Burton R. Lifland

Before the Court is the motion (the "Motion") of Irving H. Picard, Esq. (the "Trustee" or "Picard"), trustee for the substantively consolidated Securities Investor Protection Act ("SIPA") liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") and Bernard L. Madoff ("Madoff"), seeking an order (1) upholding the Trustee's determination denying customer claims for amounts listed on last BLMIS customer statements, dated November 30, 2008 (the "November 30th Statements"); (2) affirming the Trustee's determination of net equity; and (3) expunging objections to the Trustee's determinations of net equity claims filed by a certain group of claimants (the "Objecting Claimants") in the above-captioned adversary proceeding. The Motion is filed pursuant to the Court's "Order Approving Form and Manner of Publication and Mailing of Notices, Specifying Procedures For Filing, Determination, and Adjudication of Claims; and Providing Other Relief" (the "Claims Procedure Order") entered on December 23, 2008, and the Court's "Order Scheduling Adjudication of `Net Equity' Issue" (the "Scheduling Order") entered on September 16, 2009. See Peskin v. Picard (In re Bernard L. Madoff Inv. Secs. LLC), 413 B.R. 137 (Bankr.S.D.N.Y.2009) (expounding generally on the Claims Procedure Order and the Scheduling Order).

The Madoff proceeding and its accompanying SIPA liquidation involve staggering numbers, with more than 15,000 claims filed and billions of dollars at stake. As of December 11, 2008 (the "Filing Date"), customers' November 30th Statements reflected $73.1 billion in fictional net investments and related gains. Net of "negative" accounts approximating $8.3 billion, customers are purportedly owed a total of $64.8 billion. The critical issue before the Court is how to define a claimant's "net equity" under SIPA for purposes of distributing against these astounding sums.

The statutory framework for the satisfaction of customer claims in a SIPA liquidation proceeding provides that customers share pro rata in customer property to the extent of their net equities, as defined in SIPA section 78lll(11) ("Net Equity"). See SIPA § 78fff-2(c)(1)(b). If the fund of customer property is insufficient to make customers whole, the trustee is entitled to an advance from the Securities Investor Protection Corporation ("SIPC") to pay each customer the amount by which his Net Equity exceeds his ratable share of customer property, subject to a cap of $500,000 for securities claims. See SIPA § 78fff-3(a).

The Trustee defines Net Equity as the amount of cash deposited by the customer into his BLMIS customer account less any amounts already withdrawn by him (the "Net Investment Method"). In contrast, the Objecting Claimants define Net Equity as the amounts reflected on customers' November 30th Statements (the "Last Statement Method"). The Trustee and the Objecting Claimants maintain that their respective definitions of Net Equity are thoroughly consistent with SIPA, statutory and case law, and notions of equity.

Congruent to the import and complexity of this issue, the briefs filed in support and opposition to the Motion are voluminous and impressive. For the purposes of this decision, the Court has considered all papers filed in response to the Scheduling Order, including over thirty briefs and more than twenty pro se submissions. SIPC and the SEC submitted briefs in support of the Motion. The Court recognizes that the application of the Net Equity definition to the complex and unique facts of Madoff's massive Ponzi scheme is not plainly ascertainable in law. Indeed, the parties have advanced compelling arguments in support of both positions. Ultimately, however, upon a thorough and comprehensive analysis of the plain meaning and legislative history of the statute, controlling Second Circuit precedent, and considerations of equity and practicality, the Court endorses the Trustee's Net Investment Method.

Accordingly, for the reasons set forth below, the Trustee's determination of Net Equity is hereby APPROVED.

BACKGROUND

I. PROCEDURAL HISTORY

The Motion arises in connection with the infamous Ponzi scheme perpetrated by Madoff through his investment company, BLMIS. On December 11, 2008, Madoff was arrested by federal agents and charged with securities fraud in violation of 15 U.S.C. sections 78j(b), 78ff and 17 C.F.R. section 240.10b-5, in the United States District Court for the Southern District of New York (the "District Court"). United States v. Madoff, No. 08-MJ-02735. That same day, the Securities and Exchange Commission (the "SEC") filed a civil complaint in the District Court, alleging, inter alia, that Madoff and BLMIS were operating a Ponzi scheme through BLMIS's investment advisor activities. S.E.C. v. Madoff, et al., No. 08-CV-10791, 2008 WL 5197070 (the "Civil Action").

On December 15, 2008, SIPC filed an application in the Civil Action seeking a decree that the customers of BLMIS are in need of the protections afforded by SIPA. The District Court granted SIPC's application and entered an order on December 15, 2008, placing BLMIS's customers under the protections of SIPA (the "Protective Order"). The Protective Order appointed Picard as trustee for the liquidation of the business of BLMIS, appointed Baker and Hostetler, LLP as counsel to the Trustee, and removed the SIPA liquidation proceeding to this Court pursuant to SIPA sections 78eee(b)(3) and (b)(4).

On March 12, 2009, Madoff pled guilty to an 11-count criminal indictment filed against him and admitted that he "operated a Ponzi scheme through the investment advisory side of [BLMIS]." See United States v. Madoff, No. 09 CR 213(DC), Docket No. 57, Plea Hr'g Tr. at 23:14-17. On June 29, 2009, Madoff was sentenced to 150 years in prison.

II. CLAIMS ADJUDICATION PROCEDURE

On December 23, 2008, the Court approved the Claims Procedure Order, which sets forth a systematic framework for the filing, determination and adjudication of claims in the BLMIS liquidation proceeding. Pursuant to this order, all claims by customers must be filed with the Trustee, who must determine the claims in writing. If the claimant does not object to the determination, it is deemed approved by the Court and binding on the claimant. If the claimant objects and files an opposition, the Trustee must obtain a hearing date and notify the claimant thereof. Certain, but not all, Madoff claimants objected to the Trustee's determination of Net Equity due to his use of the Net Investment Method.

After a number of these objections were filed, the Court entered the Scheduling Order establishing a hearing date of February 2, 2010 to address whether Net Equity, as defined by SIPA, is calculated using the Net Investment Method or the Last Statement Method. In the interim, the Trustee continues to process and pay customer claims in the ordinary course. As of February 26, 2010, 12,047 claims have been determined, 1,936 claims have been allowed, and thus far $649,643,586.95 has been committed by SIPC.

FACTUAL HISTORY

I. THE STRUCTURE AND ORGANIZATION OF BLMIS

BLMIS is a New York limited liability company, founded by Madoff as a sole proprietorship in 1960. BLMIS was wholly-owned by Madoff, who was also its chairman and chief executive officer. Together with family members and a number of additional employees, Madoff operated the company from its principal place of business at 885 Third Avenue, New York, New York. On January 19, 1960, BLMIS registered with the SEC as a broker-dealer under section 15(b) of the Securities Exchange Act of 1934, 15 U.S.C. section 78o(b), and, beginning in 2006, as an investment advisor. By virtue of its registration as a broker-dealer, BLMIS is a member of SIPC. BLMIS's annual audits were conducted by Friehling & Horowitz, CPAs, P.C., an accounting firm consisting of three employees, one of whom was semi-retired, with offices located in a strip mall in Rockland County, New York. Outwardly, BLMIS functioned both as an investment advisor to its customers and a custodian of their securities. Based on the Trustee's investigation, it appears that BLMIS began to offer investment advisory services as early as the 1960s, yet never truly acted as a legitimate investment advisor to its customers.

BLMIS had three business units: market making (the "MM Business"), proprietary trading (the "PT Business"), and investment advisory (the "IA Business"). While these business units were financially intertwined, the MM and PT Businesses were largely operated separately from the IA Business. Specifically, the MM Business competed with other market makers, and the PT Business traded on behalf of the firm for profit. These units, albeit unprofitable, generally conducted legitimate activities; they traded with institutional counterparties, used live computer systems and trading platforms that interfaced with multiple outside feeds and data sources, and utilized a large information technology staff to support and maintain these trading platforms. In addition, they participated in compliance and risk monitoring programs and were held accountable by a number of entities, including the clearing houses they used, the exchanges they traded on, and the National Association of Securities Dealers and its successor, the Financial Industry Regulatory Authority.

