10-2378-bk(L)

10-2378-bk(L)
In re: Bernard L. Madoff Inv. Sec. LLC
1
UNITED STATES COURT OF APPEALS 2
3
FOR THE SECOND CIRCUIT 4
5
August Term, 2010 6
7
8
(Argued: March 3, 2011 Decided: August 16, 2011) 9
10
Docket Nos. 10-2378-bk(L); 10-2676-bk(con); 10-2677-bk(con); 11
10-2679-bk(con); 10-2684-bk(con); 10-2685-bk(con); 10-2687- 12
bk(con); 10-2691-bk(con); 10-2693-bk(con); 10-2694-bk(con); 13
10-2718-bk(con); 10-2737-bk(con); 10-3188-bk(con); 10-3579- 14
bk(con); 10-3675-bk(con) 15
16
- - - - - - - - - - - - - - - - - - - -x 17
18
IN RE: BERNARD L. MADOFF INVESTMENT 19
SECURITIES LLC, 20
Debtor.*
21
- - - - - - - - - - - - - - - - - - - -x 22
23
Before: JACOBS, Chief Judge, LEVAL and RAGGI, 24
Circuit Judges. 25
26
Former investors with Bernard L. Madoff appeal from an 27
order entered by the United States Bankruptcy Court for the 28
Southern District of New York (Lifland, J.) in the 29
liquidation proceedings of Bernard L. Madoff Investment 30
Securities LLC under the Securities Investor Protection Act. 31
The Trustee, Irving H. Picard, concluded that the investors’ 32
“net equity,” which determines how customer property will be 33
* Consolidated docket number 10-2737-bk was dismissed
with prejudice by stipulation of the parties on December 10,
2010. Fed. R. App. P. 42(b).

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distributed in the wake of Madoff’s fraud, should be 1
calculated based on the Net Investment Method. The 2
bankruptcy court affirmed the decision of the Trustee and 3
certified its decision for immediate appeal to this Court. 4
28 U.S.C. § 158(d)(2). This Court accepted the direct 5
appeal from the bankruptcy court, and for the following 6
reasons, we hold that the Trustee’s determination as to how 7
to calculate “net equity” under the Securities Investor 8
Protection Act is legally sound in light of the 9
circumstances of this case and the relevant statutory 10
language. Accordingly, we affirm the order of the 11
bankruptcy court. 12
HELEN DAVIS CHAITMAN, Becker & Poliakoff, 13
LLP, New York, New York (Peter Schuyler, 14
on the brief), for Appellants Diane and 15
Roger Peskin, et al. 16
17
KAREN E. WAGNER, Davis Polk & Wardwell 18
LLP, New York, New York (Brian S. 19
Weinstein, Jonathan D. Martin, on the 20
brief), for Appellants Sterling Equities 21
Associates, Arthur Friedman, David Katz, 22
Gregory Katz, Michael Katz, Saul Katz, L. 23
Thomas Osterman, Marvin Tepper, Fred 24
Wilpon, Jeff Wilpon, Richard Wilpon, Mets 25
Limited Partnership. 26
27
BARRY R. LAX, Lax & Neville, New York, 28
New York (Brian Neville, Brian Maddox, on 29
the brief), for Appellants Mary Albanese, 30
et al. 31
32
2

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Seth C. Farber, Kelly A. Librera, Dewey & 1
LeBoeuf LLP, New York, New York, for 2
Appellant Ellen G. Victor. 3
4
Stephen Fishbein, Richard F. Schwed, 5
Shearman & Sterling LLP, New York, New 6
York, for Appellants Carl J. Shapiro, et 7
al. 8
9
Carole Neville, Sonnenschein Nath & 10
Rosenthal LLP, New York, New York, for 11
Appellants Marsha Peshkin IRA, Michael 12
and Meryl Mann, Barry Weisfeld. 13
14
Matthew Gluck, Jonathan M. Landers, Brad 15
N. Friedman, Jennifer L. Young, Milberg 16
LLP, New York, New York, Stephen A. 17
Weiss, Christopher M. Van de Kieft, 18
Parvin K. Aminolroaya, Seeger Weiss LLP, 19
New York, New York, for Appellants The 20
Aspen Company, et al. 21
22
David B. Bernfeld, Jeffrey L. Bernfeld, 23
Bernfeld, DeMatteo & Bernfeld, LLP, New 24
York, New York, for Appellants Michael 25
Schur and Edith A. Schur. 26
27
David Parker, Matthew J. Gold, Jason 28
Otto, Kleinberg, Kaplan, Wolff & Cohen, 29
P.C., New York, New York, for Appellants 30
Lawrence Elins, Malibu Trading and 31
Investing, L.P. 32
33
Stanley Dale Cohen, New York, New York, 34
for Appellants Lee Mellis, Jean 35
Pomerantz, Bonnie Savitt. 36
37
Jeffrey A. Mitchell, Gibbons, P.C., New 38
York, New York, for Appellant Donald G. 39
Rynne. 40
41
Daniel M. Glosband, Goodwin Procter LLP, 42
Boston, Massachusetts (Larkin M. Morton, 43
Goodwin Procter LLP, New York, New York, 44
on the brief) for Appellants Jeffrey A. 45
Berman, et al. 46
3

