Milberg - LaxNeville Reply Brief 10 - 12

10-2378-bk(L),
Case: 10-2378 Document: 347 Page: 1 10/12/2010 122600 216
10-2676-bk(CON),
10-2677-bk(CON), 10-2679-bk(CON), 10-2684-bk(CON), 10-2685-bk(CON), 10-2687-bk(CON),
10-2691-bk(CON), 10-2693-bk(CON), 10-2694 bk(CON), 10-2718-bk(CON), 10-2737-bk(CON),
10-3188-bk(CON), 10-3579-bk(CON), 10-3675-bk(CON)
United States Court of Appeals

for the
Second Circuit
In Re: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Debtor.
_______________________________
ON APPEAL FROM THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
JOINT REPLY BRIEF FOR APPELLANTS
JONATHAN M. LANDERS STEPHEN A. WEISS

MATTHEW GLUCK CHRISTOPHER M. VAN DE KIEFT
BRAD N. FRIEDMAN PARVIN K. AMINOLROAYA
JENNIFER L. YOUNG SEEGER WEISS LLP
MILBERG LLP One William Street
One Pennsylvania Plaza New York, New York 10004
New York, New York 10119 (212) 584-0700
(212) 946-9411
Attorneys for Appellants The Aspen Company, Ann Denver, Norton Eisenberg,
Export Technicians Inc., Stephen R. Goldenberg, Judith Rock Goldman,
Albert J. Goldstein u/w FBO Ruth E. Goldstein, Jerry Guberman,
Anita Karimian, Michael Mathias, Stacey Mathias, Martin Rappaport,
Paul J. Robinson, Bernard Seldon, and Harold A. Thau
(For Continuation of Appearances See Inside Cover)

BRIAN J. NEVILLE
BARRY R. LAX
BRIAN D. MADDOX
LAX & NEVILLE, LLP
1412 Broadway, Suite 1407
New York, New York 10018
(212) 696-1999
Attorneys for Appellants Mary Albanese, the

Brow Family Partnership, Allen Goldstein,
Laurence Kaye, Suzanne Kaye, Rose Less,
and Gordon Bennett
TABLE OF CONTENTS
Page
I. INTRODUCTION ...........................................................................................1
II. ARGUMENT...................................................................................................4
A. The Trustee and SIPC Fail to Distinguish Appellants From the

Real Securities Claimants in New Times I ............................................4
1. The Existence of a Single Renamed Security on

Customer Account Statements Is Not Dispositive......................6
2. Appellants’ Initial Deposits With BLMIS Were

Sufficient to Purchase Their Initial “Investments” .....................6
3. Trade Volume Was Not Relevant to the Court’s Analysis

In New Times I, Nor Is It Relevant Here.....................................7
B. SIPC Mischaracterizes Ensminger In an Attempt to Attribute

Madoff’s Fraud to the Appellants .........................................................7
C. The “Books and Records” Interpretation Advanced by the

Trustee and SIPC Reads “Net Equity” Out of SIPA...........................11
D. The Net Investment Method Frustrates SIPA’s Legislative

Purpose of Protecting Reasonable Customer Expectations ................13
E. The Trustee’s “Capable of Liquidation” Argument Fails on

Numerous Grounds..............................................................................15
1. The Trustee’s “Capable of Liquidation” Argument

Conflicts With the Trustee’s Obligation to Purchase
Securities to Restore Customer Accounts................................16

Disregards “Street Name” Ownership ......................................17

Conflicts With New Times I......................................................19
F. The Net Investment Method is Inconsistent With the Trustee’s

Avoidance Powers...............................................................................19
i
G. SIPC and the SEC Are Not Entitled to Deference ..............................22
H. Appellants’ Customer Claims Are Based On “Net Equity,” Not

Breach of Contract Damages...............................................................25
I. The Trustee and SIPC Must Evenhandedly Administer SIPA,

Not Impose Their Own Notions of Equity..........................................27
III. CONCLUSION..............................................................................................29
ii
TABLE OF AUTHORITIES
Page(s)
CASES
Adams Fruit Co. v. Barrett,
494 U.S. 638 (1990)............................................................................................24
In re Adler Coleman Clearing Corp.,

204 B.R. 111 (Bankr. S.D.N.Y. 1997)................................................................27
Allianz Insurance Co. v. Lerner,

416 F.3d 109 (2d Cir. 2005) ...............................................................................22
Appleton v. First National Bank,

62 F.3d 791 (6th Cir. 1995) ..........................................................................12, 18
In re Asia Global Crossing, Ltd.,

333 B.R. 199 (Bankr. S.D.N.Y. 2005)................................................................21
Bayou Superfund, LLC v. WAM Long/Short Fund II, L.P.

(In re Bayou Group, LLC),
362 B.R. 624 (Bankr. S.D.N.Y. 2007)................................................................20
Bear, Stearns Securities Corp. v. Gredd

(In re Manhattan Investment Fund Ltd.),
397 B.R. 1 (S.D.N.Y. 2007) ...............................................................................20
CFTC v. Erskine,
512 F.3d 309 (6th Cir. 2008) ..............................................................................22
Holloway v. IRS (In re Odom Antennas, Inc.),

340 F.3d 705 (8th Cir. 2003) ..............................................................................21
Independent Insurance Agents, Inc. v. Federal Reserve System,

838 F.2d 627 (2d Cir. 1988) ...............................................................................25
In re Investors Center, Inc.,

129 B.R. 339 (Bankr. E.D.N.Y. 1991) ...............................................................26
iii
Jackson v. Mishkin (In re Adler, Coleman Clearing Corp.)

(“Ensminger”),
263 B.R. 406 (S.D.N.Y. 2001) .............................................................8, 9, 10, 18
Johnson v. Studholme,
619 F. Supp. 1347 (D. Colo. 1985).....................................................................28
Kawaauhau v. Geiger,
523 U.S. 57 (1998)..............................................................................................19
Merrill v. Abbott (In re Independant Clearing House Co.),

77 B.R. 843 (D. Utah 1987)................................................................................20
Muller-Paisner v. TIAA,
289 Fed. Appx. 461 (2d Cir. 2008).......................................................................1
In re New Times Securities Services (“New Times I”),

371 F.3d 68 (2d Cir. N.Y. 2004)................................................................. passim
NRDC v. Abraham,
355 F.3d 179 (2d Cir. 2004) ...............................................................................25
In re Oberweis Securities, Inc.,

135 B.R. 842 (Bankr. N.D. Ill. 1991) .................................................................14
In re Old Naples Securities, Inc.,

311 B.R. 607 (M.D. Fla. 2002)...........................................................................15
Raleigh v. Illinois Department of Revenue,

530 U.S. 15 (2000)..............................................................................................29
In re Revco D.S.,
No. 88-1308, 1990 Bankr. LEXIS 2966
(Bankr. D. Ohio Dec. 17, 1990)..........................................................................21
SEC v. Byers,
637 F. Supp. 2d 166 (S.D.N.Y. 2009) ................................................................27
SEC v. Kenneth Bove & Co.,

378 F. Supp. 697 (S.D.N.Y. 1974) .....................................................................26
iv
SEC v. S.J. Salmon & Co.,

No. 72-560, 1973 U.S. Dist. LEXIS 15606
(S.D.N.Y. Aug. 8, 1973) .....................................................................................10
SIPC v. Old Naples Securities, Inc.

(In re Old Naples Securities, Inc.),
236 B.R. 854 (Bankr. M.D. Fla. 1999) ...............................................................15
SIPC v. Old Naples Securities, Inc.

(In re Old Naples Securities, Inc.),
343 B.R. 310 (Bankr. M.D. Fla. 2006) ...............................................................27
SIPC v. Stratton Oakmont, Inc.,

229 B.R. 273 (Bankr. S.D.N.Y. 1999)................................................................26
Stafford v. Giddens (In re New Times Securities Services)

(New Times II),
463 F.3d 125 (2d Cir. N.Y. 2006).......................................................................14
Travelers Casualty & Surety Co. of America v. PG&E,

549 U.S. 443 (2007)............................................................................................18
In re United Energy Corp.,

944 F.2d 589 (9th Cir. 1991) ..............................................................................20
United States v. Meade Corp.,

533 U.S. 218 (2001)............................................................................................24
Whitman v. American Trucking Associations,

531 U.S. 457 (2001)............................................................................................12
STATUTES, REGULATIONS, & LEGISLATIVE MATERIALS

11 U.S.C. § 502(d) ...................................................................................................21
15 U.S.C. § 78ccc(b)(4) .....................................................................................14, 25
15 U.S.C. § 78eee(a)(3)(A)......................................................................................11
15 U.S.C. § 78fff-2(c)(3) ...................................................................................12, 19
15 U.S.C. § 78fff-2(d)..............................................................................................16
v
15 U.S.C. § 78ggg(b) ...............................................................................................23
15 U.S.C. § 78lll(2)....................................................................................................7
15 U.S.C. § 78lll(11)....................................................................................13, 24, 28
H.R. Rep. No. 95-746 (1977)...................................................................................16
H.R. Rep. No. 96-1321 (1980).................................................................................18
Rules of SIPC, 53 Fed. Reg. 10368 (Mar. 31, 1988)...............................................14
S. Rep. No. 95-763 (1978) .......................................................................................16
N.Y. U.C.C. § 8-501 ................................................................................................17
OTHER AUTHORITIES
Collier on Bankruptcy § 546.02...............................................................................21
vi
I. INTRODUCTION
The Trustee1 and SIPC concede numerous points both in their briefs and in a
recent Congressional hearing:
x They do not dispute that Appellants had no knowledge of Madoff’s Ponzi

scheme.
x They concede that the Last Statement Method provides customers
approximately $1.1 billion more in SIPC advances than the Net
Investment Method. See Sept. 7, 2010 Letter from SIPC to the House
Financial Services Committee (attached as Exhibit 1).2
x They concede that the Net Investment Method results in more than half
of Madoff’s victims receiving no SIPA protection. Id.
x They concede that Appellants may have valid defenses to avoidance
claims. Trustee Br. 40.
x They concede that avoidance claims are limited to a maximum six-year
“look back” period. Id. at 39-40; see also Congressional Hearing on
SIPA at 115:9-13 (testimony of SIPC’s Chairman: “[T]he law actually
has a limit to how far the trustee can go, and that’s six years. You can’t
get beyond that time frame in terms of doing an analysis.”) (Ex. 2).
1
Appellants use herein the defined terms and abbreviations set forth in Appellants’
Brief [Dkt. No. 192] (“Appellants Br.”) and similarly abbreviate citations to the
briefs filed by Appellees the Trustee [Dkt. No. 283] (“Trustee Br.”) and SIPC [Dkt.
No. 282] (“SIPC Br.”) and amicus curiae the SEC (“SEC Br.”) [Dkt. No. 296].
2
SIPC submitted this letter to the House Financial Services Committee in
anticipation of its September 23, 2010 hearing, “Assessing the Limitations of the
Securities Investor Protection Act” (“Congressional Hearing on SIPA”). The
Court may take judicial notice of associated documents and testimony offered at
the hearing. See Muller-Paisner v. TIAA, 289 Fed. Appx. 461, 466 n.5 (2d Cir.
2008) (“[C]ongressional testimony is an appropriate subject for judicial notice as a
public record for the fact that the statements were made.”). Footage of the hearing
is available at the House Financial Services Committee’s website
(www.financialservices.house.gov/hearings) and a hearing transcript is attached
hereto as Exhibit 2.
1
x They concede that the Last Statement Method was applied in New Times.
x They concede that brokerage account statements are part of the debtor’s
“books and records.” SIPC Br. 31.
x They do not dispute that if BLMIS were still in operation, it would owe
Appellants obligations based on their brokerage account statements.
Notwithstanding the foregoing, the Trustee and SIPC argue that application
of the Last Statement Method would “rubber stamp” Madoff’s fraud, SIPC Br. 34,
and allow him to control the levels of recovery. Trustee Br. 55. SIPC even goes
so far as to assert that this Court would “perpetuate the crime” by ruling in favor of
Appellants. SIPC Br. 14-15.
In so arguing, the Trustee and SIPC create a phony policy issue by self-
righteously designating themselves the “moral defenders” of the SIPC Fund. As
the Trustee and SIPC well know, providing limited SIPA protection to innocent
customers is not “endorsing the fraud” or “enforcing an illegal contract” any more
than the government’s Troubled Asset Relief Program “endorsed” the banking
industry’s subprime mortgage practices.
The real policy issue is who should bear the loss of the government’s
regulatory failures with regard to Madoff -- innocent individual customers who
reasonably relied on their brokerage account statements? Or the brokerage
industry, which contributes annually to a fund for this very purpose? In enacting
SIPA, Congress determined that the brokerage industry should absorb such losses.
2
The Trustee and SIPC frame their arguments around imputing Madoff’s
guilt to innocent customers and “blaming the victim.” During a recent
Congressional hearing, the House Financial Services Committee raised concerns
about this approach:
x “[A]t a time when we’re trying to rebuild investor confidence, we’re

sending the worst possible message to investors to show that . . .the
government allows the trustee to go after them, when they are victims, as
if they are guilty themselves. . . . When our government should be
working to help them, the government is going out of its way and the
trustee is going out of [his] way to make them victims again.”
(Congressman Peter T. King (R-NY)) Congressional Hearing on SIPA at
20:3-20 (Ex. 2).
x “I mean, what kind of attitude is it, they might have been victimized? Is
there any question that they’ve been victimized? People who directed
their entire lives and the future of their families after working hard all
their lives and doing the right things wind up with nothing in an account
and being told they’re accomplices to spending stolen money.” Id. at
81:1-10 (Congressman Gary Ackerman (D-NY)).3
This is not the result Congress intended in enacting a statute to protect brokerage
customers.
As Appellants’ customer claims for “net equity” satisfy SIPA in all respects,
Appellants respectfully request that the Court reverse the Net Equity Order (SPA-
60).
3
The Trustee’s counsel argued below, “If I could talk to 535 Congressmen, I
couldn’t find one that subscribed to [the Last Statement Method].” Hearing
Transcript at 22 (A-III:427). To the contrary, the Congressmen at the
Congressional Hearing on SIPA were supportive of the Last Statement Method and
deeply concerned about the Trustee’s approach in this case.
3
II. ARGUMENT
A. The Trustee and SIPC Fail to Distinguish Appellants From

the Real Securities Claimants in New Times I
The Trustee concedes that “[i]t is true that for claimants who believed that
they had invested in ‘real’ mutual funds in New Times, the trustee calculated net
equity based upon ‘earnings’ on those investments as represented on their customer
statements.” Trustee’s Opening Brief Below at 41 [Bankr. Dkt. No. 525]. To
distance themselves from this fact, SIPC and the Trustee analogize Appellants to
the Fake Securities Claimants in New Times I, whose claims based on bogus
securities were calculated using the Net Investment Method. Trustee Br. 30-34,
SIPC Br. 25-30. However, SIPC and the Trustee cannot escape that Appellants are
situated no differently from the Real Securities Claimants, whose claims were
calculated using the Last Statement Method.
In New Times I, the court described that the Last Statement Method was
properly applied to calculate the claims of the Real Securities Claimants because:
Although they were not actually invested in those real

funds -- because Goren never executed the transactions --
the information that these claimants received on their
account statements mirrored what would have happened
had the transactions been executed. As a result, the
Trustee deemed those customers’ claims to be “securities
claims” eligible to receive up to $500,000 in SIPC
advances. The Trustee indicates that this . . . treatment
was justified because he could purchase real, existing
securities to satisfy such securities claims. Furthermore,
the Trustee notes that, if they were checking on their
4
mutual funds, the [Real Securities Claimants], in contrast

to the [Fake Securities Claimants], could have confirmed
the existence of those funds and tracked the funds’
performance against Goren’s account statements.
New Times I, 371 F.3d 68, 74 (2d Cir. 2004) (internal citations omitted). This
analysis reflects two primary concerns. First, in discussing that the Real Securities
Claimants could confirm the existence and prices of their mutual funds, the court
emphasized customer expectations. Id. Second, the court noted that the trustee
could purchase securities to restore the accounts of the Real Securities Claimants,
as authorized by Section 78fff-2(d), since the fraudster never purchased the bona
fide securities depicted on customer account statements. Id.
On these two issues, Appellants are like the Real Securities Claimants in all
respects. Their brokerage account statements listed securities whose existence and
prices could be confirmed with publicly available information and which are
capable of “replacement” by the Trustee. See Exemplar Customer Account
Statements (A-III:757-805).
The additional arguments raised by the Trustee and SIPC provide no basis
for departing from the treatment afforded the New Times I Real Securities
Claimants.
5
1. The Existence of a Single Renamed Security on

Customer Account Statements Is Not Dispositive
SIPC argues that Appellants are like the Fake Securities Claimants because
their BLMIS account statements depicted one security -- the “Fidelity Spartan U.S.
Treasury Money Market Fund” -- that purportedly does not exist. See SIPC Br. 30;
see also Trustee Br. 18. As already discussed, that security still exists under a
different name. See Appellants Br. 32-33. However, even if the Fidelity Spartan
were “nonexistent,” that alone should not result in a denial of customer claims
based on the numerous blue chip securities listed on Appellants’ BLMIS account
statements. See Exemplar Customer Account Statements (A-III:757-805).
2. Appellants’ Initial Deposits With BLMIS Were

Sufficient to Purchase Their Initial “Investments”
SIPC next argues that Appellants are like the Fake Securities Claimants
because they purportedly deposited insufficient funds to purchase the shares listed
on their BLMIS account statements. SIPC Br. 30. Yet, the Trustee concedes that
“a customer’s initial cash investment could be said to have ‘paid’ for the initial
equity securities ‘purchased’ in the account . . . .” Trustee Br. 45. Although
Appellants’ later BLMIS account statements reflected new securities purchased
with “profits,” so too did the New Times Real Securities Claimants’ account
statements reflect “interest and fictitious dividend reinvestments.” New Times I,
371 F.3d at 71.
6
3. Trade Volume Was Not Relevant to the Court’s

Analysis In New Times I, Nor Is It Relevant Here
SIPC argues that the Appellants are like the Fake Securities Claimants
because “the number of outstanding shares . . . held by all of [Madoff’s customers]
in many instances outnumber[ed] the actual number of shares available for trading
on any given day.” SIPC Br. 30. Trade volume was not considered in New Times
I. Moreover, this argument suggests that ordinary investors should have known the
aggregate securities positions of all of Madoff’s customers as compared to publicly
available trade volume information (another “blame the victim” argument). This
information is typically unavailable to ordinary investors, and in any event, the
New Times I court held that the “goal of greater investor vigilance . . . is not
emphasized in the legislative history of SIPA.” New Times I, 371 F.3d at 87.
As Appellants are situated no differently from the Real Securities Claimants
in New Times I, they should receive the same treatment.
B. SIPC Mischaracterizes Ensminger In an Attempt to

Attribute Madoff’s Fraud to the Appellants
SIPA’s definition of “customer” expressly provides that it includes claimants
“with whom the debtor deals as principal or agent,” § 78lll(2)(A), as well as “any
person who has a claim against the debtor arising out of . . . conversions
of . . . securities.” § 78lll(2)(B)(iii). Thus, SIPA expressly provides that a
7
customer’s agency relationship with a broker committing theft does not preclude
“customer” status.
Nonetheless, SIPC argues that Jackson v. Mishkin (In re Adler, Coleman
Clearing Corp.), 263 B.R. 406 (S.D.N.Y. 2001), referred to by SIPC as
“Ensminger,” holds that innocent customers are responsible for their broker’s fraud
under agency principles, thus precluding SIPA protection.4 See SIPC Br. 34-47.
Although Ensminger is not binding on this Court and is superseded to the extent
inconsistent with New Times I, given SIPC’s heavy reliance upon and
mischaracterization of this case, Appellants discuss it below.
As an initial matter, Ensminger was decided following a week-long trial,
which supports Appellants’ argument that customer claims cannot be summarily
denied on a mass basis. See Ensminger, 263 B.R. at 465. Ensminger is also
distinguishable because “[n]one of the Claimants received written confirmations of
their . . . trades,” a key fact noted throughout the decision. Id. at 458.
More importantly, Ensminger was decided on a vastly different set of facts
implicating legal issues not applicable to this case. In Ensminger, the customers
were not immediate transferees of property from Adler, the debtor broker. Rather,
Ensminger involved what the court described as a “tripartite” arrangement through
4
The Trustee does not rely on Ensminger for this proposition, apparently
recognizing that it has no application here.
8
which Adler (the debtor), the clearing broker, transferred its property to Hanover,
the introducing broker, who then transferred the property to the customers:
Hanover was first a transferee of property of Adler’s or

held in Adler’s estate that was conveyed into Hanover’s
proprietary account, from which the assets were
subsequently transferred to the accounts of the customers
in the form of cash, credits or securities. . . . [U]nder the
arrangements of the trades in question and the tripartite
relationship that existed among the parties, . . . Adler was
the initial transferor of its property to Hanover and
incurred obligations occasioned by the actions of
Hanover as transferee of that property in the first
instance.
Id. at 446.
Hanover used a direct computer link to Adler (the debtor), “to effectuate
transfers of Adler’s property and to create obligations on Adler’s part flowing to
particular customers.” Id. at 448. Specifically, Hanover sought to obligate Adler
on securities bought and sold at manipulated prices for favored customers and “to
execute the Claimant’s transactions in a manner intended to give them preferred
SIPA claims . . . .” Id. at 458. In Adler’s ensuing SIPA liquidation, the customers
filed claims seeking to benefit from Hanover’s fraud against Adler.
The following diagram illustrates the parties’ relationships in Ensminger:
9
Adler - Clearing Broker

