Madoff: What Should be Done Now?

What shall the people injured by Bernard Madoff’s massive fraud do now?

Let me start with a cursory statement of what already is happening. There are already numerous lawsuits: there are suits against feeder funds, putative custodians, insurance companies, the SEC, SIPC, and/or the Trustee. I recently read that the number of suits already is 130. There also will be more suits in the future: suits against FINRA, suits against the IRS, more cases against the SEC and against feeder funds, against insurance companies, and possibly suits against Wall Streeters who deeply, accurately suspected Madoff of a Ponzi scheme and therefore refused to do business with him but who warned nobody of what they had good reason to suspect. This writer predicted earlier on that there will be a lawyers’ relief act, and this easy-to-make prediction is both true already and likely to become even more true in the future.

From the standpoint of injured persons, however, there are two problems with this lawyers’ relief act. One is that it will take such a long time: cases will not be finished for years — I would estimate between five and ten years. In the meanwhile, many people who have been made desperately poor will remain desperately poor, and some among the many older ones will die. The other problem is that some of the defendants, even if they lose cases, will be what is called judgment proof. That is, they will have little or no money to pay the judgments against them, so that injured parties will get little or nothing though they won the case.

In addition to lawsuits, there are some fledgling legislative efforts. Congressman Ackerman (God bless him) has introduced a bill to allow refunds of taxes paid on phony income for about the last ten years. The bill now has about a dozen cosponsors. But whether anyone will really push it, and whether it will get somewhere (i.e., whether it will be enacted) remains to be seen. Nor does it help persons whose investments were legitimately tax free such as investors through IRAs and pension funds, and charities.

Congressman Meeks introduced a bill to extend the theft deduction for more years into the past. It has a few cosponsors (fewer than Ackerman’s I think), whether it will be pushed and will be enacted remains to be seen, and part of the drive for this bill probably evaporated because of the IRS’ enactment of a safe harbor provision, even one that some of us recognize to be inadequate for or completely useless to many victims such as tax free investors and investors through feeder funds.

There has as yet, as far as I know, been no introduction of any bill raising the amount of money obtainable from SIPC from the $500,000 that is the amount enacted in 1978, before dramatic further inflation, to some greater amount such as the $1.6 million dollars that it would take in today’s dollars to equal the $500,000 of 1978.

So, judicial efforts have major weaknesses and legislative efforts, though laudable, are not yet strong, or are nonexistent, and fail to cover thousands of deeply injured persons. What, therefore, should now be done?

I can only give you one man’s opinion, although it is an opinion I have tried to further in practice for the last few months and intend to try to further much more extensively in the future. This writer thinks a legislative effort is the only way to solve the problem within any kind of reasonable time frame. He also thinks that the Ackerman bill, the Meeks bill, and a possible bill to increase the SIPC payout are all laudable, and one should support anyone who seeks to push these efforts. But any of these three legislative efforts, and likewise even all of them together, would leave huge numbers of people in the lurch. There is, in my judgment, only one kind of legislation that will resolve the problem: enactment of a bill providing bonds to replace the amounts of money reflected on the November 30th statements and lost on December 11th. (Straight cash would be better than bonds, but I don’t think this is feasible even if the companies and banks which caused the economic meltdown are getting hundreds of billions or trillions in cash.) If this solution is called a bailout, so be it, although in truth it is restitution for a disaster to which the federal government was a major contributing cause along with Bernie Madoff. The trillions that the banks and auto companies are getting to rescue them from the losses caused by their own horrible greed and mistakes are a bailout from the federal government. What my proposal seeks in order to assist innocent investors who suffered losses due to a crime to which the federal government was a malfeasant cocontributor is restitution. There is a difference.

For the last few months I have been circulating a letter to various New England legislators detailing a restitutionary bond proposal, and have spoken with two legislators personally and with the staff of several others. Now I think the time has come to create a major lobbying effort to seek enactment of the restitutionary proposal (which should probably cover victims of Stanford and other Ponzi schemes too, as well as Madoff’s victims). The letter about the proposal which I gave to legislators (and certain others) expanded on an idea written of here on March 30, 2009, and I shall now set forth here the latest version of the letter, so that people will know precisely what I am talking about. After setting forth the letter here, I will briefly discuss a method of financing the proposal, and possibilities for lobbying.

