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United States District Court Southern District of New York Case 1:12-mc-00115-JSR Document 355 Filed 09/24/12 Page 1 of 52 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES INVESTOR PROTECTION CORPORATION, Adv. Pro. No. 08-01789 (BRL) Plaintiff, v. Civil Action No. 12-mc-0115 (JSR) BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: MADOFF SECURITIES TRUSTEE’S MEMORANDUM OF LAW IN OPPOSITION TO THE DEFENDANTS’ SUPPLEMENTAL BRIEFS REGARDING THE STANDARD FOR THE “GOOD FAITH” AFFIRMATIVE DEFENSE 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 Estate of Bernard L. Madoff Case 1:12-mc-00115-JSR Document 355 Filed 09/24/12 Page 2 of 52 TABLE OF CONTENTS Page PRELIMINARY STATEMENT ................................................................................................... 2 PROCEDURAL HISTORY........................................................................................................... 5 ARGUMENT ................................................................................................................................. 6 I. THE TRUSTEE HAS MET HIS PLEADING BURDEN WITH RESPECT TO INITIAL AND SUBSEQUENT TRANSFEREES ....................... 6 A. The Trustee Has Pleaded the Elements of His Claims Under 11 U.S.C. §§ 548(a)(1)(A) and 550(a) ............................................................ 6 B. The Trustee Need Not Allege the Defendants’ Lack of Good Faith ......... 7 C. Bayou III and Manhattan III: Good Faith is an Objective Test ................ 8 II. THE COURT SHOULD DENY THE FEEDER FUNDS’ MOTION TO DISMISS .............................................................................................................. 10 A. That the Feeder Funds Hired Service Providers Does Not Establish Good Faith as a Matter of Law ................................................................ 10 B. The Feeder Funds’ Status as “Net Losers” Does Not Establish Their Good Faith ...................................................................................... 11 C. The Feeder Funds’ Alleged Lack of Control Over Their Shareholders’ Decisions to Redeem is Irrelevant to Whether the Feeder Funds Acted in Good Faith .......................................................... 12 III. THE COURT SHOULD DENY THE HEDGE FUND INVESTORS’ MOTION TO DISMISS ...................................................................................... 13 A. The Hedge Fund Investors Are Sophisticated Investors .......................... 13 B. Because They Were Presented with Facts That Suggested Fraud, the Hedge Fund Investors Had a Duty to Investigate .............................. 15 C. The Hedge Fund Investors’ “Redistribution of Wealth” Argument is Wrong and Irrelevant ........................................................................... 15 D. The Hedge Fund Investors Reliance on “Control Person” and “Aiding and Abetting” Principles Are of No Relevance to the Trustee’s Bankruptcy Claims ................................................................... 16 E. The Hedge Fund Investors’ “Social Costs” Argument Is of No Consequence ............................................................................................ 18 F. The Ponzi Scheme Presumption Does Not Expand Section 548 of the Bankruptcy Code................................................................................ 19 IV. The Court Should Deny the Leverage Providers’ Motion to Dismiss ................. 20 A. The Defendants’ Arguments Are Based on the Wrong Standard of “Good Faith” ............................................................................................ 21 -i- Case 1:12-mc-00115-JSR Document 355 Filed 09/24/12 Page 3 of 52 TABLE OF CONTENTS (continued) Page B. The Leverage Providers’ “Plausibility” Arguments Improperly Attempt to Place a Pleading Burden on the Trustee ................................ 22 C. The Trustee’s Allegations Against the Leverage Providers .................... 23 V. THE COURT SHOULD DENY THE SERVICE PROVIDERS’ MOTION TO DISMISS ....................................................................................................... 27 VI. THE COURT SHOULD DENY THE THYBO DEFENDANTS’ MOTION TO DISMISS ...................................................................................... 29 A. The Red Flags Pleaded by the Trustee Have No Bearing on the Sufficiency of the Fraudulent Transfer Claims ........................................ 30 B. There is No Presumption of Good Faith Under the Bankruptcy Code or SIPA ........................................................................................... 33 C. The Trustee Has Sufficiently Pleaded Fraudulent Transfer Claims Against Subsequent Transferee Defendants ............................................ 