09-01364-smb Doc 549 Filed 08/27/19 Entered 08/27/19 23:38:14 Main Document Pg 1 of 2 Baker & Hostetler LLP 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and the Chapter 7 Estate of Bernard L. Madoff UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES INVESTOR PROTECTION No. 08-01789 (SMB) CORPORATION, Plaintiff, SIPA Liquidation v. (Substantively Consolidated) BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: BERNARD L. MADOFF, Debtor. IRVING H. PICARD, Trustee for the Liquidation of Adv. Pro. No. 09-01364 (SMB) Bernard L. Madoff Investment Securities LLC, Plaintiff, v. HSBC BANK PLC, et al., Defendants. DECLARATION OF OREN J. WARSHAVSKY IN OPPOSITION TO ALPHA PRIME FUND LTD.’S MOTION FOR JUDGMENT ON THE PLEADINGS AND IN SUPPORT OF THE TRUSTEE’S CROSS-MOTION FOR SEVERANCE AND FOR LEAVE TO AMEND THE COMPLAINT 09-01364-smb Doc 549 Filed 08/27/19 Entered 08/27/19 23:38:14 Main Document Pg 2 of 2 I, Oren J. Warshavsky, pursuant to 28 U.S.C. § 1746, declare as follows: 1. I am a partner at Baker & Hostetler LLP, counsel for Plaintiff Irving H. Picard, as trustee (the “Trustee”) for the substantively consolidated liquidation of the business of Bernard L. Madoff Investment Securities under the Securities Investor Protection Act, 15 U.S.C. § 78aaa, et seq., and the chapter 7 estate of Bernard L. Madoff. 2. I submit this declaration in opposition to Alpha Prime Fund Ltd.’s Motion for Judgment on the Pleadings and in support of the Trustee’s Cross-Motion for Severance and for Leave to Amend the Complaint. 3. Attached hereto as Exhibit A is the Trustee’s proposed Second Amended Complaint for review by the Court, and as further discussed in the accompanying Memorandum of Law in Opposition to Alpha Prime Fund Ltd.’s Motion for Judgment on the Pleadings and in Support of the Trustee’s Cross-Motion for Severance and for Leave to Amend the Complaint. 4. Attached hereto as Exhibit B is a true and correct copy of a letter from Todd Duffy, Esq. to Geoffrey North, Esq. dated May 20, 2016. I declare under penalty of perjury that the foregoing is true and correct. Executed on the 27th day of August 2019, at New York, New York. /s/ Oren J. Warshavsky Oren J. Warshavsky 09-01364-smb Doc 549-1 Filed 08/27/19 Entered 08/27/19 23:38:14 Exhibit A Pg 1 of 54 EXHIBIT A 09-01364-smb Doc 549-1 Filed 08/27/19 Entered 08/27/19 23:38:14 Exhibit A Pg 2 of 54 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES INVESTOR PROTECTION Adv. Pro. No. 08-01789 (SMB) CORPORATION, SIPA Liquidation Plaintiff-Applicant, (Substantively Consolidated) v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: BERNARD L. MADOFF, Debtor. IRVING H. PICARD, Trustee for the Liquidation Adv. Pro. No. 09-1364 (SMB) of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. [PROPOSED] SECOND ALPHA PRIME FUND LTD., AMENDED COMPLAINT Defendant. 09-01364-smb Doc 549-1 Filed 08/27/19 Entered 08/27/19 23:38:14 Exhibit A Pg 3 of 54 TABLE OF CONTENTS Page I. NATURE OF THE ACTION ..............................................................................................1 II. JURISDICTION AND VENUE ..........................................................................................2 III. BACKGROUND, THE TRUSTEE, AND STANDING .....................................................3 IV. THE PONZI SCHEME ........................................................................................................6 V. ALPHA PRIME IS CREATED AS A CLONE OF THE PRIMEO FUND ........................9 A. Sonja Kohn Worked with Zapotocky and Bank Austria to Create Primeo ...........11 B. Alpha Prime is Managed and Serviced by Primeo’s Directors and Agents ..........13 C. The Directors Continue to Find Paths to Madoff...................................................15 VI. THE DIRECTORS KNEW THAT ALPHA PRIME’S PROFITS WERE NOT THE RESULT OF MADOFF’S TRADING SECURITIES ....................................16 A. The Directors Were Confronted with Evidence of Fraud at BLMIS While Operating Primeo ...................................................................................................16 B. The Directors See Additional Evidence of Fraud at BLMIS While Operating Alpha Prime ...........................................................................................................24 1. The Directors Knew the Trades Reflected on Alpha Prime’s Account Statements Were Impossible ......................................................................25 2. The Directors Knew the Trades Reflected on Alpha Prime’s Account Statements Did Not Reflect Madoff’s Purported SSC Strategy ................28 VII. THE DIRECTORS DEFLECT QUESTIONS AND CONCERNS TO PREVENT