Case 1:11-cv-05905-AT Document 29 Filed 02/28/14 Page 1 of 3
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
In re:
FAIRFIELD SENTRY LLMITED, et al., I I Civ. 5905 (AT)
DECLARATION OF TRACY COLE IN SUPPORT OF TRUSTEE'S MOTION TO INTERVENE
TRACY COLE, under penalty of perjury, declares:
1. 1 am a member of the Bar of this Court and a partner at the firm of Baker &
Hostetler LLP, counsel for Irving H. Picard, trustee ("Trustee") for the substantively consolidated liquidation of Bernard L. Madoff Investment Securities LLC under the Securities
Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq., and the estate of Bernard L. Madoff, individually.
2. I am fully familiar with the facts set forth herein. I make this declaration to transmit to this Court a true and correct copy of the documents in connection with the memorandum oflaw in support of the Trustee's motion to intervene to protect his interests in an assignment of claims against Fairfield Greenwich Group's ("FGG") management entities and individuals.
3. The Tmstee received notice of Morning Mist's motion to withdraw the reference
of the present action on or after August 23, 2011.
4. Tbe Trustee received notice of this Court's decision to withdraw the reference on
or after January 8, 2014.
5. True and correct copies of the foll owing documents are attached: Case 1:11-cv-05905-AT Document 29 Filed 02/28/14 Page 2 of 3
Exhibit I: Am. Compl., Picard v. Fairfield Senlly Limited, et. al, No. 09- 01239 (Bankr. S.D.N.Y. July 20, 2010), ECF No. 23.
Exhibit 2: Compl., S.E.C. v. Bernard L. Madoff, Bernard L. Madoff Investment Sec. LLC, No. 08-cv-10791 (S.D.N.Y. Dec. 11 , 2008), ECF No. L.
Exhibit 3: Op. and Order, Sec. Investor Prot. C01p. v. Bernard L. Madoff/n. v. Sec. LLC (In re Madof{Sec.), 12 MC 115 (S.D.N.Y. Dec. 6, 201 3), ECFNo. 509.
Exbi bit 4: Op. and Order, Sec. Investor Prot. Corp. v. Bernard L. Madoff fnv. Sec. LLC (In re Madojj'Sec.), No. 12 MC ll5 (S.D.N.Y. Oct. 29, 20'13), ECF No. 494.
Exhibit 5: Order Appointing Joint Liquidators, In re Fai1fi.eld Sentry Limited, No. BYIHCV2009/l36 (Eastern Caribbean Supreme Court, June 21, 2009).
Exhibit 6: Exhibit A to the Motion (Settlement Agreement), Picard v. Failfield Sentry Limited, et al. , No. 09-01239 (Bankr. S.D.N.Y. May 9, 2011), ECF No. 69.
Exhibit 7: Minute Order, In re Fai1jield Sentry Limited, et a/. , No. 10-13164 (Bankr. S.D.N.Y. July 22, 2010), ECF No. 47.
Exhibit 8: Am. Compl., In re Fairfield Sentry, et al. , No. 10-0800 (Bankr. S.D.N.Y. October 27, 2011), ECF No. 12.
Exhibit 9: Exhibit A to the Mot. to Approve, In re Fairfield Sentry, et. al. , No. 10-13164 (Bankr. S.D.N.Y. Sept. 23, 2010), ECF No. 115.
Exhibit 10: Mot. to Approve Settlement, Picard v. Failjield Sen.rry Limited, et al. , No. 09-01239 (Bankr. S.D.N.Y. May 9, 2011), ECF No. 69.
Exhibit 11: Tr. of Hearing, Picard v. FaiJfi.e/d Sentry Limited, er al., No. 09- 01239 (Bankr. S.D.N.Y. June 7, 201 '1), ECF No. 93.
Exhibit 12: Bench Mem. and Order, Picard v. Fairf ield SentJy Limited, et al. , No. 09-01239 (Bankr. S.D.N.Y. June 7, 2011 ), ECF No. 92.
Exhibit 13: Notice of BVI Court's Order Approving Fairfield Sentry Settlement, In re Fairfield Senrry Ltd. , No. 10-13164 (Bankr. S.D.N.Y. fil ed June 14, 2010), ECF No. 452.
ｅ ｸ ｾ ｢ ｩ ｴ 14: Cohen Affidavit, Picard v. Fairfield Greenwich Limited, et. a/. , No. 12-02047 (Bankr. S.D.N.Y. Nov. 29, 201 2), ECF No.5.
