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CREDIT SUISSE SECURITIES (USA) LLC, FKA CREDIT SUISSE FIRST BOSTON LLC, ET AL., PETITIONERS
v.
GLEN BILLING ET AL.
No. 05-1157.
Supreme Court of United States.
Argued March 27, 2007.
Decided June 18, 2007.

Respondent investors filed suit, alleging that petitioner investment banks, acting as underwriters, violated antitrust laws when they formed syndicates to help execute initial public offerings (IPOs) for several hundred technology-related companies. Respondents claim that the underwriters unlawfully agreed that they would not sell newly issued securities to a buyer unless the buyer committed (1) to buy additional shares of that security later at escalating prices (known as “laddering”), (2) to pay unusually high commissions on subsequent security purchases from the underwriters, or (3) to purchase from the underwriters other less desirable securities (known as “tying”). The underwriters moved to dismiss, claiming that federal securities law impliedly precludes application of antitrust laws to the conduct in question. The District Court dismissed the complaints, but the Second Circuit reversed.
Held: The securities law implicitly precludes the application of the antitrust laws to the conduct alleged in this case. Pp. 4-20.
(a) Where regulatory statutes are silent in respect to antitrust, courts must determine whether, and in what respects, they implicitly preclude the antitrust laws’ application. Taken together, Silver v. New York Stock Exchange, 373 U. S. 341; Gordon v. New York Stock Exchange, Inc., 422 U. S. 659; and United States v. National Assn. of Securities Dealers, Inc., 422 U. S. 694 (NASD) make clear that a court deciding this preclusion issue is deciding whether, given context and likely consequences, there is a “clear repugnancy” between the securities law and the antitrust complaint, i.e., whether the two are “clearly incompatible.” Moreover, Gordon and NASD, in finding sufficient incompatibility to warrant an implication of preclusion, treated as critical: (1) the existence of regulatory authority under the securities law to supervise the activities in question; (2) evidence that the responsible regulatory entities exercise that authority; and (3) a resulting risk that the securities and antitrust laws, if both applicable, would produce conflicting guidance, requirements, duties, privileges, or standards of conduct. In addition, (4) in Gordon and NASD the possible conflict affected practices that lie squarely within an area of financial market activity that securities law seeks to regulate. Pp. 4-10.
(b) Several considerations—the underwriters’ efforts jointly to promote and sell newly issued securities is central to the proper functioning of well-regulated capital markets; the law grants the SEC authority to supervise such activities; and the SEC has continuously exercised its legal authority to regulate this type of conduct—show that the first, second, and fourth conditions are satisfied in this case. This leaves the third condition: whether there is a conflict rising to the level of incompatibility. Pp. 10-12.
(c) The complaints here can be read as attacking the manner in which the underwriters jointly seek to collect “excessive” commissions through the practices of laddering, tying, and collecting excessive commissions, which according to respondents the SEC itself has already disapproved and, in all likelihood, will not approve in the foreseeable future. Nonetheless, certain considerations, taken together, lead to the conclusion that securities law and antitrust law are clearly incompatible in this context. Pp. 12-19.
(1) First, to permit antitrust actions such as this threatens serious securities-related harm. For one thing, a fine, complex, detailed line separates activity that the SEC permits or encourages from activity that it forbids. And the SEC has the expertise to distinguish what is forbidden from what is allowed. For another thing, reasonable but contradictory inferences may be drawn from overlapping evidence that shows both unlawful antitrust activity and lawful securities marketing activity. Further, there is a serious risk that antitrust courts, with different nonexpert judges and different nonexpert juries, will produce inconsistent results. Together these factors mean there is no practical way to confine antitrust suits so that they challenge only the kind of activity the investors seek to target, which is presently unlawful and will likely remain unlawful under the securities law. Rather, these considerations suggest that antitrust courts are likely to make unusually serious mistakes in this respect. And that threat means that underwriters must act to avoid not simply conduct that the securities law forbids, but also joint conduct that the securities law permits or encourages. Thus, allowing an antitrust lawsuit would threaten serious harm to the efficient functioning of the securities market. Pp. 14-17.
(2) Second, any enforcement-related need for an antitrust lawsuit is unusually small. For one thing, the SEC actively enforces the rules and regulations that forbid the conduct in question. For another, investors harmed by underwriters’ unlawful practices may sue and obtain damages under the securities law. Finally, the fact that the SEC is itself required to take account of competitive considerations when it creates securities-related policy and embodies it in rules and regulations makes it somewhat less necessary to rely on antitrust actions to address anticompetitive behavior. Pp. 17-18.
(3) In sum, an antitrust action in this context is accompanied by a substantial risk of injury to the securities markets and by a diminished need for antitrust enforcement to address anticompetitive conduct. Together these considerations indicate a serious conflict between application of the antitrust laws and proper enforcement of the securities law. The Solicitor General’s proposal to avoid this conflict does not convincingly address these concerns. Pp. 18-19.
426 F. 3d 130, reversed.
BREYER, J., delivered the opinion of the Court, in which ROBERTS, C. J., and SCALIA, SOUTER, GINSBURG, and ALITO, JJ., joined. STEVENS, J., filed an opinion concurring in the judgment. THOMAS, J., filed a dissenting opinion. KENNEDY, J., took no part in the consideration or decision of the case.
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
JUSTICE BREYER delivered the opinion of the Court.
A group of buyers of newly issued securities have filed an antitrust lawsuit against underwriting firms that market and distribute those issues. The buyers claim that the underwriters unlawfully agreed with one another that they would not sell shares of a popular new issue to a buyer unless that buyer committed (1) to buy additional shares of that security later at escalating prices (a practice called “laddering”), (2) to pay unusually high commissions on subsequent security purchases from the underwriters, or (3) to purchase from the underwriters other less desirable securities (a practice called “tying”). The question before us is whether there is a “`plain repugnancy’” between these antitrust claims and the federal securities law. See Gordon v. New York Stock Exchange, Inc., 422. U. S. 659, 682 (1975) (quoting United States v. Philadelphia Nat. Bank, 374 U. S. 321, 350-351 (1963)). We conclude that there is. Consequently we must interpret the securities laws as implicitly precluding the application of the antitrust laws to the conduct alleged in this case. See 422 U. S., at 682, 689, 691; see also United States v. National Assn. of Securities Dealers, Inc., 422 U. S. 694 (1975) (NASD); Silver v. New York Stock Exchange, 373 U. S. 341 (1963).
I
A
The underwriting practices at issue take place during the course of an initial public offering (IPO) of shares in a company. An IPO presents an opportunity to raise capital for a new enterprise by selling shares to the investing public. A group of underwriters will typically form a syndicate to help market the shares. The syndicate will investigate and estimate likely market demand for the shares at various prices. It will then recommend to the firm a price and the number of shares it believes the firm should offer. Ultimately, the syndicate will promise to buy from the firm all the newly issued shares on a specified date at a fixed, agreed-upon price, which price the syndicate will then charge investors when it resells the shares. When the syndicate buys the shares from the issuing firm, however, the firm gives the syndicate a price discount, which amounts to the syndicate’s commission. See generally L. Loss & J. Seligman, Fundamentals of Securities Regulation 66-72 (4th ed. 2001).
At the heart of the syndicate’s IPO marketing activity lie its efforts to determine suitable initial share prices and quantities. At first, the syndicate makes a preliminary estimate that it submits in a registration statement to the Securities and Exchange Commission (SEC). It then conducts a “road show” during which syndicate underwriters and representatives of the offering firm meet potential investors and engage in a process that the industry calls “book building.” During this time, the underwriters and firm representatives present information to investors about the company and the stock. And they attempt to gauge the strength of the investors’ interest in purchasing the stock. For this purpose, underwriters might well ask the investors how their interest would vary depending upon price and the number of shares that are offered. They will learn, among other things, which investors might buy shares, in what quantities, at what prices, and for how long each is likely to hold purchased shares before selling them to others.
On the basis of this kind of information, the members of the underwriting syndicate work out final arrangements with the issuing firm, fixing the price per share and specifying the number of shares for which the underwriters will be jointly responsible. As we have said, after buying the shares at a discounted price, the syndicate resells the shares to investors at the fixed price, in effect earning its commission in the process.
B
In January 2002, respondents, a group of 60 investors, filed two antitrust class-action lawsuits against the petitioners, 10 leading investment banks. They sought relief under §1 of the Sherman Act, ch. 647, 26 Stat. 209, as amended, 15 U. S. C. §1; §2(c) of the Clayton Act, 38 Stat. 730, as amended by the Robinson-Patman Act, 49 Stat. 1527, 15 U. S. C. §13(c); and state antitrust laws. App. 1, 14. The investors stated that between March 1997 and December 2000 the banks had acted as underwriters, forming syndicates that helped execute the IPOs of several hundred technology-related companies. Id., at 22. Respondents’ antitrust complaints allege that the underwriters “abused the . . . practice of combining into underwriting syndicates” by agreeing among themselves to impose harmful conditions upon potential investors—conditions that the investors apparently were willing to accept in order to obtain an allocation of new shares that were in high demand. Id., at 12.
These conditions, according to respondents, consist of a requirement that the investors pay “additional anticompetitive charges” over and above the agreed-upon IPO share price plus underwriting commission. In particular, these additional charges took the form of (1) investor promises “to place bids . . . in the aftermarket at prices above the IPO price” (i.e., “laddering” agreements); (2) investor “commitments to purchase other, less attractive securities” (i.e., “tying” arrangements); and (3) investor payment of “non-competitively determined” (i.e., excessive) “commissions,” including the “purchas[e] of an issuer’s shares in follow-up or `secondary’ public offerings (for which the underwriters would earn underwriting discounts).” Id., at 12-13. The complaint added that the underwriters’ agreement to engage in some or all of these practices artificially inflated the share prices of the securities in question. Id., at 32.
The underwriters moved to dismiss the investors’ complaints on the ground that federal securities law impliedly precludes application of antitrust laws to the conduct in question. (The antitrust laws at issue include the commercial bribery provisions of the Robinson-Patman Act.) The District Court agreed with petitioners and dismissed the complaints against them. See In re Initial Public Offering Antitrust Litigation, 287 F. Supp. 2d 497, 524-525 (SDNY 2003) (IPO Antitrust). The Court of Appeals for the Second Circuit reversed, however, and reinstated the complaints. 426 F. 3d 130, 170, 172 (2005). We granted the underwriters’ petition for certiorari. And we now reverse the Court of Appeals.
II
A
Sometimes regulatory statutes explicitly state whether they preclude application of the antitrust laws. Compare, e.g., Webb-Pomerene Act, 15 U. S. C. §62 (expressly providing antitrust immunity) with §601(b)(1) of the Telecommunications Act of 1996, 47 U. S. C. §152 (stating that antitrust laws remain applicable). See also Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U. S. 398, 406-407 (2004) (analyzing the antitrust saving clause of the Telecommunications Act). Where regulatory statutes are silent in respect to antitrust, however, courts must determine whether, and in what respects, they implicitly preclude application of the antitrust laws. Those determinations may vary from statute to statute, depending upon the relation between the antitrust laws and the regulatory program set forth in the particular statute, and the relation of the specific conduct at issue to both sets of laws. Compare Gordon, 422 U. S., at 689 (finding implied preclusion of antitrust laws); and NASD, 422 U. S., at 729-730 (same), with Otter Tail Power Co. v. United States, 410 U. S. 366, 374-375 (1973) (finding no implied immunity); Philadelphia Nat. Bank, 374 U. S., at 352 (same); and Silver, 373 U. S., at 360 (same). See also Phonotele, Inc. v. American Tel. & Tel. Co., 664 F. 2d 716, 727 (CA9 1981).
Three decisions from this Court specifically address the relation of securities law to antitrust law. In Silver the Court considered a dealer’s claim that, by expelling him from the New York Stock Exchange, the Exchange had violated the antitrust prohibition against group “boycott[s].” 373 U. S., at 347. The Court wrote that, where possible, courts should “reconcil[e] the operation of both [i.e., antitrust and securities] statutory schemes . . . rather than holding one completely ousted.” Id., at 357. It also set forth a standard, namely that “[r]epeal of the antitrust laws is to be regarded as implied only if necessary to make the Securities Exchange Act work, and even then only to the minimum extent necessary.” Ibid. And it held that the securities law did not preclude application of the antitrust laws to the claimed boycott insofar as the Exchange denied the expelled dealer a right to fair procedures. Id., at 359-360.
In reaching this conclusion, the Court noted that the SEC lacked jurisdiction under the securities law “to review particular instances of enforcement of exchange rules”; that “nothing [was] built into the regulatory scheme which performs the antitrust function of insuring” that rules that injure competition are nonetheless “justified as furthering” legitimate regulatory “ends”; that the expulsion “would clearly” violate “the Sherman Act unless justified by reference to the purposes of the Securities Exchange Act”; and that it could find no such justifying purpose where the Exchange took “anticompetitive collective action . . . without according fair procedures.” Id., at 357-358, 364 (emphasis added).
In Gordon the Court considered an antitrust complaint that essentially alleged “price fixing” among stockbrokers. It charged that members of the New York Stock Exchange had agreed to fix their commissions on sales under $500,000. And it sought damages and an injunction forbidding future agreements. 422 U. S., at 661, and n. 3. The lawsuit was filed at a time when regulatory attitudes toward fixed stockbroker commissions were changing. The fixed commissions challenged in the complaint were applied during a period when the SEC approved of the practice of fixing broker-commission rates. But Congress and the SEC had both subsequently disapproved for the future the fixing of some of those rates. See id., at 690-691.
In deciding whether antitrust liability could lie, the Court repeated Silver’s general standard in somewhat different terms: It said that an “implied repeal” of the antitrust laws would be found only “where there is a `plain repugnancy between the antitrust and regulatory provisions.’” 422 U. S., at 682 (quoting Philadelphia Nat. Bank, supra, at 350-351). It then held that the securities laws impliedly precluded application of the antitrust laws in the case at hand. The Court rested this conclusion on three sets of considerations. For one thing, the securities law “gave the SEC direct regulatory power over exchange rules and practices with respect to the fixing of reasonable rates of commission.” 422 U. S., at 685 (internal quotation marks omitted). For another, the SEC had “taken an active role in review of proposed rate changes during the last 15 years,” and had engaged in “continuing activity” in respect to the regulation of commission rates. Ibid. Finally, without antitrust immunity, “the exchanges and their members” would be subject to “conflicting standards.” Id., at 689.
This last consideration—the conflict—was complicated due to Congress’, and the agency’s, changing views about the validity of fixed commissions. As far as the past fixing of rates was concerned, the conflict was clear: The antitrust law had forbidden the very thing that the securities law had then permitted, namely an anticompetitive rate setting process. In respect to the future, however, the conflict was less apparent. That was because the SEC’s new (congressionally authorized) prohibition of (certain) fixed rates would take effect in the near-term future. And after that time the SEC and the antitrust law would both likely prohibit some of the ratefixing to which the plaintiff’s injunction would likely apply. See id., at 690-691.
Despite the likely compatibility of the laws in the future, the Court nonetheless expressly found conflict. The conflict arose from the fact that the law permitted the SEC to supervise the competitive setting of rates and to “reintroduc[e]. . . fixed rates,” id., at 691 (emphasis added), under certain conditions. The Court consequently wrote that “failure to imply repeal would render nugatory the legislative provision for regulatory agency supervision of exchange commission rates.” Ibid. The upshot is that, in light of potential future conflict, the Court found that the securities law precluded antitrust liability even in respect to a practice that both antitrust law and securities law might forbid.
In NASD the Court considered a Department of Justice antitrust complaint claiming that mutual fund companies had agreed with securities broker-dealers (1) to fix “resale” prices, i.e., the prices at which a broker-dealer would sell a mutual fund’s shares to an investor or buy mutual fund shares from a fund investor (who wished to redeem the shares); (2) to fix other terms of sale including those related to when, how, to whom, and from whom the broker-dealers might sell and buy mutual fund shares; and (3) to forbid broker-dealers from freely selling to, and buying shares from, one another. See 422 U. S., at 700-703.
The Court again found “clear repugnancy,” and it held that the securities law, by implication, precluded all parts of the antitrust claim. Id., at 719. In reaching this conclusion, the Court found that antitrust law (e.g., forbidding resale price maintenance) and securities law (e.g., permitting resale price maintenance) were in conflict. In deciding that the latter trumped the former, the Court relied upon the same kinds of considerations it found determinative in Gordon. In respect to the last set of allegations (restricting a free market in mutual fund shares among brokers), the Court said that (1) the relevant securities law “enables [the SEC] to monitor the activities questioned”; (2) “the history of Commission regulations suggests no laxity in the exercise of this authority”; and hence (3) allowing an antitrust suit to proceed that is “so directly related to the SEC’s responsibilities” would present “a substantial danger that [broker-dealers and other defendants] would be subjected to duplicative and inconsistent standards.” See NASD, 422 U. S., at 734-735.
As to the other practices alleged in the complaint (concerning, e.g., resale price maintenance), the Court emphasized that (1) the securities law “vested in the SEC final authority to determine whether and to what extent” the relevant practices “should be tolerated,” id., at 729; (2) although the SEC has not actively supervised the relevant practices, that is only because the statute “reflects a clear congressional determination that, subject to Commission oversight, mutual funds should be allowed to retain the initiative in dealing with the potentially adverse effects of disruptive trading practices,” id., at 727; and (3) the SEC has supervised the funds insofar as its “acceptance of fund-initiated restrictions for more than three decades . . . manifests an informed administrative judgment that the contractual restrictions . . . were appropriate means for combating the problems of the industry,” id., at 728. The Court added that, in these respects, the SEC had engaged in “precisely the kind of administrative oversight of private practices that Congress contemplated.” Ibid.
As an initial matter these cases make clear that JUSTICE THOMAS is wrong to regard §§77p(a) and 78bb(a) as saving clauses so broad as to preserve all antitrust actions. See post, p. ___ (dissenting opinion). The United States advanced the same argument in Gordon. See Brief for United States as Amicus Curiae in Gordon v. New York Stock Exchange, Inc., O. T. 1974, No. 74-304, pp. 8, 42. And the Court, in finding immunity, necessarily rejected it. See also NASD, supra, at 694 (same holding); Herman & MacLean v. Huddleston, 459 U. S. 375, 383 (1983) (finding saving clause applicable to overlap between securities laws where that “overlap [was] neither unusual nor unfortunate” (internal quotation marks omitted)). Although one party has made the argument in this Court, it was not presented in the courts below. And we shall not reexamine it.
This Court’s prior decisions also make clear that, when a court decides whether securities law precludes antitrust law, it is deciding whether, given context and likely consequences, there is a “clear repugnancy” between the securities law and the antitrust complaint—or as we shall subsequently describe the matter, whether the two are “clearly incompatible.” Moreover, Gordon and NASD, in finding sufficient incompatibility to warrant an implication of preclusion, have treated the following factors as critical: (1) the existence of regulatory authority under the securities law to supervise the activities in question; (2) evidence that the responsible regulatory entities exercise that authority; and (3) a resulting risk that the securities and antitrust laws, if both applicable, would produce conflicting guidance, requirements, duties, privileges, or standards of conduct. We also note (4) that in Gordon and NASD the possible conflict affected practices that lie squarely within an area of financial market activity that the securities law seeks to regulate.
B
These principles, applied to the complaints before us, considerably narrow our legal task. For the parties cannot reasonably dispute the existence here of several of the conditions that this Court previously regarded as crucial to finding that the securities law impliedly precludes the application of the antitrust laws.
First, the activities in question here—the underwriters’ efforts jointly to promote and to sell newly issued securities —is central to the proper functioning of well-regulated capital markets. The IPO process supports new firms that seek to raise capital; it helps to spread ownership of those firms broadly among investors; it directs capital flows in ways that better correspond to the public’s demand for goods and services. Moreover, financial experts, including the securities regulators, consider the general kind of joint underwriting activity at issue in this case, including road shows and book-building efforts essential to the successful marketing of an IPO. See Memorandum Amicus Curiae of SEC in IPO Antitrust, Case No. 01 CIV 2014 (WHP) (SDNY), pp. 15, 39-40, App. D to Pet. for Cert. 124a, 138a, 155a-157a (hereinafter Brief for SEC). Thus, the antitrust complaints before us concern practices that lie at the very heart of the securities marketing enterprise.
Second, the law grants the SEC authority to supervise all of the activities here in question. Indeed, the SEC possesses considerable power to forbid, permit, encourage, discourage, tolerate, limit, and otherwise regulate virtually every aspect of the practices in which underwriters engage. See, e.g., 15 U. S. C. §§77b(a)(3), 77j, 77z-2 (granting SEC power to regulate the process of book-building, solicitations of “indications of interest,” and communications between underwriting participants and their customers, including those that occur during road shows); §78o(c)(2)(D) (granting SEC power to define and prevent through rules and regulations acts and practices that are fraudulent, deceptive, or manipulative); §78i(a)(6) (similar); §78j(b) (similar). Private individuals who suffer harm as a result of a violation of pertinent statutes and regulations may also recover damages. See §§78bb, 78u-4, 77k.
Third, the SEC has continuously exercised its legal authority to regulate conduct of the general kind now at issue. It has defined in detail, for example, what underwriters may and may not do and say during their road shows. Compare, e.g., Guidance Regarding Prohibited Conduct In Connection with IPO Allocations, 70 Fed. Reg. 19672 (2005), with Regulation M, 17 CFR §§242.100-242.105 (2006). It has brought actions against underwriters who have violated these SEC regulations. See Brief for SEC 13-14, App. D to Pet. for Cert. 136a-138a. And private litigants, too, have brought securities actions complaining of conduct virtually identical to the conduct at issue here; and they have obtained damages. See, e.g., In re Initial Pub. Offering Securities Litigation, 241 F. Supp. 2d 281 (SDNY 2003).