(the debtor - defrauded by Hanover)
Hanover - Introducing Broker

(immediate transferee - defrauded Adler)
Customers
(subsequent transferees - benefitted from the fraud)
The court described this “tripartite” relationship as “crucial to the resolution” of
many of the issues in the case. Id. at 446. 5
To summarize, in Ensminger the customers’ agent defrauded the debtor
broker for their benefit. Here, the debtor broker defrauded the customers. SIPC
conveniently omits this key factual distinction, instead citing Ensminger for the
broad proposition that when a customer “can claim entitlement to cash or securities
only because of a broker’s fraud, no ‘customer’ relief under SIPA is available.”
SIPC Br. 34.
5
SEC v. S.J. Salmon & Co., also relied upon heavily by SIPC (but not the Trustee),
was decided on summary judgment after submission of evidence relating to
specific challenged securities transactions. See SEC v. S.J. Salmon & Co., No. 72-
560, 1973 U.S. Dist. LEXIS 15606, at *2-3 (S.D.N.Y. Aug. 8, 1973) (“The
trustee’s objection concerns . . . 65 sales allegedly made on February 2, 1972 . . .
.”). In that regard, Salmon actually supports Appellants’ argument that the Trustee
must assert avoidance claims in an adversary proceeding. Moreover, in Salmon,
the debtor broker executed the challenged transactions in its final hours “to place
favored customers in a position so that they could assert cash claims against
SIPC,” rather than claims for securities that had declined in value. Id. at *33.
Such facts are not present here.
10
SIPC’s remaining discussion of Section 10(b) of the 1934 Act and the
Martin Act are largely superfluous. See SIPC Br. 41-46. No one contests that
Madoff violated these laws. But, the Appellants do contest SIPC’s attempt to
attribute these violations to them through a disingenuous agency argument.
As a practical matter, a violation of the securities laws (particularly the net
capital and customer protection rules) is often a precursor to a SIPA liquidation
since, by definition, a SIPA liquidation is initiated when a broker “has failed or is
in danger of failing to meet its obligations to customers.” § 78eee(a)(3)(A). If
customers are “complicit” in their broker’s fraud or mismanagement simply by
virtue of the very customer relationship that brings them within SIPA’s reach,
SIPA’s protections would be illusory.
C. The “Books and Records” Interpretation Advanced by the

Trustee and SIPC Reads “Net Equity” Out of SIPA
Although Appellants set forth a comprehensive analysis of the SIPA
provisions at issue, Appellants Br. 19-25, 35-46, the Trustee argues that the Last
Statement Method is incorrect because “[t]he words ‘customer statements’ are
nowhere found in SIPA.” Trustee Br. 27; see also SIPC Br. 31-32.
Instead of using the term, “customer statements,” SIPA uses broader
language, such as “owes,” “obligations,” and “books and records,” evincing
Congress’s intent to protect customers in a wide range of broker mismanagement
and fraud. See New Times I, 371 F.3d at 84 (“These statutory goals -- promoting
11
investor confidence and providing protection to investors -- are better served by the
SEC’s broader reading of section 9(a)(1) [§ 78fff-3].”); Appleton v. First Nat’l
Bank, 62 F.3d 791, 801 (6th Cir. 1995) (broadly construing SIPA to effectuate its
remedial purpose).
If Congress wanted to limit “net equity” to securities actually purchased and
reflected in the debtor’s internal “books and records,” Congress could have defined
“net equity” accordingly. “Congress, . . . does not alter the fundamental details of
a regulatory scheme in vague terms or ancillary provisions -- it does not, one might
say, hide elephants in mouseholes.” Whitman v. Am. Trucking Ass’ns, 531 U.S.
457, 468 (2001).
Likewise, if Congress wanted to empower the Trustee to avoid transactions
through the “books and records” provision, it would not have specifically limited
the Trustee’s avoidance powers to those prescribed in the Code. § 78fff-2(c)(3)
(“The trustee may recover any property transferred by the debtor . . . to the extent
that such transfer is voidable or void under the provisions of Title 11.”). The Net
Investment Method acts as a separate unauthorized avoidance power, subsuming
the avoidance powers prescribed by the Code. See Appellants Br. 46-48 (citing
Supreme Court authorities prohibiting trustee from disregarding Code’s
distribution scheme).
12
Attempting to distort the issue, the Trustee and SIPC state that Appellants
ask that the debtor’s “books and records” be “ignored” solely in favor of brokerage
account statements. Trustee Br. 29; SIPC Br. 32. On the contrary, Appellants
merely ask that the Trustee review the “books and records” (including account
statements) to determine what BLMIS “owed” his customers on the filing date,
§ 78lll(11), not to determine whether securities were actually purchased. See
Appellants Br. 19-26. The Trustee and SIPC do not dispute that if BLMIS were
still in business, it would owe customers the amounts set forth on their brokerage
account statements.
The New Times trustee applied the Last Statement Method to determine the
claims of the Real Securities Claimants, even though the debtor’s “books and
records” showed that no securities had been purchased. Similarly, there is no
impediment to applying the Last Statement Method in this case.
D. The Net Investment Method Frustrates SIPA’s Legislative

Purpose of Protecting Reasonable Customer Expectations
The Trustee argues that he must disregard customer account statements in
the claims process because “the phrase ‘legitimate expectations’ cannot be found
anywhere in SIPA.” Trustee Br. 30.
While SIPA does not include this term, it is repeated throughout SIPA’s
legislative history, in numerous decisions discussing SIPA, and in SIPC’s own
rules and marketing materials. See, e.g., Appellants Br. 44-46 (discussing SIPA’s
13
legislative purpose); New Times II, 463 F.3d 125, 128 (2d Cir. 2006) (“It is a
customer’s legitimate expectations on the filing date . . . that determines the
availability, nature, and extent of customer relief under SIPA.”); In re Oberweis
Secs., Inc., 135 B.R. 842, 847 n.1 (Bankr. N.D. Ill. 1991) (“[C]ustomers with
confirmations have a legitimate expectation of receiving securities . . . .”).
Further belying SIPC’s argument is SIPA’s mandate that SIPC promulgate
rules only “as may be necessary or appropriate to carry out the purposes of
[SIPA].” § 78ccc(b)(4). SIPC promulgated the Series 500 Rules to
“provide . . . an objective standard for determining each claimant’s legitimate
expectations,” underscoring SIPA’s purpose in that regard. Rules of the SIPC, 53
Fed. Reg. 10368 (Mar. 31, 1988) (emphasis added).
Next, the Trustee argues that even if customer expectations are to be
considered, the Appellants cannot have reasonable expectations in Ponzi scheme
“profits.” Trustee Br. 34. This argument, which is another attempt to implicate
innocent customers in Madoff’s fraud, assumes that Appellants knew about
Madoff’s fraud and expected profits therefrom. The New Times I court rejected an
almost identical argument:
SIPC disputes that customers can have “legitimate”

expectations as to non-existent securities. We note that
SIPC’s approach does perhaps promote an arguably
laudable policy goal-encouraging investors to research
and monitor their investments (and their brokers) with
greater care. This goal of greater investor vigilance,
14
however, is not emphasized in the legislative history of

SIPA. Instead, . . . the drafters’ emphasis was on
promoting investor confidence in the securities markets
and protecting broker-dealer customers.
New Times I, 371 F.3d at 87.6
E. The Trustee’s “Capable of Liquidation” Argument Fails on

Numerous Grounds
The Trustee argues that customer claims for “net equity” are limited to
securities that “could have been ‘liquidated’ on the filing date.”7 Trustee Br. 23.
Since only securities that are actually purchased are capable of liquidation, the
Trustee argues, the Appellants are entitled to “net equity” claims only for their
cash deposits. Id. at 22-26. This argument is inconsistent with SIPA, the
predominant practice of “street name” ownership, and New Times.
6
The Trustee also cites In re Old Naples Secs., Inc., 311 B.R. 607 (M.D. Fla.
2002) in support of his argument that customers can have no reasonable
expectation in “phony” profits. Trustee Br. 35. But, Old Naples involved claims
for cash based on purported “ownership” of nonexistent securities for which
“[n]one of the Claimants ha[d] any documentation whatsoever to show that the
securities were purchased on their account and on their behalf.” SIPC v. Old
Naples Sec., Inc. (In re Old Naples Secs., Inc.), 236 B.R. 854, 860 (Bankr. M.D.
Fla. 1999). In contrast, BLMIS sent the Appellants monthly account statements
and trade confirmations stating that bona fide securities were purchased on their
behalf.
7
SIPC does not join in this argument.
15

Conflicts With the Trustee’s Obligation to Purchase
Securities to Restore Customer Accounts
SIPA Section 78fff-2(d) authorizes a trustee to “purchase securities as
necessary for the delivery of securities to customers in satisfaction of their claims
for net equities . . . in order to restore the accounts of such customers as of the
filing date.” § 78fff-2(d).
The legislative history relating to Section 78fff-2(d) establishes that
Congress expected SIPA trustees to purchase replacement securities where the
debtor fails to buy securities as represented to customers:
A customer generally expects to receive what he believes

is in his account at the time the stockbroker ceases
business. But because securities may have been lost,
improperly hypothecated, misappropriated, never
purchased, or even stolen, this is not always possible. . . .
One of the principal underlying purposes of these
amendments is to permit a customer to receive securities
to the maximum extent possible instead of cash, in
satisfaction of a claim for securities. By seeking to make
customer accounts whole and returning them to
customers in the form they existed on the filing date, the
amendments . . . would satisfy customers’ legitimate
expectations . . . .
H.R. Rep. No. 95-746, at 21 (1977) (emphasis added) (A-I:617); S. Rep. No. 95-
763, at *2 (1978) (A-III:326) (same).
16
Thus, SIPA authorizes the Trustee to restore customer accounts where the
debtor fails to buy securities, even though unpurchased securities are not “capable
of liquidation.” As such, the Trustee’s argument fails.

Disregards “Street Name” Ownership
The Trustee’s argument also ignores the predominant practice of “street
name” ownership authorized by federal and state laws and encouraged by SIPA.
See Sterling Equities Br. 10-15 [Dkt. No. 185]; Appellants Br. 23-24. With regard
to “street name” ownership, “[t]he entitlement holder’s rights against the securities
intermediary do not depend on whether or when the securities intermediary
acquired its interests.” N.Y. U.C.C. § 8-501 cmt. 3; see also Sterling Equities’ Br.
10-15.
SIPC argues that SIPA preempts state laws governing what a broker “owes”
customers. SIPC Br. 31 n. 10. Yet, even Ensminger, relied upon so heavily by
SIPC, rejects this argument:
The authorities . . . do not endorse the expansive

preemption theory . . . . This Court does not read that
purpose in SIPA or the SIPC Rules. In fact, the Series
500 Rules contemplate the application of contract law
principles. SIPC Rule 300.502(2) explicitly does so by
providing that whether or not the broker has sent written
confirmations the customer has a “claim for securities” if
the securities in question “have become the subject of a
completed or executory contract.”
17
Ensminger, 263 B.R. at 436 (applying NYUCC § 8-319 and other state law to
determine the obligations forming the basis of the customers’ claims). Moreover,
SIPA is a bankruptcy statute, and “bankruptcy courts [must] consult state law in
determining the validity of most claims.” Travelers Cas. & Sur. Co. of Am. v.
PG&E, 549 U.S. 443, 450 (2007); see also Appellants Br. 23.
In addition, SIPA’s legislative history provides that “increased coverage for
securities . . . would encourage customers to maintain their securities with broker-
dealers, thus promoting the immobilization of stock certificates, which was one of
the objectives of the Securities Acts Amendments of 1975.” See H.R. Rep. No. 96-
1321 (1980) (A-III:342). Even today, SIPC continues to promote reliance on
brokerage account statements: “In the unlikely event your brokerage firm fails,
you will need to prove that cash and/or securities are owed to you. This is easily
done with a copy of your most recent statement . . . .” See “Understanding Your
Brokerage Account Statements” (A-II:137).
To disallow customer claims based on “street name” ownership “would
undermine the purposes of the Act generally, and would be inconsistent with the
realities of transactions in the securities market as well.” Appleton v. First Nat’l
Bank, 62 F.3d 791, 801 (6th Cir. 1995) (rejecting attempt to exclude from
“customer” definition those who deposited checks, rather than cash, with broker).
18

Conflicts With New Times I
The Trustee’s “capable of liquidation” argument is further belied by the use
of the Last Statement Method in New Times I. Trustee ‘s Opening Br. Below at 41
[Bankr. Dkt. No. 525]. There, the bona fide securities depicted on the Real
Securities Claimants’ brokerage account statements were never purchased and thus
were not “capable of liquidation.” Yet, this fact did not preclude application of the
Last Statement Method.
F. The Net Investment Method is Inconsistent With the

Trustee’s Avoidance Powers
The Trustee argues that the Net Investment Method is consistent with his
avoidance powers, Trustee Br. 37-44; see also SIPC Br. 46-47, which are
prescribed by the Code. § 78fff-2(c)(3) (“The trustee may recover any property
transferred by the debtor . . . to the extent that such transfer is voidable or void
under the provisions of Title 11.”). To the contrary, the Net Investment Method
automatically avoids in the claims process all transactions in excess of customers’
principal, obviating the Trustee’s need to resort to the avoidance powers set forth
in the Code. See Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998) (“Reading
§ 523(a)(6) as the Kawaauhaus urge would obviate the need for § 523(a)(9) . . . .”).
Such automatic avoidance is improper because the Trustee concedes that it
“may well be true” that some transactions that would be summarily avoided
19
through the Net Investment Method may in fact be “for value.” Trustee Br. 40.
The Trustee cryptically states that this issue must be determined “at a later point”
and that “even if certain transfers cannot be avoided, some can.” Id. Yet, if the
Trustee is permitted to reduce customer claims through the Net Investment
Method, it is unclear how or when customers will be afforded the opportunity to
raise defenses to avoidance.8
Similarly, the Trustee acknowledges that his avoidance powers are subject to
statutory look-back periods the longest of which is six years under New York law,9
Trustee Br. 39-40, but he simply states that “the fact that the Trustee lacks the
power to avoid certain transfers does not change the fact that they are
8
The cases cited by the Trustee, Trustee Br. 39, none of which involved SIPA
liquidations, were decided in the context of adversary proceedings, underscoring
that avoidance claims must be asserted in the proper procedural context. See In re
United Energy Corp., 944 F.2d 589, 592 (9th Cir. 1991) (discussing summary
judgment ruling in consolidated adversary proceeding); Bear, Stearns Secs. Corp.
v. Gredd (In re Manhattan Inv. Fund Ltd.), 397 B.R. 1, 69 (S.D.N.Y. 2007)
(reversing in part summary judgment ruling issued in adversary proceeding);
Bayou Superfund, LLC v. WAM Long/Short Fund II, L.P. (In re Bayou Group,
LLC), 362 B.R. 624, 626 (Bankr. S.D.N.Y. 2007) (involving “motions to dismiss
the amended complaints in ninety-five adversary proceedings”); Merrill v. Abbott
(In re Indep. Clearing House Co.), 77 B.R. 843, 847 (D. Utah 1987) (discussing
that “[t]he trustee . . . filed some 2,085 adversary proceedings”).
9
See Appellants Br. 48-49, 56-57 (discussing the “look back” periods set forth in
the Code and New York law).
20
fraudulent.”10 Trustee Br. 40. But, if the Net Investment Method is supported by
the Trustee’s avoidance powers, then it must also be constrained by the limitations
10
Presumably, the Trustee is referring to Section 502(d), which allows a trustee to
defensively disallow a claim if the claimant is in receipt of an avoidable transfer
unless the claimant returns the property to the estate. See Appellants Br. 56-57
(discussing 11 U.S.C. § 502(d)). However, Section 502(d) still requires a trustee to
prove the elements of avoidance and obtain a judicial determination thereon before
defensively disallowing a claim. See, e.g., Holloway v. IRS (In re Odom Antennas,
Inc.), 340 F.3d 705, 708 (8th Cir. 2003) (holding that 502(d) defensive
disallowance is proper “after the entity is first adjudged liable”).
Moreover, the two-year limitations period in which the Trustee must commence an
avoidance action (as set forth in Section 546(a)) is distinct from the six-year “look
back” period to which avoidance is limited under New York law. See Appellants
Br. 56-57. Section 502(d) enables a trustee to defensively disallow claims even
where the trustee is time-barred from commencing an avoidance action, but it does
not permit the Trustee to disallow claims based on fraudulent transfers that occured
beyond the six-year “look back” period. See Collier on Bankruptcy § 546.02[1][d]
(15th ed.).
In addition, while courts permit Section 502(d) defensive disallowance where the
claimant has received avoidable “transfers,” it does not allow for defensive claim
disallowance based on avoidable “obligations.” See In re Asia Global Crossing,
Ltd., 333 B.R. 199, 202 (Bankr. S.D.N.Y. 2005) (“In short, § 502(d) applies to
avoidable transfers but does not apply to avoidable obligations.”); see also In re
Revco D.S., No. 88-1308, 1990 Bankr. LEXIS 2966, at *67 (Bankr. D. Ohio Dec.
17, 1990) (“Section 502(d) limits its application . . . to a fraudulent transfer, while
omitting any reference to incurrence of an avoidable obligation.”).
This is because Section 502(d) is a collection device used to require recipients of

avoidable transfers to return the property to the estate. An avoidable obligation,
on the other hand, cannot be returned to the estate. See Asia Global Crossing, 333
B.R. at 202 (“If the trustee avoids a ‘transfer,’ he can recover the property
transferred or the value of the property under § 550. If, on the other hand, he
avoids an obligation, the obligation is rendered unenforceable, there is nothing to
return and § 550 affords no remedy.”). The Appellants’ “net equity” claims are
based on amounts BLMIS owed but had not yet paid. Such “obligations” cannot
form the basis for defensive claim disallowance under Section 502(d).
21
on those avoidance powers. The Trustee does not address how his avoidance
powers support application of the Net Investment Method to avoid transactions
occurring as far back as the early 1990s.
Likewise, the Trustee does not address the numerous other defenses
discussed by Appellants, Appellants Br. 52-55, underscoring the impossibility of
resolving at this stage potential defenses that may be asserted by thousands of
customers in as-yet-to-be-filed avoidance actions.
G. SIPC and the SEC Are Not Entitled to Deference

The Trustee argues for the first time on appeal that the Court should afford
Chevron or Skidmore deference to the conflicting “net equity” interpretations
advanced by SIPC and the SEC. See Trustee Br. 44-49. Oddly, neither SIPC nor
the SEC request deference on their own behalf, nor did they request deference
below, perhaps recognizing such a request would be improper given SIPC’s more
than $1.1 billion stake in the outcome of this dispute.
“It is a well-established general rule that an appellate court will not consider
an issue raised for the first time on appeal.” Allianz Ins. Co. v. Lerner, 416 F.3d
109, 114 (2d Cir. 2005); see also CFTC v. Erskine, 512 F.3d 309, 314 (6th Cir.
2008) (holding that CFTC waived Chevron deference argument by failing to raise
it below).
22
Even if this argument were not waived, deference should not be afforded.
The Trustee’s request for deference to the SEC’s “net equity” interpretation is
especially remarkable, considering that the Trustee rejects much of the SEC’s
position. Analytically, the SEC’s “constant dollar” approach11 supports
Appellants’ “net equity” interpretation in that it protects customer expectations
with regard to inflation and the time-value of customer deposits with BLMIS.12
In contrast, the Net Investment Method urged by SIPC is inconsistent with
SIPA and is not entitled to any deference. In New Times I, the court considered
whether to give deference to the conflicting interpretations advanced by SIPC and
the SEC of the meaning of “claims for cash,” which SIPA does not define. New
Times I, 371 F.3d at 80. The court declined to give any deference to SIPC’s
interpretation, because SIPC is subject to the SEC’s oversight, and “Congress did
not intend for the Commission’s interpretations of SIPA to be overruled by
deference to the entity that was made subject to the Commission’s oversight.” Id.
11
Although it has the statutory authority to do so, the SEC has not compelled SIPC
to adopt the constant dollar approach. § 78ggg(b) (“In the event of the refusal of
SIPC to commit its funds or otherwise to act for the protection of customers . . . ,
the Commission may apply to the district court . . . for an order requiring SIPC to
discharge its obligations under this Act . . . .”).
12
Appellants urged the Bankruptcy Court to consider such interest-based
arguments, but the Bankruptcy Court limited consideration to the Last Statement
Method versus the Net Investment Method, reserving alternative arguments to a
later date. See Appellants Br. 61.
23
at 80. This rationale applies equally in the instant case, where SIPC and the SEC
advance conflicting interpretations of “net equity.”
Deference would be further inappropriate because, while SIPA does not
define “claims for cash,” the statutory language at issue in New Times I, SIPA
expressly defines “net equity,” the language at issue in the instant dispute. See
§ 78lll(11). “[I]f congressional intent could be discerned from the face of SIPA,
our deference inquiry would be over because ‘the court, as well as the agency,
must give effect to the unambiguously expressed intent of Congress.’” New Times
I, 371 F.3d at 80.
Moreover, “[a] precondition to deference under Chevron is a congressional
delegation of administrative authority.” Adams Fruit Co. v. Barrett, 494 U.S. 638,
649 (1990). “We have recognized a very good indicator of delegation meriting
Chevron treatment in express congressional authorizations to engage in the process
of rulemaking or adjudication that produces regulations or rulings for which
deference is claimed.” United States v. Meade Corp., 533 U.S. 218, 229 (2001).
Here, Congress expressly prohibited SIPC from promulgating rules or
regulations that would alter the definition of “net equity”:
“SIPC shall have the power . . . to adopt . . . rules relating

to . . . the definition of terms used in this Act, other than
those terms for which a definition is provided in section
16 [15 U.S.C. § 78111].
24
§ 78ccc(b)(4)(A) (emphasis added). Thus, Congress chose not to delegate any
administrative authority with regard to this key definition. It necessarily follows
that SIPC cannot alter the definition through litigation positions. Independent Ins.
Agents, Inc. v. Bd. of Governors of Fed. Reserve Sys., 838 F.2d 627, 632 (2d Cir.
1988) (“[C]ourts construing statutes enacted specifically to prohibit agency action
ought to be especially careful not to allow dubious arguments advanced by the
agency on behalf of its proffered construction to thwart congressional intent
expressed with reasonable clarity, under the guise of deferring to agency expertise
on matters of minimal ambiguity.”).
In any event, courts do not afford deference to agency interpretations that are
inconsistent with the governing statute’s language and purpose. See NRDC v.
Abraham, 355 F.3d 179, 198-99 (2d Cir. 2004). Here, the Net Investment Method
urged by SIPC violates SIPA’s plain meaning and purpose. See Appellants Br. 19-
26, 38-45. As such, no deference should be afforded.
H. Appellants’ Customer Claims Are Based On “Net Equity,”