2 Case 1:11-cv-05905-AT Document 29 Filed 02/28/14 Page 3 of 3
Ex hi bit 15: Order, Sec. lnvest.or Prot. Corp. v. Bernard L. Madoff lnv. Sec. LLC (In re Madoff Sec.), No. 12-cv-02638 (S.D.N.Y. May 16, 2012), ECF No. 8.
Exhibit 16: Mot. to Dismiss, Sec. Inveswr Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re MadojfSec.), No. 12 MC 115 (S.D.N.Y. Aug. 3, 2012), ECF No. 270.
Exhibit 17: Mem. of Law in Support, Sec. Investor Prot. C01p. v. Bernard L. Mado.fflnv. Sec. LLC (In re MadoffSec.), No. 12 MC 115 (S.D.N.Y. Aug. 3, 2012), ECF No. 271.
Exhibit 18: Tr. of Proceedings, Sec. lnveswr Pro t.. Corp. v. Bernard L. Madoff lnv. Sec. LLC (In re Madojj'Sec.), No. 12 MC 115 (S.D.N.Y. Oct. 15, 2012), ECF No. 404
Exhibit 19: Mot. to Withdraw the Bankmptcy Reference, In re Fairfield Sentry Ltd., et al., No. 11-cv-05905, (S.D.N.Y. Aug. 23, 2011), ECF No. l.
Exhibit 20: Mem. of Law in Support, ln. re Fairfield SentJy Ltd. , et al., No. 11- cv-05905, (S.D.N.Y. Aug. 23, 20 11 ), ECF No. 2.
Exhibit 2 1: Endorsed Letter, In re Fairfield Sent1y Ltd., eta.!. , No. 11 -cv- 05905 (S.D.N.Y. Oct. 3, 201 2), ECF No. 19.
Exhibit 22: Endorsed Letter, In re Fait:field Sentry Ltd. , eta!., No. 11 -cv- 05905 (S.D.N.Y. Nov. 1, 20 12), ECF No. 20.
Exhmbit 23: Letter, In re Fairfield Sent1y Ltd. , et al., No. 11-cv-05905 (S .D.N.Y. Oct. 3, 20 13), ECF No. 22.
Exhibit 24: Order, In re Fairfield Sentry Ltd., et al., No. 11-cv-05905 (S.D. N.Y. Jan. 8, 2014), ECF No. 23.
Exbjbit 25: Order, Sec. In vestor Prot. Corp. v. Bernard L. Madoff lnv. Sec. LLC (ln. re MadoffSec.), No. 12 MC 115 (S.D.N.Y. Aug. 22, 2012), ECF No. 114.
Exhjbit 26: Letter, In re Fairfield Sen. fly Ltd., et al., No. 1 l-cv-05905 (S. D.N.Y. Jan. 29, 20 14), ECF No. 25.
I declare under penalty of perjury that the foregoing is true and correct.
Executed on: February 28, 2014 New York, New York
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EXHIBIT 1
Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 2 of 229
Baker & Hostetler LLP 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 David J. Sheehan E-mail: [email protected] Marc E. Hirschfield E-mail: [email protected] Mark A. Kornfeld E-mail: [email protected]
Attorneys for Irving H. Picard, Esq., Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
SECURITIES INVESTOR PROTECTION CORPORATION, Adv. Pro. No. 08-01789 (BRL) Plaintiff-Applicant, SIPA Liquidation v. (Substantively Consolidated) BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Defendant. In re:
BERNARD L. MADOFF, AMENDED COMPLAINT
Debtor. IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Adv. Pro. No. 09-01239 (BRL)
Plaintiff,
v.
