1497bk(L)

Inre:BernardL.MadoffInvestmentSecuritiesLLC

In the

United States Court of Appeals

For the Second Circuit

AugustTerm,2014
Nos.1497bk(L),14509bk(con),14510bk(con),14511bk(con),
14512bk(con)
INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC

SECURITIESINVESTORPROTECTIONCORPORATION,
PlaintiffAppellee,
v.
2427PARENTCORPORATIONETAL.,ESTATEOFDORISM.PEARLMAN
(IRA),HAROLDJ.HEINETAL.,LILLIANBERMANGOLDFARBETAL.,
MBEPREFERREDLIMITEDPARTNERSHIPETAL.,HHIINVESTMENT
TRUST#2,MELVYNI.WEISSANDBARBARAJ.WEISSETAL.,MICHAEL
MOST,THEKOSTINCO.,MARSHAPESHKINETAL.,
ClaimantsAppellants,
IRVINGH.PICARD,
TrusteeAppellee.

AppealfromtheUnitedStatesBankruptcyCourt
fortheSouthernDistrictofNewYork.
No.081789BurtonR.Lifland,Judge.

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC

ARGUED:OCTOBER14,2014
DECIDED:FEBRUARY20,2015

Before:STRAUB,WESLEY,andLIVINGSTON,CircuitJudges.

AppealfromanorderoftheUnitedStatesBankruptcyCourt
fortheSouthernDistrictofNewYork(BurtonR.Lifland,Judge),
approvingthecalculationofnetequityclaimsundertheSecurities
InvestorProtectionActwithoutanadjustmentforinflationor
interestandoverrulingclaimantobjections.Weholdthatthe
SecuritiesInvestorProtectionActdoesnotpermitaninflationor
interestadjustmenttonetequityclaimsforcustomerproperty.
Accordingly,weAFFIRM.

P.GREGORYSCHWED,(WalterH.Curchack,Daniel
B.Besikof,MichaelBarnett,onthebrief),Loeb&
LoebLLP,NewYork,NY,forClaimantsAppellants
MBEPreferredLimitedPartnershipetal.
RICHARDA.KIRBY,(LauraK.Clinton,ScottP.
Lindsay,onthebrief),K&LGatesLLP,
Washington,DC,forClaimantAppellantEstateof
DorisM.Pearlman(IRA).
PAULAJ.WARMUTH,Stim&Warmuth,P.C.,
Farmingville,NY,forClaimantAppellantMichael
Most.

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
MatthewGluck,MatthewA.Kupillas,Jennifer
Young,MilbergLLP,NewYork,NY,Parvin
Aminolroaya,SeegerWeissLLP,NewYork,NY,
forClaimantsAppellants2427ParentCorporationet
al.
ParvinAminolroaya,SeegerWeissLLP,New
York,NY,forClaimantsAppellantsMelvynI.Weiss
andBarbaraJ.Weissetal.
CaroleNeville,DentonsUSLLP,NewYork,NY,
forClaimantsAppellantsHaroldJ.Heinetal.
PhilipBentley,EliseS.Frejka,KramerLevin
Naftalis&FrankelLLP,NewYork,NY,for
ClaimantsAppellantsLillianBermanGoldfarbetal.
MarcyResslerHarris,JenniferM.Opheim,Mark
D.Richardson,SchulteRoth&ZabelLLP,New
York,NY,forClaimantAppellantHHIInvestment
Trust#2.
BernardJ.GarbuttIII,Morgan,Lewis&Bockius
LLP,NewYork,NY,forClaimantAppellantThe
KostinCo.
HelenDavisChaitman,PeterW.Smith,Julie
Gorchkova,Becker&Poliakoff,LLP,NewYork,
NY,forClaimantsAppellantsMarshaPeshkinetal.
JOSEPHINEWANG,GeneralCounsel,(KevinH.
Bell,SeniorAssociateGeneralCounselfor
DisputeResolution,ChristopherH.Larosa,
SeniorAssociateGeneralCounselLitigation,
LaurenT.Attard,AssistantGeneralCounsel,on
3

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
thebrief),SecuritiesInvestorProtection
Corporation,Washington,DC,forPlaintiff
AppelleeSecuritiesInvestorProtectionCorporation.
SEANNAR.BROWN,(DavidJ.Sheehan,JorianL.
Rose,AmyElizabethVanderwal,onthebrief),
Baker&HostetlerLLP,NewYork,NY,for
PlaintiffAppelleeIrvingH.Picard,asTrusteeforthe
SubstantivelyConsolidatedSIPALiquidationof
BernardL.MadoffInvestmentSecuritiesLLCandthe
EstateofBernardL.Madoff.