The preceding considerations show that the first condition (legal regulatory authority), the second condition (exercise of that authority), and the fourth condition (heartland securities activity) that were present in Gordon and NASD are satisfied in this case as well. Unlike Silver, there is here no question of the existence of appropriate regulatory authority, nor is there doubt as to whether the regulators have exercised that authority. Rather, the question before us concerns the third condition: Is there a conflict that rises to the level of incompatibility? Is an antitrust suit such as this likely to prove practically incompatible with the SEC’s administration of the Nation’s securities laws?
III
A
Given the SEC’s comprehensive authority to regulate IPO underwriting syndicates, its active and ongoing exercise of that authority, and the undisputed need for joint IPO underwriter activity, we do not read the complaints as attacking the bare existence of IPO underwriting syndicates or any of the joint activity that the SEC considers a necessary component of IPO-related syndicate activity. See Brief for SEC 15, 39-40, App. D to Pet. for Cert. 138a, 155a-157a. See also IPO Antitrust, 287 F. Supp. 2d, at 507 (discussing the history of syndicate marketing of IPOs); App. 12 (complaint attacks underwriters “abuse” of “the preexisting practice of combining into underwriting syndicates” (emphasis added)); H. R. Rep. No. 1383, 73d Cong., 2d Sess., 6-7 (1934); S. Rep. No. 792, 73d Cong., 2d Sess., 5 (1934) (law must give to securities agencies freedom to regulate agreements among syndicate members). Nor do we understand the complaints as questioning underwriter agreements to fix the levels of their commissions, whether or not the resulting price is “excessive.” See Gordon, 422 U. S., at 688-689 (securities law conflicts with, and therefore precludes, antitrust attack on the fixing of commissions where SEC has not approved, but later might approve, the practice).
We nonetheless can read the complaints as attacking the manner in which the underwriters jointly seek to collect “excessive” commissions. The complaints attack underwriter efforts to collect commissions through certain practices (i.e., laddering, tying, collecting excessive commissions in the form of later sales of the issued shares), which according to respondents the SEC itself has already disapproved and, in all likelihood, will not approve in the foreseeable future. In respect to this set of claims, they contend that there is no possible “conflict” since both securities law and antitrust law aim to prohibit the same undesirable activity. Without a conflict, they add, there is no “repugnance” or “incompatibility,” and this Court may not imply that securities law precludes an antitrust suit.
B
We accept the premises of respondents’ argument—that the SEC has full regulatory authority over these practices, that it has actively exercised that authority, but that the SEC has disapproved (and, for argument’s sake, we assume that it will continue to disapprove) the conduct that the antitrust complaints attack. Nonetheless, we cannot accept respondents’ conclusion. Rather, several considerations taken together lead us to find that, even on these prorespondent assumptions, securities law and antitrust law are clearly incompatible.
First, to permit antitrust actions such as the present one still threatens serious securities-related harm. For one thing, an unusually serious legal line-drawing problem remains unabated. In the present context only a fine, complex, detailed line separates activity that the SEC permits or encourages (for which respondents must concede antitrust immunity) from activity that the SEC must (and inevitably will) forbid (and which, on respondents’ theory, should be open to antitrust attack).
For example, in respect to “laddering” the SEC forbids an underwriter to “solicit customers prior to the completion of the distribution regarding whether and at what price and in what quantity they intend to place immediate aftermarket orders for IPO stock,” 70 Fed. Reg. 19675-19676 (emphasis deleted); 17 CFR §§242.100-242.105. But at the same time the SEC permits, indeed encourages, underwriters (as part of the “book building” process) to “inquir[e] as to a customer’s desired future position in the longer term (for example, three to six months), and the price or prices at which the customer might accumulate that position without reference to immediate aftermarket activity.” 70 Fed. Reg. 19676.
It will often be difficult for someone who is not familiar with accepted syndicate practices to determine with confidence whether an underwriter has insisted that an investor buy more shares in the immediate aftermarket (forbidden), or has simply allocated more shares to an investor willing to purchase additional shares of that issue in the long run (permitted). And who but a securities expert could say whether the present SEC rules set forth a virtually permanent line, unlikely to change in ways that would permit the sorts of “laddering-like” conduct that it now seems to forbid? Cf. Gordon, supra, at 690-691.
Similarly, in respect to “tying” and other efforts to obtain an increased commission from future sales, the SEC has sought to prohibit an underwriter “from demanding . .. an offer from their customers of any payment or other consideration [such as the purchase of a different security] in addition to the security’s stated consideration.” 69 Fed. Reg. 75785 (2004). But the SEC would permit a firm to “allocat[e] IPO shares to a customer because the customer has separately retained the firm for other services, when the customer has not paid excessive compensation in relation to those services.” Ibid., n. 108. The National Association of Securities Dealers (NASD), over which the SEC exercises supervisory authority, has also proposed a rule that would prohibit a member underwriter from “offering or threatening to withhold” IPO shares “as consideration or inducement for the receipt of compensation that is excessive in relation to the services provided.” Id., at 77810. The NASD would allow, however, a customer legitimately to compete for IPO shares by increasing the level and quantity of compensation it pays to the underwriter. See Ibid. (describing NASD Proposed Rule 2712(a)).
Under these standards, to distinguish what is forbidden from what is allowed requires an understanding of just when, in relation to services provided, a commission is “excessive,” indeed, so “excessive” that it will remain permanently forbidden, see Gordon, 422 U. S., at 690-691. And who but the SEC itself could do so with confidence?
For another thing, evidence tending to show unlawful antitrust activity and evidence tending to show lawful securities marketing activity may overlap, or prove identical. Consider, for instance, a conversation between an underwriter and an investor about how long an investor intends to hold the new shares (and at what price), say a conversation that elicits comments concerning both the investor’s short and longer term plans. That exchange might, as a plaintiff sees it, provide evidence of an underwriter’s insistence upon “laddering” or, as a defendant sees it, provide evidence of a lawful effort to allocate shares to those who will hold them for a longer time. See Brief for United States as Amicus Curiae 27.
Similarly, the same somewhat ambiguous conversation might help to establish an effort to collect an unlawfully high commission through atypically high commissions on later sales or through the sales of less popular stocks. Or it might prove only that the underwriter allocates more popular shares to investors who will help stabilize the aftermarket share price. See, e.g., Department of Enforcement, Disciplinary Proceeding No. CAF030014, pp. 12-13 (NASD Office of Hearing Officers, Mar. 3, 2006).
Further, antitrust plaintiffs may bring lawsuits throughout the Nation in dozens of different courts with different nonexpert judges and different nonexpert juries. In light of the nuanced nature of the evidentiary evaluations necessary to separate the permissible from the impermissible, it will prove difficult for those many different courts to reach consistent results. And, given the fact-related nature of many such evaluations, it will also prove difficult to assure that the different courts evaluate similar fact patterns consistently. The result is an unusually high risk that different courts will evaluate similar factual circumstances differently. See Hovenkamp, Antitrust Violations in Securities Markets, 28 J. Corp. L. 607, 629 (2003) (“Once regulation of an industry is entrusted to jury trials, the outcomes of antitrust proceedings will be inconsistent with one another . . . “).
Now consider these factors together—the fine securities-related lines separating the permissible from the impermissible; the need for securities-related expertise (particularly to determine whether an SEC rule is likely permanent); the overlapping evidence from which reasonable but contradictory inferences may be drawn; and the risk of inconsistent court results. Together these factors mean there is no practical way to confine antitrust suits so that they challenge only activity of the kind the investors seek to target, activity that is presently unlawful and will likely remain unlawful under the securities law. Rather, these factors suggest that antitrust courts are likely to make unusually serious mistakes in this respect. And the threat of antitrust mistakes, i.e., results that stray outside the narrow bounds that plaintiffs seek to set, means that underwriters must act in ways that will avoid not simply conduct that the securities law forbids (and will likely continue to forbid), but also a wide range of joint conduct that the securities law permits or encourages (but which they fear could lead to an antitrust lawsuit and the risk of treble damages). And therein lies the problem.
This kind of problem exists to some degree in respect to other antitrust lawsuits. But here the factors we have mentioned make mistakes unusually likely (a matter relevant to Congress’ determination of which institution should regulate a particular set of market activities). And the role that joint conduct plays in respect to the marketing of IPOs, along with the important role IPOs themselves play in relation to the effective functioning of capital markets, means that the securities-related costs of mistakes is unusually high. It is no wonder, then, that the SEC told the District Court (consistent with what the Government tells us here) that a “failure to hold that the alleged conduct was immunized would threaten to disrupt the full range of the Commission’s ability to exercise its regulatory authority,” adding that it would have a “chilling effect” on “lawful joint activities . . . of tremendous importance to the economy of the country.” Brief for SEC 40, App. D to Pet. for Cert. 157a.
We believe it fair to conclude that, where conduct at the core of the marketing of new securities is at issue; where securities regulators proceed with great care to distinguish the encouraged and permissible from the forbidden; where the threat of antitrust lawsuits, through error and disincentive, could seriously alter underwriter conduct in undesirable ways, to allow an antitrust lawsuit would threaten serious harm to the efficient functioning of the securities markets.
Second, any enforcement-related need for an antitrust lawsuit is unusually small. For one thing, the SEC actively enforces the rules and regulations that forbid the conduct in question. For another, as we have said, investors harmed by underwriters’ unlawful practices may bring lawsuits and obtain damages under the securities law. See supra, at 10-11. Finally, the SEC is itself required to take account of competitive considerations when it creates securities-related policy and embodies it in rules and regulations. And that fact makes it somewhat less necessary to rely upon antitrust actions to address anticompetitive behavior. See 15 U. S. C. §77b(b) (instructing the SEC to consider, “in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation”); §78w(a)(2) (the SEC “shall consider among other matters the impact any such rule or regulation would have on competition”); Trinko, 540 U. S., at 412 (“[T]he additional benefit to competition provided by antitrust enforcement will tend to be small” where other laws and regulatory structures are “designed to deter and remedy anticompetitive harm”).
We also note that Congress, in an effort to weed out unmeritorious securities lawsuits, has recently tightened the procedural requirements that plaintiffs must satisfy when they file those suits. To permit an antitrust lawsuit risks circumventing these requirements by permitting plaintiffs to dress what is essentially a securities complaint in antitrust clothing. See generally Private Securities Litigation Reform Act of 1995, 109 Stat. 737; Securities Litigation Uniform Standards Act of 1998, 112 Stat. 3227.
In sum, an antitrust action in this context is accompanied by a substantial risk of injury to the securities markets and by a diminished need for antitrust enforcement to address anticompetitive conduct. Together these considerations indicate a serious conflict between, on the one hand, application of the antitrust laws and, on the other, proper enforcement of the securities law.
We are aware that the Solicitor General, while recognizing the conflict, suggests a procedural device that he believes will avoid it (in effect, a compromise between the differing positions that the SEC and Antitrust Division of the Department of Justice took in the courts below). Compare Brief for Dept. of Justice, Antitrust Division, as Amicus Curiae in Case No. 01 CIV 2014, p. 23 (seeking no preclusion of the antitrust laws), with Brief for SEC 39-40, App. D to Pet. for Cert. 155a-157a (seeking total preclusion of the antitrust laws). He asks us to remand this case to the District Court so that it can determine “whether respondents’ allegations of prohibited conduct can, as a practical matter, be separated from conduct that is permitted by the regulatory scheme,” and in doing so, the lower court should decide whether SEC-permitted and SEC-prohibited conduct are “inextricably intertwined.” See Brief for United States as Amicus Curiae 9. The Solicitor General fears that otherwise, we might read the law as totally precluding application of the antitrust law to underwriting syndicate behavior, even were underwriters, say, overtly to divide markets.
The Solicitor General’s proposed disposition, however, does not convincingly address the concerns we have set forth here—the difficulty of drawing a complex, sinuous line separating securities-permitted from securities-forbidden conduct, the need for securities-related expertise to draw that line, the likelihood that litigating parties will depend upon the same evidence yet expect courts to draw different inferences from it, and the serious risk that antitrust courts will produce inconsistent results that, in turn, will overly deter syndicate practices important in the marketing of new issues. (We also note that market divisions appear to fall well outside the heartland of activities related to the underwriting process than the conduct before us here, and we express no view in respect to that kind of activity.)
The upshot is that all four elements present in Gordon are present here: (1) an area of conduct squarely within the heartland of securities regulations; (2) clear and adequate SEC authority to regulate; (3) active and ongoing agency regulation; and (4) a serious conflict between the antitrust and regulatory regimes. We therefore conclude that the securities laws are “clearly incompatible” with the application of the antitrust laws in this context.
The Second Circuit’s contrary judgment is
Reversed.
JUSTICE KENNEDY took no part in the consideration or decision of this case.
JUSTICE STEVENS, concurring in the judgment.
When investment bankers cooperate in underwriting an initial public offering (IPO), they increase the amount of capital available to firms producing goods and services and make additional securities available for purchase. By agglomerating networks of investors and spreading the risk of overvaluation, syndicates make positive contributions to the economy that could not be achieved through independent action. See 426 F. 3d 130, 137-138 (CA2 2005). In my view, agreements among underwriters on how best to market IPOs, including agreements on price and other terms of sale to initial investors, should be treated as procompetitive joint ventures for purposes of antitrust analysis. In all but the rarest of cases, they cannot be conspiracies in restraint of trade within the meaning of §1 of the Sherman Act, 15 U. S. C. §1.
After the initial purchase, the prices of newly issued stocks or bonds are determined by competition among the vast multitude of other securities traded in a free market. To suggest that an underwriting syndicate can restrain trade in that market by manipulating the terms of IPOs is frivolous. See United States v. Morgan, 118 F. Supp. 621, 689 (SDNY 1953) (Medina, J.) (“[T]he syndicate system has no effect whatever on general market prices, nor do the participating underwriters and dealers intend it to have any. On the contrary, it is the general market prices of securities of comparable rating and quality which control the public offering price . . . . The particular issue, even if a large one, is but an infinitesimal unit of trade in the ocean of security issues running into the billions, which constitutes the general market”); see also Hovenkamp, Antitrust Violations in Securities Markets, 28 J. Corp. L. 607, 615-618 (2003). It is possible of course that the practices described in the complaints in these two cases may have enabled the underwriters to divert some of the benefits of the offerings from the issuers to themselves, thus breaching the agents’ fiduciary obligations to their principals. But if such an injury did occur, it is not an “antitrust injury” giving rise to a damages claim by investors. See Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U. S. 477, 489 (1977).
Nor do I believe that the so-called “laddering” and “tying” described in the complaints constitute vertical restraints that violate either the Sherman Act or §2(c) of the Robinson-Patman Act, 15 U. S. C. §13(c). Given the magnitude of the market these practices are alleged to have influenced, I think it obvious as a matter of law that there has been no injury to any relevant competition. Unlike in Bell Atlantic Corp. v. Twombly, 550 U. S. ___ (2007), there is no need to engage in discovery to determine whether there is any merit to the plaintiffs’ claims. See id., at ___ – ___ (STEVENS, J., dissenting) (slip op., at 24-26).
The defendants moved to dismiss for failure to state a claim on the ground, among others, that the plaintiffs’ claims challenge “the ordinary activities of participants in underwriting syndicates, which are recognized to be completely lawful and pro-competitive.” Record, Doc. 98, p. 72. I agree and would hold, as we did in Parker v. Brown, 317 U. S. 341, 351-352 (1943), that the defendants’ alleged conduct does not violate the antitrust laws, rather than holding that Congress has implicitly granted them immunity from those laws. Surely I would not suggest, as the Court did in Twombly, and as it does again today, that either the burdens of antitrust litigation or the risk “that antitrust courts are likely to make unusually serious mistakes,” ante, at 16, should play any role in the analysis of the question of law presented in a case such as this.
Accordingly, I concur in the Court’s judgment but not in its opinion.
JUSTICE THOMAS, dissenting.
The Court believes it must decide whether the securities laws implicitly preclude application of the antitrust laws because the securities statutes “are silent in respect to antitrust.” See ante, at 5. I disagree with that basic premise. The securities statutes are not silent. Both the Securities Act and the Securities Exchange Act contain broad saving clauses that preserve rights and remedies existing outside of the securities laws.
Section 16 of the Securities Act of 1933 states that “the rights and remedies provided by this subchapter shall be in addition to any and all other rights and remedies that may exist in law or in equity.” 15 U. S. C. §77p(a). In parallel fashion, §28 of the Securities Exchange Act of 1934 states that “the rights and remedies provided by this chapter shall be in addition to any and all other rights and remedies that may exist at law or in equity.” §78bb(a). This Court has previously characterized those clauses as “confirm[ing] that the remedies in each Act were to be supplemented by `any and all’ additional remedies.” Herman & MacLean v. Huddleston, 459 U. S. 375, 383 (1983).
The Sherman Act was enacted in 1890. See 26 Stat. 209. Accordingly, rights and remedies under the federal antitrust laws certainly would have been thought of as “rights and remedies” that existed “at law or in equity” by the Congresses that enacted that Securities Act and the Securities Exchange Act in the early 1930’s. See §77p; §78bb. Therefore, both statutes explicitly save the very remedies the Court holds to be impliedly precluded. There is no convincing argument for why these saving provisions should not resolve this case in respondents’ favor.
The Court’s opinion overlooks the saving clauses seemingly because they do not “explicitly state whether they preclude application of the antitrust laws.” Ante, at 4; see also Brief for Petitioners 33, n. 5.1 As the Court observes, some statutes contain saving clauses specific to antitrust. See, e.g., Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U. S. 398, 406 (2004) (quoting Telecommunications Act of 1996, §601(b)(1), 110 Stat. 143, note following 47 U. S. C. §152 (“`[N]othing in this Act or the amendments made by this Act shall be construed to modify, impair, or supersede the applicability of any of the antitrust laws’”)). But the mere existence of targeted saving clauses does not demonstrate—or even suggest— that antitrust remedies are not included within the “any and all” other remedies to which the securities saving clauses refer. Although Congress may have singled out antitrust remedies for special treatment in some statutes, it is not precluded from using more general saving provisions that encompass antitrust and other remedies. Surely Congress is not required to enumerate every cause of action—state and federal—that may be brought. When Congress wants to preserve all other remedies, using the word “all” is sufficient.
Petitioners also argue that the saving clauses should not apply because the clauses did not play a role in the Court’s prior securities-antitrust pre-emption cases. Brief for Petitioners 33, n. 5 (“[N]either provision was found to bar immunity in Gordon [v. New York Stock Exchange, Inc., 422 U. S. 659 (1975)] or [United States v. National Assn. of Securities Dealers, Inc., 422 U. S. 694 (1975) (NASD)]“). Be that as it may, none of the opinions in Silver v. New York Stock Exchange, 373 U. S. 341 (1963), Gordon, or NASD—majority or dissent—offered any analysis of the saving clauses. Omitted reasoning has little claim to precedential value. Absent any indication that these omissions were the product of reasoned analysis instead of inadvertent oversight, I would not allow the Court’s prior silence on this issue to erect a perpetual bar to arguments based on a full reading of the statute’s relevant text.
Finally, it might be argued that the saving clauses preserve only state-law rights and remedies. This argument has no textual basis. If Congress had intended to limit the clauses to state law, it surely would not have phrased them to preserve “any and all” rights and remedies. Other provisions in both Acts, including a later sentence in the section containing the Securities Exchange Act’s saving clause, suggest that Congress explicitly referred to States when it intended to impose a state-law limitation. See, e.g., 15 U. S. C. §77v(a) (referring to “State and Territorial courts”); §78bb(a) (referring to the “securities commission . . . of any State”); cf. 17 U. S. C. §301(b) (“Nothing in this title annuls or limits any rights or remedies under the common law or statutes of any State . . .”). Given Congress’ demonstrated ability to limit provisions of the securities laws to States and the lack of any such limitation here, the saving clauses cannot be understood as limited only to state-law rights and remedies.2
A straightforward application of the saving clauses to this case leads to the conclusion that respondents’ antitrust suits must proceed. Accordingly, we do not need to reconcile any conflict between the securities laws and the antitrust laws. I respectfully dissent.
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Notes:
1. The Court suggests that the argument advanced in my opinion was not preserved by the respondents. See ante, at 9. Respondents’ principal contention in the Court of Appeals below was that “[t]he federal securities laws do not expressly immunize Defendants’ alleged conduct from prosecution under the federal antitrust laws.” See, e.g., Brief for Appellants in No. 03-9288 (CA2), pp. 15-16. Because a full reading of the securities laws is essential to analyzing respondents’ central argument, I do not consider arguments based on the saving clauses unpreserved. Cf. United States v. Morton, 467 U. S. 822, 828 (1984) (“[W]e read statutes as a whole”).
2. The Court’s suggestion that the clauses were intended to save only securities-related rights and remedies is subject to many of the same criticisms. See ante, at 9. The Securities Act of 1933 provided no private federal remedy for fraud in the purchase or sale of registered securities. On the Court’s proposed reading of §77p, however, a federal action for mail or wire fraud and a state-law action for fraud, which are not securities-related rights or remedies, would not have been included within the Securities Act’s saving provision.
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In re: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor.
SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,
v.
BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.
No. 08-01789 (BRL).
United States Bankruptcy Court, S.D. New York.
March 1, 2010.