The IA Business, on the other hand, perpetuated Madoff's fraudulent activity. Physically isolated on the 17th floor from the MM and PT Businesses, the IA Business was accessible only to select employees and insiders. Unlike the SEC registration of the MM and PT Businesses, registration of the IA Business was fabricated; only 23 of its thousands of customers were reported. In contrast to the MM and PT Businesses' live computer trading system interfacing with outside feeds, the IA Business had no contact with opposite brokers or counterparties and used only one unsophisticated and archaic computer that was not programmed to execute trading of any kind. The legitimate MM and PT Businesses limited scrutiny of the IA Business. In turn, the proceeds generated by the IA Business enabled the MM and PT Businesses to remain viable, at least from 2007 forward.

II. MECHANICS OF THE PONZI SCHEME

Rather than engage in legitimate trading activity, Madoff used customer funds to support operations and fulfill other investors' requests for distributions of profits to perpetuate his Ponzi scheme. Thus, any payment of "profit" to a BLMIS customer came from another BLMIS customer's initial investment. Even if a BLMIS customer could afford the initial fake purchase of securities reported on his customer statement, without additional customer deposits, any later "purchases" could be afforded only by virtue of recorded fictional profits. Given that in Madoff's fictional world no trades were actually executed, customer funds were never exposed to the uncertainties of price fluctuation, and account statements bore no relation to the United States securities market at any time. As such, the only verifiable transactions were the customers' cash deposits into, and cash withdrawals out of, their particular accounts. Ultimately, customer requests for payments exceeded the inflow of new investments, resulting in the Ponzi scheme's inevitable collapse.

A. Solicitation of Customers and Opening of Accounts

Madoff solicited billions of dollars from investors through his fraudulent IA Business. Entry into the IA Business was coveted and selective, akin to membership in an elite club. This aura of exclusivity, combined with the secrecy and reported success of Madoff's investment strategies, limited the transparency of the IA Business to prospective investors, particularly non-institutional clients.

Once a customer was granted entry into the IA Business, standard account opening procedures followed. Under standardized written agreements, customers relinquished all investment authority to Madoff, agreeing that

[i]n all such purchases, sales or trades ... [Madoff] is authorized to act for the undersigned and in the undersigned's behalf in the same manner and with the same force and effect as the undersigned might or could do with respect to such purchases, sales or trades as well as with respect to all other things necessary or incidental to the furtherance or conduct of such purchases, sales or trades. All purchases, sales or trades shall be executed strictly in accordance with the established trading authorization directive.

See Decl. of Joseph Looby in Supp. of Trustee's Motion ("Looby Decl.") at Ex. 3. Customers retained only the authority to deposit cash and request withdrawals; all other rights associated with their accounts, including the ability to make investment decisions, were ceded to Madoff. With few isolated exceptions, customers did not direct the purchase or sale of any specific security.

B. The 703 Account

Although customer account statements reflected trading activity, funds were merely deposited into a bank account at J.P. Morgan Chase Manhattan Bank ("Chase Bank"), Account Number 140081703 (the "703 Account"), and never invested. As Madoff admitted at his plea hearing, none of the purported purchases of securities actually occurred, and the reported gains were entirely fictitious. This has been confirmed by the Trustee's investigation, which reveals that with the exception of isolated individual trades, there is no record of BLMIS having cleared any purchase or sale of securities in the Depository Trust & Clearing Corporation (the "DTCC"), a custodian for most stock and government debt securities issued in the United States. Instead, investors' funds were principally deposited into the 703 Account, which was little more than a "slush fund." Money was misappropriated from the 703 Account solely to enrich Madoff and his inner circle.

IA Business employees prepared daily reports for Madoff reflecting all 703 Account deposit and withdrawal activity. At the close of each business day, any net cash balances from this account were transferred to affiliated overnight investment accounts at Chase Bank to buy United States Treasuries or other short term paper until necessary to fund customers' withdrawal requests, BLMIS's capital obligations, or Madoff's personal wishes. At all relevant times, the fabricated amounts recorded on the monthly customer statements far exceeded the capital deposited in the 703 Account.

C. The Split-Strike Conversion Strategy

The vast majority of BLMIS customer accounts were supposedly invested in the "split-strike conversion" strategy (the "Split Strike Conversion Strategy"). Madoff outwardly attributed the success of his IA Business to this strategy, which appeared to generate remarkably consistent and above-average returns. Under this strategy, Madoff purportedly invested customer funds in a subset, or "basket," of Standard & Poor's 100 Index ("S & P 100 Index") common stocks, and maximized value by purchasing before, and selling after, price increases. Several times per year, customer funds would move "into the market," whereby a basket of stocks was supposedly purchased. Customer funds were then moved entirely "out of the market" to "invest" in United States Treasury Bills, money market funds, and cash reserves until the next trading opportunity. This continued until the end of each quarter, when all baskets would be sold and "invested" in these "out of the market" repositories. Focusing on large cap stocks, the strategy evaded inquiry into the volume of stocks in which BLMIS was fictitiously trading. Madoff's quarter-end liquidation of the split-strike security basket positions enabled him to avoid disclosure of the equities in the baskets required by SEC Form 13F. BLMIS also devised a hedging strategy to purchase and sell S & P 100 Index option contracts corresponding to the stocks in the baskets. This allowed Madoff to appear to manage the downside risk associated with possible unfavorable price changes in the baskets and limit profits associated with increases in underlying stock prices.

Madoff never executed his split-strike investment and hedging strategies, and could not possibly have done so. First, the customer funds were never actually invested "in the market" or "out of the market," despite customer statements to the contrary. In reality, funds were maintained in the 703 Account at Chase Bank. Second, according to the Trustee's investigation, an unrealistic number of option trades would have been necessary to implement the Split Strike Conversion Strategy because there were insufficient put and/or call option contracts available at the Chicago Board Options Exchange to properly hedge the volume of securities positions reflected on the customers' statements. In addition, one of the money market funds in which customer resources were allegedly invested through BLMIS, as reflected on customer statements, was Fidelity Brokerage Services LLC's "Fidelity Spartan U.S. Treasury Money Market Fund." Fidelity Brokerage Services LLC, however, has acknowledged that it did not even offer investment opportunities in any such money market fund from 2005 forward.

Yet Madoff successfully created the illusion that his trading activity was legitimate and his Split Strike Conversion Strategy was effective. In order to do so, Madoff and a select group of employees assembled historical price and volume data for each stock within the basket. Using this data, they strategically selected stocks after the fact at favorable prices to ensure promised, consistent annual returns of between 10-17%. They monitored the baskets to make certain that the selected stocks yielded returns that were neither above nor below the desired range. This practice of backdating allowed Madoff to engineer trades on the perfect dates at the best available prices to guarantee such results. Consequently, all documentation related to this strategy, including order tickets, trades, and customer statements, were necessarily concocted by Madoff. In fact, the Trustee's investigation revealed many occurrences where purported trades were outside the exchange's price range for the trade date. At bottom, the BLMIS customer statements were bogus and reflected Madoff's fantasy world of trading activity, replete with fraud and devoid of any connection to market prices, volumes, or other realities.

D. Non-Split-Strike Conversion Customer Accounts

While the majority of customers were supposedly invested in the Split Strike Conversion Strategy, as of the Filing Date there were fewer than 245 active non-split strike conversion BLMIS customer accounts (the "Non-Split Strike Accounts"), or roughly 5% of total active BLMIS accounts. The Non-Split Strike Accounts were held by devoted customers such as Stanley Chais, Jeffry Picower, and Madoff family members and employees, and reported unusually high rates of return in excess of the consistent 10-17% generated for Split Strike Conversion Strategy accounts. For example, the Trustee alleges that Chais's family and corporate accounts generated annual returns as high as 300%, and Picower's generated annual returns as high as 950%. See Trustee's Compl. at ¶ 3 (May 1, 2009) (Adv.Proc. No. 09-01172(BRL)); Trustee's Compl. at ¶ 3 (May 12, 2009) (Adv.Proc. No. 09-01197(BRL)). These accounts were handled on an account-by-account basis, in contrast to the more common basket approach. This time-consuming and labor-intensive process required the manual input of backdated transactions to represent the purported trades executed on behalf of each account. Fundamentally, however, both the split-strike and non-split-strike accounts were subjected to the same basic method—statements were fabricated based on after-the-fact published selections of stocks and related prices. With the exception of a few isolated trades and physical custody of a limited number of securities entrusted to BLMIS by certain customers, trading in the Non-Split Strike Accounts did not take place.