The latest version of the letter regarding the restitutionary bond proposal is as follows:

June 4, 2009


Knowing how incredibly busy you are (and being aware of the importance of the work you are doing), I am particularly appreciative that you made time to call me on Tuesday.

As said on the phone, I am one of the victims of Bernard Madoff. I therefore have been studying and writing about the Madoff matter for many months now, and in consequence have created a proposal that would obviate the need for victims to receive tax relief or relief through the Securities Investors Protection Corporation (SIPC). The proposal would also put an end to almost all litigation, thereby preventing what has already started to become a lawyers’ relief act that is likely to go on for ten years while many people will be hard pressed to obtain even the basic necessities of life.

As said on the phone, I hope you will find the proposal to be a potentially useful idea and will therefore pass on the idea, perhaps with a favorable comment, and possibly even with a copy of this letter, to people who could cause the proposal to be seriously considered and enacted. I am thinking of people such as Tim Geithner, Rahm Emanuel, Barney Frank and others like them.

Before describing the proposal, let me briefly detail an important prefatory matter. Most of Madoff’s victims are not the billionaires, “centamillionaires,” hedge funds, and banks that the celebrity-driven mass media has focused on, thereby causing the public to believe that the victims of Bernard Madoff are all wealthy plutocrats. Most Madoff victims are, instead, “small people.” They are people who usually started with little or nothing, as members of the working class or lower middle class, as immigrants, as children of holocaust survivors. They are people who worked like dogs all their lives, finally saved up enough money to make an investment in Madoff, and now find themselves wiped out. Many — perhaps even most — are elderly, in their late 60s, 70s, or 80s. Many had no other savings or income except what they had in or received from Madoff. Many are completely devastated, financially and psychologically. They are selling their homes in order to obtain money to live. They are attempting to reenter the work force, sometimes in menial jobs, in their 60s, 70s and 80s, in order to obtain money for food and shelter. (There is one man in his 90s who took a job in a supermarket passing out fliers in order to sustain himself.) They are the victims of both a terrible crime and a terrible tragedy.

The crime and tragedy of which they are victims were caused by Bernard Madoff, but not by Bernard Madoff alone. They also were extensively caused by the government, beginning with a widely circulated 1992 public statement by a governmental body, the SEC, which was a contributing cause to the disaster. When it undertook an investigation in the early 1990s of two accountants who gathered and forwarded monies to Madoff, the SEC had initially expected to find a Ponzi scheme. But on December 1, 1992, in a statement that securities lawyers tell me is never made by the SEC, it publicly said through the Wall Street Journal that there was no fraud involved, i.e., no Ponzi scheme. That statement by the government, which placed the imprimatur of honesty on Bernard Madoff (who was disclosed two weeks later, in the WSJ of December 16th, to be the money manager for the two accountants), caused untold numbers of people to continue their investments in Madoff, to invest with Madoff for the first time, and/or to increase investments with Madoff over time. (It was a major reason why I myself invested initially and subsequently increased my investment.) The government — the SEC — never retracted its statement, not even after Harry Markopolos began warning it in 2000 that Madoff likely was a Ponzi scheme.

The SEC’s remarkable, unique, and never retracted statement of December 1, 1992, and its failure to stop Madoff when warned to a fare-thee-well by Markopolos starting in 2000, were a major cause of the disaster which subsequently occurred. The SEC’s 1992 statement was instrumental in the Ponzi scheme growing from about $450 million in 1992 to between three and seven billion dollars in 2000, and the 1992 statement, plus the SEC’s ignoring of Markopolos, caused the scheme to grow from three to seven billion dollars in 2000 to $65 billion in 2008.

So the government, through the SEC, was a major cause of Madoff’s success and of the enormous harm which has befallen thousands of “small people.”

The “small people,” of course, invested in Madoff through a variety of differing vehicles. Some were direct investors. Some invested through feeder funds. Some through IRAs. Some through pension funds. Some through partnerships. Because of the difference in investment vehicles, many are not eligible for tax recovery, e.g., those who invested through IRAs, charities, pension funds and feeder funds. Some are not eligible for SIPC recoveries, e.g., feeder fund investors or investors who were part of a single “group” investment. In addition, such restitution as is obtainable through tax recoveries or SIPC recoveries will often be but a small portion of the losses suffered. Many people still will find it very difficult or impossible to meet daily expenses.