STRAUB,CircuitJudge:
TheissuepresentedinthisappealiswhethertheSecurities
InvestorProtectionAct,15U.S.C.78aaa,etseq.(SIPAorthe
Act),permitsaninflationorinterestadjustmenttonetequity
claimsforcustomerproperty.Weholdthatitdoesnot.
ClaimantsAppellants(Claimants)areformerinvestorsof
BernardL.MadoffInvestmentSecuritiesLLC(BLMIS).Trustee
AppelleeIrvingH.Picard(Trustee)wasappointed,pursuantto
SIPA,astrusteefortheliquidationofBLMIS.

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
SIPAprioritizesthedistributionofcustomerpropertyina
brokerdealerliquidation.TheActcreatesafundofcustomer
propertyforprioritydistributionexclusivelyamongafailedbroker
dealerscustomers,andcustomersshareinthefundproportionally,
accordingtoeachcustomersnetequity.
BecauseMadoffsfraudlastedatleastthreedecades,
ClaimantsaskthattheTrusteeadjusttheirproportionalshareof
customerpropertytoreflectinflation;oneClaimantalsoasksforan
interestadjustment,toreflectthetimevalueofmoney.Weagree
withtheTrusteeandtheBankruptcyCourt,however,thatSIPA
doesnotpermitaninflationorinterestadjustmenttonetequity
claims.Accordingly,weaffirmtheorderoftheUnitedStates
BankruptcyCourtfortheSouthernDistrictofNewYork(BurtonR.
Lifland,Judge),approvingtheTrusteesunadjustednetequity
calculationandoverrulingClaimantsobjections.

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
BACKGROUND
WedescribedBernardMadoffsfraudinapreviousappealin
thiscase.SeeInreBernardL.MadoffInv.Sec.LLC,654F.3d229,231
33(2dCir.2011)(NetEquityDecision),cert.dismissed,132S.Ct.
2712,cert.denied,133S.Ct.24,and133S.Ct.25(2012).Brieflystated,
althoughClaimantsgavemoneytoMadoffforinvestment,Madoff
neverinvestedthecustomerfunds.Id.at231.Toconcealhis
completelackoftradingactivityonbehalfofhisinvestors,Madoff
createdfictitiouspaperaccountstatementsandtradingrecords.Id.
Thecustomeraccountstatementslistedpurportedsecurities
transactions,buttheydidnotreflectanyactualtradingorholdings
ofsecuritiesbyMadoffonbehalfofthecustomer.Id.at23132.
Madoffinsteadfundedcustomerwithdrawalswiththeprincipal
investmentsofnewandexistingcustomers.Id.at232.Theonly
accurateentriesinMadoffscustomerstatementswerethosethat
reflectedthecustomerscashdepositsandwithdrawals.Id.

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
AfterthecollapseofBLMIS,theTrusteewasappointed
pursuanttoSIPA.Id.at233.SIPAwasenactedin1970asaresponse
toarashoffailuresamongsecuritiesbrokerdealersthatcaused
significantlossestocustomerswhoseassetswereunrecoverableor
becametiedupinthebrokerdealersbankruptcyproceedings.In
reNewTimesSec.Servs.,Inc.,371F.3d68,84(2dCir.2004)(internal
quotationmarksomitted)(NewTimesI).TheActcreates
proceduresforliquidatingfailedbrokerdealersandprovidestheir
customersspecialprotections.NetEquityDecision,654F.3dat233.
SIPAisdesignedtoreturncustomerpropertytocustomers.
See1CollieronBankruptcy12.01(AlanN.Resnick&HenryJ.
Sommereds.,16thed.2014)(notingthatthereturnofcustomer
propertyisSIPAsfundamentalpremise).InaSIPAliquidation,a
fundofcustomerproperty,separatefromthebrokerdealers
generalestate,isestablishedforprioritydistributionexclusively
amongcustomers.NetEquityDecision,654F.3dat233.Customer