ARGUING ON THE MOTION:
BAKER & HOSTETLER LLP, By: David Sheehan, Marc E. Hirschfield, Oren J. Warshavsky, Seanna R. Brown, New York, NY, Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff.
SECURITIES INVESTOR PROTECTION CORPORATION, By: Josephine Wang, Kevin H. Bell, Washington, DC, Attorneys for the Securities Investor Protection Corporation.
SECURITIES AND EXCHANGE COMMISSION, By: Katharine B. Gresham, Alistaire Bambach, Washington, DC, Attorneys for the Securities and Exchange Commission.
DAVIS POLK & WARDWELL LLP, By: Karen Wagner, Jonathan D. Martin, New York, NY, Attorneys for Sterling Equities Associates.
GOODWIN PROCTER LLP, By: Daniel M. Glosband, David J. Apfel, Brenda R. Sharton, Larkin M. Morton, Boston, MA, Attorneys for Jeffrey A. Berman, Russell DeLucia, Ellenjoy Fields, Michael C. Lesser, Norman E. Lesser 11/97 Rev. Trust, Paula E. Lesser 11/97 Rev. Trust, and Jane L. O’Connor, as Trustee of the Jane O’Connor Living Trust.
LAX & NEVILLE, LLP, By: Brian J. Neville, Barry R. Lax, New York, NY, Attorneys for Mary Albanese, the Brow Family Partnership, Allen Goldstein, Laurence Kaye, Suzanne Kaye, Rose Less, and Gordon Bennett.
MILBERG LLP, By: Jonathan M. Landers, Matthew Gluck, Lois F. Dix, Joshua E. Keller, New York, NY, Attorneys for Albert J. Goldstein U/W FBO, Ruth E. Goldstein TTEE, Ann Denver, Norton Eisenberg, Export Technicians, Inc., Stephen R. Goldenberg, Judith Rock Goldman, Jerry Guberman, Anita Karimian, Orthopaedic Specialty Group PC, Martin Rappaport, Paul J. Robinson, Bernard Seldon, Harold A. Thau, and The Aspen Company.
PHILLIPS NIZER LLP, By: Helen Davis Chaitman, New York, NY, Attorneys for Diane and Roger Peskin, Maureen Ebel, and a group of other customers.
SHEARMAN & STERLING LLP, By: Stephen Fishbein, New York, NY, Attorneys for Carl Shapiro and related entities.
SONNENSCHEIN NATH & ROSENTHAL LLP, By: Carole Neville, New York, NY, Attorneys for certain investors.
MEMORANDUM DECISION GRANTING TRUSTEE’S MOTION FOR AN ORDER (1) UPHOLDING TRUSTEE’S DETERMINATION DENYING CUSTOMER CLAIMS FOR AMOUNTS LISTED ON LAST CUSTOMER STATEMENT; (2) AFFIRMING TRUSTEE’S DETERMINATION OF NET EQUITY; AND (3) EXPUNGING OBJECTIONS TO DETERMINATIONS RELATING TO NET EQUITY
BURTON R. LIFLAND, Bankruptcy Judge.
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Before the Court is the motion (the “Motion”) of Irving H. Picard, Esq. (the “Trustee” or “Picard”), trustee for the substantively consolidated Securities Investor Protection Act1 (“SIPA”) liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and Bernard L. Madoff (“Madoff”), seeking an order (1) upholding the Trustee’s determination denying customer claims for amounts listed on last BLMIS customer statements, dated November 30, 2008 (the “November 30th Statements”); (2) affirming the Trustee’s determination of net equity; and (3) expunging objections to the Trustee’s determinations of net equity claims filed by a certain group of claimants (the “Objecting Claimants”)2 in the above-captioned adversary proceeding. The Motion is filed pursuant to the Court’s “Order Approving Form and Manner of Publication and Mailing of Notices, Specifying Procedures For Filing, Determination, and Adjudication of Claims; and Providing Other Relief” (the “Claims Procedure Order”) entered on December 23, 2008, and the Court’s “Order Scheduling Adjudication of `Net Equity’ Issue” (the “Scheduling Order”) entered on September 16, 2009. See Peskin v. Picard (In re Bernard L. Madoff Inv. Secs. LLC), 413 B.R. 137 (Bankr. S.D.N.Y. 2009) (expounding generally on the Claims Procedure Order and the Scheduling Order).
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The Madoff proceeding and its accompanying SIPA liquidation involve staggering numbers, with more than 15,000 claims filed and billions of dollars at stake. As of December 11, 2008 (the “Filing Date”),3 customers’ November 30th Statements reflected $73.1 billion in fictional net investments and related gains. Net of “negative” accounts approximating $8.3 billion, customers are purportedly owed a total of $64.8 billion. The critical issue before the Court is how to define a claimant’s “net equity” under SIPA for purposes of distributing against these astounding sums.
The statutory framework for the satisfaction of customer claims in a SIPA liquidation proceeding provides that customers share pro rata in customer property4 to the extent of their net equities, as defined in SIPA section 78lll(11) (“Net Equity”).5 See SIPA § 78fff-2(c)(1)(b). If the fund of customer property is insufficient to make customers whole, the trustee is entitled to an advance6 from the Securities Investor Protection Corporation (“SIPC”) to pay each customer the amount by which his Net Equity exceeds his ratable share of customer property, subject to a cap of $500,000 for securities claims. See SIPA § 78fff-3(a).
The Trustee defines Net Equity as the amount of cash deposited by the customer into his BLMIS customer account less any amounts already withdrawn by him (the “Net Investment Method”). In contrast, the Objecting Claimants define Net Equity as the amounts reflected on
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customers’ November 30th Statements (the “Last Statement Method”). The Trustee and the Objecting Claimants maintain that their respective definitions of Net Equity are thoroughly consistent with SIPA, statutory and case law, and notions of equity.
Congruent to the import and complexity of this issue, the briefs filed in support and opposition to the Motion are voluminous and impressive. For the purposes of this decision, the Court has considered all papers filed in response to the Scheduling Order, including over thirty briefs and more than twenty pro se submissions.7 SIPC and the SEC submitted briefs in support of the Motion.8 The Court recognizes that the application of the Net Equity definition to the complex and unique facts of Madoff’s massive Ponzi scheme is not plainly ascertainable in law. Indeed, the parties have advanced compelling arguments in support of both positions. Ultimately, however, upon a thorough and comprehensive analysis of the plain meaning and legislative history of the statute, controlling Second Circuit precedent, and considerations of equity and practicality, the Court endorses the Trustee’s Net Investment Method.
Accordingly, for the reasons set forth below, the Trustee’s determination of Net Equity is hereby APPROVED.
BACKGROUND
I. PROCEDURAL HISTORY
The Motion arises in connection with the infamous Ponzi scheme perpetrated by Madoff through his investment company, BLMIS. On December 11, 2008, Madoff was arrested by
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federal agents and charged with securities fraud in violation of 15 U.S.C. sections 78j(b), 78ff and 17 C.F.R. section 240.10b-5, in the United States District Court for the Southern District of New York (the “District Court”). United States v. Madoff, No. 08-MJ-02735.9 That same day, the Securities and Exchange Commission (the “SEC”) filed a civil complaint in the District Court, alleging, inter alia, that Madoff and BLMIS were operating a Ponzi scheme through BLMIS’s investment advisor activities. S.E.C. v. Madoff, et al., No. 08-CV-10791 (the “Civil Action”).
On December 15, 2008, SIPC filed an application in the Civil Action seeking a decree that the customers of BLMIS are in need of the protections afforded by SIPA. The District Court granted SIPC’s application and entered an order on December 15, 2008, placing BLMIS’s customers under the protections of SIPA (the “Protective Order”). The Protective Order appointed Picard as trustee for the liquidation of the business of BLMIS, appointed Baker and Hostetler, LLP as counsel to the Trustee, and removed the SIPA liquidation proceeding to this Court pursuant to SIPA sections 78eee(b)(3) and (b)(4).
On March 12, 2009, Madoff pled guilty to an 11-count criminal indictment filed against him and admitted that he “operated a Ponzi scheme through the investment advisory side of [BLMIS].” See United States v. Madoff, No.,09 CR 213 (DC), Docket No. 57, Plea Hr’g Tr. at 23:14-17. On June 29, 2009, Madoff was sentenced to 150 years in prison.
II. CLAIMS ADJUDICATION PROCEDURE
On December 23, 2008, the Court approved the Claims Procedure Order, which sets forth a systematic framework for the filing, determination and adjudication of claims in the BLMIS liquidation proceeding. Pursuant to this order, all claims by customers must be filed with the
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Trustee, who must determine the claims in writing. If the claimant does not object to the determination, it is deemed approved by the Court and binding on the claimant. If the claimant objects and files an opposition, the Trustee must obtain a hearing date and notify the claimant thereof. Certain, but not all, Madoff claimants objected to the Trustee’s determination of Net Equity due to his use of the Net Investment Method.
After a number of these objections were filed, the Court entered the Scheduling Order establishing a hearing date of February 2, 2010 to address whether Net Equity, as defined by SIPA, is calculated using the Net Investment Method or the Last Statement Method. In the interim, the Trustee continues to process and pay customer claims in the ordinary course. As of February 26, 2010, 12,047 claims have been determined, 1,936 claims have been allowed, and thus far $649,643,586.95 has been committed by SIPC.10
FACTUAL HISTORY11
I. THE STRUCTURE AND ORGANIZATION OF BLMIS
BLMIS is a New York limited liability company, founded by Madoff as a sole proprietorship in 1960. BLMIS was wholly-owned by Madoff, who was also its chairman and chief executive officer. Together with family members and a number of additional employees, Madoff operated the company from its principal place of business at 885 Third Avenue, New York, New York. On January 19, 1960, BLMIS registered with the SEC as a broker-dealer under section 15(b) of the Securities Exchange Act of 1934, 15 U.S.C. section 78o(b), and, beginning in 2006, as an investment advisor. By virtue of its registration as a broker-dealer,
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BLMIS is a member of SIPC. BLMIS’s annual audits were conducted by Friehling & Horowitz, CPAs, P.C., an accounting firm consisting of three employees, one of whom was semi-retired, with offices located in a strip mall in Rockland County, New York.12 Outwardly, BLMIS functioned both as an investment advisor to its customers and a custodian of their securities. Based on the Trustee’s investigation, it appears that BLMIS began to offer investment advisory services as early as the 1960s, yet never truly acted as a legitimate investment advisor to its customers.
BLMIS had three business units: market making (the “MM Business”), proprietary trading (the “PT Business”), and investment advisory (the “IA Business”). While these business units were financially intertwined,13 the MM and PT Businesses were largely operated separately from the IA Business. Specifically, the MM Business competed with other market makers, and the PT Business traded on behalf of the firm for profit. These units, albeit unprofitable, generally conducted legitimate activities; they traded with institutional counterparties, used live computer systems and trading platforms that interfaced with multiple outside feeds and data sources, and utilized a large information technology staff to support and maintain these trading platforms. In addition, they participated in compliance and risk monitoring programs and were held accountable by a number of entities, including the clearing houses they used, the exchanges they traded on, and the National Association of Securities Dealers and its successor, the Financial Industry Regulatory Authority.
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The IA Business, on the other hand, perpetuated Madoff’s fraudulent activity. Physically isolated on the 17th floor from the MM and PT Businesses, the IA Business was accessible only to select employees and insiders.14 Unlike the SEC registration of the MM and PT Businesses, registration of the IA Business was fabricated; only 23 of its thousands of customers were reported. In contrast to the MM and PT Businesses’ live computer trading system interfacing with outside feeds, the IA Business had no contact with opposite brokers or counterparties and used only one unsophisticated and archaic computer that was not programmed to execute trading of any kind. The legitimate MM and PT Businesses limited scrutiny of the IA Business. In turn, the proceeds generated by the IA Business enabled the MM and PT Businesses to remain viable, at least from 2007 forward.
II. MECHANICS OF THE PONZI SCHEME
Rather than engage in legitimate trading activity, Madoff used customer funds to support operations and fulfill other investors’ requests for distributions of profits to perpetuate his Ponzi scheme. Thus, any payment of “profit” to a BLMIS customer came from another BLMIS customer’s initial investment. Even if a BLMIS customer could afford the initial fake purchase of securities reported on his customer statement,15 without additional customer deposits, any later “purchases” could be afforded only by virtue of recorded fictional profits. Given that in Madoff’s fictional world no trades were actually executed, customer funds were never exposed to the uncertainties of price fluctuation, and account statements bore no relation to the United States securities market at any time. As such, the only verifiable transactions were the
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customers’ cash deposits into, and cash withdrawals out of, their particular accounts. Ultimately, customer requests for payments exceeded the inflow of new investments, resulting in the Ponzi scheme’s inevitable collapse.
A. Solicitation of Customers and Opening of Accounts
Madoff solicited billions of dollars from investors through his fraudulent IA Business. Entry into the IA Business was coveted and selective, akin to membership in an elite club. This aura of exclusivity, combined with the secrecy and reported success of Madoff’s investment strategies, limited the transparency of the IA Business to prospective investors, particularly non-institutional clients.
Once a customer was granted entry into the IA Business, standard account opening procedures followed. Under standardized written agreements, customers relinquished all investment authority to Madoff, agreeing that
[i]n all such purchases, sales or trades . . . [Madoff] is authorized to act for the undersigned and in the undersigned’s behalf in the same manner and with the same force and effect as the undersigned might or could do with respect to such purchases, sales or trades as well as with respect to all other things necessary or incidental to the furtherance or conduct of such purchases, sales or trades. All purchases, sales or trades shall be executed strictly in accordance with the established trading authorization directive.
See Decl. of Joseph Looby in Supp. of Trustee’s Motion (“Looby Decl.”) at Ex. 3. Customers retained only the authority to deposit cash and request withdrawals; all other rights associated with their accounts, including the ability to make investment decisions, were ceded to Madoff. With few isolated exceptions,16 customers did not direct the purchase or sale of any specific security.
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B. The 703 Account
Although customer account statements reflected trading activity, funds were merely deposited into a bank account at J.P. Morgan Chase Manhattan Bank (“Chase Bank”), Account Number 140081703 (the “703 Account”), and never invested. As Madoff admitted at his plea hearing, none of the purported purchases of securities actually occurred, and the reported gains were entirely fictitious. This has been confirmed by the Trustee’s investigation, which reveals that with the exception of isolated individual trades, there is no record of BLMIS having cleared any purchase or sale of securities in the Depository Trust & Clearing Corporation (the “DTCC”), a custodian for most stock and government debt securities issued in the United States.17 Instead, investors’ funds were principally deposited into the 703 Account, which was little more than a “slush fund.” Money was misappropriated from the 703 Account solely to enrich Madoff and his inner circle.
IA Business employees prepared daily reports for Madoff reflecting all 703 Account deposit and withdrawal activity. At the close of each business day, any net cash balances from this account were transferred to affiliated overnight investment accounts at Chase Bank to buy United States Treasuries or other short term paper until necessary to fund customers’ withdrawal requests, BLMIS’s capital obligations, or Madoff’s personal wishes. At all relevant times, the fabricated amounts recorded on the monthly customer statements far exceeded the capital deposited in the 703 Account.
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C. The Split-Strike Conversion Strategy
The vast majority of BLMIS customer accounts were supposedly invested in the “split-strike conversion” strategy (the “Split Strike Conversion Strategy”).18 Madoff outwardly attributed the success of his IA Business to this strategy, which appeared to generate remarkably consistent and above-average returns. Under this strategy, Madoff purportedly invested customer funds in a subset, or “basket,” of Standard & Poor’s 100 Index (“S&P 100 Index”) common stocks, and maximized value by purchasing before, and selling after, price increases. Several times per year, customer funds would move “into the market,” whereby a basket of stocks was supposedly purchased. Customer funds were then moved entirely “out of the market” to “invest” in United States Treasury Bills, money market funds, and cash reserves until the next trading opportunity. This continued until the end of each quarter, when all baskets would be sold and “invested” in these “out of the market” repositories. Focusing on large cap stocks, the strategy evaded inquiry into the volume of stocks in which BLMIS was fictitiously trading. Madoff’s quarter-end liquidation of the split-strike security basket positions enabled him to avoid disclosure of the equities in the baskets required by SEC Form 13F.19 BLMIS also devised a hedging strategy to purchase and sell S&P 100 Index option contracts corresponding to the stocks in the baskets. This allowed Madoff to appear to manage the downside risk associated with possible unfavorable price changes in the baskets and limit profits associated with increases in underlying stock prices.