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Chryssa V. Valletta, Phillips Nizer LLP, 1
New York, New York for Appellants Herbert 2
Barbanel, Alice Barbanel. 3
4
Lawrence R. Velvel, pro se, Andover, 5
Massachusetts, for Appellant Lawrence R. 6
Velvel. 7
8
JOSEPHINE WANG, General Counsel, 9
Securities Investor Protection 10
Corporation, Washington, District of 11
Columbia (Kevin H. Bell, Senior Associate 12
General Counsel for Dispute Resolution, 13
Christopher H. Larosa, Associate General 14
Counsel, Lauren Attard, Staff Attorney, 15
on the brief), for Appellee Securities 16
Investor Protection Corporation. 17
18
DAVID J. SHEEHAN, Baker Hostetler LLP, 19
New York, New York (Thomas D. Warren, 20
Wendy J. Gibson, Seanna R. Brown, on the 21
brief), for Appellee Irving H. Picard, as 22
Trustee for the Substantively 23
Consolidated Securities Investor 24
Protection Act Liquidation of Bernard L. 25
Madoff Investment Securities LLC and 26
Bernard L. Madoff. 27
28
MICHAEL A. CONLEY, Deputy Solicitor for 29
Securities & Exchange Commission, 30
Washington, District of Columbia (David 31
M. Becker, General Counsel, Mark D. Cahn, 32
Deputy General Counsel, Jacob H. 33
Stillman, Solicitor, Katharine B. 34
Gresham, Assistant General Counsel, on 35
the brief), for Amicus Curiae Securities 36
& Exchange Commission. 37
38
DENNIS JACOBS, Chief Judge: 39
40
In the aftermath of a colossal Ponzi scheme conducted 41
by Bernard Madoff over a period of years, Irving H. Picard 42
has been appointed, pursuant to the Securities Investor 43
4

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Protection Act, 15 U.S.C. § 78aaa et seq. (“SIPA”), as 1
Trustee for the liquidation of Bernard L. Madoff Investment 2
Securities LLC, id. § 78eee(b)(3). Pursuant to SIPA, Mr. 3
Picard has the general powers of a bankruptcy trustee, as 4
well as additional duties, specified by the Act, related to 5
recovering and distributing customer property. Id. § 78fff- 6
1. Essentially, Mr. Picard has been charged with sorting 7
out decades of fraud. The question presented by this appeal 8
is whether the method Mr. Picard selected for carrying out 9
his responsibilities under SIPA is legally sound under the 10
language of the statute. We hold that it is. Accordingly, 11
we affirm the order of the United States Bankruptcy Court 12
for the Southern District of New York (Lifland, J.). 13
BACKGROUND 14
The facts surrounding Bernard Madoff’s multibillion 15
dollar Ponzi scheme are widely known and were recounted in 16
detail by the bankruptcy court. In re Bernard L. Madoff 17
Inv. Sec. LLC, 424 B.R. 122, 125-32 (Bankr. S.D.N.Y. 2010); 18
see also, e.g., In re Beacon Assocs. Litig., 745 F. Supp. 2d 19
386, 393-94 (S.D.N.Y. 2010); Anwar v. Fairfield Greenwich 20
Ltd., 728 F. Supp. 2d 372, 387, 389-90 (S.D.N.Y. 2010); In 21
re Tremont Sec. Law, State Law & Ins. Litig., 703 F. Supp. 22
2d 363, 367-68 (S.D.N.Y. 2010). For our purposes, a few 23
5

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facts suffice. When customers invested with Bernard L. 1
Madoff Investment Securities LLC (“BLMIS”), they 2
relinquished all investment authority to Madoff. Madoff 3
collected funds from investors, claiming to invest those 4
funds pursuant to what he styled as a “split-strike 5
conversion strategy” for producing consistently high rates 6
of return on investments. 2 J.A. Vol. II at 292. The split- 7
strike conversion strategy supposedly involved buying a 8
basket of stocks listed on the Standard & Poor’s 100 Index 9
and hedging through the use of options. However, Madoff 10
never invested those customer funds. Instead, Madoff 11
generated fictitious paper account statements and trading 12
records in order to conceal the fact that he engaged in no 13
trading activity whatsoever. Even though a customer’s 14
monthly account statement listed securities transactions 15
purportedly executed during the reporting period and 16
purported individual holdings in various Standard & Poor’s 17
100 Index stocks as of the end of the reporting period, the 18
2 A select group of Madoff’s family members, close
friends, and employees held “non-split strike” accounts.
Madoff provided these customers with invented account
statements that reflected even greater investor success than
the unwavering returns purportedly earned for his split-
strike customers. In re Bernard L. Madoff, 424 B.R. at 130-
31. The non-split strike customers are not parties to this
appeal.
6

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statement did not reflect any actual trading or holdings of 1
securities by Madoff on behalf of the customer. “In fact, 2
the Trustee’s investigation revealed many occurrences where 3
purported trades were outside the exchange’s price range for 4
the trade date.” In re Bernard L. Madoff, 424 B.R. at 130. 5
Other now revealed irregularities make it clear that “Madoff 6
never executed his split-strike investment and hedging 7
strategies, and could not possibly have done so.” Id. To 8
point out just two examples, “an unrealistic number of 9
option trades would have been necessary to implement the . . 10
. [s]trategy” and “one of the money market funds in which 11
customer resources were allegedly invested through BLMIS . . 12
. has acknowledged that it did not even offer investment 13
opportunities in any such money market fund from 2005 14
forward.” Id. 15
As is true of all Ponzi schemes, see Cunningham v. 16
Brown, 265 U.S. 1, 7 (1924) (describing the “remarkable 17
criminal financial career of Charles Ponzi”), Madoff used 18
the investments of new and existing customers to fund 19
withdrawals of principal and supposed profit made by other 20
customers. Madoff did not actually execute trades with 21
investor funds, so these funds were never exposed to the 22
uncertainties or fluctuations of the securities market. 23
7

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Fictional customer statements were generated based on after- 1
the-fact stock “trades” using already-published trading data 2
to pick advantageous historical prices. J.A. Vol. I at 365- 3
66, 371, 512; J.A. Vol. II at 291, 293. The customer 4
statements documented an astonishing pattern of continuously 5
profitable trades, approximating the profits Madoff had 6
promised his customers, but reflected trades that had never 7
occurred. Although Madoff’s scheme was engineered so that 8
customers always appeared to earn positive annual returns, 9
the dreamt-up rates of return Madoff assigned to different 10
customers’ accounts varied significantly and arbitrarily. 11
In re Bernard L. Madoff, 424 B.R. at 130. Thus, the 12
customer statements reflected unvarying investor success; 13
but the only accurate entries reflected the customers’ cash 14
deposits and withdrawals. J.A. Vol. I at 513. 15
Madoff’s scheme collapsed when the flow of new 16
investments could no longer support the payments required on 17
earlier invested funds. See Eberhard v. Marcu, 530 F.3d 18
122, 132 n.7 (2d Cir. 2008) (describing typical Ponzi scheme 19
“where earlier investors are paid from the investments of 20
more recent investors . . . until the scheme ceases to 21
attract new investors and the pyramid collapses”). The 22
final customer statements issued by BLMIS falsely recorded 23
8