REVEALING THE TRUTH ABOUT MADOFF ..........................................31 VIII. THE TRANSFERS TO ALPHA PRIME ARE AVOIDABLE AND RECOVERABLE BY THE TRUSTEE.............................................................................42 IX. ALPHA PRIME’S REMAINING CUSTOMER CLAIM IS SUBJECT TO DISALLOWANCE AND/OR EQUITABLE SUBORDINATION ..................................42 COUNT ONE - FRAUDULENT TRANSFER § NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278 AND/OR 279 AND 11 U.S.C. §§ 105(a), 502(d), 544, 550(a), AND 551 ..............................................................................43 COUNT TWO - FRAUDULENT TRANSFER – NEW YORK DEBTOR AND CREDITOR LAW §§ 273 AND 278 AND/OR 279 AND 11 U.S.C. §§ 105(a), 502(d), 544, 550(a), AND 551 ..............................................................................44 -i- 09-01364-smb Doc 549-1 Filed 08/27/19 Entered 08/27/19 23:38:14 Exhibit A Pg 4 of 54 TABLE OF CONTENTS Page COUNT THREE - FRAUDULENT TRANSFER – NEW YORK DEBTOR AND CREDITOR LAW §§ 274, 278 AND/OR 279 AND 11 U.S.C. §§ 105(a), 502(d), 544, 550(a), AND 551 ...........................................................................................45 COUNT FOUR - FRAUDULENT TRANSFER – NEW YORK DEBTOR AND CREDITOR LAW §§ 275, 278 AND/OR 279 AND 11 U.S.C. §§ 105(a), 502(d), 544, 550(a), AND 551 ...........................................................................................46 COUNT FIVE - EQUITABLE SUBORDINATION OF THE DISPUTED CLAIMS ............................................................................................................................47 -ii- 09-01364-smb Doc 549-1 Filed 08/27/19 Entered 08/27/19 23:38:14 Exhibit A Pg 5 of 54 Plaintiff Irving H. Picard (the “Trustee”), as trustee for the liquidation of the business of Bernard L. Madoff Investment Securities LLC (“BLMIS”) under the Securities Investor Protection Act, 15 U.S.C. § 78aaa–lll (“SIPA”), and the substantively consolidated chapter 7 estate of Bernard L. Madoff (with BLMIS, “Debtors”), by the Trustee’s undersigned counsel, for his Second Amended Complaint (“Complaint”) states: I. NATURE OF THE ACTION 1. The directors of BLMIS feeder fund Alpha Prime Fund Ltd. (“Alpha Prime”) enabled the continuation of the BLMIS Ponzi scheme, directing approximately $400 million to BLMIS for Alpha Prime alone. They directed hundreds of millions more through other BLMIS feeder funds with which they were associated. 2. These directors, along with Alpha Prime’s service providers—most of which the directors controlled—are sophisticated securities industry professionals and knew BLMIS was engaged in fraud. 3. By the early 2000s, and well before the existence of Alpha Prime, these directors and service providers were aware of numerous impossibilities associated with BLMIS’s operations and purported trading. They opened Alpha Prime in 2003 anyway. 4. Alpha Prime’s directors and service providers conducted due diligence and prepared reports detailing BLMIS’s fraud, including that BLMIS was trading in securities outside of their daily price range, purchasing and selling thousands more options for Alpha Prime’s account alone than were available on the entire exchange, and otherwise not executing the split-strike conversion strategy as BLMIS reported. When colleagues or investors asked questions, Alpha Prime’s directors deliberately lied to conceal the fraud. They coordinated misleading answers as necessary when pressed about the impossibilities of BLMIS’s operations. 1 09-01364-smb Doc 549-1 Filed 08/27/19 Entered 08/27/19 23:38:14 Exhibit A Pg 6 of 54 5. Sometimes these directors worked feverishly to quell the concerns of fellow non- director board members despite knowing the underlying truth about BLMIS’s operations. One director went so far as to alter the minutes of a board meeting at which BLMIS’s impossible trading practices were questioned. Alpha Prime’s directors took these actions to keep the Madoff machine running and the profits coming in the door. 6. Given this history, it is through this action that the Trustee seeks to avoid fraudulent transfers of customer property Alpha Prime received from BLMIS, to disallow or equitably subordinate Alpha Prime’s claims against the estate, and any other relief the Court deems just, proper, and equitable. Alpha Prime received approximately $83,170,000 in avoidable transfers from BLMIS and filed a customer claim in the amount of $250,671,000. 7. Under the terms of a partial settlement reached between the parties on February 9, 2018 (the “Partial Settlement Agreement”), Alpha Prime returned to the Trustee $76,450,000 in transfers it withdrew from BLMIS within two years of