-in and cash-out are pretty close,
May 2006 although there were a few years when cash-out exceeded cash-in by
(usually) a small amount, so that a certain amount of the cash-out had
June 2006
to come from “reserves” from prior years. But discrepancies between
July 2006 annual cash-in and cash-out appear to have become significant,
August 2006 sometimes in one direction and sometimes in the other, from 2003
onward, with about $2.8 billion more in cash-in in 2007 and $4.25
September 2006 billion more in cash-out in 2008.
October 2006
But eyeballing the chart as a whole (eyeballing, rather than carefully
November 2006 comparing all numbers), one gets the impression that much of the time
December 2006 the cash-in and the cash-out were reasonably close. This likely
indicates that in the years of reasonable closeness Madoff was taking
January 2007 out for himself and his cronies -- Picower, Chais, probably Norman
February 2007 Levy -- an amount that was approximately equal to the difference
between the year’s cash-in and the final total of cash-out for the year.
March 2007 Otherwise, could there have been the degree of correspondence which
April 2007 often existed between annual cash-in and annual cash-out?
May 2007 I don’t know what this never-previously disclosed information in the
June 2007 chart tells us of importance about Madoff’s scam, except perhaps that it
reinforces a point that is prevalent throughout the Madoff case, is very
July 2007
important, and is almost never remarked. It could well by my own
August 2007 ignorance, but I don’t ever remember another major crime as to which
so little underlying information has been publicly disclosed and was
September 2007
publicly known nearly two years after the crime and over a year after
October 2007 the major culprit went to jail. The Trustee, SIPC, and the U.S. Attorney
November 2007 are keeping things secret as much as they can, sometimes claiming
secrecy is necessary for their success, a bovine defecation claim that
December 2007 government and quasi government bodies often make, usually falsely.
January 2008 But victims are being really hurt by this common bovine defecation
because they do not have access to information they need to further
February 2008 their efforts to recover lost funds -- as shown by the usefulness to
March 2008 victims of other information discussed here that was revealed only in
SIPC’s (sometimes hide-the-ball) answers of September 7, 2010. I have
April 2008 written many times in blogs, books and elsewhere that secrecy (and
May 2008 associated falsity) is the most serious problem human beings face,
since people are usually able to figure out what to do when they know
June 2008 the facts. It is no different here.
July 2008
August 2008 *Thus, Lifland instantly approved Picard’s staggeringly huge requests
September 2008 for fees and expenses. Fees are now up to somewhere around 88 or 90
million dollars as of four months ago (as of May 31, 2010).
October 2008
November 2008 POSTED BY VELVEL AT 9/24/2010 08:59:00 AM LIN K S TO THIS PO S T
December 2008
THURSDAY, SEPTEMBER 23, 2010
January 2009
February 2009
September 23, 2010
March 2009
April 2009 The Information Provided To Congress By SIPC.
May 2009 Part I.
June 2009
July 2009
As many of you know, this lawyer asked for discovery before Judge
September 2009 Lifland in the Bankruptcy Court. Lifland denied the requested
discovery in terms that made clear he would allow no discovery on
October 2009
anything, although a complete denial of any and all discovery on what
November 2009 lawyers call a “summary judgment” proceeding is, I think, unheard of --
December 2009 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
January 2010 have to depend upon a party’s self interested, unplumbed claims of
February 2010 what the facts are.

March 2010 After making clear that there would be no discovery to learn what the
June 2010 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
September 2010 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:
http://bit.ly/9HwWCZ

As 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 respect to
some of the answers SIPC gave. Nonetheless, the answers do provide
significant, important, often previously undisclosed information that
should be discussed in presentations to Congress, to the courts, and to
the media.*

A. To begin with, SIPC’s answers show that it has, or has ready access
to, nearly double the amount of money it would need to pay direct
investors under the final statement method (FSM). SIPC’s fund, as of
August 1 (the date as of which the subcommittee sought answers),
stood at $1.2 billion. It also had access to a $2.5 billion line of credit.
So its total available funds were $3.7 billion. Under the FSM it would
have to pay $2.01 billion in advances. So it has access to $1.6 billion
more than, or about 180 percent of, what it would have to pay in
advances under the FSM.