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nearly $64.8 billion of net investments and related 1
fictitious gains. J.A. Vol. I at 505. It is not contended 2
on this appeal that any victim knew or should have known 3
that the investments and customer statements were 4
fictitious. It is unquestioned that the great majority of 5
investors relied on their customer statements for purposes 6
of financial planning and tax reporting, to their terrible 7
detriment. 8
When Madoff’s fraud came to light, the Securities and 9
Exchange Commission filed a civil complaint in the United 10
States District Court for the Southern District of New York, 11
alleging that Madoff and BLMIS were operating a Ponzi 12
scheme.3 The Securities Investor Protection Corporation 13
(“SIPC”), a nonprofit corporation consisting of registered 14
broker-dealers and members of national securities exchanges 15
that supports a fund used to advance money to a SIPA 16
trustee, then stepped in. 4 15 U.S.C. § 78ccc; Sec. & Exch. 17
Comm’n v. Packer, Wilbur & Co., 498 F.2d 978, 980 (2d Cir. 18
1974). SIPC filed an application in the civil action 19
seeking a decree that the customers of BLMIS are in need of 20
3 Madoff was arrested and charged with securities
fraud; he pleaded guilty to an eleven-count criminal
indictment and was sentenced to 150 years’ imprisonment.
4 By virtue of its registration with the SEC as a
broker-dealer, BLMIS is a member of SIPC.
9

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the protections afforded by SIPA. 15 U.S.C. 1
§ 78eee(a)(3)(A). The district court granted SIPC’s 2
application; the protective order appointed Mr. Picard as 3
Trustee for the liquidation of the business of BLMIS and the 4
SIPA liquidation proceeding was removed to the bankruptcy 5
court. Id. § 78eee(b)(3)-(4); see also Sec. Investor Prot. 6
Corp. v. BDO Seidman, LLP, 222 F.3d 63, 67 (2d Cir. 2000). 7
SIPA establishes procedures for liquidating failed 8
broker-dealers and provides their customers with special 9
protections. In a SIPA liquidation, a fund of “customer 10
property,” separate from the general estate of the failed 11
broker-dealer, is established for priority distribution 12
exclusively among customers. The customer property fund 13
consists of cash and securities received or held by the 14
broker-dealer on behalf of customers, except securities 15
registered in the name of individual customers. 15 U.S.C. 16
§ 78lll(4). Each customer shares ratably in this fund of 17
assets to the extent of the customer’s “net equity.” Id. 18
§ 78fff-2(c)(1)(B). Under SIPA: 19
The term “net equity” means the dollar amount of 20
the account or accounts of a customer, to be 21
determined by-- 22
23
(A) calculating the sum which would have been 24
owed by the debtor to such customer if 25
the debtor had liquidated, by sale or purchase 26
on the filing date, all securities positions 27
10

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of such customer . . . ; minus 1
2
(B) any indebtedness of such customer to the 3
debtor on the filing date . . . . 4
5
Id. § 78lll(11). 6
In many liquidations, however, the assets in the 7
customer property fund are insufficient to satisfy every 8
customer’s “net equity” claim. In such a case, SIPC 9
advances money to the SIPA trustee to satisfy promptly each 10
customer’s valid “net equity” claim. For securities 11
accounts, the maximum advance is $500,000 per customer. Id. 12
§ 78fff-3(a). For customers with claims for cash, the 13
maximum advance is substantially less. Id. § 78fff-3(a)(1), 14
(d). Under SIPA, all claims must be filed with the trustee, 15
id. § 78fff-2(a)(2), who is charged with determining 16
customer claims in writing. A customer’s objection must be 17
filed with the bankruptcy court. 18
In satisfying customer claims in this case, Mr. Picard, 19
as the SIPA Trustee, determined that the claimants are 20
customers with claims for securities within the meaning of 21
SIPA. The Trustee further concluded that each customer’s 22
“net equity” should be calculated by the “Net Investment 23
Method,” crediting the amount of cash deposited by the 24
customer into his or her BLMIS account, less any amounts 25
withdrawn from it. J.A. at 274. The use of the Net 26
11

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Investment Method limits the class of customers who have 1
allowable claims against the customer property fund to those 2
customers who deposited more cash into their investment 3
accounts than they withdrew, because only those customers 4
have positive “net equity” under that method. Some 5
customers objected to the Trustee’s method of calculating 6
“net equity” and argued that they were entitled to recover 7
the market value of the securities reflected on their last 8
BLMIS customer statements (the “Last Statement Method”). 9
After the filing of a number of objections, the Trustee 10
moved the bankruptcy court for an order affirming his use of 11
the Net Investment Method of calculating “net equity.” Both 12
SIPC and the SEC submitted briefs supporting the Trustee’s 13
motion.5
14
After a hearing, the bankruptcy court upheld the 15
Trustee’s use of the Net Investment Method on the ground 16
that the last customer statements could not “be relied upon 17
to determine [n]et [e]quity” because customers’ account 18
statements were “entirely fictitious” and did “not reflect 19
5 The SEC further argued that the Net Investment Method
should be applied using inflation-adjusted dollars. The
Trustee argued that the issue whether the Net Investment
Method should be adjusted to account for inflation or
interest was beyond the scope of the briefing and took no
position on it.
12