Not Breach of Contract Damages
SIPC erroneously argues that Appellants’ “net equity” claims are based on
damages for breach of contract, which SIPA purportedly does not protect. SIPC
Br. 50-53.
25
However,
[t]his is a logical fallacy. It is true that a customer who

has nothing but a breach of contract claim cannot recover
under SIPA, but it does not follow from the fact that a
customer who has a recognizable claim under SIPA may
also have a claim for a breach of contract that he cannot
recover for the former. One does not nullify the other.
The customers here involved all have claims under the
Securities Investors Protection Act because each one
received written confirmation of a sale. That they may,
or may not, also have claims for breach of contract . . .,
claims which, as everyone recognizes are valueless, does
not deprive them of their rights against the Fund created
by SIPA.
In re Investors Ctr., Inc., 129 B.R. 339, 350-351 (Bankr. E.D.N.Y. 1991) (rejecting
argument by Irving Picard). Under SIPC’s argument, the claims of the Real
Securities Claimants in New Times were likewise based on contract “damages,” yet
the trustee in that case properly based “net equity” on customer account statements,
not principal investments. These cases underscore that the mere existence of a
“damages” claim against the debtor does not preclude a “net equity” claim.
SIPC cites cases that are inapposite because they involve non-“customers”
who only had general creditor claims the debtor broker. See, e.g., SEC v. Kenneth
Bove & Co., 378 F. Supp. 697, 699 (S.D.N.Y. 1974) (“It is undisputed that the
claimants were not customers of the Debtor” because “the property . . . was
[instead] entrusted to another broker-dealer.”); SIPC v. Stratton Oakmont, Inc., 229
B.R. 273, 279 (Bankr. S.D.N.Y. 1999) (“[T]hese Claimants are not ‘customers’ of
26
Stratton but rather of J.B. Oxford.”); In re Adler Coleman Clearing Corp., 204
B.R. 111, 119 (Bankr. S.D.N.Y. 1997) (holding that claimants were not
“customers” because their accounts were “neither trading nor margin accounts [but
were instead] established to serve as collateral.”).
I. The Trustee and SIPC Must Evenhandedly Administer

SIPA, Not Impose Their Own Notions of Equity
Appellants cited numerous decisions properly holding that innocent Ponzi
scheme victims are not required to disgorge “phony” profits because, among other
reasons, “[m]any of the investors may not have the money, and litigation to collect
it would be expensive, time-consuming, and, in some instances, cruel.” SEC v.
Byers, 637 F. Supp. 2d 166, 182 (S.D.N.Y. 2009); see also Appellants Br. 53-55,
57-60. Rather than address these cases, the Trustee simply cites a number of non-
SIPA cases holding otherwise, purportedly representing “the standard judicial
treatment of Ponzi schemes.”13 Trustee Br. 51-53.
In passing SIPA, Congress chose to provide brokerage customers more than
“the standard judicial treatment of Ponzi schemes.” Id. Congress chose to protect
13
The SEC properly noted that “[c]ustomer claims in SIPA cases must be
determined in accordance with the provisions of SIPA, not by principles courts
apply in resolving claims of Ponzi scheme victims.” SEC Br. 16.
The lone SIPA case cited by the Trustee actually supports a customer expectations-
based result. See SIPC v. Old Naples Secs., Inc. (In re Old Naples Secs., Inc.), 343
B.R. 310, 322 (Bankr. M.D. Fla. 2006) (applying the Net Investment Method
27
reasonable customer expectations to promote confidence in the securities markets -
- a goal no less important today. SIPA provides this expectation-based protection
by providing that customer claims are based on what the broker “owed” his
customers on the filing date. § 78lll(11).
In contrast, the Net Investment Method defeats customer expectations by
reducing customer claims to principal, thus “creating” for the Trustee avoidance
claims for any amounts received in excess of principal, even if withdrawn decades
ago. Many customers no longer have this money, having used it to pay taxes,
retire, or for any number of legitimate reasons. See, e.g., Johnson v. Studholme,
619 F. Supp. 1347, 1350 (D. Colo. 1985) (“Some investors who received ‘fictitious
profits’ may have spent the money on education or other necessities many years
ago. What else in equity and good conscience should plaintiffs who received
money in good faith pursuant to an ‘investment contract’ have done?”) aff’d sub
nom., Johnson v. Hendricks, 833 F.2d 908 (10th Cir. 1987).
The Trustee argues that the Net Investment Method is the most “equitable”
approach, because otherwise, “Madoff [would] determine who wins and loses.”
Trustee Br. 54. Meanwhile, SIPC seeks to impute Madoff’s fraud to his innocent
customers and even this Court, arguing that a decision awarding them SIPA
where customers were “invested” in bogus securities and “the transactions were
not evidenced by . . . customary documentation.”).
28
protection would “perpetuate the crime.” SIPC Br. 14-15. But Madoff is in
prison, and while the Trustee has purported to do “equity,” customers have lost
their homes and the comforts of retirement. At the same time, the Net Investment
Method has saved SIPC more than $1.1 billion in customer advances.
SIPC and the Trustee are charged with impartially and evenhandedly
administering SIPA, not judgmentally importing their own personal notions of
“equity” based on facts that will differ with each liquidation. Likewise,
“Bankruptcy courts are not authorized in the name of equity to make wholesale
substitution of underlying law controlling the validity of creditors’ entitlements,
but are limited to what the Bankruptcy Code itself provides.” Raleigh v. Ill. Dep’t
of Rev., 530 U.S. 15, 24-25 (2000); see also Appellants Br. 47.
III. CONCLUSION
Based on the foregoing, Appellants respectfully request that the Court
reverse the Net Equity Order (SPA-60).
29
Dated: October 12, 2010

New York, New York
s/ Jonathan M. Landers
Jonathan M. Landers
Matthew Gluck
Brad N. Friedman
Jennifer L. Young
MILBERG LLP
One Pennsylvania Plaza
48th Floor
Telephone: (212) 594-5300
SEEGER WEISS LLP

Stephen A. Weiss
Christopher M. Van de Kieft
Parvin K. Aminolroaya
One William Street
Telephone: (212) 584-0700
Attorneys for Appellants The Aspen

Company, Ann Denver, Norton Eisenberg,
Export Technicians Inc., Stephen R.
Goldenberg, Judith Rock Goldman, Albert J.
Goldstein U/W FBO Ruth E. Goldstein,
Jerry Guberman, Anita Karimian, Michael
and Stacey Mathias, Martin Rappaport,
Paul J. Robinson, Bernard Seldon, and
Harold A. Thau
30
s/ Brian J. Neville
Brian J. Neville
Barry R. Lax
Brian D. Maddox
LAX & NEVILLE, LLP
Telephone: (212) 696-1999

and Gordon Bennett
31
CERTIFICATE OF COMPLIANCE WITH TYPE-VOLUME

LIMITATION, TYPE FACE, AND TYPE STYLE REQUIREMENTS
This brief complies with the type-volume limitation of Fed. R. App. P.
32(a)(7)(B)(ii), because this brief contains 6,998 words, excluding the parts of the
brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).
This brief complies with the typeface requirements of Fed. R. App. P.
32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because this
brief has been prepared in proportionately spaced typeface using Microsoft Word
in 14-point Times New Roman font.
Dated: October 12, 2010

New York, New York
s/ Jonathan M. Landers
Jonathan M. Landers
Matthew Gluck
Brad N. Friedman
Jennifer L. Young
MILBERG LLP
One Pennsylvania Plaza
48th Floor
Telephone: (212) 594-5300
32
SEEGER WEISS LLP

Stephen A. Weiss
Christopher M. Van de Kieft
Parvin K. Aminolroaya
One William Street
Telephone: (212) 584-0700
Attorneys for Appellants The Aspen

Company, Ann Denver, Norton Eisenberg,
Export Technicians Inc., Stephen R.
Goldenberg, Judith Rock Goldman, Albert J.
Goldstein U/W FBO Ruth E. Goldstein,
Jerry Guberman, Anita Karimian, Michael
and Stacey Mathias, Martin Rappaport,
Paul J. Robinson, Bernard Seldon, and
Harold A. Thau
s/ Brian J. Neville
Brian J. Neville
Barry R. Lax
Brian D. Maddox
LAX & NEVILLE, LLP
Telephone: (212) 696-1999

and Gordon Bennett
33
EXHIBIT 1

EXHIBIT 2
Page 1
2 Hearing on ASSESSING THE LIMITATIONS OF THE
3 SECURITIES INVESTOR PROTECTION ACT
5 House Financial Services Committee
6 2128 Rayburn House Office Building
7 Washington, DC 20515
9 September 23, 2010
10 10:00AM
11
12 http://financialservices.house.gov/hearings/he
13 aringDetails.aspx?newsid=1357
14
15
16 APPEARANCES:
17 CHAIRMAN PAUL E. KANJORSKI, Congressman (D-PA)
18 CONGRESSMAN SCOTT GARRETT (R-NJ)
19 CONGRESSMAN GARY ACKERMAN (D-NY)
20 CONGRESSMAN PETER T. KING (R-NY)
21 CONGRESSMAN ED PERLMUTTER (D-CO)
22 CONGRESSMAN TRAVIS CHILDERS (D-MS)
23 CONGRESSMAN RONALD KLEIN (D-FL)
24
25
VERITEXT REPORTING COMPANY

212-267-6868 www.veritext.com 516-608-2400
Page 2
1 WITNESS LIST & PREPARED TESTIMONY:
2 MR. JOSEPH P. BORG, Director, Alabama
3 Securities Commission
4 THE HONORABLE ORLAN JOHNSON, Chairman of the
5 Board, Securities Investor Protection
6 Corporation
7 MR. JOHN C. COFFEE, JR., Adolf A. Berle
8 Professor of Law, Columbia Law School
9 MR. IRA HAMMERMAN, Senior Managing Director
10 and General Counsel, Securities Industry
11 and Financial Markets Association
12 MR. STEVEN B. CARUSO, Partner, Maddox,
13 Hargett & Caruso
14
15
16
17
18
19
20
21
22
23
24
25

212-267-6868 www.veritext.com 516-608-2400
Case: 10-2378 Document:
ASSESSING347THE
Page: 54 10/12/2010
LIMITATIONS OF THE 122600 216
SIPA - 9/23/10
Page 3
1 CHAIRMAN KANJORSKI: -- Enterprises
2 will come to order.
3 Pursuant to Committee rules and
4 prior discussions with the ranking
5 member, each side will have ten minutes
6 for opening statements. Without
7 objection, all members' opening
8 statements will be made part of the
9 record, and I yield five minutes to
10 myself.
11 Nearly two years have passed since
12 the massive sixty-five billion dollar
13 Madoff Ponzi scheme came to light. Since
14 then, we have enacted the Dodd-Frank Wall
15 Street Reform and Consumer Protection
16 Act. Among many other things, this law
17 amended the Securities Investor
18 Protection Act, the statute that works to
19 return money and securities to customers
20 of failed brokerages.
21 To better protect the customers of
22 failed brokerages going forward, the
23 Dodd-Frank Act increases cash protection
24 limits and bolsters the resources of the
25 reserve fund used to replace customers'

212-267-6868 www.veritext.com 516-608-2400
ASSESSING347THE
Page: 55 10/12/2010
SIPA - 9/23/10
Page 4
1 missing cash and securities. This new
2 law also quintuples penalties for
3 misrepresentations of membership in or
4 protections offered by the Securities
5 Investor Protection Corporation.
6 Moreover, the statute makes important
7 changes to prevent, rather than simply
8 replace, the loss of customers' property,
9 including new custody safeguards for
10 customers' assets held by certain
11 financial professionals.
12 The Dodd-Frank Act additionally
13 requires the auditors of broker-dealers
14 to register with the Public Company
15 Accounting Oversight Board, and this
16 regulatory body has the authority to
17 regulate these market gatekeepers. This
18 change ought to put incompetent and
19 unscrupulous one-man auditor shops like
20 the one which blessed the books of the
21 Madoff brokerage out of business before
22 investors get harmed.
23 Much more, however, remains to be
24 done to protect investors. The victims of
25 the Madoff Ponzi scheme and the Stanford

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1 Financial fraud include many hardworking
2 families and frugal retirees who invested
3 their hard-earned money with now
4 imprisoned or indicted con artists.
5 Numerous press stories have relayed
6 accounts about how these victims who
7 sought to play by the rules have now had
8 to greatly modify the ways they live.
9 The victims of these frauds believe that
10 SIPC has fallen short in meeting their
11 responsibilities, and they want change.
12 I do, too.
13 We, therefore, have many questions
14 to explore today. For example, although
15 SIPA's protections do not currently
16 extend to customers of investment
17 advisers, we must explore the issue of
18 expanding SIPA's coverage as investment
19 advisers may also commit fraud.
20 In any serious efforts to reform
21 SIPA, we must also consider what
22 responsibility SIPC has to honor the
23 broker statements that customers receive.
24 SIPC has denied the claims of customers
25 based on the seemingly legitimate

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1 paperwork provided to them by the
2 brokers, yet SIPC expects customers to
3 use those very same statements to report
4 unauthorized trading in their accounts.
5 This inconsistency is unacceptable, and
6 we must work to resolve it.
7 Investor trust, for which SIPA was
8 designed to preserve, has been seriously
9 eroded by SIPC's narrow interpretations
10 of its statutory mandate. While SIPC's
11 actions may follow the letter of the law,
12 many would argue that SIPA has ignored
13 the spirit of the law. We therefore must
14 consider the best way to change the tone
15 at SIPC and refocus this body on
16 maintaining confidence in the financial
17 system and promoting investor protection.
18 To the extent possible, we ought to also
19 explore how SIPC could learn from the
20 success of the Federal Deposit Insurance
21 Corporation in maintaining the public's
22 trust.
23 To address these questions and many
24 others, SIPC has focused on modernization
25 task force, and several members of this

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1 panel will appear before us today in
2 their personal capacities. I, for one,
3 expect this task force to complete its
4 work with great transparency,
5 considerable outreach, and much speed.
6 Moreover, this task force must view its
7 mission as broadly as possible and work
8 to provide Congress with a comprehensive
9 plan for reform.
10 In closing, we can further improve
11 SIPA by building on the reforms of the
12 Dodd-Frank Act. The witnesses before us
13 today are recognized securities experts.
14 Their recommendations, along with those
15 offered by the Madoff victims at our
16 hearing last December, will undoubtedly
17 help us in our work to update SIPA and
18 better protect investors.
19 Chair recognizes the gentleman from
20 New Jersey for ten minutes.
21 CONGRESSMAN GARRETT: Thank you.
22 As mad as I am at Madoff, I'm even
23 more upset at my own government over the
24 way I've been treated in the aftermath of
25 this fraud.

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1 That is the gist of a quote from one
2 of my constituents who was defrauded by
3 Bernie Madoff and who feels failed by the
4 SEC and FINRA in protecting him while the
5 fraud was going on and who now faces a
6 SIPC trustee who is threatening to claw
7 back funds he withdrew from his Madoff
8 account over the course of the last
9 fifteen or twenty years.
10 In a sense, these innocent investors
11 are being held to a higher standard in
12 both the government that was supposed to
13 protect them and that gladly took their
14 tax payments, and the organization, SIPC,
15 that was supposedly set up to protect
16 them while instilling greater confidence
17 in our securities market.
18 We are holding today's hearing to
19 assess the limitations of the Securities
20 Investor Protection Act, the SIPA, and
21 the Securities Investor Protection
22 Corporation, SIPC, and to identify
23 whether there are potential reforms that
24 would better protect the investors. It
25 would seem to me that one major and

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1 fundamental reform would be for them,
2 through the actions of the trustee that
3 has been appointed, to see itself as an
4 advocate for, rather than an adversary
5 against, innocent defrauded investors, so
6 that they feel that they are being
7 assisted by SIPC process rather than
8 hunted down and accused somehow of them
9 doing some sort of wrong doing.
10 So there's one piece of legislation
11 that's out there that could go at least
12 part of the way in making things right
13 for once, and potentially twice
14 victimizing (sic) the Madoff investors.
15 A colleague of mine in New Jersey, Bill
16 Pascrell, has introduce a bill, H.R.5058.
17 It's called the Ponzi Scheme Victims' Tax
18 Relief Act. And what it would do is
19 liberalize the ability of those who are
20 victims of theft to receive their refund
21 for taxes that they paid on gains that
22 the SIPC trustee is now trying to take
23 back from them. I'm co-sponsor of this
24 bill, which actually should perhaps go a
25 little further than the ten-year look-

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1 back, since their trustee is going back
2 further than the ten years in calculating
3 the so-called net winners and losers.
4 Another aspect of the trustee's
5 handling of this case are now in the
6 process of working its way through the
7 court system which their matters will be
8 decided. I'm concerned, though, about a
9 looming deadline that's coming up, and
10 that's in December, when the trustee will
11 decide whether to go forward with
12 potentially thousands of clawbacks from
13 these innocent defrauded investors.
14 SIPC leadership and the trustee has
15 indicated that they will not be going
16 after the so-called ordinary people;
17 people who are not leading a lavish
18 lifestyle and who had no knowledge of the
19 fraud. But if you hear from my office,
20 from my staff, that's not what I'm
21 hearing from my constituents and others
22 and the people I talk to when I'm back at
23 home. I spoke with one gentleman who,
24 years ago, withdrew money to pay for
25 college and who lives a very modest

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1 lifestyle now. He contacted the
2 trustee's firm to get clarification that
3 he wouldn't be clawed back. But he was
4 told that other than forgiving a small
5 percentage of what the trustee had
6 calculated what he owed, he otherwise
7 looked like he would be on the hook for
8 the rest. In addition, he was told that
9 anything he might recover in the form of
10 tax refund, that, too, might be subject
11 to seizure by the trustee.
12 So I'm also concerned that while
13 these court cases are underway, SIPC
14 trustee has denied access to Madoff's
15 records for the victims and their
16 attorneys. So access to these records is
17 important for several key aspects of the
18 case, including whether or not all
19 transactions reported by Madoff over the
20 years were actually fraudulent
21 transactions. If some of them weren't,
22 then the trustee's equity formulation
23 would completely be called into question.
24 Inequitable access to these records
25 results in a fundamental imbalance of the

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1 scales of justice in this case and also
2 calls into question whether ultimately
3 there will be a fair trial at the end of
4 the day in this case.
5 So all of this, when you think about
6 it, should make all of us feel very
7 uncomfortable. The SIPC decal is
8 supposed to mean protection. The SEC was
9 supposed to provide protection. The IRS
10 taking the tax payment also serves as a
11 government imprimatur. SIPC is supposed
12 to provide up to 500,000 dollars in
13 protection based upon the "reasonable
14 expectation of customers". In fact, SIPC
15 was created at the behest of the
16 securities industry to encourage
17 confidence in a more efficient, paperless
18 process where investors no longer have
19 the peace of mind one gets from holding
20 on to the actual stock certificate like
21 we used to do in the old days. In their
22 place, customers grew accustomed to
23 depending on trade confirmations and
24 account statements which were regulated,
25 of course, by the SEC and FINRA to set

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1 their reasonable expectations that they
2 should have. As I said earlier, though,
3 instead of SIPC's meeting investors
4 reasonable expectations, now it seems as
5 though that they're blaming the victims,
6 instead. Instead of customers being able
7 to rely on their account statements to
8 calculate their SIPC protection, they're
9 basically at the mercy of the trustee's
10 formulation of equity that doesn't into
11 take into account or consideration
12 interest earning or the time value of
13 money. Nor does this so-called customer-
14 friendly methodology take into account
15 the receiving SIPC protection as separate
16 and distinct from the distribution of
17 assets recovered.
18 One of the results, unfortunately,
19 is that SIPC has clearly lost the trust
20 of many investors as well as the trust of
21 many members, here, of Congress, as well.
22 So this hearing, Mr. Chairman, is timely.
23 SIPC clearly needs the SIPC Modernization
24 Task Force to assist in its refocusing on
25 its proper role going forward. So I do

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1 look forward to the testimony we'll hear
2 and the questioning from this panel.
3 With that, I yield back.
4 CHAIRMAN KANJORSKI: Thank you very
5 much, Mr. Garret. We'll now hear from
6 the gentleman from New York, Mr.
7 Ackerman.
8 CONGRESSMAN ACKERMAN: Thank you
9 very much, Chairman Kanjorski, for
10 calling this very important hearing.
11 It's been nearly two years since
12 Bernard Madoff confessed to masterminding
13 the largest and longest-running Ponzi
14 scheme in history and turned himself in.
15 After that fateful day in December, 2008,
16 the Securities Investment Protection
17 Corporation, which is tasked with
18 ensuring victims of broker fraud or
19 failure in recovering assets from the
20 fraud of those victims, received over
21 16,000 insurance claims from Madoff
22 innocent victims. Of them, to date, SIPC
23 has granted only 2,200. That means that
24 right now, at this very minute, many, if
25 not most of the over 13,000 innocent

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1 victims of Bernard Madoff who, for years,
2 reasonably thought that they were
3 entitled to SIPC insurance on the balance
4 in their accounts in the unlikely event
5 that their investments were entangled in
6 a broker-dealer fraud or failure, instead
7 are destitute and out of luck. And those
8 are just the investors who filed actual
9 claims.
10 What crime did these investors
11 commit? These 13,000 people and their
12 families, like millions and millions of
13 people who invest in our market, put
14 their trust in our financial system, its
15 regulators, and its safeguards. Two
16 years after Madoff turned himself in, two
17 years after these 13,000 people have been
18 turned away time and time again from the
19 protection to which they reasonably
20 believed they were entitled. It has
21 become very clear that Madoff has robbed
22 them, our system betrayed them, and our
23 government failed them.
24 Who's responsible? Who caused this
25 problem? Who do we turn to? Who do the

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1 victims turn to?
2 People have reasonable expectations
3 of government, its agencies, and the
4 organizations that are created by them.
5 Where I come from, if the police don't do
6 their job and stand idly by when terrible
7 things happen, if a doctor just stands
8 around and doesn't do what he's supposed
9 to do, if emergency responders show up in
10 the ambulance, they just sit and watch
11 the accident, people wind up suing those
12 agencies and the city and the
13 municipality and the government for
14 negligence. Someone is liable, whether
15 it's because incompetence or misfeasance
16 or malfeasance, somebody is responsible
17 for not fulfilling the reasonable
18 expectations that people have and come to
19 rely on. And here, in the federal
20 government, if there's not a legal
21 responsibility, there certainly is a
22 moral responsibility for creating the
23 climate that people depended on. That we
24 have failed these investors is
25 heartbreaking enough in terms of human