In addition, litigation is likely to go on for the better part of a decade (as has occurred in other cases), while victims continue to lack resources to meet everyday expenses. No one can doubt that there will be, for example, long lasting litigation against SIPC on the questions of whether it is proper to exclude investors through feeder funds from the definition of customers, and whether the definition of net equity can be the restrictive and unusual cash in/cash out definition that has been adopted by the Trustee in order to deny recovery to thousands — and that many think wholly illegal — or whether SIPC must instead use the standard definition of net equity and thereby adhere to the well established securities law principle of honoring “legitimate expectations” of customers.

There is likewise sure to be a decade worth of litigation against the government on the question of liability arising from the prior causative actions and inactions of the SEC. Those litigations will revolve around such questions as the government’s responsibility under the Federal Tort Claims Act for negligence or for intentional misconduct, responsibility arising from its extraordinary, and extraordinarily wrong, public statement in 1992 which caused the Ponzi scheme to grow by leaps and bounds and its failure to act against Madoff from 2000-2008 though warned time and again by Harry Markopolos.

There will also be extensive litigation against the IRS (i) because many people will not accept the “safe harbor” theft deduction provisions which it has created and which will be harmful to many even though the provisions are well intended, and (ii) because if people are not wealthy, they will not be much helped or even helped at all by the “safe harbor” provisions. The cases will involve such questions, which the government in its safe harbor provisions sought to elide, as claim of right, equitable estoppel, equitable tolling (in the present circumstances of governmental culpability), negative tax benefit, the constitutionality under the 16th Amendment of levying a tax, and now keeping the tax, on money that is now known not to have been income, even though the amendment explicitly permits only the taxation of money that is income, and whether the government can force people into giving up doctrinal rights, and rights to interest on refunds of unlawfully assessed taxes, in order to be allowed to use safe harbor theft deduction provisions.

There will also be litigation on the question of whether the government has a right to calculate theft losses in the particular way it has in its safe harbor provisions. In the latter regard, the questions to be litigated will include whether it was proper for the government to calculate theft losses in such a way that, if two persons invested the same amount of principal and earned at the same percentage rate, but one was wealthy enough to pay tax on Madoff income from other income while not withdrawing money from Madoff, but the other, less affluent investor had to withdraw money from Madoff in order to pay tax on Madoff income, the wealthier taxpayer will benefit far more from the IRS’ safe harbor provision, thus creating serious inequality between the two investors to the detriment of the less affluent one. And there obviously will be litigation on the additional question of whether the government’s action was the result of pressure from extraordinarily wealthy contributors to the Democratic Party who immediately placed pressure on the government and who will benefit to the tune of scores or even hundreds of millions of dollars from the safe harbor calculations promulgated by the government, while those who have little money and had to live off of their Madoff earnings over the years will get very little benefit and certainly not enough to live on.

There will also be very important questions raised in litigation as to why the IRS’ program of approval of non bank custodians did not expose the Ponzi scheme. This is a remarkable and potentially highly explosive point. Madoff was approved by the IRS in 2004 — in the midst of Markopolos’ revelations to the SEC — to be one of only about 260 non-bank custodians for IRAs and pension funds throughout the entire United States. How did that happen — i.e., how could Madoff possibly have been approved by the IRS in 2004 — especially since the IRS has claimed, since 1984, the right to inspect the books and records of non bank custodians? Such inspection of Madoff would have shown that Madoff was in major violation of the IRS’ own governing regulations and would have blown open the Ponzi scheme. It would have shown, directly contrary to governing IRS regulations, that Madoff himself owned 90 to 100 percent of the business rather than the maximally allowable 50 percent designed to insure corporate continuity, had no trust department, had no vault for customers’ securities (and indeed had no securities being held for customers), did not keep fiduciary IRA records separate from other records, and had been acting as an illegal non-approved custodian of IRAs and pension funds for decades. It would inevitably have shown that Madoff was acting illegally under the IRS’ own rules and was not doing what he claimed to be doing. It would have exposed the Ponzi scheme.

Yet the IRS approved Madoff, contrary to Congress’ specific intent that it act in a fiduciary capacity in overseeing non-bank custodians of IRAs and pension funds. Does the IRS, contrary to Congress’ intent that it exercise careful fiduciary oversight, simply approve companies to be non bank custodians without looking at their books and records to insure they are legitimate and that the owners of IRAs and other accounts are protected? Did the IRS look at Madoff’s books and records and, like the SEC, the NASD and FINRA, negligently miss the Ponzi scheme? Whatever the IRS failed to do, its negligence (or worse?) is bound to be explosive. For the nation’s tax collector to have been the facilitator of a Ponzi scheme, as appears to have occurred here, will necessarily be regarded as awful. (I note that one Congressman already has written to the IRS about this situation although it was disclosed (by me) less than two weeks ago.)

