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cases concluding that lenders are not customers and clarifying that “customer” includes
“only a person who enjoys the type of fiduciary relationship with the debtor that
characterizes customers in general” (internal quotation marks omitted)).
Finally, the Trustee and SIPC contend that SIPA does not provide insurance
against fraud. Again, they misstate the law. SIPA does not provide insurance in the
event that a customer is induced by fraud to purchase a security that then loses its value.
See, e.g., SIPC v. Charisma Sec. Corp., 371 F. Supp. 894, 899 n.7 (S.D.N.Y. 1974)
(stating that claims for market losses “are not included in the insurance umbrella afforded
by SIPC”). But the SIPC Fund was established precisely to compensate customers who
have been deprived of their securities positions – through misappropriation, conversion,
or otherwise – by brokers who go bankrupt. See, e.g., SEC v. Packer, Wilbur & Co., 498
F.2d 978, 984 (2d Cir. 1974) (SIPA was designed to protect investors “who suffered
significant losses when a brokerage house collapsed, often because the house had in its
last days misappropriated the investor’s funds to its own use”). That the broker’s
collapse is brought about by fraud does not change the protections afforded to the
broker’s customers by SIPA.
For all of these reasons, BLMIS customers’ “net equity” claims equal the
liquidation value, as of the filing date, of the securities positions on the November 30,
2008 account statements. Accordingly, the Trustee’s motion must be denied.
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