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1 tragedy. But the damage that has been
2 done to investor confidence at this
3 critical time in our economic and
4 financial recovery as a result of our
5 failure to safeguard and protect these
6 innocent Madoff victims and our country's
7 negligence in leading them to believe
8 that they were insured is as frightening
9 as it is self-defeating.
10 Today's hearing will focus on the
11 Securities Investor Protection Act and
12 the present and future role of SIPC in
13 providing assurance to investors in our
14 markets that they are protected -- really
15 protected, not fake protected -- against
16 broker-dealer fraud or failure. It is my
17 strong hope that this hearing is a
18 prelude to the subcommittee's
19 consideration of the Ponzi Scheme
20 Investor Protection Act, a bipartisan
21 bill that I've introduced along with
22 numerous members of this subcommittee and
23 the House to provide some relief to many
24 of those innocent victims of Ponzi
25 schemes of all times who have been burned

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1 by SIPC, and to proactively assure
2 investors in our securities market that
3 they are protected against fraud,
4 regardless of its scope or longevity.
5 Mr. Chairman, thank you very much
6 again for scheduling the hearing, and I,
7 too, look forward to hearing from our
8 witnesses. And I yield back the balance
9 of my time.
10 CHAIRMAN KANJORSKI: Thank you, Mr.
11 Ackerman.
12 Now we'll hear from the other
13 gentleman from New York for two minutes,
14 Mr. King.
15 CONGRESSMAN KING: Thank you, Mr.
16 Chairman. At the outset, let me thank
17 you very much for holding this hearing.
18 And I know it's important to get on to
19 the hearing, so I'll keep my remarks
20 brief.
21 I want to fully identify myself with
22 the statement of Mr. Garrett both in
23 precise content and also in spirit. The
24 fact is that the investors of Madoff were
25 let down, were failed by our government,

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1 by SEC, by FINRA. Despite numerous
2 reasons why this fraud should have been
3 stopped, it wasn't. So these investors
4 made the mistake of, number one, relying
5 on Madoff, but number two, and more
6 importantly, relying on our federal
7 government. And now that they are
8 victims, they are being treated by the
9 trustee as if they were co-conspirators
10 of Madoff, rather than victims. And I've
11 done some practical lore (ph.) over the
12 years, and when you listen to the
13 investors and realize -- and you listen
14 to the tactics and methods being used
15 against them by the trustee, it's similar
16 to people under indictment or under
17 investigation by a grand jury, by United
18 States Attorney, by the SEC. Their years
19 of records are being demanded, going back
20 ten, fifteen, twenty years. Every
21 excuse, every possibility's been looked
22 at by the trustee to try to suck people
23 into this, to bring them in, not giving
24 them the benefit of the doubt but, again,
25 treating them as if they were criminal

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1 defendants, rather than victims. And to
2 me, as my good friend, Mr. Ackerman,
3 said, at a time when we're trying to
4 rebuild investor confidence, we're
5 sending the worst possible message to
6 investors to show that not only does the
7 government let them down, but that in
8 effect, the government allows the trustee
9 to go after them, when they are victims,
10 as if they are guilty themselves. And
11 we're talking about people who have
12 already lost millions of dollars because
13 of this Ponzi scheme of Madoff, now
14 having to spend millions and millions of
15 dollars in legal fees to defend
16 themselves. When our government should
17 be working to help them, the government
18 is going out of its way and the trustee
19 is going out of its way to make them
20 victims again. I find this entire
21 process wrong. I think sometimes we can
22 get caught in our own universe and we
23 start debating how many angels can dance
24 on the head of a pin and not realize that
25 good, good people who are being hurt

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1 once, now are being hurt even worse by
2 the tactics of this trustee. So I think
3 it's important to keep that in mind as we
4 go forward and debate the technicalities
5 and legalities, realize the moral harm
6 that's being done here.
7 And with that, I yield back the
8 balance of my time.
10 King. And the gentleman from Colorado,
11 Mr. Perlmutter, recognized for one
12 minute.
13 CONGRESSMAN PERLMUTTER: Thank you,
14 Mr. Chairman.
15 I agree with one point raised by Mr.
16 Garrett, Mr. King, and I disagree with
17 another point. To start where we
18 disagree. Terms of the timing of this,
19 it was under an SEC and under
20 administration of George Bush, and there
21 was really not a lot of police on Wall
22 Street even though Mr. Markopolis raised
23 the red flags a dozen times. So got to
24 take a look at who's in office to decide
25 whether the system is working or not.

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1 But it did not work well at that time.
2 I agree with the gentlemen that this
3 is insult added to injury, and that
4 really is what we're talking about. And
5 that seems to be the unfairness of the
6 system, that individuals, through no
7 real -- you know, they weren't active
8 participants in a fraud. They were
9 innocent victims of a fraud perpetrated
10 by Mr. Madoff. There should be an
11 opportunity for them to recover either
12 through their taxes, through claims with
13 SIPC, or to not have to face a clawback
14 if they're not active participants. And
15 the law, I think, is a real problem in
16 this arena and needs to be changed, and I
17 look forward to working with the
18 gentlemen on these very subjects.
19 Thank you.
20 CHAIRMAN KANJORSKI: The chair will
21 recognize Mr. Childers for three minutes.
22 CONGRESSMAN CHILDERS: Thank you. I
23 want to thank the chairman, first, for
24 holding this important and very timely, I
25 think, hearing to address the Securities

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1 Investor Protection Act. I will thank
2 our witness for being here today.
3 This subcommittee has looked at a
4 number of issues related to SIPA during
5 this Congress, focusing on the Madoff
6 Ponzi scheme, as well as the Stanford
7 Financial Ponzi scheme. I'm here today
8 as an advocate of the victims of the
9 Stanford Financial scheme. While the
10 victims of the Madoff scheme and the
11 Stanford Financial scheme live throughout
12 our country -- I realize that -- but too
13 many of those Stanford Financial scheme
14 victims live in the district that I
15 serve, the northern portion of
16 Mississippi. They are north Mississippi
17 families who now live an uncertain
18 future. They invested much of their life
19 savings in certificates of deposit with
20 the Stanford Group Company, a SIPC member
21 and registered broker-dealer. It is
22 estimated that in Mississippi alone, our
23 families lost sixty-eight million
24 dollars. That is no small matter to me
25 and to the state of Mississippi. SIPC

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1 has denied coverage to the Stanford
2 victims when the SEC had the jurisdiction
3 to file enforcement action against
4 Stanford in 2009.
5 These investors purchased securities
6 they didn't get. They purchased them
7 from a SIPC member. SIPC's entire
8 function is to return securities to
9 customers of a broker-dealer when a firm
10 becomes insolvent. There are several
11 legalities to the case for extending SIPC
12 coverage to Stanford victims, and I don't
13 want to get into all of that. But these
14 investors are ordinary Americans,
15 ordinary Mississippians who planned and
16 saved for a retirement that they may
17 never enjoy, and they deserve the
18 protection assured by the SIPC member,
19 Stanford Group Company.
20 As we examine ideas to improve SIPA,
21 and work towards a resolution for making
22 these Stanford victims whole, I urge all
23 participants to keep these victims and
24 their hard-working families in mind, and
25 the fact that they worked, many times, a

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1 lifetime to accumulate this money that
2 they've lost.
3 I yield back my time. Thank you,
4 Mr. Chairman.
6 much.
7 We will now hear from our panel of
8 witnesses. Thank you very much for
9 appearing before the subcommittee today,
10 and without objection, your entire
11 written statements will be made a part of
12 the record. You'll each be recognized
13 for five minute to summarize your
14 statement or present it any way you see
15 fit.
16 We'll get right down to it. First,
17 we have Mr. Joseph Borg, Director,
18 Alabama Securities Commission. Mr. Borg.
19 MR. BORG: Thank you, Mr. Chairman,
20 Ranking Member Garrett and Members of the
21 Subcommittee. I'm Joe Borg, Director of
22 the Alabama Securities Commission, and
23 thank you for the invitation to
24 participate today.
25 Our office has administrative, civil

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1 and criminal authority under the Alabama
2 Securities Act and we've brought dozens
3 of investigations of Ponzi and pyramid
4 schemes, illegal blind pools, fraudulent
5 private placement offerings and other
6 scams which have led to numerous
7 enforcement cases and criminal
8 prosecutions. I've submitted written
9 testimony which has additional details
10 and discussion of the bullet points I
11 will outline here, today.
12 Here are some of my particular areas
13 of concern. First, there's the levels of
14 protection. It is my belief that the
15 level of protection with regard to the
16 SIPC Fund should be increased from
17 500,000 to 1,000,000 dollars. A large
18 portion of retirement savings consist of
19 securities investments, and most people
20 just do not leave huge amounts of retire
21 money in banks. It's at the brokerage
22 house.
23 The one million dollar level of
24 protection would also match SIPC's
25 Canadian counterpart, the CIPF, Canadian

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1 Investor Protection Fund, which is
2 currently at the one million dollars,
3 Canadian.
4 I also believe that the levels of
5 protection should be indexed to
6 inflation, and indexing would allow some
7 incremental measure of increased
8 protection going forward.
9 On the issue of fictitious
10 securities, a major issue is the
11 treatment of claims based on a securities
12 position which never actually existed.
13 There are conflicts between decisions
14 from the Second and Sixth Circuit Courts
15 of Appeals, and I believe that part of
16 the problem stems from SIPA's distinction
17 between cash and securities. The
18 disparate protection between claims for
19 cash and securities and claims for
20 securities should be eliminated. For
21 example, if I have 500,000 dollars of
22 securities, I sell 350,000 dollars, and
23 the brokerage house is closed before I
24 get to cash the check but the money's
25 still in the account, I've just lost

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1 100,000 dollars because of the 250,000
2 dollar limit.
3 I would also note that the Canadians
4 eliminated the distinction between claims
5 for cash and claims for securities back
6 in 1998. In a discussion with SIPC
7 staff, a change in favor of eliminating
8 the cash versus securities distinction
9 would not alter the risk models used by
10 SIPC.
11 The next item is the increase in the
12 line of credit from Treasury. If we
13 expect continued growth in the securities
14 market, and a change of cover to,
15 perhaps, one million dollars, cash or
16 securities and you index it to inflation,
17 it may require an increase in the line of
18 credit from Treasury. I know it hasn't
19 been tapped, so far, in history, but
20 we've asked the SIPC staff to review the
21 effect of protections at the one million
22 dollar level. My personal feeling that a
23 line of credit of five billion matched
24 with reserves of five billion from the
25 industry would be an appropriate amount,

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1 going forward. At the current level of
2 assessments, it will take a number of
3 years to reach the 2.5 billion dollar
4 level. I think the staff has told us
5 about five years. But I think if we
6 target for ten billion and we start to
7 be -- let's be realistic and start
8 planning for them now, that planning
9 should start now.
10 On assessments, prior to the
11 enactment of Dodd-Frank SIPC had a floor
12 of 150 dollars; ridiculously low. There
13 are now some SIPC members, though, who
14 pay zero assessments because of the
15 change of the law. I think that's just
16 an unintended consequence. It's my
17 belief that there should be a minimum
18 assessment of some amount. Perhaps 1,000
19 dollars; I'd prefer a range of 2,000 to
20 2,500. Also, I was very surprised to
21 learn that in computing assessments that
22 revenues on mutual funds are not
23 included. And I'm of the opinion that
24 since all investors benefit from
25 protection or should benefit from

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1 protection, and broker-dealers benefit
2 from SIPC availability, that revenues on
3 mutual funds should be included for
4 assessment purposes as well.
5 I would also suggest that any time
6 that a target level is reached, whether
7 it's a billion, 2.5 billion, or 5 billion
8 dollars, there should be another
9 determination of whether assessments are
10 adequate based on the current level of
11 investors' assets in the market. Let me
12 suggest that the current arrangement with
13 the Treasury for the line of credit that
14 exists, which is now a term loan, should
15 actually be a revolving loan in order to
16 ensure continuity and flexibility in the
17 ability of SIPC to protect investors
18 where and when needed.
19 On investor education, the general
20 public has the misconception that SIPC is
21 some type of insurance, just like FDIC
22 insurance for banks. If we're going to
23 make a change, it's going to change the
24 entire dynamic. And I'm not suggesting
25 we don't change it. But I think that the

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1 parameters of what this task force is
2 going to look at will change, depending
3 on Congressional intent.
4 If it was not intended to be
5 insurance for fraud, but only for
6 replacing cash and securities, I think
7 this misconception was exacerbated by
8 references to FDIC tying the amounts of
9 coverage to the same levels of FDIC, and
10 a comparison by the broker-dealer
11 community who tout specific protection
12 levels.
13 Suggestion to fix it. TV ads and
14 seminars and publications are great, but
15 that's not how you're going to educate
16 the public. Include in the brokerage
17 statements every quarter or every month
18 that they go out a section on SIPC
19 protection: what it is, but more
20 importantly what it's not. I think
21 you're going to need a constant education
22 effort on a regular basis to get over the
23 misconceptions that have occurred. And I
24 wouldn't to an insert. You know what I
25 do with inserts. You throw them away,

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1 you read the statement. It needs to be
2 part of the brokerage statement. I know
3 that SIPC does not have the power to do
4 that. That would have to come from SEC
5 and FINRA.
6 I know my time's up. I have
7 submitted materials with regard to
8 indirect investing, with regard to
9 retirement plans and hedge funds. I
10 think they ought to be matched up to the
11 way that FDIC and FCUA are looking
12 through those procedures at the present
13 time utilizing the IRS Code 401(d), 408
14 and including 457 plans.
15 And I would lastly say, in
16 conclusion, that under international
17 relations, I've been specifically tasked
18 by the Task Force to look at matters
19 involving international involvement of
20 SIPC. There is a -- SIPC just became a
21 member of the IOSCO, International
22 Organization, as an affiliate member.
23 Some of the things we're going to look
24 at, I think, would be formal rules on
25 cross-border protection, create a dispute

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1 resolution mechanism with a team of
2 experts -- this is from the Lehman
3 Brothers matter -- establish cooperative
4 principles, and develop a platform for
5 exchange of information.
6 I thank you again for the invitation
7 and the opportunity to be here, today.
8 And I'll be happy to answer any
9 questions.
10 Thank you.
12 Borg.
13 Next, we have the Honorable Orlan
14 Johnson, the Chairman of the Board of
15 Securities Investors Protection
16 Corporation. Chairman Johnson.
17 CHAIRMAN JOHNSON: Thank you, Mr.
18 Chairman.
19 Chairman Kanjorski, Ranking Member
20 Garrett, and Members of the Subcommittee,
21 I'd like to thank you for the opportunity
22 to appear before you today and discuss
23 the work of SIPC and the possible
24 improvements to the Securities Investor
25 Protection Act. I'm Orlan Johnson, and

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1 I'm the chairman of SIPC, and I also
2 serve as chairman of the SIPC
3 Modernization Task Force which is
4 conducting a complete and comprehensive
5 review of SIPC's operations, as well as
6 the changes to SIPA.
7 The Task Force was convened on June
8 17th of this year, and it consists of a
9 very wide range of experts. And we are
10 in the midst of a review of all the
11 considerations that are necessary from a
12 statutory standpoint, from a procedural
13 standpoint, and other reforms as it
14 relates to SIPA and SIPC. At my
15 confirmation hearing before the Senate
16 Banking Committee last December, I made
17 crystal clear that my intent, from the
18 beginning, was to come in and to have a
19 comprehensive review, and this review is
20 being undertaken. Chairman Kanjorski,
21 thereafter, contacted us and suggested a
22 number of important topics for the Task
23 Force to consider. And today I'll
24 briefly describe SIPC and the work of the
25 Task Force, in addition to providing

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1 responses to issues that the subcommittee
2 presented to me in their letter of
3 September 16th.
4 The Task Force has drawn its members
5 from all ranks, from all parts of the
6 United States. We've drawn ranks from
7 the ranks of state regulators, attorneys
8 who represent investor, academia, the
9 securities industry, trustee of the
10 largest securities brokerage insolvency
11 in history. We've included, also, the
12 chairman of SIPC's counterpart in China
13 and observer from the SEC. We anticipate
14 the diversity of viewpoint results in
15 what I would call the rigorous analysis
16 of the issues that concern investors
17 today. We have begun our work in
18 earnest, and we are examining the extent
19 of the protection and also the problems
20 that have occurred as a result of
21 "indirect" investors, the use of
22 bankruptcy avoidance powers and other
23 fundamental issues of concerns to
24 investors and to Congress.
25 We anticipate that some of our

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1 recommendations are not going to make
2 everyone happy. Nevertheless, it is the
3 role of this Task Force to have
4 everything on the table. All aspects of
5 what we need to be looking at; all
6 aspects of what needs to be reviewed. We
7 have also created a public input platform
8 on our web, in which the public is
9 invited to share their comments and for
10 all to see.
11 We've also undertaken a major public
12 outreach to ensure that as many investors
13 as possible will learn about this process
14 and get an opportunity to participate.
15 In using our web site portals, we have
16 conducted an open online forum. We did
17 our first one on September the 14th. We
18 have a next one that's going to be taking
19 place fairly soon. We also are hoping to
20 organize a live event so that we can have
21 members of the public present their views
22 directly to the Task Force.
23 After discussion of some of the
24 issues, several members of the Task Force
25 have volunteered to help us draft a

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1 number of recommendations which we intend
2 to present to the SIPC Board, and it's
3 our goal to get a full set of
4 recommendations some time in the early
5 part of the first quarter of 2011.
6 My written submission to the
7 committee addresses a number of the
8 specific issues of concerns of Congress,
9 and SIPC's work is the focus of attention
10 as it never has been in the last forty
11 years. Dodd-Frank Wall Street Reform and
12 Consumer Protection Act amended SIPA and
13 gives SIPC a new and different role in
14 the wind-down of systemically significant
15 financial conglomerates where a SIPC-
16 member brokerage firm is involved.
17 I would hope that the Task Force
18 will soon present additional
19 recommendations that will lead to
20 additional legislation and to further
21 enhance and update the SIPC program of
22 investors.
23 In conclusion, I want to assure the
24 subcommittee that the Task Force is
25 making progress and will continue to its

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1 work aimed at developing and recommending
2 substantial reforms to SIPA and SIPC.
3 I'd like to thank you for their
4 time, and I would like to thank you for
5 having members of our Task Force with
6 you, and I'd be pleased to answer any
7 questions that the members of the
8 subcommittee may have. Thank you again,
9 Mr. Chairman.
11 much, Chairman Johnson.
12 Next, we have Mr. John Coffee, the
13 Adolph A. Berle Professor of Law at
14 Columbia University. Mr. Coffee.
15 MR. COFFEE: Chairman Kanjorski,
16 Ranking Member Garrett, and Fellow
17 Congressmen --
18 Are we now on? Okay, thank you.
19 I have only two points to make in my
20 brief remarks. There are things Congress
21 should do to amend, extend, and modernize
22 the Securities Investor Protection Act.
23 But, too, there are things Congress
24 should not do. My hopes for what
25 Congress could do must be balanced

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1 against my fears of what Congress might
2 do.
3 The first rule always has to be "do
4 no harm", and I think there are some
5 harms here in some of the potential
6 reforms. Let me start with my host. I
7 agree very much with Mr. Borg's comments.
8 I think I won't cover the same ground
9 he's covered. So let me start with a
10 different point.
11 Congress should extend the
12 definition of customer to reach
13 beneficial and indirect owners in a
14 variety of collective investment
15 vehicles. Americans, today, invest
16 through collective investment vehicles.
17 The highest priority should be to cover
18 the smaller pension funds and other
19 collective investment vehicles where
20 typically the legal owner has failed or
21 neglected to inform the covered broker of
22 all of the individual accounts that are
23 represented in that collective fund. The
24 presumption, the strong presumption
25 should be in favor of a pass-through

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1 approach. That is what both the Federal
2 Deposit Insurance Corporation Act and the
3 Federal Credit Union Act already adopted
4 over a decade ago. SIPA, the Securities
5 Investment Protection Act, is behind the
6 pack in not having adopted a pass-through
7 approach that reaches beneficial and
8 indirect owners.
9 Such a pass-through approach is
10 superior to what is being provided in
11 proposed H.R.5032 which only amounts to a
12 100,000 dollar advance to the indirect
13 owner, and it requires the indirect owner
14 to waive their right to sue the feeder
15 funds who put them into the Ponzi scheme.
16 I can so no reason in the world why
17 Congress wants to exempt bodies like
18 Fairfield Greenwich that appear to have
19 behaved very, very recklessly, at the
20 least.
21 Now, I realize that what I'm saying,
22 that we should cover beneficial or
23 indirect owners, would be costly for
24 SIPC. And thus, I think it's necessary
25 to prioritize. I don't think I would

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1 initially try to cover the large mutual
2 fund or the very large pension fund
3 because they are, by law, diversified and
4 cannot suffer really significant losses
5 from a Ponzi scheme. But the smaller
6 funds and the smaller pension funds would
7 be my priority to cover first. And yes,
8 this may require some increase in the
9 assessment, which right now starts at
10 one-half of one percent of your gross
11 revenues until your fund reaches a
12 certain size. I think the average small
13 businessman in America spends more than
14 one-half of one percent of their gross
15 revenues on covering insurance and
16 similar costs. My basic point, though,
17 is we now have a system that doesn't
18 cover the smaller person because they're
19 more likely to be the person who is in
20 the indirect position of being a
21 beneficial owner.
22 Next point, which Mr. Borg also
23 said, and I'll just say it very briefly,
24 I think we should abolish the distinction
25 between cash and securities. It produces

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1 arbitrary distinctions because it's a
2 happenstance what your account consists
3 of on the moment that the broker-dealer
4 fails.
5 Now, on the other side of the
6 ledger, there are proposed reforms that I
7 would urge Congress not to adopt.
8 Particularly, I would advise you against
9 powers of a SIPC trustee to sue the net
10 winners in a Ponzi scheme because, in
11 reality, Ponzi schemes are composed of
12 net winners and net losers. To the
13 extent we protect the net winners, we
14 injure the net losers. When Mr. Picard,
15 the Madoff trustee, sues the net winners,
16 he's not giving that money to the federal
17 government. He's seeking to aid the net
18 losers. Although I can sympathize with
19 the position of some of the net winners,
20 their experience was far less tragic, far
21 less traumatic than that of the net
22 losers, and I don't think Congress should
23 subordinate the net losers to the net
24 winners. I note that Mr. Picard has
25 filed, as of April, some fourteen actions

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1 seeking 14.8 billion dollars. Those
2 fourteen actions are not against poor,
3 unsuspecting people; they are against
4 very large entities, and if 5032 passes
5 in its current form, I think the
6 settlement value of those cases would be
7 dramatically reduced.
8 Thus, I'm urging you in my written
9 testimony that if you want to do
10 something for the net winners that you
11 think are unsuspecting, unfortunate
12 victims, it would be better to create
13 either a de minimis exception, saying no
14 recovery until the fictitious profits go
15 above a certain level, or use what I'll
16 call an imputed interest factor. Say, if
17 you put money in ten years ago, you're
18 entitled to at least a ten percent return
19 a year, and that would double the
20 recovery. But if you use the current
21 approach, there are going to be people
22 who, according to a published article in
23 the Wall Street Journal, have offered to
24 settle in the neighborhood of two billion
25 dollars in just one case who are going to

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1 find that the settlement value of that
2 kind of recovery will be greatly reduced
3 because it's going to be very difficult
4 to prove that anybody was complicit in
5 Madoff's fraud or that they were
6 negligent, where they'll say they were
7 relying upon audited financial
8 information.
9 Lastly, and just one second, I do
10 think that the approach taken in the
11 Financial Services Appropriation Bill
12 which would compel the SIPC to cover all
13 the losses in the Stanford scandal
14 probably goes beyond what the SIPC can
15 possibly handle. It was established to
16 cover securities that were in the custody
17 of the broker or that were on the
18 broker's books. Asking the SIPC to cover
19 all fraud-related losses could threaten
20 the solvency of the SIPC. That should
21 not be done retroactively.
22 On this point, I'll stop. Happy to
23 answer further questions.
25 much, Mr. Coffee.