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Madoff never executed his split-strike investment and hedging strategies, and could not possibly have done so. First, the customer funds were never actually invested “in the market” or “out of the market,” despite customer statements to the contrary. In reality, funds were maintained in the 703 Account at Chase Bank. Second, according to the Trustee’s investigation, an unrealistic number of option trades would have been necessary to implement the Split Strike Conversion Strategy because there were insufficient put and/or call option contracts available at the Chicago Board Options Exchange to properly hedge the volume of securities positions reflected on the customers’ statements. In addition, one of the money market funds in which customer resources were allegedly invested through BLMIS, as reflected on customer statements, was Fidelity Brokerage Services LLC’s “Fidelity Spartan U.S. Treasury Money Market Fund.” Fidelity Brokerage Services LLC, however, has acknowledged that it did not even offer investment opportunities in any such money market fund from 2005 forward.
Yet Madoff successfully created the illusion that his trading activity was legitimate and his Split Strike Conversion Strategy was effective. In order to do so, Madoff and a select group of employees assembled historical price and volume data for each stock within the basket. Using this data, they strategically selected stocks after the fact at favorable prices to ensure promised, consistent annual returns of between 10-17%. They monitored the baskets to make certain that the selected stocks yielded returns that were neither above nor below the desired range. This practice of backdating allowed Madoff to engineer trades on the perfect dates at the best available prices to guarantee such results. Consequently, all documentation related to this strategy, including order tickets, trades, and customer statements, were necessarily concocted by Madoff. In fact, the Trustee’s investigation revealed many occurrences where purported trades
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were outside the exchange’s price range for the trade date.20 At bottom, the BLMIS customer statements were bogus and reflected Madoff’s fantasy world of trading activity, replete with fraud and devoid of any connection to market prices, volumes, or other realities.
D. Non-Split-Strike Conversion Customer Accounts
While the majority of customers were supposedly invested in the Split Strike Conversion Strategy, as of the Filing Date there were fewer than 245 active non-split strike conversion BLMIS customer accounts (the “Non-Split Strike Accounts”), or roughly 5% of total active BLMIS accounts. The Non-Split Strike Accounts were held by devoted customers such as Stanley Chais, Jeffry Picower, and Madoff family members and employees, and reported unusually high rates of return in excess of the consistent 10-17% generated for Split Strike Conversion Strategy accounts. For example, the Trustee alleges that Chais’s family and corporate accounts generated annual returns as high as 300%, and Picower’s generated annual returns as high as 950%. See Trustee’s Compl. at ¶ 3 (May 1, 2009) (Adv. Proc. No. 09-01172 (BRL)); Trustee’s Compl. at ¶ 3 (May 12, 2009) (Adv. Proc. No. 09-01197 (BRL)). These accounts were handled on an account-by-account basis, in contrast to the more common basket approach. This time-consuming and labor-intensive process required the manual input of backdated transactions to represent the purported trades executed on behalf of each account. Fundamentally, however, both the split-strike and non-split-strike accounts were subjected to the same basic method—statements were fabricated based on after-the-fact published selections of stocks and related prices. With the exception of a few isolated trades and physical custody of a
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limited number of securities entrusted to BLMIS by certain customers, trading in the Non-Split Strike Accounts did not take place.
E. The AS/400 Computer System
To manage purported split-strike trade activity, the IA Business used an archaic computer system, the AS/400, consisting of an IBM computer and custom software dating to the early 1990s. The AS/400 was programmed to store BLMIS customer account information, record fictitious securities positions and customer cash transactions, prepare customer statements, and produce trade confirmations. Specifically, it contained software that could enter a basket of trades with any price or trade date and allocate the trades pro rata to BLMIS customer accounts in the database. Once a fictitious return was chosen for a given basket trade, “key punch operators” would manually input the relevant pricing information into the AS/400 database. This basket trade was automatically replicated in each customer account and divided proportionately according to the fraction or number of baskets each customer could afford. The AS/400 then generated the customer statements and related trade confirmations for BLMIS customers. This monthly process repeatedly compounded customers’ false profits during the course of the scheme. The AS/400 was not programmed, however, to execute, communicate, or facilitate trading of any kind. None of the split-strike trades inputted into the AS/400 was reconciled with the DTCC.21
This outmoded technology prevented customers from obtaining electronic, real-time online access to their accounts, as was customary in the industry by the year 2000, and instead generated paper trade confirmations.22 Mailing these paper statements and confirmations to
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customers allowed BLMIS additional time to concoct trading records and delay the delivery of information, thereby facilitating Madoff’s scheme.
III. CLASSIFICATION OF CLAIMANTS
Under the Trustee’s Net Equity calculus, the Objecting Claimants fall into three classifications according to their respective deposit and withdrawal histories.23 The first group of Objecting Claimants withdrew funds from BLMIS in an amount that exceeds their initial investments and subsequent deposits (the “Net Winners”). A customer in this category received a full return of his principal as well as some “profit,” which consisted, in reality, of other customers’ investments. Under the Net Investment Method, these customers have zero Net Equity, and thus no allowed claims.
A second category of customers withdrew less money from BLMIS than they deposited, with net investment amounts over the $500,000 statutory limit (“Over the Limits Net Losers”). According to the Trustee’s Net Investment Method, an Over the Limits Net Loser has positive Net Equity, and thus an allowed claim for the amount invested less the amount withdrawn. The Over the Limits Net Losers will receive full $500,000 advances from SIPC, as their respective pro rata shares of customer property will be insufficient to satisfy their Net Equity claims.
A third category of customers similarly withdrew less money than they deposited, with net investment amounts under the $500,000 statutory limit (“Under the Limits Net Losers”) (together with “Over the Limits Net Losers,” “Net Losers”). An Under the Limits Net Loser receives a SIPC advance against his pro rata share of customer property in the amount of his net investment. This is so even though his November 30th Statement may reflect a balance higher
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than $500,000. These customers are not entitled to a further distribution from the fund of customer property because their Net Equity claims will be fully satisfied by the SIPC advance. In general, Net Winners will be concentrated among early investors, while a critical mass of Net Losers will be found among later investors.24
DISCUSSION
I. THE HISTORY OF SIPA
A. Generally
As a backdrop for the Court’s review of the Net Equity issue in this SIPA proceeding, a brief overview of the history and purpose of the statute will provide helpful context. Congress enacted SIPA in 1970 for the primary purpose of protecting customers from losses caused by the insolvency or financial instability of broker-dealers. See SEC v. S.J. Salmon & Co., Inc., 375 F. Supp. 867, 871 (S.D.N.Y. 1974). In doing so, Congress sought to “reinforce the confidence that investors have in the U.S. securities markets” and “strengthen[] . . . the financial responsibilities of broker-dealers.” H.R. Rep. No. 91-1613, at 2-4 (1970), reprinted in 1970 U.S.C.C.A.N. 5254, 5257.
To accomplish these aims, SIPA establishes procedures for liquidating failed broker-dealers and provides “customers,” as defined by SIPA section 78lll(2),25 with special protections. A SIPA liquidation is essentially a bankruptcy liquidation tailored to achieve SIPA’s objectives.
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See SIPA § 78fff(b) (“[A] liquidation proceeding shall be conducted in accordance with, and as though it were being conducted under chapters 1, 3 and 5 and subchapters I and II of chapter 7 of Title 11.”); In re Adler Coleman Clearing Corp, 19,5 B.R. 266 (Bankr. S.D.N.Y. 1996). Separate from the general SIPA estate, a fund of “customer property” is established for priority distribution exclusively among the debtor’s customers. See SIPA § 78lll(4) (defining “customer property”); In re Adler, Coleman Clearing Corp., 216 B.R. 719, 722 (Bankr. S.D.N.Y. 1998) (“A person whose claim against the debtor qualifies as a `customer claim’ receives preferential treatment in the distribution of assets from the debtor’s estate.”). Each customer is entitled to share in this fund pro rata to the extent of his Net Equity. See SIPA § 78fff-2(c)(1)(b). In many SIPA liquidations, however, customer property is inadequate to wholly satisfy customers’ Net Equity claims. Under these circumstances, SIPC, an independent, non-profit membership corporation created by SIPA, provides additional protection. SIPC is charged with establishing and administering a SIPC fund to advance money to the SIPA trustee to promptly pay each customer’s valid Net Equity claim, up to $500,000 per customer.26 See SIPA §§ 78ddd(a)(1), ccc(a)(1), fff-3(a). However, these advances cover only “the amount by which the net equity of each customer exceeds his ratable share of customer property.” SIPA § 78fff-3(a). If the amount of the SIPC advance taken together with the subsequent customer property distribution exceeds the customer’s Net Equity, SIPC recoups the excess. In effect, SIPC becomes subrogated to the claims of customers to the extent it has supplied advances, and cannot seek recovery from customer property “until after the allocation thereof to customers.” SIPA §§ 78fff-3(a), 2(c)(1).
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B. SIPC Payments Are Inextricably Connected to Payments from Customer Property.
Contrary to the contention of many Objecting Claimants,27 permitting a customer to recover SIPC payments based on final account statements would in fact affect the limited amount available for distribution from the customer property fund. These Objecting Claimants rely upon the false premise that Madoff customers are statutorily entitled to an additional source of recovery in the form of SIPC insurance, separate and apart from customer property distributions. This argument finds no support in the text of the statute, which characterizes SIPC payments as advances inextricably tied to distributions of customer property. SIPA provides that:
In order to provide for prompt payment and satisfaction of net equity claims of customers of the debtor, SIPC shall advance to the trustee such moneys, not to exceed $500,000 for each customer, as may be required to pay or otherwise satisfy claims for the amount by which the net equity of each customer exceeds his ratable share of customer property. . . .
SIPA § 78fff-3(a)(1) (emphasis added). SIPC payments therefore serve only to replace missing customer property and cannot be ascertained independently of the determination of a customer’s pro rata share of customer property. Accordingly, the SIPA statute does not allow bifurcation of the claims process, with customers recovering SIPC payments based on the Last Statement Method, and recovering customer property shares based on the Net Investment Method.
II. PLAIN LANGUAGE AND LEGISLATIVE HISTORY SUPPORT THE NET INVESTMENT METHOD
Given that BLMIS account statements purport securities positions totaling an unparalleled $64.8 billion, the dispute concerning the definition of Net Equity is pivotal both to customers and SIPC. Resolution of this issue “begins where all such inquiries must begin: with the language of the statute itself.” U.S. v. Ron Pair Enter., Inc., 489 U.S. 235, 241 (1989); see
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also Conn. Nat. Bank v. Germain, 503 U.S. 249, 253-54 (1992) (“[C]ourts must presume that a legislature says in a statute what it means and means in a statute what it says there.”). SIPA defines Net Equity in section 78lll(11):
The term “net equity” means the dollar amount of the account or accounts of a customer, to be determined by —
(A) calculating the sum which would have been owed by the debtor to such customer if the debtor had liquidated, by sale or purchase on the filing date, all securities positions of such customer . . .; minus
(B) any indebtedness of such customer to the debtor on the filing date. . . .
SIPA § 78lll(11) (emphasis added).
The main source of contention between the Trustee and the Objecting Claimants lies in how each would determine a customer’s “securities positions,” as that term is used in the definition of Net Equity. The Objecting Claimants state that the best evidence of a customer’s securities positions is the customer’s account statement as of the Filing Date, or in this case, his November 30th Statement. They assert that SIPA’s legislative history, indicating the intent to protect investors’ “legitimate customer expectations” and “make customer accounts whole,” supports this position. H.R. Rep. No. 95-746, 95th Cong., 1st Sess. at 21 (1977). Written upon consideration of the 1978 amendments to SIPA, a House of Representatives’ Report states,
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 . . . never purchased or even stolen, this is not always possible. . . . [C]ustomers generally receive pro rata portions of the securities claims, and as to any remainder, they will receive cash based on the market value as of the filing date.
Id. (emphasis added). Here, as argued by the Objecting Claimants, the customers had legitimate expectations that they held the securities positions reflected on their November 30th Statements. Therefore, the Objecting Claimants espouse the Last Statement Method and believe that Net Equity claims must be recognized in the amount of the customers’ account balances as of November 30, 2008.
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However, the Court agrees with the Trustee, joined by the SEC and SIPC, that the Objecting Claimants’ “securities positions” can be ascertained only by reference to the books and records of BLMIS. The account statements are entirely fictitious, do not reflect actual securities positions that could be liquidated, and therefore cannot be relied upon to determine Net Equity. As a result, the definition of Net Equity under SIPA section 78lll(11) must be read in tandem with SIPA section 78fff-2(b), which requires the Trustee to discharge Net Equity claims only “insofar as such obligations are [1] ascertainable from the books and records of the debtor or [2] are otherwise established to the satisfaction of the trustee.” SIPA § 78fff-2(b). The BLMIS books and records expose a Ponzi scheme where no securities were ever ordered, paid for or acquired. Because “securities positions” are in fact nonexistent, the Trustee cannot discharge claims upon the false premise that customers’ securities positions are what the account statements purport them to be. Rather, the only verifiable amounts that are manifest from the books and records are the cash deposits and withdrawals. Moreover, if customers’ legitimate expectations are relevant to any determination other than whether customers hold “claims for securities” or “claims for cash,” they do not apply where they would give rise to an absurd result. See New Times Secs. Servs., 371 F.3d 68, 87-88 (2d Cir. 2004) (“New Times I”) (rejecting the District Court’s Net Equity calculation, which was based on customers’ “legitimate expectations”); New Times Secs. Servs., 463 F.3d 125, 130 (2d Cir. 2006) (“New Times II”) (“The [New Times I] court declined to base the recovery on the rosy account statements . . . because treating the fictitious paper profits as within the ambit of the customers’ `legitimate expectations’ would lead to [] absurdity. . . .”). The Trustee has properly satisfied expectations by providing all customers with “claims for securities.”28 Accordingly, the plain
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language of the SIPA statute supports adoption of the Net Investment Method in distributing customer property to Madoff investors.
III. THE TRUSTEE’S AVOIDANCE POWERS AND IRS TAX TREATMENT OF MADOFF CLAIMANTS
A. The Trustee’s Calculus of Net Equity is Consistent with his SIPA and Bankruptcy Avoidance Powers.
The Trustee, in reliance on his avoidance powers and a substantial body of case law, propounds his theory of Net Equity as being net of fraudulent transfers. The Court agrees and finds that only the Net Investment Method is consistent with the Trustee’s statutory avoidance powers. In the context of this hybrid proceeding (U.S.C. Titles 11 and 15), the definition of Net Equity cannot be construed in isolation from corollary provisions of SIPA and the Code. See Auburn Hous. Auth. v. Martinez, 277 F.3d 138, 144 (2d Cir. 2002) (“the preferred meaning of a statutory provision is one that is consonant with the rest of the statute.”); see also SIPA § 78fff(b) (“[A] liquidation proceeding shall be conducted in accordance with . . . Title 11.”). SIPA and the Code intersect to, inter alia, grant a SIPA trustee the power to avoid fraudulent transfers for the benefit of customers. See SIPA § 78fff-2(c)(3) (“[T]he 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 Trustee relies on numerous cases, all holding that transfers made in furtherance of a Ponzi scheme, and specifically transfers of fictitious profits, are avoidable.29 The Net Investment Method harmonizes the definition of Net Equity with these
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avoidance provisions by similarly discrediting transfers of purely fictitious amounts and unwinding, rather than legitimizing, the fraudulent scheme. The Last Statement Method, by contrast, would create tension within the statute by centering distribution to customers on the very fictitious transfers the Trustee has the power to avoid.
