In Re: Bernard L. Madoff
Justia.com Opinion Summary: Former investors with Bernard L. Madoff appealed from an order entered by the United States Bankruptcy Court in the liquidation proceedings of Bernard L. Madoff Investment Securities LLC under the Securities Investor Protection Act (SIPA), 15 U.S.C. 78aaa et seq. At issue was whether the Net Investment Method the trustee selected for carrying out his responsibilities under SIPA was legally sound under the language of the statutes. The court held that the trustee's determination as to how to calculate "net equity" under SIPA was legally sound in light of the circumstances of the case and the relevant statutory language. Accordingly, the court affirmed the order of the bankruptcy court.
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10-2378-bk(L) In re: Bernard L. Madoff Inv. Sec. LLC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term, 2010 (Argued: March 3, 2011 Decided: August 16, 2011) Docket Nos. 10-2378-bk(L); 10-2676-bk(con); 10-2677-bk(con); 10-2679-bk(con); 10-2684-bk(con); 10-2685-bk(con); 10-2687bk(con); 10-2691-bk(con); 10-2693-bk(con); 10-2694-bk(con); 10-2718-bk(con); 10-2737-bk(con); 10-3188-bk(con); 10-3579bk(con); 10-3675-bk(con) - - - - - - - - - - - - - - - - - - - -x IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor.* - - - - - - - - - - - - - - - - - - - -x Before: JACOBS, Chief Judge, LEVAL and RAGGI, Circuit Judges. Former investors with Bernard L. Madoff appeal from an 28 order entered by the United States Bankruptcy Court for the 29 Southern District of New York (Lifland, J.) in the 30 liquidation proceedings of Bernard L. Madoff Investment 31 Securities LLC under the Securities Investor Protection Act. 32 The Trustee, Irving H. Picard, concluded that the investors’ 33 “net equity,” which determines how customer property will be * Consolidated docket number 10-2737-bk was dismissed with prejudice by stipulation of the parties on December 10, 2010. Fed. R. App. P. 42(b). 1 distributed in the wake of Madoff’s fraud, should be 2 calculated based on the Net Investment Method. 3 bankruptcy court affirmed the decision of the Trustee and 4 certified its decision for immediate appeal to this Court. 5 28 U.S.C. § 158(d)(2). 6 appeal from the bankruptcy court, and for the following 7 reasons, we hold that the Trustee’s determination as to how 8 to calculate “net equity” under the Securities Investor 9 Protection Act is legally sound in light of the The This Court accepted the direct 10 circumstances of this case and the relevant statutory 11 language. 12 bankruptcy court. 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Accordingly, we affirm the order of the HELEN DAVIS CHAITMAN, Becker & Poliakoff, LLP, New York, New York (Peter Schuyler, on the brief), for Appellants Diane and Roger Peskin, et al. KAREN E. WAGNER, Davis Polk & Wardwell LLP, New York, New York (Brian S. Weinstein, Jonathan D. Martin, on the brief), for Appellants Sterling Equities Associates, Arthur Friedman, David Katz, Gregory Katz, Michael Katz, Saul Katz, L. Thomas Osterman, Marvin Tepper, Fred Wilpon, Jeff Wilpon, Richard Wilpon, Mets Limited Partnership. BARRY R. LAX, Lax & Neville, New York, New York (Brian Neville, Brian Maddox, on the brief), for Appellants Mary Albanese, et al. 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 Seth C. Farber, Kelly A. Librera, Dewey & LeBoeuf LLP, New York, New York, for Appellant Ellen G. Victor. Stephen Fishbein, Richard F. Schwed, Shearman & Sterling LLP, New York, New York, for Appellants Carl J. Shapiro, et al. Carole Neville, Sonnenschein Nath & Rosenthal LLP, New York, New York, for Appellants Marsha Peshkin IRA, Michael and Meryl Mann, Barry Weisfeld. Matthew Gluck, Jonathan M. Landers, Brad N. Friedman, Jennifer L. Young, Milberg LLP, New York, New York, Stephen A. Weiss, Christopher M. Van de Kieft, Parvin K. Aminolroaya, Seeger Weiss LLP, New York, New York, for Appellants The Aspen Company, et al. David B. Bernfeld, Jeffrey L. Bernfeld, Bernfeld, DeMatteo & Bernfeld, LLP, New York, New York, for Appellants Michael Schur and Edith A. Schur. David Parker, Matthew J. Gold, Jason Otto, Kleinberg, Kaplan, Wolff & Cohen, P.C., New York, New York, for Appellants Lawrence Elins, Malibu Trading and Investing, L.P. Stanley Dale Cohen, New York, New York, for Appellants Lee Mellis, Jean Pomerantz, Bonnie Savitt. Jeffrey A. Mitchell, Gibbons, P.C., New York, New York, for Appellant Donald G. Rynne. Daniel M. Glosband, Goodwin Procter LLP, Boston, Massachusetts (Larkin M. Morton, Goodwin Procter LLP, New York, New York, on the brief) for Appellants Jeffrey A. Berman, et al. 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 Chryssa V. Valletta, Phillips Nizer LLP, New York, New York for Appellants Herbert Barbanel, Alice Barbanel. Lawrence R. Velvel, pro se, Andover, Massachusetts, for Appellant Lawrence R. Velvel. JOSEPHINE WANG, General Counsel, Securities Investor Protection Corporation, Washington, District of Columbia (Kevin H. Bell, Senior Associate General Counsel for Dispute Resolution, Christopher H. Larosa, Associate General Counsel, Lauren Attard, Staff Attorney, on the brief), for Appellee Securities Investor Protection Corporation. DAVID J. SHEEHAN, Baker Hostetler LLP, New York, New York (Thomas D. Warren, Wendy J. Gibson, Seanna R. Brown, on the brief), for Appellee Irving H. Picard, as Trustee for the Substantively Consolidated Securities Investor Protection Act Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff. MICHAEL A. CONLEY, Deputy Solicitor for Securities & Exchange Commission, Washington, District of Columbia (David M. Becker, General Counsel, Mark D. Cahn, Deputy General Counsel, Jacob H. Stillman, Solicitor, Katharine B. Gresham, Assistant General Counsel, on the brief), for Amicus Curiae Securities & Exchange Commission. DENNIS JACOBS, Chief Judge: In the aftermath of a colossal Ponzi scheme conducted 42 by Bernard Madoff over a period of years, Irving H. Picard 43 has been appointed, pursuant to the Securities Investor 4 1 Protection Act, 15 U.S.C. § 78aaa et seq. (“SIPA”), as 2 Trustee for the liquidation of Bernard L. Madoff Investment 3 Securities LLC, id. § 78eee(b)(3). 