These questions, as said, are sure to be raised in litigation. Another question that will be raised is this. There are tax lawyers who claim the IRS has a program which matches corporate reports of dividends and interest paid against taxpayers’ reports of dividends and interest received. We have been unable to locate information on such a program. But if it does exist, how could it have failed to expose Madoff’s Ponzi scheme, since the reports of dividends and interest paid by companies would have had to be far smaller than the reports of dividends and interest received by taxpayersbecause Madoff was making up the latter out of whole cloth? Since the program of matching, if it exists, is largely shrouded in obscurity, people outside the IRS cannot know how it works or its capabilities; thus the question of why (if it exists) it didn’t catch Madoff will surely be raised in litigation.

There will also be extensive litigation against FINRA. It and its predecessor, the NASD, inspected Madoff every two years since 1962. Yet it never uncovered the largest Ponzi scheme in the history of the world. How could this possibly be? This question, and FINRA’s liability for negligence or worse to every single victim of Madoff, will be the subject of lengthy litigation.

The entire process of ironing out all these questions, relating to governmental and quasi governmental agencies, in a variety of forums is bound to take a decade or so, while those who are not highly wealthy suffer immensely and the process becomes, as it is already becoming, mainly a lawyers’ relief act.

Surely there must be a better way than a decade of widespread hassling and litigation.

There in fact is a better way. It is a way that, at one and the same time, will enable deeply injured people to obtain enough income to live on, while costing the government far less for several years than the provision of tax relief would. It would also, though large in absolute number, be a drop in the bucket compared to the trillions being spent in bailouts. I hope, as said, that you will look upon it with favor.

The idea I have in mind, even though it is simplicity itself, will greatly assist direct investors, feeder fund investors, IRA investors, pension fund investors, charities — everyone. It will nullify the need for tax refunds. It will nullify the need for tax deductions. It will nullify the need for SIPC payments. Rather than provide any of these, the government would instead provide victims with government bonds whose principal is not payable for ten years, and whose interest rate, payable annually, would be seven percent tax free. To satisfy the principle of legitimate expectations, the bonds’ principal would be the amount shown in an investor’s final, November 30, 2008 statement (minus amounts already obtained in tax refunds or from SIPC). All private or other litigation rights against potentially culpable parties would be transferred to the government, which is best situated to and can pursue them in court through the Department of Justice if it wishes, and may be able to recover immense amounts by doing so. (The SIPC trustee has already filed suits seeking ten billion dollars or so.) The victims, however, will simply get bonds whose principal will come due in ten years, with interest payable annually.

This is simple, clean, direct and would achieve crucial goals. Let us start with victims. Whether they were direct investors or investors through feeder funds, many of them, who are now wiped out, were literally living off of their Madoff earnings, which they would take out every year for living expenses. In recent years Madoff claimed to be earning, roughly speaking, about ten to twelve percent taxable, about eight or nine percent after taxes. Victims, whether direct investors or feeder fund investors, will continue to get roughly similar amounts (a bit less actually) under the bond proposal, but enough to live on.

Pension funds and charities will be able to continue to obtain money tax free, just as before. Partnerships and trusts will likewise receive the same treatment as before.

For those who do not want to hold on to their government bonds for ten years, there is likely to develop — there almost surely will develop — a secondary market, an over the counter market, on which the bonds can be sold, depending on the situation, for their appropriately discounted value or their appropriately higher-than-face-value value.

As for the government, it will make out reasonably well in comparison with the situation otherwise. The government has estimated the amount of loss shown in statements from Madoff at being $65 billion. It was also estimated early on that the government might have to pay out a total of 20 billion or more in tax refunds and SIPC recovery, though this estimate may now be far different. (If the government itself has made knowledgeable estimates that are different, it has not disclosed them to the public or Congress). Under the bond proposal, at 7 percent tax free, the government, for ten years, will pay out only $4.55 billion a year (seven percent of $65 billion). It will not pay out a total of the previously estimated $20 billion until the fifth year — not until then will the total interest reach $20 billion. The principal of $65 billion will not be paid by the government for ten years and, if my understanding is correct, is only the same amount the FDIC expects to pay out in the next five yearsdue to bank closings. And each year the government will pay out in interest an amount that, very roughly, is only about one-tenth of one percent of the total of ten trillion dollars (or even more) which it is now estimated the government will provide, as an investor, lender, and/or insurer, to the financial oligarchs who caused the current economic meltdown.