Moreover, SIPC expects that during the remainder of 2010 and 2011 it
will take in another $500 million for its fund from the industry. This
will bring its available monies to a total of $4.2 billion, or precisely
double what it would have to pay directs in advances.

When the imbroglio with SIPC and the Trustee began, some of us
thought they were using cash-in/cash-out because of fear that
otherwise SIPC would not have enough money for advances. Our view
may or may not have been true, but in any event it has now been
overtaken. SIPC already has and/or will have nearly twice the amount
or twice the amount (depending on the date one uses) that it would
need under the FSM to pay advances to all direct investors.

Moreover, by continuing to use cash-in/cash-out (CICO) even though it

has way more than enough to cover directs under the FSM, SIPC is
attempting to save itself another $1.130 billion. For the amount of
advances to which it has already committed under CICO is $713
million, and it expects to pay another $175 million in advances for a
total of $888 million. $888 million is $1.130 billion less than the $2.01
billion it would have to pay under the FSM. SIPC appears to be trying
to enrich itself by this amount instead of paying it to devastated
investors: as discussed in an email of August 26th, Picard said, on page
50 of his Third Interim report, that he is trying to recover money to
give to SIPC. This is further discussed below.

(I do not know what the changes in the numbers would be if indirect

investors received advances under the CICO or FSM. All I can say for
sure is that SIPC’s answers say it disallowed 8,489 claims of “claimants
who had no account at Madoff,” and an additional 2,094 claims (or a
total of 10,583) are tentatively in this category, but conceivably could
be recategorized. (Anybody wanna bet on that?) Since there were
“only” 4,459 claims by direct investors, the changes in numbers would
likely be dramatic if indirects are eligible for advances from SIPC. But
the information needed to know the amounts of the changes was not
asked for by the subcommittee nor given by SIPC.)

B. Although the celebrity-driven media has focused on the rich and

famous who lost gazillions with Madoff, it is clear that a significant
percentage of Madoff’s investors were small investors. Many of them
are being hurt terribly. Under CICO, 1,204 of 2,319 accounts potentially
eligible for a SIPC advance, or over half, are less than $1,000,000, with
an average account value of about $318,000. (A combined value of
$382 million divided by 1,204 accounts equals about $318,000 per
account.) Another 626 of the 2,319 accounts, or another 25% of them,
are between $1,000,000 and $3,000,000, with the average account
value being approximately $1,751,640. (A combined value of $1.96
billion divided by 626 accounts.) There are only 138 potentially eligible
accounts worth more than $10 million. So plainly, as said, most
investors were small or reasonably small, with averaged figures
showing that half are worth $318,000 or less.

The same story is told if one looks at the numbers of accounts

potentially eligible for an advance from SIPC under the FSM. Here
1,485 accounts out of a total of 4,450, or about one-third, are worth
less than $1,000,000, with an average value of about $456,000. (A
combined value of $670,889,986 divided by 1,485 accounts.) Another
1,372 accounts, or about another 30 percent, had a value between
$1,000,000 and $3,000,000, with an average value of about
$1,860,129 dollars. (A combined value of $2,552,097, 200 divided by
1,372 accounts.) Thus a total of 63 percent, or nearly two-thirds, were
small or reasonably small investors, with one-third the accounts on an
averaged basis being worth $456,000 or less. Only 499 accounts are
larger than $10 million.

Thus it is plain, as said, that most accounts were those of investors who
ranged from very small to what might be considered the upper edge of
small ($3,000,000), with a reported average per all allowed claims,
according to SIPC, of $375,671 -- which means that on average SIPC is
not paying out even the full maximum of $500,000 per claim. Of the
allowed claims under CICO, 1,330 were for more than the maximum
payment of $500,000 and 845 were for less. The average allowed
claim, as said, is $375,671, or over 20 percent less than the maximum
allowed advance from the SIPC fund.

As well, the allowed claims number only 2,175 under CICO. Under the
FSM they would number 4,459, or 2,284 more. So in addition to
paying, under CICO, more than twenty percent less than the maximum
allowable, by using CICO rather than the FSM SIPC has shed itself of
over 50 percent of the otherwise allowable claims of direct investors.