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
propertyconsistsofcashandsecuritiesreceived,acquired,or
heldbythebrokerdealerforthesecuritiesaccountsof
customers,exceptsecuritiesregisteredinthenamesofindividual
customers.15U.S.C.78lll(4).
Customersofthebrokerdealershareratablyinthefundof
customerpropertyonthebasisandtotheextentoftheirrespective
netequities.Id.78fff2(c)(1)(B).Thelargerthecustomersnet
equity,thegreaterthecustomersshareofthefundofcustomer
property.1Collier,supra,12.14.SIPAdefinesnetequity,in
relevantpart,as:
[T]he dollar amount of the account or
accounts of a customer, to be determined
by calculating the sum which would
have been owed by the debtor to such
customer if the debtor had liquidated, by
sale or purchase on the filing date all
securities positions of such customer
minus any indebtedness of such
customertothedebtoronthefilingdate.
15U.S.C.78lll(11).Paymentstocustomersbasedonnetequityare
madeinsofarastheamountowedtothecustomerisascertainable
8

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
fromthebooksandrecordsofthedebtoror[is]otherwise
establishedtothesatisfactionofthetrustee.Id.78fff2(b);seealso
NetEquityDecision,654F.3dat237.
SIPAguaranteescustomersaminimumamountofrecovery.
Whenacustomersratableshareoftherecoveredcustomerproperty
isinsufficienttosatisfyhisorhernetequityclaim,thecustomers
claimcanbesupplementedbytheSecuritiesInvestorProtection
Corporation(SIPC),whichwascreatedbySIPAandadministersa
fundcapitalizedbythebrokeragecommunity.See15U.S.C.
78ccc,78ddd.TheSIPCadvancestotheSIPAtrusteeupto
$500,000percustomer,seeid.78fff3(a),exceptthattheadvancefor
acustomersclaimforcashcannotexceed$250,000,see
id.78fff3(a)(1),(d).Totheextentthatcustomerpropertyand
SIPCadvancesareinsufficienttosatisfyacustomersfullnetequity
claim,thecustomerisentitledtoparticipateinthegeneral
estateasanunsecuredcreditor.Id.78fff2(c)(1).

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
IntheNetEquityDecision,weheldthatMadoffsinvestorsare
customerswithclaimsforsecuritiesunderSIPA.654F.3dat
236.Wealsoaddressedhownetequityshouldbecalculatedinthis
case,giventhatSIPAsdefinitionofnetequityreferencessecurities
positionsbutMadoffneverinvestedcustomerfunds.Werejected
theargumentofvariouscustomersthattheirclaimsshouldbebased
ontheamountslistedintheirlastBLMISaccountstatement.Id.We
observedthatrelianceonMadoffsfalsestatementstodeterminenet
equitywouldhavetheabsurdeffectoftreatingfictitiousand
arbitrarilyassignedpaperprofitsasrealandwouldgivelegaleffect
toMadoffsmachinations.Id.at235.Instead,weupheldasa
matteroflawtheTrusteesdeterminationthatnetequityshouldbe
calculatedbytheamountthatacustomerdepositedintohisorher
BLMISaccount,lessanyamountthatheorshewithdrewfromthe
account.Id.at233,23642&238n.7.Wedeclinedtoaddress,
however,whetherthecalculationofnetequityshouldbeadjustedto

10

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
accountforinflationorinterest,becausetheBankruptcyCourthad
notyetaddressedtheissue.Id.at235n.6.
Afterward,theTrusteeandtheSIPCarguedtotheBankruptcy
CourtthatSIPAdoesnotpermitadjustmentsforinflationorinterest
tocustomersnetequityclaims.Variousclaimantsobjected,some
seekingjustaninflationadjustment,othersaninterestadjustment.
TheSecuritiesandExchangeCommission(SEC),whichhas
plenaryauthoritytosupervisetheSIPC,SIPCv.Barbour,421U.S.
412,417(1975)(internalquotationmarksomitted),disagreedwith
theTrusteeandtheSIPCandcontendedthatnetequitycouldbe
adjustedtoaccountforinflation.TheSECarguedbeforethe
BankruptcyCourtthatadjustingforinflationwouldbeanaccurate
waytocalculatecustomernetequityunderthenarrowsetoffactual
circumstancespresentedhere,althoughitacknowledgedthatthe
decisiontomakesuchanadjustmentmustrestontheCourts
considerationofthecostsandbenefitsofdoingso.SECMem.of