FAIRFIELD SENTRY LIMITED, Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 3 of 229
GREENWICH SENTRY, L.P., GREENWICH SENTRY PARTNERS, L.P., FAIRFIELD SIGMA LIMITED, FAIRFIELD LAMBDA LIMITED, CHESTER GLOBAL STRATEGY FUND LIMITED, CHESTER GLOBAL STRATEGY FUND, IRONGATE GLOBAL STRATEGY FUND LIMITED, FAIRFIELD GREENWICH FUND (LUXEMBOURG), FAIRFIELD INVESTMENT FUND LIMITED, FAIRFIELD INVESTORS (EURO) LIMITED, FAIRFIELD INVESTORS (SWISS FRANC) LIMITED, FAIRFIELD INVESTORS (YEN) LIMITED, FAIRFIELD INVESTMENT TRUST, FIF ADVANCED, LTD., SENTRY SELECT LIMITED, STABLE FUND, FAIRFIELD GREENWICH LIMITED, FAIRFIELD GREENWICH (BERMUDA), LTD., FAIRFIELD GREENWICH ADVISORS LLC, FAIRFIELD GREENWICH GP, LLC, FAIRFIELD GREENWICH PARTNERS, LLC, FAIRFIELD HEATHCLIFF CAPITAL LLC, FAIRFIELD INTERNATIONAL MANAGERS, INC., FAIRFIELD GREENWICH (UK) LIMITED, GREENWICH BERMUDA LIMITED, CHESTER MANAGEMENT CAYMAN LIMITED, WALTER NOEL, JEFFREY TUCKER, ANDRÉS PIEDRAHITA, MARK MCKEEFRY, DANIEL LIPTON, AMIT VIJAYVERGIYA, GORDON MCKENZIE, RICHARD LANDSBERGER, PHILIP TOUB, CHARLES MURPHY, ROBERT BLUM, ANDREW SMITH, HAROLD GREISMAN, GREGORY BOWES, CORINA NOEL PIEDRAHITA, LOURDES BARRENECHE, CORNELIS BOELE, SANTIAGO REYES, JACQUELINE HARARY
Defendants. Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 4 of 229
I. NATURE OF THE ACTION ...... 1 II. JURISDICTION AND VENUE ...... 4 III. BACKGROUND ...... 5 IV. TRUSTEE’S POWERS AND STANDING ...... 10 V. DEFENDANTS ...... 12 A. The Feeder Funds...... 12 B. FGG Affiliates ...... 16 VI. FGG AND ITS HISTORICAL RELATIONSHIP WITH FGG...... 79 A. Noel and Tucker Meet Madoff and Make Their First Investments With BLMIS ...... 81 B. Noel and Tucker Expand FGG’s Offerings to U.S. Investors and Piedrahita Joins the Partnership...... 81 C. FGG’s Operations ...... 83 VII. THE DEFENDANTS’ ROLE IN FACILITATING THE FRAUD ...... 84 A. The Defendants’ Investment Strategy...... 85 B. The Defendants Facilitate the Scheme Through Marketing and Sales ...... 87 C. The Defendants Serve as a Gatekeeper for Madoff to Ensure Investors Would Not Find Out the Truth...... 87 D. FGG Conspires with Madoff to Hide from the SEC Madoff’s True Involvement with the Feeder Funds...... 90 E. The Defendants Deceive Their Investors by Telling Them They Were Performing Extensive and Top of the Line Due Diligence, But They Were Doing No Such Thing ...... 94 VIII. THE DEFENDANTS WERE CONSTANTLY FACED WITH EVIDENCE OF A FRAUD, BUT CHOSE NOT TO REVEAL THAT EVIDENCE...... 98 A. The Defendants Learn that BLMIS’s Auditor is a Single Person in a Strip Mall Office ...... 99 B. The Defendants Regularly Received Information That Made It Clear Madoff Was Lying About His Alleged Trades and Performance ...... 105 IX. THE DEFENDANTS WERE WILLING TO IGNORE THE RED FLAGS; THEIR INVESTORS AND CONSULTANT WERE NOT ...... 130 A. FGG Does Everything It Can to Mollify Investor Concerns as Opposed to Performing Independent Inquiry Into the Possibility of Fraud ...... 131
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B. FGG’s Consultant Tells the Defendants Madoff May Be a Fraud ...... 133 X. DESPITE YEARS OF SEEING INDICIA OF FRAUD, THE DEFENDANTS CONTINUED TO FUNNEL BILLIONS TO MADOFF...... 136 A. 2006: GS Is Expanded and GSP Is Created...... 136 B. 2007: Leveraged Note Programs ...... 136 C. 2008: The Emerald Funds...... 137 XI. THE AFTERMATH ...... 139 XII. PEOPLE WILL TELL: OH THIS WAS FRAUD, THERE IS NOTHING WE COULD HAVE DONE ...... 141 A. The Barron’s and MAR/Hedge Articles Are Published in 2001 ...... 142 B. Tightening Industry Standards...... 144 C. It Was All Over the Street: Madoff Was Suspected of Being a Fraud ...... 146 XIII. THE DEFENDANTS’ MOTIVATION WAS BOUNDLESS AVARICE ...... 154 XIV. THE TRANSFERS ...... 156 A. Transfers from BLMIS to the Feeder Funds...... 156 B. Transfers from the Feeder Funds to the FGG Affiliates, Management Defendants, and Sales Defendants...... 158 COUNT ONE: TURNOVER AND ACCOUNTING – 11 U.S.C. § 542...... 160 COUNT TWO: PREFERENTIAL TRANSFERS (INITIAL TRANSFEREE) – 11 U.S.C. §§ 547(b), 550(a)(1), AND 551 ...... 161 COUNT THREE: PREFERENTIAL TRANSFERS (INITIAL TRANSFEREE) – 11 U.S.C. §§ 547(b), 550(a)(1), AND 551 ...... 162 COUNT FOUR: PREFERENTIAL TRANSFERS (SUBSEQUENT TRANSFEREE) – 11 U.S.C. §§ 547(b), 550(a)(2), AND 551...... 164 COUNT FIVE: FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – 11 U.S.C. §§ 548(a)(1)(A), 550(a)(1), AND 551 ...... 166 COUNT SIX: FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – 11 U.S.C. §§ 548(a)(1)(A), 550(a)(1), AND 551 ...... 167 COUNT SEVEN: FRAUDULENT TRANSFERS (SUBSEQUENT TRANSFEREE) – 11 U.S.C. §§ 548(a)(1)(A), 550(a)(2), AND 551...... 168 COUNT EIGHT: FRAUDULENT TRANSFER (INITIAL TRANSFEREE) – 11 U.S.C. §§ 548(a)(1)(B) , 550(a)(1), AND 551...... 170 COUNT NINE: FRAUDULENT TRANSFER (INITIAL TRANSFEREE) – 11 U.S.C. §§ 548(a)(1)(B) , 550(a)(1), AND 551...... 171
