10 ... 23 78 ... bk-(L), 1 0-2676-bk(con),10-2677-bk(con), 1 0-2679-bk( con), 1 0-2684-bk( con), 1 0-2685-bk( con), 1 0-2687-bk( con), 1 0-2691-bk(con), 10-2693-bk(con), 10-2694-bk(con), 10-2718-bk(con),

10-2737-bk(con), 1 0-3188-bk(con), 10-3579-bk(con), lO-3675-bk( con)

QCourt of jfor tDe QCirruit

LEE MELLIS, JEAN POMERANTZ, BONNIE SAVITT,

Appellants, v.

BERNARD L. MADOFF INVESTMENT SECURITIES, LLC., SHANA D. MADOFF,

Appellee.

ON APPEAL FROM THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

APPELLANTS'BRIEF

STANLEY DALE COHEN, ESQ. Attorney for Appellants Lee Mellis, Jean Pomerantz and Bonnie Savitt 41 Park Avenue, Suite 4-F New York, New York 10016 (212) 686-8200 s@;Ytancohen.com

DlCK BAILEY SERVICE (212) 608·7666 (718) 522·4363 (516) 222·2470 (914) 682·0848 Fax: (718) 522·4024

1-800-531-2028

! : ; i

CORPORATE DISCLOSURE STATEMENT

In accordance with Rule 26.1 of the Federal Rules of Appellate Procedure, Appellants hereby state that each of the Appellants are either individuals or private entities that have no parent corporation and have never issued any stock.

Dated: New York, New York October 1, 2010

STANLEY DALE COHEN 41 Park Avenue, Suite 4-F New York, NY 10016 (212) 686-8200 Email: S@StanCohen.com Attorney for Lee Mellis, Jean Pomerantz and Bonnie Savitt

TABLE OF CONTENTS

TABLE OF AUTHORITIES .................................................................................. 3

STATEMENT OF SUBJECT MATTER AND APPELLATE JURISDICTION .............................................................. 5

QUESTIONS PRESENTED ................................................................................... 6

STANDARD OF REVIEW .................................................................•................... 7

ARGUMENT ............................................................................................................ 8

I. THE COURT EB..F..ED IN ITS INTERPRETATION OF SIPA WHEN IT AFFIRMED THE TRUSTEE'S UNILATERAL MODIFICATION OF THE DEFINITION OF "NET EQUITY" IN VIOLATION OF 15 USC §78ccc(b)(4)(A), SINCE THE TERM "NET EQUITY" IS PLAINLY DEFINED IN THE ENABLING STATUTE AND AMENDMENTS THERETO, AND CANNOT BE MODIFIED BY A TRUSTEE IN BANKRUPTY ACCORDING TO SETTLED CASE LAW ...................................................................................................... 8

A. The Term "NET EQUITY" Is A Defined Term Under 15 U.S.C. §781l1(11), As Such Neither The Trustee Nor SIPC May Adopt, Amend Or Repeal The Definition Of "NET EQUITY" ....................................................................................... 8

B. Case Law Has Recognized The Statutory Definition of "NET EQUITY" ................................................................................... 9

II. THE APPELLANTS, AS CUSTOMERS OF THE BROKER-DEALER, HAVE A LEGITIMATE EXPECTATION THAT THEIR STATEMENTS INDICATED THE VALUE OF THEIR SECURITIES AT THE TIME OF THE FILING AND SIPC WILL PAYACCORDING TO THOSE STATEMENTS .•..••.....••... 13

1

III. THE SIPC CONSTRUCTION OF "NET EQUITY" IS CONTRARY TO LAW, AND IS INEQUITABLE TO APPELLANTS AND OTHERS SIMILARLY SITUATED AND AS SUCH, SHOULD BE REVIEWED AND MODIFIED BY THIS COURT ON THE LAW AND IN THE INTERESTS OF ruSTICE? ................................................................................................ 22

A. SIPC, inequitably, changed its methods to avoid paying the amounts necessary under their own enabling statutes, amendments and rules ........................................................................... 22

B. SIPC's actions create a hardship for these Appellants: As the cash in/cash out method does not take into account differences between customer's status ........................•............••...•........ 32

IV. SIPC AND THE TRUSTEE'S METHODS ARE INEQUITABLE AND THE BANKRUPTCY COURT WAS IN ERROR IN ORDERING THAT "NET EQUITY" BE DEFINED BY CASH IN/CASH 0 UT ............................................................................................... 39

v. SIP A WAS INTENDED TO COVER SECURITIES EVEN IF THE BROKER-DEALER DID NOT ACTUALLY

PURCHASE THE SECURITIES FOR THE CUSTOMERS ..•....•.••.......... 48

CONCLUSION ...................................................................................................... 51

CERTIFICATE OF COMPLIANCE .................................................................. 53

APPENDIX I - Notices of Determination of Claim for Lee Mellis (IRA), Lee Mellis and Jean Pomerantz ............................................................................ 54

2

TABLE OF AUTHORITIES

Cases

Appleton v. First Nat 'I Bank of Ohio, 62 F. 3d 791, 794 (6th Cir. 1995) .......................................... 40 In re Adler Coleman Clearing Corp. 247 B.R. 51, 61 n.2 (B.S.D.N.Y. 1999) ................................ 10 In re Bernard L. Madoffinvestment Securities LLC, 424 B.R. 122 (Bankr. S.D.N.Y. 2010) ............ 5 In re Donald Sheldon & Co., Inc., 153 B.R. 661,667 (B. S.D.N.Y. 1993) ..................................... 31 In re Investors Ctr.Inc. 129 B.R. 339, 350 (Bankr. E.D.N.Y. 1991) ........................................ 23,24 In re New Times Sec. Servs., Inc. 463 F 3d 125, 128 (2d Cir. 2006) (New Times ll) ................. 19,21 In re New Times Securities Services, Inc. 371 F. 3d 68, 72 (2d Cir. 2004) ............................... passim In re Obenlleiss Sec., Inc., 135 B.R. 842, 847 n.l (B. N.D. Ill. 1991) ............................................. 50 SEC v. Goren, 206 F. Supp 2d 344 (E.D.N.Y. 2002) (No. 00-CV-970) .................................... 19,20 SIPC v. BDO Seidman, LLP, 49 F. Supp. 2d 644, 649 (SDNY 1999) ............................................. 10

Statutes

15 U.S.c. §78ccc(b)(4)(A) ..................................................................................................... 6, 7, 8,9 15 U.S.C. §78eee(b)(4) ....................................................................................................................... 5 15 U.S.C. §78fff(a) ........................................................................................................................... 30 15 U.S.C. §78fff-2(a) .......................................................................................................................... 9 15 U.S.C. §78fff-2(b) ................................................................................................................. 11,31 15 U.S.C. §78fff-2(c)(2) ................................................................................................................... 30 15 U.S.C. §78fff-3(a) ............................................................................................................ 30,31,40 15 U.S.C. §78fff-3(a)(I) ................................................................................................................... 17 15 U.S.C. §781Il(11) ........................................................................................................................... 8 28 U.S.C. 158 (d)(2) ....................................................................................................................... 5,6

Other Authorities

Federal Securities Laws Legislative History, 1933-1982, vol. IV, at 4642-4644 (1983) ................ 30 In re New Times Sec. Servs. Inc. 371 F 3d 68 (BEDNY 2000), hearing Transcript Stephen

Harbeck (at pages 37-38) .............................................................................................................. 25 New Times Trustee and SIPC at 7 n.6 .............................................................................................. 49 Notice of Trustee's Determination of Claim .............................................................................. 17,38 2 Restatement (Second) of Contracts § 282(1) at 386 (1981) .......................................................... 14 Rev. Proc 2009-20 ............................................................................................................................ 38 S. Rep. 91-1218, at 10-12 (1970) ..................................................................................................... 30

3

Rules

17 C.P .R. § 300.S01 (a) ..................................................................................................................... 24 17 C.P .R. § 300.S02(a) ..................................................................................................................... 24 SIPC's Series SOO Rules, 17 C.P.R. §§300.S00-300.S04 ................................................................. 49

4

STATEMENT OF SUBJECT MATTER AND APPELLATE JURISDICTION

This Appeal is submitted in support of Lee Mellis, Jean Pomerantz and

Bonita Savitt (the "Appellants") is based upon an erroneous ruling of the

Bankruptcy Court in which the Court below granted SIPC and its Trustee the right

to change the definition of "Net Equity" for its benefit and to the detriment of the

Appellants and many other similarly situated victims of the fraud of Bernard L.