C. SIPC says there were “approximately 90,000 disbursements totaling

$18.5 billion made to Madoff investors in excess of their investments”
(P. 5). It says the Trustee has brought 19 avoidance actions seeking to
recover about $15 billion, and it then says, in answer to the
subcommittee’s inquiry about future avoidance actions, that the
Trustee (i) is considering “approximately 1,000 possible avoidance
actions,” against persons who had no knowledge of the fraud, “that
could result in the recovery of approximately $4,800,000,000.00 for
the benefit of creditors who have yet to recover their principal,” and (ii)
is considering another approximately “100 avoidance actions,” against
persons who “had enough information to be on inquiry notice of the
fraud,” “seeking the recovery of at least $2,000,000,000.00 for the
benefit of customers who have yet to recover their principal.” (P. 5.)

These statements have some crucial implications. One is that, despite

any past protestations indicating the possible contrary, the Trustee is
thinking about going after small investors who had no idea that there
could be a fraud here. For as said above, very large percentages of the
accounts are small fry, and it was small fry who were most likely to not
have a breath of suspicion that there could be a fraud. Also, although
the Trustee’s figures play hide-the-ball on the question, I think it is
possible that someone more adept at mathematics than I could pierce
the ball-hiding and, by putting together various figures which appear in
different places, could calculate how many of the 1,000 potential
avoidance suits against innocent people would involve small investors.
We can feel pretty confident it would be a lot.

Of course, it would be very valuable to have exact figures from SIPC,

figures such as precisely how many of the 1,000 people who are
innocent had accounts of less than one million dollars, how many had
accounts of between one and three million dollars, how many had
accounts of three to five million dollars, and ditto for five to ten million
dollars and over ten million dollars. SIPC could produce this with the
touch of a computer button, and it is probably a sure thing that the
results would show that a major preponderance of the 1,000 persons
are small fry.

As well, if the same exercise were performed for Congress by SIPC with
regard to the possibly non innocent 100 who may have avoidance suits
brought against them, it is dollars to doughnuts that the result would
show that a large percentage of them are big investors: are hedge funds
or banks or wealthy individuals with tens to scores of millions of
dollars that were invested. It is after all, large players -- hedge funds,
banks, etc. -- that had the capability to figure out that something must
be wrong.

All of this brings up a curious point. SIPC says that from the 1,000
innocent people whom the Trustee may sue and who are likely to be
small investors, he could recover $4.8 billion dollars; while from the
100 persons with possible knowledge, many of whom are likely to be
large investors, he may recover at least $2 billion -- or only a bit over
40 percent of what he could get from the smaller investors. Even
understanding that the Trustee’s 19 avoidance actions to date are
mainly or exclusively against large investors, the imbalance between
seeking another $4.8 billion from mainly small people but only another
$2 billion from mainly large people, when coupled with the idea that
very large investors were often so wealthy that they did not have to take
cash out of Madoff to pay taxes, to live, etc., gives credence to those
who have said in recent months that the Trustee, contrary to Robin
Hood, is taking money from the poor to give to the rich.

Here is another matter of consequence stemming from SIPC’s points

about additional avoidance actions. Picard is currently seeking $15
billion in such actions and may seek another $6.8 billion (or a total,
rounded off, of $22 billion). What would happen if he obtained all this?
Or even if he obtained only half of it? -- he has said he thinks he’ll get 9
or 10 billion. Well, one thing that would happen is that SIPC might get
filthy rich (or filthier rich). Picard has said that his working number of
the amount of cash-in to Madoff from victims was, at the end, $19 or
$20 billion. Let’s call it $20 billion for ease of figuring. SIPC’s answers
say that the already allowed claims under (CICO) total 4.55 billion. (P.
3.) The Trustee, SIPC says, expects to ask SIPC to give him money to
pay another $175 million in advances, but as near as I can see does not
tell us the total amount of the claims for which he will seek $175
million for advances. But we know that 2,175 allowed claims had a total
account value of $5,556,299,243, and involved a total of $713 million
in advances. For horseback purposes we can figure that advances of
$175 million will involve roughly $1.2 billion in total claims, since $175
million in advances is roughly one-fourth of $713 million in advances
and 1.2 billion in total claims is roughly one-fourth of $5.55 billion in
total claims. Thus, the total claims under CICO will be about $6.75
billion ($5.55 billion plus $1.2 billion).