4 Picard has the general powers of a bankruptcy trustee, as 5 well as additional duties, specified by the Act, related to 6 recovering and distributing customer property. 7 1. 8 out decades of fraud. 9 is whether the method Mr. Picard selected for carrying out 10 his responsibilities under SIPA is legally sound under the 11 language of the statute. 12 we affirm the order of the United States Bankruptcy Court 13 for the Southern District of New York (Lifland, J.). Pursuant to SIPA, Mr. Id. § 78fff- Essentially, Mr. Picard has been charged with sorting The question presented by this appeal We hold that it is. Accordingly, 14 BACKGROUND 15 The facts surrounding Bernard Madoff’s multibillion 16 dollar Ponzi scheme are widely known and were recounted in 17 detail by the bankruptcy court. 18 Inv. Sec. LLC, 424 B.R. 122, 125-32 (Bankr. S.D.N.Y. 2010); 19 see also, e.g., In re Beacon Assocs. Litig., 745 F. Supp. 2d 20 386, 393-94 (S.D.N.Y. 2010); Anwar v. Fairfield Greenwich 21 Ltd., 728 F. Supp. 2d 372, 387, 389-90 (S.D.N.Y. 2010); 22 re Tremont Sec. Law, State Law & Ins. Litig., 703 F. Supp. 23 2d 363, 367-68 (S.D.N.Y. 2010). 5 In re Bernard L. Madoff For our purposes, a few In 1 facts suffice. When customers invested with Bernard L. 2 Madoff Investment Securities LLC (“BLMIS”), they 3 relinquished all investment authority to Madoff. 4 collected funds from investors, claiming to invest those 5 funds pursuant to what he styled as a “split-strike 6 conversion strategy” for producing consistently high rates 7 of return on investments.2 8 strike conversion strategy supposedly involved buying a 9 basket of stocks listed on the Standard & Poor’s 100 Index J.A. Vol. II at 292. Madoff The split- 10 and hedging through the use of options. However, Madoff 11 never invested those customer funds. 12 generated fictitious paper account statements and trading 13 records in order to conceal the fact that he engaged in no 14 trading activity whatsoever. 15 monthly account statement listed securities transactions 16 purportedly executed during the reporting period and 17 purported individual holdings in various Standard & Poor’s 18 100 Index stocks as of the end of the reporting period, the Instead, Madoff Even though a customer’s 2 A select group of Madoff’s family members, close friends, and employees held “non-split strike” accounts. Madoff provided these customers with invented account statements that reflected even greater investor success than the unwavering returns purportedly earned for his splitstrike customers. In re Bernard L. Madoff, 424 B.R. at 13031. The non-split strike customers are not parties to this appeal. 6 1 statement did not reflect any actual trading or holdings of 2 securities by Madoff on behalf of the customer. 3 the Trustee’s investigation revealed many occurrences where 4 purported trades were outside the exchange’s price range for 5 the trade date.” 6 Other now revealed irregularities make it clear that “Madoff 7 never executed his split-strike investment and hedging 8 strategies, and could not possibly have done so.” 9 point out just two examples, “an unrealistic number of “In fact, In re Bernard L. Madoff, 424 B.R. at 130. Id. To 10 option trades would have been necessary to implement the . . 11 . [s]trategy” and “one of the money market funds in which 12 customer resources were allegedly invested through BLMIS . . 13 . has acknowledged that it did not even offer investment 14 opportunities in any such money market fund from 2005 15 forward.” Id. 16 As is true of all Ponzi schemes, see Cunningham v. 17 Brown, 265 U.S. 1, 7 (1924) (describing the “remarkable 18 criminal financial career of Charles Ponzi”), Madoff used 19 the investments of new and existing customers to fund 20 withdrawals of principal and supposed profit made by other 21 customers. 22 investor funds, so these funds were never exposed to the 23 uncertainties or fluctuations of the securities market. Madoff did not actually execute trades with 7 1 Fictional customer statements were generated based on after- 2 the-fact stock “trades” using already-published trading data 3 to pick advantageous historical prices. J.A. Vol. I at 365- 4 66, 371, 512; J.A. Vol. II at 291, 293. The customer 5 statements documented an astonishing pattern of continuously 6 profitable trades, approximating the profits Madoff had 7 promised his customers, but reflected trades that had never 8 occurred. 9 customers always appeared to earn positive annual returns, 10 the dreamt-up rates of return Madoff assigned to different 11 customers’ accounts varied significantly and arbitrarily. 12 In re Bernard L. Madoff, 424 B.R. at 130. 13 customer statements reflected unvarying investor success; 14 but the only accurate entries reflected the customers’ cash 15 deposits and withdrawals. 16 Although Madoff’s scheme was engineered so that Thus, the J.A. Vol. I at 513. Madoff’s scheme collapsed when the flow of new 17 investments could no longer support the payments required on 18 earlier invested funds. 19 122, 132 n.7 (2d Cir. 2008) (describing typical Ponzi scheme 20 “where earlier investors are paid from the investments of 21 more recent investors . . . until the scheme ceases to 22 attract new investors and the pyramid collapses”). 23 final customer statements issued by BLMIS falsely recorded See Eberhard v. Marcu, 530 F.3d 8 The 1 nearly $64.8 billion of net investments and related 2 fictitious gains. 3 on this appeal that any victim knew or should have known 4 that the investments and customer statements were 5 fictitious. 6 investors relied on their customer statements for purposes 7 of financial planning and tax reporting, to their terrible 8 detriment. 