We received a comment from a person whom I will call “N.P.” in response to Installment 55 in this series on the Bernard L. Madoff (“Madoff”) scandal. N.P.’s question was based on an article by Linda Sandler posted on June 1, 2011 on Bloomberg.com. In essence, N.P. was asking why Installment 55 had raised a question as to whether the courts will continue to approve the fees of Trustee Irving Picard and his law firm as has been done in the past. Based on the Sandler article, N.P. observed the following:

Even though a federal judge described Trustee Picard and his law firm's billing as ‘profligate,’ neither the federal nor the bankruptcy courts have the power to review bills when SIPC [Securities Investor Protection Corporation] is paying or, more accurately, when SIPC is imposing fees on broker-dealers to pay.

I respond to N.P. that I respectfully take a different view from him and Judge Burton Lifland in the bankruptcy court, which, to this point, District Court Judge Jed S. Rakoff appears to have embraced at first blush. First, if “approval” of any kind by the bankruptcy judge is needed for the fees “recommended” by SIPC, logic dictates that, at the very least, the judge has the inherent flexibility to review whether such fees are arbitrary, capricious and/or unreasonable and not require him to approve fees that fall into such categories. Otherwise a review is a foolish and meaningless exercise.

More importantly, however, is the question as to whose money is really being spent here. The Sandler article states the following:

Picard has filed 1,000 suits and is processing more than $17 billion in claims, lawyers told Lifland today. Through March [2011], Picard was personally paid $3.6 million and his law firm was paid $145.6 million, bringing fees for all professionals to $318 million since Madoff’s 2008 arrest, according to court filings.

About $346.3 million of the money advanced by SIPC for use by the Madoff estate was consumed by fees and other administrative expenses, while about $779.3 million was used to pay customer claims, according to court filings. [Emphasis supplied.]

The key to my concerns and disagreement with N.P. is the reference to the amount of “money advanced by SIPC for use by the Madoff estate.” It does not say that the SIPC paid the fees and other administrative expenses. In this regard, a visit to the SIPC Web site on the page entitled “Who We Are” has the following single-sentence paragraph: “Recovered funds are used to replenish SIPC's reserve in the event that the reserve is tapped in the early stages of a liquidation proceeding.” This statement would lead one to reasonably conclude that the $346.3 million in legal fees and administrative expenses advanced by SIPC in the Madoff proceeding, or at least a meaningful portion thereof, will not be paid by broker-dealer members of SIPC, but rather will be recouped by SIPC out of recoveries by Picard. That would mean, in effect, that funds otherwise available to pay victims are being depleted by the substantial legal fees and administrative expenses.

I would urge Judge Rakoff to take a second look at who is really paying for the expenses of the Madoff proceeding.

[To be continued in Installment 57]