$6.75 billion is considerably less than the nine or ten billion Picard
said he expects to recover, and even considerably less to a far greater
extent than the amounts he could recover under SIPC’s figures,
amounts ranging up to $22 billion. What will happen to the extra
money? Well, SIPC will get a bundle of it. Under the statute, customer
property is allocated first to SIPC “in repayment of advances . . . to the
extent such advances recovered securities which were apportioned to
customer property.” I long thought SIPC was very dubiously
interpreting this provision defacto to mean SIPC recovers advances
even when the advances were not made “to recover securities,” but only
to pay victims in cash. But SIPC’s brief in the Second Circuit does not
interpret it this way, at least not now. If the first allocation provision
were to be interpreted as I thought SIPC previously was doing, then,
out of the recovered customer property that can range anywhere from
about $6.75 billion to $22 billion, SIPC would get $888 million dollars
that it will have paid in advances.

Next in line under the statute - - the beneficiaries of the second

allocation provision - - are customers who have a positive net equity.
Their claims will amount to $6.75 billion ($5.55 billion plus $1.2
billion) minus the amount they would already have received in
advances (or $888 million), or $5.862 billion.

So, thus far $6.75 billion in customer property is accounted for ($888
million in advances plus another $5.862 billion to cover the remainder
of the total value of the accounts having positive net equities). What
about the remainder of the nine or ten billion dollars Picard expects to
receive (or the amounts up to $22 billion that he could conceivably
recover)? Well, I gather SIPC would obtain either $6.75 billion to cover
all the money it paid to customers if it did not get money under the
first allocation provision, or another $5.862 billion if it did (for a total
of $6.75 billion). For under the statute, after the customers are repaid,
SIPC now gets money as “subrogee for the claims of customers.” I
assume this must mean the claims of customers who received money --
i.e., those with a positive CICO net equity -- because how could SIPC be
a subrogee to a claim of someone who did not receive money? So SIPC
will, as said, get either $6.75 billion or another $5.862 billion.

SIPC is also fourth in line, for allocations though this time its position
seems meaningless. Here SIPC is reimbursed for delivering “customer
name” securities (I presume as opposed to street name securities) to a
customer. But SIPC hasn’t delivered any customer name securities to
anybody as far as any of us know, so being fourth in line is irrelevant.

Any money remaining from customer property will then go into the
general estate. Who will get this money from the general estate is
unknown to me and, as far as I know, neither SIPC nor Picard have
ever said. Customers (i.e., investor victims) can share in it only to the
extent they have unsatisfied net equities. So the general estate is in this
regard irrelevant to directs because they either have negative net
equities under CICO or, if they have positive net equities, their entire
claim will have been satisfied under CICO. So who will get the money?

I know no bankruptcy law, which I presume would govern the

question, but, though admittedly ignorant in the field, would assume
the money would go to creditors to the extent that there are creditors.
Would the indirects have claims as creditors although they are not
currently regarded as customers? Would directs have a claim as
creditors even though they have a negative net equity? And if indirects
or any or all directs have claims against the general estate as creditors,
is the claim for the amount shown on their final statements? After all,
Madoff owed them the amounts on their statements, as was shown by
the fact that before the fall he would pay the amount shown on the
statement to an investor who closed his account.

The bottom line is that who may get what from the general estate is
unknown. But, with regard to recipients of money in categories that
come before the general estate, SIPC will get a bundle while penurious,
wiped out small investors will get, as it is said, bupkis.

Of course, if the FSM were used instead of CICO, then SIPC would have
to pay $2,010,467,854 in advances, and might recoup that as first in
line for customer property if SIPC can recover for advances not used to
recover securities. If this assumption, which I thought was previously
indulged by Picard and SICP is wrong, as SIPC’s brief seems to
implicitly admit, then SIPC might very well get nothing rather than two
billion dollars. For the customer property would go to victims – at least
it would go to direct investors; the direct investors may represent a
very large dollar amount of the $57 billion that SIPC’s analysis says is
the total amount owed to customers (which “excludes the potential
results of settlements”); and there might therefore be nothing left for
SIPC. (P. 6, n.1.) So SIPC’s situation would be far less favorable to it
under the FSM than under CICO, a fact which you can bet has not
escaped either Harbeck or Picard.**

*Parts I and II of this posting were both completed before the

Kanjorski Subcommittee hearing of September 23rd. If that hearing
requires any additions or changes to the post, I will try and discuss
such points in a later posting after receiving the transcript of the
hearing.

