JeffreyAMitchellGibbonsPC - Brief

Case: 10-2378 Document: 220 Page: 1 08/11/2010 86922 29
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10-2676(CON), 10-2677(CON), 10-2679(CON), 10-2684(CON),
10-2685(CON), 10-2687(CON), 10-2691(CON), 10-2693(CON),
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10-2694(CON), 10-2718(CON), 10-2737(CON)
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IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Debtor.
ON APPEAL FROM THE UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK
BRIEF OF APPELLANT
DONALD G. RYNNE
JEFFREY A. MITCHELL
GIBBONS, P.C.
Counsel for Appellant
Donald G. Rynne
One Pennsylvania Plaza, 37th Floor
New York, New York 10119-3701
(212) 613-2000
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ii
I JURISDICTIONAL STATEMENT 1
II PRELIMINARY STATEMENT 1
III STATEMENT OF ISSUES PRESENTED 1
IV STATEMENT OF THE CASE 1
V FACTS 2
a. Background 2
b. The Account 4
c. The Nature of the Parties' Relationship : 6
d. The BankIuptcy Court Order 10
e. Using the Last Account Statement Does Not Rubber Stamp the
Fraud 16
f. There is No Competent Evidence about BLMIS From Madoff
and DiPascali 18
VI ARGUMENT BACKGROUND 20
a. SIPA 20
b. SIPC Protection 22
VII NEW YORK STATUTORY INTEREST 23
VIII SUMMARY OF ARGUMENT 25
IX ARGUMENT 25
X CONCLUSION 25
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TABLE OF AUTHORITIES
Page(s)
Statutes
15 U.S.C. § 78eee(b)(4) 1
15 U.S.C. §78ccc(c)(2) 21
15 U.S.C. §78ddd(h) 20
28 U.S.C. § 158(d)(2)(A) 1
SIPA § 7811l(ll) 15
Other Authorities
Internal Revem:te Bulletin:

2009-19, Rev. Proe. 2009-26 13
Rules
Fed. R. App. P. 32(a)(7)(B)(iii) 26
Fed. R. App. P. 32(a)(7)(C) 26
NYCPLR §5001(b) 24
NYCPLR, §§5001-5004 23
NYCPLR, §5004 24
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I JURISDICTIONAL STATEMENT
The United States Bankruptcy Court for the Southern District of New York
has jurisdiction over this proceeding pursuant to 15 U.S.C. § 78eee(b)(4). This
Court has jurisdiction over this direct appeal pursuant to 28 U.S.C. § 158(d)(2)(A).
II PRELIMINARY STATEMENT
In order to reduce the amount of briefing on this appeal, appellant Donald G.
Rynne ("Rynne") joins in and adopts those portions of the briefs filed by Becker &
Poliakoff, LLP and Davis Polk & Wardwell on behalf of their respective clients
(the "Adopted Briefs") that are indicated below. Rynne submits this brief to
address certain facts and arguments from his perspective as an individual investor
about which he would like the Court to be separately aware.
III STATEMENT OF ISSUES PRESENTED

Rynne joins in the Statement of Issues presented in the Adopted Briefs.
IV STATEMENT OF THE CASE