E. The AS/400 Computer System

To manage purported split-strike trade activity, the IA Business used an archaic computer system, the AS/400, consisting of an IBM computer and custom software dating to the early 1990s. The AS/400 was programmed to store BLMIS customer account information, record fictitious securities positions and customer cash transactions, prepare customer statements, and produce trade confirmations. Specifically, it contained software that could enter a basket of trades with any price or trade date and allocate the trades pro rata to BLMIS customer accounts in the database. Once a fictitious return was chosen for a given basket trade, "key punch operators" would manually input the relevant pricing information into the AS/400 database. This basket trade was automatically replicated in each customer account and divided proportionately according to the fraction or number of baskets each customer could afford. The AS/400 then generated the customer statements and related trade confirmations for BLMIS customers. This monthly process repeatedly compounded customers' false profits during the course of the scheme. The AS/400 was not programmed, however, to execute, communicate, or facilitate trading of any kind. None of the split-strike trades inputted into the AS/400 was reconciled with the DTCC.

This outmoded technology prevented customers from obtaining electronic, real-time online access to their accounts, as was customary in the industry by the year 2000, and instead generated paper trade confirmations. Mailing these paper statements and confirmations to customers allowed BLMIS additional time to concoct trading records and delay the delivery of information, thereby facilitating Madoff's scheme.

III. CLASSIFICATION OF CLAIMANTS

Under the Trustee's Net Equity calculus, the Objecting Claimants fall into three classifications according to their respective deposit and withdrawal histories. The first group of Objecting Claimants withdrew funds from BLMIS in an amount that exceeds their initial investments and subsequent deposits (the "Net Winners"). A customer in this category received a full return of his principal as well as some "profit," which consisted, in reality, of other customers' investments. Under the Net Investment Method, these customers have zero Net Equity, and thus no allowed claims.

A second category of customers withdrew less money from BLMIS than they deposited, with net investment amounts over the $500,000 statutory limit ("Over the Limits Net Losers"). According to the Trustee's Net Investment Method, an Over the Limits Net Loser has positive Net Equity, and thus an allowed claim for the amount invested less the amount withdrawn. The Over the Limits Net Losers will receive full $500,000 advances from SIPC, as their respective pro rata shares of customer property will be insufficient to satisfy their Net Equity claims.

A third category of customers similarly withdrew less money than they deposited, with net investment amounts under the $500,000 statutory limit ("Under the Limits Net Losers") (together with "Over the Limits Net Losers," "Net Losers"). An Under the Limits Net Loser receives a SIPC advance against his pro rata share of customer property in the amount of his net investment. This is so even though his November 30th Statement may reflect a balance higher than $500,000. These customers are not entitled to a further distribution from the fund of customer property because their Net Equity claims will be fully satisfied by the SIPC advance. In general, Net Winners will be concentrated among early investors, while a critical mass of Net Losers will be found among later investors.

DISCUSSION

I. THE HISTORY OF SIPA

A. Generally

As a backdrop for the Court's review of the Net Equity issue in this SIPA proceeding, a brief overview of the history and purpose of the statute will provide helpful context. Congress enacted SIPA in 1970 for the primary purpose of protecting customers from losses caused by the insolvency or financial instability of broker-dealers. See SEC v. S.J. Salmon & Co., Inc., 375 F.Supp. 867, 871 (S.D.N.Y.1974). In doing so, Congress sought to "reinforce the confidence that investors have in the U.S. securities markets" and "strengthen[ ] ... the financial responsibilities of broker-dealers." H.R.Rep. No. 91-1613, at 2-4 (1970), reprinted in 1970 U.S.C.C.A.N. 5254, 5257.

To accomplish these aims, SIPA establishes procedures for liquidating failed brokerdealers and provides "customers," as defined by SIPA section 78lll(2), with special protections. A SIPA liquidation is essentially a bankruptcy liquidation tailored to achieve SIPA's objectives. See SIPA § 78fff(b) ("[A] liquidation proceeding shall be conducted in accordance with, and as though it were being conducted under chapters 1, 3 and 5 and subchapters I and II of chapter 7 of Title 11."); In re Adler Coleman Clearing Corp., 195 B.R. 266, 269-70 (Bankr.S.D.N.Y.1996). Separate from the general SIPA estate, a fund of "customer property" is established for priority distribution exclusively among the debtor's customers. See SIPA § 78lll(4) (defining "customer property"); In re Adler, Coleman Clearing Corp., 216 B.R. 719, 722 (Bankr.S.D.N.Y.1998) ("A person whose claim against the debtor qualifies as a `customer claim' receives preferential treatment in the distribution of assets from the debtor's estate."). Each customer is entitled to share in this fund pro rata to the extent of his Net Equity. See SIPA § 78fff-2(c)(1)(b). In many SIPA liquidations, however, customer property is inadequate to wholly satisfy customers' Net Equity claims. Under these circumstances, SIPC, an independent, non-profit membership corporation created by SIPA, provides additional protection. SIPC is charged with establishing and administering a SIPC fund to advance money to the SIPA trustee to promptly pay each customer's valid Net Equity claim, up to $500,000 per customer. See SIPA §§ 78ddd(a)(1), ccc(a)(1), fff-3(a). However, these advances cover only "the amount by which the net equity of each customer exceeds his ratable share of customer property." SIPA § 78fff-3(a). If the amount of the SIPC advance taken together with the subsequent customer property distribution exceeds the customer's Net Equity, SIPC recoups the excess. In effect, SIPC becomes subrogated to the claims of customers to the extent it has supplied advances, and cannot seek recovery from customer property "until after the allocation thereof to customers." SIPA §§ 78fff-3(a), 2(c)(1).

B. SIPC Payments Are Inextricably Connected to Payments from Customer Property.

Contrary to the contention of many Objecting Claimants, permitting a customer to recover SIPC payments based on final account statements would in fact affect the limited amount available for distribution from the customer property fund. These Objecting Claimants rely upon the false premise that Madoff customers are statutorily entitled to an additional source of recovery in the form of SIPC insurance, separate and apart from customer property distributions. This argument finds no support in the text of the statute, which characterizes SIPC payments as advances inextricably tied to distributions of customer property. SIPA provides that:

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

SIPA § 78fff-3(a)(1) (emphasis added). SIPC payments therefore serve only to replace missing customer property and cannot be ascertained independently of the determination of a customer's pro rata share of customer property. Accordingly, the SIPA statute does not allow bifurcation of the claims process, with customers recovering SIPC payments based on the Last Statement Method, and recovering customer property shares based on the Net Investment Method.

II. PLAIN LANGUAGE AND LEGISLATIVE HISTORY SUPPORT THE NET INVESTMENT METHOD

Given that BLMIS account statements purport securities positions totaling an unparalleled $64.8 billion, the dispute concerning the definition of Net Equity is pivotal both to customers and SIPC. Resolution of this issue "begins where all such inquiries must begin: with the language of the statute itself." U.S. v. Ron Pair Enter., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989); see also Conn. Nat. Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992) ("[C]ourts must presume that a legislature says in a statute what it means and means in a statute what it says there."). SIPA defines Net Equity in section 78lll(11):

The term "net equity" means the dollar amount of the account or accounts of a customer, to be determined by— (A) calculating the sum which would have been owed by the debtor to such customer if the debtor had liquidated, by sale or purchase on the filing date, all securities positions of such customer ...; minus (B) any indebtedness of such customer to the debtor on the filing date....

SIPA § 78lll(11) (emphasis added).