**SIPC’s figure of 57 billion dollars in potentially eligible claims under

the FSM does not in terms include indirects. For the claims of indirects
are not currently eligible for SIPC benefits. The questions asked of
SIPC by the subcommittee inquired as to how many claims were
disallowed because they were indirect (Question 9), but did not ask
what the aggregate size of those claims is. On the other hand, to the
extent that claims were submitted to Picard by the banks, hedge funds,
pension plans, etc., in which the indirects invested, the indirects’
claims are part of the 57 billion dollars because the claims submitted
by each of the investment vehicles (each fund, bank, etc.) would
presumably include all the indirect monies invested in the vehicle,
turned over to Madoff, and lost when the Ponzi scheme collapsed.

POSTED BY VELVEL AT 9/23/2010 12:21:00 PM LIN K S TO THIS PO S T

WEDNESDAY, SEPTEMBER 22, 2010

Addendum to Post of September 21, 2010

ADDENDUM TO POST OF
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

POSTED BY VELVEL AT 9/22/2010 10:11:00 AM LIN K S TO THIS PO S T

TUESDAY, SEPTEMBER 21, 2010

The One (or Two) Dimensional Coach.

September 21, 2010

The 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
defeated Iowa, 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 defense? Oh, my God!!

A few years ago, when the underperforming Lloyd Carr was still head
coach, I heard the panelists on ESPN’s college football show --
particularly the highly accomplished ex-coach Lou Holtz -- do
something that such panelists rarely do. I heard them criticizing a head
coach, in this case Carr. But that may have been as nothing compared
to what Holtz and the adroit Mark May (didn’t he play at Notre
Dame?) said about Michigan’s defense this Sunday, right after the
UMass game. They both savaged Michigan’s defense, which they found
abominable, with Holtz saying, among other things, that this is not the
Michigan defense he used to warn his teams about. And it was May, I
believe, who specifically blamed Greg Robinson for the problem, saying
he had installed a new defense -- if, as I say, Michigan’s defense can
even be given that name. (Maybe it should be called “Michigan’s non
defense,” or “Michigan’s porous”).

And who is it that hired Robinson after he was fired at Syracuse

because he had performed so ineptly -- and had so many more points
score against his team than it scored -- and who is it that put him in
charge of the Michigan defense? Well, it was the West Virginia genius,
Rich Rodriguez, who now has a great offense but no defense -- and is
likely to pay the price in the Big Ten for having only half a team in his
third year. And who allowed Rodriguez to hire Greg Robinson? Why
the Michigan athletic department, of course, thereby showing no sign of
competent thinking.

So Michigan’s football future does not look too bright in the Big Ten
this year, unless a miracle happens and Greg Robinson somehow
teaches Michigan’s porous to play defense within, say, less than two
weeks, when Michigan plays Michigan State.

And lest one forgets, let me reiterate that Michigan has no kickers. It
simply cannot make field goals and, perhaps with some exaggeration, I
would say it seems hard pressed to kick kick-offs more than two thirds
of the way to the end zone. How could Rodriguez have failed in three
years to recruit even one player who can kick off and kick field goals?
You can bet your sweet bippy, as I think Artie Johnson or somebody or
other used to say on Laugh-In forty years ago, that in the Big Ten
Michigan will pay the price for this ineptitude at kicking.

Humorously enough, Michigan’s best kicking play of the season was a

pooch kick on a punt, (not, of course, on a kick off or field goal
attempt) that ended up on the opponent’s five or seven yard line if I
remember correctly. Although, few media personnel commented on
this marvelous play in view of his running and passing, will it surprise
you to learn that the pooch punter was Dennard Robinson? He must be
Michigan’s best all around player since Tom Harmon (or at least Ron
Kramer or Charles Woodson).