The present value to the investors of receiving a collective total of $4.55 billion per year for ten years at a rate of seven percent is approximately $32 billion. Also, the present value to the investors of $65 billion in principal to be received in ten years, calculated at a discount rate of seven percent, is $33 billion. So investors receive a total present value of about $65 billion. This total present value of $65 billion “replaces” the present value possessed by the investors on December 10th (the day before the fraud was disclosed). On December 10th investors had accounts worth $65 billion plus, assuming an after tax “return” from Madoff of eight percent, another $5.2 billion per year every year for the next ten years, or a present value of $36.5 billion, for a total present value on December 10th of $101.5 billion. So the total present value on December 10th of $101.5 billion ($65 billion plus $36.5 billion) would be replaced by present value of $65 billion ($32 billion plus $35 billion). Accordingly, investors are much less well off under the bond proposal than they expectably would have been had Madoff been for real. Yet they will be able to live.

* * *

In conclusion, I would be very grateful if you were to look with favor upon the proposal discussed here, and were to pass on the idea to persons who are high level decisionmakers. As is evident, the proposal has many advantages. It will provide wiped-out investors with annual monies on which to live. It will cost the government less for many years than likely will otherwise be the cost in tax deductions, tax refunds and possible government financing of SIPC payments. It will provide restitution for the governmental conduct which helped cause the disaster — the incredible SEC statement of December 1992, the phenomenal SEC negligence, or worse, of 2000-2008, and IRS actions or inactions that allowed Madoff to become a non bank custodian. It will end all private litigation, leaving only litigation that the government chooses to pursue. It will help restore confidence in the securities markets, confidence essential to recovery from the current economic meltdown. It will show that the people who caused the meltdown, and who in one way or another are receiving an estimated ten trillion dollars or more in bailout monies, are not the only ones whom the government will assist. And it is the moral thing to do.

Finally, let me say that I greatly appreciate your willingness to take the time to consider this, and, as said, hope that will look upon it with favor.

Sincerely yours,

Dean, Massachusetts School of Law

Having set forth the letter about the bond proposal, let me now turn to the question of financing the proposal.

One of the last legislative assistants I spoke to asked me a question that nobody else had. She asked how the bonds would be financed, how they would be paid for. This, she said, would be a very important consideration. I replied that I had always assumed they would simply be issued by the government (just as it issues savings bonds, Treasury bills, etc.), but would give consideration to the question of how to finance them. After some consideration, it seems to me that they could be financed by a technique similar or identical to the way in which SIPC itself is financed — by the brokerage industry — or to a way in which people are speaking of financing healthcare — by a tax on companies issuing the gilt-edged plans costing $25,000 or more per year.

The government could require that, let us say, $100 billion in 20-year, two percent bonds must be bought by the industry whose philosophy, practices and greed gave rise to the general economic meltdown and to the culture which let Madoff get away with fraud for 20 to 45 years, which is receiving hundreds of billions or trillions in bailout monies (which it often is not lending though lending was a major goal in giving the industry trillions in bailout monies) and which is again making money hand over fist and will be giving out huge pay packages. The government would thus require the investment banking/banking/brokerage industry (“ib/b//b industry”) — the once three separate groups that Sandy Weill and friends (including Alan Greenspan, Robert Rubin and Lawrence Summers) thought it would be great to and did combine or allow to combine, thereby bringing disaster to ordinary people — to buy the $100 billion or so in bonds at two percent interest, with the principal payable in twenty years. The government would then invest the 100 billion dollars and earn interest on it at the best rate it can get.

Then the government would issue, to Madoff victims, bonds with a face value of $65 billion, at seven percent interest payable annually and tax free, with the 65 billion dollars in principal being payable to the victims after ten years.

