Legal Update
Dear NIAP Member,
In last week’s update, I brought Madoff victims up to speed regarding HR757, and its movement forward in the House Capital Markets Subcommittee. This week’s update will focus on the Court actions taking place. Legal activity is occurring on two major fronts: the Supreme Court of the United States (SCOTUS) on Net Equity, and the District Court before Judge Jed Rakoff, who will be ruling on various clawback-related actions.
Supreme Court and Net Equity
As you may recall, as a result of the unfortunate decision by the Second Circuit Court of Appeals regarding Net Equity, two Certiorari petitions have been filed with the Supreme Court requesting the Court to agree to accept the Second Circuit’s decision for review. The Petitions (submitted by Dean Lawrence Velvel and Helen Chaitman) were supported by persuasive legal briefs both in support of the Petitions and in response to the opposition papers submitted by the Trustee, SIPC and the SEC (through the Solicitor General’s office). [Click here for the related Supreme Court Filings.] While victims were anxiously hoping that the Supreme Court would decide in June whether or not to take the case, it appears unlikely that the Court will up the decision before the Court recesses, and will likely make its decision in the Fall when it resumes its public actions. There remains, however, a small chance that the Court will make a decision this coming week. We’re clearly hoping that the Supreme Court does, in fact, take the case, given the significance of the issue and the impact on thousands of Madoff victims. We do recognize, of course, that the odds are generally pretty long against any Cert petition being granted, given how few cases the Court agrees to hear. Of course, should the Court take the case, the biggest challenge then would be getting the Court to overturn the Second Circuit decision – something that would require, and merit, the highest level of Supreme Court experience obtainable.
NY District Court (Rakoff) & Clawback
As you may know, Judge Rakoff has agreed to remove from the Bankruptcy Court and decide himself a number of very significant legal issues, each having its own process and timing. The first of these issues is whether the Supreme Court decision in Stern v. Marshall decided last summer prevents the Bankruptcy Court from a) entering a final determination in the various claw back actions and if it does, whether b) the Bankruptcy Court may still hear the cases, make proposed factual findings and conclusions to the District Court which, following a de novo review, will have the sole authority to enter a final judgment. This issue has been fully briefed and was argued earlier this week to Judge Rakoff. The Court did not decide the issue nor did it indicate when a decision was likely to be rendered. We’ll keep you posted on this.
A number of other issues are also in the Rakoff hopper. These include:
• Antecedent debt: whether withdrawals from Madoff accounts constitute “for value payments of antecedent debts” (and thus are defenses to claw back),
• Transfers between Madoff accounts: whether transfers from one Madoff account to another separate Madoff account which predate the applicable statute of limitations should be credited to the transferee for the full statement amount of the transfer or if the Trustee may disallow “fictitious profits” in the account of the transferor,
• Whether SIPA and the Bankruptcy Code as incorporated in SIPA can be applied to non-US investors as it does to US investors (has “extraterritorial” effect),
• How fresh deposits by an account holder during the two-year period immediately preceding the SIPC filing should be treated for purpose of calculating claw back liability, and what the proper standard is for “good faith”.
• The Court has established briefing schedules and will conduct oral arguments over the next few months with September and October the most likely dates for argument. Invariably the decisions rendered will be followed by appeals. In any case, the process will be lengthy, expensive, and wearing to all victims.
The reasonably good news for Madoff victims currently being sued by the Trustee is the extent to which Rakoff, in the Trustee’s case against the Mets’ owners and in his follow up decisions in other claw back cases has dramatically reduced the Trustee’s reach, reducing the claw back period to two years (although he left open for future determination how that amount would be calculated). And for those who the Trustee alleges “should have known” through a concept called “inquiry notice”, Judge Rakoff raised the bar in the Mets’ owners’ case on what the Trustee must be able to prove (“willful blindness”). This is one the issues Rakoff will be revisiting in the upcoming “good faith” hearings.
What is also good news is that, behind the scenes, a fairly large group comprised of several highly regarded and experienced law firms are working collaboratively and positively in preparation for the briefings and hearings that will be presented to Judge Rakoff.
Tax Legislation
Unlike the SIPC legislation, the tax legislation proposed by Senators Schumer and Kyl (S.3166) and Congressman Pascrell (HR1635) have been dormant, largely victims of the tax stalemate currently extant in Congress. It is understood that this legislation would need to be appended to another piece of tax legislation, and currently tax legislation doesn’t appear likely to happen until the lame duck session of Congress at the end of 2012, or more likely, early in 2013. Meanwhile, Congressman Pascrell, who sponsored HR1635, and having just survived a difficult primary runoff, is now fighting for reelection.
HR757-Grassroots
HR757 – Grassroots needed in Representatives Grimm, Hayworth districts. Last week we asked victims to take a time out in their letter-writing efforts to allow time for HR757 to move toward a markup in Congressman Scott Garrett’s House Capital Markets Subcommittee. Grassroots energy would now be well spent by identifying potential letter-writers – i.e. friends and family members, including those who are not victims – in Congressional districts outside of the Madoff-impacted areas for later in the year. However, we do want some continued targeted letter-writing now to Congressmen Michael Grimm (Staten Island) and Congresswoman Nan Hayworth (Lower Hudson Valley) as they make up the New York Metro-area delegation on the Congressman Garrett’s Subcommittee. Once again, only members within those districts should write letters. [Click here to submit your letter on-line or for sample letter-templates]. If you do feel compelled to send a letter now, only send a polite, personal “thank you” if your Congressional member has supported the legislation.
Also, we continue to seek “Grasstops” in these districts and all other districts – individuals who have direct access to their Congressional members. If you are, or know someone in that capacity, please contact us for further directions.
Up next: an update on PR and communications. We are also gearing up a major fundraising push so that we can continue to pursue this effort and keep our highly effective team intact. We’ll look to you in the coming days for your support, even in these difficult times. We can’t thank our lobby, PR, and legal team enough for all the hard work they’ve invested on our behalf. Click here for more information on how you can help now.
Thanks so much,
Ron Stein, CFP
President
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