Rynne was a customer of BLMIS for approximately 10 years. After BLMIS
failed, he filed a claim of approximately $6-million with SIPC, the amount
reflected on his November 30, 2008 statement as being in his account (Rynne, p.
2).1 The trustee rejected Rynne's claim, and after performing his own analysis,
I References to the Memorandum of Law submitted by Rynne in opposition to the Motion for an
Order Upholding the Trustee's Determination is referred to by the designation "Rynne" followed
by the page number on which the reference appears.
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issued a new statement which alleged that on a purely cash basis, and without
factOling in interest or tax payments, he had withdrawn close to $2-million more
over the life of the account than the actual cash deposited, and therefore had a
negative balance of nearly $2-million (Rynne, p. 3). Rynne was denied $500,000
of SIPC coverage despite the fact that his statements showed far more than that in
his account before BLMIS failed (Rynne, p. 2).
The trustee moved in the Bankruptcy Court for an Order upholding his
decision to deny customer claims, such as those of Rynne, for amounts listed on
their last BLMIS statement. The trustee asked that his determination of net equity
based on a pure cash-in/cash-out analysis (also referred to as the "Net Investment
Method") be validated. In the Order appealed from (SPA-7), the Bankruptcy Court
found that the Net Investment Method proposed by the trustee was consistent with
SIPA, and appropriate under the circumstances of the Madoff case. 2
V FACTS
a. Background
Until the moment word got out on December 11, 2008 that Bernard L.
Madoff had been arrested, to the world at large, his company Bernard L. Madoff
Securities, LLC. ("BLMIS") carried every conceivable sign of legitimacy a
customer might look for (Rynne, p. 6) Its activities were regulated by the
2The Bankruptcy Court Order appealed from is contained in the Special Appendix, and page
references begin with the prefix "SPA-".
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Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers (now FINRA), neither of which even once publicly questioned
the integrity of the finn or its principal. Its accounts were protected by the
Securities Investor Protection Corporation ("SIPC"), which supposedly provided
loss coverage of up to $500,000 (SPA-IS). Even Bernard Madoff himself was a
lion of the securities industry, having been an honored guest and speaker at
countless industry events, and served as chainnan of the NASDAQ stock market.
For those reasons and others like them, no customer or regulator publicly
expressed suspicion that anything was amiss at BLMIS until the very day Madoff
sUlTendered to authorities. The finn issued regular account statements, customers
paid taxes to state and federal authorities on whatever income was reported (SPA-
22), and no one suspected that the trading reflected on account statements was not
real.
Rynne is an 86-year-old decorated World War II veteran who flew missions
during the war as an Air Force pilot in support of allied operations throughout
North Africa, the Middle East, China, Bunna and India (Rynne, p. 2). He had a
long career in international trade, and most recently lost half of a lung to cancer
(ld.). Rynne has never in his life been charged with any crime, and is not alleged
to have had any role whatsoever in the criminal activity that led to the demise of
BLMIS ([d.). Rynne is simply an innocent customer who kept an account at
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BLMIS to hold his life savings. On December 10, 2008 he believed he had close
to $6-million in account number 100072 (the "Account") to support his retirement,
with at least $500,000 of that amount insured by SIPC (ld.). However, the SIPC
trustee denied his claim for coverage, and said that despite the $6-million shown
on his last BLMIS statement, he actually had a negative balance of close to $2-
million. Now, if the Order appealed from is affirmed, Rynne stands to lose not
only his SIPC protection, but is almost certain to next find himself defending
against a claim by the trustee to repay the negative balance.
b. The Account
Rynne maintained the Account with BLMIS for more than a decade, and
made periodic withdrawals, most often just to pay taxes on reported income
(Rynne, p. 3). He thought he retained a healthy balance for future financial
security (ld.) As would any customer of a regulated company, Rynne presumed
that whatever was shown on statements as being in his account was "equity" since
all taxes due on previously reported gains were paid each year (Rynne, p. 5). His
was not like a brokerage account where securities are bought and held long-tenn
with capital gains tax only due on embedded unrealized profits when a position is
sold. At BLMIS, all securities were reported as having been sold at various times
every year, so any reported gains (or losses) were realized and taxed regularly as
income (SPA-19-22). Therefore, it was reasonable for Rynne to believe that when
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his Account was reported as "invested" in the market in well-known securities, his
statements showed what were fully paid for positions (with after tax dollars) in
S&P 500 equities, index funds, or cash equivalents. No regulator ever gave any
BLMIS customer reason to believe that the balances reflected in their accounts
were not real, or that taxes were not really due on profits reported each year
because the firm's trading activity was a sham.
Only after Madoff's arrest did anyone - the government, regulators,
customers, and others -learn that the financial advisory division of BLMIS was a
fraud of unprecedented proportions (the "IA Business"). SIPC, however,
apparently did not have sufficient reserves on hand to cover the entirety of the loss
that was anticipated from Madoff's crime. It therefore divided BLMIS customers
into separate classes, and in doing so, looked to reduce the claim pool, and by
implication, its own liability (See, SPA-23). Rather than rely on the last account
statement issued by BLMIS as it had historically done in other cases, every IA
Business customer got a new accounting from the trustee (Id.). Those like Rynne,
who had been customers long enough to have made withdrawals over the years that
exceeded their actual cash deposits - without interest - now had negative rather
than positive balances. Anyone with a negative balance, derisively referred to
below as a "net winner," was denied SIPC coverage (Id.). If the Order appealed
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from stands, those customers are also presumably at risk of being called upon to
repay those negative balances because of the new statements issued by the trustee.
c. The Nature of the Parties' Relationship

BLMIS represented that managed accounts like that of Rynne "were
supposedly invested in the 'split-strike conversion' strategy" (SPA-19). The Court
described the strategy as follows:
Under this strategy, Madoff purportedly invested customer funds in a

