vn\\r>
`
`No.
`3f n tfie
`Supreme Court of tfje fHntteb States
`
`FILED
`APR 2 h im
`
`MALCOLM H. SAGE,
`
`Petitioner,
`
`v.
`
`IRVING H. PICARD, ET AL.,
`Respondents.
`
`On Petition for a Writ of Certiorari to the
`United States Court of Appeals for the Second Circuit
`
`PETITION FOR A WRIT OF CERTIORARI
`
`Malcolm Sage
`Petitioner Pro Se
`45 Christopher Street 14B
`New York, NY 10014
`(212) 986-0101
`msdocuments 19@gmail. com
`
`April 24,2024
`SUPREME COURT PRESS
`
`♦
`
`(888) 958-5705
`
`Boston, Massachusetts
`
`RECEIVED
`APR 29 2029
`8SagcToHuE@f
`
`
`
`No.
`3f n tfie
`Supreme Court of tfje fHntteb States
`
`FILED
`APR 2 h im
`
`MALCOLM H. SAGE,
`
`Petitioner,
`
`v.
`
`IRVING H. PICARD, ET AL.,
`Respondents.
`
`On Petition for a Writ of Certiorari to the
`United States Court of Appeals for the Second Circuit
`
`PETITION FOR A WRIT OF CERTIORARI
`
`Malcolm Sage
`Petitioner Pro Se
`45 Christopher Street 14B
`New York, NY 10014
`(212) 986-0101
`msdocuments 19@gmail. com
`
`April 24,2024
`SUPREME COURT PRESS
`
`♦
`
`(888) 958-5705
`
`Boston, Massachusetts
`
`RECEIVED
`APR 29 2029
`8SagcToHuE@f
`
`
`
`1
`
`QUESTIONS PRESENTED
`1. Does an Article III Court have the power to
`reject the statutory definition of “net equity” as set
`forth in 15 U.S.C. Section 78aaa et seq. by employing
`the Madoff Trustee’s “Net Investment Method”
`(“NIM”) as a formula to calculate the net equity of a
`customer in contradiction of the plain text of SIPA?
`2. If the Courts below have such power, did the
`District Court and the Court of Appeals nevertheless
`err in upholding the use of the Net Investment Method
`advocated by a SIPC Trustee to disallow Petitioner’s
`“net equity’ claim and clawback funds under circum
`stances where Petitioner maintained a traditional buy
`and hold stock brokerage account, did not relinquish
`control of his accounts to Madoff, but, instead, directed
`trading in specific securities in his account?
`
`
`
`( I i
`
`11
`
`PARTIES TO THE PROCEEDINGS
`Petitioner and Defendant-Appellant below
`• Malcolm H. Sage, in his Capacity as Partner or
`Joint Venturer of Sage Associates and Sage Realty,
`Individually as Beneficiary of Sage Associates and
`Sage Realty, and as the Personal Representative of
`The Estate of Lillian M. Sage.
`Note: Sage Associates and Sage Realty, of which
`Petitioner was a principal are defunct.
`
`Respondent and Plaintiff-Appellee below
`• Irving H. Picard, the Trustee for the liquidation of
`Bernard L. Madoff Investment Securities LLC
`
`Party in Interest and Intervenor in the Second
`Circuit
`• Securities Investor Protection Corporation (a
`party in interest in all liquidation proceedings
`commenced under the Securities Investor Protection
`Act, 15 U.S.C. § 78eee(d))
`
`
`
`Ill
`
`LIST OF PROCEEDINGS
`Direct Proceedings Below
`
`In re Bernard L. Madoff Investment Securities LLC,
`Nos. 22-1107(L), 22-1110-bk(CON), U.S. Court of
`Appeals for the Second Circuit. Summary Order
`August 10, 2023; Rehearing Denied November 28,
`2023.
`
`Picard v. Sage Associates et.al., No. l:20-cv-10057,
`U.S. District Court for the for the Southern District
`of New York. Judgment entered April 20, 2021.
`
`Picard v. Sage Realty et.al., No. l:20-cv-10109,
`U.S. District Court for the for the Southern District
`of New York. Judgment entered April 20, 2021.
`
`
`
`(
`
`IV
`
`TABLE OF CONTENTS
`
`Page
`
`1 n m I
`
`X 1 1 1 2 2
`
`QUESTIONS PRESENTED........ .................
`PARTIES TO THE PROCEEDINGS...........