9 J.A. Vol. I at 505. It is not contended It is unquestioned that the great majority of When Madoff’s fraud came to light, the Securities and 10 Exchange Commission filed a civil complaint in the United 11 States District Court for the Southern District of New York, 12 alleging that Madoff and BLMIS were operating a Ponzi 13 scheme.3 14 (“SIPC”), a nonprofit corporation consisting of registered 15 broker-dealers and members of national securities exchanges 16 that supports a fund used to advance money to a SIPA 17 trustee, then stepped in.4 18 Comm’n v. Packer, Wilbur & Co., 498 F.2d 978, 980 (2d Cir. 19 1974). 20 seeking a decree that the customers of BLMIS are in need of The Securities Investor Protection Corporation 15 U.S.C. § 78ccc; Sec. & Exch. SIPC filed an application in the civil action 3 Madoff was arrested and charged with securities fraud; he pleaded guilty to an eleven-count criminal indictment and was sentenced to 150 years’ imprisonment. 4 By virtue of its registration with the SEC as a broker-dealer, BLMIS is a member of SIPC. 9 1 the protections afforded by SIPA. 2 § 78eee(a)(3)(A). 3 application; the protective order appointed Mr. Picard as 4 Trustee for the liquidation of the business of BLMIS and the 5 SIPA liquidation proceeding was removed to the bankruptcy 6 court. 7 Corp. v. BDO Seidman, LLP, 222 F.3d 63, 67 (2d Cir. 2000). 8 9 15 U.S.C. The district court granted SIPC’s Id. § 78eee(b)(3)-(4); see also Sec. Investor Prot. SIPA establishes procedures for liquidating failed broker-dealers and provides their customers with special 10 protections. 11 property,” separate from the general estate of the failed 12 broker-dealer, is established for priority distribution 13 exclusively among customers. 14 consists of cash and securities received or held by the 15 broker-dealer on behalf of customers, except securities 16 registered in the name of individual customers. 17 § 78lll(4). 18 assets to the extent of the customer’s “net equity.” 19 § 78fff-2(c)(1)(B). 20 21 22 23 24 25 26 27 In a SIPA liquidation, a fund of “customer The customer property fund 15 U.S.C. Each customer shares ratably in this fund of Id. Under SIPA: 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 10 1 2 3 4 5 6 of such customer . . . ; minus (B) any indebtedness of such customer to the debtor on the filing date . . . . Id. § 78lll(11). 7 In many liquidations, however, the assets in the 8 customer property fund are insufficient to satisfy every 9 customer’s “net equity” claim. In such a case, SIPC 10 advances money to the SIPA trustee to satisfy promptly each 11 customer’s valid “net equity” claim. 12 accounts, the maximum advance is $500,000 per customer. 13 § 78fff-3(a). 14 maximum advance is substantially less. 15 (d). 16 id. § 78fff-2(a)(2), who is charged with determining 17 customer claims in writing. 18 filed with the bankruptcy court. 19 For securities Id. For customers with claims for cash, the Id. § 78fff-3(a)(1), Under SIPA, all claims must be filed with the trustee, A customer’s objection must be In satisfying customer claims in this case, Mr. Picard, 20 as the SIPA Trustee, determined that the claimants are 21 customers with claims for securities within the meaning of 22 SIPA. 23 “net equity” should be calculated by the “Net Investment 24 Method,” crediting the amount of cash deposited by the 25 customer into his or her BLMIS account, less any amounts 26 withdrawn from it. The Trustee further concluded that each customer’s J.A. at 274. 11 The use of the Net 1 Investment Method limits the class of customers who have 2 allowable claims against the customer property fund to those 3 customers who deposited more cash into their investment 4 accounts than they withdrew, because only those customers 5 have positive “net equity” under that method. 6 customers objected to the Trustee’s method of calculating 7 “net equity” and argued that they were entitled to recover 8 the market value of the securities reflected on their last 9 BLMIS customer statements (the “Last Statement Method”). 10 After the filing of a number of objections, the Trustee 11 moved the bankruptcy court for an order affirming his use of 12 the Net Investment Method of calculating “net equity.” 13 SIPC and the SEC submitted briefs supporting the Trustee’s 14 motion.5 15 Some Both After a hearing, the bankruptcy court upheld the 16 Trustee’s use of the Net Investment Method on the ground 17 that the last customer statements could not “be relied upon 18 to determine [n]et [e]quity” because customers’ account 19 statements were “entirely fictitious” and did “not reflect 5 The SEC further argued that the Net Investment Method should be applied using inflation-adjusted dollars. The Trustee argued that the issue whether the Net Investment Method should be adjusted to account for inflation or interest was beyond the scope of the briefing and took no position on it. 12 1 actual securities positions that could be 2 liquidated . . . .” 3 135. 4 “net equity” under SIPA “must be read in tandem with SIPA 5 section 78fff-2(b), which requires the Trustee to discharge 6 [n]et [e]quity claims only ‘insofar as such obligations are 7  ascertainable from the books and records of the debtor 8 or  are otherwise established to the satisfaction of the 9 trustee.’” In re Bernard L. Madoff, 424 B.R. at The bankruptcy court reasoned that the definition of Id. (quoting 15 U.S.C. § 78fff-2(b)(2)). The 10 bankruptcy court emphasized that the “BLMIS books and 11 records expose a Ponzi scheme where no securities were ever 12 ordered, paid for or acquired[,]” and concluded the Trustee 13 could not “discharge claims upon the false premise that 14 customers’ securities positions are what the account 15 statements purport them to be.” 16 Method, unlike the Last Statement Method, allowed Mr. Picard 17 to (in the bankruptcy court’s phrase)“unwind, rather than 18 legitimiz[e], the fraudulent scheme.” 19 bankruptcy court reserved decision on the issue of whether 20 the Net Investment Method should be adjusted to account for 21 inflation or interest. 