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1 Next, we have Mr. Ira Hammerman,
2 senior managing director and general
3 counsel to the Securities Industry And
4 Financial Markets Association. Mr.
5 Hammerman.
6 MR. HAMMERMAN: Thank you, Mr.
7 Chairman, Ranking Member Garrett, and
8 members of the Subcommittee.
9 I'm pleased to testify on behalf of
10 the Securities Industry and Financial
11 Markets Association on this important
12 subject. My testimony focuses on SIFMA's
13 preliminary recommendations regarding
14 revisions to SIPA in light of issues
15 emerging from recent liquidations and the
16 effects of the Dodd-Frank.
17 SIPA's fundamental purpose is to
18 promote investor confidence in the
19 capital markets by protecting customers
20 against the loss of cash or securities in
21 the failure of the broker holding such
22 property. It is not intended to protect
23 investors against losses on their
24 investments, only against losses of their
25 investments. When a broker fails, SIPA

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1 provides for the distribution of the
2 customer property, pro rata, to all
3 customers. And to the extent there are
4 shortfalls, 500,000 dollars from SIPC is
5 available to restore to each customer
6 missing cash or securities.
7 Investors who lose money because of
8 a decline in the value of the securities
9 purchased for their accounts, however,
10 are not protected by SIPA against such
11 losses, whether the decline is due to
12 market forces or even due to fraud. In
13 this regard, SIFMA opposes the SIPA
14 Culberson amendment as it would extend
15 SIPC's protection to cover fraud by the
16 issuer of securities which are neither
17 lost nor stolen but in fact in the
18 customer's possession.
19 SIPA's customer protection framework
20 has been challenged like never before by
21 two recent events: the Madoff Ponzi
22 scheme, a massive, long-term fraud
23 that inflicted significant harm on many
24 investors, including individuals,
25 families, charitable and educational

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1 institutions highlighted questions about
2 the scope of customer protection under
3 SIPA, especially as it applies to the
4 calculation of a customer's net equity in
5 a Ponzi scheme and the application of
6 SIPC's protection to indirect investors.
7 The insolvency of Lehman Brothers
8 exposed inconsistencies between SIPA and
9 the SEC's Customer Protection Rule.
10 When a failed broker-dealer was
11 operated as a Ponzi scheme, we believe
12 that customer property should be
13 distributed to the victims based on the
14 net amounts entrusted to the failed
15 broker-dealer, reduced by any
16 distributions received, without regard to
17 fictitious profits shown on fraudulent
18 account statements. The property held by
19 a Ponzi scheme and available for
20 distributions to the investors is simply
21 the pooled property of all the victims,
22 and distributions based on anything other
23 than their net investment would be
24 fundamentally unfair.
25 Indirect investors, who did not have

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1 accounts with a failed broker but
2 invested in another entity, like a hedge
3 fund, that had an account are not
4 eligible for SIPC's protection.
5 SIPC, generally, should not provide
6 greater protection to institutions than
7 to individuals, and accordingly, SIFMA
8 opposes an increase in the protection
9 provided to customers that are hedge
10 funds, corporations, or partnerships.
11 This principle, however, may not apply to
12 trusts or employee benefit plans, which
13 represent the interests of their
14 beneficiaries in a more straightforward
15 way.
16 Before expanding SIPC protection to
17 these indirect investors, however,
18 Congress should consider the additional
19 cost.
20 SIPA and the SEC's Customer
21 Protection Rule should work together.
22 This rule requires each broker to
23 maintain possession of its customers'
24 fully-paid and excess margin securities
25 and deposit into a reserve account an

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1 amount generally equal to its net
2 monetary obligation to customers. In a
3 SIPA liquidation, the customer securities
4 and the reserve account are available for
5 distribution to customers. If SIPA and
6 the Customer Protection Rule are
7 harmonized, a failed broker that complied
8 with the rules should have sufficient
9 customer property to satisfy the net
10 equity claims of all customers.
11 Unfortunately, the two are not fully
12 harmonized, today.
13 Additionally, as the SEC begins to
14 develop the requirements applicable to
15 securities-based swap dealers, the
16 divergences between the SEC's customer
17 protection requirements and SIPA will
18 only increase.
19 Dodd-Frank Act amended the
20 liquidation provisions of the Bankruptcy
21 Code to treat accounts holding
22 securities-based swaps as "securities
23 accounts" but no similar amendment
24 was made to SIPA, leaving unclear the
25 treatment in a SIPA liquidation of

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1 customers' securities-based
2 swaps and related margin.
3 Lastly, SIPA provides for the
4 distribution of a single pool of
5 property, pro rata, among all customers,
6 which may unfairly impose risks of the
7 more complex types of accounts, like
8 portfolio margin accounts, on the
9 customers who have simpler accounts, like
10 cash accounts. To protect customers with
11 the simpler accounts, customers should be
12 divided up into separate account classes,
13 the rules tailored to create a separate
14 pool of customer property for each
15 account class, and SIPA and the
16 Bankruptcy Code, should provide for the
17 distribution of each such separate pool
18 to the customers in the related account
19 class. The best way to harmonize the
20 customer protection rules with the
21 liquidation process and to tailor both to
22 separate account classes is for Congress
23 to authorize the SEC to make appropriate
24 rules under SIPA, the Bankruptcy Code,
25 and the Exchange Act.

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1 We also believe that the basis on
2 which members contribute to SIPC's fund
3 may be outdated and should be reviewed in
4 light of the manner in which members
5 currently operate.
6 In conclusion, SIFMA is strongly
7 committed to working constructively with
8 the SIPC Task Force and this subcommittee
9 to recommend ways to better protect
10 investors and thereby increase investor
11 confidence in the financial markets.
12 I would be pleased to answer any
13 questions you may have. Thank you.
15 much, Mr. Hammerman.
16 Finally, we have Mr. Steven Caruso,
17 partner in Maddox, Hargett & Caruso. Mr.
18 Caruso.
19 MR. CARUSO: Thank you. Chairman
20 Kanjorski, Ranking Member Garrett,
21 members of the subcommittee, my name is
22 Steven Caruso. I'm an attorney from New
23 York City with the law firm of Maddox,
24 Hargett & Caruso. Our law firm
25 represents investors. That is what we

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1 do.
2 I am also now a member of the SIPC
3 Modernization Task Force, and I view my
4 role on that Task Force as looking
5 forward, what can we do to make sure that
6 what we have experienced in the past few
7 years does not happen again. There's a
8 lot of blame to go around. We can blame
9 the SEC, we can blame FINRA. We heard
10 earlier somebody blaming the prior
11 administration. That doesn't answer the
12 question.
13 There are, in my mind, two questions
14 when we leave here today. One, what do
15 we do to keep anything tragic from
16 happening as we move forward, and two,
17 what do we do to remedy what has happened
18 to investors in Madoff and Stanford and a
19 host of other situations where investors
20 have been screwed? Plain and simple.
21 That, in my view, is what this committee
22 needs to consider going forward. We have
23 heard from other colleagues on this panel
24 about increasing SIPC coverage; that has
25 to be done. We have heard about

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1 increasing the target level; that must be
2 done. Just think, over the past few
3 years what we have all seen. Lehman
4 Brothers is gone. Bear Stearns is gone.
5 Who's next? And what happens if somebody
6 needs to step up to cover the exposure
7 associated with those firms?
8 You need to eliminate the
9 distinction between cash and securities.
10 Every investor for covered securities
11 should get, plain and simple, at least a
12 million dollars of coverage. That is the
13 only fair and decent thing to do.
14 There are other suggestions and
15 other questions that I have put in my
16 materials.
17 But make no mistake about it.
18 Madoff will happen again. There are
19 people out there who are greedy.
20 Stanford will happen again. Lehman
21 Brothers, it's going to happen again. So
22 what do we do? We build in protections
23 going forward, but it begs the question,
24 what do we do about all these people who
25 have been hurt in the past.

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1 Now, I'm not aware of any
2 legislation having been introduced by the
3 Congress that would provide any financial
4 restitution to these people, and it's
5 very convenient to make SIPC the whipping
6 boy for what's happened. But if we want
7 to take care of those people, then I,
8 today, call on Congress to introduce
9 legislation in addition to the tax relief
10 that would provide a means of restitution
11 away from the SIPC process. That's the
12 most equitable and the fairest thing to
13 do.
14 I thank you for inviting me today,
15 and I'd be pleased to answer any
16 questions.
17 CONGRESSMAN ACKERMAN: Thank you
18 very much, Mr. Caruso, and I thank the
19 entire panel for your testimony.
20 I know -- I think we all have some
21 questions, and I'll begin with my own and
22 we'll take five minutes each, and we'll
23 go as many rounds as anybody would like.
24 I'll go backwards and start with a
25 statement that Mr. Caruso just made, and

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1 that is seeing the mission as looking
2 forward. When I look forward, I see
3 before me some of the wounded warriors of
4 the past, the victims, at least a
5 thousand of whom were traumatized by
6 Bernard Madoff and are now being
7 terrorized by the trustee. That's what I
8 see, looking forward, for some people.
9 And I believe it was Professor Coffee who
10 said, recalling the Hippocratic Oath of
11 "first do no harm", to look at this
12 situation that we are doing tremendous
13 harm with the issue of the clawback to
14 many, many people.
15 I think one of the terrible things
16 that we've done here is because of the
17 way this zero sum gain equation works,
18 that we have created classes of victims.
19 I don't understand, really -- and I know
20 the math -- net winners and net losers.
21 Except for the few who have yet to be
22 identified, should there be those, who
23 were complicit with Madoff, everybody
24 else is a victim. People who might have
25 taken more money out of money that they

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1 think is theirs have been victimized.
2 People who put their money in the bank --
3 and I know that's a different system when
4 you're talking about the FDIC and not
5 SIPC -- who are using their own money,
6 and suddenly somebody says that wasn't
7 really your money because you weren't
8 entitled to that seven percent interest,
9 or whatever it was, they're victims. If
10 you're telling people their whole
11 lifestyle -- not just in the future but
12 in the past -- has to be reversed, that
13 they can no longer live in their house or
14 maintain their business or drive in their
15 car or continue to pay for their children
16 or grandchildren's education, they are
17 victims. That's traumatic. And to
18 create classes of people by saying some
19 are rich, wealthy entities and some are
20 not, a guy dies and the insurance company
21 ain't doing so well, so you say to the
22 widow, I know you had a policy but you're
23 okay. I'll give it to someone else.
24 After you think the money is yours
25 and you paid for the premium, and I don't

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1 know what kind of premium, by the way,
2 you think you get 500,000 dollars worth
3 of insurance for 150 bucks a year. And
4 the system pretends that the people had
5 real insurance. And the SEC agrees that
6 that's real insurance after they're
7 supposed to be supervising the agency.
8 And the U.S. Congress, which is complicit
9 in this thing as well, because we're
10 supposed to be overseeing -- and
11 everybody's just pretending. You know,
12 at least during the commercials, the guy
13 says, "I'm not a real doctor; I'm just
14 playing one on TV." Well, this isn't
15 real insurance; we're just making believe
16 to make you feel better.
17 My question is about clawback. If
18 we're going to move forward, how do you
19 move backward? That's question number
20 one. Clawback. Anybody? Everybody?
21 MR. CARUSO: I'll offer a
22 suggestion. I think anytime you get into
23 the issue of clawbacks, you not only
24 implicate SIPC and SIPA, but you also do
25 the Bankruptcy Code. Is it fair to go

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1 back to somebody who took out money to
2 pay taxes? Is it fair to go after
3 somebody who may have taken money to pay
4 for a grandchild's education? I don't
5 think, I don't think anybody in this room
6 would say it's necessarily fair. And I
7 think Congress has the power to step up
8 and say that's not fair. That is simply
9 not fair. Whether you should be able to
10 go back a year or two years, clearly, for
11 insiders, it would be different. But for
12 other people to go back five, six, seven
13 years, in my personal opinion, I find
14 that to be stretching the limit.
15 But I don't think SIPC or the Task
16 Force has the power to change that. I
17 think that rests with the Congress. And
18 maybe I'm wrong on that, but if --
19 CONGRESSMAN ACKERMAN: And what
20 would you suggest as a policy that
21 Congress do? Do we have a responsibility
22 to those people?
23 MR. CARUSO: I think you clearly
24 have a responsibility to those people,
25 and I heard earlier a suggestion about a

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1 distinction about how much of a clawback
2 would you go after. You know, would
3 there be a threshold limit. Clearly, if
4 there's somebody like a feeder fund who
5 benefited by millions or billions of
6 dollars, there should be no limitation on
7 the ability to get the money back.
8 CONGRESSMAN ACKERMAN: Isn't this a
9 moral question and not a means-tested
10 thing? I mean, I am sure without knowing
11 anything -- but maybe I shouldn't be so
12 sure -- but I am willing to bet that
13 there are people who took nothing out of
14 their accounts who are much wealthier --
15 much wealthier than people who took 150
16 percent out of their account because they
17 had to live off it. Do we means-test
18 this thing or do we make a policy
19 decision and try to do what's right?
20 I mean, this is a real Solomonic
21 question that's before us, and I think we
22 need some policy guidance, and you all
23 are looking at this thing prospectively,
24 how to protect people in the future. But
25 you know, when you come up with a cure

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1 for a disease, it's our obligation not
2 only to inoculate people yet who have not
3 gotten the disease but to treat the
4 people who are suffering from it at the
5 same time. How do we deal with these
6 people?
7 MR. COFFEE: May I try to address
8 that question, Congressman?
9 CONGRESSMAN ACKERMAN: Professor
10 Coffee, please.
11 MR. COFFEE: I would --
12 CONGRESSMAN ACKERMAN: And then I'm
13 going to yield to my colleague, Mr.
14 Garrett, because my time is up.
15 MR. COFFEE: I would just suggest to
16 you that we look at all of the
17 participants who fall into this heading
18 of net winners who took more cash out
19 than they put cash in, there is a
20 continuum. There may be people that
21 Congress wants to protect; you could
22 protect them with a de minimis test,
23 saying that only fictitious profits over
24 $X could be recovered. You could protect
25 them with what I'll call an imputed

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1 interest test because if you put this
2 money in ten years ago, the fact that you
3 made ten percent a year would entitle you
4 to take out a hundred percent or more
5 above the money you put in. But you do
6 not need to protect the feeder funds and
7 the other people who look like they
8 behaved irresponsibly and probably
9 corruptly. Those names are well-known to
10 the financial press, whether it's
11 Fairfield Greenwich, Mr. Merkin, Stanley
12 Chais, Jeffry Picower. Those people are
13 cheering you on right now because if you
14 move the standard up, anytime you make
15 the recovery harder for the trustee,
16 you'll reduce the settlement value of the
17 trustee's claims against them, and the
18 trustee can get billions of dollars back
19 from them for the net losers. I don't
20 think Congress should make it harder to
21 recovery by the trustee on behalf of the
22 net losers from the people who I think
23 were very culpable. And there were a
24 number of those people.
25 Thus, if you would protect the

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1 people you want to protect by, instead,
2 using a de minimis test or an imputed
3 interest test, I think you will achieve
4 most of your objective without protecting
5 those people who are culpable.
6 CONGRESSMAN ACKERMAN: I'll respond
7 but in a different round or probe that in
8 a different round.
9 Mr. Garrett.
10 CONGRESSMAN GARRETT: Thanks. So
11 going forward, does anyone have a
12 recommendation with regard to the SIPC
13 logo and that some people have suggested
14 that we put a little asterisk by it
15 saying that -- warning you that
16 statements that you're receiving may be
17 interpreted in a different way and that
18 you'll be subject to clawbacks in the
19 future or other interpretations. I say
20 that facetiously, but maybe not, because
21 a couple of your comments -- everyone's
22 comments seem to imply that the investor
23 had a misinterpretation of exactly what
24 they were getting when they -- if they
25 understood that SIPC was there and what

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1 they were relying upon. But some of you
2 have suggested -- Mr. Hammerman, if I was
3 following, if you were going into the
4 weeds on some of that, I think you said
5 different pools or classifications, what
6 have you. Mr. Coffee, Professor, you
7 were talking about it, not in those
8 terms, but in -- similar approach, or
9 getting to the end place. I, as the
10 typical little investor going into my
11 local shop to make my investment and
12 seeing the SIPC logo there, probably is
13 not going to know right away, Mr.
14 Hammerman, do I fall in pool number (sic)
15 A, B, C, or is there no water in my pool
16 at the end of the day because I
17 miscalculated. And someone over there,
18 Mr. Coffee or Mr. Johnson, somebody made
19 the comment about -- no, it was Mr.
20 Borg -- about not reading all the
21 disclaimers and everything that you get
22 in your mail, just like none of us read
23 our disclaimers that we get from the
24 credit card companies and all those
25 things.

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1 So how do we address that? We're
2 going to create a whole bunch of
3 different classifications -- I'll start
4 with Mr. Hammerman, there -- and then,
5 for me, the little guy, that just doesn't
6 follow this to begin with?
7 MR. HAMMERMAN: I think at the heart
8 of your question is investor education
9 and informing the public to a better
10 extent than we've been doing historically
11 as to what SIPC is all about. And again,
12 when I talk about SIPC, it's the SIPC of
13 the last forty years. There's a lot of
14 discussion about where this should go in
15 the future. But certainly from the
16 industry standpoint, we would be willing
17 to work with all experts: SIPC, NASA,
18 the SEC, FINRA, consumer groups, whoever
19 the right people in the room are. If
20 there's a way to do a better job of
21 investor education so that investors
22 understand, and it's not just a one-time
23 thing, so it's not just a disclosure at
24 the opening of an account. As Mr. Borg
25 said, this needs to be ingrained over

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1 time.
2 CONGRESSMAN GARRETT: So
3 realistically, I mean, I don't know how
4 about you, I get my statements regularly,
5 and I get them all the time, and I look
6 at the number and, whoo, I'm doing pretty
7 good, or right now, I'm doing pretty
8 poorly. I'm not reading through the rest
9 of all the fine print. Maybe I'm
10 abnormal in that regard. Maybe other
11 people read through all that sort of
12 stuff, but I don't.
13 So if we do try to reeducate folks
14 and tell them that, in the future, and I
15 think we should -- I think -- I agree on
16 this -- in the future, the American
17 public should not rely upon the federal
18 government to be protecting them to the
19 extent that they thought that the federal
20 government was protecting them in the
21 past because we've shown that the federal
22 government in these areas, the various
23 agencies can't do it. So I think that's
24 one learning lesson that the Americans
25 did get.