`LIST OF PROCEEDINGS..... .......................
`TABLE OF AUTHORITIES..........................
`PETITION FOR A WRIT OF CERTIORARI
`OPINIONS BELOW......................................
`JURISDICTION.............................................
`STATUTORY PROVISIONS INVOLVED....
`STATEMENT OF THE CASE.......................
`A. Factual Background......................................
`B. A Case of First Impression and Unsettled
`Law.................................................................
`C. Statutory Background...................................
`D. The 2011 Net Equity Decision established
`the use of the NIM to calculate Net Equity,
`but its holding was narrowly confined and
`limited to Madoff s split-strike scheme.......
`E. The Panel erred in affirming the District
`Court decision that the net equity in SA
`was properly determined by using the Net
`18
`Investment Method.......................................
`19
`1. The Panel’s Errors...................................
`Error number 1: “the same Ponzi scheme” ..19
`Error number 2: “the same perpetrator”.. 19
`Error number 3: “the same ‘extraordinary
`facts’”
`
`2 4
`
`11
`
`12
`
`20
`
`
`
`!
`
`! !
`
`V
`
`TABLE OF CONTENTS - Continued
`
`25
`
`26
`
`27
`
`Page
`Error number 4 - The Same Method of
`Generating Fictitious Account State
`ments .........................................................
`Error number 5 — “rigged to reflect a
`steady and upward trajectory in good
`times and bad.” (App.6a).........................
`Error number 6 — non-engagement in the
`market.......................................................
`Error number 7 - The Panel committed
`reversible error in stating that the NIM
`was “the most reasonable” method to
`calculate net equity:........ ........................
`Error 8. “Using the Last Statement
`Method would limit the total customer
`property fund pool.”.................................
`a. The Net Equity Decision was limited
`to split-strike......................................
`b. There is no statutory grant of
`“equitable” discretion to SIPC, a
`SIPA trustee, or a court of law..........
`c. SIPA and the Bankruptcy Code are
`not inequitable statutes .....................
`d. It is unreasonable to depart from the
`plain language of a statute to treat
`claimants with disparate fact patterns
`the same way......................................
`
`29
`
`31
`
`31
`
`32
`
`32
`
`33
`
`
`
`VI
`
`TABLE OF CONTENTS - Continued
`
`34
`
`Page
`e. Neither SIPC nor a SIPC Trustee is
`empowered by SIPA to invent a frame
`work not established in a statute or
`even its legislative history................
`f. Unless expressly authorized by stat
`ute, no Trustee can selectively choose
`which customers to collect from, which
`customers to absolve of liability.
`Critically, where, as here, a Trustee
`does so arbitrarily, capriciously, and
`inconsistent with his own established
`rules, there is no justification to
`selectively pursue customers............
`g. SIPA does not provide for strict
`liability of all customers who are
`defrauded by a broker because of his
`failure to purchase the stock he
`35
`commits to buying..............................
`REASONS FOR GRANTING THE PETITION...... 36
`CONCLUSION
`37
`
`34
`
`
`
`vn
`
`TABLE OF CONTENTS - Continued
`
`Page
`
`APPENDIX TABLE OF CONTENTS
`
`U.S.C.A., Second Circuit
`In re Bernard L. Madoff Inv. Sec. LLC
`22-1107(L), 22-1110-BK (Con)
`Summary Order, U.S. Court of Appeals for the
`Second Circuit (August 10, 2023)......................
`U.S.D.C., Southern District New York
`No. 20-CV-10109 (JFK), No. 20-CV-10057 (JFK)
`Modified Final judgment Order,
`U.S. District Court, S.D. New York
`(April 18, 2022)...........................................
`Findings of Fact and Conclusions of Law,
`U.S. District Court, S.D. New York
`(April 15, 2022)...........................................
`Memorandum Opinion & Order, U.S. District
`Court, S.D. New York (May 18, 2021)......
`
`la
`
`12a
`
`14a
`
`96a
`
`U.S.C.A., Second Circuit Rehearing Order
`Order, U.S. Court of Appeals For the Second
`Circuit Denying Petition for Panel
`Rehearing (November 28, 2023).............
`
`114a
`
`
`
`Vlll
`
`TABLE OF CONTENTS - Continued
`
`Page
`
`U.S.C.A., Second Circuit
`In re Bernard L. Madoff Inv. Sec. LLC et al.