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actual securities positions that could be 1
liquidated . . . .” In re Bernard L. Madoff, 424 B.R. at 2
135. The bankruptcy court reasoned that the definition of 3
“net equity” under SIPA “must be read in tandem with SIPA 4
section 78fff-2(b), which requires the Trustee to discharge 5
[n]et [e]quity claims only ‘insofar as such obligations are 6
[1] ascertainable from the books and records of the debtor 7
or [2] are otherwise established to the satisfaction of the 8
trustee.’” Id. (quoting 15 U.S.C. § 78fff-2(b)(2)). The 9
bankruptcy court emphasized that the “BLMIS books and 10
records expose a Ponzi scheme where no securities were ever 11
ordered, paid for or acquired[,]” and concluded the Trustee 12
could not “discharge claims upon the false premise that 13
customers’ securities positions are what the account 14
statements purport them to be.” Id. The Net Investment 15
Method, unlike the Last Statement Method, allowed Mr. Picard 16
to (in the bankruptcy court’s phrase)“unwind[], rather than 17
legitimiz[e], the fraudulent scheme.” Id. at 136. The 18
bankruptcy court reserved decision on the issue of whether 19
the Net Investment Method should be adjusted to account for 20
inflation or interest. Id. at 125 n.8. The bankruptcy 21
court certified an immediate appeal to this Court, over 22
which this Court accepted jurisdiction, pursuant to 28 23
U.S.C. § 158(d)(2)(A). 24
13

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DISCUSSION 1
We review the legal conclusions of the bankruptcy 2
court, including its interpretation of SIPA, de novo. 3
Turner v. Davis, Gillenwater & Lynch (In re Inv. Bankers, 4
Inc.), 4 F.3d 1556, 1560 (10th Cir. 1993). In conducting 5
our independent review, we consider that the views of the 6
Securities & Exchange Commission (“SEC”) and SIPC are 7
“entitled to respect, but only to the extent that [they 8
have] the power to persuade.” Chao v. Russell P. Le Frois 9
Builder, Inc., 291 F.3d 219, 228 (2d Cir. 2002) (internal 10
quotation marks and alterations omitted); see also In re New 11
Times Sec. Servs., Inc., 371 F.3d 68, 76 (2d Cir. 2004) 12
(“New Times I”) (observing “that the drafters of SIPA 13
clearly envisioned roles for both the SEC and SIPC in 14
administering the statute”). 15
The positions of the parties on appeal are as follows. 16
Mr. Picard asserts that the objecting BLMIS claimants are 17
customers with claims for securities under SIPA and that the 18
plain language of SIPA dictates that their “net equity” be 19
calculated based on the Net Investment Method. The SEC, as 20
amicus curiae, supports the Trustee’s view that, here, the 21
Net Investment Method is required by the language of SIPA. 22
The SIPC--deemed to be a party in interest as to all matters 23
14

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arising in a SIPA proceeding--urges this Court to affirm the 1
order of the bankruptcy court, which holds that on the 2
present facts the Net Investment Method (and not the Last 3
Statement Method) correctly measures “net equity.” The 4
objecting BLMIS claimants contend that the Last Statement 5
Method is mandated by the language of SIPA; that they had a 6
legitimate expectation that their customer statements were 7
accurate; that SIPA is designed to protect this legitimate 8
expectation; and that the Net Investment Method undermines 9
the purpose of the statute. 10
First, accepting that the objecting BLMIS claimants are 11
“customers” under SIPA, they are customers with claims for 12
securities. Second, while the objecting BLMIS claimants and 13
the Trustee argue the plain language of SIPA supports their 14
(irreconcilable) positions, we conclude that the statutory 15
language does not prescribe a single means of calculating 16
“net equity” that applies in the myriad circumstances that 17
may arise in a SIPA liquidation. 6 See Sec. & Exch. Comm’n 18
v. Aberdeen Sec. Co., 480 F.2d 1121, 1123 (3d Cir. 1973) 19
(“The intent of Congress to protect customers of financially 20
6 The two competing methods of calculating “net equity”
proposed by the parties to this litigation are the only two
methods at issue here. We do not hold that they are the
only possible approaches to calculation of “net equity”
under SIPA.
15

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distressed security dealers is clear, but the specifics of 1
precise resolution of individual situations are clouded by 2
the provisions of a statute which range far from the clarity 3
of blue sky one might expect in this area of the law.”); 4
McKenny v. McGraw (In re Bell & Beckwith), 104 B.R. 842, 848 5
(Bankr. N.D. Ohio 1989) (rejecting “plain meaning” arguments 6
as to meaning of “allocation” under SIPA as “not 7
persuasive”). Differing fact patterns will inevitably call 8
for differing approaches to ascertaining the fairest method 9
for approximating “net equity,” as defined by SIPA. See 15 10
U.S.C. § 78fff-2(b)(2). 11
Mr. Picard’s selection of the Net Investment Method was 12
more consistent with the statutory definition of “net 13
equity” than any other method advocated by the parties or 14
perceived by this Court. There was therefore no error. 7
15
SIPA serves dual purposes: to protect investors, and to 16
protect the securities market as a whole. See Sec. Inv. 17
Prot. Corp. v. Barbour, 421 U.S. 412, 415 (1975). Treatment 18
of the BLMIS claimants as customers with claims for 19
securities and calculating “net equity” based on the Net 20
7 We express no view on whether the Net Investment
Method should be adjusted to account for inflation or
interest, an issue on which the bankruptcy court has not yet
ruled and which is not before us on this interlocutory
appeal.
16

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Investment Method effectuates these purposes. As the 1
bankruptcy court observed, “[a]ny dollar paid to reimburse a 2
fictitious profit is a dollar no longer available to pay 3
claims for money actually invested. If the Last Statement 4
Method were adopted,” those claimants who have withdrawn 5
funds from their BLMIS accounts that exceed their initial 6
investments “would receive more favorable treatment by 7
profiting from the principal investments of [those claimants 8
who have withdrawn less money than they deposited], yielding 9
an inequitable result.” In re Bernard L. Madoff, 424 B.R. 10
at 141. The statutory definition of “net equity” does not 11
require the Trustee to aggravate the injuries caused by 12
Madoff’s fraud. Use of the Last Statement Method in this 13
case would have the absurd effect of treating fictitious and 14
arbitrarily assigned paper profits as real and would give 15
legal effect to Madoff’s machinations. 16
I 17
The threshold issues are whether the BLMIS claimants 18
are “customers” within the meaning of SIPA and, if so, 19
whether they are customers with claims for securities or 20
customers with claims for cash. If the objecting BLMIS 21
claimants are not “customers,” 15 U.S.C. § 78lll(2)(A), they 22
are not entitled to the protection of SIPA at all, see Sec. 23
17