11

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
Lawat4,SIPCv.BernardL.MadoffInv.Sec.LLC,0801789smb
(Bankr.S.D.N.Y.Dec.10,2012),ECFNo.5142.However,ina
colloquywiththeBankruptcyCourt,theSECslawyer,whenasked
whatkindofdeferencehesought,statedthattheSECwasactually
notaskingfordeference.
TheBankruptcyCourtupheldtheTrusteesdetermination
thatnoadjustmentforinflationorinterestcouldbemadeunder
SIPA.Thecourtruledthat,asamatteroflaw,SIPAdidnotpermita
timebasedadjustmenttonetequity.Itthencertifiedanimmediate
appealofitsdecisionpursuantto28U.S.C.158(d)(2).Wegranted
thepetitionfordirectappeal.
DISCUSSION
WereviewdenovothelegalconclusionsoftheBankruptcy
Court,includingitsinterpretationofSIPA.NetEquityDecision,654
F.3dat234.ClaimantscontendthattheBankruptcyCourterredin
concludingthatSIPAdoesnotallowaninflationadjustmenttonet
equityclaimsforcustomerproperty.TheyalsoassertthattheSECs
12

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
supportforaninflationadjustmentisentitledtoSkidmoredeference.
Wedisagree.
I.

AnInflationAdjustmenttoCustomerNetEquityClaimsIs
ImpermissibleUnderSIPA
AccordingtoClaimants,withoutaninflationadjustment,the

claimsofMadoffsearlierinvestorsareunfairlyundervaluedwhen
comparedtotheclaimsofMadoffslaterinvestors.AlthoughSIPAs
textdoesnotprovideforaninflationadjustmenttonetequity,
ClaimantsurgeustoconstrueSIPAtopermittrusteediscretionto
makesuchanadjustment.Butweconcludethataninflation
adjustmenttonetequityisnotpermissibleunderSIPA.Aninflation
adjustmentgoesbeyondthescopeofSIPAsintendedprotections
andisinconsistentwithSIPAsstatutoryframework.
SIPAdoesnotaddressthepossibilityofaninflation
adjustmenttonetequity.TheActsdefinitionofnetequitymakes
nomentionofinflation,see15U.S.C.78lll(11),whereasother,albeit
unrelated,portionsofSIPAdo,see,e.g.,id.78fff3(e)(providing

13

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
proceduresfortheSIPCtoperiodicallydeterminewhetheran
inflationadjustmenttothestandardmaximumcashadvancement
amountisappropriate).AndalthoughSIPAinstructsthat
customersecuritiesarevalued,forpurposesofcalculatingnet
equity,asthoughtheywereliquidatedonthefilingdate,
id.78lll(11)(A),(B),thisdoesnotindicatethatcashdepositedbut
neverinvestedistobeadjustedforinflation.1
SIPAssilenceisunsurprising.Inatypicalbrokerdealer
failure,aninflationadjustmenttonetequitywouldbenonsensical;
wheresecuritiesareactuallypurchasedforabrokerdealers
customers,thesecuritieshavevaluesthatalreadyincorporate
economiccircumstancessuchasinflation.SIPAssupposedpurpose

1ThefilingdateistypicallythedatethattheSIPCbringsanapplicationin

courtforaprotectivedecreebecausethebrokerdealerscustomersneedSIPA
protection.See15U.S.C.78eee(a)(3),78lll(7).Thetermisusedthroughout
SIPA,e.g.,id.78fff(c)(determinationofcustomerstatus);id.78fff2(d)
(trusteespurchaseofsecuritiestoreplacecustomersecurities);id.78lll(3)
(definingcustomernamesecurities),anditfacilitatesthereturntocustomers
oftheirinvestmentsastheywerejustbeforeliquidation.Here,Claimantsnet
equitiesarevaluedasofthefilingdatebyincorporatingpriordepositsand
withdrawals.