subset, or "basket," of Standard & Poor's 100 Index ("S&P 100
Index") common stocks, and maximized value by purchasing before,
and selling after, price increases. Several times per year, customer
funds would move "into the market," whereby a basket of stocks was
supposedly purchased. Customer funds were then moved entirely
"out of the market" to "invest" in United States Treasury Bills, money
market funds, and cash reserves until the next trading opportunity.
This continued until the end of each quarter, when all baskets would
be sold and "invested" in these "out of the market" repositories.
Id. What is significant about this "strategy" is that the customer accounts were
supposedly in and out of the market during the course of every year, and always
out at the end of a quarter (Id.). Accordingly, by year end, all gains or losses were
realized, and taxes at ordinary income rates were due and ultimately paid. Rynne
would withdraw funds from his account to fund the payment of those taxes.
During "out of the market" periods (Trustee MOL, p. 11),3 customers could make
withdrawals believing their securities had been liquidated. All of this was shown
3The Memorandum of Law filed by the Trustee below is referred to with the designation
"Trustee MOL" followed by the page number.
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on account statements issued by BLMIS on which Rynne and others like him relied
(Rynne, p. 5).
While the Trustee focused on the fraudulent securities transactions to
undermine the value of account statements issued to BLMIS customers, those
statements nevertheless reflected to those customers an amount represented as
"owed" to them by the firm (Id.). Whether or not BLMIS engaged in fraudulent
activity throughout its existence, the account statements it issued most especially
when customers were "out of the market" and supposedly in cash or cash
equivalents, were an obligation of the firm to its customers. Until Madoff's arrest,
BLMIS honored those statements for decades and never failed to pay Rynne or
others when they requested withdrawals.
True or not, BLMIS represented to its customers that the activity shown on
each statement actually occurred, and that during cash periods, they were entitled
to withdraw whatever funds were reflected on them (SPA-19). Assuming a firm
was not insolvent, but nevertheless reported fake trading activity on some account
statements, it could not just avoid the obligation to pay the benefits of reported
trading by later admitting the statements were fake. A trustee steps into the shoes
of an insolvent firm. The trustee is therefore bound by account statements issued
by BLMIS before the fraud was exposed, and should be not entitled to create new
and different account statements simply to reduce SIPe's exposure, most
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especially without providing for a customer's reasonable expectations. While
BLMIS may not now have sufficient assets to satisfy those obligations, the
obligations remain much like those any other business that becomes insolvent; due
and payable as a representation by the firm.
Rynne had an honest and good faith belief, supported by years of a
relationship and supposed third party regulatory oversight, that the account
statements he received reflected amounts owed to him by BLMIS (Rynne, p. 6).
Since the customer has no way to audit the business activities of a firm like
BLMIS, he relies on his account statements as accurate, and on regulators to be on
the lookout for fraud (ld.). SIPC coverage provides the customer with an
assurance that what he sees on his statement has at least up to $500,000 of
protection. However, rather than allow claims based on what trustee knows were
the legitimate expectations of customers like Rynne, he instead looks to treat what
he calls "net winners" as if they were knowing participants in fraud because they
get no credit for anything other than "cash in" and "cash out," regardless of
circumstance and length of investment. That is a fundamental change in the
customer/firm relationship here that is not consistent with past practice.
Indeed, at least until the time of Madoff's arrest, every customer of BLMIS
had been able to withdraw funds when the account was supposedly out of the
market and in cash. The decision whether or not to withdraw funds was the free
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choice of every customer. Some who presumably did not need the funds in their
accounts, allowed their assets to remain at BLMIS and, they thought looking at
their statements, presumably grow. Others withdrew funds for such things as
living expenses, taxes, charitable contributions, school tuitions, gifts and the like.
Lost in the trustee's decision to favor "net losers" is that their decision to reinvest
each quarter by keeping funds with BLMIS was a voluntary and knowing one - an
exercise of free will every bit as much as the decision of others to make
withdrawals. Yet, those who chose to not make withdrawals and reinvest
everything are rewarded by the Order for choosing to exercise their free will
differently than those who chose to withdraw.
Why customers who made the investment decision to keep their funds
invested with Madoff should be favored over other customers who withdrew funds
is nowhere explained by the Order. Suffice it to say, there is no logical reason to
prefer one group of customers over another since both are making a voluntary
decision each quarter about what to do with their funds. One group withdraws
funds, while the other rolls them over. The latter decision is not entitled to any
greater protection than the former, either logically or legally.
The Court refers to the IA Business as a "Ponzi scheme," and presumes that
funds paid to "net winners" were funded by deposits of "net losers" (SPA-39-40).
However, that applies equally to both groups. Since the Court presumes, without
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evidentiary support in the record, that BLMIS was always a Ponzi scheme, the
initial deposits of "net winners" were equally used at the outset to fund
withdrawals by earlier investors. Therefore, what is important is what the account
statements of each customer showed, since during cash periods, everyone was
presumably free to make withdrawals. A voluntary decision to refrain from
making. a withdrawal in favor of reinvesting with BLMIS, presumably because
doing so was better for the customer than taking out cash or investing elsewhere, is
simply not something that should be entitled to the greater protection afforded by
the Order. Stated differently, why should someone who voluntarily reinvests all
his "profits" in a Ponzi scheme be entitled to more protection than someone who
only reinvests a portion of his "profits"?
d. The Bankruptcy Court Order

The Banlauptcy Court acknowledged in the Order that "the briefs filed in
support and opposition to the Motion are voluminous and impressive... [and] that
the application of the Net Equity definition to the complex and unique facts of
Madoff's massive Ponzi scheme is not plainly ascertainable in law." (SPA-12)
Nevertheless, the Court adopted the trustee's simplistic mathematical "cash-
in/cash-out" approach as being appropriate, meaning the last BLMIS account
statements are discarded in favor of new calculations made by the trustee with the
benefit of the pure hindsight that nothing at BLMIS was ever as it seemed.
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Therefore, the trustee treats all money, no matter how long ago it may have been
invested with BLMIS, as if it was simply put under a mattress, so what could be
taken out is limited by what went under the mattress in the first place (Rynne, p. 2).
The Bankruptcy Court found that because the IA Business of BLMIS was a
sham, in hindsight, there was no basis for anyone to have ever relied on account
statements it issued for any purpose whatsoever. Because the statements were
"entirely fictitious" (SPA-28), customers should only be entitled to a "cash
in"/"cash-out" calculation of their respective positions. The Court said:
The BLMIS books and records expose a Ponzi scheme where no