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Inv. Prot. Corp. v. Pepperdine Univ. (In re Brentwood Sec., 1
Inc.), 925 F.2d 325, 327 (9th Cir. 1991). Under SIPA, 2
“[t]he term ‘customer’ includes . . . any person who has 3
deposited cash with the debtor for the purpose of purchasing 4
securities.” 15 U.S.C. § 78lll(2)(B)(i); see also Tew v. 5
Res. Mgmt. (In re ESM Gov’t Sec., Inc.), 812 F.2d 1374, 1376 6
(11th Cir. 1987) (observing “that it is the act of 7
entrusting the cash to the debtor for the purpose of 8
effecting securities transactions that triggers the customer 9
status provisions” (emphasis omitted)). It also includes: 10
. . . [a person] who has a claim on account of 11
securities received, acquired, or held by the 12
debtor in the ordinary course of business as a 13
broker or dealer from or for the securities 14
accounts of such person for safekeeping, with a 15
view to sale, to cover consummated sales, pursuant 16
to purchases, as collateral, security, or for 17
purposes of effecting transfer. 18
19
15 U.S.C. § 78lll(2)(A). We conclude that the BLMIS 20
claimants are customers with claims for securities within 21
the meaning of SIPA. 22
While SIPA does not--and cannot--protect an investor 23
against all losses, it “does . . . protect claimants who 24
attempt to invest through their brokerage firm but are 25
defrauded by dishonest brokers.” Ahammed v. Sec. Inv. Prot. 26
Corp. (In re Primeline Sec. Corp.), 295 F.3d 1100, 1107 27
(10th Cir. 2002). SIPA provides this protection by ensuring 28
18

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that claimants who deposited cash with a broker “for the 1
purpose of purchasing securities,” 15 U.S.C. § 2
78lll(2)(B)(i), are treated as customers with claims for 3
securities. This is so because the “critical aspect of the 4
‘customer’ definition is the entrustment of cash or 5
securities to the broker-dealer for the purposes of trading 6
securities.” Appleton v. First Nat’l Bank of Ohio, 62 F.3d 7
791, 801 (6th Cir. 1995) (emphasis added). 8
The legislative history supports the view that the 9
BLMIS claimants are customers with claims for securities. 10
“Throughout the [House Report on SIPA,] ‘investors’ is used 11
synonymously with ‘customers,’” and it is clear that an 12
individual who had documentation of his status as a “trading 13
customer . . . was to be protected.” Sec. & Exch. Comm’n v. 14
F.O. Baroff Co., 497 F.2d 280, 283 (2d Cir. 1974). Indeed, 15
treating the BLMIS claimants as customers with claims for 16
securities protects their “legitimate expectations” as 17
investors in the securities market. S. Rep. No. 95-763, at 18
2 (1978), reprinted in 1978 U.S.C.C.A.N. 764, 765. 19
Similarly, SIPA’s implementing regulations bolster the 20
shared view of the Trustee, SIPC, and the SEC that a 21
claimant who has “written confirmation” that securities have 22
been purchased or sold on his or her behalf should be 23
19

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treated as a customer with a claim for securities. 17 1
C.F.R. §§ 300.501(b)(1), 300.502(a)(1). The regulation does 2
not, however, mandate that this “written confirmation” form 3
the basis for calculating a customer’s “net equity.” 4
II 5
The BLMIS claimants object that the only way their 6
“legitimate expectations” can be protected is by calculating 7
“net equity” by reference to their last customer statements. 8
We conclude, however, that while the BLMIS customer 9
statements confirm that the BLMIS claimants are properly 10
treated as customers with claims for securities, the last 11
customer statements are not useful for ascertaining “net 12
equity.” We “begin[] where all such inquiries must begin: 13
with the language of the statute itself.” United States v. 14
Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989). Two 15
provisions interact. SIPA provides that a customer’s “net 16
equity” is determined by: 17
(A) calculating the sum which would have been owed 18
by the debtor to such customer if the debtor had 19
liquidated, by sale or purchase on the filing date 20
[of the protective order]-- 21
22
(i) all securities positions of such customer 23
. . . minus 24
25
(B) any indebtedness of such customer to the 26
debtor on the filing date . . . . 27
28
15 U.S.C. § 78lll(11) (emphasis added). At the same time, 29
20

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SIPA provides that the Trustee should make payments to 1
customers based on “net equity” insofar as the amount owed 2
to the customer is “ascertainable from the books and records 3
of the debtor or [is] otherwise established to the 4
satisfaction of the trustee.” Id. § 78fff-2(b) (emphasis 5
added). 6
The objecting BLMIS claimants contend that their 7
“securities positions” should be determined by reference to 8
the “liquidat[ion]” value, id. § 78lll(11)(A), of the 9
securities listed on their last customer statements. The 10
Trustee argues that the customer statements do not reflect 11
“securities positions” that could be “liquidated” because 12
the account statements were wholly the invention of Madoff 13
and do not reflect actual securities positions; that any 14
pay-out of “net equity” therefore also requires a review of 15
the “books and records” of BLMIS; and that “the books and 16
records of the debtor reveal that the last statements are a 17
fiction.” Br. of Appellee Picard at 28. 18
We agree with Mr. Picard that a SIPA trustee’s 19
obligation to reimburse customers based on “net equity” must 20
be considered together with SIPA’s requirement that the 21
Trustee discharge “obligations of the debtor to a customer 22
relating to, or net equity claims based upon . . . 23
21

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securities . . . 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 3
trustee.” 15 U.S.C. § 78fff-2(b)(2); see also Sec. Investor 4
Prot. Corp. v. Lehman Bros. Inc., 433 B.R. 127, 133 (Bankr. 5
S.D.N.Y. 2010) (“Under SIPA, the Trustee is required to 6
determine a ‘customer’ claim based on the ‘net equity’ of 7
the customer as shown on the books and records of the 8
debtor.” (footnote omitted)). This accords with our usual 9
practice of examining the “overall structure and operation” 10
of a statute. Puello v. Bureau of Citizenship & Immigration 11
Servs., 511 F.3d 324, 329 (2d Cir. 2007). “The meaning of a 12
particular section in a statute can be understood in context 13
with and by reference to the whole statutory scheme, by 14
appreciating how sections relate to one another.” Auburn 15
Hous. Auth. v. Martinez, 277 F.3d 138, 144 (2d Cir. 2002). 16
“In other words, the preferred meaning of a statutory 17
provision is one that is consonant with the rest of the 18
statute.” Id. 19
When the terms of the statute are read together, the 20
statute directs that a SIPA trustee should determine a 21
customer’s entitlement to recover “net equity” based both on 22
the statutory definition of that term and by reference to 23
the books and records of the debtor. While the language of 24
22

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the statute clearly requires a SIPA trustee to distribute 1
customer property based on “net equity,” the statute does 2
not define “net equity” by reference to a customer’s last 3
account statement. Nor does it say specifically how “net 4
equity” should be calculated if a dishonest broker failed to 5
place a customer’s funds into the security market, 6
notwithstanding that the customer “deposited cash with the 7
debtor for the purpose of purchasing securities,” id. § 8
78lll(2)(B)(i). 9
Here, the profits recorded over time on the customer 10
statements were after-the-fact constructs that were based on 11
stock movements that had already taken place, were rigged to 12
reflect a steady and upward trajectory in good times and 13
bad, and were arbitrarily and unequally distributed among 14
customers. These facts provide powerful reasons for the 15
Trustee’s rejection of the Last Statement Method for 16
calculating “net equity.” In addition, if the Trustee had 17
permitted the objecting claimants to recover based on their 18
final account statements, this would have “affect[ed] the 19
limited amount available for distribution from the customer 20
property fund.” In re Bernard L. Madoff, 424 B.R. at 133. 21
The inequitable consequence of such a scheme would be that 22
those who had already withdrawn cash deriving from imaginary 23
23

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profits in excess of their initial investment would derive 1
additional benefit at the expense of those customers who had 2
not withdrawn funds before the fraud was exposed. Because 3
of these facts, the Net Investment Method better measures 4
“net equity,” as statutorily defined, than does the Last 5
Statement Method. 8 As the bankruptcy court reasoned, “[t]he 6
Net Investment Method is appropriate because it relies 7
solely on unmanipulated withdrawals and deposits and refuses 8
to permit Madoff to arbitrarily decide who wins and who 9
loses.” In re Bernard L. Madoff, 424 B.R. at 140. 10
In holding that it was proper for Mr. Picard to reject 11
the Last Statement Method, we expressly do not hold that 12
such a method of calculating “net equity” is inherently 13
impermissible. To the contrary, a customer’s last account 14
8 Because we find that, in this case, the Net
Investment Method advocated by Mr. Picard is superior to the
Last Statement Method as a matter of law, we have no need to
consider whether a SIPA trustee may exercise discretion in
selecting a method to calculate “net equity.” Fraud is
endlessly resourceful and the unraveling of weaved-up sins
may sometimes require the grant of a measure of latitude to
a SIPA trustee. It therefore appears to us that that in
many circumstances a SIPA trustee may, and should, exercise
some discretion in determining what method, or combination
of methods, will best measure “net equity.” We have no
reason to doubt that a reviewing court could and should
accord a degree of deference to such an exercise of
discretion so long as the method chosen by the trustee
allocates “net equity” among the competing claimants in a
manner that is not clearly inferior to other methods under
consideration.
24

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statement will likely be the most appropriate means of 1
calculating “net equity” in more conventional cases. We 2
would expect that resort to the Net Investment Method would 3
be rare because this method wipes out all events of a 4
customer’s investment history except for cash deposits and 5
withdrawals. The extraordinary facts of this case make the 6
Net Investment Method appropriate, whereas in many 7
instances, it would not be. The Last Statement Method, for 8
example, may be appropriate when securities were actually 9
purchased by the debtor, but then converted by the debtor. 10
Indeed, the Last Statement Method may be especially 11
appropriate where--unlike with the BLMIS accounts at issue 12
in this appeal--customers authorize or direct purchases of 13
specific stocks. See generally Miller v. DeQuine (In re 14
Stratton Oakmont, Inc.), No. 01-CV-2812 RCC, 01-CV-2313 RCC, 15
2003 WL 22698876 (S.D.N.Y. Nov. 14, 2003). 16
Ascertaining the proper measure of “net equity” in a 17
given case is for the ultimate purpose of issuing payments 18
to customers; so, the ability to deduce payment amounts (to 19
the satisfaction of the trustee) will bear upon the method 20
selected for calculating “net equity.” In this case, the 21
Net Investment Method allows the Trustee to make payments 22
based on withdrawals and deposits, which can be confirmed by 23
the debtor’s books and records, and results in a 24
25

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distribution of customer property that is proper under SIPA. 1
III 2
Under the circumstances of this case, the limitation on 3
the objecting customers’ recovery imposed by the Net 4
Investment Method is consistent with the purpose and design 5
of SIPA. “The principal purpose of SIPA is to protect 6
investors against financial losses arising from the 7
insolvency of their brokers.” In re New Times Sec. Servs., 8
Inc., 463 F.3d 125, 127 (2d Cir. 2006) (“New Times II”) 9
(internal quotation marks omitted). SIPA is also intended 10
to “protect capital markets by instilling confidence in 11
securities traders.” Sec. Investor Prot. Corp. v. Morgan, 12
Kennedy & Co., 533 F.2d 1314, 1317 (2d Cir. 1976). “SIPA’s 13
main purpose [i]s . . . not to prevent fraud or conversion, 14
but to reverse los[s]es resulting from brokers’ insolvency.” 15
In re Stratton Oakmont, 2003 WL 22698876, at *5; see also 16
Appleton, 62 F.3d at 801; In re Brentwood Sec., 925 F.2d at 17
326. 18
The BLMIS claimants characterize the overall statutory 19
scheme as an insurance guarantee of the securities positions 20
set out in their account statements. They maintain that 21
SIPA should operate to make them whole from the losses they 22
incurred as a result of Madoff’s dishonesty. We disagree. 23
26

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While this Court has referred to SIPC as providing a “form 1
of public insurance,” Packer, Wilbur & Co., 498 F.2d at 985, 2
it is clear that the obligations imposed on an insurance 3
provider under state law do not apply to this 4
congressionally-created “nonprofit membership corporation.” 5
Barbour, 421 U.S. at 413; see also, e.g., Rosenbluth 6
Trading, Inc. v. United States, 736 F.2d 43, 46 (2d Cir. 7
1984) (observing that although Social Security is often 8
referred to as insurance, “[m]anifestly, social security is 9
not traditional insurance, and consequently principles 10
applicable to [insurance policies] . . . need not be 11
imported uncritically into lawsuits involving social 12
security”). Moreover, a registered broker-dealer may obtain 13
insurance under New York law and, in the event of a SIPA 14
liquidation, New York law governs the relative ability of 15
implicated parties to obtain the benefit of insurance 16
coverage. See generally Am. Bank & Trust Co. v. Davis 17
(Matter of F.O. Baroff Co.), 555 F.2d 38, 41-42 (2d Cir. 18
1977) (stating claimant in SIPA liquidation may share in 19
insurance held by bankrupt debtor). 20
It is not at all clear that SIPA protects against all 21
forms of fraud committed by brokers. See In re Investors 22
Ctr., Inc., 129 B.R. 339, 353 (Bankr. E.D.N.Y. 1991) 23
(“Repeatedly this Court has been forced to tell claimants 24
27

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that the fund created for the protection of customers of 1
honest, but insolvent, brokers gives them no protection when 2
the insolvent broker has been guilty of dishonesty, breach 3
of contract or fraud.”); H.R. Rep. No. 91-1613, at 1 (1970), 4
reprinted in 1970 U.S.C.C.A.N. 5254, 5255 (stating “[t]he 5
primary purpose of [SIPA] . . . is to provide protection for 6
investors if the broker-dealer with whom they are doing 7
business encounters financial troubles”). But it is clear 8
that the statute is not designed to insure investors against 9
all losses. See, e.g., Packer, Wilbur & Co., 498 F.2d at 10
983 (“SIPA was not designed to provide full protection to 11
all victims of a brokerage collapse.”); Sec. Investor Prot. 12
Corp. v. Associated Underwriters, Inc., 423 F. Supp. 168, 13
171 (D. Utah 1975) (SIPA does not “guarantee that customers 14
will recover their investments which may have diminished as 15
a result of, among other things, market fluctuations or 16
broker-dealer fraud”). But, no party has contested the 17
availability of advances under SIPA to cushion the impact of 18
Madoff’s fraud. 19
In any event, SIPA is intended to expedite the return 20
of customer property, and SIPC provides advances on customer 21
property. Customer property, in turn, is a term defined by 22
the statute as “cash and securities . . . at any time 23
28

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received, acquired, or held by or for the account of a 1
debtor from or for the securities accounts of a customer, 2
and the proceeds of any such property transferred by the 3
debtor, including property unlawfully converted.” 15 U.S.C. 4
§ 78lll(4). Here, notwithstanding the BLMIS customer 5
statements, there were no securities purchased and there 6
were no proceeds from the money entrusted to Madoff for the 7
purpose of making investments. Moreover, customers share 8
“ratably” in customer property on the basis of their “net 9
equity,” id. § 78fff-2(c)(1)(B); so if customers receive 10
SIPC advances based on property that is a fiction, those 11
advances will necessarily diminish the amount of customer 12
property available to other investors, including those who 13
have not recouped even their initial investment. Because 14
the main purpose of determining “net equity” is to achieve a 15
fair allocation of the available resources among the 16
customers, the Trustee properly rejected the Last Statement 17
Method as it would have undermined this objective. 18
IV 19
The objecting claimants maintain that a pair of 20
decisions of this Court--New Times I and New Times II-- 21
dictate that the Last Statement Method be used to calculate 22
“net equity.” We conclude that, to the contrary, our 23
29

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precedent is consistent with the Trustee’s decision to 1
utilize the Net Investment Method under the circumstances of 2
this case. And, use of the Last Statement Method in this 3
case would have been an impermissible means of calculating 4
“net equity.” 5
Like the BLMIS litigation, the New Times cases arose 6
out of a Ponzi scheme. After the New Times scheme was 7
exposed, a SIPA trustee was appointed and a liquidation 8
proceeding commenced. New Times I, 371 F.3d at 71. The 9
SIPA trustee divided the claimants into two groups. One 10
group of claimants had been misled to believe that they were 11
investing “in mutual funds that in reality existed.” Id. at 12
74. “[T]he information that these claimants received on 13
their account statements mirrored what would have happened 14
had the given transaction been executed.” Id. (internal 15
quotation marks omitted). The New Times SIPA trustee 16
treated these claimants as customers with claims for 17
securities and reimbursed them based on their account 18
statements. The second group of claimants were 19
“fraudulently induced” to buy “shares in bogus mutual funds” 20
that did not exist. Id. at 71. The New Times trustee 21
treated these claimants as customers with claims for cash; 22
they objected; and the district court sustained their 23
objections, holding that they had claims for securities and 24
30