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1 MR. COFFEE: That's a very good
2 question.
3 CONGRESSMAN GARRETT: Yeah.
4 MR. COFFEE: I think your question's
5 a profound one because when you give
6 investors investor education and you show
7 that there are some arbitrary lines, it
8 really become incumbent upon Congress to
9 change those lines and not insist upon
10 arbitrary distinction. Mr. Borg, I, and
11 others have told you that the definition
12 of customer is too limited. Rather than
13 tell all investors that the definition of
14 customer is limited and arbitrary, it is
15 better to change the definition of
16 customer so it makes a little more sense
17 and it includes the smaller person who
18 thought he had coverage, but doesn't.
19 CONGRESSMAN GARRETT: I appreciate
20 that, and maybe if you do a round, but I
21 want to get one other question for Mr.
22 Johnson.
23 In your statement, you claim in the
24 past, the court and SIPC had rejected
25 using the customer's last statement as a

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1 guide for the SIPC coverage where
2 fictitious profits are involved. Okay.
3 But in the leading case in the Second
4 Circuit's New Times I, in fact, the
5 customer's final statement was used, I
6 understand, in calculating their SIPC
7 reimbursement. Comments?
8 MR. JOHNSON: We have a number of
9 cases, and also the bankruptcy courts
10 have always looked at whether or not
11 there was reason to believe that the last
12 statement that you had received actually
13 was the information that was accurate.
14 CONGRESSMAN GARRETT: True.
15 MR. JOHNSON: One of the things that
16 we've been doing is trying to figure out
17 how do we make sure that we utilize these
18 statements in a way that we're protecting
19 all the investors. What the primary
20 concern is, regarding the final
21 statement, is making sure that we don't
22 create an environment where the wrongdoer
23 actually has the opportunity to create
24 the forum for who would be successful and
25 who would not be successful. The reason

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1 that's important is that you could have a
2 situation -- let's take the Madoff case -
3 - where you have someone that tells you
4 something that, from the beginning, was
5 not true. But the final statement, they
6 tell you, guess what, you've got nothing
7 to worry about because whatever I got on
8 that final statement is what you're going
9 to be protected from. That would be the
10 only true statement that would come out
11 of their mouths, and what we would be
12 doing is creating an environment where
13 the wrongdoer now has an opportunity to
14 set the tone for how the government will
15 be responsible for responding. And so
16 the primary issue that we're concerned
17 with is making sure that whatever method
18 that we use, are going to ensure that we
19 are not going to allow the wrongdoer to
20 actually set the parameters on how we go
21 about making final decisions and putting
22 Congress in a position of where they end
23 up doing something that may be
24 unintended, as well.
25 CONGRESSMAN GARRETT: Okay, well,

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1 you're sort of going down a slightly
2 different road on that, but I understand
3 what you're saying. But there's case
4 law, now, that says the final statement
5 can be used by you for the reimbursement
6 purposes. So going forward on that case
7 law, contrary to the position of SIPC,
8 then.
9 MR. JOHNSON: There's case law that
10 has said that. There's also bankruptcy
11 rulings that have mentioned the fact that
12 you can look at things from a different
13 standpoint as it relates, also, to not
14 only whether or not you've got this
15 fictitious statement but also whether or
16 not you're a net winner or net loser.
17 And part of that calculation takes into
18 consideration whether or not this
19 fictitious statement or the statement you
20 have is one that's valid. Now, whether
21 or not it should be taken into
22 consideration, it should be. But at the
23 end of the process, there has to be some
24 analysis to determine whether or not that
25 actual statement is what you should end

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1 up using as the basis of how you would go
2 about making a payment on a claim.
3 CONGRESSMAN GARRETT: But you're
4 going to continue to reject the use of
5 that as a guide for your coverage in
6 cases?
7 MR. JOHNSON: What we will do is we
8 will continue to look at the statements
9 that come in, and then we will continue
10 to look at what we would call the global
11 aspect of what happened in a particular
12 set of circumstances, and then, if there
13 is a conflict, we will take it to the
14 court and allow a third party to help us
15 to make a decision whether or not we
16 should move forward or not.
17 All we're trying to do is,
18 hopefully, vigorously pursue the law as
19 we understand it and interpret it, and we
20 understand that there can be reasonable
21 minds that may differ on how you may
22 interpret the law. But once we are told
23 from a third party or any place else that
24 we should be operating differently, then
25 we intend to vigorously move forward in

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1 that vein, as well.
2 CONGRESSMAN GARRETT: Does -- I
3 don't know, is, Mr. Caruso, I don't want
4 to throw you on the spot on that one.
5 Any response to that, considering where
6 you come from? If not, fine.
7 MR. CARUSO: Well, clearly, there
8 are going to be different opinions from
9 different circuits from different courts.
10 Part of the confusion that exists is that
11 there is no well-defined standard that is
12 universal throughout the country. And
13 the only way that I know of that that
14 finally could be resolved would be
15 through the Congress of the United States
16 because you're going to have different
17 court opinions on every issue.
18 MR. JOHNSON: I think one other
19 point that's worth mentioning regarding
20 the Second Circuit case is it also points
21 out the fact that where the decision
22 regarding what those amounts on the
23 statement are arbitrary, and in this
24 case, we're looking at a situation where
25 the numbers, for example, in the Madoff

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1 statements were arbitrary, then that
2 would be taken into consideration in
3 terms of coming to a final analysis, as
4 well.
5 CONGRESSMAN ACKERMAN: Thank you.
6 Next, my co-collaborator and co-sponsor
7 of the Ponzi Scheme Investment Protection
8 Act, Mr. King.
10 Ackerman. As I'm listening to this, I
11 don't think we're getting the full import
12 or impact of the reality that while SIPC
13 was set up to protect investors, in too
14 many cases, right now, the trustee is
15 acting as a prosecutor of victims. And
16 we can try to explain it any way we want,
17 but the fact is that these people were
18 victims, and they're now being subjected
19 to the same type of treatment that
20 defendants are put through in massive
21 criminal conspiracies, and yet there's no
22 evidence that any of these people are co-
23 conspirators. They're victims. And, you
24 know, I look at the SIPC web site, and it
25 says although not every investor is

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1 protected by SIPC, no fewer than ninety-
2 nine percent of persons who are eligible
3 get their investments back from SIPC.
4 So clearly, what's being done in
5 reality is different from what people had
6 every reason to expect. They relied on
7 the statements they received from Madoff,
8 they relied on statements from SIPC that
9 ninety-nine percent of investors will be
10 protected, and yet they are, in addition
11 to all the money that they've lost
12 because of Madoff, they are now running
13 up incredible legal fees, they are being
14 required to produce documents going back
15 twenty-five and thirty years, and it's
16 being done in, I believe, a very
17 arbitrary and high-handed way, and very
18 heavy-handed way which is just
19 perpetuating the terrible injustice that
20 was inflicted upon them in the first
21 place.
22 Now, as far as going forward with
23 SIPC, if I could just be clear in my
24 mind, how was the trustee, how was Picard
25 appointed?

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1 MR. JOHNSON: Well, he's really
2 appointed by the bankruptcy court. They
3 have an opportunity to review who the
4 potential trustees may be. There'll be
5 recommendations that'll be made, they
6 would check to see if there are any
7 conflicts of interest, and then they
8 would go forward and go through that
9 selection process.
10 Mr. Picard is obviously someone
11 who's been involved in this industry for
12 a --
13 CONGRESSMAN KING: Let me stop you
14 because time will be running. Did SIPC
15 make any recommendation on who the
16 trustee would be?
17 MR. JOHNSON: Yes, we do make a
18 recommendation regarding who we think
19 would be a good trustee.
20 CONGRESSMAN KING: And who did you
21 recommend?
22 MR. JOHNSON: Who did we recommend?
23 CONGRESSMAN KING: Yes.
24 MR. JOHNSON: I believe we
25 recommended Mr. Picard.

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1 CONGRESSMAN KING: Mr. Picard. So
2 in effect, we have the court selecting a
3 trustee that you recommended, and the
4 argument could be made that he is now
5 putting a tremendous effort in to
6 protecting SIPA's funds, that rather than
7 protecting investors, he's actually
8 working to protect SIPA. And to me,
9 there's almost an inherent conflict of
10 interest in it. I know the court made
11 the final decision, but the
12 recommendation was made by SIPA. And it
13 seems to me for going forward with
14 recommendations in the future, maybe
15 trying to correct the investors of the
16 present, we would find a way to have a
17 much more independent person appointed as
18 trustee in which SIPA would have no input
19 whatsoever.
20 MR. JOHNSON: Well, let me make one
21 thing clear. I don't think that we need
22 a trustee to protect SIPC funds under any
23 circumstances because these funds, from
24 my standpoint, don't belong to any of us.
25 These are funds that should be utilized

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1 in order to protect the customers. What
2 we're trying to do is make sure that
3 whatever the role the trustee is going to
4 be utilizing is going to be in compliance
5 with the law. Now, we do have a certain
6 responsibility as we manage this fund,
7 but we're not in the business of trying
8 to figure out how to get as few people
9 helped as possible. But we are in the
10 business of making sure that whatever
11 policies and procedures that we use can
12 be protected under the law.
13 CONGRESSMAN KING: But to me,
14 looking at the record, what the trustee
15 is doing is not trying to protect as many
16 as people as possible, but he's using
17 this -- apart from the fact that he's
18 already gotten, I believe, thirty-six
19 million dollars in fees authorized to
20 himself, it's -- I just think, you know,
21 I've seen runaway prosecutors, special
22 prosecutors, and to me, what I'm saying
23 in this is a runaway trustee who's
24 putting innocent wounded people through
25 increased suffering. And I know that

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1 even -- maybe it was Professor Coffee
2 made a statement, he said, people who we
3 might think are innocent. Well, don't we
4 have to assume they're innocent? I mean,
5 is there any reason to think that any of
6 the people in this room who lost millions
7 of dollars and are now being put on the
8 rack, is there any reason to assume
9 they're not innocent? There's almost an
10 inference here that the trustee is being
11 hired because -- or, has been appointed
12 or his job is to find out those who may
13 have been involved, and we think others
14 are involved, when there's no evidence
15 that they were. And to me, the
16 presumption should be that these people
17 are innocent; how do we help them. Not
18 put them through the incredible ravages
19 and suffering that they're going through
20 right now. There's something wrong about
21 this system. I think somehow, we're
22 standing back at, you know, 30,000 feet
23 and we're saying okay, well, we dropped
24 the bomb; there may be collateral damage,
25 but we're not really, you know -- that's

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1 what happens in a war. Well, the fact
2 is, there's a lot of collateral damage
3 right now, and it's from people who are
4 already damaged are now being
5 collaterally damaged again. And I don't
6 know if we're really addressing that, the
7 inequity, the injustice, the horror of
8 that.
9 MR. JOHNSON: I think, Congressman
10 King, your point is well taken, and one
11 of the things that I've tried to do as
12 chairman is to make sure that we start
13 out with the proper tone as to how we're
14 going to go forward dealing with any of
15 the individuals who have been victimized.
16 I think the role of the trustee is one
17 that is difficult and complex, and that
18 when you begin to start to go through the
19 process, it's unclear who may be
20 complicit, who may have engaged in
21 wrongdoing, who has not.
22 But the one thing we have made clear
23 is that we wanted to make sure that
24 everyone had an opportunity, even if you
25 got, quote, unquote "received" a service

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1 of a document, that you had an
2 opportunity to come in and speak with the
3 trustee because our goal is to make sure
4 that we're going after the correct
5 individuals. We're not trying to simply
6 just go after anybody for the sake of
7 going after anybody. We understand that
8 this is a very sensitive issue, and we
9 sympathize with some of the horrors that
10 individuals have gone through, and we
11 want to make sure that at the end of the
12 day, that that process has taken place in
13 a way that we will all be comfortable.
14 And that's basically the commitment that
15 I'd like to continue to make here, today.
16 CONGRESSMAN KING: If Mr. Ackerman
17 could just give me time for one more
18 question or one more statement, if that's
19 the case, then I think someone should
20 tell Mr. Picard, because I've spoken to
21 many of these people, and they've
22 described to me what they're going
23 through. They are not being treated as
24 citizens. They're being treated as
25 defendants; they're being treated as

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1 criminals. And it's a high-handed
2 arrogant attitude by the trustee toward
3 these people. And I think something has
4 to be done, if the message should come
5 from you or the court or someone, but to
6 tell him to knock it off and treat them
7 like victims, not as criminals.
8 MR. JOHNSON: Your point is noted,
9 Congressman King.
10 CONGRESSMAN ACKERMAN: And I will
11 also note for the record that there are
12 compassionate conservatives.
13 (Laughter)
14 CONGRESSMAN KING: I take exception
15 to that.
16 CONGRESSMAN ACKERMAN: Well, you are
17 exceptional.
18 Several things. These letters that
19 are going out aren't, hey, I'm from the
20 government, I'm here and I want to help
21 you. These letters sent the tone of a
22 very adversarial relationship, and it's
23 scaring a lot of people. It's now us
24 against you or you against us. And these
25 are people not if they might have been

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1 victimized; they're victims. I mean,
2 what kind of attitude is it, they might
3 have been victimized? Is there any
4 question that they've been victimized?
5 People who directed their entire lives
6 and the future of their families after
7 working hard all their lives and doing
8 the right things wind up with nothing in
9 an account and being told they're
10 accomplices to spending stolen money. I
11 mean, that's pretty adversarial. And
12 you've got to give it back, even if you
13 don't have it. And you've got a problem
14 with that, come and talk to me.
15 You know, I mean, I understand your
16 argument, Chairman Johnson, that you
17 don't want to put the crooks in charge of
18 setting the dialogue by having the Ponzi
19 scheme operator send you a statement
20 and -- but, you know, just because the
21 guy lied and put that as the bottom line
22 on the statement, you believed it, and
23 therefore, you're guilty of something,
24 and therefore, the crooks are in charge
25 of the agenda and it's your fault for

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1 believing the bottom line. Well, let me
2 tell you something. Your government, my
3 government, our government, the Internal
4 Revenue Service was very pleased, was
5 happy, was delighted to rely on the
6 bottom line in collecting taxes and going
7 after them if people didn't pay, based on
8 that bottom line. We empowered that
9 bottom line as being gospel in telling
10 people they had to pay based on that
11 bottom line because that bottom line was
12 the bottom line. And why didn't the
13 government investigate? Why didn't the
14 government do -- I mean, this whole thing
15 is bizarre. It's Kafkaesque. I mean,
16 "first, do no harm" should be the rule --
17 I mean, it was cited here, and properly
18 so. But instead of the Hippocratic Oath,
19 we're taking the hypocritic oath. We're
20 saying first do no harm, and then we're
21 going after these people. The whole
22 notion is weird.
23 You know, my colleague, Mr. Garrett,
24 you know, talked about the SIPC logo.
25 This is the SIPC logo. People look --

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1 you know, people look in shorthand. They
2 look for symbols; they look for things.
3 And they -- this is the way we conduct
4 our lives, fortunately or not. And we
5 all get those little statements from our
6 financial institutions fifteen times a
7 week with all that fine print and it's
8 folded in sixteen pieces and we don't
9 read it and we throw it out and sometimes
10 we say who made these people send this
11 out, and then I scratch my head and I
12 say, oh, my God, what have we done. But
13 we don't read those things. We do the
14 shorthand.
15 And it says, you know, people go
16 into the bank; it says, protected by the
17 FDIC and people believe they know what
18 that is. It's the government standing
19 behind, and they've got insurance up to a
20 certain amount that we just increased in
21 this last Congress. And they know
22 they've got insurance and the
23 government's standing behind it. And
24 then they go to their broker and they see
25 this, and it looks kind of like the same

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1 kind of deal. And you go to your guy to
2 make an investment, and he hands you his
3 business card, and we just pulled two out
4 of the fishbowl that we got, and on it it
5 says he's a member of the NASD and he's a
6 member of SIPC. And everybody's business
7 card, they're proud, they're a member of
8 SIPC. That's code for you're protected
9 and Uncle Sam and the government is
10 standing behind it. You go into the
11 guy's shop and you go to your broker-
12 dealer. And he's got this on the door,
13 and if you looked him up like I used to
14 do not too many years ago, and those of
15 us who were technologically challenged,
16 his ad has this in it. His stationery
17 has this on it. His radio ad tells you;
18 his TV ad tells you. You go to the
19 Internet, and he's advertising he's a
20 member of SIPC. And you see what it says
21 right under the logo: Security
22 Investor -- that's me -- Protection --
23 that's what I need -- Corporation --
24 that's what I got. And instead of a dot
25 on the I, guess what we got. We've got

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1 the American eagle, just like on my
2 stationery and on the shield of the
3 President of the United States and the
4 Supreme Court. That's shorthand for your
5 government is standing behind this. And
6 we've allowed this to happen.
7 If I'm not a real doctor, but I'm
8 playing one to fool you and your
9 government is accepting it, and you got
10 insurance from 500,000 dollars, except
11 you ain't got nothin'. We've got a moral
12 responsibility to these people, do we
13 not? Or am I missing something.
14 Question mark.
15 MR. JOHNSON: I think we do have a
16 responsibility to these people, and I
17 think when we look at things, we have a
18 responsibility to every victim that was
19 part of the scheme. And one of the
20 things that we have to figure out how we
21 balance, and whether we do it the right
22 way or do it the wrong way is how do we
23 ensure that we are not simply going to
24 benefit those that, by the luck of time,
25 got out at the right time, as opposed to

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1 those individuals that may not have been
2 as fortunate.
3 CONGRESSMAN ACKERMAN: So if you got
4 a transfusion first, we should take out
5 the blood to give to somebody who's a
6 pint short?
7 MR. JOHNSON: Well, I wouldn't take
8 the blood, Congressman, in order to have
9 somebody take their life away, but we do
10 give blood to others from time to time
11 who are in need. And one of the things
12 that we're simply trying to --
13 CONGRESSMAN ACKERMAN: But shouldn't
14 that be a collective decision that we do
15 as a society and not have a trustee
16 decide who to go after and take their
17 blood back?
18 MR. JOHNSON: Well, and I think
19 maybe the role that Congress will end up
20 taking is to help us to get more specific
21 guidelines as to how that needs to take
22 place, and I think we'll be more than
23 happy to vigorously follow that rule in
24 whatever way Congress decides to move
25 forward.

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1 CONGRESSMAN ACKERMAN: Yeah, but
2 we're looking to you -- I mean, this is
3 not King Solomon's court and none of us
4 pretend to be that. And it's an awesome
5 responsibility. And you, by virtue of
6 the fact of the role that you have
7 looking forward, which I agree is your
8 role, and sometimes we have to see how to
9 fix the problem going forward, what we do
10 about the collateral damages Pete King
11 said that we've left behind, the carnage
12 here. We shouldn't be trampling on the
13 bodies of those who were injured in order
14 to help people in the future. We have to
15 try to help everybody. And you don't do
16 that by further wounding those people who
17 are suffering. You know, it's not taking
18 away from -- you know, we are what we
19 are. It's a static situation right now.
20 Do you go in and further probe the wounds
21 of those people who may or may not have
22 the wherewithal to do anything to give to
23 people who are "net losers" who may be
24 richer than the "net winners".
25 I don't know how you figure this

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1 thing out. I mean, we have some
2 legislation on the people who went
3 through broker-dealers and third parties
4 and all that to give them up to 100,000
5 dollars in insurance. And we have to, as
6 a society, maybe we, who are complicit in
7 it, which is society and us and you and
8 everybody else for letting this happen to
9 say okay, this is, you know, this is the
10 help we have to give people. And we all
11 bore the responsibility and we have to
12 pay for it. It's not just voter (sic)
13 education. You know, we all know you
14 can't go over the speed limit, but we
15 still put cops out there. And people
16 rely on the cops to enforce the law and
17 our cops haven't done that. And
18 everybody thought they were doing what
19 they were supposed to be doing and then
20 find out that their whole world is topsy-
21 turvy. And my time is up.
22 CONGRESSMAN GARRETT: Thank you.
23 So, I wasn't sure where you were going
24 with this King Solomon reference, but,
25 you know, in the case of King Solomon, of

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1 course, we all know the story from the
2 Old Testament. At the end of the day, of
3 course, he didn't slice the baby in half,
4 and the baby survives. I thought he was
5 going to go and suggest that in this
6 case, we are slicing the baby in half and
7 making that wrong decision, and then the
8 penalty is then on both the mother and
9 the dead child.
10 So just to follow along, then, also
11 on where Peter -- or, the gentleman from
12 New York -- excuse me -- was saying with
13 regard to the trustee, just two quick
14 questions, there. One question that we
15 get, oftentimes, is do you know what the
16 trustee has billed SIPC so far? And
17 where do those funds come from, actually?
18 MR. JOHNSON: Yeah, I think he's
19 billed the court about thirty-nine
20 million dollars.
21 CONGRESSMAN GARRETT: Thirty-nine
22 million dollars. And where --
23 UNIDENTIFIED SPEAKER: Did he get
24 paid on time?
25 CONGRESSMAN GARRETT: Yeah, the

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1 question from the -- from my colleague,
2 here, is does he get paid on time, and
3 where do those funds come from?
4 MR. JOHNSON: They come from fees
5 that are paid by SIPC members.
6 CONGRESSMAN GARRETT: Okay, so the
7 same -- in essence, it has to be, right,
8 from the same pot of money.
9 And Peter was -- I'm sorry. The
10 question was asked by the gentleman from
11 New York with regard to the appointment
12 of the trustee, and I understand your
13 answer. But over time, not just in this
14 case, is it just the norm with regard
15 that SIPC makes the recommendation for a
16 trustee, and is it the norm that the
17 judge would approve that --
18 MR. JOHNSON: It's the norm for SIPC
19 to make the recommendation, and it's
20 simply up to the judge. I can't say that
21 I know of a circumstance --
22 CONGRESSMAN GARRETT: Yeah.
23 MR. JOHNSON: -- where the judge may
24 not have accepted that recommendation,
25 but at the end of the day, it's

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1 completely in the judge's discretion.
2 CONGRESSMAN GARRETT: Do we know,
3 is, in other cases, does the investor
4 class or anyone else make recommendations
5 to the court as to who they would --
6 MR. JOHNSON: Well, we make the
7 designation basically by statute. So if
8 the statute was different, then it would
9 allow others to make the call, but we're
10 designated by statute to do so. So
11 that's why we really don't have any other
12 third parties that are involved.
13 MR. CARUSO: I don't believe
14 investors would have the right to propose
15 their own trustee, at least, initially.
16 CONGRESSMAN GARRETT: Okay, and just
17 as a quick question, then, does anyone --
18 MR. COFFEE: Your statement was
19 correct. It is SIPC who makes the
20 recommendation. The trustee -- the court
21 simply decides if the proposed trustee is
22 qualified. So there's a strong
23 presumption in favor of the SIPC nominee.
24 CONGRESSMAN GARRETT: Does anybody
25 here on the panel suggest that that is

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1 good, bad, or should be changed?
2 MR. COFFEE: I think SIPC is very
3 much overseen by the SEC in this regard,
4 and it is the SEC who has asked SIPC to
5 generate a list of potential trustees in
6 advance. So I think it's a combination
7 of the SEC and SIPC that has developed
8 this approach of developing a list of
9 potential trustees in advance.
10 CONGRESSMAN GARRETT: And does
11 anybody suggest that that is not the
12 appropriate, some of you said looking
13 forward, so looking forward, is that
14 something we should be looking at?
15 MR. JOHNSON: Well, in terms of that
16 whole process, I mean, that's on the
17 table in terms of what we're looking at
18 during the Task Force. The way we're
19 looking at the Task Force is we want to
20 look at everything we're doing from top
21 to bottom. We just went and had a
22 complete full view of the operations of
23 the staff which was something that I
24 wanted to have an opportunity to take a
25 look at. So we've got everything on the

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1 table in terms of how we think we can
2 best protect investors and customers when
3 this is all said and done.
4 CONGRESSMAN GARRETT: Okay, would
5 one of those other things -- and anybody
6 can answer this question, and this was in
7 my opening statement was the question
8 regarding how equity should be
9 calculated, and the question as far as
10 access to the records to the investor
11 class in order to help make those
12 determinations. I understand that, well,
13 obviously, it'd be critically important
14 for the investor class to be able to have
15 those information as well as SIPC to have
16 them, but right now, I guess, they're not
17 done. I understand the SIPC trustee --
18 SIPC's formulation could be called into
19 question if you were to look at the --
20 have access to those records and to look
21 at those records and to say in those
22 examples that some of you are raising
23 that, well, yes, some of these
24 transactions over the last -- how many --
25 couple decades were actually legitimate