securities were ever ordered, paid for or acquired. Because "securities
positions" are in fact nonexistent, the Trustee cannot discharge claims
upon the false premise that customers' securities positions are what
the account statements purport them to be. Rather, the only verifiable
amounts that are manifest from the books and records are the cash
deposits and withdrawals. Moreover, if customers' legitimate
expectations are relevant to any determination other than whether
customers hold "claims for securities" or "claims for cash," they do
not apply where they would give rise to an absurd result.
Id.
BLMIS had been a registered broker-dealer that issued account statements to
customers without interruption since 1960 (SPA-14). Yet, the Bankruptcy Court
disregarded the last account statements issued by the firm in favor of a new
accounting performed by the trustee, which was limited to account deposits and
withdrawals. In doing so, it disregarded statutes of limitations, taxes paid on
reported profits, statutory interest, the time value of money, customer expectations,
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or any other similar protections to which a customer like Rynne would ordinarily
be entitled.
The Order favors more recent BLMIS customers, those who voluntarily
chose to reinvest rather than make withdrawals, and customers who withdrew
everything before Madoff's arrest, over longstanding customers like Rynne who
treated their accounts like any other and made deposits and withdrawals as needed
(SPA-24). The Bankruptcy Court presumes that someone who got cash back that
exceeded dollar-for-dollar cash deposited had no legitimate reason for relying on
his account statement, and should therefore not get anything in the BLMIS
liquidation (SPA-34). However, all customers, old and new, received account
statements that purported to reflect the values of their accounts. Customers relied
on those statements, and nothing else, and made voluntary and knowing decisions
to either withdraw funds or keep money in to reinvest. Indeed, customers who
were fortunate enough to have closed their BLIMS accounts and withdrawn
everything before Madoff's arrest are not even considered - and indeed may even
get to keep everything simply because they did not file a SIPC claim.
The legitimate expectation of every existing customer of BLMIS was
obviously that the November 30, 2008 statement (the last issued before Madoff's
arrest) reflected the equity in their accounts, and was the value each thought was
being invested for them by the firm at that time. The Net Investment Method
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approach was an after the fact justification adopted by the trustee, likely to reduce
the demand on SIPC coverage by eliminating from consideration longer-term
customers who still had open accounts but whose withdrawals of funds exceeded
cash deposits.
Every BLMIS customer's investment goal was identical - to achieve the
benefits of a managed account with the IA Business. Many, like Rynne, withdrew
funds over many years to pay taxes on reported income (phantom or not), yet only
a portion of those taxes may be recoverable, though likely not by a person of
Rynne's age. (see, Internal Revenue Bulletin: 2009-19, Rev. Proc. 2009-26).
Nevertheless, the Bankruptcy Court allowed the trustee to consider only deposits
and withdrawals back to account inception, and without interest or credit for taxes
paid, even where inception (as in the case of Rynne) was longer ago than any
possible statute of limitations period.
If the Order stands, innocent customers will be paying twice for many of the
years their accounts were open - once to the government for taxes on non-existent
profits for which no tax relief is available, and again to the estate in having to
refund those same non-existent profits. The "cash-in"l"cash-out" formula
proposed is far too simplistic when it comes to equitably unwinding the largest and
longest running financial crime in American history.
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Underlying the Bankruptcy Court's decision is the fallacy that because
everyone now knows that the IA Business of BLMIS was a fraud, the only
"equity" can be the cash actually deposited into an account and nothing else. The
Bankruptcy Court reasoned "[a]dopting the Last Statement Method would only
exacerbate the harm caused to Net Losers and would improperly distribute
customer funds based on Madoff's arbitrary design ...Equality is achieved in this
case by employing the Trustee's method, which looks solely to deposits and
withdrawals that in reality occurred." (SPA-39)
However, that conclusion is not supported by the record. No one disputes
that all customers, old and new, reasonably relied on their account statements as
accurately reflecting what they thought was in their accounts (Rynne, p. 11).
Those statements either showed equity positions when they were supposedly
"invested" in the market, or cash equivalents when they were not "invested",
precisely the kind of investments SIPC coverage is there to protect. Congress
instituted SIPC protection in the 1970's to reassure the investing public that even
though stock certificates for positions reflected in account statements might be held
in street name by a firm and not physically delivered to the customer, their
investments were nevertheless protected against fraud up to $500,000. The law
does not create an exception for frauds that are too large, nor does it provide that
blame can be shifted to innocent customers to avoid payment to them.
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Nevertheless, the Bankruptcy Court by the Order added a new exception
nowhere found in SIPA - that is, unless "[t]he account statements are entirely
fictitious." (SPA-28) In that circumstance, according to the Court, the positions
reflected in an account statement "cannot be relied upon to determine Net Equity."
Id. It is impossible to harmonize the requirement of SIPA that coverage be
afforded in the statement amount of "all securities positions of such customer"
(SIPA § 78lll(11» with the Bankruptcy Court's "entirely fictitious" exception. If
securities shown on any account statement were not in fact acquired, then that
account statement is fictitious by definition. Congress did not create an "entirely
fictitious" exception, and the Order cites to no authority by which it is empowered
to engraft one into the law simply because SIPC may be underfunded to deal with a
fraud the magnitude of the one perpetrated by Madoff.
The fallacy of the exception is best illustrated by the fact that if a trustee
ultimately recovers more than 100% of what was lost, the "net winners" would not
share in any of the excess. Likewise, customers who had the good fortune of
withdrawing. everything before Madoff's arrest apparently get to keep everything,
as does the government for taxes paid on "profits" that are not being refunded.
The only real "equality" is not as the Order found, but rather, if everyone uses the
same November 30,2008 final statement for purposes of determining "net equity,"
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most especially for purposes of the $500,000 of SIPC protection (Rynne, p. 4).
That is also consistent with past practice.
e. Using the Last Account Statement Does Not Rubber Stamp the
Fraud
The Order finds that accepting the last account statement as a basis for
dividing proceeds would give effect to Madoff's fraud (SPA-39). The Bankruptcy
Court observed:
Adopting the Last Statement Method would only exacerbate the harm
caused to Net Losers and would improperly distribute customer funds
based on Madoff's arbitrary design. Net Winners and Net Losers,
equally innocent in Madoff's Ponzi scheme, should not be treated
disparately. Accordingly, the circumstances of this case "call strongly
for the principle that equality is equity." Cunningham, 265 U.S. at 13.
Id.
However, by authOlizing three separate classes of claimants - (i)· "net
winners", (ii) "net losers", and (iii) "under the limit net losers" (SPA-23-24), the
Order establishes a scheme that is not equal. "Net winners" do not share at all in
anything; SIPC coverage or possible future distributions from the estate. "Net
losers" share in both. "Under the limit" net losers get the portion of SIPC coverage
that makes them whole, and nothing more. Id. Nowhere considered in these
categories are customers who were fortunate enough to have closed their accounts
and withdrawn everything before Madoff's arrest. Also, if the trustee recovers
enough to make "net losers" whole, "net winners" still do not share in any
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distributable excess. In effect, "net winners" like Rynne are treated as victims of
fraud, but made to stand as a possible funding source for "net losers" rather than
SIPC.
On the record here, equality requires that all customers simply be entitled to
rely on their last account statements for purposes of determining "net equity."
That would .establish, on a relative basis, a percentage that all customers are
entitled to share in ratably on whatever proceeds are ultimately recovered in excess
of the $500,000 SIPC limits (Rynne, p. 9). The "legitimate expectations of the
customer" - whether identified as a net winner or net loser - were the same for
everyone; that their account statements reflected the amount BLMIS owed them in
cash or securities (Rynne, p. 9).
For an individual investor like Rynne, who believed he was earning income
on which he paid taxes for years, the amounts reflected on his statements were
liquid assets he counted on as being his after tax "net equity" (Rynne, p. 5). A
customer who had not yet withdrawn funds had no greater expectation of value in
an account, simply because nothing had yet been withdrawn (Rynne, p. 10). Each
is identically looking at his/her/its account statement as reflecting the real value of
what is on deposit (Id.). Each is also damaged, from the perspective of the
investor, by the amount the customer learned upon Madoff's arrest was, in fact, not
in his or her account (ld.). The fiction that all the trustee should consider is actual
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"cash in" versus "cash out," was not within the contemplation of anyone at the
time of Madoff's arrest (ld.).
Finally, if the last statement is used to determine net equity, all Madoff
customers whose accounts showed positive balances upon his arrest will receive all
or a portion of the $500,000 SIPC coverage to which they all thought they were
entitled. Yet, customers like Rynne will be disqualified from receiving anything at
all, most especially the benefits of SIPC coverage, which is not reasonable.
f. There is No Competent Evidence about BLMIS From Madoff and