14

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
wastoremedybrokerdealerinsolvenciesnotnecessarilybroker
dealerfraud.SeeH.R.Rep.No.911613,at1(1970),reprintedin1970
U.S.C.C.A.N.5254,5255(Theprimarypurposeof[SIPA]isto
provideprotectionforinvestorsifthebrokerdealerwithwhomthey
aredoingbusinessencountersfinancialtroubles.).Hence,aswe
notedintheNetEquityDecision,SIPAdoesnotspecifyhownet
equityshouldbecalculatedinacaselikethis,inwhichadishonest
brokerfailedtoinvestcustomerfunds.654F.3dat23738.We
determinedthatthestatutorylanguagedoesnotprescribeasingle
meansofcalculatingnetequitythatappliesinthemyriad
circumstancesthatmayariseinaSIPAliquidation,and[d]iffering
factpatternswillinevitablycallfordifferingapproachesto
ascertainingthefairestmethodforapproximatingnetequity.Id.
at235.
TheflexibilityespousedintheNetEquityDecision,though,has
norelevancetothiscase.TheNetEquityDecisionstatednoview

15

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
onwhethertheTrusteesmethodforcalculatingnetequityshould
beadjustedtoaccountforinflationorinterest.Id.at235n.6.
Althoughwesuggested,indicta,thataSIPAtrusteeshould
exercisesomediscretioninselectingamethodtocalculatenet
equity,andareviewingcourtshouldaccordadegreeof
deferencetothemethodchosen,id.at238n.7,thatstandardis
inapplicablehere:WeconcludethatSIPAsschemedisallowsan
inflationadjustmentasamatteroflaw.
Asweemphasizedpreviously,SIPAisintendedtoexpedite
thereturnofcustomerproperty.Id.at240.WithoutSIPA,customer
fundsandsecuritiesheldbyafailedbrokeragecouldbecome
depletedorenmeshedinbankruptcyproceedings.SeeSECv.
SIPC,758F.3d357,36263(D.C.Cir.2014).SIPAaddressesthat
issuebyprotectingthecustodyfunctionofbrokers.Id.;seealso
1Collier,supra,12.01(explainingthatSIPAprotectsinvestors
againstlossesresultingfromthefailureofaninsolventor

16

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
otherwisefailedbrokerdealertoproperlyperformitsroleasthe
custodianofcustomercashandsecurities).Netequityclaimsare
thuslinkeddirectlytothecustomerpropertyheldbyabroker
dealer;SIPAinstructsatrusteetoprocessclaimstotheextentthat
theyareascertainablefromthebrokerdealersbooksandrecordsor
otherwiseestablishedtothetrusteessatisfaction.See15U.S.C.
78fff2(b).BLMISsbooksandrecordsreflectedonlyfunds
depositedandwithdrawn,withoutanytimebasedadjustment,see
BriefforTrusteeAppelleeat7,23,andthesedeposits,less
withdrawals,constitutecustomerpropertyinthiscase,seeNetEquity
Decision,654F.3dat240;15U.S.C.78lll(4)(definingcustomer
property,inrelevantpart,ascashandsecuritiesreceived,
acquired,orheldbythebrokerdealerforthesecuritiesaccounts
ofcustomers).
AlthoughSIPAdefendsinvestorsfromabrokerdealers
failuretoperformitscustodialroleovercustomerproperty,itdoes

17

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
nototherwiseshieldinvestorsfromloss.Instead,theActmerely
restoresinvestorstowhattheirpositionwouldhavebeeninthe
absenceofliquidation.WehavenotedthatSIPAsschemeassumes
thatacustomerasaninvestorinsecuritieswishestoretainhis
investmentsdespitetheliquidationofthebroker;thestatutethus
workstoexposethecustomertothesamerisksandrewardsthat
wouldbeenjoyedhadtherebeennoliquidation.InreNewTimes
Sec.Servs.,Inc.,463F.3d125,128(2dCir.2006)(NewTimesII)
(internalquotationmarksomitted).Hence,SIPAinstructsatrustee,
inmanycircumstances,toprovidecustomerswithsecuritiesinkind
insteadofacashequivalent.See15U.S.C.78fff1(b)(1),78fff
2(b)(2);seealsoid.78fff2(d)(providingthatthetrusteeshall,to
theextentthatsecuritiescanbepurchasedinafairandorderly
market,purchasesecuritiesasnecessaryforthedeliveryofsecurities
tocustomersinsatisfactionoftheirclaimsfornetequities).