Whether the Objecting Claimants have defenses to avoidance actions in this specific case does not change the inherent inconsistency between the Last Statement Method and the Trustee’s avoidance powers. The Objecting Claimants devote much discussion to defenses that could be asserted against hypothetical avoidance actions, including statutes of limitations, the section 548(c) good faith defense, and the section 546(e) safe harbor for securities contracts.30 The fact that the Trustee may be unable to avoid a transfer in particular circumstances, however, is irrelevant to the Court’s finding that the power itself is inconsistent with a distribution scheme that credits the reported products of a fraud. The Net Investment Method allows the definition of Net Equity and the Trustee’s powers to avoid and recover property, contained in the same statutory framework, to be interpreted with preferred consonance. See Auburn Hous. Auth., 277 F.3d at 144.
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B. The Net Investment Method Does Not Contradict the IRS’s Treatment of Madoff Claimants.
Some Objecting Claimants liken the IRS’s treatment of Madoff claimants to recognizing fictitious profits as real income. The characterization of the IRS’s treatment of Madoff claimants is irrelevant, however, as the IRS and SIPC are governed by disparate statutory schemes with different purposes. See, e.g., SIPC v. Morgan, Kennedy & Co., Inc., 533 F.2d 1314, 1318-19 (2d Cir. 1976) (declining to interpret SIPA by reference to the Federal Deposit Insurance Act, as “SIPA and FDIA are independent statutory schemes, enacted to serve the unique needs of the banking and securities industries, respectively”). In addition, the IRS treatment of Madoff claimants is temporal, rather than part of an established statutory scheme. See, e.g., Post-Madoff Rev. Proc. 2009-20, 2009-14 I.R.B. 749 (established Mar. 17, 2009 to address, in relevant part, the tax treatment of losses from criminally fraudulent investment arrangements that take the form of Ponzi schemes).
IV. THE HOLDING IN NEW TIMES I SUPPORTS THE TRUSTEE’S NET INVESTMENT METHOD
Even though the mechanics of Ponzi schemes are essentially the same, with later investors’ money used to pay earlier investors, underlying factual disparities make the definition of Net Equity susceptible to differing formulations. The Second Circuit has addressed this issue in New Times I. Not surprisingly, both the Trustee and Objecting Claimants cite New Times I as support for their respective positions.
The New Times I case was a SIPA liquidation involving a Ponzi scheme in which investors were fraudulently induced to purchase securities through New Times Securities Services, Inc. and New Age Financial Services, Inc. (collectively, the “Debtors”). The securities intended to be purchased included (1) nonexistent money market funds and (2) shares of bona
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fide mutual funds.31 New Times I, 371 F.3d at 71. Rather than invested, the customer funds advanced were misappropriated by the Debtors and used to pay fictitious profits on prior investments. Id. at 71-72, 72 n.2. To facilitate the fraud, the Debtors generated bogus confirmations and fake monthly account statements that reflected fictitious profits and nonexistent securities positions. Id. at 71, 74.
In the course of the liquidation, the SIPA trustee determined that customers who were fraudulently induced to invest in bogus money market funds (the “Fake Securities Claimants”) were entitled to claims for cash, and thus eligible for a SIPC advance of up to only $100,000. Id. at 71, 74. Moreover, the SIPA trustee concluded that the value of their claims was the amount principally invested less any withdrawals or redemptions. Id. Thus, fictitious profits shown on their account statements as interest or dividends on the phantom securities were not included in calculating their net equity claims. Id. at 74.
By contrast, customers who were induced to invest in mutual funds that in reality existed (the “Real Securities Claimants”) were entitled to claims for securities, eligible to receive up to $500,000 in SIPC advances. Id. In addition, their net equity claims were based upon the “profits” reflected on their customer account statements. These claimants received favorable treatment from the SIPA trustee because, inter alia, the trustee could purchase real securities to satisfy their claims, and the information shown on the account statements reflected what would have happened had the transactions been executed. Id.
The Fake Securities Claimants filed written objections to both (1) the SIPA trustee’s determination of their claims as claims for cash, and (2) his refusal to value claims based on the fictitious amounts shown as dividends and interest on their last account statements. Id. at 74. In
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response, the SIPA trustee, joined by SIPC, filed a motion for an order upholding his determination of claims. Id. at 74-75. The District Court sustained the Fake Securities Claimants’ objection and held that the claimants had claims for securities. Id. at 75. Moreover, the court found that the value of those claims could be ascertained by reference to the fictitious interest and dividend reinvestments reflected on claimants’ last account statements. Id. The SIPA trustee and SIPC promptly appealed the District Court’s decision to the Court of Appeals for the Second Circuit. Id.
The Second Circuit upheld the District Court’s determination that the Fake Securities Claimants had claims for securities, not claims for cash. Citing SIPC’s Series 500 Rules32 and the legislative history of SIPA section 78fff-3(a)(1), the court found that claimants were entitled to claims for securities because they relied upon the confirmations and account statements they received from the Debtors. Id. at 84-87 (“[T]he premise underlying the Series 500 Rules-that a customer’s `legitimate expectations,’ based on written confirmations of transactions, ought to be protected-supports the SEC’s interpretation of section [78fff-3(a)(1)].”). Moreover, the court held that its ruling promoted SIPA’s goal of providing investor protection. Id. at 83-84.
However, as to the Net Equity issue, the Second Circuit reversed the District Court’s holding. Instead, the court upheld the joint position of the SIPA trustee, SEC and SIPC that customer claims should be based upon the net cash invested in the scheme, not the fictitious interest or dividend reinvestments reflected on the claimants’ account statements. Id. at 87-88. The court agreed that the amounts on the account statements were arbitrary, and basing Net
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Equity claims on them would be “irrational and unworkable.”33 Id. at 88. Accordingly, the Second Circuit found that the value of the claimants’ Net Equity claims was the net cash invested in the scheme.
In a subsequent decision issued in the New Times SIPA liquidation, New Times II, a different Second Circuit panel explained the court’s holding in New Times I with respect to the Net Equity calculation issue. The New Times II court highlighted the absurdity and inherent unfairness that would result from relying on the fictitious account statements when no such securities existed and explained that reimbursing customers with actual securities or their market value on the filing date was impossible. New Times II, 463 F.3d at 129-30.
The Objecting Claimants identify with the Real Securities Claimants while the Trustee analogizes the Madoff claimants to the Fake Securities Claimants.
The Objecting Claimants assert that Madoff customers, comparable to the Real Securities Claimants in New Times I, are entitled to the value of the securities listed on their final account statements. They maintain that New Times I stands for the proposition that when a customer’s account statement reflects securities positions in real securities, the SIPA trustee must either purchase the securities or pay the market value of those securities as of the filing date. Citing New Times II, they contend that the Second Circuit used the Net Investment Method in New Times I only “[b]ecause there were no [] securities, and it was therefore impossible to reimburse customers with the actual securities or their market value.” New Times II, 463 F.3d at 129. The securities listed on the Objecting Claimants’ account statements, they argue, like those of the New Times Real Securities Claimants, exist in the market and therefore have values that can be ascertained. As such, the Objecting Claimants posit that the Trustee must satisfy Net Equity
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claims by either purchasing, or paying the market value of, the securities reflected on their November 30th Statements.
Although somewhat sympathetic to the Objecting Claimants’ arguments, the Court agrees with the Trustee that New Times I and II support using the Net Investment Method here. The holding in New Times I, as it relates to the Net Equity analysis, hinged on the fact that customer account statements reflected “arbitrary amounts that necessarily ha[d] no relation to reality.” New Times I, 371 F.3d at 88 (quoting Br. for Amicus Curaie SEC at 16). In addition, the court recognized “the potential absurdities created by reliance on the entirely artificial numbers.” New Times I, 371 F.3d at 88. To adopt the Last Statement Method in this case would be to likewise base recovery on “rosy account statements,” leading to “the absurdity of `duped’ investors reaping windfalls as a result of fraudulent promises.” New Times II, 463 F.3d at 130.
Analogous to the account statements of the Fake Securities Claimants, the BLMIS account statements “have no relation to reality.” New Times I, 371 F.3d at 88. Although the securities that Madoff allegedly purchased were identifiable in name, the securities positions reflected on customer account statements were artificially constructed. By backdating trades to produce predetermined, favorable returns, Madoff, like the fraudster in New Times, essentially pulled the fictitious amounts from thin air. The resulting securities positions on customers’ November 30th Statements were therefore entirely divorced from the uncertainty and risk of actual market trading. In fact, at certain times, Madoff customers, like the Fake Securities Claimants, held at least one imaginary security.34
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The Objecting Claimants are also clearly distinguishable from the Real Securities Claimants in the New Times liquidation. The Real Securities Claimants’ initial investments were sufficient to acquire their securities positions, and the corresponding paper earnings “mirrored what would have happened” had the fraudster purchased the securities as promised. New Times I, 371 F.3d at 74 (quoting Br. for Appellants James W. Giddens and SIPC at 7, n.6). In contrast, the Madoff customers’ initial investments were insufficient to acquire their purported securities positions, which were made possible only by virtue of fictitious profits. Rather than “mirroring” the market, the account activity was manipulated with the benefit of deliberately calibrated hindsight, and many purported trades were settled outside the exchange’s price range for the trade dates of those securities. As such, the Objecting Claimants should not be treated like the Real Securities Claimants, but rather like the Fake Securities Claimants.
Accordingly, a careful review of New Times I and II convinces the Court that the Trustee’s Net Investment Method is correct.35 It would be simply absurd to credit the fraud and legitimize the phantom world created by Madoff when determining Net Equity. See New Times I, 371 F.3d at 88. The Net Investment Method is appropriate because it relies solely on
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unmanipulated withdrawals and deposits and refuses to permit Madoff to arbitrarily decide who wins and who loses. Given the utter disconnect between the securities positions on customer account statements and market trading reality, the Court finds that the Objecting Claimants and the Fake Securities Claimants are similarly situated and should therefore be afforded the same treatment. As such, the proper way to determine Net Equity is by adopting the Net Investment Method, which is the only approach that can appropriately serve as a proxy for the imaginary securities positions shown on customers’ last account statements.
V. EQUITY AND PRACTICALITY FAVOR THE NET INVESTMENT METHOD
While the Court recognizes that the outcome of this dispute will inevitably be unpalatable to one party or another, notions of fairness and the need for practicality also support the Net Investment Method.
As distribution of customer property to the “equally innocent victims” of Madoff’s fraud is a zero-sum game,36 equity dictates that the Court implement the Net Investment Method. See Cunningham v. Brown, 265 U.S. 1, 13 (1924). Customer property consists of a limited amount of funds that are available for distribution. Any dollar paid to reimburse a fictitious profit is a dollar no longer available to pay claims for money actually invested. If the Last Statement Method were adopted, Net Winners would receive more favorable treatment by profiting from the principal investments of Net Losers, yielding an inequitable result.
To demonstrate the profound negative impact on Net Losers were Net Equity claims to be based upon fictitious statements rather than net investment, the Trustee submitted an illustrative
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hypothetical.37 Investor 1 invested $10 million many years ago, withdrew $15 million in the final year of the collapse of Madoff’s Ponzi scheme, and his fictitious last account statement reflects a balance of $20 million. Investor 2 invested $15 million in the final year of the collapse of Madoff’s Ponzi scheme, in essence funding Investor 1’s withdrawal, and his fictitious last account statement reflects a $15 million deposit. Consider that the Trustee is able to recover $10 million in customer funds and that the Madoff scheme drew in 50 investors, whose fictitious last account statements reflected “balances” totaling $100 million but whose net investments totaled only $50 million.
Under the Last Statement Method, Net Equity claims would be fulfilled based on a 10% recovery ($10 million recovered ÷ $100 million in fictitious account balances). Investor 1 would be entitled to 10% of his $20 million “account balance” and a $500,000 SIPC advance, or $2.5 million, despite his recent withdrawal of $15 million from the scheme. The total recovery would be $17.5 million on an initial investment of $10 million, or a $7.5 million profit. Investor 2 would be entitled only to 10% of his $15 million “account balance” and a $500,000 SIPC advance, or $2 million of his $15 million investment, resulting in a $13 million loss. Therefore, even though Investor 2 invested more money than Investor 1, and even though Investor 2’s money was used to fund Investor 1’s withdrawal, Investor 2 stands to lose significantly more money. Employing the Last Statement Method would yield a grossly inequitable outcome.
In contrast, under the Net Investment Method, Investor 1 would not have a Net Equity claim and would not be entitled to a SIPC advance because he already withdrew more than he deposited. Investor 2, however, would recover 20% ($10 million recovered ÷ $50 million in total net investment) of his $15 million net investment, plus a $500,000 SIPC advance, totaling $3.5 million, a significantly more just result.
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This hypothetical demonstrates that if the Last Statement Method were used, Net Winners such as Investor 1 would continue to recover funds from customer property at the expense of Net Losers, who recovered little or nothing from Madoff and whose “investments” were used to fund the very withdrawals that made the earlier investors Net Winners. Adopting the Last Statement Method would only exacerbate the harm caused to Net Losers and would improperly distribute customer funds based on Madoff’s arbitrary design. Net Winners and Net Losers, equally innocent in Madoff’s Ponzi scheme, should not be treated disparately. Accordingly, the circumstances of this case “call strongly for the principle that equality is equity.” Cunningham, 265 U.S. at 13.
Equality is achieved in this case by employing the Trustee’s method, which looks solely to deposits and withdrawals that in reality occurred. To the extent possible, principal will rightly be returned to Net Losers rather than unjustly rewarded to Net Winners under the guise of profits. In this way, the Net Investment Method brings the greatest number of investors closest to their positions prior to Madoff’s scheme in an effort to make them whole.38
With refreshing clarity, Simon Jacobs (“Jacobs”), himself a victim of Madoff’s fraud, makes this very point in his pro se letter brief:
In a Ponzi scheme, the perpetrator takes in money from investors, promising a return that is wholly fictitious, and instead pays cash returns to early investors with cash collected from later investors. This means that any cash returned to an investor was either his own, or more likely, was taken from another later investor. No money is actually invested for either gain or loss. Money is simply moved by the perpetrator from one investor to another.
. . .
Such cash that [Net Winners] withdrew in excess of their deposits was, by definition, cash that other customers put in, NOT a return on their purported investment, since there was no investment made, and hence no return.
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. . .
The idea that because Madoff was a broker dealer, the assets recovered by the trustee should be returned to investors in proportion to their last monthly statement would effectively make the trustee perpetrate his own Ponzi scheme, because the net winners would again receive money put into the scheme by the net losers. This is so because any money recovered must, ipso facto, have come from the net losers, the net winners having already recovered their original investment, and more. Thus later investors, the net losers, would lose even more money and the earlier investors, the net winners . . . would gain still further.
Ltr. Br. in Favor of the Trustee’s Motion on the Net Equity Issue (Dec. 7, 2009) (Case No. 08-1789, Docket No. 1041) (emphasis added). Jacobs concludes that adoption of the Last Statement Method would run “directly counter to any concept of equitable fairness.”
The Court agrees and finds that the Net Investment Method proposed by the Trustee is the more equitable and appropriate way to determine Net Equity, is consistent with Second Circuit precedent, and gives a workable blueprint for distribution to the victims of Madoff’s incogitable scheme.
CONCLUSION
For all the reasons set forth herein, the Trustee’s Motion for an order, inter alia, upholding his determination of Net Equity is hereby GRANTED. The Trustee is directed to submit an order consistent with this decision.
Page 33