Madoff.

This Appeal seeks review of the Bankruptcy Court Decision of March 1,

2010 and the March 8, 2010 Order of the Bankruptcy Court for the Southern

District of New York (Hon. Burton L. Lifland) (the "Bankruptcy Court") Special

Appendix 60-63 1. The Order was based upon a Memorandum Decision issued on

March 1,2010 reported as In re Bernard L. MadotfInvestment Securities LLC, 424

B.R. 122 (Bankr. S.D.N.Y. 2010). See SPA 7-59.

The Bankruptcy Court has jurisdiction pursuant to 15 U.S.C. § 78eee(b)(4).

On March 8, 2010, the Bankruptcy Court certified the Order for direct appeal to

this Court pursuant to 28 U.S.C. §158(d)(2). Appellants filed a Notice of Appeal

on March 31, 2010. On August 12, 2010 the Appellants filed Joinder in Joint

I The Special Appendix shall hereinafter be cited as "SPA"

5

Petition for Permission to Appeal Under 28 U.S.C. § 158(d)(2) and the Court

granted the petition on September 15,2010.

QUESTIONS PRESENTED

1. Did the Bankruptcy Court commit reversible error when it accepted a new

definition of "Net Equity" proffered by the SIPC Trustee, Irving H. Picard,

thereby allowing SIPC (Securities Investor Protection Corporation) to

benefit by reducing its obligations to the victims of the fraud of Bernard L.

Madoff despite the Congressional enabling statute, the Securities Investor

Protection Act ("SIPA") and the clear definition of "Net Equity" in clear

violation of 15 USC § 78ccc(b)( 4 )(A)?

2. Notwithstanding the existence of a Ponzi scheme, which was undiscoverable

to the S.E.C. the Appellants, or any of the experts who served as Trustees,

Brokers, and in all other capacities, over the course of decades, since the

Appellants had a Legitimate Expectation that their statements indicated the

true value of the real securities listed throughout their investment period, and

therefore that they owned those securities at the time of the filing, do the

prior dealings of the SIPC and public policy require that the Bankruptcy

Court be reversed so that the SIPC will advance funds in to the Appellants in

accordance with the final statements prior to the filing as adjusted to the date

of the filing?

6

3. Should SIPC and The Bankruptcy Court be ordered to accept the value of

the securities as set forth on the final monthly statement in accordance with

15 USC §78ccc(b)(4)(A) rather than to permit the Trustee in Bankruptcy to

create a new statutory scheme, and new definitions of value which were

never intended by the Legislature and would be inconsistent with prior SIPC

practice.?

4. The SIPC construction is inequitable to Appellants and others similarly

situated and as such should it not be reviewed and modified by this Court in

the interests of Justice?

STANDARD OF REVIEW

The Court reviews de novo the Bankruptcy Court's conclusions of law and

its application of law including its interpretation of SIPA. See In re New Times,

371 F. 3d at 75. ("We review de novo the District Court's conclusions of law,

including its interpretation of SIP A and the Series 500 Rules. To the extent that

Decision is based upon the Bankruptcy Court's factual findings, this Court reviews

those findings under a "clearly erroneous" standard.

7

ARGUMENT

Pursuant to Federal Rules of Appellate Procedure 28 (i), The Appellants

herein adopt and incorporate by reference herein the legal arguments presented to

this court in the Becker & Poliakoff Brief, the Davis Polk Brief, the Kleinberg,

Kaplan Brief, the Goodwin Proctor Brief and the MilberglLax Brief. The

Appellants reserve the right to file a reply brief and to orally argue the appeal.

I

THE BANKRUPTCY COURT ERRED IN ITS INTERPRETATION OF SIPA WHEN IT AFFIRMED THE TRUSTEE'S UNILATERAL

MODIFICATION OF THE DEFINITION OF "NET EQillTY" IN VIOLATION OF 15 USC §78ccc(b)(4)(A), SINCE THE TERM "NET

EQillTY" IS PLAINLY DEFINED IN THE ENABLING STATUTE AND AMENDMENTS THERETO, AND CANNOT BE MODIFIED BY A

TRUSTEE IN BANKRUPTY ACCORDING TO SETTLED CASE LAW.

A. THE TERM "NET EQUITY" IS A DEFINED TERM UNDER 15 U.S.C. §78lU(11), AS SUCH NEITHER THE TRUSTEE NOR SIPC MAY ADOPT, AMEND OR REPEAL THE DEFINITION OF NET EQillTY

In defining the term, "Net Equity", 15 U.S.C. §781l1(11) provides in relevant part that:

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 (other than customer name securities reclaimed by such customer); minus

8

(B) any indebtedness of such customer to the debtor on the filing date; plus

(C) any payment by such customer of such indebtedness to the debtor which is made with the approval of the trustee and within such period as the trustee may determine (but in no event more than sixty days after the publication of notice under section 78fff-2 (a) of this title.

In determining net equity under this paragraph, accounts held by a customer in separate capacities shall be deemed to be accounts of separate customers.

Since it is a defined term, SIPC has no power to change the

statutory definition of "net equity".

15 USC §78ccc(b)(4)(A) sets forth that

SIPC shall have the power. .. to adopt, amend and repeal, by its Board of Directors, such rules as may be necessary or appropriate to carry out the purposes of this chapter, including rules relating to ... the definition of terms in this chapter, other than those terms for which a definition is provided in section 78lll of this title.

B. CASE LAW HAS RECOGNIZED THE STATUTORYDEFINITION OF NET EQUITY

The term "net equity" is well settled under statutory provisions which have

been determined many times in Courts to be the only definition of "net equity".

Thus, the formula to be applied to calculate "net equity" is settled under case

law and, even the existence of the largest Ponzi scheme in history should not alter

the definition of "net equity".

9

Case law determined by this Court and others have clearly and consistently

maintained the statutory definition of '"net equity".

Each customer's '"net equity" is defined as:

The dollar amount of the account or accounts of a customer, to be determined by 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 corrected for any indebtedness of such customer to the debtor on the filing date.

In re New Times Securities Services, Inc. 371 F. 3d 68, 72 (2d Cir. 2004); SIPC v. BDO Seidman, LLP, 49 F. Supp. 2d 644, 649 (SDNY 1999).

As Defined by SIP A, '"net equity" is the amount that the broker would have owed a customer had it liquidated all the customer's holdings on the date SIPC filed for a protective decree, less any outstanding debt the customer owed to the broker." In re Adler Coleman Clearing Corp. 247 B.R. 51,61 n.2 (B.S.D.N.Y. 1999)

Not only is the definition of "net equity" settled under Federal case law, but

the practical day-to-day application of this term to the interchange between

customers and Broker-Dealers IS settled as well.

Thus, it has become settled practice that "Net Equity" is calculated from the

last statement received by a customer from a BrokerlDealer. As such, Net Equity

is the difference between what the debtor owes the customer and what the

customer owes the debtor on the date the SIP A proceeding is filed. Since none of

the Appellees have power to make a new definition of ''Net Equity" the

10

Bankruptcy COUli erred by permitting the Trustees to recreate a well settled and

defined term.

While at first blush, it may have seemed appropriate for the Bankruptcy

Court to take into consideration the existence of the Ponzi scheme and seek a

solution to this dilemma which it determined to be equitable. However, in fact, by

rejecting account statements as the best and proper evidence of the securities

positions held in their accounts, the Bankruptcy Court has improperly modified the

law and misinterpreted prior rulings of the Second Circuit Court. The problem is

simply that the Bankruptcy Court followed the logic of this Court in New Times 1

as it related to "securities positions" which were, in fact, nonexistent. The

Bankruptcy Court below saw the fictitious transactions as the same as creating

securities positions in nonexistent securities. That is not the holding in New Times,

which had two classes of victims. In that case one set of victims had securities

positions that were held in named publicly traded funds, and as to those securities

positions the claimants were given SIPC advances. The second group had, on their

statements, holdings in a fictitious fund, and there this court expressed there was

no "legitimate expectation" that those holdings were real and therefore no right to

SIPC advance for "securities" held.