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COUNT TEN: FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE) – 11 U.S.C. §§ 548(a)(1)(B) , 550(a)(2), AND 551...... 172 COUNT ELEVEN: FRAUDULENT TRANSFER (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551...... 174 COUNT TWELVE: FRAUDULENT TRANSFER (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551...... 175 COUNT THIRTEEN: FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(2), AND 551...... 177 COUNT FOURTEEN: FRAUDULENT TRANSFER (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 273 AND 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551...... 178 COUNT FIFTEEN: FRAUDULENT TRANSFER (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 273 AND 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551...... 179 COUNT SIXTEEN: FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE) –NEW YORK DEBTOR AND CREDITOR LAW §§ 273 AND 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(2), AND 551...... 180 COUNT SEVENTEEN: FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 274, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551 ...... 181 COUNT EIGHTEEN: FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 274, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551 ...... 182 COUNT NINETEEN: FRAUDULENT TRANSFERS (SUBSEQUENT TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 274, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(2), AND 551...... 183 COUNT TWENTY: FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 275, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551 ...... 185 COUNT TWENTY-ONE: FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 275, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551 ...... 186 COUNT TWENTY-TWO: FRAUDULENT TRANSFERS (SUBSEQUENT TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 275, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(2), 551...... 187
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COUNT TWENTY-THREE: UNDISCOVERED FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – NEW YORK CIVIL PROCEDURE LAW AND RULES 203(g), 213(8), NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551...... 188 COUNT TWENTY-FOUR: UNDISCOVERED FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – NEW YORK CIVIL PROCEDURE LAW AND RULES 203(g), 213(8), NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551...... 190 COUNT TWENTY-FIVE: UNDISCOVERED FRAUDULENT TRANSFERS (SUBSEQUENT TRANSFEREE) – NEW YORK CIVIL PROCEDURE LAW AND RULES 203(g), 213(8), NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(2), AND 551...... 191 COUNT TWENTY-SIX: OBJECTION TO THE DEFENDANTS’ CUSTOMER CLAIMS ...... 193 COUNT TWENTY-SEVEN: UNJUST ENRICHMENT ...... 194 COUNT TWENTY-EIGHT: CONVERSION...... 195 COUNT TWENTY-NINE: MONEY HAD AND RECEIVED ...... 196 COUNT THIRTY: AIDING AND ABETTING FRAUD...... 197 COUNT THIRTY-ONE: AIDING AND ABETTING BREACH OF FIDUCIARY DUTY...... 208
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1. Irving H. Picard, Esq. (the “Trustee”), as trustee for the substantively consolidated
liquidation of the business of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and
Bernard L. Madoff (“Madoff”), under the Securities Investor Protection Act §§ 78aaa et seq., by
and through his undersigned counsel, for this Amended Complaint, states as follows:
I. NATURE OF THE ACTION
2. The Defendants named in this Amended Complaint worked in conjunction with
BLMIS and Madoff to commit, and exponentially expand, the single largest financial fraud in history. Serving as one of Madoff’s largest marketing and investor relations arms, the
Defendants were active participants in, and substantially aided, enabled, and helped sustain
Madoff’s Ponzi scheme. Every dollar the Defendants purportedly “earned,” and every dollar they kept to unjustly enrich themselves, was stolen money. Every asset the Defendants own that originated from the purported management and performance fees drawn from fictitious returns is in fact Customer Property, as defined by statute,1 and must be returned to the Trustee for equitable distribution to BLMIS customers.