EXHIBIT A — SUMMARY OF ARGUMENTS

TOPIC ARGUMENTS IN SUPPORT OF THE TRUSTEE ARGUMENTS IN OPPOSITION TO THE TRUSTEE

I. The amount of cash deposited by the customer into I. The liquidation value of the securities positions listed on a customer’s
his customer account less any amounts withdrawn by November 30th Statement: the Last Statement Method.
Proposed him: the Net Investment Method. a. A customer’s securities positions need not represent actually-held
Definition of Net a. The SEC further proposes the “constant dollar” securities, because the Trustee is authorized to “purchase securities as
Equity method by adjusting for the effects of inflation (or necessary for the delivery of securities to customers in satisfaction of
deflation). their claims for net equities.” SIPA § 78fff-2(d).

I. The plain language of SIPA supports the Net I. The Net Investment Method is at odds with SIPA’s plain language.
Investment Method. a. The Trustee erroneously interprets net equity to mean “net investment,”
a. SIPA section 78lll(11) defines Net Equity generally rendering the Net Equity section superfluous.
as the liquidation value of the customer’s “securities i. The Net Investment Method looks back over the life of an account,
positions,” minus amounts owed to the debtor. If while the temporal focus of SIPA is on the filing date. SIPA aims to
Congress had intended for customers to be satisfied restore a customer’s account to its amount as of the filing date of the
Plain Language based solely upon their last statement, it would have SIPA liquidation, just as the FDIC restores a bank customer to the
and Legislative included such language in SIPA. time of the bank failure.
History b. The SEC and the Trustee agree that the “books and b. Net Equity claims need not be “ascertainable from the books and
records” requirement of SIPA section 78fff-2(b) records of the debtor or [] otherwise established to the satisfaction of
applies in this case to determine Net Equity. the trustee.”
i. The SEC concludes that Net Equity claims must i. The SEC misreads SIPA section 78fff-2(b), which treats
always be “ascertainable from the books and “obligations of the debtor” and “Net Equity claims” separately, and
records of the debtor or [] otherwise established states only that “obligations” be ascertainable or established to the
to the satisfaction of the trustee.” SIPA § 78fff-2(b). trustee’s satisfaction. The amount of the Net Equity claim is a
The Last Statement Method satisfies neither separate issue, under the separate SIPA section 78lll(11), unrelated
because (1) the books and records reveal a fraud to the books and records requirement of SIPA section 78fff-2(b).
and (2) customers cannot show that they paid for ii. SIPA section 78fff-2(b) is limited to establishing a customer’s
the securities positions. status as a preferred customer to qualify for a SIPC advance.
ii. The Trustee argues that the “books and records” iii. SIPA section 78fff-2(b) governs the Trustee’s obligations in
requirement gives “guidance” in this case, as the satisfying customer claims, not the amount of those claims, which
account statements are fictitious. The only bona are governed by the definition of Net Equity.
fide transactions ascertainable from the books and
records are deposits and withdrawals. Therefore,
the Net Investment Method is appropriate.
Page 34

iii. It is appropriate to look to SIPA section 78fff-2(b). iv. In New Times, the fraudster’s books and records were deemed not
SIPA section 78lll(11)(defining net equity) dispositive of the proper calculation of the customer claims.
does not address how to determine a broker-dealer’s v. Claimants should not be harmed because the fraudster did not keep
obligations to its customers. That is good books and records. SIPA provides money to claimants where
supplied by SIPA section 78fff-2(b). Thus, 78fff-2(b) brokers misappropriated or stole securities and have unreliable
is not limited to establishing whether books and records.
claimants are entitled to customer status.

II. The Net Investment Method is at odds with SIPA’s legislative history
II. Customers do not have a legitimate expectation in indicating Congressional intent to protect customers’ legitimate
Plain Language fictitious profits. expectations.
and Legislative i. A customers’ legitimate expectations relate only a. SIPA’s purpose, according to the legislative history, is to protect
History to whether he holds a “claim for securities” or investors’ “legitimate customer expectations,” and to “make customer
(cont’d) claim for cash” as defined under SIPA. To the accounts whole.
extent that the concept of “legitimate i. “A customer generally expects to receive what he believes is in his
expectations” has some relevance to net equity, account at the time the stockbroker ceases business. But because
claimants cannot articulate a legitimate securities may have been … never purchased or even stolen, this is
expectation in the proceeds of a fraud. not always possible … customers generally receive pro rata
ii. The Trustee has properly satisfied customers’ portions of the securities claims, and as to any remainder, they will
legitimate expectations by providing them with receive cash based on the market value as of the filing date.” H.R.
claims for securities. Rep. No. 95-746, at 21 (emphasis added).
1. Claims for securities cannot be satisfied in ii. Customers’ legitimate expectations should not be affected by badges
kind because they cannot be purchased in a of fraud.
“fair and orderly market” under SIPA 1. Customers cannot monitor all investors’ accounts, and
section 78fff-2(d). Purchasing the therefore did not expect that the trading volume among all
securities would wreak havoc on the investors was impossible or that there were insufficient
market place. Moreover, because of the option contracts available to accomplish the aggregate split-strike
enormous number of buys and sells, it is conversion strategy.
impossible to trace a customer’s “real”
money to any particular securities.
Page 35

I. The Net Investment Method mirrors the standard I. The Trustee erroneously relies on Old Naples and non-SIPA case law.
judicial treatment of Ponzi schemes and has been
specifically upheld under SIPA. a. The Net Investment Method was appropriate in Old Naples because the
claims were ones for cash and not, as here, for securities.
a. Old Naples held that the Net Investment Method was b. Old Naples is distinguishable because customers were not given trade
the proper way to calculate customers’ Net Equity in a confirmations. See SIPC v. Old Naples Secs., Inc. (In re Old Naples
SIPA liquidation involving a Ponzi scheme. Secs., Inc.), 236 B.R. 854, 860 (Bankr. M.D. Fla. 1999).
i. “[P]ermitting claimants to recover not only their c. Non-SIPA cases are not authoritative.
initial capital investment but also the phony i. In non-SIPA cases, the SIPA definition of Net Equity and the
`interest’ payments they received and rolled into purposes behind SIPA were not in play. SIPA is the exclusive
another transaction is illogical. No one disputes framework to apply when a broker-dealer fails for any reason. SIPA
that the interest payments . . . were merely portions was enacted to accomplish a specific purpose in the special cases
of other victims’ capital investments. If the Court involving broker-dealers. Non-SIPA cases are therefore irrelevant.
Focht v. Athens were to agree with the [] claimants, the fund would d. Non-SIPA Ponzi scheme cases support the Last Statement Method
(In re Old likely end up paying out more money than was i. “[T]he out-of-pocket theory, which seeks to restore to Plaintiffs
Naples Secs., invested in [the] Ponzi scheme. This result is not only the $21 million they originally invested less their subsequent
Inc.) consistent with the goals of SIPA, which does not withdrawals, is a wholly inadequate measure of damages.” Visconsi
311 B.R. 607 purport to make all victimized investors whole but v. Lehman Brothers, Inc., 244 Fed. Appx. 708, 713 (6th Cir. 2007).
(M.D. Fla. 2002) only to partially ameliorate the losses of certain ii. “Although many courts . . . believe that it is more `just’ to require
and classes of investors.” Old Naples, 311 B.R. at 617. that an innocent investor victim who received reasonable contractual
Non-SIPA Cases b. Non-SIPA Ponzi scheme cases are relevant for the interest return it so that it can be redistributed among the investors
equitable principle that early investors should not who did not recover all of their principal. . . . I believe that the
benefit at the expense of later investors. majority of the general public would agree that allowing those
i. Visconsi v. Lehman Brothers, Inc., 244 F. App’x victims to keep their interest is as fair or even a more fair solution.”
708 (6th Cir. 2007), which upheld an arbitrator’s Lustig v. Weisz & Assocs., Inc. (In re Unified Comm. Capital, Inc.),
award that was in excess of the cash in/cash out 260 B.R. 343, 351 (Bankr. W.D.N.Y. 2001).
amount, does not support the claimants iii. In SEC v. Byers, 637 F. Supp. 2d 166 (S.D.N.Y. 2009), the court
interpretation of Net Equity: approved a formula to fix claims at investors’ net investment plus
1. Lehman Brothers, unlike BLMIS, was reinvested earnings. Distributions would “roll over” into investors’
solvent and therefore had sufficient funds to accounts, even though distributions never existed and did not
satisfy all claims. correlate to an out of pocket loss.
2. The Visconsi case involved a tort lawsuit
that was not governed by SIPA.
ii. Byers did not reject the Net Investment Method.
Page 36

I. New Times I controls—insofar as it adopted the Net I. New Times I controls—insofar as it rejected the Net Investment Method
Investment Method for the Fake Securities for the Real Securities Claimants.
Claimants. a. Madoff investors are analogous to the New Times I Real Securities
a. The Objecting Claimants closely resemble the Fake Claimants, whose net equities were calculated as the liquidation value of
Securities Claimants in New Times I. the securities listed on their final account statements.
i. Under the Last Statement Method, customers i. Madoff’s purported trading activity similarly involved “real”
would recover amounts that have no relation to securities that existed in the marketplace. Both New Times I and
reality. Madoff investors could check, against real world results, the existence
1. Stocks were purportedly traded in and value of the stocks that they believed they owned. They are thus
impossible volumes, and at least one entitled to such value as their legitimate expectation.
purported investment fund was not b. The court’s decision to value Net Equity for the Fake Securities
offered for investment as of 2005 Claimants as the value of customers’ initial investments was based
(Fidelity Mutual Funds). entirely on the fact that the fictitious funds could not be valued. It was
New Times Secs. 2. Securities positions could not have been impossible to apply the Net Equity definition because there was no
Servs., Inc. purchased as shown because trades were liquidation value for the fake securities.
371 3d 68 concocted after the fact based on i. By contrast, virtually all of the Madoff securities were blue chip
(2d Cir. 2004) historical prices. securities, the values of which can be ascertained.
(New Times I) 3. BLMIS customers did not have enough
actual monies to purchase the securities
reflected on their statements.
4. The “transactions” were not subject to
any of the risks associated with market
trading.
b. The Objecting Claimants are distinguishable from
the Real Securities Claimants in New Times I.
i. Unlike the BLMIS statements, those of the Real
Securities Claimants reflected earnings that were
real and subject to market risks. As a result, the
securities behaved on paper the way they
actually did in the market.
c. New Times I does not hold that customers have a
legitimate expectation in fictitious profits.
i. The Second Circuit discussed legitimate
expectations as it relates to whether claimants
hold claims for securities or cash—it did not rely
upon legitimate expectations to calculate Net
Equity.
Page 37