The 100 billion dollars the government receives by selling bonds to the culprit ib/b/b industry would be used to pay victims the seven percent they are to receive annually for ten years, and then to pay them the $65 billion principal of their bonds. $100 billion plus the annual earnings on the $100 billion would, I suspect, suffice to pay the victims seven percent per year (which is $4.55 billion a year or just over $45.5 billion in ten years, plus pay 2 percent interest payable to the investment bankers each year, or another $2 billion per year for a total of $6.55 billion per year ($2 billion plus $4.5 billion equals $6.5 billion), or a total of $65.5 billion over ten years. This would leave, at the end of ten years of interest payments, $34.5 billion of the original amount obtained from the ib/b/b industry, plus the amount of interest earned over the ten years on the money obtained from the ib/b/b industry. This overall total, as indicated, would, I suspect, be enough to pay the Madoff victims the $65 billion in principal owed to them after ten years.

After paying the Madoff victims the principal owed to them after ten years, the government would then continue paying the members of the ib/b/b industry two percent a year for another ten years and, at the end of that ten years, would pay them the $100 billion principal on the bonds they hold.

I do not know the extent to which amounts left in government coffers from the initial $100 billion sale of bonds to the ib/b/b industry, plus interest earned on that money, would cover the interest paid to the ib/b/b industry from years 11-20 and the repayment of principal to the ib/b/b industry after year 20. All of this is a matter for mathematicians and financial experts, who would use such financial tools as discount rates, etc. to decide how much in bonds should be sold to the ib/b/b industry if we want the initial sale to the industry, plus earnings, to cover repayment to the industry after 20 years. (A lesser amount than otherwise could be sold to the industry if we don’t care about that.) Allthat I am trying to do here is to set forth a basic idea: that the guilty industry should be required to buy an amount of low interest rate bonds sufficient to provide the money to pay Madoff victims seven percent a year for ten years, and to pay $65 million in principal to victims after ten years, and that the principal of the bonds held by the guilty ib/b/b industry should be paid after 20 years.

I conclude with a brief discussion of an all-important ingredient in obtaining enactment of a bond proposal (or any proposal relating to Madoff victims): lobbying. Without a major lobbying effort, there will be no enactment of a bond proposal (or, in all probability, of the Ackerman or Meeks proposals or of a proposal to increase the amount paid by SIPC to reflect inflationary changes since 1978). Lobbying is the way Congress works; for practical purposes, lobbying and huge expenditures on lobbyists — plus gigantic campaign contributions — is the way Washington as a whole works. I strongly recommend that any political tyro interested in the possibility of obtaining enactment of anything in regard to Madoff read Robert Kaiser’s recent book called So Damn Much Money in order to learn how the lobbying game works, including obtaining the support of key Congressional players and their staffs, persuading one or more of the legislators to be the point person for the effort, contacting many or most of the rest of the members of Congress and their staffs, providing Congress and its staff with memos of the reasons in favor of a bill and of the answers to criticisms, providing them with a draft of a bill, drafts of floor speeches about a bill and drafts of committee reports on it, and continuously keeping in close touch with Congressmen and Congresswomen. (I interviewed Kaiser, for several years the Managing Editor of the Washington Post, about his book for the better part of two hours for a television program I regularly do on books. Watching a DVD of the program (DVDs will be available to others in a few weeks) would give you much information more quickly than reading the entire book, but I nevertheless strongly recommend reading the entire book if you are a political novice who wants to get a fix on what would be involved in a lobbying campaign regarding Madoff. I know people don’t like to read books, but . . .)

There are only two ways that a significant lobbying campaign in favor of the bond proposal can be mounted. One way, the standard one, is to enlist the services of a professional lobbyist, often, even usually, a Washington lobbying group or a Washington law firm that lobbies (or perhaps a lobbyist located elsewhere with extensive experience in and contacts required for lobbying in Washington). I have been part of a small group of people who pursued this earlier this year. The problem is that the lobbyists want, in the words of Kaiser’s title, so damn much money. The price ran between one and two million dollars. People who have been wiped out by Madoff do not have that kind of money.

There are, of course, some persons who were and still are so rich that, despite huge losses to Madoff’s Ponzi scheme, the one to two million dollars needed for a massive lobbying campaign by professional lobbyists on behalf of the bond proposal would be pocket change to them. None of these people have yet stepped forward publicly, in connection with lobbying, in regard to any aspect of Madoff (though I believe some of them have done some things behind the scenes). Whether they would be willing to step forward to fund a lobbying effort on behalf of the bond proposal remains to be seen. In absolute terms they would benefit monetarily more than anybody else from the success of the bond proposal, since it would restore scores or even hundreds of millions of dollars to each of them in return for what is to them pocket change.

