Academic

Dear Ethicist,

I am the general counsel at a federal agency.  This agency, while I was not employed there, somehow missed the largest Ponzi scheme in U.S. history, even though there were red flags.  Now, the agency is involved in the bankruptcy/liquidation proceeding, which is attempting to round up funds (sometimes from other participants in the Ponzi scheme) and distribute it equitably among the participants who lost money.  In all likelihood, claims will not be satisfied in full.  My agency is going to take a position on how to calculate participants' losses -- i.e., who is a "net winner" and who is a "net loser" -- which will affect how much each participant will be able to claim (if any amount at all).  Here's the thing -- my mother was a participant, though she surely did not suspect that the investment fund was a Ponzi scheme.  She died several years ago, prior to the fund's collapse, but during the time that it was operating as a Ponzi scheme, and her account balance (just over $2 million), reflecting principal and capital gain, was liquidated and became part of her estate.  I was the executor of the estate and an heir.  There is only the tiniest probability (in my mind) that I would be sued or asked to disgorge any amounts.  Do I have a conflict of interest?

I'm no ethicist, but I think I would have said "yes" or at least "maybe, so let's think of some way to avoid the appearance of impropriety."  Apparently, though, when David Becker, general counsel of the SEC, posed this question to an ethics officer (one he supervised), the ethics officer pondered the question for up to 25 minutes before replying by email "no."    Chairman Mary Schapiro regrets this now.  Just to get the facts out, Becker re-joined the SEC in 2009 for a two-year stint, which is almost over.

On December 11, 2009, the SEC filed a Memorandum of Law prior to a February 2, 2010 hearing in the Madoff SIPC liquidation that Madoff investors be able to claim the principal amounts that they had invested (less withdrawals) plus interest calculated to reflect inflation (a "constant dollars" approach).  (For example, if Mrs. X invested $100,000 in 1983, then her claim would be for basically the same amount but in 2008 dollars.)  This filing was signed by Katherine Gresham, assistant general counsel.  Remember that SIPC was taking the position that the claim would be just for the $100,000, and the other Madoff investors were arguing that the claim would be for $100,000 plus the "phantom returns" that their monthly balances purported to show.  (SIPC won in bankruptcy court and now the issue is in front of the Second Circuit.)  The SEC's position seems like a (very)reasonable one, and not one against the interest of the other Madoff investors.  However, this position might be a pro-Becker position.  The Complaint against Becker states that his withdrawal from BLMIS contains at least $1.544,494 of fictitious profits that must be clawed back, suggesting that the principal amount might have been $500,000.  Under SIPC's position, Mrs. Becker's estate has only a $500,000 claim.  However, if that principal was deposited many years (or decades) ago, then the time value of that money may be fairly substantial.  This position may help other similarly situated investors, but it could definitely be in Becker's interest as well.

My colleague Larry Ribstein was all over this last week.  I'm a little late to the party.