22 court certified an immediate appeal to this Court, over 23 which this Court accepted jurisdiction, pursuant to 28 24 U.S.C. § 158(d)(2)(A). Id. The Net Investment Id. at 136. Id. at 125 n.8. 13 The The bankruptcy 1 2 DISCUSSION We review the legal conclusions of the bankruptcy 3 court, including its interpretation of SIPA, de novo. 4 Turner v. Davis, Gillenwater & Lynch (In re Inv. Bankers, 5 Inc.), 4 F.3d 1556, 1560 (10th Cir. 1993). 6 our independent review, we consider that the views of the 7 Securities & Exchange Commission (“SEC”) and SIPC are 8 “entitled to respect, but only to the extent that [they 9 have] the power to persuade.” In conducting Chao v. Russell P. Le Frois 10 Builder, Inc., 291 F.3d 219, 228 (2d Cir. 2002) (internal 11 quotation marks and alterations omitted); see also In re New 12 Times Sec. Servs., Inc., 371 F.3d 68, 76 (2d Cir. 2004) 13 (“New Times I”) (observing “that the drafters of SIPA 14 clearly envisioned roles for both the SEC and SIPC in 15 administering the statute”). 16 The positions of the parties on appeal are as follows. 17 Mr. Picard asserts that the objecting BLMIS claimants are 18 customers with claims for securities under SIPA and that the 19 plain language of SIPA dictates that their “net equity” be 20 calculated based on the Net Investment Method. 21 amicus curiae, supports the Trustee’s view that, here, the 22 Net Investment Method is required by the language of SIPA. 23 The SIPC--deemed to be a party in interest as to all matters 14 The SEC, as 1 arising in a SIPA proceeding--urges this Court to affirm the 2 order of the bankruptcy court, which holds that on the 3 present facts the Net Investment Method (and not the Last 4 Statement Method) correctly measures “net equity.” 5 objecting BLMIS claimants contend that the Last Statement 6 Method is mandated by the language of SIPA; that they had a 7 legitimate expectation that their customer statements were 8 accurate; that SIPA is designed to protect this legitimate 9 expectation; and that the Net Investment Method undermines 10 11 The the purpose of the statute. First, accepting that the objecting BLMIS claimants are 12 “customers” under SIPA, they are customers with claims for 13 securities. 14 the Trustee argue the plain language of SIPA supports their 15 (irreconcilable) positions, we conclude that the statutory 16 language does not prescribe a single means of calculating 17 “net equity” that applies in the myriad circumstances that 18 may arise in a SIPA liquidation.6 19 v. Aberdeen Sec. Co., 480 F.2d 1121, 1123 (3d Cir. 1973) 20 (“The intent of Congress to protect customers of financially Second, while the objecting BLMIS claimants and 6 See Sec. & Exch. Comm’n The two competing methods of calculating “net equity” proposed by the parties to this litigation are the only two methods at issue here. We do not hold that they are the only possible approaches to calculation of “net equity” under SIPA. 15 1 distressed security dealers is clear, but the specifics of 2 precise resolution of individual situations are clouded by 3 the provisions of a statute which range far from the clarity 4 of blue sky one might expect in this area of the law.”); 5 McKenny v. McGraw (In re Bell & Beckwith), 104 B.R. 842, 848 6 (Bankr. N.D. Ohio 1989) (rejecting “plain meaning” arguments 7 as to meaning of “allocation” under SIPA as “not 8 persuasive”). 9 for differing approaches to ascertaining the fairest method Differing fact patterns will inevitably call 10 for approximating “net equity,” as defined by SIPA. 11 U.S.C. § 78fff-2(b)(2). 12 See 15 Mr. Picard’s selection of the Net Investment Method was 13 more consistent with the statutory definition of “net 14 equity” than any other method advocated by the parties or 15 perceived by this Court. 16 SIPA serves dual purposes: to protect investors, and to 17 protect the securities market as a whole. 18 Prot. Corp. v. Barbour, 421 U.S. 412, 415 (1975). 19 of the BLMIS claimants as customers with claims for 20 securities and calculating “net equity” based on the Net There was therefore no error.7 7 See Sec. Inv. Treatment We express no view on whether the Net Investment Method should be adjusted to account for inflation or interest, an issue on which the bankruptcy court has not yet ruled and which is not before us on this interlocutory appeal. 16 1 Investment Method effectuates these purposes. As the 2 bankruptcy court observed, “[a]ny dollar paid to reimburse a 3 fictitious profit is a dollar no longer available to pay 4 claims for money actually invested. 5 Method were adopted,” those claimants who have withdrawn 6 funds from their BLMIS accounts that exceed their initial 7 investments “would receive more favorable treatment by 8 profiting from the principal investments of [those claimants 9 who have withdrawn less money than they deposited], yielding If the Last Statement 10 an inequitable result.” 11 at 141. 12 require the Trustee to aggravate the injuries caused by 13 Madoff’s fraud. 14 case would have the absurd effect of treating fictitious and 15 arbitrarily assigned paper profits as real and would give 16 legal effect to Madoff’s machinations. 17 18 In re Bernard L. Madoff, 424 B.R. The statutory definition of “net equity” does not Use of the Last Statement Method in this I The threshold issues are whether the BLMIS claimants 19 are “customers” within the meaning of SIPA and, if so, 20 whether they are customers with claims for securities or 21 customers with claims for cash. 22 claimants are not “customers,” 15 U.S.C. § 78lll(2)(A), they 23 are not entitled to the protection of SIPA at all, see Sec. 17 If the objecting BLMIS 1 Inv. Prot. Corp. v. Pepperdine Univ. (In re Brentwood Sec., 2 Inc.), 925 F.2d 325, 327 (9th Cir. 1991). 3 “[t]he term ‘customer’ includes . . . any person who has 4 deposited cash with the debtor for the purpose of purchasing 5 securities.” 