There are some who think that the reason such very wealthy people have not stepped forward in the past is that so far there has been little focus on obtaining restitutionary legislation, as opposed to focus on lawsuits, SIPC, etc., and that the relevant wealthy persons may step forward in future if and when the focus changes to obtaining legislation. But, as said, this remains to be seen.

Another way to finance a lobbying campaign is for lobbyists to work on a contingency fee basis. My clear recollection is that there is no federal law against this (although some states, like New York, have such a law governing their own citizens). Given that scores of billions of dollars are involved — $65 billion on the November 30th statements, $100 billion or so in a bond sale to the culpable ib/b/b/ industry – – even a contingency fee that is miniscule in percentage terms would be a gigantic absolute sum. (One-tenth of one percent of $65 billion dollars is $65 million, which would be a gigantic contingency fee in absolute terms. One percent of $100 billion would be an even more gigantic contingency fee of $100 million.)

Payment of the fee could be assured in either of two ways. One would be to have an earmark for the fee in the bond proposal legislation itself. The other would be as follows: It is probable that the legislation should contain provisions setting up a very small temporary organization — of not more than four or five people or perhaps fewer even than that — to calculate the amount of bonds to be received by each victim and to insure that all goes as it should. Not all the victims would get the amount shown on their November 30th statements (even when they are completely innocent victims rather than participants in Madoff’s fraud), because some will already have had part of their losses covered by SIPC or tax refunds. The job of the small group would be somewhat analogous to the job of Kenneth Feinberg and his people in regard to payments to the families of victims of 9/11 (though the small group’s job would be infinitely simpler than Feinberg’s was). With regard to assuring payment of a contingency fee, the small organization of five or fewer persons could be given the duty of determining and arranging for payment, from the bonds bought by the culprit ib/b/b industry, or from general federal coffers if bonds are not sold to the industry, of a contingency fee that can be no greater than some small percentage established in the legislation (analogously to limits on payments to trustees established in the Bankruptcy Code).

If no way is found, or accepted, to finance a lobbying campaign by professionals, then a victims’ group would have to be formed to lobby. The problem here, as relayed to me by people who have been active in victims’ groups (and as I have in part seen myself by reading the traffic on the groups’ websites) is that some people don’t do the jobs they say they will do, some people are uncooperative, etc. In my judgment, therefore, a new and very small group of persons would have to run the lobbying campaign if it is to succeed. That is, in order to succeed, the campaign would have to be under the ultimate centralized control of one person or at most a very few people. The concept of “centralized control” is perhaps obnoxious to many, but is essential to getting the job done lest there otherwise be disorganization and lack of accomplishment. This is little different, if different at all, from oft-present requirements for success in corporations, the military (where it is called unity of command), law firms, etc.

Persons who agree to work would be given particular substantive assignments (drafting the reasons for the legislation and responses to opponents, producing initial drafts of legislation, producing floor speeches and committee reports, continuously pursuing and dealing with particular assigned legislators, etc.). People who agree to work with the group would have to perform the tasks they are assigned to do or else they would be required to resign from the effort.

Creating and “operating” a successful grass roots victims’ group to lobby for what is needed (as the Jersey Girls did with regard to 9/11) may be the hardest of the various ways to create a lobbying campaign in behalf of a bond proposal, but it will nonetheless be the only way if one to two million dollars cannot be raised to finance a professional group of lobbyists and if professional groups are not attracted by the possibility of even a gigantic contingency fee. But, regardless of any of these difficulties, I believe a bond proposal supported by a major lobbying effort is the only way, and at minimum is far and away the quickest way, to obtain anything like adequate restitution for people who have suffered greatly because of Madoff’s fraud and the extraordinary governmental facilitation of that fraud. Thus, despite other major calls on my time in future (e.g., overseeing the law school, starting a new history college), part of my own time will in future be spent pursuing the bond proposal and, crucially, the establishment of a major lobbying campaign by professionals or by victims. I shall soon send out a formal request for much-needed help in establishing a lobbying campaign, and of course hope that competent and diligent people will offer the needed assistance.

Lawrence Velvel, dean of the Massachusetts School of Law, is the author of Thine Alabaster Cities Gleam and An Enemy of the People. He can be reached at:

* This posting represents the personal views of LAWRENCE R. VELVEL.










Lawrence Velvel, dean of the Massachusetts School of Law, is the author of Thine Alabaster Cities Gleam and An Enemy of the People. He can be reached at: