"MADOFF CLASS ACTION"
On June 5, 2009, our firm filed a class action adversarial proceeding in the United States Bankruptcy Court for the Southern District of New York seeking to obtain a declaratory judgment, pursuant to the Federal Declaratory Judgment Act, 28 U.S.C. § 2201, et seq., (i) that the Trustee’s definition of “net equity” is incorrect as a matter of law, and (ii) that a customer’s “net equity” under SIPA is the value of the securities reflected in the customer’s Madoff account as of the SIPA filing date (even where the securities were never actually purchased) less any amounts the customer owes to Madoff.
First and foremost, the Trustee/SIPC Approach is an unlawful contravention of SIPA that deprives innocent victims of their SIPC recovery. It is also unprecedented. We are aware of no case in the history of SIPA where customers, who have been provided with written confirmations and account statements reflecting purchases and holdings of real securities (e.g., IBM, AT&T, etc.), had their “net equity” claims determined on the basis of the cash in, cash out approach being used by the Trustee and SIPC in this case. Indeed, in January of this year, SIPC President Stephen Harbeck acknowledged that, for this one case, SIPC took the extraordinary step of modifying the standard SIPC claim form used over the past 39 years. That form, which simply asks for the information required under the SIPA Definition (namely, what the debtor owes the customer and what the customer owes the debtor as of the filing date), was changed to ask for the customer’s total deposits and total withdrawals (for what could be decades). Neither the Trustee nor SIPC has set forth any statutory basis for this departure from the SIPA Definition of “net equity” and past practice, and there is none.
Second, these adversely affected investors are not seeking a bail out from the government. SIPC was designed essentially as an insurance policy for investors defrauded by broker/dealers. The funding associated with these duly authorized SIPC payouts would come from SIPC funds, which are comprised of the yearly registration fee paid in by registered broker/dealers. Just recently, SIPC reviewed and increased its membership due’s formula and has authorized increased contributions. Broker/Dealer registration in SIPC is voluntary, and contrary to the assertion made in the Times article, there are excellent alternatives other than taxpayers footing the bill for these payouts. SIPC could borrow the funds, increase membership dues, and seek retroactive contributions from its members.
In sum, this class action seeks a declaration by the Court on the definition of “net equity.” We feel that our position is strongly supported by the law, and is supported by the policy arguments originally offered when SIPA was enacted.
If you have any questions regarding these matters, please contact either myself or partners Barry Lax and Brian Neville at (212) 696-1999.
Madoff Class Action Adv. Pro. No. 09-1265(BRL)