6 Res. Mgmt. (In re ESM Gov’t Sec., Inc.), 812 F.2d 1374, 1376 7 (11th Cir. 1987) (observing “that it is the act of 8 entrusting the cash to the debtor for the purpose of 9 effecting securities transactions that triggers the customer 10 Under SIPA, 15 U.S.C. § 78lll(2)(B)(i); see also Tew v. status provisions” (emphasis omitted)). It also includes: 11 12 13 14 15 16 17 18 19 20 15 U.S.C. § 78lll(2)(A). 21 claimants are customers with claims for securities within 22 the meaning of SIPA. 23 . . . [a person] who has a claim on account of securities received, acquired, or held by the debtor in the ordinary course of business as a broker or dealer from or for the securities accounts of such person for safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral, security, or for purposes of effecting transfer. We conclude that the BLMIS While SIPA does not--and cannot--protect an investor 24 against all losses, it “does . . . protect claimants who 25 attempt to invest through their brokerage firm but are 26 defrauded by dishonest brokers.” 27 Corp. (In re Primeline Sec. Corp.), 295 F.3d 1100, 1107 28 (10th Cir. 2002). Ahammed v. Sec. Inv. Prot. SIPA provides this protection by ensuring 18 1 that claimants who deposited cash with a broker “for the 2 purpose of purchasing securities,” 15 U.S.C. § 3 78lll(2)(B)(i), are treated as customers with claims for 4 securities. 5 ‘customer’ definition is the entrustment of cash or 6 securities to the broker-dealer for the purposes of trading 7 securities.” 8 791, 801 (6th Cir. 1995) (emphasis added). 9 This is so because the “critical aspect of the Appleton v. First Nat’l Bank of Ohio, 62 F.3d The legislative history supports the view that the 10 BLMIS claimants are customers with claims for securities. 11 “Throughout the [House Report on SIPA,] ‘investors’ is used 12 synonymously with ‘customers,’” and it is clear that an 13 individual who had documentation of his status as a “trading 14 customer . . . was to be protected.” 15 F.O. Baroff Co., 497 F.2d 280, 283 (2d Cir. 1974). 16 treating the BLMIS claimants as customers with claims for 17 securities protects their “legitimate expectations” as 18 investors in the securities market. 19 2 (1978), reprinted in 1978 U.S.C.C.A.N. 764, 765. 20 Similarly, SIPA’s implementing regulations bolster the 21 shared view of the Trustee, SIPC, and the SEC that a 22 claimant who has “written confirmation” that securities have 23 been purchased or sold on his or her behalf should be 19 Sec. & Exch. Comm’n v. Indeed, S. Rep. No. 95-763, at 1 treated as a customer with a claim for securities. 17 2 C.F.R. §§ 300.501(b)(1), 300.502(a)(1). 3 not, however, mandate that this “written confirmation” form 4 the basis for calculating a customer’s “net equity.” The regulation does 5 II 6 The BLMIS claimants object that the only way their 7 “legitimate expectations” can be protected is by calculating 8 “net equity” by reference to their last customer statements. 9 We conclude, however, that while the BLMIS customer 10 statements confirm that the BLMIS claimants are properly 11 treated as customers with claims for securities, the last 12 customer statements are not useful for ascertaining “net 13 equity.” 14 with the language of the statute itself.” 15 Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989). 16 provisions interact. 17 equity” is determined by: 18 19 20 21 22 23 24 25 26 27 28 29 We “begin where all such inquiries must begin: United States v. Two SIPA provides that a customer’s “net (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 [of the protective order]-(i) all securities positions of such customer . . . minus (B) any indebtedness of such customer to the debtor on the filing date . . . . 15 U.S.C. § 78lll(11) (emphasis added). 20 At the same time, 1 SIPA provides that the Trustee should make payments to 2 customers based on “net equity” insofar as the amount owed 3 to the customer is “ascertainable from the books and records 4 of the debtor or [is] otherwise established to the 5 satisfaction of the trustee.” 6 added). 7 Id. § 78fff-2(b) (emphasis The objecting BLMIS claimants contend that their 8 “securities positions” should be determined by reference to 9 the “liquidat[ion]” value, id. § 78lll(11)(A), of the 10 securities listed on their last customer statements. 11 Trustee argues that the customer statements do not reflect 12 “securities positions” that could be “liquidated” because 13 the account statements were wholly the invention of Madoff 14 and do not reflect actual securities positions; that any 15 pay-out of “net equity” therefore also requires a review of 16 the “books and records” of BLMIS; and that “the books and 17 records of the debtor reveal that the last statements are a 18 fiction.” 19 The Br. of Appellee Picard at 28. We agree with Mr. Picard that a SIPA trustee’s 20 obligation to reimburse customers based on “net equity” must 21 be considered together with SIPA’s requirement that the 22 Trustee discharge “obligations of the debtor to a customer 23 relating to, or net equity claims based upon . . . 21 1 securities . . . insofar as such obligations are 2 ascertainable from the books and records of the debtor or 3 are otherwise established to the satisfaction of the 4 trustee.” 5 Prot. Corp. v. Lehman Bros. Inc., 433 B.R. 127, 133 (Bankr. 6 S.D.N.Y. 2010) (“Under SIPA, the Trustee is required to 7 determine a ‘customer’ claim based on the ‘net equity’ of 8 the customer as shown on the books and records of the 9 debtor.” (footnote omitted)). 15 U.S.C. § 78fff-2(b)(2); see also Sec. Investor This accords with our usual 10 practice of examining the “overall structure and operation” 11 of a statute. 12 Servs., 511 F.3d 324, 329 (2d Cir. 2007). 13 particular section in a statute can be understood in context 14 with and by reference to the whole statutory scheme, by 15 appreciating how sections relate to one another.” 16 Hous. Auth. v. Martinez, 277 F.3d 138, 144 (2d Cir. 2002). 17 “In other words, the preferred meaning of a statutory 18 provision is one that is consonant with the rest of the 19 statute.” 