Tuesday, September 1, 2009

Arguments in the Madoff Case - About "Legitimate Expections"

Madoff investors have filed objections to trustee Picard's determination of their SIPC claims for the amount set forth in their November 30, 2008 Madoff statement. The trustee rejects various claimants on that basis that they had already withdrawn more than was deposited into their account, leaving not "net equity." Apparently the trustee's methodology was to net out all deposits and withdrawals back to 1993 and give no credit for "appreciation" in the account or a reasonable rate of return on the money.

One objecting claimant alleges that the trustee does not point to a provision of the Securities Investor Protection Act ("SIPA") that "authorizes him to limit SIPC insurance to customers who have a positive net investment on his 'cash in/cash out' valuation." The claimant argued that SIPC is "statutorily bound" to honor a customer's "legitimate expectations" based upon written transaction confirmations even when the broker-dealer never purchased the securities. The claimant argued that the trustee's position was contrary to that taken by SIPC in the New Times Securities Services, Inc. ponzi scheme case where SIPC allegedly voluntarily agreed to pay customers up to $500,000 based on their final brokerage statements.

The claimants argues that the trustee is attempting to change SIPA's statutory definition of "net equity. " In 15 U.S.C. section 78lll(11), SIPA sets forth that

The term 'net equity' means the dollar amount of the account or accounts of a customer, to be determined by -

(A) calculating the sum which would have been owed by the debtor to such customer if the debtor had liquidated, by sale or purchase on the filing date, all securities positions of such customer...; minus
(B) any indebtedness of such customer to the debtor on the filing date...

One claimant alleged that the trustee was acting to "enrich SIPC" and allow it to avoid paying SIPC insurance to many long-term Madoff investors. The claimant also alleges that SIPC was acting to "save money for the brokerage community at the expense of innocent investors."

The claimant alleged that he did indeed have a "legitimate expection" that his account was genuine and that his account statements set forth Fortune 100 stocks and US Treasury securities earning him a 9 - 11% in the past few years.

The claimant also argued that he is entitled to interest on his funds deposited with Madoff under New York law. Furthermore, the claimant aruged that the trustee has no right to utilize bankruptcy trustee avoidance powers as his actions were not in an effort to assure an equal distribution of the debtor's assets among its creditors. The claimant also argued that the trustee was barred by the statute of limitations in the fraudulent conveyance laws and that even if the trustee's "cash in/cash out" methodology was proper, he was required to use the balance in the account as of the first day of the statute of limitations period.
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