The main source of contention between the Trustee and the Objecting Claimants lies in how each would determine a customer's "securities positions," as that term is used in the definition of Net Equity. The Objecting Claimants state that the best evidence of a customer's securities positions is the customer's account statement as of the Filing Date, or in this case, his November 30th Statement. They assert that SIPA's legislative history, indicating the intent to protect investors' "legitimate customer expectations" and "make customer accounts whole," supports this position. H.R.Rep. No. 95-746, 95th Cong., 1st Sess. at 21 (1977). Written upon consideration of the 1978 amendments to SIPA, a House of Representatives' Report states,

A customer generally expects to receive what he believes is in his account at the time the stockbroker ceases business. But because securities may have been ... never purchased or even stolen, this is not always possible.... [C]ustomers generally receive pro rata portions of the securities claims, and as to any remainder, they will receive cash based on the market value as of the filing date.

Id. (emphasis added). Here, as argued by the Objecting Claimants, the customers had legitimate expectations that they held the securities positions reflected on their November 30th Statements. Therefore, the Objecting Claimants espouse the Last Statement Method and believe that Net Equity claims must be recognized in the amount of the customers' account balances as of November 30, 2008.

However, the Court agrees with the Trustee, joined by the SEC and SIPC, that the Objecting Claimants' "securities positions" can be ascertained only by reference to the books and records of BLMIS. The account statements are entirely fictitious, do not reflect actual securities positions that could be liquidated, and therefore cannot be relied upon to determine Net Equity. As a result, the definition of Net Equity under SIPA section 78lll(11) must be read in tandem with SIPA section 78fff-2(b), which requires the Trustee to discharge Net Equity claims only "insofar as such obligations are [1] ascertainable from the books and records of the debtor or [2] are otherwise established to the satisfaction of the trustee." SIPA § 78fff-2(b). The BLMIS books and records expose a Ponzi scheme where no securities were ever ordered, paid for or acquired. Because "securities positions" are in fact nonexistent, the Trustee cannot discharge claims upon the false premise that customers' securities positions are what the account statements purport them to be. Rather, the only verifiable amounts that are manifest from the books and records are the cash deposits and withdrawals. Moreover, if customers' legitimate expectations are relevant to any determination other than whether customers hold "claims for securities" or "claims for cash," they do not apply where they would give rise to an absurd result. See New Times Secs. Servs., 371 F.3d 68, 87-88 (2d Cir.2004) ("New Times I") (rejecting the District Court's Net Equity calculation, which was based on customers' "legitimate expectations"); New Times Secs. Servs., 463 F.3d 125, 130 (2d Cir.2006) ("New Times II") ("The [New Times I] court declined to base the recovery on the rosy account statements ... because treating the fictitious paper profits as within the ambit of the customers' `legitimate expectations' would lead to [ ] absurdity...."). The Trustee has properly satisfied expectations by providing all customers with "claims for securities." Accordingly, the plain language of the SIPA statute supports adoption of the Net Investment Method in distributing customer property to Madoff investors.

III. THE TRUSTEE'S AVOIDANCE POWERS AND IRS TAX TREATMENT OF MADOFF CLAIMANTS

A. The Trustee's Calculus of Net Equity is Consistent with his SIPA and Bankruptcy Avoidance Powers.

The Trustee, in reliance on his avoidance powers and a substantial body of case law, propounds his theory of Net Equity as being net of fraudulent transfers. The Court agrees and finds that only the Net Investment Method is consistent with the Trustee's statutory avoidance powers. In the context of this hybrid proceeding (U.S.C. Titles 11 and 15), the definition of Net Equity cannot be construed in isolation from corollary provisions of SIPA and the Code. See Auburn Hous. Auth. v. Martinez, 277 F.3d 138, 144 (2d Cir.2002) ("the preferred meaning of a statutory provision is one that is consonant with the rest of the statute."); see also SIPA § 78fff(b) ("[A] liquidation proceeding shall be conducted in accordance with ... Title 11."). SIPA and the Code intersect to, inter alia, grant a SIPA trustee the power to avoid fraudulent transfers for the benefit of customers. See SIPA § 78fff-2(c)(3) ("[T]he trustee may recover any property transferred by the debtor ... to the extent that such transfer is voidable or void under the provisions of Title 11."). The Trustee relies on numerous cases, all holding that transfers made in furtherance of a Ponzi scheme, and specifically transfers of fictitious profits, are avoidable. The Net Investment Method harmonizes the definition of Net Equity with these avoidance provisions by similarly discrediting transfers of purely fictitious amounts and unwinding, rather than legitimizing, the fraudulent scheme. The Last Statement Method, by contrast, would create tension within the statute by centering distribution to customers on the very fictitious transfers the Trustee has the power to avoid.

Whether the Objecting Claimants have defenses to avoidance actions in this specific case does not change the inherent inconsistency between the Last Statement Method and the Trustee's avoidance powers. The Objecting Claimants devote much discussion to defenses that could be asserted against hypothetical avoidance actions, including statutes of limitations, the section 548(c) good faith defense, and the section 546(e) safe harbor for securities contracts. The fact that the Trustee may be unable to avoid a transfer in particular circumstances, however, is irrelevant to the Court's finding that the power itself is inconsistent with a distribution scheme that credits the reported products of a fraud. The Net Investment Method allows the definition of Net Equity and the Trustee's powers to avoid and recover property, contained in the same statutory framework, to be interpreted with preferred consonance. See Auburn Hous. Auth., 277 F.3d at 144.

B. The Net Investment Method Does Not Contradict the IRS's Treatment of Madoff Claimants.

Some Objecting Claimants liken the IRS's treatment of Madoff claimants to recognizing fictitious profits as real income. The characterization of the IRS's treatment of Madoff claimants is irrelevant, however, as the IRS and SIPC are governed by disparate statutory schemes with different purposes. See, e.g., SIPC v. Morgan, Kennedy & Co., Inc., 533 F.2d 1314, 1318-19 (2d Cir.1976) (declining to interpret SIPA by reference to the Federal Deposit Insurance Act, as "SIPA and FDIA are independent statutory schemes, enacted to serve the unique needs of the banking and securities industries, respectively"). In addition, the IRS treatment of Madoff claimants is temporal, rather than part of an established statutory scheme. See, e.g., Post-Madoff Rev. Proc. 2009-20, 2009-14 I.R.B. 749 (established Mar. 17, 2009 to address, in relevant part, the tax treatment of losses from criminally fraudulent investment arrangements that take the form of Ponzi schemes).

IV. THE HOLDING IN NEW TIMES I SUPPORTS THE TRUSTEE'S NET INVESTMENT METHOD

Even though the mechanics of Ponzi schemes are essentially the same, with later investors' money used to pay earlier investors, underlying factual disparities make the definition of Net Equity susceptible to differing formulations. The Second Circuit has addressed this issue in New Times I. Not surprisingly, both the Trustee and Objecting Claimants cite New Times I as support for their respective positions.

The New Times I case was a SIPA liquidation involving a Ponzi scheme in which investors were fraudulently induced to purchase securities through New Times Securities Services, Inc. and New Age Financial Services, Inc. (collectively, the "Debtors"). The securities intended to be purchased included (1) nonexistent money market funds and (2) shares of bona fide mutual funds. New Times I, 371 F.3d at 71. Rather than invested, the customer funds advanced were misappropriated by the Debtors and used to pay fictitious profits on prior investments. Id. at 71-72, 72 n. 2. To facilitate the fraud, the Debtors generated bogus confirmations and fake monthly account statements that reflected fictitious profits and nonexistent securities positions. Id. at 71, 74.

In the course of the liquidation, the SIPA trustee determined that customers who were fraudulently induced to invest in bogus money market funds (the "Fake Securities Claimants") were entitled to claims for cash, and thus eligible for a SIPC advance of up to only $100,000. Id. at 71, 74. Moreover, the SIPA trustee concluded that the value of their claims was the amount principally invested less any withdrawals or redemptions. Id. Thus, fictitious profits shown on their account statements as interest or dividends on the phantom securities were not included in calculating their net equity claims. Id. at 74.

By contrast, customers who were induced to invest in mutual funds that in reality existed (the "Real Securities Claimants") were entitled to claims for securities, eligible to receive up to $500,000 in SIPC advances. Id. In addition, their net equity claims were based upon the "profits" reflected on their customer account statements. These claimants received favorable treatment from the SIPA trustee because, inter alia, the trustee could purchase real securities to satisfy their claims, and the information shown on the account statements reflected what would have happened had the transactions been executed. Id.