Based upon this error, the Bankruptcy Court ruled that net equity must be

determined in accordance with SIP A section 78fff-2(b), which requires that the

11

Trustee discharge net equity claims insofar as such obligations are ascertainable

from the books and records of the debtor or are otherwise established to the

satisfaction of the Trustee. (SPA-22). While, to the Bankruptcy Court it may have

seemed that it was fashioning an appropriate remedy, that Court was wrong on the

law and on the application of the law to the facts.

Under Series 500 Rules, whether a claim is treated as one for securities or cash

depends not on what is actually in the customer's account but on what the

customer has been told by the debtor in written confirmations. It is not the

fictitious transactions that defines the claim, but the "securities positions" that the

claimant understood he had that defines the customer's net equity.

F or all of the above reasons, the Bankruptcy Court was wrong in allowing

the SIPC and its Trustee to use any other method for calculating "Net Equity"

other than the statutory basis. And as such, the Appellants should receive the SIPC

advance for the values listed in their last statements prior to the filing date, to the

maXImum extent as allowed under the SIPA statute, to wit: $500,000.00 per

account.

12

POINTH

THE APPELLANTS, AS CUSTOMERS OF THE BROKER-DEALER, HAVE A LEGITIMATE EXPECTATION THAT

THEIR STATEMENTS INDICATED THE VALUE OF THEIR SECURITIES AT THE TIME OF THE FILING AND THAT SIPC WILL PAY ACCORDING TO THOSE STATEMENTS

Even though Bernard L. Madoff Investment Securities LLC, the Broker

Dealer, committed a massive fraud over what appears to be a lengthy time period,

by creating the largest Ponzi Scheme known to man, the Appeliants and their

advisors were not able to discover it, nor was the S.E.C. able to discover it, despite

investigations in usual course and investigations in response to allegations, so their

expectations that the statements they received over the course of 15 plus years,

were accurate was a fair and reasonable expectation.

The statements between a broker and its customer are to be relied upon as a

basis of commerce. Without such reliance, there would be no understanding of

holdings and reciprocal rights and obligations. The Restatement of Contracts

defines An Account Stated

(1) An Account Stated is a manifestation of assent by debtor and creditor to

a stated sum as an accurate computation of an amount due the creditor.

(2) The account stated does not itself discharge any duty but is an admission

by each party of the facts asserted and a promise by the debtor to pay

13

according to its terms. 2 Restatement (Second) of Contracts § 282(1) at 386

(1981).

It is that reliance on statements that is codified by the statutes of SIP A and

its expressions of "legitimate expectations" and ratified by courts indicating the

importance of relying on account statements.

From the outset, all of the accounts of the Appellants were funded with

substantial investments, enough to fund the purchase of securities positions as

reported on their statements. The Trustee, in creating its Notice of Determination

that the Appellants were not entitled to any recovery in this SIPC liquidation

admitted as much by attaching a chart of investments and withdrawals. (see

Appendix 1, attached hereto and made a part hereof.)2

Over the years of these investments from the early 1990's to 2008 the American

economy went through explosive growth, especially in the securities markets.

There is nothing in the business methods of Bernard L. Madoff Investment

Securities, LLC ("BLMIS") or in the statements that were investigated and

approved by SEC and others that would show there was anything other than a

reasonable expectation that what the statements showed was what the reality is

over the course of all the years. However, the Bankruptcy Court determined,

contrary to fact, and without basis, that there was not proper initial investment, and

2 The Notice of Determination by Trustee as to all three accounts of these Appellants are attached. However, they are not accurate representations of deposits and/or withdrawals.

14

, , '

therefore based upon that false finding, followed the Trustee's argument that,

therefore there was not a legitimate expectation that the securities positions set

forth on each statement was accurate. This is contrary to fact and therefore

contrary to the statute and precedent of case law.

Case law (discussed herein) has honored those expectations in the past as

has SIPC, on numerous occasions, and claimants have, throughout the decades

since SIPA was enacted, been advanced the money (to the SIPC limit)

notwithstanding the existence of a fraud or because securities were in fact never

purchased. This has always been based upon the statutory construction that it was

important for consumer confidence in the markets to honor a customer's legitimate

expectations. Counsel for the Trustee and SIPC attempt to suggest that fraud is an

exception and does not get paid by SIPC, all cases upon which they rely are

distinguishable in facts from the matter at bar, and are addressed directly in other

briefs for other appellants.

In the case at bar, the fraud was maSSIve and because of SIPC' s dues

structures and other business decisions made by its Board of Directors, SIPC's

treasury may be stretched to pay the full amount of claims that should be paid, and

so SIPC, and its Trustee, have determined that it must avoid its plain obligations

and found some construction to allow it to do that. But this Court cannot allow for

that, as such would make the Madoff victims, victims once agam.

15

Series 500 Rules provides that a customer's "legitimate expectations" based

on written confirmations of transactions, ought to be protected. See Rules of the

Sec. Investor Prot. Corp., 53 Fed. Reg. 10368-69 & n.3 (Mar. 31, 1988).

Under the Series 500 Rules, whether a claim is treated as one for securities

or cash depends not on what is actually in the customers' account but on what the

customer has been told by the debtor in written confirmations.

In this case the Claimants should be treated as having claims for securities

because the confirmations and account statements that they received from the

Debtors stated that the Claimants held securities in their accounts. Br. For Amicus

Curiae SEC at 8 in In re New Times 371 F .3d. 68 (2nd Cir. 2004) (hereinafter

referred to as New Times 1), That panel of this Circuit Court found the distinction

between the customers who deposited money to purchase real securities and were

allowed claims based on the value of the securities on the filing date, consistent

with what was shown on their account statements and the claimants who had

statements showing they invested in a bogus fund that did not exist and therefore

did not have a legitimate expectation of owning securities. (emphasis added)

Contrary to the SIPC position in New Times, in which SIPC gladly paid

advances to customers who had holdings in "real securities", SIPC, in the case at

bar, attempts to argue a different position. SIPC suggests that the Appellants and

similarly situated customers of BLMIS may be holding "real securities" but not

16

based upon "real transactions" and therefore cannot have a legitimate expectation

as to what was in their accounts because of the fraud upon them. The Trustee

premised the determination that Appellants were not entitled to SIPC protection by

stating that "no securities were ever purchased for your account" (See Notice of

Trustee's Determination of Claim attached as Appendix 1). As set forth by this

Court in New Times i, After reviewing the language of the statute, its purposes of

protecting investors and inspiring confidence in the securities markets, and the

specific history surrounding the drafting of the relevant language found in section

9(a)(1) of SIPA, 15 U.S.C. §78fff-3(a)(1), the Court found that a customer's

"legitimate expectations" based on written confirmations and statements ought to

be protected. The New Times 1 Court made it clear that the crucial fact is that

some claimants invested in funds that never existed. That difference has not been

overcome by SIPC in this matter. They say that the transactions never existed and

that therefore everything was fictitious. This is just not the law. In New Times 1,

investors who were misled by Goren to believe that they were investing in mutual

funds that in reality existed were treated much more favorably. Although they

were not actually invested in those funds-because Goren never executed the

transactions-the information that these claimants received on their account

statements mirrored what would have happened had the given transactions been

executed. As a result, those customers were deemed eligible to receive up to

17

( ,<

$500,000 in SIPC advances. The difference was that, if the real securities

investors were checking on their mutual funds, they would have been able to

confirm the existence of those funds and tracked the funds' performance against

the account statements. The claimants who had been receiving statements showing

they were in a fictitious fund, could not have followed the values no matter what

due diligence could have been involved.

In the case at bar, the victims had experts review the statements and even the

United States Government's agency, the SEC, involved itself, several times, in

reviewing the business operations of the Debtor, and found no wrongdoing

throughout the years. Therefore, the claims of the Appellants, based on the last

statement, were in fact, based upon the legitimate expectations of the claimants, as

for more than a decade all statements indicated the investments held and the

expectations that such positions were there, was reasonable and legitimate.