18

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
SIPAlikewiseprovidescustomerswithnocompensationfor
thelostuseoftheirsecuritiesorcashwhileliquidationispending.
Customersecurities,whetherreturnedinkindorasacash
equivalent,arevaluedasofthefilingdate,regardlessofany
subsequentfluctuationsinvalue.See15U.S.C.78fff2(b),(c)(1).
Thismayharmaninvestorifthesecuritiesfallinvalue,but
avoidanceoflossbeyondrestorationoftheprefailurestatusquois
notSIPAsgoal.See6Collier,supra,741.06([I]naSIPA
liquidation,customersareatriskformarketloss.).Althoughthe
securitiesandcashhaveopportunitycoststhataredeniedtothe
investorduringliquidation,andalthoughthecashsimilarlymay
havelostpurchasingpowerinaninflationaryeconomy,SIPA
returnstothecustomerthenominalpreliquidationbalance.Cf.
SIPCv.AmbassadorChurchFin./Dev.Grp.,Inc.,788F.2d1208,121012
(6thCir.)(denyingclaimsbroughttorecoverpostbankruptcy
petitioninterestforthesevenandonehalfyearperiodthatthe

19

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
SIPChaddelayedinpayinginvestorsclaims,inpartbecausethe
definitionofnetequitydoesnotincludeinterest),cert.denied,479
U.S.850(1986).
Claimantsassertthatadjustingnetequityclaimsforinflation
isthefairestmethodofdeterminingnetequity.Yet,wehave
explainedthatSIPAwasnotdesignedtoprovidefullprotectionto
allvictimsofabrokeragecollapse,andargumentsbasedsolelyon
theequitiesarenot,standingalone,persuasive.SECv.Packer,
Wilbur&Co.,498F.2d978,983(2dCir.1974).Contraryto
Claimantsassertion,moreover,anunadjusteddistributionof
customerpropertyisnotunjust.Infact,werecentlyfoundnoabuse
ofdiscretioninadistrictcourtsapproval,overobjection,ofa
receiversdistributionplantothevictimsofaPonzischemethat
lastedthirteenyears,eventhoughthedistributionprovidedno
adjustmentforinflation.SeeCommodityFuturesTradingCommnv.
Walsh,712F.3d735,73839,75455(2dCir.2013);cf.alsoNewTimes

20

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
I,371F.3dat88(agreeingthatnetequitywasproperlycalculated
astheamountofmoneyinitiallyplacedwiththePonzischeme
brokerage,withoutnotingthepossibilityofaninflationadjustment).
Becauseitisdoubtfulthatthefullamountofcustomer
propertywillberecoveredinthiscase,2eachdollarallocatedto
earlierinvestorsinrecognitionofinflationreducestheamountof
principalrecoveredbylaterinvestors.Evenifallcustomerproperty
weremiraculouslyrecovered,itwouldbeinsufficienttosatisfy
customerclaimstotheextentsuchclaimswereincreasedtoreflect
inflation.Aninflationadjustmenttonetequityclaimscouldallow
somecustomerstoobtain,ineffect,aprotectionfrominflationfor

2TheTrusteehasstatedthatheisunlikelytorecoverthefullamountoflost

customermoney.SeeU.S.GovtAccountabilityOffice,GAO12991,Securities
InvestorProtectionCorporation:CustomerOutcomesintheMadoffLiquidation
Proceeding6(2012).Almost$20billioninprincipalwaslostinMadoffsscheme,
approximately$17.5billionofwhichwaslostbythosewhohavefiledclaims
withtheTrustee.SeeTrusteesTwelfthInterimReportforthePeriodEnding
September30,2014,at1n.3,SIPCv.BernardL.MadoffInv.Sec.LLC,0801789smb
(Bankr.S.D.N.Y.Oct.27,2014),ECFNo.8276.Asoflate2014,theTrusteehad
recoveredroughly$10billion.Seeid.at1;seealso
http://www.madofftrustee.com.Atoralargumentinthisappeal,theSIPCalso
predictedashortfallintheamountofcustomerpropertyrecovered.