`10-2378-BK (L)
`Opinion, U.S. Court of Appeals for the
`Second Circuit (August 16, 2011).............
`Oral Argument at Second Circuit, Transcript,
`Relevant Excerpts (March 3, 2011)..........
`
`116a
`
`141a
`
`Statutory Provisions Involved
`Securities Investor Protection Act of 1970,
`Relevant Provisions..................................
`
`Other Documents
`U.S. Supreme Court Extension Letter
`(February 21, 2024)..............................
`Brief for the Securities and Exchange
`Commission in Opposition (May 2012)
`
`144a
`
`153a
`
`155a
`
`
`
`IX
`
`TABLE OF AUTHORITIES
`
`Page
`
`32
`
`6
`
`CASES
`Butner v. United States,
`440 U.S. 48 (1979).........................................
`Chevron U.S.A., Inc. v. Natural Res. Def.
`Council, Inc., 467 U.S. 837,
`104 S.Ct. 2778 (1984)....................................
`In re Bernard L. Madoff Inv. Securities LLC,
`424 B.R. 122 (2010).......................................
`In re Bernard L. Madoff Inv. Securities LLC,
`654 F.3d 229(2011).......................................
`In re Bernard L. Madoff Investment Securities
`LLC, 424 B.R. 122 (2010).............................
`In re New Times Securities Services, Inc.
`371 F.3d 68 (2004)
`6, 7, 11, 19, 23, 24
`In re New Times Securities Services, Inc.
`No 00-8178 (Bankr.E.D.N.Y. 7/28/00, filed
`9/26/00)..............................................................
`McKenny v. McGraw (In re Bell & Beckwith),
`104 B.R. 842 (Bankr. N.D. Ohio 1989).......
`Raleigh v. III. Dep’t of Revenue,
`530 U.S. 15 (2000)...........................................
`Securities Investor Protection Corp. v. 2427
`Parent Corp, 779 F.3d 74 (2d Cir. 2015).....
`Securities Investor Protection Corp. v. Barbour,
`421 U.S. 412 (1975)........................................
`Skidmore v. Swift & Co.,
`
`
`17, 22
`
`4
`
`30, 31
`
`27
`
`17
`
`32
`
`7,11
`
`11
`
`323 U.S. 134, 65 S.Ct. 161 (1944).............6,7
`
`
`
`X
`
`TABLE OF AUTHORITIES - Continued
`Page
`
`33
`
`7 l
`
`i 6
`
`28
`7
`5, 6, 12, 16
`...... i, 2, 37
`1
`
`United States v. Noland,
`517U.S. 535 (1996)
`
`STATUTES
`. 15 U.S.C. § 78ccc(e)(3).....
`15U.S.C. § 78eee(d).........
`15 U.S.C. § 78fff-l............
`15 U.S.C. § 78fff-2(b)... ....
`15 U.S.C. § 78ggg(c).........
`15 U.S.C. § 78111(11).........
`15 U.S.C. §§ 78aaa, et seq
`28 U.S.C. § 1254(1)..........
`
`OTHER AUTHORITIES
`CNBC, SIPC Chief Speaks Out, January 6,
`2009 https://www.youtube.com/watch?v=
`gyywi9zp0qc.....................................................
`Harry Markopolos
`The World’s Largest Hedge Fund is a
`Fraud (November 7 2005).............................
`Laurence Kotlikoff, Professor at Boston Univ.,
`Why brokerage account insurance is a
`bigger scam than Madoff, PBS
`NEWSHOUR, June 26, 2014, www.pbs.org/
`newshour/nation/why-brokerage-account-
`insurance-is-a-bigger-scam-than-madoff...
`SEC Office of Investigations,
`Investigation of Failure of the SEC To
`
`13
`
`21
`
`28
`
`
`
`XI
`
`TABLE OF AUTHORITIES - Continued
`
`Uncover Bernard Madoff’s Ponzi Scheme,
`Report No. OIG-509, August 31, 2009;
`https://www.sec.gov/files/oig-5090.pdf......
`Stephen P. Harbeck, SIPC CEO,
`Another View: Unwinding Madoff’s
`Fraud. Dealbook, New YORK TIMES (May
`6, 2009)...........................................................
`U.S. House of Representatives,
`Past, Present, And Future, Capital
`Markets and Govt. Sponsored Enterprise
`of the Comm, on Fin. S’vcs., 112 Cong.,
`2nd Sess., March 7, 2012........... ................