I. Claimants are not “customers” to the extent the I. Claimants are “customers” with claims against the debtor regardless of,
securities transactions did not occur in the and even because of, the fraudulent transactions.
“ordinary course of business.” a. SIPA is designed to reimburse customers when a broker-dealer
a. A customer has no claim to the securities on his misappropriates funds, which is never in the “ordinary course of
account statement unless the purchase of those business.”
securities occurred in the “ordinary course of b. Under the alternative definition of “customer” in SIPA section 78lll(2), a
business.” See SIPA § 78lll(2) (defining customer is any person “who has a claim against the debtor arising out of
“customer” as a person with “a claim on account of sales or conversions of such securities, and any person who has deposited
Whether securities received, acquired, or held by the debtor cash with the debtor for the purpose of purchasing securities.” SIPA
Claimants are in the ordinary course of its business”) (emphasis section 78lll(2). This alternative definition does not have an “ordinary
“Customers” added). course” requirement.
with Respect to i. Transfers to investors made in furtherance of a i. In any event, the Trustee has acknowledged the claimants’ customer
Transactions in Ponzi scheme are not made in a broker’s status without raising the “ordinary course of business” argument, and
Furtherance of a “ordinary course of [] business.” Thus, a is therefore estopped from taking an inconsistent position with respect
Ponzi Scheme claimant is not a customer for claims to to Net Equity claims.
securities whose purported “purchase” was made
in furtherance of Madoff’s Ponzi scheme.
Page 38

I. A Trustee can avoid fictitious profits as fraudulent I. The Trustee’s avoidance powers are reconcilable with the Last
transfers in a SIPA proceeding. Statement Method.
a. It would be inherently inconsistent to allow a trustee a. Fictitious profits should be recognized as included in customers’ Net
to recover fictitious profits through avoidance actions Equity claims, even though, as the Trustee argues, they can theoretically
and, at the same time, recognize claims based on be avoided, because in this case they are not avoidable:
fictitious profits. i. Section 546(e) of the Code (safe harbor protection against avoidance
b. The fact that some transfers cannot be avoided does for securities transactions) limits the Trustee to section 548(a)(1)(A)
not eliminate the inherent inconsistency between a of the Code.
distribution scheme based upon fraud and the ii. Transfers were made outside of the statute of limitations period for
Trustee’s ability to avoid fraudulent transfers. avoidance actions under the Code and New York law.
c. Section 546(e) of the Code, which precludes a trustee b. The Trustee’s avoidance powers are inapplicable to the calculation of
from avoiding a transfer made in connection with a customers’ Net Equity.
securities contract, does not prevent the trustee from i. The Trustee cannot summarily avoid transactions on a mass basis by
avoiding Ponzi scheme transfers. Moreover, this conflating his avoidance powers with SIPA’s definition of Net
Whether the section has no applicability here because Madoff Equity. If the Net Investment Method is used to determine that Net
Trustee’s Ability never actually traded in securities for customers, and Winners’ fictitious profits can be clawed back, the Trustee should
to Avoid thus never entered into securities contracts. In any still be required to meet the specific requirements of the avoidance
Transfers is event, even if the agreements are securities contracts, provisions of the Code with regard to each customer and transaction,
Consistent with section 546(e) of the Code expressly excludes from and customers are entitled to defenses.
the Last its reach transactions that are actually fraudulent c. “Net Equity” must be determined before any transfers can be deemed
Statement under section 548(a)(1)(A) of the Code. Moreover, fraudulent.
Method the “Ponzi-scheme presumption”—that transfers i. Any transfer up to the value of a customer’s Net Equity is not
made in a Ponzi scheme are presumed to be made fraudulent because it is for “value.”
with fraudulent intent—is still valid Second Circuit ii. Determining fraudulent conveyances first undermines SIPA’s goal to
law. Thus, section 546(e) of the Code does not expeditiously pay customer claims.
eliminate the inherent conflict discussed above.
i. In addition, this section was meant to protect
brokers, not customer account withdrawals.
ii. Applying section 546(e) of the Code in this
context would have the effect of sanctioning
backdated trades at fabricated prices, which would
undermine the financial markets.
Page 39

I. Basing Net Equity on fictitious statements would be I. Equity and public policy are irrelevant in statutory interpretation
inequitable and make for poor public policy. and, in the alternative, weigh against the Net Investment Method.
a. Last Statement favors earlier investors. a. Net Investment subrogates older investors—who did not take
b. It’s a zero-sum game: every dollar paid to reimburse a advantage of different investment opportunities because they
fictitious profit is one less dollar available to pay a believed they were successfully invested with Madoff—to newer
claim for money actually invested. Equality is Equity. investors, who had the opportunity to invest outside of Madoff for
c. Adherence to the final fictitious customer statements decades.
permits Madoff to determine who wins and loses. b. It is vital to national securities markets that investors retain
d. Customers who have not yet made significant confidence in the industry’s ability to safeguard customer funds and
withdrawals are unfairly penalized under the Last securities. The only way to do so is to apply the statute as written.
Statement Method. c. “Some investors who received `fictitious profits’ may have spent the
e. A ruling in favor of the Last Statement Method would money on education or other necessities many years ago. What else
have a materially adverse effect on customers who did in equity and good conscience should plaintiffs who received money
not withdraw fictitious profits, by greatly expanding in good faith pursuant to an `investment contract’ have done?”
the pool of claims that would share in whatever Johnson v. Studholme, 619 F. Supp. 1347, 1350 (D. Colo. 1985),
customer property is recovered. aff’d, Johnson v. Hendricks, 833 F.2d 908 (10th Cir. 1987).
f. The Last Statement Method assumes that which is
Equity and impossible—that if every dollar of customer property
Public Policy were recovered, each customer could recover the full II. Nor is the SEC’s Constant Dollar Approach a more equitable
amount of his last account balance. solution.
II. The SEC recommends compensating for the time a. No legal basis in SIPA.
value of money—the Constant Dollar Approach. b. Would not significantly increase the number of claimants with
allowable Net Equity claims, and would deny more than half of
III. Adopting the Last Statement Method and giving BLMIS customers’ SIPA protection.
credence to fictitious profits has the effect of c. Does not equalize older and newer investors—Newer investors can
undermining securities laws—thus weakening them. supplement SIPA recovery with theft loss tax benefits that permit
a. While the primary function of SIPA is to provide them to deduct from their ordinary income their net BLMIS
investor protection, another central function is to investments and fictitious BLMIS income reported during the past
reinforce the broker-dealers financial responsibility five years.
requirements so that the securities laws are d. Denies long-term investors credit for their legitimate BLMIS
strengthened and not weakened. If the Trustee utilizes investments prior to the commencement of the fraud.
the Last Statement Method, he will give credence to
backdated trades and false profits invented by Madoff.
See Mishkin v. Ensminger (In re Adler, Coleman
Clearing Corp.), 247 B.R. 51 (Bankr. S.D.N.Y. 1999).
Page 40

I. To give effect to the Last Statement Method would be I. Claimants are not precluded from receiving fictitious profits on the
to improperly allow claimants to benefit from the basis that Madoff was acting as their agent in committing fraud.
fraud of their agent. a. SIPA expressly allows customers to receive claims where the broker-agent
a. The Trustee can avoid fictitious trades and transfers misappropriated their investments.
as illegal contracts under federal and state securities b. The contracts were not illegal: Madoff did not fulfill trading
laws, as well as common-law fraud (IE: section 10(b) authorizations or customer agreements, but they were not agreements to
of the Securities Exchange Act of 1934 and the do anything illegal. Trades listed on customer statements are not
Martin Act). “illegal contracts.”
i. Under NY agency law, customers cannot benefit c. While customers cannot retain a benefit resulting from an agent’s fraud,
from Madoff’s fraud. these customers lost money. Thus, they seek not to benefit, but to be
b. The Trustee is not barred by the doctrine of unclean made whole.
hands because the Trustee has not brought any II. Madoff acted outside the scope of his agency when he executed the
affirmative fraud claims against the claimants. Ponzi scheme and failed to trade securities as required in the
Whether II. Even if the transactions fall outside of the agency authorizations.
Madoff’s Fraud relationship, claimants are still chargeable with the
is Imputed to underlying fraud because they rely on the BLMIS
Claimants such fraudulent statements as the foundation for their Net
that They Have Equity claims.
no Claims for
Fictitious Profits
Page 41

I. The IRS tax treatment of Madoff claimants does not I. The Net Investment Method is inconsistent with tax law.
conflict with the Net Investment Method. a. The Trustee’s Net Equity calculation is inconsistent with Revenue
The Extent to a. First, the IRS and SIPC are governed by different Procedure 2009-20, which expressly recognizes the income earned by
Which the Net statutory schemes. Second, the IRS does not treat customers, and customers paid taxes on this income annually.
Investment fictitious profits as income. Rather, it allows a b. Rev. Proc. 2009-20 provides for a five-year carryback of theft loss, but
Method taxpayer to treat fictitious profits as a loss for IRS the Trustee is intending to claw back income withdrawn over the last six
Contravenes Tax purposes only if the taxpayer previously treated those years.
Law profits as income and paid taxes on them, but never c. The IRS does not allow taxpayers to go back more than three years to
in fact received them. correct and file amended returns.

I. SIPC’s prior positions do not prevent the Trustee I. Net Investment is contrary to SIPC’s previous interpretations of Net
from arguing the Net Investment Method. Equity.
a. Even if SIPC did advance an opposite position in a. In New Times, SIPC maintained that “reasonable and legitimate
New Times, the Trustee would not be estopped claimant expectations on the filing date are controlling even where
because he is legally distinct from SIPC and was not inconsistent with transactional reality . . . [such as] where the purchase
a party to New Times. In addition, judicial estoppel never actually occurred and the debtor instead converted the cash
Whether SIPC’s applies only to factual, not legal, positions. deposited by the claimant to fund that purchase.” SIPC Br. New Times
Prior b. In any event, SIPC did not advance an opposite II, at 23-24, 2005 WL 5338148, at *12.
Interpretations position; rather, where the New Times “gains” were b. SIPC publicly stated, “in the unlikely event your brokerage firm fails,
of Net Equity the result of the fraudster’s imagination, SIPC did not you will need to prove that cash and/or securities are owed to you. This
Prevent the support recognition of those gains. Here, the Trustee is easily done with a copy of your most recent statement and transaction
Trustee from and SIPC are espousing the same position. records of the items bought or sold after the statement,” and “net
Using the Net equity of a customer’s claim is determined by adding the total value of
Investment cash and securities the firm owes the customer and subtracting the total
Method value of cash and securities the customer owes the firm.”
c. SIPC changed its standard customer claim form specifically for the
Madoff case to ask questions relevant to the Net Investment Method.
Withdrawal amounts were never relevant before.
d. As reported less than a week after Madoff was arrested, Josephine
Wang, SIPC General Counsel, stated, “if client number 1234 was given
a statement showing that they owned 1000 GOOG shares, even if a
transaction never took place, then SIPC has to buy and replace the 1000
GOOG shares.” See SIPC’s Role in Madoff-Of-All-Scams Could Save
The Stock Market, available at StreetInsider.com, Dec. 16, 2008.
(emphasis added).
Page 42

I. The Series 500 Rules do not support the Last I. The Series 500 Rules support the Last Statement Method.
Statement Method. a. “Where the Debtor held cash in an account for a customer, the customer
Whether SIPC’s a. Rather, these rules are only relevant in deciding has a `claim for securities’ with respect to any authorized securities
Series 500 Rules whether a customer has a claim for cash or securities. purchase [i]f the Debtor has sent written confirmation to the customer
Support the Last Furthermore, they apply only with respect to that the securities in question have been purchased for or sold to the
Statement transactions made in the ordinary course of business. customer’s account.” 17 C.F.R. § 300.502(a) (emphasis added).
Method Thus, they are irrelevant with respect to fraudulent i. These rules concern the type of claim, rather than how to value the
transactions. claim, but they make clear that the customer’s receipt of
confirmations, not the debtor’s performance, is controlling for the
purpose of SIPC advancements. Statutes should be interpreted to
avoid inconsistencies.

I. Entitlement to a SIPC advance arises only when a I. Payments to one customer using the Last Statement Method will not
customer will receive a distribution from the fund of deny payments to another.
customer property, and participation in the fund a. Initial payments of up to $500,000 come from SIPC’s fund, not
Whether requires a valid Net Equity claim. Thus, if a customer property or the bankruptcy estate.
Distribution is a customer has negative Net Equity based on the Net b. The Madoff liquidation is not a zero-sum game because SIPC is a third
“Zero-Sum Investment Method, they are not entitled to any party insurer that has an absolute obligation to replace securities. That
Game” funds from SIPC. obligation is completely separate from each customer’s share of estate
such that the a. If a customer is entitled to share in customer property, and the payment by SIPC of insurance to each customer in no
Net Investment property, and if his pro rata share is insufficient to way reduces estate property.
Method is fully satisfy his Net Equity, then he will receive a c. SIPC has authority to obtain more funding from Congress.
Necessary for SIPC advance.
Equality Among
Claimants
Page 43
APPENDIX 1 — APPEARANCES
PARTIES SUPPORTING THE NET INVESTMENT METHOD
1. BAKER & HOSTETLER LLP

45 Rockefeller Plaza
New York, NY 10111
Telephone: (212) 589-4200
Facsimile: (212) 589-4201
By: David Sheehan
Marc E. Hirschfield
Oren J. Warshavsky
Seanna R. Brown

Attorneys for Irving H. Picard,
Trustee for the Substantively Consolidated SIPA Liquidation of
Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff
2. SECURITIES INVESTOR PROTECTION CORPORATION

805 Fifteenth Street, N.W. Suite 800
Washington, DC 20005
Telephone: (202) 371-8300
Facsimile: (202) 371-6728
By: Josephine Wang
Kevin H. Bell

Attorneys for the Securities Investor Protection Corporation
3. SECURITIES AND EXCHANGE COMMISSION

100 F. Street, N. E.
Washington, DC 20548
Telephone: (202) 551-5148
By: Katharine B. Gresham
Alistaire Bambach

Attorneys for the Securities and Exchange Commission
4. CRAVATH, SWAINE & MOORE LLP

825 Eighth Avenue
New York, NY 10019
Telephone: (212) 474-1000
Facsimile: (212) 474-3700
By: Richard Levin

Attorneys for Optimal Strategic U.S. Equity Limited and Optimal Arbitrage
Limited
5. Simon Jacobs (Pro Se)
Page 44
OBJECTING CLAIMANTS
Represented by Counsel
1. BERNFELD, DEMATTEO & BERNFELD LLP

600 Third Avenue
New York, NY 10016
Telephone: (212) 661-1661
Facsimile: (212) 557-9610
By: David B. Bernfeld
Jeffrey Bernfeld

Attorneys for Dr. Michael Schur and Mrs. Edith A. Schur
2. BROWN RUDNICK LLP

Seven Times Square
New York, NY 10036
Telephone: (212) 209-4800
Facsimile: (212) 209-4801
By: David J. Molton
Martin S. Siegel

Attorneys for Kenneth M. Krys and Christopher D. Stride as Liquidators of and
for Fairfield Sentry Limited
3. STANLEY DALE COHEN

41 Park Avenue, Suite 17-F
New York, NY 10016
Telephone: (212) 686-8200
By: Stanley Dale Cohen

Attorney for Lee Mellis, Lee Mellis (IRA), Jean Pomerantz T.O.D., and Bonita
Savitt
4. DAVIS POLK & WARDWELL LLP

450 Lexington Avenue
New York, NY 10017
Telephone: (212) 450-4000
Facsimile: (212) 701-5800
By: Karen Wagner
Jonathan D. Martin

Attorneys for Sterling Equities Associates
Page 45
5. DEWEY & LEBOEUF LLP

1301 Avenue of the Americas
New York, NY 10019
Telephone: (212) 259-8000
Facsimile: (212) 259-6333
By: Seth C. Farber
James P. Smith III
Kelly A. Librera

Attorneys for Ellen G. Victor
6. GIBBONS, P.C.

One Pennsylvania Plaza, 37th Floor
New York, NY 10119
Telephone: (212) 613-2009
Facsimile: (212) 554-9696
By: Jeffrey A. Mitchell
Don Abraham

Attorneys for Donald G. Rynne
7. GOODWIN PROCTER LLP

53 State Street
Boston, MA 02109
Telephone: (617) 570-1000
Facsimile: (617) 523-1231
By: Daniel M. Glosband
David J. Apfel
Brenda R. Sharton
Larkin M. Morton

Attorneys for Jeffrey A. Berman, Russell DeLucia, Ellenjoy Fields, Michael C.
Lesser, Norman E. Lesser 11/97 Rev. Trust, Paula E. Lesser 11/97 Rev. Trust, and
Jane L. O’Connor, as Trustee of the Jane O’Connor Living Trust
8. HERRICK, FEINSTEIN LLP

2 Park Avenue
New York, NY 10016
Telephone: (212) 592-1400
Facsimile: (212) 592-1500
By: William R. Fried

Attorneys for Magnify, Inc.
Page 46
9. KLEINBERG, KAPLAN, WOLFF & COHEN, P.C.