20 Puello v. Bureau of Citizenship & Immigration “The meaning of a Auburn Id. When the terms of the statute are read together, the 21 statute directs that a SIPA trustee should determine a 22 customer’s entitlement to recover “net equity” based both on 23 the statutory definition of that term and by reference to 24 the books and records of the debtor. 22 While the language of 1 the statute clearly requires a SIPA trustee to distribute 2 customer property based on “net equity,” the statute does 3 not define “net equity” by reference to a customer’s last 4 account statement. 5 equity” should be calculated if a dishonest broker failed to 6 place a customer’s funds into the security market, 7 notwithstanding that the customer “deposited cash with the 8 debtor for the purpose of purchasing securities,” id. § 9 78lll(2)(B)(i). 10 Nor does it say specifically how “net Here, the profits recorded over time on the customer 11 statements were after-the-fact constructs that were based on 12 stock movements that had already taken place, were rigged to 13 reflect a steady and upward trajectory in good times and 14 bad, and were arbitrarily and unequally distributed among 15 customers. 16 Trustee’s rejection of the Last Statement Method for 17 calculating “net equity.” 18 permitted the objecting claimants to recover based on their 19 final account statements, this would have “affect[ed] the 20 limited amount available for distribution from the customer 21 property fund.” 22 The inequitable consequence of such a scheme would be that 23 those who had already withdrawn cash deriving from imaginary These facts provide powerful reasons for the In addition, if the Trustee had In re Bernard L. Madoff, 424 B.R. at 133. 23 1 profits in excess of their initial investment would derive 2 additional benefit at the expense of those customers who had 3 not withdrawn funds before the fraud was exposed. 4 of these facts, the Net Investment Method better measures 5 “net equity,” as statutorily defined, than does the Last 6 Statement Method.8 7 Net Investment Method is appropriate because it relies 8 solely on unmanipulated withdrawals and deposits and refuses 9 to permit Madoff to arbitrarily decide who wins and who 10 11 loses.” Because As the bankruptcy court reasoned, “[t]he In re Bernard L. Madoff, 424 B.R. at 140. In holding that it was proper for Mr. Picard to reject 12 the Last Statement Method, we expressly do not hold that 13 such a method of calculating “net equity” is inherently 14 impermissible. To the contrary, a customer’s last account 8 Because we find that, in this case, the Net Investment Method advocated by Mr. Picard is superior to the Last Statement Method as a matter of law, we have no need to consider whether a SIPA trustee may exercise discretion in selecting a method to calculate “net equity.” Fraud is endlessly resourceful and the unraveling of weaved-up sins may sometimes require the grant of a measure of latitude to a SIPA trustee. It therefore appears to us that that in many circumstances a SIPA trustee may, and should, exercise some discretion in determining what method, or combination of methods, will best measure “net equity.” We have no reason to doubt that a reviewing court could and should accord a degree of deference to such an exercise of discretion so long as the method chosen by the trustee allocates “net equity” among the competing claimants in a manner that is not clearly inferior to other methods under consideration. 24 1 statement will likely be the most appropriate means of 2 calculating “net equity” in more conventional cases. 3 would expect that resort to the Net Investment Method would 4 be rare because this method wipes out all events of a 5 customer’s investment history except for cash deposits and 6 withdrawals. 7 Net Investment Method appropriate, whereas in many 8 instances, it would not be. 9 example, may be appropriate when securities were actually 10 purchased by the debtor, but then converted by the debtor. 11 Indeed, the Last Statement Method may be especially 12 appropriate where--unlike with the BLMIS accounts at issue 13 in this appeal--customers authorize or direct purchases of 14 specific stocks. 15 Stratton Oakmont, Inc.), No. 01-CV-2812 RCC, 01-CV-2313 RCC, 16 2003 WL 22698876 (S.D.N.Y. Nov. 14, 2003). 17 We The extraordinary facts of this case make the The Last Statement Method, for See generally Miller v. DeQuine (In re Ascertaining the proper measure of “net equity” in a 18 given case is for the ultimate purpose of issuing payments 19 to customers; so, the ability to deduce payment amounts (to 20 the satisfaction of the trustee) will bear upon the method 21 selected for calculating “net equity.” 22 Net Investment Method allows the Trustee to make payments 23 based on withdrawals and deposits, which can be confirmed by 24 the debtor’s books and records, and results in a 25 In this case, the 1 distribution of customer property that is proper under SIPA. 2 III 3 Under the circumstances of this case, the limitation on 4 the objecting customers’ recovery imposed by the Net 5 Investment Method is consistent with the purpose and design 6 of SIPA. 7 investors against financial losses arising from the 8 insolvency of their brokers.” 9 Inc., 463 F.3d 125, 127 (2d Cir. 2006) (“New Times II”) “The principal purpose of SIPA is to protect In re New Times Sec. Servs., 10 (internal quotation marks omitted). 11 to “protect capital markets by instilling confidence in 12 securities traders.” 13 Kennedy & Co., 533 F.2d 1314, 1317 (2d Cir. 1976). 14 main purpose [i]s . . . not to prevent fraud or conversion, 15 but to reverse los[s]es resulting from brokers’ insolvency.” 16 In re Stratton Oakmont, 2003 WL 22698876, at *5; see also 17 Appleton, 62 F.3d at 801; In re Brentwood Sec., 925 F.2d at 18 326. 19 SIPA is also intended Sec. Investor Prot. Corp. v. Morgan, “SIPA’s The BLMIS claimants characterize the overall statutory 20 scheme as an insurance guarantee of the securities positions 21 set out in their account statements. 