`U.S. Securities and Exchange Commission
`Mission Statement
`https://www.sec.gov/about/mission...........
`
`Page
`
`22
`
`32
`
`16
`
`3, 11
`
`!
`
`
`
`1
`
`PETITION FOR A WRIT OF CERTIORARI
`Petitioner MALCOLM H. SAGE respectfully petitions
`this Court for a writ of certiorari to review the order
`of the United States Court of Appeals for the Second
`Circuit in this case.
`
`*
`
`OPINIONS BELOW
`The Opinion of the Court of Appeals for the Second
`Circuit (the “Second Circuit”), in Nos. 22-1107(L) and
`22-1110-bk (CON), In re Bernard L. Madoff Inv. Sec.
`LLC (2d Cir. 2023) (the “Panel”) is included at App.la.
`The opinion, of the District Court for the Southern
`District of New York, No. 20 Civ. 10109 (JFK) & No.
`20 Civ. 10057 (JFK) (“District Court”) in Picard v.
`Sage Realty et.al., 2002 WL 1125643 (S.D.N.Y. 2022)
`is included at App.l4a. The opinion of the District
`Court removing matters from the Bankruptcy Court in
`Picard v. Sage Realty et.al., 20-cv-10109 (AJN) (S.D.N.Y.
`May 18, 2021) is included at App.96a.
`
`%■
`
`JURISDICTION
`This Court has jurisdiction under 28 U.S.C.
`§ 1254(1).
`The Second Circuit entered its judgment on August
`10, 2023 (App.la) and the Panel denied rehearing on
`November 28, 2023 (App.ll4a). The Court granted an
`
`
`
`2
`
`extension to file a petition, for a writ of certiorari
`through April 26,2024. Sup. Ct. No. 23A765 (App.l53a).
`The final order of the Panel affirmed a final order
`of the District Court (App.l4a) which, inter alia, held
`that Petitioner’s net equity was determined by the
`“NIM” (deposits less withdrawals) over the life of the
`accounts—going back approximately 30 years before
`the bankruptcy.
`
`STATUTORY PROVISIONS INVOLVED
`Relevant portions of the Securities Investor
`Protection Act of 1970 (SIPA), 15 U.S.C. §§ 78aaa et
`seq., are reproduced in the App.l44a-152a.
`
`STATEMENT OF THE CASE
`A. Factual Background
`The Sage Associates (“SA”) and Sage Realty (“SR”)
`matters arose out of the Madoff debacle. In the after-
`math of the worst financial scandal in the history of
`Wall Street, both cases were swept up in the maelstrom
`of litigation which ensued. The cases were tried together
`because of the common thread of the perpetrator of the
`crime, but in fact, the cases were entirely different.
`SA and SR have been defunct since the Madoff
`bankruptcy. SA consisted of three siblings Malcolm,
`Martin & Ann Sage. SR included the three siblings
`and four close family members. Neither SR nor SA
`operated as a business, nor did they incur business
`
`
`
`3
`
`profits or losses as shown on the tax returns produced
`to the Trustee. 100% of the income was investment
`income consisting solely of capital losses or gains,
`interest, and dividends.
`SR maintained a split-strike account (;infra at 20-
`25) with Madoff. Split-strike accounts involved a bogus
`strategy invented by Madoff. With the single exception
`of SA’s case, every other Madoff clawback case against
`concededly innocent victims, litigated over the past 15
`years, involved a split-strike account where the customer
`gave Madoff total control over purchases and sales of
`securities in their account.
`SA was not a split-strike account but a typical buy
`and hold account (infra at 20-25) where customers invest
`in capital markets by selecting, purchasing, holding, and
`selling specific stocks. Buy and hold focuses primarily
`on long-term potential rather than short-term market
`fluctuations as split-strike did. The mechanics of split-
`strike were entirely different from buy and hold. Split-
`strike, as that term has been used in the Madoff cases
`“supposedly involved Madoff, solely at his discretion,
`buying a basket of stocks listed on the Standard & Poor’s
`100 Index and hedging through the use of options,”
`(App.ll8a) on a strictly short-term trading basis.