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that their “net equity” should be determined by reference to 1
their customer statements. Id. The New Times Trustee and 2
SIPC appealed. 9
3
This Court ruled [i] that the New Times claimants who 4
believed they had invested in mutual funds that did not, in 5
fact, exist, should be treated as customers with claims for 6
securities, but [ii] that their “net equity” could not be 7
calculated by reference to the “fictitious securities 8
positions reflected in the Claimants’ account statements.” 9
Id. at 75. The New Times I Court was persuaded by the joint 10
view of the SEC and SIPC that “basing customer recoveries on 11
fictitious amounts in the firm’s books and records would 12
allow customers to recover arbitrary amounts that 13
necessarily have no relation to reality . . . [and would] 14
leave[] the SIPC fund unacceptably exposed.” Id. at 88 15
(internal quotation marks omitted). Calculations based on 16
made-up values of fictional securities would be “unworkable” 17
and would create “potential absurdities.” Id. Accordingly, 18
it was held that “each Claimant’s net equity should be 19
calculated by reference to the amount of money the Claimants 20
originally invested with the Debtors (not including any 21
9 The New Times claimants who were originally treated
as customers with claims for securities and compensated
based on their customer statements were never before this
Court.
31

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fictitious interest or dividend reinvestments).” Id. at 71. 1
In New Times II, this Court concluded that investors in 2
New Times Securities Services who, prior to the SIPA 3
proceeding, “were induced to liquidate their accounts . . . 4
and make a loan of the imaginary funds to the brokerage 5
house and to [the principal]” were not customers within the 6
meaning of SIPA. New Times II, 463 F.3d at 126, 129. They 7
could only legitimately have expected to be treated as 8
lenders unprotected by SIPA. Id. at 130. 9
Taken together, New Times I and New Times II militate 10
in favor of limiting recovery by BLMIS claimants to their 11
Net Investment. True, the objecting BLMIS claimants are 12
unlike the appellants in New Times I because their customer 13
statements reflected investments in real stocks listed on 14
the Standard & Poor’s 100 Index. However, the objecting 15
BLMIS claimants are similarly situated to the New Times 16
appellants in a crucial respect: assessing “net equity” 17
based on their customer statements would require the Trustee 18
to establish each claimant’s “net equity” based on a fiction 19
created by the perpetrator of the fraud. Commenting on the 20
New Times I decision, the New Times II Court stated: 21
The court declined to base the recovery on the 22
rosy account statements telling customers how well 23
the imaginary securities were doing, because 24
treating the fictitious paper profits as within 25
the ambit of the customers’ “legitimate 26
32

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expectations” would lead to the absurdity of 1
“duped” investors reaping windfalls as a result of 2
fraudulent promises made on fake securities. 3
4
Id. at 130 (quoting New Times I, 371 F.3d at 87-88). 5
Madoff constructed account statements retrospectively, 6
designating stocks based on advantageous historical price 7
information and arbitrarily distributing profits among his 8
customers.10 It would therefore have been legal error for 9
the Trustee to “discharge claims upon the false premise that 10
customers’ securities positions are what the account 11
statements purport them to be.” In re Bernard L. Madoff, 12
424 B.R. at 135. The Trustee properly declined to calculate 13
“net equity” by reference to impossible transactions. 14
Indeed, if the Trustee had done otherwise, the whim of the 15
defrauder would have controlled the process that is supposed 16
to unwind the fraud. 17
In any event, SIPA covers potentially a multitude of 18
situations; no one size fits all. See Exch. Nat’l Bank of 19
Chicago v. Wyatt, 517 F.2d 453, 459 n.12 (2d Cir. 1975) 20
(stating SIPA “liquidation procedures have been carefully 21
designed to allow flexibility”). The fact that the trustee 22
appointed to oversee the liquidation underlying the New 23
Times cases calculated “net equity” in one manner is not 24
10 Some purported trades were settled outside the Stock
Exchange’s price range for the trade dates.
33

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determinative as to the proper method of ascertaining “net 1
equity” in this case. 11 The New Times trustee calculated 2
“net equity” based on customer statements for those 3
claimants whose account statements “mirrored what would have 4
happened had the given transaction[s] been executed.” New 5
Times I, 371 F.3d at 74 (internal quotation marks omitted). 6
Here, however, the BLMIS customer statements reflect 7
impossible transactions and the Trustee is not obligated to 8
step into the shoes of the defrauder or treat the customer 9
statements as reflections of reality. 10
CONCLUSION 11
11 A SIPA liquidation is a hybrid proceeding. See 15
U.S.C. § 78fff-1(a) (“A trustee shall be vested with the
same powers and title with respect to the debtor and the
property of the debtor, including the same rights to avoid
preferences, as a trustee in a case under Title 11.”); id.
§ 78fff(b) (“To the extent consistent with the provisions of
this chapter, a liquidation proceeding shall be conducted in
accordance with, and as though it were being conducted under
[the Bankruptcy Code].”); see also In re Housecraft Indus.
USA, Inc., 310 F.3d 64, 71 (2d Cir. 2002) (stating
bankruptcy trustee may avoid fraudulent transactions). As
the bankruptcy court ruled, “SIPA and the [Bankruptcy] Code
intersect to . . . grant a SIPA trustee the power to avoid
fraudulent transfers for the benefit of customers.” In re
Bernard L. Madoff, 424 B.R. at 136. The objecting BLMIS
claimants point out that no avoidance power has been invoked
in this case. True, however--in the context of this Ponzi
scheme--the Net Investment Method is nonetheless more
harmonious with provisions of the Bankruptcy Code that allow
a trustee to avoid transfers made with the intent to
defraud, see 11 U.S.C. § 548(a)(1)(A), and “avoid[s] placing
some claims unfairly ahead of others,” In re Adler, Coleman
Clearing Corp., 263 B.R. 406, 463 (Bankr. S.D.N.Y. 2001).
34

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For the reasons set forth above, we affirm the order of 1
the United States Bankruptcy Court for the Southern District 2
of New York (Lifland, J.) and hold that use of the Net 3
Investment Method for calculating the “net equity” of the 4
BLMIS customers was proper. 5
35

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