The New Times 1 court also found that because the claimants directed that

the money they placed with the Debtors be used to purchase securities-and,

importantly, because they received confirmations and account statements reflecting

such purchases-they are not the types of cash depositors envisioned by the

drafters of the "claims for cash" provision. 371 F 3d. 68

In 2006, a different Second Circuit panel considered related issues and

found, once again, "it is a customer's legitimate expectations on the filing

18

0

date ... that determines the availability, nature and extent of customer relief under

SIPA." In re New Times Sec. Servs., Inc. 463 F 3d 125, 128 (2d Cir. 2006) (New

Times 11). The Bankruptcy Court relied on language in New Times 11, however,

that dicta from the 2d Circuit was misapplied by the Bankruptcy Court, in that the

Second Circuit court was talking about customers who had been informed that they

had invested in imaginary securities and therefore the fictitious paper profits were

not within the customer's legitimate expectations. This is even made more clear

when reviewing both SIPC's stance and the New Times trustee valuing Existent

Securities customers' claims in accordance with the statutory definition of net

equity even when those claims included mutual fund shares that were purchased

through "dividend reinvestments" despite the fact that since the initial securities

had never been purchased, the customers had received no dividends to reinvest.

Specifically,

[I]nvestors who believed that their accounts held shares of mutual funds that actually existed (but were never purchased for their accounts) are having their claims (both as to shares of mutual funds never purchased by Goren and shares shown in customer statements as purchased through dividend reinvestment) satisfied by the Trustee up to the statutory maximum of $500,000.

Claimants' Joint memo Of Law in Opposition to Joint Motion of Trustee and

SIPC for Order Upholding Determinations at 3, SEC v. Goren, 206 F. Supp 2d 344

(E.D.N.Y. 2002) (No. 00-CV-970).

19

[W]hereas the Trustee has disallowed that portion of the claim of [the non-existent securities] investors representing shares of [the Non-existent Securities] purchase through dividend reinvestment, the Trustee has allowed that portion of the mutual fund investors' claims [i.e. «Existent Securities" investors claims] as represents shares of such mutual funds purchased by them through dividend reinvestment.

Limited Objection to Trustee's Determination of Claim at 6 nA, SEC v.

Goren, 206 F. Supp. 2d 344 (E.D.N.Y 2002) (No. 00-CV-970). SIPC and the

Trustee described their method in the New Times liquidation:

In every case [of an 'existent security' customer], the Trustee has been able to identifY the actual mutual fund in question by cross-checking the information supplied by Goren on the customer statements, including share price information, with publicly available information and then been able to purchase that security.

Joint Mem. Of Law in Support of Trustee's Motion for an Order Upholding

Trustee's Determinations with Respect to Claims Filed for Investments in Non-

Existent Money Market Funds ... , SEC v. Goren, F. Supp. 2d 344 (E.D.N.Y. 2002)

(No. 00-CV-970). They further stated that where customers' statements reflected

securities positions in closed mutual funds, "the trustee gave the customers cash

equal to the filing date values of the closed mutual funds." Reply Mem. In Further

Support of Trustee's Motion for Order Upholding Determinations at 20, S.E.C. v.

Goren, id.

Further, in that same matter the SEC filed an amicus curiae brief, in which

they gave the underlying reasoning for the Trustee and SIPC position stating "[0 ]ur

20

, /'

VIew [is] that when possible, SIP A should be interpreted consistently with a

customer's legitimate expectations based on confinnations and account

statements." Br. of the SEC, Amicus Curiae, In Partial Support of the Position of

Appellants and In Partial Support of the Positions of Appellees ("SEC Amicus

Curiae Brief') at 13, New Times J (No. 02-6166).

Then in New Times 11, SIPC stated in its brief that:

Reasonable and legitimate claimant expectations on the filing date are controlling even where inconsistent with transactions reality. Thus, for example, where a claimant orders a securities purchase and receives a written confirmation statement reflecting that purchase, the claimant generally has a reasonable expectation that he or she holds the securities identified in the confinnation and therefore generally is entitled to recover those securities (within the limits imposed by SIPA), even where the purchase never actually occurred and the debtor instead converted the cash deposited by the claimant to fund that purchase ... This emphasis on reasonable and legitimate claimant expectations frequently yields much greater 'customer' protection than would be the case if transactional reality, not claimant expectations, were controlling, as this Court's earlier opinion in this liquidation well illustrates.

Br. of Appellant SIPC, available at 2005 WL 5338148 (Dec. 27, 2005) at 23-

24 (Citing New Times) ( emphasis added). SEC, SIPC, its Trustee and this Court all

recognized that it is "claimant expectations," rather than "transactional reality" that

controls.

The change in SIPC position is based upon a need to protect its membership,

without legal authority and is, at the very least, inequitable to Appellants, the

similarly situated victims of BLMIS, and all future investors who rely on

21

statements and allow a Broker/Dealer to invest in street name. In New Times, there

was no issue about those customers with real securities receiving the SIPC

advance. SIPC "gladly" paid customers, whose statements showed Existent

Securities that were never purchased, their full claims, even if the actual securities'

value had "triple[ d]". Here, the Trustee refuses to recognize the Customers'

identical claims based upon their legitimate expectations of what the final

statement indicated.

The Appellants, as customers, had legitimate expectations that they owned

real securities. They could have no other expectation, based upon the trade

confirmations and account statements they received. Thus, SIPC must employ the

same method used in New Times and honor Customer claims in the amount of their

last statement balance as that is what the statute requires.

POINTllI

THE SIPC CONSTRUCTION OF "NET EQUITY" IS CONTRARY TO LAW, AND IS INEQUITABLE TO APPELLANTS AND OTHERS SIMILARLY SITUATED AND AS SUCH, SHOULD BE REVIEWED

AND MODIFIED BY TillS COURT ON THE LAW AND IN THE INTERESTS OF JUSTICE?

A. SIPC, inequitably, changed its methods to avoid paying the amounts necessary under their own enabling statutes, amendments and rules.

The mechanisms involved In the underlying consolidated

liquidation/bankruptcy proceeding indicate that the Appellees have used their best

22

effOlis to intentionally and inequitably change their own methods and interfere

with and contravene the express language of the Statute, amendments and

legislative history in order to deny coverage to as many customers of Bernard L.

MadoffInvestment Securities LLC ("BLMIS") as possible.

The Trustee, Irving Picard, has been designated Trustee 111 prIor SIPC

liquidation proceedings. So while it would seem that his designation should have

helped with the fast and smooth liquidation proceedings, in actuality, he has been

an advocate for SIPC and an adversary against claimants for the consistent

purposes of avoiding and delaying payments to claimants, without the need for

adversary proceedings and discovery, and avoiding statutes and limitations.

It seems more than ironic, based upon the claims and determinations in that

case, that this Trustee, Irving Picard would not use the last statements as the proof

of ownership. Almost twenty years ago, In the matter In re Investors Ctr. Inc., Mr.

Picard, the Trustee (selected by SIPC, there and in this case) took exception to the

claimants view that they held cash, not securities, because their last statements

indicated that the company had sold the securities (even though the firm had not

executed the sales). The positions were taken because the securities had lost their

value at the time of the filing, so the Trustee wanted to use the value of the

securities so he would be able to pay little if any value in that SIPC liquidation

proceedings. The Court ruled, under SIPC's rules it is not performance that is

23

critical, but receipt of written confirmation of sale. This is clear from the Rules

themselves. In re Investors Clr. Inc. 129 B.R. 339, 350 (Bankr. E.D.N.Y. 1991).

SIPC promulgated the Series 500 Rules, which govern whether a customer

has a claim for cash (eligible for a $100,000.00 advance from SIPC) or a claim for

securities (eligible for a $500,000 advance from SIPC). Rule 502(a) provides that

"where the Debtor held cash in an account for a customer, the customer has a

'claim for securities' if the Debtor has sent a written confirmation to the customer

that the securities in question have been purchased for or sold to the customer's

account." 17 C.F.R. § 300.502(a). conversely, where [the debtor] held securities in

an account for a customer, the customer has a 'claim for cash' if the Debtor has

sent written confirmation to the customer that the securities in question have been

sold for or purchased from the customer's account. 17 C.F.R. § 300.501(a). In

that matter claimants were attempting to obtain a determination that they held cash,

rather than securities, based upon those written confirmations of sale of the

securities. For purposes of avoiding an obligation that SIPC would have to pay to

those claimants the Trustee argued that the sale had not yet been executed so

therefore the securities were still owned. The court ruled against him clearly

stating, that the customer's legitimate expectation was best expressed in the written

confirmations and statements that had been sent, and that the Trustee must use the

24

last written information and accept the value therein. Having learned that lesson,

he tries a different approach here, trying still to avoid heeding the lesson.