22 SIPA should operate to make them whole from the losses they 23 incurred as a result of Madoff’s dishonesty. 26 They maintain that We disagree. 1 While this Court has referred to SIPC as providing a “form 2 of public insurance,” Packer, Wilbur & Co., 498 F.2d at 985, 3 it is clear that the obligations imposed on an insurance 4 provider under state law do not apply to this 5 congressionally-created “nonprofit membership corporation.” 6 Barbour, 421 U.S. at 413; see also, e.g., Rosenbluth 7 Trading, Inc. v. United States, 736 F.2d 43, 46 (2d Cir. 8 1984) (observing that although Social Security is often 9 referred to as insurance, “[m]anifestly, social security is 10 not traditional insurance, and consequently principles 11 applicable to [insurance policies] . . . need not be 12 imported uncritically into lawsuits involving social 13 security”). 14 insurance under New York law and, in the event of a SIPA 15 liquidation, New York law governs the relative ability of 16 implicated parties to obtain the benefit of insurance 17 coverage. 18 (Matter of F.O. Baroff Co.), 555 F.2d 38, 41-42 (2d Cir. 19 1977) (stating claimant in SIPA liquidation may share in 20 insurance held by bankrupt debtor). 21 Moreover, a registered broker-dealer may obtain See generally Am. Bank & Trust Co. v. Davis It is not at all clear that SIPA protects against all 22 forms of fraud committed by brokers. 23 Ctr., Inc., 129 B.R. 339, 353 (Bankr. E.D.N.Y. 1991) 24 (“Repeatedly this Court has been forced to tell claimants 27 See In re Investors 1 that the fund created for the protection of customers of 2 honest, but insolvent, brokers gives them no protection when 3 the insolvent broker has been guilty of dishonesty, breach 4 of contract or fraud.”); H.R. Rep. No. 91-1613, at 1 (1970), 5 reprinted in 1970 U.S.C.C.A.N. 5254, 5255 (stating “[t]he 6 primary purpose of [SIPA] . . . is to provide protection for 7 investors if the broker-dealer with whom they are doing 8 business encounters financial troubles”). 9 that the statute is not designed to insure investors against But it is clear 10 all losses. 11 983 (“SIPA was not designed to provide full protection to 12 all victims of a brokerage collapse.”); Sec. Investor Prot. 13 Corp. v. Associated Underwriters, Inc., 423 F. Supp. 168, 14 171 (D. Utah 1975) (SIPA does not “guarantee that customers 15 will recover their investments which may have diminished as 16 a result of, among other things, market fluctuations or 17 broker-dealer fraud”). 18 availability of advances under SIPA to cushion the impact of 19 Madoff’s fraud. 20 See, e.g., Packer, Wilbur & Co., 498 F.2d at But, no party has contested the In any event, SIPA is intended to expedite the return 21 of customer property, and SIPC provides advances on customer 22 property. 23 the statute as “cash and securities . . . at any time Customer property, in turn, is a term defined by 28 1 received, acquired, or held by or for the account of a 2 debtor from or for the securities accounts of a customer, 3 and the proceeds of any such property transferred by the 4 debtor, including property unlawfully converted.” 5 § 78lll(4). 6 statements, there were no securities purchased and there 7 were no proceeds from the money entrusted to Madoff for the 8 purpose of making investments. 9 “ratably” in customer property on the basis of their “net 10 equity,” id. § 78fff-2(c)(1)(B); so if customers receive 11 SIPC advances based on property that is a fiction, those 12 advances will necessarily diminish the amount of customer 13 property available to other investors, including those who 14 have not recouped even their initial investment. 15 the main purpose of determining “net equity” is to achieve a 16 fair allocation of the available resources among the 17 customers, the Trustee properly rejected the Last Statement 18 Method as it would have undermined this objective. Here, notwithstanding the BLMIS customer 19 20 15 U.S.C. Moreover, customers share Because IV The objecting claimants maintain that a pair of 21 decisions of this Court--New Times I and New Times II-- 22 dictate that the Last Statement Method be used to calculate 23 “net equity.” We conclude that, to the contrary, our 29 1 precedent is consistent with the Trustee’s decision to 2 utilize the Net Investment Method under the circumstances of 3 this case. 4 case would have been an impermissible means of calculating 5 “net equity.” And, use of the Last Statement Method in this Like the BLMIS litigation, the New Times cases arose 6 7 out of a Ponzi scheme. After the New Times scheme was 8 exposed, a SIPA trustee was appointed and a liquidation 9 proceeding commenced. New Times I, 371 F.3d at 71. The 10 SIPA trustee divided the claimants into two groups. One 11 group of claimants had been misled to believe that they were 12 investing “in mutual funds that in reality existed.” 13 74. 14 their account statements mirrored what would have happened 15 had the given transaction been executed.” 16 quotation marks omitted). 17 treated these claimants as customers with claims for 18 securities and reimbursed them based on their account 19 statements. 20 “fraudulently induced” to buy “shares in bogus mutual funds” 21 that did not exist. 22 treated these claimants as customers with claims for cash; 23 they objected; and the district court sustained their 24 objections, holding that they had claims for securities and Id. at “[T]he information that these claimants received on Id. (internal The New Times SIPA trustee The second group of claimants were Id. at 71. 30 The New Times trustee 1 that their “net equity” should be determined by reference to 2 their customer statements. 3 SIPC appealed.9 4 Id. The New Times Trustee and This Court ruled [i] that the New Times claimants who 5 believed they had invested in mutual funds that did not, in 6 fact, exist, should be treated as customers with claims for 7 securities, but [ii] that their “net equity” could not be 8 calculated by reference to the “fictitious securities 9 positions reflected in the Claimants’ account statements.” 