`While SA was sui generis in the litigation in the
`Madoff world, SA was in the class of hundreds of
`millions of investors in the real world who invest in
`capital markets. In fact, the SEC claims that it “over-
`see[s] more than $100 trillion in securities trading on
`U.S. equity markets annually.”! SA was fully typical
`of the average investor who buys and holds a stock
`
`1 U.S. Securities and Exchange Commission Mission Statement
`https://www.sec.gov/about/mission
`
`I
`
`
`
`1 I
`
`4
`
`portfolio to build a nest egg for their medical,
`educational, family, personal, and retirement needs.
`B. A Case of First Impression and Unsettled Law
`On May 18, 2021, Judge Alison Nathan,2 removed
`the Sage cases from the Bankruptcy Court, opining
`that she was legally mandated to do so because the
`“case squarely involves a matter of first impression,
`undecided by the Second Circuit,” (App.ll3a) and that
`it required “significant interpretation and application of
`non-bankruptcy federal law.” (App.ll3a) Judge Nathan
`observed that the case involved several questions of
`Unsettled” law (Ann. 107a. 108a, 109a, 113a), as well
`as a question of “statutory interpretation.” (App.l06a)
`Judge Nathan noted: “One of the primary issues
`presented in the adversary proceeding is whether the
`Net Investment Method (“NIM”) can be applied to the
`Defendants’ customer accounts.” (App.l06a)
`The NIM formula was invented by the SIPA
`Trustee and recognized by the Second Circuit to dis
`allow claims of Madoff customers whose funds were
`invested in Madoff s split-strike scheme. (In re Bernard
`L. Madoff Inv. Securities LLC, 654 F.3d 229 (2011)).
`There is no authority under SIPA, or its legislative
`history, to justify the NIM, under which a customer’s
`net equity is credited with the amount of cash deposited
`by the customer into their account from the date the
`
`2 SDNY Judge Nathan was assigned to decide whether a removal
`of the reference motion was mandated in the Sage matters in
`November 2020. She left the case one year later and on the very
`day when direct testimony was placed on the District Court
`docket. She was replaced by Judge John Keenan, (SJ, S.D.N.Y.)
`who took over the case on 11/01/2021. Judge Nathan currently
`serves on the Court of Appeals for the Second Circuit.
`
`
`
`!
`
`5
`
`account was opened, less all amounts withdrawn from
`it over the lifetime of the account. But that legal error
`is grossly compounded in this case because the NIM
`has been applied to the SA account where investment
`decisions were not ceded to Madoff but maintained by
`the customer.
`Judge Nathan recognized the fundamental issue
`laid out by the Circuit of where “a customer’s account
`statement is an accurate or reliable representation of
`their ‘securities positions’” (App.l08a) noting that the
`Circuit was concerned about whether it was “per
`missible” to employ the NIM under § 78111(11) SIPA to
`“calculate sums owed” because doing so would “wipeQ
`out all events of a customer’s investment history except
`for cash deposits and withdrawals.” (App.l08a)
`Judge Nathan wrote: “without delving into the
`merits prematurely, the Court notes that, contrary to
`the Trustee’s contention, it may be the case that the
`most appropriate method for calculating the Defend
`ants’ net equity under SIPA is the Last Statement
`Balance method.” (“LSM”) (App.l07a)
`The LSM is dictated by SIPA and assures custom
`ers that they can rely on the statements they receive
`from their brokers to determine net equity and requires
`SIPC to pay customers claims from the customer
`protection fund based upon the amount the broker
`owes them, as reflected on their last statement. See 15
`U.S.C. § 78111(11).
`Still further, in her Opinion, written ten-vears
`after the Second Circuit defined net equity by resorting
`to the NIM for split-strike customers (App.ll6a, 131a
`fn7), Judge Nathan explained: “The question in this
`adversary proceeding is not merely which method is
`
`
`
`6
`
`2)
`
`most appropriate to determine the Defendants’ net
`equity, but whether the Net Investment Method, the
`method that the Trustee has already chosen, is a
`permissible method as a matter of law under SIPA.”