So, considering everything, it has to be said that Rich Rodriguez has

thus far proven himself the one dimensional man, or maybe the two
dimensional man. In his first two years he proved that he excels at
losing. Michigan never before had a coach so successful at losing, not
even Chalmers (Bump) Elliot, God help us. Now he’s proven that, given
time, he can build a terrific offense, at least if he gets a smashingly
great running and passing quarterback like Pat White at West Virginia
or Dennard Robinson at Michigan. But so far at least, he also has
shown that he knows nothing about and cares not a whit about defense,
kicking or hiring competent assistants. And all he ever seems able to
come up with when reporters ask him about his team’s deficiencies on
television is “We have to work harder.”

Oh boy. It could end up being another long season for Michigan fans.*

*This posting represents the personal views of Lawrence R. Velvel. If

you wish to comment on the post, on the general topic of the post, you
can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe

please visit VelvelOnNationalAffairs.com, and click on the link on the
top left corner of the page. The podcasts can also be found on iTunes or
at www.lrvelvel.libsyn.com
In addition, one hour long television book shows, shown on Comcast,
on which Dean Velvel, interviews an author, one hour long television
panel shows, also shown on Comcast, on which other MSL personnel
interview experts about important subjects, conferences on historical
and other important subjects held at MSL, and an MSL journal of
important issues called The Long Term View, can all be accessed on the
internet, including by video and audio. For TV shows go to:
www.mslaw.edu/about_tv.htm or
www.youtube.com/user/mslawdotedu; for conferences go to:
www.mslawevents.com; for The Long Term View go to:
www.mslaw.edu/about¬_LTV.htm.

POSTED BY VELVEL AT 9/21/2010 10:42:00 AM LIN K S TO THIS PO S T

WEDNESDAY, JUNE 23, 2010

SIPC Task Force

June 23, 2010

Dear Ron:

Because of the major brouhaha raised by SIPC’s announcement of a

special review committee, I have decided to put my initial views in
writing.

It seems to me that eight out of thirteen members of the review

committee appointed by SIPC come from SIPC, the SEC or the
industry, and should not be regarded as friends of the victimized
investors. The powerful committee chairpersons (Bowen and Johnson,
who also are partners in major law firms) are also the Chairman and
Vice Chairman of the Board of SIPC. They are the people on whose
watch disaster has occurred, yet now they are to oversee a committee
which is supposed to investigate the very things which they allowed to
happen on their watch.

A third member (Heyman) is also on the Board of Directors of SIPC, so

it is on his watch too that the disasters occurred. Moreover, he is from
a major institution in the financial industry (Travelers). Since the
industry will likely have to pay for major necessary changes that will be
proposed, e.g., with regard to net equity and coverage of indirects, etc.,
he should not be expected to be favorable to small, powerless investors
who would benefit, such as those who belong to NIAP by the hundreds.

A fourth member (Macchiaroli) is from the SEC, which ostensibly has

supervisory authority over SIPC, but allowed the SIPC disasters to
occur and now has an interest in diminishing their importance.

A fifth member (Hammerman) is from a major securities industry

association. As with Heyman, since his is the industry which would
likely have to foot the bill for major necessary changes that will be
proposed, Hammerman should not be expected to be favorable to
small, powerless victims who would be beneficiaries.

A sixth member (Giddens) is from a major Wall Street firm and is well
known as a Trustee for SIPC. Doubtless he makes a nice piece of
change from SIPC, and can hardly be expected to favor anything that
would be contrary to SIPC’s desires.

A seventh member (Coffee) is a professor, parts of whose testimony

before Congress have been strongly criticized by small victims.

An eighth member (Chen Gongyan) is not American but rather is an

official in the Chinese financial industry. He is Chair of an agency
which was set up with the assistance of SIPC (apparently, I have read,
with the assistance of Harbeck personally). As well, it is hard to
understand why a Chinese official would be on the Committee.

There are two Committee members (Aidikoff and Caruso) whom SIPC
seems to claim are plaintiffs’ lawyers (the claim appears to be correct),
and three (Borg, Lubin and Smith), who are state securities officials. I
know little about any of these five, although it has been claimed that
some of the relevant states have not been active in protecting investors,
unlike New York and Massachusetts -- whose relevant officials were not
picked for the Committee. It probably is fair to assume, however, that
these five might be open minded on crucial issues.