35 VII. THE COURT SHOULD DENY THE THEMA DEFENDANTS’ MOTION TO DISMISS ...................................................................................... 36 A. The Thema Defendants’ Purported Restitution Claim Is Irrelevant to the Good Faith Affirmative Defense ................................................... 37 B. The Trustee’s Claim Against the Thema Defendants Is Consistent With the Purpose of SIPA and the Bankruptcy Code .............................. 40 C. The Trustee’s Claim Against the Thema Defendants is Consistent With the Plain Language of the Bankruptcy Code .................................. 41 D. The Thema Defendants Did Not Demand the Return of Their Investments .............................................................................................. 42 CONCLUSION ............................................................................................................................ 44 -ii- Case 1:12-mc-00115-JSR Document 355 Filed 09/24/12 Page 4 of 52 TABLE OF AUTHORITIES Cases Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) .................................................................................................................. 34 Air Atlanta Aero Eng’g v. SP Aircraft Owner I, LLC, 637 F. Supp. 2d 185 (S.D.N.Y. 2009)......................................................................................... 9 Anderson News, L.L.C. v. Am. Media, Inc., 680 F.3d 162 (2d Cir. 2012)........................................................................................................ 9 Armstrong v. Collins, No. 01 Civ. 2437 (PAC), 2010 WL 1141158 (S.D.N.Y. Mar. 24, 2010) ................................. 39 Ashcroft v. Iqbal, 556 U.S. 662 (2009) .................................................................................................................. 29 Basic Inc. v. Levinson, 485 U.S. 224 (1988) ............................................................................................................ 34, 35 Bayou Accredited Fund, LLC v. Redwood Growth Partners, L.P. (In re Bayou Grp., LLC), 396 B.R. 810 (Bankr. S.D.N.Y. 2008) .......................................................................... 12, 37, 43 Bayou Superfund, LLC v. D. Canale Beverages, Inc. (In re Bayou Grp., LLC), No. 09 Civ. 02340(PGG), 2012 WL 386275 (S.D.N.Y. Feb. 6, 2012) .................................. 4, 8 Bear Stearns Sec. Corp. v. Gredd, 275 B.R. 190 (S.D.N.Y. 2002) .................................................................................................. 40 Bear, Stearns Sec. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd.), 397 B.R. 1 (S.D.N.Y. 2007) ................................................................................................ 4, 8, 9 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) .............................................................................................................. 9, 29 Bos. Trading Grp. Inc. v. Burnazos, 835 F.2d 1504 (1st Cir. 1988) ................................................................................................... 44 Brown v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348 (8th Cir.1995) ....................................................................................................... 9 Christian Bros. High Sch. Endowment v. Bayou No Leverage Fund, LLC (In re Bayou Grp., LLC), 439 B.R. 284 (S.D.N.Y. 2010) ........................................................................................... passim CompuDyne Corp. v. Shane, 453 F. Supp. 2d 807 (S.D.N.Y. 2006)....................................................................................... 17 Crigger v. Fahnestock, 443 F.3d 230 (2d Cir. 2006)................................................................................................ 12, 15 Curcio v. Commʼr of Internal Revenue, No. 10-3578-ag(L), 2012 WL 3224041 (2d Cir. Aug. 9, 2012) ............................................... 11 iii Case 1:12-mc-00115-JSR Document 355 Filed 09/24/12 Page 5 of 52 Cyber Media Grp., Inc. v. Island Mortg. Network, Inc., 183 F. Supp. 2d 559 (E.D.N.Y. 2002) ...................................................................................... 17 Deitrich v. Bauer, 126 F. Supp. 2d 759 (S.D.N.Y. 2001)....................................................................................... 17 Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008) .................................................................................................... 37 Dunnigan v. Metro. Life Ins. Co., 214 F.R.D. 125 (S.D.N.Y. 2003) .............................................................................................. 35 Edison Fund v. Cogent
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