`(App.l08a) (emphasis in original)
`Finally, Judge Nathan noted that:
`1)
`“neither § 78fff-l, which covers the ‘Powers
`and duties of a trustee’ under SIPA, nor
`§ 78111(11), which defines net equity, discuss
`whether the Trustee has discretion for
`choosing how to calculate net equity, and if
`so, to what degree.” (App.llOa), and
`“Therefore, determining if the Trustee is
`permitted to use the Net Investment Method
`for calculating the Defendants’ net equity may
`very well require the court to hold as a matter
`of law for the first time the scope of a Trustee’s
`power to choose a method for calculating net
`equity under SIPA.” (App.llOa)
`Indeed, Judge Nathan’s conclusion is bolstered by
`the Second Circuit’s observation that Courts have
`been exceedingly reluctant to accord either Chevron
`deference or even the more limited Skidmore defer
`ence to SIPC itself, much less to a SIPA-selected, court-
`appointed trustee. (In re New Times Securities Services,
`Inc. 371 F.3d 68, p.76-83. (2004); Chevron U.S.A., Inc.
`v. Natural Res. Def. Council, Inc., 467 U.S. 837,104 S.Ct.
`2778 (1984); and Skidmore v. Swift & Co., 323 U.S.
`134, 65 S.Ct. 161 (1944)).
`In New Times, SIPC argued that other government-
`created corporations have been accorded “Chevron-
`style deference” (New Times at 78) but the Court in
`New Times cited key differences in several cases leading
`
`
`
`7
`
`it to conclude that: 1) SIPC did not have authority
`similar to those corporations, (New Times at 78), 2)
`SIPC, as a non “governmental agency” could not “take
`advantage of. .. implicit deference” (Id.), 3) “Congress
`deliberately limited the authority of SIPC relative to the
`SEC,” which was given “plenary authority to supervise
`SIPC,” even to the extent that the SEC could “require
`SIPC to adopt, amend or repeal any SIPC bylaw or
`rule, whenever adopted,” (Id. at 77), and 4) “[w]hatever
`SIPC’s expertise in overseeing SIPA liquidations,
`Congress did not intend for the Commission’s inter
`pretations of SIPA to be overruled by deference to the
`entity that was made subject to the Commission’s over
`sight.” (id.at 80) see 15 U.S.C. § 78ccc(e)(3) & § 78ggg(c)
`(1970)
`In Securities Investor Protection Corp. v. 2427
`Parent Corp, 779 F.3d 74 (2d Cir. 2015), the 2d Circuit,
`in a Madoff split-strike case, refused to accord Skidmore
`deference to even the SEC under circumstances where
`the agency sought an adjustment for inflation for Madoff
`customers absent a provision for interest adjustment
`under SIPA. In Parent Corp., the Circuit ruled that
`“SIPA’s text does not provide for an inflation adjustment
`to net equity.” (Id. at 79) In so holding, the Circuit’s
`adherence to plain text was manifest and deference to
`read beyond the plain text of SIPA was prohibited.
`Neither the District Court nor the Panel questioned
`the right of a Trustee to choose a method to calculate
`net equity. Further, neither considered whether the facts
`of the SA buy and hold account merited a different
`method (i.e. either the LSM or another method entirely
`as the Net Equity Decision held: “The two competing
`methods of calculating ‘net equity’ proposed by the
`parties to this litigation are the only two methods at
`
`
`
`8
`
`issue here. We do not hold that they are the only
`possible approaches to calculation of‘net equity’ under
`SIPA”) (App.l25a-fn5).
`If a Trustee is afforded deference to define net
`equity by selecting a method of calculating it outside
`both the plain meaning of the statute and the narrow
`(legally questionable) exception the Circuit made for
`schemes like split-strike, a SIPC Trustee will always
`impose the NIM because it minimizes the burden on
`the SIPC’s members to fund the SIPC customer fund. 3
`Ultimately, the cost of the failure would fall, not on
`SIPC’s members as Congress expressly intended, but
`rather on the very customers whose investments were
`intended to be protected.
`Judge Nathan’s question as to whether the NIM
`is even “a permissible method as a matter of law under
`SIPA” (App.l08a) is reflective of a split in opinion
`within the Circuit, as to the employment of the NIM
`in the first place, or under disparate factual circumstan
`ces than the split-strike customers in the Net Equity
`Decision.
`In extending the use of the NIM to the buy and
`hold SA account, the District Court misapprehended
`Judge Nathan’s Opinion by entirely overlooking her
`observation that the Second Circuit in the Net Equity
`Decision applied the principles of its interpretation of
`SIPA solely to “the BLMIS customers involved in that
`appeal, which were the ones for whom Madoff claimed
`
`3 At the time of the Madoff debacle, every brokerage firm in
`America, from Goldman Sachs to Charles Schwab paid a mere
`$150 premium towards the fund annually. Unimaginably, this
`fee covered an entire firm’s responsibility regardless of the
`number of customers or the level of business engaged.