DiPascali
While everyone now knows that the IA Business of BLMIS was a sham,
they did not know that until after Madoff's arrest. The "Factual History" section of
the Order credits Madoff himself, as well as his chief assistant, Frank DiPascali,
Jr., for a portion of the evidence upon which the decision is based. 4 The
Bankruptcy Court failed to consider that allocutions from criminal defendants like
these, masterminds of the largest and longest running financial fraud in history
who are looking for sentencing leniency, are inherently unreliable as evidence
(Rynne, p. 8). Madoff hardly said anything in his allocution, other than to take
4 Footnote 11 of the Order credits the "Factual History" as follows: "These facts are largely
undisputed and have been taken primarily from the Trustee's memorandum of law and
supporting declarations, as well as the criminal allocutions of Madoff and Frank DiPascali, Jr.
("DiPascali"). On August 11, 2009, DiPascali pled guilty to 10 criminal charges stemming from
his extensive participation in the Madoff fraud. On February 11,2010, an order was entered
releasing DiPascali on bail pending sentencing."
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responsibility for his actions, and presumably deflect attention away from family
members by claiming he engaged in fraud mostly by himself. DiPascali, who is
cooperating with the government, has not been subjected to the rigors of cross-
examination, and has only described the operations of BLMIS in the most general
sense.
The Order states that payments to fund withdrawals of profits by some
customers were funded by money stolen from others, and nothing else, presumably
based on the Madoff and DiPascali allocations (SPA-23). However, the record
shows that deposits were made by BLMIS into bank accounts, treasury certificates
and, certainly before 2007, Madoff's other legitimate business divisions generated
revenue and perhaps profit (SPA-IS). Accordingly, while BLMIS misrepresented
that each customer was in fact invested in the market, it did earn money on what it
fraudulently obtained by those deposits and investments, so the finding in the
Order that only stolen money was used to fund withdrawals is not supported by the
evidence. Regardless, there is simply not enough credible evidence to allow the
Court to rely on the unchallenged allocutions of known criminals as a basis for
findings of fact.
Even in the most charitable of circumstances, there is little prospect that the
Trustee will ever successfully introduce into evidence much of what the Order
credits to Madoff and DiPascali (Rynne, p. 4). The Bankruptcy Court should have
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limited its findings to evidence presented by the trustee based on what he learned
upon his own review of the records, and not allocations of criminal masterminds of
such a massive fraud.
VI ARGUMENT BACKGROUND
a. SIPA
On December 30, 1979, when President Richard Nixon signed SIPA into
law, he described its purpose as follows:
Just as the Federal Deposit Insurance Corporation protects the user of