But the Trustee was retained by SIPC because they could rely on him to

attempt to find a way to avoid paying the vast array of victims in the Madoff

matter. Certainly SIPC could have selected Mr. Giddens, the same trustee as they

had used in New Times, but that Trustee would have just paid the values that were

on the last statements because the statements showed real securities positions,

SIPC needed a craftier trustee.

Even SIPC President, Stephen Harbeck understood that SIPC advances were

to be made, as per his testimony in New Times in the Eastern District Bankruptcy

Court:

Harbeck: Even if they're not there. The Court: Even if they're not there? Harbeck: Correct. The Court: In other words, if the money was diverted, converted-Harbeck: And securities were never purchased. The Court: Okay Harbeck: and if those positions triple, we will gladly give the people their security positions.

In re New Times Sec. Servs. Inc. 371 F 3d 68 (BEDNY 2000) hearing

Transcript Stephen Harbeck (at pages 37-38).

In a brief submitted to the Second Circuit in 2005, SIPC represented that its

policy was to honor the legitimate expectations of investors, even where the broker

never purchased the securities. SIPC wrote:

25

Reasonable and legitimate expectations on the filing date are controlling even where inconsistent with transaction reality. Thus, for example, where a claimant orders a securities purchase and receives a written confirmation statement reflecting that position, the claimant generally has a reasonable expectation that he or she holds the securities identified in the confirmation and therefore generally is entitled to recover those securities (within limits imposed by SIPA), even where the purchase never actually occurred and the debtor instead converted the cash deposited by the claimant to fund that purchase. This emphasis on reasonable and legitimate claimant expectations frequently yields much greater 'customer' protection than would be the case if transactional reality, not claimant expectations, were controlling, as this Court's earlier opinion in this liquidation well illustrates.

Br of Appellant SIPC, available 2005 WL 5338148 (Dec 27, 2005) at 23-24

(citing New Times 1).

Even as recently as December 16, 2008, the day after the commencement of

this case, Josephine Wang, counsel for SIPC, stated:

If clients were presented with statements and had reason to believe that the securities were in fact owned, the SIPC will be required to buy these securities in the open market to make the customers whole up to $500,000.00 each. So if a Madoff client number 1234 was given a statement showing they owned 1,000 Goog shares, even if a transaction never took place, the SIPC has to buy and replace the 1,000 GOOG shares.

December 16,2008 Insiders Blog, www.streetinsider.comIInsiders)

+Blog+Role+In +Madoff-of-all-scams+Could+Save+the

+Market/4343249html.

Sometime after that announcement, SIPC came to the conclusion that it

needed to change its method to avoid making payments to all customers and found

26

{) 0 (

a new construction to avoid paying most of the BLMIS victims and while not a

correct reading of the law, it was used to deny claims as it protected the members

of SIPC despite being inequitable to the victims of the BLMIS fraud.

The Trustee has attempted to use vast resources of SIPC money to retain

attorneys, forensic accountants and many others to create this attempt to modify

the positions of SIPC for its benefit. But such actions are inequitable to the

customers on many levels.

It is of note that, in this liquidation proceeding that SIPC modified its claim

forms and changed its website. The claims form first required the claimants to

attach their final statement and fill in blanks about their net equity claim from that

November 30, 2008 statement. Thereafter, when the appellants sought payment

under the Trustee's hardship application process, they had to fill in cash/in and

cash out information and attach checks and other deposit information from decades

ago. Never before had any SIPC liquidation required a claimant to inform the

Trustee of the amounts of investments and withdrawals over the course of a period

of decades. President of SIPC, Harbeck, admitted this change in January, 2009

when he announced: "We have 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 did you take out." (Jan. 6, 2009, CNBC). He also stated that "[O]ne of

the first things we did ... was to modify our standard claim form to make sure that

27

: r:. ..

we asked the claimants themselves what evidence they had in terms of money in

and money out" (Jan 5, 2009, Stephen Harbeck, testimony before House Financial

Services Committee). Of importance is the factor that in going back for almost 20

years there are little to no records maintained and therefore, the Appellants were

unable to absolutely prove (or disprove) the cash in/cash out amounts set forth in

the Trustee's Notice of Determination to the Appellants. (See Appendix "1 ",

which indicates that the amounts, in all three of the Appellant's accounts, go back

to the early 1990's.) Originally, it was explained that the process for the hardship

application was needed to verify that the claimants had, in fact put money into

Madoff. Only later was it learned that the need for this form was to use the

information against the claimants.

But of equal, if not greater importance in indicating that SIPC deviated from

its usual course in its way of handling the Madoffliquidation as versus the 39 years

of liquidations it handled previous to the instant matter, SIPC changed its website

and brochure as to claims. SIPC had always led investors to believe that SIPC

insurance was based upon their last brokerage statement:

In the unlikely event your brokerage firm fails, you will need to prove that cash and/or securities are owed to you. This is easily done with a copy of your most recent statement and transaction records of the items bought or sold after the statement.

See SIPC/SIFMA brochure Understanding Your Brokerage Account

Statements, at 5, SIPC Website 2009.

28

After all those years upon which investors relied upon the promise that SIPC

insurance was based upon the investors' last statement, it is inequitable that SIPC

now changes its rules, simply because they do not want to pay all Madoff

claimants which could require use of a line of credit from SEC and/or an increase

in the assessment on its broker/dealer members that SIPC may need in order to

fund SIPC liabilities here and in the future.

It is also inequitable that SIPC has violated its mandate to "'Promptly" pay

customer claims. Congress made absolutely clear its intent to minimize the

devastation to customers of an insolvent broker/dealer through prompt payment of

SIPC insurance.

SIP A requires that SIPC ··promptly" pay SIPC insurance to investors of a

liquidated brokerage firm:

GENERAL PROVISIONS OF A LIQUIDATION PROCEEDING

(a) PURPOSES

The purposes of a liquidation proceeding under this chapter shall be-

(l)As promptly as possible after the appointment of a trustee in such

liquidation proceeding, and in accordance with the provisions of this

chapter-

29

(A)To deliver customer name securities to or on behalf of the customers

of the debtor entitled thereto as provided in §78fff-2(c)(2) of this title;

and

(B)To distribute customer property and (in advance thereof or

concurrently therewith) otherwise satisfy net equity claims of

customers to the extent provided in this section.

See 15 USC §78-fff-2(c)(2)as well as 15 USC §78fff-3(a).

The Senate committee, at the time of creating the SIP A statutes and

rules, reported

The committee also believes that it is in the interest of customers of a debtor that securities held for their account be distributed to them as rapidly as possible in order to minimize the period during which they are unable to trade and consequently are at the risk of market f1 uctuati ons.

Because of the difficulties involved in filing proofs of claims ... the bill provides in general for the trustee to make payments and deliveries based upon the books and records of the debtor or when otherwise established to his satisfaction, without requiring customers to file proofs of claim.

See S. Rep. 91-1218, at 10-12 (1970), reprinted in Federal Securities

Laws Legislative History, 1933-1982, vol. IV, at 4642-4644 (1983).

The Courts have taken heed of these promulgated rules.

Among the stated purposes of a liquidation proceeding is to make customers whole "as promptly as possible after the appointment of a trustee, 15 U.S.C.A. §78fff(a), who is required to 'promptly discharge' all obligations of the debtor to a customer relating to

30

securities." 15 U.S.C.A. §78fff-2(b). SIPC fund moneys must be advanced to the trustee up to certain limits "'to provide for prompt payment and satisfaction of. .. claims of customers." 15 U.S.C.A. §78fff-3(a). Congress has commanded customer damages to be repaired promptly. In re Donald Sheldon & Co., Inc., 153 B.R. 661, 667 (B. S.D.N.Y. 1993)

In this proceeding, SIPC and its Trustee have not acted in good faith to the

detriment of the Appellants and others similarly situated.

As to Appellants Mellis and Pomerantz, they have lost their retirement

holdings and as such they have suffered emotionally as well as financially. Mr.

Mellis has had to borrow money from friends and then had to sell his car in order

to pay his rent and have food. He has since sold his Florida apartment for rather

discounted value just to have some money to live his day to day life. All while his

personality has changed because of his new found insecurity at 88 years of age.

So not only did SIPC not pay the advances due promptly, now it has found a

method to compute net equity so as to make the Bankruptcy Court below believe

that these appellants, and other customers of BLMIS, who have lost their life

savings are not entitled to recovery of their retirement assets, and moreover might

be sued for recovery of their surplus takings. SIPC's conduct in changing its

methods to delay and avoid paying the amounts necessary under their own

enabling statutes, amendments and rules is at the least inequitable to the Appellants

31

but has been conducted to benefit the members of SIPC to the detriment of

Appellants (and all others similarly situated).

B. SIPC's actions create a hardship for these Appellants As the cash in/cash out method does not take into account differences between customer's status.

The Appellant Lee Mellis is an 88 year old man, who retired many years

ago. He began investing his retirement funds with the Broker Dealer in 1992, as

well as his personal funds in a separate account.

Since he has been more than 70 for the entirety of the holding period of his

retirement funds with BLMIS, he has been statutorily mandated to meet required

minimum withdrawals, in accordance with Internal Revenue Code and Rules, and

as part of those rules he has had to pay taxes on those withdrawals as income. As a

law abiding citizen he followed those mandates and withdrew sums from the

Madoff accounts in accordance with that which he was legally required each year.

Again, well-settled law has been flouted by the SIPC and now Mr. Mellis finds

himself a victim of SIPC's new method of computing his expected recovery so as

to determine that he has no entitlements from SIPC or in this liquidation

proceeding. That is inequitable to him and other customers of his age, as other

customers under age 70 and a half, did not have required minimum withdrawals

32

over some or all of the time. Therefore, the Trustee's methods are inequitable as

to the determination with respect to Mr. Mellis' IRA account.

The trustee's mechanism is also inequitable because of the difference

in payments and consequences for wealthier customers. A wealthier customer may

not have needed to access the retirement accounts from Madoff. If an investor had

other accounts he could have lived without withdrawing from his Madoff accounts,

even if mandated by IRS to withdraw funds from a retirement account, as that

wealthier investor may have had the ability to withdraw mandated funds from

other funds, in which case, he would now have a claim in accordance with SIPC's

cash in/cash out formula. As such that wealthier customer would now receive full

amount of SIPC funding.

The consequences are different for just slightly younger customers. Assume

two customers. Customer A, invested and started taking out money 10 years

before the bankruptcy and Customer B, invested five years before the bankruptcy,

and started to withdraw. Each invested $1,000,000 on their first day. Each

customer withdrew $100,000 per year. Over the course of the years, Customer A

withdrew $1,000,000. Customer B only withdrew $500,000. Therefore, customer

A gets zero according to the Trustee and Customer B gets the full $500,000 SIPC

advance.

33

Customer A-I0 yrs of withdrawals Customer B-5 yrs of withdrawals

Investment made 1998 Investment made 2003

Initial investment $1,000,000. Initial Investment $1,000,000.

Withdrew $100,000 per year Withdrew $100,000 per year

Total withdrawals: over 10 years Total Withdrawals: over 5 years

$1,000,000 $500,000

SIPC CASH IN/CASH OUT SIPC CASH IN/CASH OUT

Advance required $0 Advance required $500,000

The example above also indicates another inequity. A review of those

circumstances shows that the SIPC approach also takes away any return on

investment during those years. It assumes that 5 years into the 10 year investment

Customer A had earned no income and had used half of his principal (all without

knowing it). That is not customer A's legitimate expectation based upon

statements received each month and it also is not reasonable to believe that in 2010

he can be told that in 2003 he had used half his principal and by 2008 he had

nothing left. Yet that is what SIPC is trying to establish. It is inequitable,

unreasonable and not a legitimate expectation.

34

Mr. Mellis deposited $132,000 into his Madoff account just weeks before

the failure of BLMIS was announced. According to the SIPC methods that money

was lost. The Trustee would have it that this particular amount was not invested

but rather he argues that Mr. Mellis was repaying an obligation he owed. That is

contrary to any legitimate expectation and beyond all reason. No reasonable man

would have invested that money if it was possible to learn that thereafter, a

governmental protective service might determine that the money was owed and

now it was gone. This despite the indications on the BLMIS statements and

confirmations that such amount was invested for the Appellant in real securities as

an addition to the amounts that BLMIS held for Mr. Mellis. In this instance, SIPC

is the beneficiary of Mr. Madoffs fraud. Mr. Mellis was given no return on that

particular amount, but more importantly, if he had invested that money anywhere

else, he would have that money today. If he had taken that money and put it in his

mattress, he would have that money today. It was not Madoff that stole that

$132,000 investment, it is SIPC. This conduct is contrary to the purpose of SIPA,

which is to instill and restore confidence in the marketplace. Certainly as to that

investment, of more than $132,000.00, SIPC has not followed its precepts. If

another new customer had invested that same amount of money, that other new

customer would have a SIPC advance for that full amount of $132,000. Under

SIP A, if Mr. Mellis had invested that amount in another account, in a different

35

capacity, he would have that money returned to him by SIPe, even under the

torturous accounting that SIPe and its Trustee are creating in the BLMIS matter.

This shows several other inequities in the mathematics of the SIPe accounting.

Wealthy customers gain from the calculus of the SIPe formula. A

wealthy customer may not have needed to use his funds for living, for education,

for vacations. The Trust funds or the personal funds could have sat there for all the

years just gathering returns from income, dividends and reinvestments in the

market. That wealthy BLMIS customer who invested $500,000 five years ago and

did not touch it, according to the Trustee, he would have his $500,000 back today.

But a customer who invested that same $500,000, but needed money because of

life's needs, like education, medical expenses, or even luxuries like a family

wedding, a vacation or a new car and spent $100,000 per year would now have no

money returned to him. That distinction is inequitable as one person has nothing,

while the wealthy person has the SIPe advance plus a claim for recovery from the

collections on behalf of the bankrupt estate. The legitimate expectations of the

person of lesser wealth were that he was investing in a fund which grew in value.

If he knew he was withdrawing principal, not income, he might not have made that

wedding (to the extent he did) or paid for the son's private school education

(maybe state school would have made due), or bought that Lexus, (maybe a Toyota

would have been good enough). Or, in order to pay his monthly bills for rent, food

36

and heat, he might have maintained a bank account and earned a small percent

return, if he expected that the Government would not protect his funds from a

conversion. The Appellants were not using their funds to take risk, they invested

because the returns seemed proper, the securities in the basket seemed secure and

Mr. Madoff enjoyed a good reputation. But the point is that his legitimate

expectation was that he could afford all of the items because each month he

received statements of what he thought was accurate and left him with the

reasonable belief that he could afford those purchases. Now the Trustee informs

him that there is no advance for you and you bankrupted yourself by your own

actions. It was your fault for hiring and trusting Bernard Madoff. (Not for trusting

that SIPC would be there if Madoff was a fraudster, and not for trusting SEC for

investigating allegations and finding no merit to them, thereby missing the biggest

fraud ever). Watching your statements every month and talking to others about

how your stocks were doing. That wasn't reality, according to the Trustee. The

only way one could be protected from Madoff was to ask for the stock certificate to

be issued to him. But over the last thirty years, that is not the way the market

worked. That is why SIPC was formed, so that investors can trust Brokers and

know that if an broker creates a massive fraud, an investor will be protected,

pursuant to SIPe. But that is not what the Trustee wants now. This defense

37

against the claimants is simply not the purpose of SIP A, it is the exact opposite of

the intent of SIP A.

Another inequity in the Trustee's position is that there was no way for the

appellants to establish their deposits or check whether the Trustee's investigators

properly listed all the deposits and only the right withdrawals. Since the Trustee

did a review of books and records that were not subject to review by any other

party, it is unfair to put upon the Appellants and other's similarly situated, amounts

of cash in and cash out, when there is no way of establishing those amounts

beyond the time that IRS requires one to maintain records. The Trustee should not

be able to unilaterally re-configure accounts for the period of time of the life of

these accounts (more than 16 years at the time of filing) as it has done in its Notice

of Determinations (See Appendix 1).

While the Trustee has gone back 16 years plus, IRS has only allowed

theft loss claims for five years. Rev. Proc 2009-20. Taxes have been paid on the

income and principal (withdrawn from a retirement account in accordance with the

required minimum withdrawals), and yet now the funds are no longer there,

because of SIPe's contrivance. This is inequitable.