551 Fifth Avenue, 18th Floor
New York, NY 10176
Telephone: (212) 986-6000
Facsimile: (212) 986-8866
By: David Parker
Matthew J. Gold
Jason Otto

Attorneys for Lawrence Elins and Malibu Trading and Investing, L.P.
10. LAX & NEVILLE, LLP

1412 Broadway, Suite 1407
New York, NY 10018
Telephone: (212) 696-1999
Facsimile: (212) 566-4531
By: Brian J. Neville
Barry R. Lax

Attorneys for Mary Albanese, the Brow Family Partnership, Allen Goldstein,
Laurence Kaye, Suzanne Kaye, Rose Less, and Gordon Bennett
11. MCCARTER & ENGLISH, LLP

245 Park Avenue, 27th Floor
New York, NY 10167
Telephone: (212) 609-6800
Facsimile: (212) 609-6921
By: Joseph Lubertazzi, Jr.

Attorneys for Wachovia Bank, National Association
12. MILBERG LLP

One Pennsylvania Plaza
New York, NY 10119
Telephone: (212) 594-5300
Facsimile: (212) 868-1229
By: Jonathan M. Landers
Matthew Gluck
Lois F. Dix
Joshua E. Keller
Sanford P. Dumain
Jennifer L. Young
Page 47

SEEGER WEISS LLP
One William Street
New York, NY 10004
Telephone: (212) 584-0700
Facsimile: (212) 584-0799
By: Stephen A. Weiss
Christopher M. Van de Kieft
Parvin K. Aminolroaya

Attorneys for Albert J. Goldstein U/W FBO, Ruth E. Goldstein TTEE, Ann
Denver, Norton Eisenberg, Export Technicians, Inc., Stephen R. Goldenberg,
Judith Rock Goldman, Jerry Guberman, Anita Karimian, Orthopaedic Specialty
Group PC, Martin Rappaport, Paul J. Robinson, Bernard Seldon, Harold A.
Thau, and The Aspen Company
13. PHILLIPS NIZER LLP

666 Fifth Avenue
New York, NY 10103
Telephone: (212) 841-1320
Facsimile: (212) 262-5152
By: Helen Davis Chaitman

Attorneys for Diane and Roger Peskin, Maureen Ebel, and a group of other
customers
14. BRUCE S. SCHAEFFER

404 Park Avenue South
New York, NY 10016
Telephone: (212) 689-0400
By: Bruce S. Schaefer

Attorney for Irving J. Pinto Revocable Trust, Irving J. Pinto Grantor Retained
Annuity Trust of 1994, Irving J. Pinto Grantor Retained Annuity Trust of 1996,
and Amy Lome Pinto Revocable Trust
15. SCHULTE ROTH & ZABEL LLP

919 Third Avenue
New York, NY 10022
Telephone: (212) 756-2000
Facsimile: (212) 593-5955
By: William D. Zabel
Michael L. Cook
Marcy Ressler Harris
Frank J. LaSalle

Attorneys for the SRZ Claimants
Page 48
16. SHEARMAN & STERLING LLP

599 Lexington Avenue
New York, NY 10022
Telephone: (212) 848-4000
Facsimile: (212) 848-7179
By: Stephen Fishbein
James Garrity
Richard Schwed

Attorneys for Carl Shapiro and associated entities
17. SONNENSCHEIN NATH & ROSENTHAL LLP

1221 Avenue of the Americas
New York, NY 10020
Telephone: (212) 768-6889
Facsimile: (212) 768-6800
By: Carole Neville

Attorneys for certain investors
Pro Se
1. Hugh de Blacam
2. Ethel and James Chambers
3. Anthony Fusco
4. Herbert and Ruth Gamberg
5. Cynthia Pattison Germaine
6. Lillian Gilden
7. Phyllis Glick
8. Yolanda Greer
9. Joseph M. Hughart
10. Marvin Katkin
11. Marshall W. Krause
12. Jason Mathias
13. Michael and Stacey Mathias
14. Shawn Mathias
Page 49
15. Herbert A. Medetsky
16. Josef Mittleman
17. Josef Mittleman, on behalf of Just Empire, LLC
18. Arlene Perlis
19. Gunther and Margaret Unflat
20. Lawrence R. Velvel
21. Alan J. Winters
PARTIES NOT TAKING A POSITION ON THE CALCULATION OF NET EQUITY
1. JOHNSON, POPE, BOKOR, RUPPEL & BURNS, LLP

911 Chestnut Street
Clearwater, FL 33757
Telephone: (727) 461-1818
Facsimile: (727) 443-6548
By: Angelina E. Lim
Michael C. Cronin
Attorneys for Anchor Holdings, LLC
2. MORRISON COHEN LLP

909 Third Avenue
New York, NY 10022
Telephone: (212) 735-8600
Facsimile: (212) 735-8708
By: Michael R. Dal Lago

Attorneys for David Silver
—————
Notes:
1. 15 U.S.C. §§ 78aaa et seq. References to sections of SIPA hereinafter shall replace “15 U.S.C.” with “SIPA.”
2. A list of the Objecting Claimants, as well as other parties who have appeared and filed written submissions, is attached hereto as Appendix 1.
3. Here, the Filing Date is the date on which the SEC brought suit against BLMIS, December 11, 2008, which resulted in the appointment of a receiver for the entity. See SIPA § 78lll(7)(B).
4. A fund of “customer property” consists of assets garnered by the SIPA trustee on account of customers. These assets are not ascribable to individual customers, but rather are distributed pro rata to the extent of a customer’s Net Equity. See SIPA § 78lll(4) (defining “customer property”); see infra at Discussion, section I.
5. SIPA section 78lll(11) defines Net Equity as “the dollar amount of the account or accounts of a customer, to be determined by —
(A) calculating the sum which would have been owed by the debtor to such customer if the debtor had liquidated, by sale or purchase on the filing date, all securities positions of such customer . . .; minus
(B) any indebtedness of such customer to the debtor on the filing date. . . .”
6. Some Objecting Claimants refer to this advance as “insurance,” a designation strenuously controverted by the Securities and Exchange Commission (the “SEC”), SIPC and the Trustee, and a designation that is not supported by the controlling SIPA statute. See SIPA § 78fff-3(a) (titled, “Advances for Customers’ Claims”) (emphasis added).
7. The principal arguments made in support and opposition to the Motion have been outlined in a dispassionate manner and organized in a table for ease of reference, attached hereto as Exhibit A. This table is not exhaustive of all arguments made. The Court does not necessarily agree or disagree with the arguments set forth in Exhibit A.
8. The SEC differs from the Trustee in an area that does not affect the Court’s analysis (the SEC recommends compensating Madoff customers for the time value of money when utilizing the Net Investment Method (the “Constant Dollar Approach”)).
9. On March 10, 2009, this action was assigned to the Honorable Denny Chin in the United States District Court for the Southern District of New York, and was given a new docket number, No. 09-CR-213 (DC).
10. See http://www.madofftrustee.com.
11. These facts are largely undisputed and have been taken primarily from the Trustee’s memorandum of law and supporting declarations, as well as the criminal allocutions of Madoff and Frank DiPascali, Jr. (“DiPascali”). On August 11, 2009, DiPascali pled guilty to 10 criminal charges stemming from his extensive participation in the Madoff fraud. On February 11, 2010, an order was entered releasing DiPascali on bail pending sentencing.
12. David Friehling is the subject of a criminal information filed by the United States alleging, inter alia, securities fraud. See Friehling Information, United States v. Friehling, No. 09-CR-0700 (AKH) (S.D.N.Y. July 17, 2009), Dkt. No. 14. He has since pled guilty, and sentencing is scheduled for September 3, 2010. Id. at Dkt. No. 37.
13. See the criminal complaint dated February 24, 2010 filed by the United States against Daniel Bonventre, a former BLMIS operations director, charging, inter alia, securities fraud and conspiracy in connection with the Madoff scheme, and alleging that investor money was used to support the PT and MM Businesses.
14. The IA Business was staffed by more than 25 employees, including Madoff and DiPascali, who directed its day-to-day affairs.
15. The Trustee notes that, in most instances, the customer likely did not invest enough capital to buy even those securities listed on his first BLMIS customer statement, given that prices selected for the purchase of securities for customer accounts were backdated and orchestrated.
16. The Trustee’s investigation indicates that one customer directed the purchase and sale of a few specific securities. This is exclusive of those holding “friends and family” accounts, such as Jeffry Picower and Stanley Chais, who also directed securities transactions for their accounts.
17. The customer funds were not segregated in a “15c3-3″ account, as required by SEC Rule 15c3-3(e) and 17 C.F.R. section 240.15c3-3 promulgated under the Securities Exchange Act of 1934, which requires brokers and dealers to maintain a “Special Reserve Bank Account for the Exclusive Benefit of Customers.” See SEC Rule 15c3-3a. This special reserve bank account is “separate from any other bank account of the broker or dealer” and is required to maintain a certain minimum balance. Id. BLMIS maintained a $20,000 balance from the end of 2002 until the Filing Date, which was outrageously insufficient given the apparent multi-billion dollar value of its customer accounts.
18. Although the Split Strike Conversion Strategy was carried out by Madoff, DiPascali, and the employees who worked for them, DiPascali had primary responsibility for the customer accounts.
19. Institutional investment managers who exercise investment discretion over $100 million or more in Section 13(f) securities must report their holdings on SEC Form 13F. This form requires disclosure to the SEC of the names of the institutional investment managers, the names of the securities they manage and the class of securities, the CUSIP number, the number of shares owned, and the total market value of each security. See 17 C.F.R. § 240.13f-1.
20. For example, in one instance, a monthly account statement for December 2006 reported a sale of Merck (“MRK”) with a settlement date of December 28, 2006. BLMIS records reflect a trade date of December 22, 2006 at a price of $44.61 for this transaction. However, the daily price range for MRK stock on December 22, 2006 was a low of $42.78 and a high of $43.42. See Looby Decl. at ¶ 106.
21. DTCC records from 2002-2008 were made available to the Trustee.
22. The Trustee’s investigation indicates that BLMIS provided customer statements in electronic form to only two of its thousands of customers, representing only six accounts. Even though these statements were electronic, they consisted merely of data files. No BLMIS customer had real-time access to his account information and trading data, as no such information or data existed because no trading actually took place.
23. For purposes of this decision, the Court will adopt the Trustee’s nomenclature with regard to his classification of claimants.
24. For reasons that are self-evident, a majority of those objecting to the Trustee’s Net Investment Method are Net Winners.
25. A “customer” is defined as—
any person . . . who has a claim on account of securities received, acquired, or held by the debtor in the ordinary course of its business as a broker or dealer from or for the securities accounts of such person for safekeeping, with . . . collateral security, or for purposes of effecting transfer. The term `customer’ includes any person who has a claim against the debtor arising out of sales or conversions of such securities, and any person who has deposited cash with the debtor for the purpose of purchasing securities. . . .
SIPA section 78lll(2).
26. SIPA section 78fff-3(a)(1) divides customer claims into “claims for cash” and “claims for securities” in order “to distinguish the custodial functions of a broker-dealer with respect to securities from the broker-dealer’s depository-like functions with respect to cash deposits.” In re New Times Secs. Servs., Inc., 371 F.3d 68, 86 (2d Cir. 2004). When eligible, claims for cash are entitled to a $100,000 advance from SIPC, while claims for securities are entitled to a $500,000 advance from SIPC. See SIPA § 78fff-3(a)(1).
27. See, e.g., Reply Mem. of Phillips Nizer Claimants at 8 (arguing that SIPC advances take the form of a completely separate and independent insurance obligation).
28. In New Times I, the SEC stated that the SIPA trustee sought to treat claims as claims for cash, with a $100,000 limit on SIPC advances. New Times I, 371 F.3d at 74. Here, notwithstanding a cash component reflected on monthly statements, the Madoff Trustee has regarded all claims as claims for securities, eligible for advances of up to $500,000 each.
29. See, e.g., Manhattan Inv. Fund Ltd., 397 B.R. 1, 8 (S.D.N.Y. 2007) (“There is a general rule-known as the `Ponzi scheme presumption’—that such a scheme demonstrates `actual intent’ as matter of law because `transfers made in the course of a Ponzi scheme could have been made for no purpose other than to hinder, delay or defraud creditors.’”); Bayou Superfund, LLC v. WAM Long/Short Fund II, L.P. (In re Bayou Group, LLC), 362 B.R. 624, 634 (Bankr. S.D.N.Y. 2007) (“redemption payments of . . . wholly-fictitious profits, as reflected on fraudulent financial statements, were made to earlier investors requesting redemption using funds invested by subsequent investors. Indeed, it is impossible to imagine any motive for such conduct other than actual intent. . . .”); Drenis v. Haligiannis, 452 F. Supp. 2d 418, 429 (S.D.N.Y. 2006) (“Plaintiffs’ complaint adequately pleads fraudulent intent on the part of the transferor-namely, the defrauding defendants-who are alleged elsewhere in the complaint to be perpetrators of a Ponzi scheme. In such cases, courts have found that the debtor’s intent to hinder, delay or defraud is presumed to be established.”); Donell v. Kowell, 533 F.3d 762, 772 (9th Cir. 2008) (“[A]ll payments of fictitious profits are avoidable as fraudulent transfers.”).
30. As no avoidance action is currently pending here, the Court does not reach the merits of these defenses. It should be noted, however, that the application of section 546(e) of the Code to insulate transferees of Madoff’s fictitious securities from avoidance actions is dubious. Indeed, courts have held that to extend safe harbor protection in the context of a fraudulent securities scheme would be to “undermine, not protect or promote investor confidence . . . [by] endorsing a scheme to defraud SIPC,” and therefore contradict the goals of the provision. In re Adler, Coleman Clearing Corp., 247 B.R. 51, 105 (Bankr. S.D.N.Y. 1999), aff’d, 263 B.R. 406 (S.D.N.Y. 2001); see also In re Grafton Partners, 32,1 B.R. 527 (B.A.P. 9th Cir. 2005) (“The few decisions that involve outright illegality or transparent manipulation reject [section] 546(e) protection.”); Wider v. Wootton, 907 F.2d 570, 573 (5th Cir. 1990) (“To apply the stockbroker defense to shield the payments Cohen made to Wider would lend judicial support to `Ponzi’ schemes by rewarding early investors at the expense of later victims.”) (internal quotations and citations omitted). In any event, the safe harbor provision explicitly excepts from its protection actual fraudulent transfers avoidable under section 548(a)(1)(A) of the Code. See 11 U.S.C. § 546(e).
31. Certain investors were also induced to invest in fraudulent promissory notes. Id. at 71. However, the treatment of those investors is irrelevant for purposes of this decision.
32. These rules apply to determine whether a securities transaction gives rise to a “claim for cash” or a “claim for securities” on the filing date of a SIPA liquidation proceeding. See 17 C.F.R. §§ 300.500-300.503.
33. When SIPC and the SEC disagreed as to the interpretation of SIPA section 78fff-3(a)(1) with regard to whether claimants had claims for cash or for securities, the court found, in a lengthy discourse, that the SEC was entitled to a degree of deference, a deliberative factor not lost on the Court. See New Times I, 371 F.3d at 82-83.
34. As discussed supra at Factual History, section II, part C, “Fidelity Spartan U.S. Treasury Money Market Fund,” was reflected on customer account statements at times when Fidelity Brokerage Services LLC was not offering participation in any such fund for investment.
35. The Court is also persuaded by the reasoning in Focht v. Athens (In re Old Naples Secs., Inc.), 311 B.R. 607 (M.D. Fla. 2002). In re Old Naples was a SIPA liquidation involving a Ponzi scheme in which the court adopted the Net Investment Method in satisfying claims for cash:
According to the Trustee, participants in a Ponzi scheme such as that involved here are entitled only to receive their net loss, or the amount invested less any payments received.
. . .
[P]ermitting claimants to recover not only their initial capital investment but also the phony “interest” payments they received and rolled into another transaction is illogical. No one disputes that the interest payments were not in fact interest at all, but were merely portions of other victims’ capital investments. If the Court were to agree with the Athens claimants, the fund would likely end up paying out more money than was invested in Zimmerman’s Ponzi scheme. This result is not consistent with the goals of SIPA, which does not purport to make all victimized investors whole but only to partially ameliorate the losses of certain classes of investors.
In re Old Naples, 31,1 B.R. at 616-17. Some of the Objecting Claimants attempt to distinguish Old Naples on the grounds that the claims in that case were for cash ($100,000 SIPC advance), and not for securities ($500,000 SIPC advance). This purported distinction, however, was irrelevant to the Net Equity holding. Whether the claims were for cash or securities, the fact remains that the Old Naples court found that it would be “illogical” to rely on fictitious interest payments in determining Net Equity claims. Id. at 617.
36. Zero-sum is a colloquial term that describes a scenario in which a participant’s gain or loss is exactly balanced by the losses or gains of the other participants. If the total gains of the participants are added up, and the total losses are subtracted, they will equal zero. See http://www.merriam-webster.com.
37. See Trustee’s Reply Br. in Supp. of the Motion at 18-19.
38. Compensating Madoff investors on the basis of fictional account statements leads to an additional inequality as it enables the thief to dictate who receives a larger proportion of the assets collected by the Trustee. Madoff should not be entitled to award, to equally deserving clients, higher and lower returns based solely on his whim.
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