banking services from the danger of bank failure, so will the
Securities Investor Protection Corporation protect the user of
investment services from the danger of brokerage firm failure.
It is undisputed that Rynne and others like him received account statements that
reflected securities positions that were historically insured by SIPC. It is also
undisputed that neither the regulators nor SIPC discovered that those positions
were not real until after Madoff was arrested, and BLMIS failed. In such a
circumstance, there was no basis to relieve SIPC from its historic obligation to
provide the protection for which it was created.
SIPC was formed by the Securities Investor Protection Act of 1970 for the
express purpose of protecting investors who have accounts with member firms.
SIPC is funded primarily by premium payments of member firms, but if there is a
shortfall, it can borrow from the United States Treasury. 15 U.S.C. §78ddd(h).
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When a SIPC member firm fails, upon application to the District Court, SIPC steps
in to oversee the liquidation process.
Because of the magnitude of the BLMIS liquidation, this case presents
issues never before faced by SIPC. According to the trustee, no securities were
ever purchased for any accounts at BLMIS, so all positions that were ever reflected
on customer statements were fictitious (SPA-28). The Bankruptcy Court observed
that "[o]utwardly, BLMIS functioned both as an investment advisor to its
customers and a custodian of their securities" (SPA-IS). "Although customer
account statements reflected trading activity, funds were merely deposited into a
bank account at J.P. Morgan Chase Manhattan Bank... and never invested." (SPA-
18). Indeed, BLMIS had in place all of the indicia of legitimacy one would
ordinarily expect from a legitimate finn, such as "order tickets, trades, and
customer statements" (SPA-20), which was good enough to fool not only
customers, but the regulators at the SEC and NASDIFINRA as well.
As a result, on the one side are customers like Rynne, who invested with a
regulated investment advisor whose accounts were supposedly protected by up to
$500,000 of SIPC coverage. On the other side is SIPC, created by an Act of
Congress, and whose directors are appointed by the Secretal"Y of the Treasury, the
Federal Reserve Board, and the President of the United States with the advice and
consent of the Senate. 15 U.S.C. §78ccc(c)(2). The Bankruptcy Court said that
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109422-67219
customers like Rynne, and not SIPC, should bear the burden of loss for their entire
account balances, and stand at risk to perhaps repay any shortfall as well. Such a
result is nowhere contemplated by SIPA. No regulator ever raised any question
publicly about the legitimacy of BLMIS, that is, until after Madoff was arrested.
Nevertheless, once his crime was exposed, a maelstrom of unprecedented
proportions was left in his wake. No innocent customer has ever been called upon
by SIPC to take responsibility for such a disaster.
b. SIPC Protection
The Securities Investor Protection Corporation publishes a brochure entitled
How SIPC Protects You (Rynne, p. 7), which describes to customers the extent of
SIPC protection. For example, it describes the role of the SIPC as follows:
SIPC is the first line of defense in the event a brokerage firm fails
owing customers cash and securities that are missing from customer
accounts.
When a brokerage is closed due to bankruptcy or other financial

difficulties and customer assets are missing, SIPC steps in as quickly
as possible and, within certain limits, works to return customers' cash,
stock and other securities. Without SIPC, investors at financially
troubled brokerage firms might lose their securities or money
forever ... or wait for years while their assets are tied up in court.
However, because not everyone, and not every loss, is protected by
SIPC, you are urged to read this whole brochure carefully to learn
about he limits of protection.
The brochure goes on to explain how assets of customers are valued when a
firm fails, and SIPC steps in. It states:
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109422-67219
How claims are valued. Typically, when SIPC asks a court to put a
troubled brokerage finn in liquidation, the financial worth of a
customers' account is calculated as of the "filing date."
Id.
The Order totally disregards account statements upon which all BLMIS
investors relied, and essentially allows that BLMIS be unwound as if Madoff
himself never existed. One dollar invested 15 or 20 years ago is treated at the same
value as a dollar invested today, and unrefundable taxes paid on reported profits
are completely ignored. One of the express purposes of SIPC protection is to
assure investors that a finn is legitimate, and its business real. At a minimum, on
the record here, innocent customers like Rynne, who received account statements
for years, were entitled to presume that the balances reflected on them were at least
SIPC protected up to $500,000. That was the purpose for coverage in the first
place.
VII NEW YORK STATUTORY INTEREST