10 Id. at 75. 11 view of the SEC and SIPC that “basing customer recoveries on 12 fictitious amounts in the firm’s books and records would 13 allow customers to recover arbitrary amounts that 14 necessarily have no relation to reality . . . [and would] 15 leave the SIPC fund unacceptably exposed.” 16 (internal quotation marks omitted). 17 made-up values of fictional securities would be “unworkable” 18 and would create “potential absurdities.” 19 it was held that “each Claimant’s net equity should be 20 calculated by reference to the amount of money the Claimants 21 originally invested with the Debtors (not including any The New Times I Court was persuaded by the joint 9 Id. at 88 Calculations based on Id. Accordingly, The New Times claimants who were originally treated as customers with claims for securities and compensated based on their customer statements were never before this Court. 31 1 2 fictitious interest or dividend reinvestments).” Id. at 71. In New Times II, this Court concluded that investors in 3 New Times Securities Services who, prior to the SIPA 4 proceeding, “were induced to liquidate their accounts . . . 5 and make a loan of the imaginary funds to the brokerage 6 house and to [the principal]” were not customers within the 7 meaning of SIPA. 8 could only legitimately have expected to be treated as 9 lenders unprotected by SIPA. 10 New Times II, 463 F.3d at 126, 129. They Id. at 130. Taken together, New Times I and New Times II militate 11 in favor of limiting recovery by BLMIS claimants to their 12 Net Investment. 13 unlike the appellants in New Times I because their customer 14 statements reflected investments in real stocks listed on 15 the Standard & Poor’s 100 Index. 16 BLMIS claimants are similarly situated to the New Times 17 appellants in a crucial respect: assessing “net equity” 18 based on their customer statements would require the Trustee 19 to establish each claimant’s “net equity” based on a fiction 20 created by the perpetrator of the fraud. 21 New Times I decision, the New Times II Court stated: 22 23 24 25 26 True, the objecting BLMIS claimants are However, the objecting Commenting on the The court declined to base the recovery on the rosy account statements telling customers how well the imaginary securities were doing, because treating the fictitious paper profits as within the ambit of the customers’ “legitimate 32 1 2 3 4 5 6 expectations” would lead to the absurdity of “duped” investors reaping windfalls as a result of fraudulent promises made on fake securities. Id. at 130 (quoting New Times I, 371 F.3d at 87-88). Madoff constructed account statements retrospectively, 7 designating stocks based on advantageous historical price 8 information and arbitrarily distributing profits among his 9 customers.10 It would therefore have been legal error for 10 the Trustee to “discharge claims upon the false premise that 11 customers’ securities positions are what the account 12 statements purport them to be.” 13 424 B.R. at 135. 14 “net equity” by reference to impossible transactions. 15 Indeed, if the Trustee had done otherwise, the whim of the 16 defrauder would have controlled the process that is supposed 17 to unwind the fraud. 18 In re Bernard L. Madoff, The Trustee properly declined to calculate In any event, SIPA covers potentially a multitude of 19 situations; no one size fits all. 20 Chicago v. Wyatt, 517 F.2d 453, 459 n.12 (2d Cir. 1975) 21 (stating SIPA “liquidation procedures have been carefully 22 designed to allow flexibility”). 23 appointed to oversee the liquidation underlying the New 24 Times cases calculated “net equity” in one manner is not 10 See Exch. Nat’l Bank of The fact that the trustee Some purported trades were settled outside the Stock Exchange’s price range for the trade dates. 33 1 determinative as to the proper method of ascertaining “net 2 equity” in this case.11 3 “net equity” based on customer statements for those 4 claimants whose account statements “mirrored what would have 5 happened had the given transaction[s] been executed.” 6 Times I, 371 F.3d at 74 (internal quotation marks omitted). 7 Here, however, the BLMIS customer statements reflect 8 impossible transactions and the Trustee is not obligated to 9 step into the shoes of the defrauder or treat the customer 10 The New Times trustee calculated New statements as reflections of reality. 11 CONCLUSION 11 A SIPA liquidation is a hybrid proceeding. See 15 U.S.C. § 78fff-1(a) (“A trustee shall be vested with the same powers and title with respect to the debtor and the property of the debtor, including the same rights to avoid preferences, as a trustee in a case under Title 11.”); id. § 78fff(b) (“To the extent consistent with the provisions of this chapter, a liquidation proceeding shall be conducted in accordance with, and as though it were being conducted under [the Bankruptcy Code].”); see also In re Housecraft Indus. USA, Inc., 310 F.3d 64, 71 (2d Cir. 2002) (stating bankruptcy trustee may avoid fraudulent transactions). As the bankruptcy court ruled, “SIPA and the [Bankruptcy] Code intersect to . . . grant a SIPA trustee the power to avoid fraudulent transfers for the benefit of customers.” In re Bernard L. Madoff, 424 B.R. at 136. The objecting BLMIS claimants point out that no avoidance power has been invoked in this case. True, however--in the context of this Ponzi scheme--the Net Investment Method is nonetheless more harmonious with provisions of the Bankruptcy Code that allow a trustee to avoid transfers made with the intent to defraud, see 11 U.S.C. § 548(a)(1)(A), and “avoid[s] placing some claims unfairly ahead of others,” In re Adler, Coleman Clearing Corp., 263 B.R. 406, 463 (Bankr. S.D.N.Y. 2001). 34 1 For the reasons set forth above, we affirm the order of 2 the United States Bankruptcy Court for the Southern District 3 of New York (Lifland, J.) and hold that use of the Net 4 Investment Method for calculating the “net equity” of the 5 BLMIS customers was proper. 35