The Fake Securities Claimants filed written objections to both (1) the SIPA trustee's determination of their claims as claims for cash, and (2) his refusal to value claims based on the fictitious amounts shown as dividends and interest on their last account statements. Id. at 74. In response, the SIPA trustee, joined by SIPC, filed a motion for an order upholding his determination of claims. Id. at 74-75. The District Court sustained the Fake Securities Claimants' objection and held that the claimants had claims for securities. Id. at 75. Moreover, the court found that the value of those claims could be ascertained by reference to the fictitious interest and dividend reinvestments reflected on claimants' last account statements. Id. The SIPA trustee and SIPC promptly appealed the District Court's decision to the Court of Appeals for the Second Circuit. Id.

The Second Circuit upheld the District Court's determination that the Fake Securities Claimants had claims for securities, not claims for cash. Citing SIPC's Series 500 Rules and the legislative history of SIPA section 78fff-3(a)(1), the court found that claimants were entitled to claims for securities because they relied upon the confirmations and account statements they received from the Debtors. Id. at 84-87 ("[T]he premise underlying the Series 500 Rules-that a customer's `legitimate expectations,' based on written confirmations of transactions, ought to be protected-supports the SEC's interpretation of section [78fff-3(a)(1)]."). Moreover, the court held that its ruling promoted SIPA's goal of providing investor protection. Id. at 83-84.

However, as to the Net Equity issue, the Second Circuit reversed the District Court's holding. Instead, the court upheld the joint position of the SIPA trustee, SEC and SIPC that customer claims should be based upon the net cash invested in the scheme, not the fictitious interest or dividend reinvestments reflected on the claimants' account statements. Id. at 87-88. The court agreed that the amounts on the account statements were arbitrary, and basing Net Equity claims on them would be "irrational and unworkable." Id. at 88. Accordingly, the Second Circuit found that the value of the claimants' Net Equity claims was the net cash invested in the scheme.

In a subsequent decision issued in the New Times SIPA liquidation, New Times II, a different Second Circuit panel explained the court's holding in New Times I with respect to the Net Equity calculation issue. The New Times II court highlighted the absurdity and inherent unfairness that would result from relying on the fictitious account statements when no such securities existed and explained that reimbursing customers with actual securities or their market value on the filing date was impossible. New Times II, 463 F.3d at 129-30.

The Objecting Claimants identify with the Real Securities Claimants while the Trustee analogizes the Madoff claimants to the Fake Securities Claimants.

The Objecting Claimants assert that Madoff customers, comparable to the Real Securities Claimants in New Times I, are entitled to the value of the securities listed on their final account statements. They maintain that New Times I stands for the proposition that when a customer's account statement reflects securities positions in real securities, the SIPA trustee must either purchase the securities or pay the market value of those securities as of the filing date. Citing New Times II, they contend that the Second Circuit used the Net Investment Method in New Times I only "[b]ecause there were no [ ] securities, and it was therefore impossible to reimburse customers with the actual securities or their market value." New Times II, 463 F.3d at 129. The securities listed on the Objecting Claimants' account statements, they argue, like those of the New Times Real Securities Claimants, exist in the market and therefore have values that can be ascertained. As such, the Objecting Claimants posit that the Trustee must satisfy Net Equity claims by either purchasing, or paying the market value of, the securities reflected on their November 30th Statements.

Although somewhat sympathetic to the Objecting Claimants' arguments, the Court agrees with the Trustee that New Times I and II support using the Net Investment Method here. The holding in New Times I, as it relates to the Net Equity analysis, hinged on the fact that customer account statements reflected "arbitrary amounts that necessarily ha[d] no relation to reality." New Times I, 371 F.3d at 88 (quoting Br. for Amicus Curaie SEC at 16). In addition, the court recognized "the potential absurdities created by reliance on the entirely artificial numbers." New Times I, 371 F.3d at 88. To adopt the Last Statement Method in this case would be to likewise base recovery on "rosy account statements," leading to "the absurdity of `duped' investors reaping windfalls as a result of fraudulent promises." New Times II, 463 F.3d at 130.

Analogous to the account statements of the Fake Securities Claimants, the BLMIS account statements "have no relation to reality." New Times I, 371 F.3d at 88. Although the securities that Madoff allegedly purchased were identifiable in name, the securities positions reflected on customer account statements were artificially constructed. By backdating trades to produce predetermined, favorable returns, Madoff, like the fraudster in New Times, essentially pulled the fictitious amounts from thin air. The resulting securities positions on customers' November 30th Statements were therefore entirely divorced from the uncertainty and risk of actual market trading. In fact, at certain times, Madoff customers, like the Fake Securities Claimants, held at least one imaginary security.

The Objecting Claimants are also clearly distinguishable from the Real Securities Claimants in the New Times liquidation. The Real Securities Claimants' initial investments were sufficient to acquire their securities positions, and the corresponding paper earnings "mirrored what would have happened" had the fraudster purchased the securities as promised. New Times I, 371 F.3d at 74 (quoting Br. for Appellants James W. Giddens and SIPC at 7, n. 6). In contrast, the Madoff customers' initial investments were insufficient to acquire their purported securities positions, which were made possible only by virtue of fictitious profits. Rather than "mirroring" the market, the account activity was manipulated with the benefit of deliberately calibrated hindsight, and many purported trades were settled outside the exchange's price range for the trade dates of those securities. As such, the Objecting Claimants should not be treated like the Real Securities Claimants, but rather like the Fake Securities Claimants.

Accordingly, a careful review of New Times I and II convinces the Court that the Trustee's Net Investment Method is correct. It would be simply absurd to credit the fraud and legitimize the phantom world created by Madoff when determining Net Equity. See New Times I, 371 F.3d at 88. The Net Investment Method is appropriate because it relies solely on unmanipulated withdrawals and deposits and refuses to permit Madoff to arbitrarily decide who wins and who loses. Given the utter disconnect between the securities positions on customer account statements and market trading reality, the Court finds that the Objecting Claimants and the Fake Securities Claimants are similarly situated and should therefore be afforded the same treatment. As such, the proper way to determine Net Equity is by adopting the Net Investment Method, which is the only approach that can appropriately serve as a proxy for the imaginary securities positions shown on customers' last account statements.

V. EQUITY AND PRACTICALITY FAVOR THE NET INVESTMENT METHOD

While the Court recognizes that the outcome of this dispute will inevitably be unpalatable to one party or another, notions of fairness and the need for practicality also support the Net Investment Method.

As distribution of customer property to the "equally innocent victims" of Madoff's fraud is a zero-sum game, equity dictates that the Court implement the Net Investment Method. See Cunningham v. Brown, 265 U.S. 1, 13, 44 S.Ct. 424, 68 L.Ed. 873 (1924). Customer property consists of a limited amount of funds that are available for distribution. Any dollar paid to reimburse a fictitious profit is a dollar no longer available to pay claims for money actually invested. If the Last Statement Method were adopted, Net Winners would receive more favorable treatment by profiting from the principal investments of Net Losers, yielding an inequitable result.

To demonstrate the profound negative impact on Net Losers were Net Equity claims to be based upon fictitious statements rather than net investment, the Trustee submitted an illustrative hypothetical. Investor 1 invested $10 million many years ago, withdrew $15 million in the final year of the collapse of Madoff's Ponzi scheme, and his fictitious last account statement reflects a balance of $20 million. Investor 2 invested $15 million in the final year of the collapse of Madoff's Ponzi scheme, in essence funding Investor 1's withdrawal, and his fictitious last account statement reflects a $15 million deposit. Consider that the Trustee is able to recover $10 million in customer funds and that the Madoff scheme drew in 50 investors, whose fictitious last account statements reflected "balances" totaling $100 million but whose net investments totaled only $50 million.

Under the Last Statement Method, Net Equity claims would be fulfilled based on a 10% recovery ($10 million recovered ÷ $100 million in fictitious account balances). Investor 1 would be entitled to 10% of his $20 million "account balance" and a $500,000 SIPC advance, or $2.5 million, despite his recent withdrawal of $15 million from the scheme. The total recovery would be $17.5 million on an initial investment of $10 million, or a $7.5 million profit. Investor 2 would be entitled only to 10% of his $15 million "account balance" and a $500,000 SIPC advance, or $2 million of his $15 million investment, resulting in a $13 million loss. Therefore, even though Investor 2 invested more money than Investor 1, and even though Investor 2's money was used to fund Investor 1's withdrawal, Investor 2 stands to lose significantly more money. Employing the Last Statement Method would yield a grossly inequitable outcome.

In contrast, under the Net Investment Method, Investor 1 would not have a Net Equity claim and would not be entitled to a SIPC advance because he already withdrew more than he deposited. Investor 2, however, would recover 20% ($10 million recovered ÷ $50 million in total net investment) of his $15 million net investment, plus a $500,000 SIPC advance, totaling $3.5 million, a significantly more just result.

This hypothetical demonstrates that if the Last Statement Method were used, Net Winners such as Investor 1 would continue to recover funds from customer property at the expense of Net Losers, who recovered little or nothing from Madoff and whose "investments" were used to fund the very withdrawals that made the earlier investors Net Winners. Adopting the Last Statement Method would only exacerbate the harm caused to Net Losers and would improperly distribute customer funds based on Madoff's arbitrary design. Net Winners and Net Losers, equally innocent in Madoff's Ponzi scheme, should not be treated disparately. Accordingly, the circumstances of this case "call strongly for the principle that equality is equity." Cunningham, 265 U.S. at 13, 44 S.Ct. 424.

Equality is achieved in this case by employing the Trustee's method, which looks solely to deposits and withdrawals that in reality occurred. To the extent possible, principal will rightly be returned to Net Losers rather than unjustly rewarded to Net Winners under the guise of profits. In this way, the Net Investment Method brings the greatest number of investors closest to their positions prior to Madoff's scheme in an effort to make them whole.

With refreshing clarity, Simon Jacobs ("Jacobs"), himself a victim of Madoff's fraud, makes this very point in his pro se letter brief:

In a Ponzi scheme, the perpetrator takes in money from investors, promising a return that is wholly fictitious, and instead pays cash returns to early investors with cash collected from later investors. This means that any cash returned to an investor was either his own, or more likely, was taken from another later investor. No money is actually invested for either gain or loss. Money is simply moved by the perpetrator from one investor to another.
. . .
Such cash that [Net Winners] withdrew in excess of their deposits was, by definition, cash that other customers put in, NOT a return on their purported investment, since there was no investment made, and hence no return.
. . .
The idea that because Madoff was a broker dealer, the assets recovered by the trustee should be returned to investors in proportion to their last monthly statement would effectively make the trustee perpetrate his own Ponzi scheme, because the net winners would again receive money put into the scheme by the net losers. This is so because any money recovered must, ipso facto, have come from the net losers, the net winners having already recovered their original investment, and more. Thus later investors, the net losers, would lose even more money and the earlier investors, the net winners ... would gain still further.

Ltr. Br. in Favor of the Trustee's Motion on the Net Equity Issue (Dec. 7, 2009) (Case No. 08-1789, Docket No. 1041) (emphasis added). Jacobs concludes that adoption of the Last Statement Method would run "directly counter to any concept of equitable fairness."

The Court agrees and finds that the Net Investment Method proposed by the Trustee is the more equitable and appropriate way to determine Net Equity, is consistent with Second Circuit precedent, and gives a workable blueprint for distribution to the victims of Madoff's incogitable scheme.

CONCLUSION

For all the reasons set forth herein, the Trustee's Motion for an order, inter alia, upholding his determination of Net Equity is hereby GRANTED. The Trustee is directed to submit an order consistent with this decision.

EXHIBIT A

EXHIBIT A &mdash SUMMARY OF ARGUMENTS

|-------------------|-------------------------------------------------------------------|------------------------------------------------------------------------------------------| | | | | | TOPIC | ARGUMENTS IN SUPPORT OF THE TRUSTEE | ARGUMENTS IN OPPOSITION TO THE TRUSTEE | | | | | |-------------------|-------------------------------------------------------------------|------------------------------------------------------------------------------------------| | | I. The amount of cash deposited by the customer into | I. The liquidation value of the securities positions listed on a customer's | | | his customer account less any amounts withdrawn by | November 30 ^th Statement: the Last Statement Method. | | Proposed | him: the Net Investment Method. | a. A customer's securities positions need not represent actually-held | | Definition of Net | a. The SEC further proposes the "constant dollar" | securities, because die Trustee is authorized to "purchase securities as | | Equity | method by adjusting for the effects of inflation (or | necessary for the delivery of securities to customers in satisfaction of | | | deflation). | their claims for net equities." SIPA § 78fff-2(d). | | | | | |-------------------|-------------------------------------------------------------------|------------------------------------------------------------------------------------------| | | I. The plain language of SIPA supports the Net | I. The Net Investment Method is at odds with SIPA's plain language. | | | Investment Method. | a. The Trustee erroneously interprets net equity to mean "net investment," | | | a. SIPA section 78lll(11) defines Net Equity generally | rendering the Net Equity section superfluous. | | | as the liquidation value of the customer's "securities | i. The Net Investment Method looks back over the life of an account, | | | positions," minus amounts owed to the debtor. If | while the temporal focus of SIPA is on the filing date. SIPA aims to | | | Congress had intended for customers to be satisfied | restore a customer's account to its amount as of the filing date of the | | Plain language | based solely upon their last statement, it would have | SIPA liquidation, just as the FDIC restores a bank customer to the | | and Legislative | included such language in SIPA. | time of the bank failure. | | History | b. The SEC and the Trustee agree that the "books and | b. Net Equity claims need not be "ascertainable from the books and | | | records" requirement of SIPA section 78fff-2(b) | records of the debtor or [] otherwise established to the satisfaction of | | | applies in this case to determine Net Equity, | the trustee." | | | i. The SEC concludes that Net Equity claims must | i. The SEC misreads SIPA section 78fff-2(b), which treats | | | always be "ascertainable from the books and | "obligations of the debtor" and "Net Equity claims" separately, and | | | records of the debtor or [] otherwise established | states only that "obligations" be ascertainable or established to the | | | to the satisfaction of the trustee." SIPA § 78fff-2(b). | trustee's satisfaction. The amount of the Net Equity claim is a | | | The Last Statement Method satisfies neither | separate issue, under the separate SIPA section 78lll(11), unrelated | | | because (1) the books and records reveal a fraud | to the books and records requirement of SIPA section 78fff-2(b). | | | and (2) customers cannot show that they paid for | ii. SIPA section 78fff-2(b) is limited to establishing a customer's | | | the securities positions. | status as a preferred customer to qualify for a SIPC advance. | | | | | | | ii. The Trustee argues that the "books and records" | iii. SIPA section 78fff-2(b) governs the Trustee's obligations in | | | requirement gives "guidance" in this case, as the | satisfying customer claims, not the amount of those claims, which | | | account statements are fictitious. The only bona | are governed by the definition of Net Equity. | | | fide transactions ascertainable from the books and | | | | records are deposits, and withdrawals. Therefore, | | | | the Net Investment Method is appropriate. | | |-------------------|-------------------------------------------------------------------|------------------------------------------------------------------------------------------|