The Order appears to validate a "cash-in/cash-out" accounting, with no
consideration given for interest or other expenses. If the trustee is permitted to go
back to account inception, without regard to statutes of limitations, in order to
unwind an entire reported history and then presumably try to claw back negative
balances, then the customer is at least entitled to statutory interest on his initial
cash deposits (See, NYCPLR, §§5001-5004). The trustee argued and the
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#1543713 v4
109422-67219
Bankruptcy Court found that the IA Business was a fraud, and rather than invest in
securities, Madoff took deposits and simply transferred them to other customers.
Accordingly, the initial cash deposits of Rynne were procured by fraud (the false
promise to invest in securities), and in unwinding and recalculating each account,
the trustee is confirming Madoff's fraud by effectively returning initial deposits,
and then charging back to those deposits all withdrawals. New Yark CPLR
§5001(b) provides that "[i]nterest shall be computed from the earliest ascertainable
date the cause of action existed....Where such damages were incurred at various
times, interest shall be computed upon each item from the date it was incurred or
upon all of the damages from a single reasonable intermediate date."
As a victim of fraud, if the trustee is authorized by Order to ignore
customers' last account statements in favor of a Net Investment Method, then
Rynne is entitled to interest on each of his cash deposits from the date made ("the
earliest ascertainable date") at the statutory rate specified by NYCPLR, §5004. 5
His cash was solicited by Madoff for the represented purpose of investing funds
with the IA Business to purchase and sell securities. The Order finds that no such
purchases or sales were ever made. Accordingly, Rynne is a victim of fraud, as is
every other customer of BLMIS, and he is entitled to the return of his invested
funds, plus statutory interest at the rate required by New York law. Any charge
5 Rynne is also likely entitled to statutory interest on all tax payments made to taxing authorities
for reported profits from the date each such tax payment was made.
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#1543713 v4
109422-672J9
back by the trustee for withdrawals should not be against just cash deposits, but
should be against the full principal and interest to which the customer is entitled as
calculated in accordance with New York law. This is a statutory right to
prejudgment interest afforded to all fraud victims in New York.
VIII SUMMARY OF ARGUMENT
Rynne joins in the Summary of Argument contained in the Adopted Briefs
IX ARGUMENT
Ryllne joins in the Arguments contained in the Adopted Briefs
X CONCLUSION
For the reasons stated above as well as in the Adopted Briefs, the Order
appealed from should be reversed.
submitted,
"...""'
//
. -: Mitchell
GIBBONS, P.C.
Jeffrey A. Mitchell (JM-5323)
One Pennsylvania Plaza, 3ih Fl.
New York, New York 10119-3701
(212) 649-4700 (tel.)
(212) 554-9696 (fax)
Counsel for Appellant

Donald G. Rynne
Dated: August 9,2010
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CERTIFICATE OF COMPLIANCE
PURSUANT TO F.R.A.P. 32(a)(7)(C)
I hereby certify that this brief complies with the type-volume limitations
under Fed. R. App. P. 32(a)(7)(C) and contains 6,116 words, exclusive of this
certificate and the items contained in Fed. R. App. P. 32(a)(7)(B)(iii).
Dated: August 9,2010
#1543713 v4
109422-67219
10-2718 In Re: Bernard L. Madoff "DEFECTIVE Document CURED" Page 1 of2
Lawrence Velvel
From: cmecf@ca2.uscourts.gov
Sent: Wednesday, August 11, 2010 3:46 PM
To: ve/ve/@mslaw.edu
Subject: 10-2718 In Re: Bernard L. Madoff "DEFECTIVE Document CURED"
***NOTE TO PUBLIC ACCESS USERS*** Judicial Conference of the United States
policy permits attorneys of record and parties in a case (including pro se litigants) to
receive one free electronic copy of all documents filed electronically, if receipt is required
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Court of Appeals, 2nd Circuit
Notice of Docket Activity
The following transaction was filed on 08/11/2010

Case Name: In Re: Bernard L. IvIadoff
Case Number: 10-2718
Docket Text:
DEFECTIVE DOCUMENT [12], on behalf of Appellant Donald G. Rynne, CURED.[86956]
[10-2718]
Notice will be electronically mailed to:
Aminolroaya, Parvin K, Attorney: paminolroaya@seegerweiss.com, jdmora@seegerweiss.com

Bell, Kevin H., -: kbell@sipc.org
Mr. Bernfeld, David B., Attorney: dbblaw@hotmail.com
Ms. Brown, Seanna R., Attorney: sbrown@bakerlaw.com, nlandrio@bakerlaw.com,
bhbkteam@bakerlaw.com, bhlitdocket@bakerlaw.com
Ms. Chaitman, Helen Davis, -: HChaitman@becker-poliakoff.com, lblanco@becker-
poliakoff.com, pschuyler@becker-poliakoff.com
Dessources, Ronald, Deputy Clerk: Ronald_Dessources@ca2.uscourts.gov
Dudley, Wilson, Deputy Clerk: Wilson_Dudley@ca2.uscourts.gov
Fishbein, Stephen, -: sfishbein@sheannan.com, manattyoffice@sheannan.com,
brian.burke@shearman.com, michael.carucci@shearman.com
Mr. Friedman, Brad N., Attorney: bfriedman@milberg.com
Glosband, Daniel M., -: dglosband@goodwinprocter.com
Mr. Gluck, Matthew, -: mgluck@milberg.com
Kebbe, Timothy P., -: tkebbe@brunellelaw.com
Landers, Jonathan M., Attorney: jlanders@milberg.com
Lax, Barry R., -: blax@laxneville.com
Librera, Kelly A., Attorney: ldibrera@dl.com, courtalert@dl.com
Maddox, Brian, -: bmaddox@laxneville.com
Mitchell, Jeffrey A., Attorney: jmitchell@gibbonslaw.com
Morton, Larkin M., -: lmorton@goodwinprocter.com
Mr. Neville, Brian, -: bneville@laxneville.com
8/11/2010
10-2718 In Re: Bernard L. Madoff"DEFECTIVE Document CURED" Page 2 of2
Neville, Carole, -: cneville@sOlmenschein.com