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1 transactions, right, and so when I got my
2 statement, I put in a half a million
3 dollars on and it said three million
4 dollars. Maybe 750,000 of them were
5 actually a legitimate transaction, right.
6 So when you all figure out the net
7 valuation on that, you want to know that,
8 right? But if the investor folks don't
9 have access to the information, they are
10 not in an position to argue that. So
11 what are we doing with those records?
12 MR. JOHNSON: That point is well-
13 noted, and I think from my standpoint, I
14 don't really see the reason why they
15 shouldn't have access to that
16 documentation, and that's one of the
17 issues that we'll be looking at making
18 the recommendation, potentially, with the
19 task force.
20 CONGRESSMAN GARRETT: But where are
21 we right now on that? I mean --
22 MR. JOHNSON: I'm sorry?
23 CONGRESSMAN GARRETT: It's in the
24 court right now. I mean, is this
25 something that can be changed for with

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1 regard that's going on right now? Or is
2 this just -- and I'm not talking about
3 Mr. Caruso's fine comment of saying what
4 do we do in the future on the next
5 Madoff. We're talking about the
6 situation right now, I guess, for some of
7 the folks behind you. Can we say that,
8 tomorrow, this information is available?
9 Or where are we?
10 MR. JOHNSON: Well, in terms of
11 where we are right now --
12 CONGRESSMAN GARRETT: Yup.
13 MR. JOHNSON: -- I'm not sure if
14 we've got the authorization to make that
15 available, but that's something that we
16 can take a look at, and if we have the
17 authorization to do so, we will.
18 CONGRESSMAN GARRETT: All right, so
19 there is a question whether SIPA itself
20 may need to be amended in order for that
21 to occur, is that my understanding?
22 MR. JOHNSON: That's clearly the
23 case. I mean --
24 CONGRESSMAN GARRETT: It is.
25 MR. JOHNSON: -- I don't want to --

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1 I make, yeah, very clear that --
2 CONGRESSMAN GARRETT: Okay.
3 MR. JOHNSON: -- this is a statute
4 that really hasn't been reviewed for
5 about forty years in a serious way, and
6 that's part of the reason that we're
7 trying to figure out how to get this
8 statute to be more flexible to be able to
9 deal with the issues that we're currently
10 dealing with in this type of market, in
11 this type of investment climate, and
12 understanding the type of investors that
13 we're dealing with right now.
14 CONGRESSMAN GARRETT: Okay, just so
15 I'm clear, then. So that needs to be
16 done, and we -- we -- you don't have
17 flexibility under the current language?
18 MR. JOHNSON: Well, we're reviewing
19 it and we'll determine whether or not we
20 have the flexibility under the current
21 language. So what -- if, in the event,
22 we do not, that may be a recommendation
23 that we may move forward with.
24 CONGRESSMAN GARRETT: All right,
25 well, then, you just opened up the next

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1 question, then, when you say we're trying
2 to determine this. How long does that
3 take in order to determine it, because I
4 sort of think that that would be the
5 information that I would want yesterday.
6 MR. JOHNSON: Well, that's
7 information that we can find out very
8 quickly, and as soon as I have that
9 response, I can get it back to you,
10 Congressman. But I can't imagine it
11 should take us a long time to make that
12 determination.
13 CONGRESSMAN GARRETT: Thanks. And
14 the gentleman next to you would like some
15 time.
16 MR. BORG: Congressman Garrett, I
17 was going to make an analogy to some of
18 the cases that are non-SIPC. Most of the
19 cases I prosecute, my office prosecutes
20 are Ponzi schemes with fictitious
21 securities and whatnot, but there's no
22 SIPC coverage or there hasn't been in the
23 past. You know, I'd like to see nothing
24 better than everybody gets all their
25 money back. I'm not too sure how you

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1 would do that.
2 CONGRESSMAN GARRETT: Before you --
3 hold that thought. Could you explain why
4 they would -- how do they come about that
5 they're not going through a SIPC --
6 MR. BORG: Historically because the
7 securities are not either held by a
8 broker-dealer, for example, private
9 placements --
11 MR. BORG: -- is a big area for us,
12 the reg-Ds, we've complained about this
13 many, many times. The sales that occur
14 through a broker-dealer.
16 MR. BORG: It might be a private
17 placement where they get an LLC
18 partnership, limited partnership type
19 certificate or something. The
20 certificate is not held at the broker-
21 dealer. It's not in inventory. They do
22 get account statements because there's a
23 report, and they'll actually get, say,
24 that according to your oil and gas well,
25 or whatever it may have been, you've got

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1 XX dollars. Historically, that has not
2 gone through SIPC, and I guess I've had
3 this discussion with SIPC since the mid-
4 90s on that, but there was no interest
5 from any government body at the time to
6 take that on up. This goes back to the
7 microcap area that I testified to in the
8 Senate back in 1996.
9 As a practical matter, though, the
10 Ponzi schemes that we oversee end up
11 having a very limited pool of funds.
12 Although we very rarely see the clawback
13 issue come up because, quite honestly,
14 these Ponzi schemes usually don't last
15 twenty years; the ones we see on a more
16 local level are a lot shorter in
17 duration. And therefore, the time-value
18 money is not really that significant, and
19 let's face it; most of these folks don't
20 want the cheese. They just want out of
21 the trap and get their money back, if
22 they can. Most of the time, it's pennies
23 on the dollar. I am going to suggest,
24 though, that if we're looking at things
25 like covering the Stanford matter, I've

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1 got five cases right now in the last
2 year, that's another seven billion
3 dollars that needs to be added to that.
4 What is not reported that Stanford
5 and Madoff, just because of sheer size,
6 are not unusual cases. They're unusual
7 because of the size and the -- I've got
8 one case that had 18,000 victims in it.
9 But the dollar numbers were small because
10 we caught it early. But that being said,
11 there was no coverage there.
12 I think that, as much as I would
13 like to get everybody coverage, if you're
14 going to cover the fictitious securities
15 outside of the broker-dealer custody
16 area, you're probably going to look at a
17 several hundred billion dollar fund that
18 needs to be funded, and that's going to
19 take us time, depending on what you're
20 going to do with the assessment. I would
21 love for that to happen. I don't think
22 it's practical, at least under the
23 current standards. But I do think --
24 let's not forget, I think, because there
25 are other frauds out there, that if we

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1 are going to expand coverage, we need to
2 do it for all Americans and all frauds,
3 not just a Stanford fraud or a Madoff
4 fraud. And you know, I can give you a
5 list of twenty that we've prosecuted
6 within the last twelve months with a
7 range anywhere from half a million
8 dollars to a couple hundred million
9 dollars. And the effect of losing your
10 retirement fund through Madoff --
11 CONGRESSMAN GARRETT: I think that
12 all of the legislation that we've cited
13 here that we've proposed are not Madoff-
14 specific but they apply to all Ponzi
15 schemes or sub schemes, some of them
16 within a time frame of --
17 MR. BORG: And I think that's
18 something that really does need to be
19 looked at, and I compliment you to that.
20 CONGRESSMAN ACKERMAN: Mr. King?
22 Ackerman. Mr. Johnson, what weight, if
23 any, does SIPC give to the final
24 statement?
25 MR. JOHNSON: I'm sorry?

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1 CONGRESSMAN KING: What weight, if
2 any, does SIPC give to the final
3 statement in Madoff?
4 MR. JOHNSON: Oh, well, the final
5 statement has to be part of the analysis
6 because that's where we begin to
7 determine exactly how we got to this
8 point, and then we start to look back
9 from there. So in terms of the final
10 statement, we have to begin with
11 something. And then once we start to go
12 through analysis regarding how do we get
13 to that point, that's when we have to
14 determine whether or not it's fictitious.
15 And the bankruptcy courts and SIPC and
16 the trustees have reviewed this issue for
17 a number of years, and we have found that
18 in instances where it is fictitious, that
19 the courts will come in and make a
20 decision, and that's something that we
21 have to look through and go to find out
22 what the real loss is going to be. So we
23 do have to begin with that and then
24 hopefully try to draw some type of
25 analogy as to where we're supposed to end

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1 up.
2 CONGRESSMAN KING: Does it weigh, at
3 all, in determining the reasonable
4 expectation of the investor, what the
5 reasonable belief of the investor was?
6 MR. JOHNSON: Oh, sure. I mean, no
7 one's saying that we have a situation
8 where you get this statement that
9 someone's complicit and therefore should
10 not have had some type of reasonable
11 belief. What we're trying to do is make
12 sure that even when we go through that
13 analysis that we have a bigger picture to
14 understand it, although you might have
15 believed this was the case.
16 And in most Ponzi schemes, you have
17 a lot of individuals that believed that
18 something actually belonged to them. And
19 the responsibility of the third party is
20 to come in and to make clear what really
21 belonged to somebody else and try to
22 figure out how you balance that equation
23 so that more people are going to be
24 benefited when it's all said and done,
25 and that's the same practice that we

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1 would go through.
2 CONGRESSMAN KING: Moving on, I
3 guess my concern is -- first of all, I
4 thank all of you for your testimony.
5 Obviously, it's a very complex situation.
6 But I'm just wondering, after all of
7 this, if another Madoff scheme occurs ten
8 years from now, is there any reason to
9 believe that investors would receive any
10 more equity than they are right now? I
11 mean, with all of the -- even the
12 recommendations that are coming out here,
13 unless we set up, what, a fund of several
14 hundred billion dollars, it would appear
15 that we could be back in the same place
16 ten years from now where you have
17 innocent people who took the money out
18 relying on their statement which they
19 thought was guaranteed by the government,
20 and then they then get clawed back, and
21 then others who left their money in,
22 also, they're in a terrible situation,
23 too. I mean, is there anything that's
24 coming out of this hearing or any of the
25 review that would make it any -- the

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1 situation any better ten years from now
2 for innocent people in a Madoff-like
3 scheme?
4 MR. JOHNSON: That would be the
5 hope. The idea is that, you know, when
6 you look back to when the first Ponzi
7 scheme came into play, we would've hoped
8 that we would've never had to see that
9 happen again, and our primary goal is to
10 hopefully try to put into place some
11 modernization that will make our statute
12 flexible enough to be able to deal with
13 those things that we can't imagine. The
14 biggest issue that we have is in 1970,
15 the current statute we had --
16 CONGRESSMAN KING: Right.
17 MR. JOHNSON: -- could not have
18 anticipated this. And we're hoping we're
19 going to put something in place that will
20 give --
21 CONGRESSMAN KING: But now that we
22 know, I guess what I'm saying is, besides
23 hope, is there any reasonable
24 expectation --
25 MR. JOHNSON: Well --

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1 CONGRESSMAN KING: -- for the hope
2 that we would be able to protect a person
3 who took his money out, let's say
4 systematically relying on his statement,
5 took their money out over the years, and
6 now is suddenly confronted with a massive
7 clawback which is going to destroy that
8 person, destroy their family, destroy
9 their business, and also destroy any hope
10 of financial security for their children
11 and grandchildren. Is there any -- do
12 you see anything coming out of the
13 discussion so far which would protect
14 those people in the future, in a large
15 scheme like this?
16 MR. BORG: I think, and I listened
17 to Professor Coffee's idea. I don't
18 think -- I don't think that under the
19 current system, if another Madoff
20 happened in ten years, anything would be
21 different. I think where you would be
22 different is if you do set the
23 limitations on the clawback that
24 Professor Coffee suggested. Because from
25 my point of view, there's always a

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1 limited pool of money. And historically,
2 in the cases that we have, again, the
3 non-SIPC, because that's where most of
4 our experience is, we always have, for
5 example, ten million dollars. That's all
6 I've got. That's every asset. We've
7 taken the houses and the land and
8 whatnot, and I've got a hundred million
9 dollars worth of claims. The only fair
10 way I've been able to do it without
11 having any SIPC coverage is to say, if
12 you put in 100,000 dollars and you took
13 50,000 dollars out, yes, I know you were
14 expecting that was interest, but I have
15 somebody over here put 100,000 dollars in
16 and never took anything out. Therefore,
17 your loss has got to be 50,000 dollars,
18 and their loss is 100, and then when I do
19 the mathematics pro rata, you're all
20 going to get the same sort of share of
21 the loss, as opposed to trying to make
22 you whole.
23 If you have an unlimited fund or a
24 fund of 500 billion dollars or something
25 like that, then of course, you can do

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1 different. If you have that expectation
2 and you can cover everybody's
3 expectation. I don't think it's
4 practical to cover everybody's
5 expectation for the full amount without
6 some sort of limitation. Ten years, five
7 percent, ten percent, whatever it is,
8 though I do think ten percent is high in
9 the current economy. I'd love to get ten
10 percent on a CD at a bank, if I could.
11 But whatever the number is, I think
12 the important thing is that we have a
13 finite number to start with, and that's a
14 finite number that has to be divided. If
15 I've got five people in my family and
16 there's a lemon pie, I can cut it into
17 five pieces. But if somebody's already
18 got a piece, I'm not sure they're
19 entitled to a full piece the next time
20 around.
21 CONGRESSMAN KING: Let me start with
22 Professor Coffee on that. Have you done
23 any of the math that reasonable
24 expectation was built in over the years?
25 MR. COFFEE: How about if I take Mr.

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1 Borg's example, take it one step further.
2 CONGRESSMAN KING: Sure.
3 MR. COFFEE: If you put in one
4 million and you take out fifty million,
5 and there are those cases in Madoff, I do
6 not want to totally disarm the trustee.
7 Trustees in bankruptcy for the last 500
8 years have had the power to attack
9 fraudulent conveyances. I think we would
10 be sweeping too broadly if we totally
11 disarmed the trustee. I understand your
12 concerns. I think the better way to deal
13 with the people you're most sympathetic
14 to is to create either a de minimis test
15 saying if it's only 500,000, 700,000,
16 some number like that that you took out,
17 that's immune. Or your personal assets,
18 your home is immune. Or we could say
19 we're going to give you a minimum return
20 of ten percent a year because you've been
21 invested in here for ten years. All of
22 those techniques would reach most of the
23 people you're talking about.
24 But if we were to disarm the trustee
25 entirely, the next case may come along,

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1 and you're going to be heading a
2 Congressional hearing as to why this
3 trustee couldn't do anything when there
4 was real fraud going on here. So I'm
5 saying be careful about how broadly you
6 disarm the trustee.
7 CONGRESSMAN KING: I realize that
8 it's a limited staff. I'm just wondering
9 has anyone done any research on what the
10 impact would be if it was eight percent
11 or nine percent or ten percent being
12 built in as the reasonable rate of return
13 over the years, how that would affect
14 Madoff investors.
15 MR. COFFEE: Madoff went on for
16 twenty years -- Madoff went on for over
17 twenty years, maybe twenty-five years or
18 more. If you used compounded interest,
19 you'd be able to get up to three or four
20 times what you invested and be exempt
21 from any kind of clawback.
22 CONGRESSMAN KING: Thank you very
23 much.
24 CONGRESSMAN ACKERMAN: Can I come
25 back to the pie?

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1 MR. BORG: Please do.
2 CONGRESSMAN ACKERMAN: What if you
3 discovered, suddenly, that you had more
4 pie than you thought?
5 MR. BORG: I can tell you from my
6 experience, on the occasion where we do
7 have more pie than we thought, we make
8 the pro rate distributions go up. It's
9 almost like all the victims would get --
10 you get a dollar, a dollar, a dollar, and
11 you raise it all up.
12 CONGRESSMAN ACKERMAN: Would you
13 continue to try to stomach pump the guy
14 that ate the first piece of pie?
15 MR. BORG: If I had enough to go
16 around? I personally wouldn't. I do not
17 like clawbacks. I have very, very rarely
18 ever done a clawback. But then again,
19 most of my Ponzi schemes are not twenty-
20 year long Ponzi schemes, so the clawbacks
21 haven't been significant enough to even
22 make that determination. But if you've
23 got more assets, and you can cover all
24 the folks, why do the clawback?
25 CONGRESSMAN ACKERMAN: Well, if you

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1 somehow discover that you have more pie,
2 I'm sure it's not going to be enough to
3 cover everybody's expectations, and
4 probably not even if you do the imputed
5 interest that my colleague, Mr. King, was
6 inquiring about, but would you
7 discontinue doing harm to those people
8 who already ate the pie?
9 MR. BORG: I would --
10 CONGRESSMAN ACKERMAN: I mean, they
11 could have eaten that pie three years
12 ago.
13 MR. BORG: That's true. But there
14 are some folks who tried to save that pie
15 and put it over in the fridge and didn't
16 eat it, and now they don't have it at
17 all, so they never got the benefit of the
18 first piece of pie in the first place.
19 CONGRESSMAN ACKERMAN: Yeah, but
20 those people may have six other pies.
21 MR. BORG: Yes, but you know, the
22 problem with that is we don't get into --
23 at least I haven't, and I'm not talking
24 about the Madoff situation because I'm
25 not involved in the Madoff trustee case,

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1 that's why I don't know the details. But
2 in the cases we have, where we've seen
3 that someone else has a lot of assets,
4 the point is they're still entitled to
5 protection under my statute and they're
6 entitled to --
7 CONGRESSMAN ACKERMAN: Exactly.
8 MR. BORG: -- to cover that. If I
9 have excess property, I probably don't
10 have much of a case to worry about
11 because I've got enough money to go
12 around.
13 CONGRESSMAN ACKERMAN: No, not
14 excess but more than you thought you had.
15 Nobody's going to get excess because
16 there wasn't enough money generated by --
17 MR. BORG: We do have a fifty
18 billion dollar loss, here, and even if
19 there's more pie, it's only going to add
20 just a few more pennies, a few more
21 dollars to the entire class of victims.
22 CONGRESSMAN ACKERMAN: One of the
23 things that I think we'd like to look to
24 you towards, you're tasked with the
25 responsibility of what we do in the

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1 future, so to make this situation better,
2 for future investors, and you guys are
3 looking at this in a lot more depth than
4 the total Congress, or even this
5 committee. I mean, we have lots of other
6 legislation and stuff that we do, despite
7 the fact that victims would like to think
8 that we're doing this and this
9 exclusively, full time. I mean,
10 everybody knows that we have a lot of
11 other balls that we're trying to keep in
12 the air. So you guys, this is your job
13 as well. We're not begging off at all.
14 But it would be useful for us to hear
15 your suggestions for the future to treat
16 people fairly and equitably and justly.
17 Why wouldn't those recommendations that
18 hopefully you will make sooner, rather
19 than later, be applicable to the people
20 who were already victimized as far as how
21 we approach this? If this is the way we
22 should have done it because we're going
23 to do this in the future, why can't we
24 backfill and see if we can be helpful to
25 these people that way?

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1 MR. JOHNSON: Well, really, I mean,
2 what that boils down, that'll be a legal
3 question. If it turns out that pursuant
4 to the law that we can look back, then
5 that's something that we can take into
6 consideration. But if the law, for
7 example, sets specific guidelines, like
8 for example, we've been talking about how
9 far back the trustee can go, the law
10 actually has a limit to how far the
11 trustee can go, and that's six years.
12 You can't get beyond that time frame in
13 terms of doing an analysis.
14 So what we would be looking to do is
15 really to be in compliance with law. If
16 it turns out that the law allows us to
17 look back in some way, then that will
18 have to be taken into consideration as we
19 go forward with making recommendations.
20 But that basically would be what we would
21 use as the, hopefully, the parameters as
22 how we are to make the decision
23 retroactively.
24 CONGRESSMAN ACKERMAN: No, my -- if
25 you're tasked with the responsibility of

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1 looking forward, it doesn't mean you
2 can't look over your shoulder.
3 MR. JOHNSON: Well, I don't think we
4 can really adequately know what to do
5 forward unless we have looked over our
6 shoulder to do a real analysis to where
7 we came from. Now, whether --
8 CONGRESSMAN ACKERMAN: My question
9 is, if you're making judgments based on
10 what you believe is just, I'm asking a
11 theoretical question, why should that not
12 be applicable. Why should not we use
13 that as a standard?
14 MR. COFFEE: We sympathize, and I'm
15 not saying we can't, but this is a
16 private insurance system. And if you
17 suddenly decide that you want to cover
18 losses that the insurance system never
19 reserved for, you're going to sink the
20 insurance system. That is the problem of
21 Allen Stanford. If you ask broker-
22 dealers to cover fraud-related damages,
23 that's the kind of liability that dwarfs
24 what's in the fund.
25 CONGRESSMAN ACKERMAN: I don't want

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1 to go back and beat a dead horse, but I
2 know that we all know that this private
3 insurance system was inadequately funded.
4 You know, whose fault that is is a matter
5 of speculation on people's part, and I
6 think there's a big shared responsibility
7 here. Who I would say it's not the fault
8 of is the guy who walked into the
9 broker's office and saw this. It's not
10 his fault or her fault. We've allowed
11 that to perpetuate in a myth that these
12 people were adequately protected. You
13 know, the hospital hires a guy that's not
14 a real doctor and he operates on your
15 kid, God forbid, there is a liability
16 here. You know, this guy who hung up
17 this certificate to operate on your
18 finances wasn't protected with the
19 insurance that you thought he had. And
20 your goal is to try to fix that in the
21 future, but the way that you fix that in
22 the future, I would think, would set a
23 moral tone to the responsibility that we
24 have to look at as far as how do we help
25 the people that already took a hit. And

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1 not only that they took a hit, but with
2 the clawback thing, are going to continue
3 to be traumatized. And before I move on
4 to my colleague, I want to -- and this is
5 not your responsibility, either, but the
6 government should not be the ultimate
7 beneficiary of the ill-gotten gains of
8 Bernard Madoff. And that's our job to
9 try to figure out how to fix that, and
10 some of us have some legislation that's
11 moving forward in the Congress.
12 Mr. Garrett.
13 CONGRESSMAN GARRETT: Thanks. And
14 just to wrap up, so the gentleman from
15 New York holds that logo up and what have
16 you and the issue of what the expectation
17 was. As I sit here, listening to that,
18 and sit here, also, thinking about what
19 we have done in Congress over the last
20 year and a half and what the Fed has
21 done, and what have you, I think we're
22 probably in even a more difficult
23 position than ever before in terms of
24 lowering the expectations. Regardless of
25 what SIPC did or didn't do in this

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1 situation, if I can make the suggestion,
2 know what we really should do, we would
3 just send a blanket notice to everyone
4 who comes in the dealer's office that
5 says you're not protected for X, Y, and Z
6 in big, bold letters or something like
7 that so everybody would know, and you all
8 say education and what have you, but we
9 already had law to that effect, actually,
10 on something that I use, and that is the
11 money market fund. And every time I
12 called up the money market fund, I would
13 get an automatic recording at the
14 beginning or the end of the phone call
15 that said, these are not FDIC insured, so
16 there is no protection by the federal
17 government. And I knew that going in
18 that there was absolutely no guarantee.
19 But guess what? At the end of the day,
20 when the reserve fund had a problem, and
21 there was a problem on Wall Street, all
22 of a sudden, they were all guaranteed,
23 and they didn't want all the funds to
24 break the dollar at that point. And we
25 just created something, and I guess the