Bankruptcy law allows for preference claims, adversary proceedings

and avoidance actions, but the Trustee did not have to follow any of those

procedures, including any discovery or any limitations in time, or including any

38

reasonableness to the positions. However, cOUl1 precedent and statutes involved

here are clear, that customer legitimate expectations are what controls based upon

the last statements. So while the Trustee has acted inequitably, we are of faith that

this Court will right the wrong.

All of these examples indicate bases for this Court to overturn the

Bankruptcy Court's ruling as the disarray in the market from this determination is

such that no one can have confidence in any holdings in street name in any

broker/dealer account. This Court must overturn the Bankruptcy Court ruling to

give credence to the purpose of SIPC as a source of assurance that if you lose your

money to a Broker who puts his desires ahead of your needs, whether through

fraud, conversion or just misdealings, that there is a fund to protect you.

POINT IV

SIPC AND THE TRUSTEE'S METHODS ARE INEQUITABLE AND THE BANKRUPTCY COURT WAS IN

ERROR IN ORDERING THAT "NET EQUITY" BE DEFINED BY CASH IN/CASH OUT

The purpose of SIP A, as evidenced by its title, was to "protect" investors

who allowed the Financial Services Industry to hold their life savings in street

name securities. H.R. Rep. No 9101613, at 3-4 (1970). ("SIPA will reinforce the

confidence that investors have in the u.S. Securities markets."). In New Times 1,

39

1 i' '/

371 F .3d at 87 The SIP A drafters emphasis was on promoting investor confidence

in the securities markets and protecting broker-dealer customers.") Appleton v.

First Nat'l Bank a/Ohio, 62 F. 3d 791, 794 (6th Cir. 1995). ("Congress enacted

SIP A to restore investor confidence in the capital markets and upgrade the

financial responsibility requirements for registered brokers and dealers. SIP A

§6(c)(2)(B)-(D), Pub. L. No. 91-598, 84 stat. 1636, 1648-50 (1970); H.R. Rep. No.

95-746 (39-41) (statement ofSIPC Chairman Hugh F. Owens).

The Trustee's creation of a new method for calculating the cash in/cash out

are inconsistent with bankruptcy rules, Federal Rules of Procedure with respect to

discovery or any reasonable method of calculations for the substantial period of

years.

The calculations go beyond any statute of limitations or any right to

information or modification of rights and obligations known in jurisprudence (but

for murder).

The costs and delays in this proceeding are inequitable as Trustee and SIPC

have determined to delay and deny claimants, all to the detriment, expense and

psychological damage of the Appellants. SIPC was created to advance moneys to

customers rather quickly. As written in the enabling statute: 15 USC 78 - Sec.

78fff-3. (a)

40

Advances for customers' claims: In order to provide for prompt payment and satisfaction of net equity claims of customers of the debtor, SIPe shall advance to the trustee such moneys, not to exceed $500,000 for each customer, as may be required to payor otherwise satisfy claims for the amount by which the net equity of each customer exceeds his ratable share of customer property ...

The Trustee and SIPe have attempted at every step in the process to

withhold advances despite the requirement that SIPe provide for prompt payment

and satisfaction of net equity claims of customers of the debtor. The United States

General Accounting Office (GAO), wrote:

SIPe's statutory mission is to promote confidence in securities markets by allowing for the prompt return of missing customer cash and/or securities held at a failed firm. SIPe fulfills its mission by initiating liquidation proceedings where appropriate and transferring customer accounts to another securities firm or returning the cash or securities to the customer by restoring to the customer accounts the customer's "net equity". (emphasis added).

United States General Accounting Office Reports of May 2001 and July 2003.

SIPe has failed its duty in all regards, to the detriment of the Appellants.

Part of the analysis that SIPe argued and the Bankruptcy Court accepted

was that "the split strike accounts yielded consistent annual returns generally

between 10% and 17%, and largely outperformed the movement of the S&P 100

Index from which the "stocks" were chosen. Based upon this fictitious trading it is

SIPe's analysis that though about $20BiIlion was invested by customers, the

41

investments of the customers amounted to approximately $64.8B by early

December 2008.

This analysis is faulty as there are several other funds that exist today and

have existed for decades that show better results than the 10% to 17% annual

returns, which the Court felt showed BLMIS was fictitious. According to the Wall

Street Journal.com, Stanley Druckenmiller's Duquesne Capital Management "has

averaged gains of some 30% over the past two decades" and George Soros'

Quantum earned 30% average annual returns during three decades. WSJ.Com

8/9/1 0, reported by Jenny Strasburg and Mark Gongloff. It is requested that this

Court take judicial notice of these other funds returning much higher yields.

Therefore, there is a basic flaw in the Bankruptcy Court's reasoning in its

decision, when it found that "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." Bankruptcy Court decision at page 1 0 (SPA 17). The Court

was wrong in its reasoning, not only because it made findings that were clearly

erroneous in its determinations on the facts of the matter, but more importantly,

even if the facts determined were correct, it was wrong in the application of the

law, in regards to these facts, as it determined that the fictitious transactions set

forth on the statements leaves the claimants in the same position as those claimants

42

l; ,

in New Times 1, who had fictitious securities listed. The proper application would

be to distinguish those claimants from the Appellants and find that these

Appellants, like the claimants in New Times 1 who had the statements indicating

that they invested in a real securities position (Putnam Funds). The Appellants and

many other victims all had real securities listed and therefore are entitled to have

their legitimate expectations (over the course of 15 plus years) met. Meaning SIPe

must advance the funds to the customers ofBLMIS.

Another inequity in SIPe' s position is that it gives no effect to what all

persons expect when money is invested in any account, and that is the expectation

of a return on investment. Each of the Appellants had accounts in BLMIS for

more than 15 years. If we follow the SIPe approach, as they invested money, they

were owed no interest and had no legitimate or reasonable expectation of return on

their investments. Even in a cash in/cash out method, some deference must be

given to some return on investment. In New York State, the pre-judgment interest

on each investment converted would be 9%. A full accounting of the funds

invested and withdrawn, according to the trustee's notices of determinations (See

Appendix 1) would create a surplus in the accounts over time that would have

created a judgment and 9% interest from each investment as the date of deposit

would be the date of each conversion. In such circumstances, the SIPe position

would not be using correct numbers. Suffice it to say, that it is not a reasonable or

43

legitimate expectation to receive zero percent return on money invested, reinvested

and even more unreasonable given that each of the Appellants and most customers

similarly situated added more money to their accounts over time. That is based

upon their legitimate expectations that they were receiving returns as set forth in

their statements.

It is of note that SIPC funds are invested at interest. Yet they do not give

any credence to the expectation that every investor believed that they were

investing in growth rather than at zero percent interest.

Adding an interest rate would change the negative amount that the

Appellants have according to the Trustee's inequitable argument and

determination, but would not return the principal that each of the Appellants

thought they had in their account based upon their account statements that they

received and November 2008 and every month prior thereto.

SIPC would have the court believe that having the full pool of investors will

hurt those investors who have not taken money out of the brokerage house.

Actually, that is another inequitable argument that assists the wealthiest ofBLMIS

customers and hurts all others. However, the provisions of SIPe assure that the

advances are supposed to help the poorest of the victims (a group that these

appellants unfortunately fit into because of their extensive losses in BLMIS as a

percentage of their wealth) to get their money returned so they can reinvest and

44

pay their bills. Since the Trustee's position is that these net winners have no

further rights in the proceedings as collections come in from finding Madoff assets

the beneficiaries will be a small group of persons who have not taken money out

over time and SIPC and its members, the broker dealers of Wall Street, who have

the incentives and the audacity to attempt to hurt the victims one more time.

The Bankruptcy Court found that the Trustee's argument that there are net

winners and net losers made sense, in that this is a zero sum game. This is just

another misleading argument in the SIPC stance. The SIP A was set up to obtain

funding for these kinds of losses from the membership of SIPC. In order to do

business as a Broker/Dealer an entity has to pay dues each year. For most of the

time period in question the annual dues was $150, whether you were a single-

person office or one of the entities within the category of "too big to fail". Just a

couple of years ago, the dues were raised to .25% of the annual net revenues of

each licensed entity. That requirement of a fraction of 1 % of net revenues is still a

very small amount of money (many top level executives of these firms received

similar amount if not more than that percentage just in their bonuses). But such

amount will be enough to pay the Madoff claimants in full even if every investor is

paid in accordance with his or her last statement to the SIPA limit). Another way

of looking at how SIPC has chosen to protect its members is looking at the amount

every tax payer must pay to support social security (a much higher percentage of

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income of every working person). The SIPe management and its Trustee just

choose to say no to the victims, in hopes that they can convince this Court to

modify the law and precedent and help them save money for their membership.