Parker, David, -: DParker@KKWC.com
Mr. Sheehan, David J., Attorney: dsheehan@bakerlaw.com, bhlitdocket@bakerlaw.com,
bhbkteam@bakerlaw.com, sbrown@bakerlaw.com, nlandrio@bakerlaw.com
Smith, Mark Warren, -: msmith@svlaw.com
Valletta, Chryssa V, -: cvalletta@phillipsnizer.com
Mr. Van de Kieft, Christopher M, Attorney: cvandekieft@seegerweiss.com, dmora@seegerweiss.com
Mr. Velvel, Lawrence Robert, Attorney: velvel@mslaw.edu
Wagner, Karen E, Attorney: karen.wagner@dpw.com, ecf.ct.papers@dpw.com,
jelmifer.newstead@davispolkcom, hayward.smith@davispolkcom, sonali.patel@davispolkcom,
henry.shi@davispolkcom, andrew.gehring@davispolkcom, j onathan.martin@davispolkcom
Ms. Wang, Josephine, -: jwang@sipc.org
Weiss, Stephen A., Attorney: sweiss@seegerweiss.com, dmora@seegerweiss.com
Young, Jennifer Leigh, Attorney: jyoung@milberg.com
Mr. Sharma, Hemant, -: hsharma@sipc.org (daily summary)
Notice will be stored in the notice cart for:
Dessources, Ronald, Deputy Clerk

Dudley, Wilson, Deputy Clerk
Quality Control 1, -
The following information is for the use of comi personnel:
DOCKET ENTRY ID: 86956

RELIEF(S) DOCKETED:
DOCKET PART(S) ADDED: 136980, 136981, 133405
8/1112010

JeffreyAMitchellGibbonsPC - Brief

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Case: 10-2378 Document: 220 Page: 1 08/11/2010 86922 29

lEtnit£lk §tat£s Qrourt of 1\pp£als

ON APPEAL FROM THE UNITED STATES BANKRUPTCY COURT

Internal Revem:te Bulletin:

Fed. R. App. P. 32(a)(7)(B)(iii) 26

Fed. R. App. P. 32(a)(7)(C) 26

has jurisdiction over this proceeding pursuant to 15 U.S.C. § 78eee(b)(4). This

about which he would like the Court to be separately aware.

III STATEMENT OF ISSUES PRESENTED

IV STATEMENT OF THE CASE

failed, he filed a claim of approximately $6-million with SIPC, the amount

factOling in interest or tax payments, he had withdrawn close to $2-million more

his account before BLMIS failed (Rynne, p. 2).

based on a pure cash-in/cash-out analysis (also referred to as the "Net Investment

SIPA, and appropriate under the circumstances of the Madoff case. 2

Securities, LLC. ("BLMIS") carried every conceivable sign of legitimacy a

Securities and Exchange Commission ("SEC") and the National Association of

Securities Investor Protection Corporation ("SIPC"), which supposedly provided

loss coverage of up to $500,000 (SPA-IS). Even Bernard Madoff himself was a

sUlTendered to authorities. The finn issued regular account statements, customers

Rynne is an 86-year-old decorated World War II veteran who flew missions

BLMIS ([d.). Rynne is simply an innocent customer who kept an account at

to $6-million in account number 100072 (the "Account") to support his retirement,

against a claim by the trustee to repay the negative balance.

(Rynne, p. 3). He thought he retained a healthy balance for future financial

security (ld.) As would any customer of a regulated company, Rynne presumed

because the firm's trading activity was a sham.

Only after Madoff's arrest did anyone - the government, regulators,

fraud of unprecedented proportions (the "IA Business"). SIPC, however,

statement issued by BLMIS as it had historically done in other cases, every IA

than positive balances. Anyone with a negative balance, derisively referred to

c. The Nature of the Parties' Relationship

supposedly invested in the 'split-strike conversion' strategy" (SPA-19). The Court

described the strategy as follows:

Under this strategy, Madoff purportedly invested customer funds in a

While the Trustee focused on the fraudulent securities transactions to

undermine the value of account statements issued to BLMIS customers, those

statements nevertheless reflected to those customers an amount represented as

others when they requested withdrawals.

to withdraw whatever funds were reflected on them (SPA-19). Assuming a firm

of an insolvent firm. The trustee is therefore bound by account statements issued

and different account statements simply to reduce SIPe's exposure, most

especially without providing for a customer's reasonable expectations. While

and payable as a representation by the firm.

Rynne had an honest and good faith belief, supported by years of a

statements he received reflected amounts owed to him by BLMIS (Rynne, p. 6).

BLMIS, he relies on his account statements as accurate, and on regulators to be on

assurance that what he sees on his statement has at least up to $500,000 of

circumstance and length of investment. That is a fundamental change in the

customer/firm relationship here that is not consistent with past practice.

differently than those who chose to withdraw.

is nowhere explained by the Order. Suffice it to say, there is no logical reason to

greater protection than the former, either logically or legally.

withdrawals by earlier investors. Therefore, what is important is what the account

presumably free to make withdrawals. A voluntary decision to refrain from

making. a withdrawal in favor of reinvesting with BLMIS, presumably because

only reinvests a portion of his "profits"?

d. The Bankruptcy Court Order

Madoff's massive Ponzi scheme is not plainly ascertainable in law." (SPA-12)

Nevertheless, the Court adopted the trustee's simplistic mathematical "cash-

in/cash-out" approach as being appropriate, meaning the last BLMIS account

"entirely fictitious" (SPA-28), customers should only be entitled to a "cash