Friday, February 11, 2011

Floyd Norris Misses the Point

There's an uncharacteristically obtuse piece up this morning from the mostly astute Floyd Norris, about the adventures of Irving Picard, the bankruptcy trustee in Bernie Madoff's case. Picard is going after investors for their fictitious profits but also in some cases--those closest to Madoff--he wants them to cough up the whole of their swag. He's not saying they were in on the fraud--this is more of a shouda coulda woulda case where he's saying that even if they didn't know, why it's just tough.

Norris compares/contrast the Picard story with the settled law of disclosure in securities fraud cases; the doctrine that requires you to disclose your own positions when you give investment advice. in these securities cases, "tough luck" is not a defense.   If you are currently dumping toxic waste you are touting, you have to warn the toutee. Norris says in effect that Picard is trying to use the "tough luck" defense against Madoff investors, and to make them pay up for, as it were, not finding out that they were being defrauded.

It's an interesting point but it misses a critical distinction: Picard is not Madoff. Indeed, that is a condition of his job:  he is stranger with the big key ring who steps in to clean up the mess after the bad guy has fled. In a sense he is the successor to Madoff; he takes over Madoff's property. But better to think of him as the agent/spokesman/representive of all he defrauded investors. Read him as saying: okay, granted Madoff defrauded you. Still, it was he who defrauded you, and his fraud should not be binding on me as the representative of the whole class.

It is perhaps a bit of a novelty--most bankruptcy cases are about plain-vanilla creditors, not defrauded investors. And maybe I have just been bathed too long in th brine of bankruptcy law. But it looks okay. At the very least, it the point that innocent-successor Irving is not properly understood as being in the company of all those criminals and malefactors whose evil machinations led to the creation of the disclosure doctrine.

One more point, a repeat, beginning with a full disclosure: so far as I know, I've never laid eyes on Irving Picard (although I had heard of him in bankruptcy circles). And I don't have a sliver of sliver at stake in the Madoff case. And I'm not surprised that Picard is catching so much flac today. But I suspect that when it is all over, Picard will emerge as a hero, a least in some circles--the guy who leveled the playing field and did more to help than to harm Bernie's victims.

There's another angle that Norris doesn't mention although I suspect he might agree with me. That is: I'm struck by the discontinuity between the SEC's disclosure mandate and the (mis)behavior of the big banks as they predate on their cusotmers. Think of JP Morgan quietly tiptoeing away from its Madoff hedge without telling buyers of its Madoff tracking fund; or Goldman not telling buyers of its toxic portfolio that it was assembled by the guy who wanted to short against it. Yes, yes, I understand that technically these transactions are not covered by he SEC doctrine. But to repeat a favorite mantra: there was a day when your banker was your friend, or at least a person with some fiduciary duty of loyalty to you as a customer. For the health of the system, we would do well to get back to that day.


Ebenezer Scrooge said...

I was with you, until the penultimate sentence. The word "fiduciary" is a legal word, which never applied to the majority of bank-customer relationships. The word "loyalty" is not necessary a legal word. It is the sense of loyalty and solidarity with the (financially healthy) customer that has been lost. The fiduciary aspects never existed, outside the trust department.

Buce said...

Well, I'm not wedded to "fiduciary." And I take your point about the old-fashioned trust department: a highly stylized set of special relationships, fairly well understood and enforced. But I'm not persuaded that the word "ficuariary" has ever been used with such disciplined precision. I think you could document much broader usage where people tack on the "fiduciary" tag as a conclusory label to some kind of behavior that they want to denounce. Which, for good or ill, was exactly what I was doing here. I do believe the Jimmy-Stewart banker operated under some "don't-screw-your-client" rules that seem to have gone the way of, well, of Jimmy Stewart. How far these were a matter of reputation-protection in a face-to-face community and how far a matter of law is, I admit, a question to which I guess I don't know the answer. But I think they were there; they are gone, and I miss them.

Ebenezer Scrooge said...

I agree with everything you said. But you're a lawyer and I'm a lawyer and we both know the proper context of the word. You have many influential lay readers (if not nearly as many commenters as you deserve), and they all know you are a lawyer. You don't want, say, Brad DeLong to think you are using the word technically when you are not. That could cause some real damage.