21

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
whichtheyneverbargained,incontraventionofthetextand
purposeofSIPA,andattheexpenseofcustomerswhohavenotyet
recoveredthepropertytheyplacedinMadoffshands.3
ThepurposeofdeterminingnetequityunderSIPAisto
facilitatetheproportionaldistributionofcustomerpropertyactually
heldbythebroker,nottorestoretocustomersthevalueofthe
propertythattheyoriginallyinvested.Wethuspreviously
concludedthatinthiscasenetequitycouldnotbebasedonfictitious
customerstatementsbutinsteadshouldbedeterminedbasedon
customersactualdepositsandwithdrawals.SeeNetEquityDecision,
654F.3dat235.Thesedeposits,netwithdrawals,constitute

3Anadjustmenttoreflectdeflationintheeconomyratherthaninflation

wouldalsobeinconsistentwithSIPAsscheme.Adeflationadjustmentwould
preventcustomersfromobtainingpriorityreturnofthefullamountoftheir
customerproperty.

22

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
customerpropertyhere.UnderSIPA,Claimantsnetequityclaims
cannotbeadjustedtoreflectinflation.4
II.

TheSECsViewisNotEntitledtoDeference
Inreachingthisdecision,nodeferenceisowedtotheSECs

view.TheSECsubmittedabriefandparticipatedinoralargument
beforetheBankruptcyCourtinsupportofthepositionthatSIPA
permitsadjustmentsforinflationtonetequityclaims.5Atthe
hearingonthisissuebeforetheBankruptcyCourt,however,theSEC
statedthatitwasnotclaimingChevrondeference.6TheSECeven

4Tobeclear,ourholdingislimitedtoapostliquidationadjustmentof

customersnetequitycalculations.Obviously,ifacustomerspreliquidation
accountcontainedearningsfromholdingsthatawardedinterestorwere
protectedagainstinflation,forinstance,thecustomersclaimfornetequity
wouldincludethoseearnings,becausetheywouldhavebeenowedbythe
debtortosuchcustomerifthedebtorhadliquidatedallsecuritiespositionsof
suchcustomer.15U.S.C.78lll(11).
5DuringanappearancebeforetheHouseofRepresentativesSubcommitteeon

CapitalMarketsin2009,theSECsDeputySolicitorsimilarlycontendedthat
distributionstoMadoffsinvestorsshouldreflectinflation.SeeStatementof
MichaelA.Conley,MadoffPonziScheme,CapitalMarkets,Ins.&GovtSponsored
Enters.,HouseFin.Servs.,2009WL4647561(Dec.9,2009).
6Chevrondeferenceisgiventoanadministrativeimplementationofastatute

whenitappearsthatCongressdelegatedauthoritytotheagencygenerallyto

23

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
saidmoregenerallythatitwasnotaskingfordeferencehere,but
that,[i]f[it]wereaskingfordeferenceitwouldbeSkidmore
deference.TheSEChasnotfiledabriefinthisappeal,eventhough
SIPAprovidesthattheSECmay,onitsownmotion,filenoticeof
itsappearanceinanyproceedingunderthischapterandmay
thereafterparticipateasaparty.15U.S.C.78eee(c).Claimants
nonethelesscontendthattheSECspositionwarrantsSkidmore
deference.
InSkidmorev.Swift&Co.,323U.S.134(1944),theSupreme
Courtheldthatanagencysinterpretationmaymeritsome
deferencewhateveritsform,giventhespecializedexperienceand
broaderinvestigationsandinformationavailabletotheagency,and
giventhevalueofuniformityinitsadministrativeandjudicial

makerulescarryingtheforceoflaw,andthattheagencyinterpretationclaiming
deferencewaspromulgatedintheexerciseofthatauthority.Barrowsv.Burwell,
No.134179,__F.3d__,2015WL264727,at*1n.6(2dCir.Jan.22,2015)(internal
quotationmarksomitted);seeChevron,U.S.A.,Inc.v.NaturalRes.Def.Council,
Inc.,467U.S.837(1984).