The zero sum game is not investor to investor, as part of the Ponzi scheme in

that each person's money was used to pay someone else. It is only a zero sum

game in that either the members of SIPe must payout the funds or the victims of

Madoff s fraud don't get reimbursed. This inequity, apparent on its face, will be

even harder to swallow in the event the Trustee finds a substantial percentage of

the funds and assets which were converted and instead of the Appellants receiving

their SIPC advances and having a right in the claims against the bankruptcy estate,

the money goes into the SIPe coffers just for the purposes of keeping the dues to

its members low. This is not how this entity should act to restore and maintain

confidence in the securities markets.

It is clear that if SIPe pays out advances to all victims it will have both the

money available to do that, from its own accounts and the SEC credit line. And

thereafter, it will have the resources to refill its coffers as its membership will have

to pay dues (maybe a bit higher than the .25% of net that the members have paid

for one year in a row, (prior to 2009 the fees were just $150 a year that the largest

broker-dealers in the world had to pay for most of the years of the BLMIS fraud).

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In 1993, SIPC, in light of the largest failure to be protected by SIPC to that

date, MJK Clearing, retained Fitch Risk Management to report on a Review of

SIPC Risk Profile and Practices. In that report there was, amongst other chapters,

a discussion on risks and SIPC' s involvement in satisfYing customer claims in the

event of liquidation. The report suggested forthcoming changes in the climate of

risk, impending claims and the impact on SIPC funds. One of the findings was "to

compensate the fund for any exposure that cannot be eliminated through

monitoring or controls, SIPC would charge premiums based on the risk assumed.

(P 6-7). SIPC did not increase its annual dues to manage that risk from that 1993

report until 2009.

As it was reported to Congressmen Kanjorski and Garrett of the

subcommittee on Capital Markets, Insurance and Government Sponsored

Enterprises by SIPC' s president, Stephen Harbeck that "since April, 2009 the SIPC

member assessment was increased to .25% of each member's net operating

revenues ... " Just to reiterate that is one quarter of one percent of net revenues.

This information is important to understand the reasons for the inequities the

Trustee and SIPC are attempting to accomplish, as they want to save their own

corporation's treasury (while amassing huge fees for the trustee and his appointees)

and want to save their members from having to pay higher dues than the .25% of

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net. That is the only zero sum game in this matter and the Court below erred in its

findings that the BLMIS liquidation is a zero sum game between the customers.

POINT V

SIPA WAS INTENDED TO COVER SECURITIES EVEN IF THE BROKER-DEALER DID NOT ACTUALLY PURCHASE THE SECURITIES FOR THE CUSTOMERS

The Senate and House Reports on the 1978 amendments to SIP A show that

SIP A was intended to cover securities that the broker-dealer did not actually

purchase:

Under present law, because securities belonging to customers may have been lost, improperly hypothecated, misappropriated, never purchased or even stolen, it is not always possible to provide to customers that which they expect to receive, that is, securities which they maintained in their brokerage account ... By seeking to make customer accounts whole and ... would satisfy the customers' legitimate expectations. S. Rep. No 95-763, at 2 (1978) (emphasis added)

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 lost, improperly hypothecated, misappropriated, never purchased, or even stolen, this is not always possible. Accordingly, customers will receive cash based on the market value as of the filing date. H.R. Rep. No. 95-746 at 21. (emphasis added).

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The Second Circuit took particular note of this issue in New

Times 1]

Investors who were misled by Goren to believe that they were investing in mutual funds, that in reality existed, were treated much more favorably. Although they were not actually invested in those real funds-because Goren never executed the transactions, the information that these claimants received on their account statements "mirrored what would have happened had the given transactions been executed." [Br. For New Times Trustee and SIPC] at 7 n.6. As a result, the Trustee deemed those customers' claims to be "securities claims" eligible to receive up to $500,000 in SIPC advance. ld. The Trustee indicates that this disparate treatment was justified because he could purchase real, existing securities to satisfY such securities claims. ld. Furthermore, the Trustee notes that, if they were checking on their mutual funds, the "securities claimants," in contrast to the "cash claimants" bringing this appeal, could have confirmed the existence of those funds and tracked the funds' performance against Goren's account statements. ld. New Times 1] 371 F. 3d at 74. (emphasis added)

The Second Circuit found that the customer's legitimate expectations based

on written confirmations and account statements control how a "net equity" claim

is determined, citing SIPC's Series 500 Rules, 17 C.F.R. §§300.500-300.504,

which confirm the importance of written confirmations. The Court explained that

"the premise underlying the Series 500 Rules [is] that a customer's 'legitimate

expectations' based on written confirmations of transactions, ought to be

protected." 371 F. 3d at 87. It noted that "under the Series 500 Rules, whether a

claim is treated as one for securities or cash depends not on what is actually in the

49

, l

customer's account, but on what the customer has been told by the debtor III

written confirmations." Id. At 86 (emphasis in original).

See also In re Oberweiss Sec., Inc., 135 B.R. 842, 847 n.l (B. N.D. Ill. 1991) ("The court agrees with the Trustee's argument that Congress did not intend to treat customers without confirmations the same as those with confirmations; that customers with confirmations have a legitimate expectation of receiving securities, but customers without confirmations do not have the same expectation.").

In this matter SIPC has justified the Trustee's rejection of SIP A's definition

of "net equity" by asserting that using the final statements perpetuates the Ponzi

Scheme, as it allows the thief, Mr. Madoff, to determine who receives the assets

collected by the Trustee. This justification is completely specious. SIP A defines

the amount that must be paid in any liquidation as the amount owed by the broker

to a customer at the time of the filing. SIP A honors the legitimate expectations of

the customer, even if the customer is dealing with a thief. For precisely this

reason, SIPC supported this position and persuaded the Second Circuit to accept a

thiers books and records in New Times as to all customers who had a legitimate

expectation that their statements were accurate. The Second Circuit flatly rejected

the argument that a fraud-feasor's role was important in a SIPC liquidation. New

Times 1371 F.3d at 75.

Under the SIPA statutory scheme, the dishonesty of the broker is irrelevant

to the allowance of customer claims. The only issue in determining the amount of

a customer's claim is whether the customer had a "legitimate expectation" that the

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assets reflected on his last statement belonged to him. Again it is the legitimate

expectations that matters, not the transactional reality.

To now argue that the fraud-feasor is an agent of the Customer and

therefore, makes the customer, as principal, responsible for the fraud-feasor' s bad

acts is just another specious argument, as it goes against the protection afforded

under SIP A for the customers of broker-dealers and the confidence in the market of

customers.

CONCLUSION

While the Madoff Ponzi Scheme was the largest in history, and while

it has even been part of the circumstances stemming from Wall Street's

wrongdoing on our Nation's economy, we respectfully ask this Court to

honor the SIPC' s procedural history, the SIP A Legislative History, well

settled Law and therefore the reasonable and legitimate expectations of the

Appellants. Appellants received trade confirmations and accounts

statements showing an ownership interest in securities which were real and

reviewable every day. Only in hindsight do we now know the trades were

fraudulent. This is precisely the situation that SIP A was designed to address

and since Appellants had a legitimate expectation that they owned the assets

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shown on the last statement they are entitled to a claim in the amount of the

balance on their November 30,2008 statement.

Dated: New York, New York October 5, 2010

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Stanley Dale Cohen 41 Park Avenue Suite 4-F New York, NY 10016 212-686-8200 Fax 212-686-4900 Email: S@StanCohen.com

Attorney for Lee Mellis, Jean Pomerantz and Bonita Savitt

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DATED: NEW YORK, NEW YORK October 5, 2010

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.. / .... STANLEY DALE COHEN 41 Park Avenue, Suite 4-F New York, NY 10016 (212) 686-8200 Email: S(a).StanCohen.com Attorney for Lee Mellis, Jean Pomerantz and Bonnie Savitt