It is important, I would think, that SIPC’s statement of the task force’s

mission says “SIPC staff” will be involved in the work of the Committee
(which SIPC calls a “Task Force”). This means that the very staff which
created the recurrent disasters, and which therefore has vast self
interest to protect, will be deeply involved in the work of (in the
mission statement’s words) “identify[ing] key issues, provid[ing]
assessments . . . suggest[ing] reforms and the means to their
implementation” . . . [and] discuss[ing] any impediments and the
estimated costs of reform to SIPC, its members . . . .” The staff and the
three Review Committee members who are directors of SIPC (including
SIPC’s Chair and Vice Chair, who head the Committee) have every
interest in defending, minimizing and not having to explain the reasons
behind their prior SIPC actions that have wreaked disaster upon
victims. So it seems fair to say that the fox has been put in charge of
the hen house. And this entirely aside from the fact that several other
members of the Task Force come from the industry that likely would
have to pay for changes and are therefore likely to be unfavorable to
them.

Needless to say, SIPC has provided no information that I know of on

how the task force members were selected. And given the interests of
the staff, SIPC Board members and industry personnel in defending,
minimizing and not having to explain prior bad actions, we cannot
expect deep address, or sometimes even any address, by the Task Force
of vital issues such as the sudden, unexpected use of cash-in/cash-out
and SIPC’s refusal to say whether lack of funds to cover the final
statement method was the underlying reason for such use, litigating for
decades for a very narrow definition of customers, a definition which
has been very harmful to indirects, explaining whether the same
lawyers are constantly picked to be the Trustee in major cases because
they do what SIPC desires and thereby save it money by finding alleged
reasons to turn down large percentages of applicants for payments
from the SIPC fund, explaining why SIPC charged so little to brokerage
houses for so many years, which proved disastrous, the failure of SIPC
to pay with promptness despite Congress’ repeatedly stated intent that
payment should be prompt, SIPC’s use of cash-in/cash-out as a
method of circumventing normal rules of bankruptcy regarding alleged
preferences, explaining what SIPC was told by actuaries when it failed
to heed Congressional demands that it increase the size of its fund in
the early 2000s, how SIPC managed to dissuade the SEC from
supervising it although the SEC was supposed to supervise it, and other
crucial pertinent questions which defenders of SIPC have every reason
to try to evade.

There are some other problems also. As shown by the work of a similar,
perhaps identical, committee in the 1970s, the new committee’s work is
likely to take years before anything comes of it. And even if one thinks
that this might be alright for the long term, especially when it deals
with matters mentioned in the mission statement as being of interest
but which are nonetheless of little concern to current victims (like
“corporate governance” and international affairs), work that takes years
before it is completed and has effect will not solve the problem that
there are thousands of innocent, injured investors who desperately
need certain changes now, not years from now, as occurred in the
1970s. (It is much like the Gulf oil spill: whatever might be decided
about offshore drilling in the long term, the gushing of oil needs to be
stopped now.) That people need help now cannot be stressed enough.
People in their 70s and 80s cannot wait until 2015 or 2020 for specific
needed reforms. They need help immediately.

As well, as shown in the 1970s, it is too easy for people whose careers
are invested in the industry to ignore the real problems. You may
remember that the record of Senate hearings in the 1970s contained a
memorandum of about 40 pages from a constituent that Senator
Cranston put into the record. That memo identified many, many of the
already existing problems that Gretchen Morgenson wrote about
twenty-five years or so later, in 2000, and that were again brought to
consciousness by the Madoff scandal in 2008. Yet the 1970s committee
ignored these already existing problems, as then did the Congress, so
the problems are still with us. The new task force, comprised heavily of
SIPC and industry insiders with deep interests to protect, and with its
staff work to be done by the very SIPC staff who likewise have much in
the way of heavily criticized actions to protect, can all too plainly be
expected to repeat the 1970s performance of ignoring vital matters, or
at minimum soft pedaling them.

Larry

POSTED BY VELVEL AT 6/23/2010 01:36:00 PM LIN K S TO THIS PO S T