`
`
`
`I
`
`9
`
`to have implemented the ‘split-strike conversion’
`investment strategy.” (App.l03a).
`The Panel herein inexplicably overlooked Judge
`Nathan’s Opinion, and the questions she raised. In
`fact, the Panel never even referenced her opinion in its
`order affirming the judgment of the District Court.
`It was error for the courts below to overlook the
`question of what it would mean for the NIM to be
`applied to a buy and hold account. The answer is clear:
`if a Trustee is permitted to claw back even under the
`circumstances of buy and hold, he would essentially
`be able to substitute SIPA’s statutory framework with
`a “cash-in/cash-out” approach, based on subjective
`personal views of fairness and theories of avoidance
`that have no foundation in the law.
`What would then emerge is either the very “one
`size fits all” (App.l39a) formula that the Circuit admon
`ished against, or ad hoc decisions and inconsistent
`methods to calculate net equity that would destroy
`investor confidence in the securities markets. Moreover,
`it would leave innocent customers of failed brokerage
`houses uncertain—not only as to whether they might
`collect monies from the SIPC customer protection fund
`—but also whether they themselves might be compelled
`to contribute to the customer protection fund, even in
`circumstances where the customer didn’t relinquish full
`investment authority to a broker but instead directed
`trading of securities in the account and authorized or
`directed the purchase of specific stock in the account.
`The Circuit in the Net Equity Decision stated:
`“Indeed, the Last Statement Method may be especially
`appropriate where—unlike with the BLMIS accounts
`at issue in this appeal—customers authorize or direct
`
`
`
`10
`
`purchases of specific stocks.” (App.l32a). In fact, the
`Panel recognized that Appellant: “effectively argued
`that the facts of his case satisfy Net Equity’s dicta
`regarding the kind of case in which the Last Statement
`Method would be appropriate because he is a customer
`that authorized or directed Madoffs purchase of
`specific stocks.” (App.6a-7a). Nevertheless, the Second
`Circuit upheld the use of the NIM in SA’s buy and hold
`account.
`By misquoting the Net Equity Decision and erro
`neously omitting critical words used by the Circuit
`therein, the Panel showed its misunderstanding of
`a vital aspect of the holding in that case. The
`Panel’s misquote from the Net Equity Decision was:
`“The Last Statement Method may be appropriate when
`securities were actually purchased by the debtor, but
`then converted by the debtor or where . . . customers
`authorize or direct purchases of specific stocks.”
`(App.6a) (Emphasis added)
`What the Net Equity Decision actually said was
`quite different: “Indeed, the Last Statement Method
`may be especially appropriate where—unlike with the
`BLMIS accounts at issue in this appeal—customers
`authorize or direct purchases of specific stocks.” (App.
`132a-133a) (Emphasis added) That language makes
`clear that the Circuit would have ruled that Appellant
`was entitled to have its claim allowed based upon the
`last statement it received from Madoff.
`As the Second Circuit is overwhelmingly the most
`likely venue to encounter litigation under SIPA because
`it is where the securities firms are located, it is very
`unlikely that a full split between Circuits might ever
`arise. That makes the intra-circuit split arising out of
`Judge Nathan’s 2021 opinion enormously significant.
`
`
`
`11
`
`Coupled with the massive number of customers who
`trade more than a hundred trillion dollars in equity
`markets annually,4 which makes the question presented
`in this matter one of national importance, the Court
`should grant this Petition for Certiorari.
`C. Statutory Background
`In 1970, Congress, enacted SIPA in response to the
`collapse of numerous brokerage houses at the end of
`the 1960’s. Congress divided the responsibilities for
`implementing SIPA between the SEC and a newly
`established body, the SECURITIES INVESTOR PROTECTION
`CORPORATION (“SIPC”), a nonprofit corporation con
`trolled by the securities industry. SIPC is not “an
`agency or establishment of the United States Govern
`ment . . . and Congress ‘deliberately limited’ its
`authority ‘relative to the SEC.’” (New Times at 76).
`SIPA was enacted to deal with an evolving market
`place where equities were no longer tangibly possessed
`by the customers. Instead, from then on, the only evi
`dence the customer had of the securities he had
`purchased, and his holdings, were trade confirmations
`and monthly account statements sent by their licensed
`broker.