3. This is a case in which sophisticated hedge fund investment advisers and promoters engaged in a systematic, purposeful enterprise with Madoff to maintain and profit from a fraud and wrongly enrich themselves. The Defendants had actual and constructive knowledge of Madoff’s fraud and cannot deny their knowledge of many “red flags” indicating the likelihood of that fraud. This case goes well beyond “red flags.”
1 SIPA § 78lll(4) defines “Customer Property” as “cash and securities . . . at any time received, acquired, or held by or for the account of a debtor from or for the securities accounts of a customer, and the proceeds of any such property transferred by the debtor, including property unlawfully converted.”
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4. The Defendants did not properly, independently, and reasonably perform due diligence into the many red flags strongly indicating Madoff was a fraud. The Defendants did exactly the opposite. The Defendants misled regulators, investors, and potential investors and generally looked the other way, focusing only on self-interest and profit. Among many other things, the Defendants:
a. failed to perform as independent investment advisers and fiduciaries, serving by their own admission as an extension of BLMIS’s marketing and customer relations operation;
b. knowingly and explicitly conspired with Madoff to deceive the Securities Exchange Commission (the “SEC”) by misrepresenting the true nature of their respective investment advisory roles and by intentionally misstating Madoff’s role;
c. ascribed inconsistent roles to Madoff depending on the circumstances. Sometimes the Defendants claimed Madoff was merely a broker-dealer executing the Defendants’ own investment strategy. At other times, the Defendants said Madoff was an investment adviser acting as an agent. And still at other times, the Defendants claimed BLMIS was acting as a principal in performing investment adviser functions;
d. provided false security to their investors through false marketing materials, and shielded Madoff from direct inquiries. The Defendants discouraged customers, potential customers, and others from performing direct due diligence on Madoff, intentionally removed references to him from their offering memoranda and marketing materials, and in all respects served as a “gatekeeper” in order to prevent unwanted inquiries;
e. performed no real due diligence on Madoff’s one-person auditing firm before or even after one of their investors likened BLMIS to another Ponzi scheme. Some of the individual Defendants not only ignored the fact that Madoff’s auditing firm lied to them, but perpetrated their own fraud by knowingly misleading investors and potential investors about the auditing firm’s size, reputation, and capabilities;
f. ignored basic, standard industry statistical analyses of Madoff’s consistent returns over nearly two decades that should have led them to reasonably conclude the returns were manufactured. The lack of any volatility ever, even in often volatile markets, was an obvious sign of fraud. The Defendants utilized the consistent lack of volatility as a banner to promote the success of their own funds;
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g. regularly received Madoff’s trade confirmations reflecting implausible equities trading volumes and percentages, as well as options trading volumes that were impossible, as they greatly exceeded the entire volume of reported options trading on the relevant exchanges. The Defendants never questioned how trading at such massive volumes could not leave a “footprint” in the market or otherwise impact pricing;
h. represented that the massive options trading that was part of Madoff’s purported strategy was made through over-the-counter trades with individual counterparties, even though the trade confirmations the Defendants received from BLMIS reflected exchange traded options, not over-the-counter trades. The Defendants never knew the identity of a single options trade counterparty, nor did they investigate the counterparties’ ability to perform their obligations under the trade agreements;
i. willingly entered into an investment relationship with Madoff that prevented all of the traditional, independent checks and balances seen in the investment advisory business. Madoff served as investment adviser, prime broker, valuation agent, sub-custodian, as well as executing broker, and all compliance and supervisory functions at BLMIS were performed by Madoff’s family. This structure was tailor-made for perpetrating fraud – Madoff could readily misappropriate assets without any independent oversight – but the Defendants never questioned it;