|-------------------|-------------------------------------------------------------------|------------------------------------------------------------------------------------------| | | iii. It is appropriate to look to SIPA section 78fff-2(b). | iv. In New Times, the fraudster's books and records were deemed not | | | SIPA section 78lll(11)(defining net equity) | dispositive of the proper calculation of the customer claims. | | | does not address how to determine a broker-dealer's | v. Claimants should not be harmed because the fraudster did not keep | | | obligations to its customers. That is | good books and records. SIPA provides money to claimants where | | | supplied by SIPA section 78fff-2(b). Thus. 78fff-2(b) | brokers misappropriated or stole securities and have untenable | | | is not limited to establishing whether | books and monk. | | | claimants arc entitled to customer status. | | | | | | | | | | | | | II. The Net Investment Method is at odds with SIPA's legislative history | | | | indicating Congressional intent to protect customers' legitimate | | | II. Customers do not have a legitimate expectation in | expectations' | | | fictitious profits. | | | Plain Language | i. A customers' legitimate expectations relate only | a. SIPA's purpose, according to the legislative history, is to protect | | and Legislative | to whether he golds a "claim for securities" or | investors' "legitimate customer expectations," and to "make customer | | History | "claim for cash," as defined under SIPA. To the | accounts whole." | | (cont'd) | extent that the concept of "legitimate | i. "A customer generally expects to receive what he believes is in his | | | expectations" has some relevance to net equity, | account at the time the stockbroker ceases business. But because | | | claimants cannot articulate a legitimate | securities may have been ... never purchased or even stolen, this is | | | expectation in the proceeds of a fraud. | not always possible ... customers generally receive pro rate | | | ii. The Trustee has properly satisfied customers | portions of the securities claims, and as to any remainder, they will | | | legitimate expectations by providing them with | receive cash based on the market value as of the filing date." H.R. | | | claims for securities. | Rep. No. 95-746, at 21 (emphasis added). | | | | | | | 1. Claims for securities cannot be satisified in | ii. Customers' legitimate expectations should not be affected by badges | | | kind because they cannot be purchased in a | of fraud. | | | "fair and orderly market" under SIPA | 1. Customers cannot monitor all investors' accounts, and | | | section 78fff-2(d). Purchasing the | therefore did not expect that the trading volume among all | | | securities would wreak havoc on the | investors was impossible or that there were insufficient | | | market place. Moreover, because of the | option contracts available to accomplish the aggregate split-strike | | | enormous number of buys and sells, it is | conversion strategy. | | | impossible to trace a customer's "real" | | | | money to any particular securities. | | | | | | |-------------------|-------------------------------------------------------------------|------------------------------------------------------------------------------------------|

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

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

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

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

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

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

|-------------------|-------------------------------------------------------------------|------------------------------------------------------------------------------------------| | | I. The IRS lax treatment of Medoff claimants does not | I. The Net Investment Method is inconsistent with tax law. | | | conflict with the Net Investment Method. | a. The Trustee's Net Equity calculation is inconsistent with Revenue | | The Extent to | a. First, the IRS and SIPC are governed by different | Procedure 2009-20, which expressly recognizes the income earned by | | Which the Net | statutory schemes. Second, the IRS does not treat | customers, and customers paid taxes on this income annually. | | Investment | fictitious profits as income. Rather, it allows a | b. Rev. Proc. 2009-20 provides for a five-year carryback of theft loss, but | | Method | taxpayer to treat fictitious profits as a loss for IRS | the Trustee is intending to claw back income withdrawn over the last six | | Contravenes Tax | purposes only if the taxpayer previously treated those | years. | | Law | profits as income and paid taxes on them, but never | c. The IRS does not allow taxpayers to go back more than three years to | | | in fact received them. | correct and file amended returns. | | | | | | | | | |-------------------|-------------------------------------------------------------------|------------------------------------------------------------------------------------------| | | I. SIPC's prior positions do not prevent the Trustee | I. Net Investment is contrary to SIPC's previous interpretations of Net | | | from arguing the Net Investment Method. | Equity. | | | a. Even if SIPC did advance an opposite position in | a. In New Times, SIPC maintained that "reasonable and legitimate | | | New Times, the Trustee would not be estopped | claimant expectations on the filing date are controlling even where | | | because he is legally distinct front SIPC and was not | inconsistent with transactional reality ... [such as] where the purchase | | | a party to New Times. In addition, judicial estoppel | never actually occurred and the debtor instead converted the cash | | Whether SIPC's | applies only to factual, not legal, positions. | deposited by the claimant to fund that purchase." SIPC Br. New Times | | Prior | b. In any event, SIPC did not advance an opposite | II, at 23-24, 2005 WL 5338148, at *12. | | Interpretations | position; rather, where the New Times "gains" were | b. SIPC publicly stated, "in the unlikely event your brokerage firm fails, | | of Net Equity | the result of the fraudster's imagination, SIPC did not | you will need to prove that cash and/or securities are owed to you. This | | Prevent the | support recognition of those gains. Here, the Trustee | is easily done with a copy of your most recent statement and transaction | | Trustee from | and SIPC are espousing the same position. | records of the items bought or sold after the statement," and "net | | Using the Net | | equity of a customer's claim is determined by adding the total value of | | Investment | | cash and securities the firm owes the customer and subtracting the total | | Method | | value of cash and securities the customer owes the firm." | | | | c. SIPC changed its standard customer claim foam specifically for the | | | | Medoff case to ask questions relevant to the Net Investment Method. | | | | Withdrawal amounts were never relevant before. | | | | d. As reported less than a week after Madoff was arrested, Josephine | | | | Wang, SIPC General Counsel, stated, "if client number 1234 was given | | | | a statement showing that they owned 1000 GOOG shares, even if a | | | | transaction never took place, then SIPC has to buy and replace the 1000 | | | | GOOG shares." See SIPC's Role in Madoff-Of-All-Scams Could Save | | | | The Stock Market, available at StreetInsider.com. Dec. 16, 2008. | | | | (emphasis added). | | | | (emphasis added). | |-------------------|-------------------------------------------------------------------|------------------------------------------------------------------------------------------|

|-------------------|-------------------------------------------------------------------|------------------------------------------------------------------------------------------| | | I. The Series 500 Rules do not support the Last | I. The Series 500 Rues support the Last Statement Method. | | | Statement Method. | a. "Whore the Debtor held cash in an account for a customer, the customer | | Whether SIPC's | a. Rather, these rules are only relevant in deciding | has a `claim for securities' with respect to any authorized securities | | Series 500 Rules | whether a customer has a claim for cash or securities. | purchase [i]f the Debtor has sent written confirmation to the customer | | Support the Last | Furthermore, they apply only with respect to | that the securities in question have been purchased for or sold to the | | Statement | transactions made in the ordinary course of business. | customer's account." 17 C.F.R. § 300.502(a) (emphasis added). | | Method | Thus, they ate irrelevant with respect to fraudulent | i. These rules concern the type of claim, rather than bow to value the | | | transactions. | claim, but they make clear that the customer's receipt of | | | | confirmations, not the debtor's performance, is controlling for the | | | | purpose of SIPC advancements. Statutes should be interpreted to | | | | avoid inconsistencies. | |-------------------|-------------------------------------------------------------------|------------------------------------------------------------------------------------------| | | I. Entitlement to a SIPC advance arises only when a | I. Payments to one customer using the Last Statement Method will not | | | customer will receive a distribution from the fund of | deny payments to another. | | | customer property, and participation in the fund | a. Initial payments of up to $500,000 come from SIPC's fund, not | | Whether | requires a valid Net Equity claim. Thus, if a | customer property or the bankruptcy estate. | | Distribution is a | customer has negative Net Equity based en the Net | b. The Madoff liquidation is not a zero-sum game because SIPC is a third | | "Zero-Sum | Investment Method, they are not gadded to any | party insurer that has an absolute obligation to replace securities. That | | Game" | funds from SIPC. | obligation is completely separate from each customer's share of estate | | such that the | a. If a customer is entitled to share in customer | property, and the payment by SIPC of insurance to each customer in no | | Net Investment | property, and if his pro rata share is insufficient to | way reduces estate property. | | Method is | fully satisfy his Net Equity, then he will receive a | c. SIPC has authority to obtain more funding from Congress. | | Necessary for | SIPC advance. | | | Equality Among | | | | Claimants | | | | | | | | | | | |-------------------|-------------------------------------------------------------------|------------------------------------------------------------------------------------------|

