So,
as said, calling Madoff a Ponzi scheme, in which there were no transactions and
no profits, was of tremendous importance to, and had tremendous consequences
for, not just newly impoverished, scrabbling victims, but also SIPC and its
management.
There
also were tremendous consequences for the Trustee, Irving Picard, and his law
firm. Picard reached a deal with and
joined his law firm (he left another one) in mid December 2008, just a few days
after SIPC asked him to be the Trustee.
We know, because of statements made in open court and from a GAO Report,
that under his deal with his new firm he receives a portion of the firm's fees
attributable to the Madoff case. We do
not know the percentage, because neither Picard nor his firm will disclose that
information. But the legal and
associated fees thus far are around 500 million dollars, and estimates are that
ultimately the total such fees will be around one billion dollars. I would guess that about 300 or 400 million
dollars of the already incurred 500 million dollars has gone to the law firm,
and, based on what (little) I know of the kinds of deals in which lawyers
receive a percentage of what they bring into the firm, I would estimate (or
guesstimate) that Picard himself already has personally made somewhere between
50 and 75 million dollars and that his firm's take and Picard's personal take
will double before the case is over if the relevant fees mount to around a
billion dollars, as Picard says they will.
If any of my guesstimates are remarkably wrong, there is an easy remedy
to correct them: Picard and his firm
could disclose how much he is making under his deal with his firm: could disclose what percentage of the fees go
to him personally, how much he thus has personally made so far, and how much it
is expected he personally will make in future.
Why do I think that neither Picard nor his firm will voluntarily
disclose the specific relevant information to correct my mistaken estimates if
those estimates are mistaken?
Of
key importance here is the question of what legal and associated work is it
that produces the huge fees. As I
understand it, and I believe I am almost surely correct, it is work that arises
because SIPC and the Trustee are using not the standard final statement method
of determining net equity, but instead the CICO method which they can employ if
there is a Ponzi scheme. Under the final
statement method, the question of the amount of a person's net equity is
usually pretty straightforward and simple:
his net equity is what his brokerage account statement shows to be owing
to him. Oh, there can sometimes be some
complications, I assume, such as when a person has two accounts, one with a
positive net equity and one with a negative net equity (because of loans from
the broker, for example), and the question is whether you should combine the
two accounts, so that the investor's overall net equity will be less and he
will receive less from the SIPC fund (and from so-called customer property, if
any) because his positive net equity in one account will be reduced by the
negative net equity in the other, or whether you should instead keep the
accounts separate so that he will receive more from the SIPC fund (and from
customer property) because his net equity in the positive account will not be
reduced by the negative net equity in the other account. But though there can occasionally be
complications, usually the amount of one's net equity is straightforward: it is what the account statement shows it to
be, and no elaborate legal or accounting work is needed to calculate it.
The
situation is completely different, however, when CICO is used to determine net
equity for SIPA purposes because there is a Ponzi scheme. Now the legal and accounting work can be, and
in the Madoff case often (even usually?) is complicated and difficult. To determine what was put into an account
(and taken out of it) might require reconstruction of records going back 40 or
50 years, as in the Madoff case. It
might require assessment of what was put into and what was taken out of the
accounts of grandparents, parents, uncles, aunts, brothers or sisters whose
accounts were, by inheritance, gift or in other ways merged into the victim's
account over the decades. Needed records
may be missing and/or very hard to find.
The whole process is something of a mess requiring extensive forensic work by the Trustee and his people, and the
numbers and ideas they came up with, which almost inevitably will favor SIPC,
which has billions at stake collectively, will almost surely be contested by
the victims (as is regularly occurring), who individually have large sums at
stake, think the Trustee's numbers and notions about what happened over decades
-- over scores of years -- are quite wrong, and who bring long-lasting,
expensive lawsuits to contest the Trustee.
It is little wonder that, when CICO is used, the work of the Trustee and
his minions mounts into untold numbers of hours, hundreds of millions of
dollars in fees for the Trustee's law firm, and gigantic fees for the Trustee
himself.
So,
once again, enormous consequences attach to the claim that Madoff was a Ponzi
scheme. The work and fees of the
Trustee, his law firm, and his other minions are increased almost beyond belief
(as are the costs to victims of contesting the determinations of the Trustee
and SIPC). The work and fees of the
Trustee and his minions, which would be far less, perhaps almost incalculably
less, under the simple, standard final statement method, are increased under
the CICO method of Ponzi cases to the point where fees now total around 500
million dollars in the Madoff case and are estimated to ultimately reach about
a billion dollars. (I personally think
it possible that, conceivably, one billion dollars ultimately could prove to be
a low ball estimate.)
Calling
Madoff a Ponzi scheme also has major consequences for so-called
"clawbacks." "Clawbacks" mean that the
Trustee can recover, from victims, amounts of money that they completely
innocently took out of their Madoff accounts, thinking that the money was
theirs because it was shown on their account statements as being theirs, either
as principal or as earnings on invested principal. Often such monies were elderly victims'
dominant, even almost sole, source of income (along with Social Security) on
which to live. Now victims, often
elderly ones, find themselves without this source of income, and, horrifyingly,
being subjected by the Trustee to clawbacks of the money they took out of
Madoff. Large numbers of victims are
truly terrified by the possibility of these clawbacks.
Now,
I am the first to say that the subject of clawbacks is, legally speaking, a
very complex topic about which I don't know a whole lot. True, I am a member of a committee of about
20 victims' lawyers who are submitting consolidated briefs on subjects relating
to clawbacks, but I desired to be on this committee only because I have 50
years of brief writing experience and feel qualified to comment on such things
as logic, persuasiveness, style, etc., not
because I pretend to have significant substantive knowledge on the subject
of clawbacks. Fortunately, the committee
has many other lawyers, excellent ones, some from Wall Street firms and some
from smaller firms, who do know a lot about clawbacks.
But
though my knowledge of clawbacks is limited, I do think it true that sometimes --
perhaps even often, or possibly always -- a clawback of monies taken out by a
victim cannot be obtained by the Trustee unless the fraudster gave the money to
the victim with the actual or constructive content of thereby hiding the fact
that there was a fraud. To prove this
intent can be difficult for reasons we need not canvass here.
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