`SIPA is a remedial statute enacted to promote the
`legitimate expectations of a customer, instill investor
`confidence, forestall the failure of brokerage firms,
`and provide protection for customers whose assets were
`lost resulting from the failures. (Securities Investor
`Protection Corp. v. Barbour, 421 U.S. 412, 414 (1975)).
`Nowhere in the record was it even contemplated
`that if a licensed broker committed fraud, a SIPA
`
`4 https://www.sec.gov/about/mission
`
`
`
`i
`
`12
`
`Trustee could turn up 30-years later and say that all
`the monies an individual withdrew exceeding what he
`deposited in those three decades needed to be turned
`over to SIPC.
`D. The 2011 Net Equity Decision established
`the use of the NIM to calculate Net Equity,
`but its holding was narrowly confined and
`limited to Madoff s split-strike scheme
`The Net Equity Decision permitting the use of
`the NIM in the narrowly confined circumstances of
`Madoff s split-strike scheme is inconsistent with the
`plain text of § 78111(11) which indicates that customers’
`claims be allowed for the balance on their last
`statement.
`The SIPA definition of 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—
`(i) all securities positions of such customer
`(other than customer name securities
`reclaimed by such customer); and . . .
`B) any indebtedness of such customer to the
`debtor on the filing date.”
`In the Net Equity case, instead of shielding all
`concededly innocent customers and good faith trans
`ferees from Madoffs brokerage failure, SIPC and its
`Trustee “advocated” (App.l31a, fn.7) for the disallow
`ance of all customer claims arising from investment in
`
`
`
`13
`
`the split-strike conversion strategy. The Trustee then
`sued all innocent customers of Madoff whose funds
`were invested in the split-strike strategy for alleged
`fraudulent transfers where these customers legally
`withdrew funds from their accounts over decades and
`paid short-term capital gains taxes on their investment
`returns.
`In ignoring the text of SIPA, the Circuit approved
`SIPC’s disallowance of the claims of all split-strike
`customers in determining each customer’s net equity.
`The Circuit recognized that the NIM was draconian
`because it “wipe(d) out all events of a customer’s
`investment history except for cash deposits and with
`drawals” (App.l32a). Nevertheless, the Second Circuit
`determined that it could be employed to protect the
`split-strike net-losers. A net-loser according to the
`Trustee is an individual who withdrew less money
`than he put into his account over the lifetime of the
`account. SIPC President Stephen Harbeck conceded
`the ad hoc nature of the Trustee’s approach to the NIM
`in this case when he stated shortly after the SIPC
`customer claim form was mailed out to thousands of
`Madoff customers on January 2, 2009: “We’ve modified
`our usual claim form to ask investors a question that’s
`unique to this case, which is how much money did
`you put in and how much money did you take out.”5
`Conversely, a net-winner according to the Trustee
`was an individual who withdrew monies exceeding
`his original investment and further deposits. In fact,
`the plain text of SIPA mentions neither net-winners
`
`5 Jan. 6, 2009, SIPC Chief Speaks Out, January 6, 2009 CNBC
`https://www.youtube.com/watch?v=gyywi9zp0qc.
`
`
`
`14
`
`ii)
`
`nor net-losers. Those terms were constructs established
`by the Trustee herein.
`Critically, the Second Circuit confined its decision
`by establishing key criteria for the NIM to apply:
`i)
`Its application was limited to the customers
`who “relinquished all investment authority”
`and invested in Madoffs scheme, his “split-
`strike conversion strategy.” (App.ll7a)
`It held that the NIM was confined to the
`“extraordinary facts” and circumstances
`surrounding split-strike and the split-strike
`customers. (App.l32a)
`iii) It held that its decision would be inappli
`cable in “more conventional cases” where a
`“customer’s last account statement will likely
`be the most appropriate means of calculating
`“net equity.” (App.l32a)
`iv) It held that powerful reasons for its ultimate
`decision was that split-strike trades were
`“rigged to reflect a steady and upward tra
`jectory in good times and bad.” (App.l31a)
`However, given that the NIM formula might result
`in the financial ruination of innocent victims of a
`crime who had already been devastated, the Circuit in
`dealing with the gravity of the situation:
`i) Noted that it expected that application of the
`Trustee’s method for calculating net equity
`to cases involving failed brokerage houses
`would be “rare.” (App.l32a)
`ii) Stated that “Indeed, the Last Statement
`Method may be especially appropriate
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