APPENDIX 1

APPENDIX 1—APPEARANCES

PARTIES SUPPORTING THE NET INVESTMENT METHOD

1. BAKER & HOSTETLER LLP 45 Rockefeller Plaza New York, N.Y. 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 By: David Sheehan Marc E. Hirschfield Oren J. Warshavsky Seanna R. Brown Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff 2. SECURITIES INVESTOR PROTECTION CORPORATION 805 Fifteenth Street, N.W. Suite 800 Washington, DC 20005 Telephone: (202) 371-8300 Facsimile: (202) 371-6728 By: Josephine Wang Kevin H. Bell Attorneys for the Securities Investor Protection Corporation 3. SECURITIES AND EXCHANGE COMMISSION 100 F. Street, N. E. Washington, DC 20548 Telephone: (202) 551-5148 By: Katharine B. Gresham Alistaire Bambach Attorneys for the Securities and Exchange Commission 4. CRAVATH, SWAINE & MOORE LLP 825 Eighth Avenue New York, N.Y. 10019 Telephone: (212) 474-1000 Facsimile: (212) 474-3700 By: Richard Levin Attorneys for Optimal Strategic U.S. Equity Limited and Optimal Arbitrage Limited 5. Simon Jacobs (Pro Se) OBJECTING CLAIMANTS Represented by Counsel 1. BERNFELD, DEMATTEO & BERNFELD LLP 600 Third Avenue New York, N.Y. 10016 Telephone: (212) 661-1661 Facsimile: (212) 557-9610 By: David B. Bernfeld Jeffrey Bernfeld Attorneys for Dr. Michael Schur and Mrs. Edith A. Schur 2. BROWN RUDNICK LLP Seven Times Square New York, N.Y. 10036 Telephone: (212) 209-4800 Facsimile: (212) 209-4801 By: David J. Molton Martin S. Siegel Attorneys for Kenneth M. Krys and Christopher D. Stride as Liquidators of and for Fairfield Sentry Limited 3. STANLEY DALE COHEN 41 Park Avenue, Suite 17-F New York, N.Y. 10016 Telephone: (212) 686-8200 By: Stanley Dale Cohen Attorney for Lee Mellis, Lee Mellis (IRA), Jean Pomerantz T.O.D., and Bonita Savitt 4. DAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, N.Y. 10017 Telephone: (212) 450-4000 Facsimile: (212) 701-5800 By: Karen Wagner Jonathan D. Martin Attorneys for Sterling Equities Associates 5. DEWEY & LEBOEUF LLP 1301 Avenue of the Americas New York, N.Y. 10019 Telephone: (212) 259-8000 Facsimile: (212) 259-6333 By: Seth C. Farber James P. Smith III Kelly A. Librera Attorneys for Ellen G. Victor 6. GIBBONS, P.C. One Pennsylvania Plaza, 37th Floor New York, N.Y. 10119 Telephone: (212) 613-2009 Facsimile: (212) 554-9696 By: Jeffrey A. Mitchell Don Abraham Attorneys for Donald G. Rynne 7. GOODWIN PROCTER LLP 53 State Street Boston, MA 02109 Telephone: (617) 570-1000 Facsimile: (617) 523-1231 By: Daniel M. Glosband David J. Apfel Brenda R. Sharton Larkin M. Morton Attorneys for Jeffrey A. Berman, Russell DeLucia, Ellenjoy Fields, Michael C. Lesser, Norman E. Lesser 11/97 Rev. Trust, Paula E. Lesser 11/97 Rev. Trust, and Jane L. O'Connor, as Trustee of the Jane O'Connor Living Trust 8. HERRICK, FEINSTEIN LLP 2 Park Avenue New York, N.Y. 10016 Telephone: (212) 592-1400 Facsimile: (212) 592-1500 By: William R. Fried Attorneys for Magnify, Inc. 9. KLEINBERG, KAPLAN, WOLFF & COHEN, P.C. 551 Fifth Avenue, 18th Floor

New York, N.Y. 10176 Telephone: (212) 986-6000 Facsimile: (212) 986-8866 By: David Parker Matthew J. Gold Jason Otto Attorneys for Lawrence Elins and Malibu Trading and Investing, L.P. 10. LAX & NEVILLE, LLP 1412 Broadway, Suite 1407 New York, N.Y. 10018 Telephone: (212) 696-1999 Facsimile: (212) 566-4531 By: Brian J. Neville Barry R. Lax Attorneys for Mary Albanese, the Brow Family Partnership, Allen Goldstein, Laurence Kaye, Suzanne Kaye, Rose Less, and Gordon Bennett 11. McCARTER & ENGLISH, LLP 245 Park Avenue, 27th Floor New York, N.Y. 10167 Telephone: (212) 609-6800 Facsimile: (212) 609-6921 By: Joseph Lubertazzi, Jr. Attorneys for Wachovia Bank, National Association 12. MILBERG LLP One Pennsylvania Plaza New York, N.Y. 10119 Telephone: (212) 594-5300 Facsimile: (212) 868-1229 By: Jonathan M. Landers Matthew Gluck Lois F. Dix Joshua E. Keller Sanford P. Dumain Jennifer L. Young SEEGER WEISS LLP One William Street New York, N.Y. 10004 Telephone: (212) 584-0700 Facsimile: (212) 584-0799 By: Stephen A. Weiss Christopher M. Van de Kieft Parvin K. Aminolroaya Attorneys for Albert J. Goldstein U/W FBO, Ruth E. Goldstein TTEE, Ann Denver, Norton Eisenberg, Export Technicians, Inc., Stephen R. Goldenberg, Judith Rock Goldman, Jerry Guberman, Anita Karimian, Orthopaedic Specialty Group PC, Martin Rappaport, Paul J. Robinson, Bernard Seldon, Harold A. Thau, and The Aspen Company 13. PHILLIPS NIZER LLP 666 Fifth Avenue New York, N.Y. 10103 Telephone: (212) 841-1320 Facsimile: (212) 262-5152 By: Helen Davis Chaitman Attorneys for Diane and Roger Peskin, Maureen Ebel, and a group of other customers 14. BRUCE S. SCHAEFFER 404 Park Avenue South New York, N.Y. 10016 Telephone: (212) 689-0400 By: Bruce S. Schaefer Attorney for Irving J. Pinto Revocable Trust, Irving J. Pinto Grantor Retained Annuity Trust of 1994, Irving J. Pinto Grantor Retained Annuity Trust of 1996, and Amy Lome Pinto Revocable Trust 15. SCHULTE ROTH & ZABEL LLP 919 Third Avenue New York, N.Y. 10022 Telephone: (212) 756-2000 Facsimile: (212) 593-5955 By: William D. Zabel Michael L. Cook Marcy Ressler Harris Frank J. LaSalle Attorneys for the SRZ Claimants 16. SHEARMAN & STERLING LLP 599 Lexington Avenue New York, N.Y. 10022 Telephone: (212) 848-4000 Facsimile: (212) 848-7179 By: Stephen Fishbein James Garrity Richard Schwed Attorneys for Carl Shapiro and associated entities 17. SONNENSCHEIN NATH & ROSENTHAL LLP 1221 Avenue of the Americas New York, N.Y. 10020 Telephone: (212) 768-6889 Facsimile: (212) 768-6800 By: Carole Neville Attorneys for certain investors Pro Se 1. Hugh de Blacam 2. Ethel and James Chambers 3. Anthony Fusco 4. Herbert and Ruth Gamberg 5. Cynthia Pattison Germaine 6. Lillian Gilden 7. Phyllis Glick 8. Yolanda Greer 9. Joseph M. Hughart 10. Marvin Katkin 11. Marshall W. Krause 12. Jason Mathias 13. Michael and Stacey Mathias 14. Shawn Mathias 15. Herbert A. Medetsky 16. Josef Mittleman 17. Josef Mittleman, on behalf of Just Empire, LLC 18. Arlene Perlis 19. Gunther and Margaret Unflat 20. Lawrence R. Velvel 21. Alan J. Winters PARTIES NOT TAKING A POSITION ON THE CALCULATION OF NET EQUITY 1. JOHNSON, POPE, BOKOR, RUPPEL & BURNS, LLP 911 Chestnut Street Clearwater, FL 33757

Telephone: (727) 461-1818 Facsimile: (727) 443-6548 By: Angelina E. Lim Michael C. Cronin Attorneys for Anchor Holdings, LLC 2. MORRISON COHEN LLP 909 Third Avenue New York, N.Y. 10022 Telephone: (212) 735-8600 Facsimile: (212) 735-8708 By: Michael R. Dal Lago Attorneys for David Silver