j. despite representing Madoff’s investment strategy as their own for nearly two decades, the Defendants’ internal communications indicate they never understood the strategy;
k. knew for many years that their investors, market experts, due diligence experts, and even their own consultant (hired to review BLMIS transactions) had grave suspicions Madoff and the investment strategy were a sham;
l. touted and marketed their due diligence process as being the best, as well as the “value added” service that justified fees greater than those of many of their competitors, when, in fact, the Defendants failed to perform even a modicum of reasonable due diligence;
m. turned a blind eye to Madoff’s fraudulent activities for the simple reason that the Defendants’ continued prosperity and very existence was directly and exclusively tied to Madoff – if he was exposed as a fraud, their vast empire would collapse; and
n. acted as Madoff’s de facto partners by failing to act as fiduciaries and by lending their resources, marketing, reputation, protection, and undying allegiance to Madoff. The Defendants, along with many others,
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knowingly and actively aided Madoff, causing a catastrophic growth of the fraud and deepening of BLMIS’s insolvency, the result of which was billions in damages to thousands of customers.
5. Through this Amended Complaint the Trustee seeks the return of all Customer
Property belonging to the BLMIS estate, in the form of redemptions, fees, compensation, and
assets; as well as all damages, including but not limited to compensatory and punitive damages,
caused by the Defendants’ misconduct; and the disgorgement of all funds and properties by
which the Defendants were unjustly enriched at the expense of BLMIS’s customers.
II. JURISDICTION AND VENUE
6. The Trustee brings this adversary proceeding pursuant to his statutory authority
under SIPA §§ 78fff(b) and 78fff-2(c)(3), sections 105(a), 502(d), 542, 544, 547, 548(a), 550(a),
and 551 of 11 U.S.C. §§ 101 (the “Bankruptcy Code”), the New York Fraudulent Conveyance
Act (N.Y. Debt. & Cred. § 270 (McKinney 2001)), New York Civil Practice Law and Rules
(McKinney 2001), and other applicable law, for turnover, accounting, preferences, fraudulent
conveyances, unjust enrichment, conversion, money had and received, aiding and abetting fraud,
aiding and abetting breach of fiduciary duty, consequential and punitive damages, and objection
to the customer claims filed by some of the Defendants. The Trustee seeks, among other things,
to set aside all avoidable transfers, collect damages caused by the Defendants, preserve the stolen
Customer Property for the benefit of BLMIS customers, and recover all stolen Customer
Property from the Defendants, in whatever form it may now or in the future exist.
7. This is an adversary proceeding brought in the Court in which the main underlying SIPA proceeding, No. 08-01789 (BRL) (the “SIPA Proceeding”) is pending. The
Securities Investor Protection Corporation (“SIPC”) originally brought the SIPA Proceeding in the United States District Court for the Southern District of New York as Securities Exchange
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Commission v. Bernard L. Madoff Investment Securities LLC et al., No. 08 CV 10791 (the
“District Court Proceeding”). This Court has jurisdiction over this adversary proceeding under
28 U.S.C. § 1334(b) and SIPA §§ 78eee(b)(2)(A), (b)(4).
8. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (C), (E), (F), (H), and (O).
9. Venue in this district is proper under 28 U.S.C. § 1409.
III. BACKGROUND
10. On December 11, 2008 (the “Filing Date”), Madoff was arrested by federal agents
for violations of the criminal securities laws, including, inter alia, securities fraud, investment
adviser fraud, and mail and wire fraud. Contemporaneously, the SEC filed the District Court
Proceeding against Madoff, which remains pending. The SEC complaint alleges that Madoff
and BLMIS engaged in fraud through the BLMIS Investment Advisory business (the “BLMIS
IA Business”).
11. On December 12, 2008, The Honorable Louis L. Stanton entered an order
appointing Lee S. Richards, Esq. as receiver for the assets of BLMIS (the “Receiver”).