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INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
understandingsofwhatanationallawrequires.UnitedStatesv.
MeadCorp.,533U.S.218,234(2001)(internalcitationomitted)
(quotingSkidmore,323U.S.at139).Skidmoredeferenceisamore
limitedstandardofdeferencethanChevrondeference.NewTimesI,
371F.3dat83.Anagencysinterpretationsareentitledtorespect
underSkidmore,butonlytotheextentthatthoseinterpretations
havethepowertopersuade.Christensenv.HarrisCnty.,529U.S.
576,587(2000)(quotingSkidmore,323U.S.at140).Indetermining
whethertodefertoanagencysinterpretationunderSkidmore,we
considertheagencysexpertise,thecareittookinreachingits
conclusions,theformalitywithwhichitpromulgatesits
interpretations,theconsistencyofitsviewsovertime,andthe
ultimatepersuasivenessofitsarguments.NewTimesI,371F.3dat
83(internalquotationmarksomitted).
ThesefactorsdonotsupportdeferencetotheSECs
interpretation.ThepositionthattheSECtookbeforetheBankruptcy

25

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
Courtinthiscaseisnovel,inconsistentwithitspositionsinother
cases,andultimatelyunpersuasive.Cf.SECv.SIPC,872F.Supp.2d
1,10(D.D.C.2012)(holdingthattheSECsviewonadistinctissueof
SIPAinterpretationwasentitledtolittle,ifany,deferencewhereit
contradictedtheSECslongstandingview),affd,758F.3d357(D.C.
Cir.2014).
TheSIPCexplainsthat,inmorethanthreehundredSIPA
liquidationspriortothisone,theSEChasnotoncesuggestedthat
theamountofcustomerclaimssubjecttosatisfactionwithcash
shouldbeadjustedtoreflectinflation.SeeBriefforPlaintiff
AppelleeSIPCat43.Inthiscase,theSECassertedthatadjusting
claimsforinflationwouldprovidethemostaccuratevaluation,yetit
recentlyopposedaninflationadjustmentinadifferentlonglasting
Ponzischeme.SeeWalsh,712F.3dat744.InWalsh,whichaddressed
acourtappointedreceiversproposeddistribution,theSECargued
thatanunadjusteddistributionwasthebestandmostfair

26

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
approachunderthecircumstances,becauseityieldsasubstantial
recoveryforallinvestors.Id.(quotingtheSECsjoint
recommendationwiththeCommodityFuturesTrading
Commission).AlthoughtheSECspositioninWalshnotedthatan
inflationadjustmentmightbeappropriateincertaininstances,id.,
thereasonstatedforeschewinganadjustmentinWalshwasthelack
ofassetstofullysatisfyeachinvestorsclaim,seeid.,whichis
expectedtobethecasehereaswell.7Nordoweultimatelyfindthe
SECsbriefbeforetheBankruptcyCourttobeconvincing.Itechoes
Claimantscontentionsthatwerejecthere.

7InoralargumentbeforetheBankruptcyCourt,theSECadmittedthe

incongruenceofitsstanceinWalshanditscontentionstotheBankruptcyCourt.
SeeTranscriptofSept.10,2013,Hearingat25,SIPCv.BernardL.MadoffInv.Sec.
LLC,0801789smb(Bankr.S.D.N.Y.Sept.10,2013),ECFNo.5476(We
acknowledgethatthisisapositionthatweretakinginthislitigationandasyou
pointedout,adifferentpositionwastakenintheWalshcase.).

27

INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC
III.

AnInterestAdjustmenttoCustomerNetEquityClaimsIs
AlsoImpermissibleUnderSIPA
Inthisappeal,onlyoneClaimantseeksanadjustmentfor

interest,inadditiontoinflation;allotherClaimantsseekan
adjustmentsolelyforinflation.TheSEClikewisearguedonlyforan
inflationadjustment.Forthesamereasonsstatedabovewith
respecttoaninflationadjustment,supraSectionI,wefindthatthat
aninterestadjustmenttocustomernetequityclaimsis
impermissibleunderSIPAsscheme.
CONCLUSION
Fortheforegoingreasons,weaffirmtheorderoftheUnited
StatesBankruptcyCourtfortheSouthernDistrictofNewYorkand
holdthatSIPAdoesnotpermitaninflationorinterestadjustmentto
netequityclaims.

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