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1 point was just made this past week of a
2 new CFPA, Consumer Financial Protection
3 Bureau, or Agency, or something like
4 that. So now, the American public really
5 doesn't have to listen to anything, if
6 you listen to the testimony over the last
7 several months because we have an agency
8 out there that will protect us from
9 ourselves in any investment or
10 any -- not securities, per se, under the
11 CFPA, but any investment -- any financial
12 product that's out there because the CFPA
13 is going to be watching out for us. So
14 regardless, I guess, of what SIPC does in
15 this regard, we know that the good faith
16 and credit of the United States and
17 federal government will be behind any
18 future financial activity that I engage
19 in, and I should look to the federal
20 government.
21 I think that is a problem that you
22 will have going forward to be able to
23 actually, whatever your recommendations
24 are, is delineate exactly what your
25 responsibilities are, whether it's

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1 500,000 or a million dollars, as some
2 people say, or something else. Folks at
3 home are going to think, no it's not.
4 The fed's going to step in. Congress is
5 going to step in, just like they did in
6 these other situations, and it's
7 irrelevant. You have a difficult job
8 ahead of you to try to reeducate and
9 convince the public that there is
10 limitations to this.
11 One question on this, though, and I
12 know you weren't around back then, but
13 back in '03 -- well, you were someplace
14 in '03 --
15 MR. JOHNSON: I hope so.
16 CONGRESSMAN GARRETT: -- but you
17 weren't here, the GAO and members of
18 Congress warned that the size of the fund
19 wasn't the right size, I guess, and it
20 should be increased. I guess that wasn't
21 done. So if you, A, want to comment on
22 your understanding of what may have
23 occurred back then to the best of your
24 analysis -- your best opinion on that,
25 but more to the point, where you are

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1 right now. Now you've got two and a half
2 billion. Is there a statistic for an
3 actuarial analysis to say that that's the
4 right size? Because I think some other
5 folks here were suggesting that that
6 should be a much higher figure.
7 MR. JOHNSON: Well, that's actually
8 one of the -- I would say one of the real
9 conversation points that we have as it
10 relates to the task force. How do we
11 right size that number? And a lot of it
12 really boils down to what would be the
13 ultimate responsibilities that we would
14 be taking on as SIPC. If, for example,
15 Congress were to decide that SIPC should
16 be in the business of protecting against
17 fraud, then that number would have to be
18 a completely different analysis that we
19 would have to go through. It could be a
20 situation where you take the number up to
21 ten billion dollars, maybe that we're
22 raising from fees, therefore, you never
23 tap the Treasury line. That would be an
24 analysis of how we could figure out what
25 number we need to be at. But part of

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1 what we're going through with the Task
2 Force is really going through an analysis
3 and hiring those to be part of the
4 process to help us figure out how do we
5 right size what that number is, and what
6 it really boils down to is what are the
7 responsibilities that Congress wants us
8 to take moving forward, and that would
9 help us to be able to get to that point.
10 CONGRESSMAN GARRETT: And of course
11 the issue of fraud, most people coming
12 into the broker doesn't differentiate
13 what he's being protected for right now.
14 MR. JOHNSON: Right.
15 CONGRESSMAN GARRETT: Just like I
16 don't differentiate under the FDIC what
17 I'm being protected; I'm just protected
18 to the limits. Which goes to a question
19 Mr. Borg was saying that you dealt with
20 cases outside of SIPC, right? So it
21 seems to me that we're talking about
22 maybe two different things here when
23 you're talking about clawbacks and what
24 have you because in your non-SIPC case,
25 then you're just dealing with, what, an

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1 estate, right? And you're taking this
2 little estate or big estate and saying
3 how am I going to divvy it up, and maybe
4 use some of the -- if it was long-term,
5 if present value of money, you might have
6 done that. If short-term, you're not
7 going to do that, right?
8 MR. BORG: That's for cash-in, cash-
9 out, basic asset, you put it in, you take
10 it out.
11 CONGRESSMAN GARRETT: Exactly. But
12 here, you're dealing with that, so you
13 have to make those decisions, and I
14 understand that, and with regard to the
15 issue about the statements and everything
16 and you understand that. But here,
17 you're talking about something else with
18 SIPC, right, because you're dealing with
19 what? Sort of, to my way of thinking, an
20 insurance policy, but a separate pot of
21 funds that you've collected over the
22 years from the dealers. There, that's
23 different, in my estimation, with regard
24 to how that should be treated, because
25 that's really where the expectation.

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1 When I come in, I see that thing. I
2 think, if I'm smart enough, and I bet
3 most people don't even ask what I'm
4 covered for, but if it's up to 500,000,
5 then it goes to Mr. Coffee's comment. If
6 I invested 500,000 twenty years ago, and
7 I put in -- and now it's 50 billion, I
8 took out 50 billion, I still have an
9 expectation, just like I have -- I'm
10 sorry, I used the word -- an insurance
11 policy for 500,000 dollars worth of
12 coverage, regardless of whether I took it
13 out. That's different, in my estimation,
14 of what you were doing or you're also
15 doing with the estate residual. Is that
16 correct?
17 MR. BORG: Yes, sir. That's
18 absolutely correct. That's why I was
19 trying to distinguish the SIPC coverage
20 from the non-SIPC coverage. Only from
21 the point of view of anything over that
22 amount, we still sort of have to do some
23 sort of pro ration. My point was really
24 that the coverage is going to depend on
25 how big you've got a pot to deal with.

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1 CONGRESSMAN GARRETT: But only for
2 the residual.
3 MR. BORG: Exactly.
4 CONGRESSMAN GARRETT: Not for the
5 500,000.
6 MR. BORG: I think we're saying the
7 same thing. But I'm using that as an
8 example to show what else is out there --
9 CONGRESSMAN GARRETT: So Mr. Coffee,
10 when you make --
11 MR. BORG: -- on the net equity type
12 of calculation.
13 CONGRESSMAN KING: Right, so when
14 you give the example you did before,
15 somebody invested a million bucks, he
16 thinks he has 500,000, right? And he
17 took out, what did you say, 50 million
18 dollars over the last year, but the
19 statement comes out and still says I have
20 a million dollars on my statement today,
21 right, that person should still have the
22 correct interpretation that he has a half
23 a million dollars worth of coverage, or
24 protection, and there should be
25 absolutely no clawback for that 500,000

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1 dollars, correct?
2 MR. COFFEE: Never clawback,
3 specifically.
4 CONGRESSMAN GARRETT: Right.
5 MR. COFFEE: The clawback is for the
6 amounts that were earlier --
7 CONGRESSMAN GARRETT: Only for
8 the --
9 MR. COFFEE: -- that were fraudulent
10 conveyances, arguably.
11 CONGRESSMAN GARRETT: Right. That's
12 what I wanted, clarification on Mr.
13 Borg's comment. And thanks to the panel,
14 too, because I think that's the last
15 of --
16 CONGRESSMAN ACKERMAN: One question,
17 and then we have Mr. Klein. Has any
18 thought been given to, as you point out,
19 the private sector, because this is
20 private sector insurance, the private
21 sector that made so much money over the
22 years on people's investments, huge
23 profits, underpaying insurance to give
24 people -- that, in effect, gave people a
25 false sense of confidence, that they step

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1 up to the plate an increasing the size of
2 the pie by putting in by whatever
3 formulaic circumstance, additional
4 amounts, perhaps based on a recalculation
5 of what a reasonable premium should have
6 been because they, indeed, made a profit
7 and stand to profit additionally by
8 restoring investor confidence in the
9 market?
10 MR. JOHNSON: Well, I think the role
11 of --
12 CONGRESSMAN ACKERMAN: Or is that
13 too sensitive an issue for you guys to go
14 to?
15 MR. JOHNSON: Well, I was trying to
16 kind of mull through my mind, is the role
17 of private insurance, it sounds like what
18 we're talking about to actually act as an
19 additional backstop. Is that where we're
20 going with that, congressman?
21 CONGRESSMAN ACKERMAN: No, I'm
22 saying, hey, boys, let's chip in and make
23 this thing good.
24 MR. JOHNSON: Oh, I see what you're
25 saying. Well, you know, what we end up

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1 doing, really, is increasing the
2 assessments because increasing the
3 assessments at some point is the only way
4 that we will actually end up getting the
5 funding.
6 CONGRESSMAN ACKERMAN: No, I know,
7 but we made a decision that the
8 assessments should have been a heck of a
9 lot larger to begin with. We're going to
10 fix that in the future.
11 MR. JOHNSON: Um-hum.
12 CONGRESSMAN ACKERMAN: But has
13 anybody given any thought to saying the
14 guys who are going to profit by keeping
15 investors as investors, making good to
16 restore confidence by paying what they
17 should have paid in the first place into
18 the fund?
19 MR. JOHNSON: That's an area that we
20 can take into consideration in terms of
21 how that role would be going forward.
22 I'm unclear on how it could play out, but
23 that is something we can take a look at.
24 CONGRESSMAN ACKERMAN: I think that
25 might be a good thing.

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1 Mr. Klein from Florida.
2 CONGRESSMAN KLEIN: Thank you very
3 much, Mr. Chairman, and thanks to the
4 panel and people who are here today in
5 support of an full understanding of what
6 can be done to fix this. Obviously,
7 there's the going forward assessment of
8 what can we do to avoid something in the
9 future, but I think we've all heard from,
10 in our communities, the people who have
11 suffered and have lost these resources
12 and had certain expectations based on the
13 SIPC sign on the door, and all the rest
14 of these things.
15 So I first of all want to associate
16 myself with Mr. Ackerman and Mr. King's
17 comments. They were strong, and I agree.
18 They certainly don't need to be repeated.
19 Certainly representing south Florida,
20 where I'm from, we've had a whole lot of
21 people who are very, very concerned about
22 the whole clawback issue. Again, based
23 on expectations, based on the fact that
24 they paid taxes on monies they received
25 and, you know, there doesn't seem to be

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1 any relief on that whole story, this is a
2 serious problem. And the fact that the
3 limited amount of pooled resources
4 available is making it even more
5 complicated, particularly based on Mr.
6 Ackerman's last comment that there was an
7 underassessment in the first place. And
8 I would agree with that. I think it was
9 a ridiculously underassessed issue.
10 So I guess I want to stress the
11 point about addressing the clawbacks.
12 And even if we have to change the
13 definition of net equity to get to the
14 right place here. I think, again, the
15 people who have come to me and talked to
16 me about this, and they've been on both
17 sides of the equation, here. But again,
18 just what's fair in terms of trying to
19 make it whole and trying to make sure
20 that the SIPC lives up to its
21 obligations, maybe Mr. Ackerman's
22 comments are the way to get there, but I
23 certainly want to encourage, you know, as
24 quickly as possible. This has taken a
25 long, long time to get through all these

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1 things. People have been suffering
2 through having lost these resources,
3 don't know a return, some of them had to
4 make pretty dramatic changes in their
5 lives.
6 I also want to mention the Stanford
7 issue, also, because although it's
8 complicated, again, it seems to me these
9 victims should be compensated under the
10 SIPC as well. So again, I don't -- I
11 think the questions have been asked, and
12 I just want to be here to support very
13 strongly, as quickly as possible. A lot
14 of frustration has gone on through this
15 whole thing. And again, I look at the
16 victims and that's one level. But I also
17 look at the investor public that really
18 depends, and our country's economy
19 depends on confidence in investing. And
20 if we don't have that kind of confidence,
21 it creates a whole lot of other problems.
22 And we're not looking to go back to the
23 point in time when people are putting
24 money in their mattress. We want people
25 to feel that when they invest, and

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1 they're dealing with people, in the
2 absence of fraud, that they know where
3 this money is and how they can recompense
4 themselves, and we have to have a
5 structure going forward that is set up in
6 a way to make sure that the resources,
7 and those people who are benefiting from
8 it, the companies have to stand up for
9 it. And you know, I think that's part of
10 the deal.
11 So Mr. Chairman, I won't take up
12 more time, but I wanted to reflect on
13 that and the issue as strong as possible
14 a statement to get the SIPC right on this
15 and to get our folks that have been
16 impacted made whole.
17 CONGRESSMAN ACKERMAN: Thank you,
18 Mr. Klein. The committee would just like
19 one clarification of something I think
20 Chairman Johnson might have said on the
21 issue of clawback. Did you say that the
22 trustee was looking on going back limited
23 to only six years on the clawback?
24 MR. JOHNSON: We have a statute of
25 limitation, I believe, as to how far back

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1 we can go --
2 MR. COFFEE: Six years is the New
3 York rule. And the statute lets you use
4 either the federal rule or the state
5 rule. Six years is New York's.
6 CONGRESSMAN ACKERMAN: So we're
7 under New York law on this?
8 MR. COFFEE: The statute lets you
9 use either the federal rule, which is two
10 years, or the state rule, which is, in
11 New York's case, six years.
12 CONGRESSMAN ACKERMAN: So you have
13 chosen the New York statute --
14 MR. COFFEE: I've chosen nothing.
15 I'm just a humble academic.
16 CONGRESSMAN ACKERMAN: Mr. Johnson?
17 MR. JOHNSON: That's what the
18 trustee has chosen, yes.
19 CONGRESSMAN ACKERMAN: So the
20 clawback can go back six years an no
21 further.
22 MR. JOHNSON: That's correct.
23 CONGRESSMAN ACKERMAN: Well, let me
24 thank the panel. You've been very, very
25 helpful. This is a very complicated and

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1 emotionally-charged issue. We appreciate
2 all the thought and the work that you've
3 put into it.
4 We know that everybody is going to
5 not be completely satisfied. Some people
6 will be emotionally, as well as
7 financially, scarred forever, and we know
8 that you're doing the best that you can.
9 We have to do some work, as well. But
10 you've been very helpful to us in our
11 deliberations.
12 I thank the members of the
13 committee, as well. The chair would also
14 note that some members may have
15 additional questions for the panel and
16 they will submit them to you. If you
17 would answer them in writing to us, we
18 would be appreciative, and that would be
19 made part of the official record.
20 Without objection, the hearing,
21 therefore, will remain open for thirty
22 days for members to submit those
23 questions in writing and for the answers
24 to be placed in the record. Without
25 objection, that is so ordered.

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1 There being no further business
2 before the committee, the panel is
3 dismissed with our thanks.
4 (End of audio)
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

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1 C E R T I F I C A T I O N
3 I, Dena Page, hereby certify that the
4 foregoing is a true and correct transcription,
5 to the best of my ability, of the sound
6 recorded proceedings submitted for
7 transcription.
9 I further certify that I am not employed
10 by nor related to any party to this action.
11
12 In witness whereof, I hereby sign this
13 date:
14 October 1, 2010.
15
16 _________________________________
17 Dena Page
18
19
20
21
22
23
24
25

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2009 24:4 academia 35:8 action 24:3 137:10 aftermath 7:24
2010 1:9 137:14 academic 134:15 actions 6:11 9:2 agencies 16:3,12
2011 37:5 accepted 90:24 42:25 43:2 65:23
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STATE OF NEW YORK )

) ss.: AFFIDAVIT OF
COUNTY OF NEW YORK ) CM/ECF SERVICE
I, Kersuze Morancy, being duly sworn, depose and say that deponent is not a
party to the action, is over 18 years of age.
On October 12, 2010
deponent served the within: Joint Reply Brief for Appellants
upon:
PLEASE SEE THE ATTACHED SERVICE LIST
via the CM/ECF Case Filing System. All counsel of record in this case are registered
CM/ECF users. Filing and service were performed by direction of counsel.
Sworn to before me on October 12, 2010
s/
Malika K. Julien
Notary Public State of New York
No. 01JU6096798
Qualified in New York County
Commission Expires September 4, 2011
Job # 232275
SERVICE LIST
Via Electronic Service
David J. Sheehan, Esq.

Seanna R. Brown, Esq.
Wendy J. Gibson, Esq.
Thomas D. Warren, Esq.
Baker & Hostetler LLP
45 Rockefeller Plaza
New York, NY 10111
dsheehan@bakerlaw.com
sbrown@bakerlaw.com
wgibson@bakerlaw.com
twarren@bakerlaw.com
Josephine Wang, Esq.

Kevin H. Bell, Esq.
Hemant Sharma, Esq.
Lauren T. Attard, Esq.
Securities Investor Protection Corporation
805 15th Street, N.W., Suite 800
Washington, DC 20005-2215
jwang@sipc.org
kbell@sipc.org
hsharma@sipc.org
lattard@sipc.org
Karen E. Wagner, Esq.

Davis Polk & Wardell LLP
450 Lexington Avenue
New York, NY 10017
karen.wagner@davispolk.com
Helen Davis Chaitman, Esq.

Becker & Poliakoff, LLP
45 Broadway, 11th Floor
New York, NY 10006
hchaitman@becker-poliakoff.com
Stephen Fishbein, Esq.

Shearman & Sterling LLP
599 Lexington Avenue
New York, NY 10022
sfishbein@shearman.com
David B. Bernfeld, Esq.

Bernfeld Dematteo & Bernfeld LLP
600 Third Avenue, Suite 1500
New York, NY 10016
davidbernfeld@bernfeld-dematteo.com
David Parker, Esq.

Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue, 18th Floor
New York, NY 10176
dparker@kkwc.com
Chryssa V. Valletta, Esq.

Phillips Nizer LLP
666 Fifth Avenue
New York, NY 10103
cvalletta@phillipsnizer.com
Carole Neville, Esq.

Sonnenschein Nath & Rosenthal LLP
1221 Avenue of the Americas
New York, NY 10020
cneville@sonnenschein.com
Kelly A. Librera, Esq.

Dewey & LeBoeuf LLP
1301 Avenue of the Americas
New York, NY 10019-6092
klibrera@dl.com
Jeffery A. Mitchell, Esq.

Gibbons P.C.
One Pennsylvania Plaza, 37th Floor
New York, NY 10019-3701
jmitchell@gibbonslaw.com
Daniel M. Glosband, Esq.

Larkin M. Morton, Esq.
Goodwin Procter LLP
The New York Times Building
620 Eighth Avenue
New York, NY 10018
dglosband@goodwinprocter.com
lmorton@goodwinprocter.com
Mark Warren Smith, Esq.
2
Smith Valliere, PLLC

509 Madison Avenue, Suite 1510
New York, NY 10022
msmith@svlaw.com
Lawrence R. Velvel, Esq.

Massachusetts School of Law
500 Federal Street
Andover, MA 01810
velvel@mslaw.edu
Katharine B. Gresham, Esq.

Securities and Exchange Commission
100 F St., NE
Washington, DC 20549
greshamk@sec.gov
Stanley Dale Cohen, Esq.

41 Park Avenue, Suite 17-F
New York, NY 10016
s@stancohen.com

Milberg - LaxNeville Reply Brief 10 - 12

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10-2378-bk(L),

Case: 10-2378 Document: 347 Page: 1 10/12/2010 122600 216

United States Court of Appeals

In Re: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,

JOINT REPLY BRIEF FOR APPELLANTS

JONATHAN M. LANDERS STEPHEN A. WEISS

(For Continuation of Appearances See Inside Cover)

Attorneys for Appellants Mary Albanese, the

A. The Trustee and SIPC Fail to Distinguish Appellants From the

1. The Existence of a Single Renamed Security on

2. Appellants’ Initial Deposits With BLMIS Were

3. Trade Volume Was Not Relevant to the Court’s Analysis

B. SIPC Mischaracterizes Ensminger In an Attempt to Attribute

C. The “Books and Records” Interpretation Advanced by the

D. The Net Investment Method Frustrates SIPA’s Legislative

E. The Trustee’s “Capable of Liquidation” Argument Fails on

1. The Trustee’s “Capable of Liquidation” Argument

2. The Trustee’s “Capable of Liquidation” Argument

3. The Trustee’s “Capable of Liquidation” Argument

F. The Net Investment Method is Inconsistent With the Trustee’s

G. SIPC and the SEC Are Not Entitled to Deference ..............................22

H. Appellants’ Customer Claims Are Based On “Net Equity,” Not

I. The Trustee and SIPC Must Evenhandedly Administer SIPA,

In re Adler Coleman Clearing Corp.,

Allianz Insurance Co. v. Lerner,

Appleton v. First National Bank,

In re Asia Global Crossing, Ltd.,

Bayou Superfund, LLC v. WAM Long/Short Fund II, L.P.

Bear, Stearns Securities Corp. v. Gredd

Holloway v. IRS (In re Odom Antennas, Inc.),

Independent Insurance Agents, Inc. v. Federal Reserve System,

In re Investors Center, Inc.,

Jackson v. Mishkin (In re Adler, Coleman Clearing Corp.)

Merrill v. Abbott (In re Independant Clearing House Co.),

In re New Times Securities Services (“New Times I”),

In re Oberweis Securities, Inc.,

In re Old Naples Securities, Inc.,

Raleigh v. Illinois Department of Revenue,

SEC v. Kenneth Bove & Co.,

SEC v. S.J. Salmon & Co.,

SIPC v. Old Naples Securities, Inc.

SIPC v. Old Naples Securities, Inc.

SIPC v. Stratton Oakmont, Inc.,

Stafford v. Giddens (In re New Times Securities Services)

Travelers Casualty & Surety Co. of America v. PG&E,

In re United Energy Corp.,

United States v. Meade Corp.,

Whitman v. American Trucking Associations,

STATUTES, REGULATIONS, & LEGISLATIVE MATERIALS

15 U.S.C. § 78ccc(b)(4) .....................................................................................14, 25

15 U.S.C. § 78fff-2(c)(3) ...................................................................................12, 19

15 U.S.C. § 78ggg(b) ...............................................................................................23

15 U.S.C. § 78lll(11)....................................................................................13, 24, 28

H.R. Rep. No. 95-746 (1977)...................................................................................16

H.R. Rep. No. 96-1321 (1980).................................................................................18

Rules of SIPC, 53 Fed. Reg. 10368 (Mar. 31, 1988)...............................................14

S. Rep. No. 95-763 (1978) .......................................................................................16

N.Y. U.C.C. § 8-501 ................................................................................................17

recent Congressional hearing:

x They do not dispute that Appellants had no knowledge of Madoff’s Ponzi

Appellants. SIPC Br. 14-15.

righteously designating themselves the “moral defenders” of the SIPC Fund. As

industry’s subprime mortgage practices.