12. On December 15, 2008, pursuant to SIPA § 78eee(a)(4)(B), SIPC filed an
application in the District Court alleging, inter alia, BLMIS was not able to meet its obligations
to securities customers as they came due and, accordingly, its customers needed the protections
afforded by SIPA. On that same date, pursuant to SIPA § 78eee(a)(4)(A), the SEC consented to
a combination of its own action with SIPC’s application.
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13. Also on December 15, 2008, Judge Stanton granted SIPC’s application and entered an order pursuant to SIPA (the “Protective Decree”), which, in pertinent part:
a. Appointed the Trustee for the liquidation of the business of BLMIS pursuant to SIPA § 78eee(b)(3);
b. Appointed Baker & Hostetler LLP as counsel to the Trustee pursuant to
SIPA § 78eee(b)(3);
c. Removed the case to this Bankruptcy Court pursuant to SIPA
§ 78eee(b)(4); and
d. Removed the Receiver for BLMIS.
14. Pursuant to SIPA § 78lll(7)(B), the Filing Date is deemed to be the date of the filing of the petition within the meaning of sections 547 and 548 of the Bankruptcy Code and the date of the commencement of the case within the meaning of section 544 of the Bankruptcy
Code.
15. By orders dated December 23, 2008 and February 4, 2009, respectively, the
Bankruptcy Court approved the Trustee’s bond and found the Trustee was a disinterested person.
Accordingly, the Trustee is duly qualified to serve and act on behalf of the estate of BLMIS.
16. By virtue of his appointment under SIPA, the Trustee has the responsibility to recover and pay out Customer Property to BLMIS customers, assess claims, and liquidate any other assets of BLMIS for the benefit of the estate and its creditors. The Trustee is in the process of marshalling BLMIS’s assets, but such assets will not be sufficient to fully reimburse BLMIS customers for the billions of dollars they invested through BLMIS. Consequently, the Trustee
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must use his broad authority as expressed and intended by both SIPA and the Bankruptcy Code
to pursue recovery for BLMIS accountholders.
17. Based upon the Trustee’s ongoing investigation, it now appears there were more
than 8,000 customer accounts at BLMIS over the life of the scheme. In early December 2008,
BLMIS generated account statements for its approximately 4,900 open customer accounts.
When added together, these statements purportedly showed that BLMIS customers had
approximately $65 billion invested through BLMIS. In reality, BLMIS had assets on hand worth
a fraction of that amount. Customer accounts had not accrued any real profits because no
investments were ever made. By the time the Ponzi scheme came to light on December 11,
2008, investors had already lost approximately $20 billion in principal.
18. As Madoff admitted at his Plea Hearing, he never purchased any of the securities,
options, or Treasurys for the BLMIS IA Business and the returns he reported to customers were
entirely fictitious. Based on the Trustee’s investigation to date, there is no record of BLMIS
having cleared a single purchase or sale of securities on any exchange in connection with the
SSC Strategy.2
19. For years, prior to his arrest, Madoff repeatedly represented that he conducted his
options trading on the over-the-counter (“OTC”) market rather than through any listed exchange.
Based on the Trustee’s investigation to date, there is no evidence that the BLMIS IA Business
ever entered into any OTC options trades on behalf of BLMIS account holders.
2 Madoff did a de minimus amount of securities trading outside of the SSC Strategy – such trading is not at issue in the Trustee’s allegations here.
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20. In connection with his efforts to recoup billions of dollars of stolen Customer
Property, on May 18, 2009, the Trustee filed the Complaint in this action against the three
Fairfield Greenwich Group (“FGG”) entities that maintained accounts with BLMIS: Fairfield
Sentry Limited (“Fairfield Sentry”), Greenwich Sentry, L.P. (“GS”), and Greenwich Sentry
Partners, L.P. (“GSP”) (collectively, the “Feeder Funds”). Each of the Feeder Funds maintained one or more customer accounts at BLMIS, were collectively among Madoff’s largest sources of investor principal. The Feeder Funds withdrew billions of dollars from the BLMIS accounts.
The Trustee initially filed suit against the Feeder Funds in order to recover all avoidable transfers
BLMIS made to them.
21. FGG is a trade name used to refer to a number of affiliated entities, including both domestic and foreign corporations, general partnerships, limited partnerships, trusts, and limited liability companies. Internally, those formal business structures were ignored. According to
FGG’s own documents, the profits earned by the myriad of FGG entities were distributed to individuals and entities based upon their “partnership” percentages in FGG.
22. Fairfield Sentry is currently in liquidation. On July 21, 2009, the Eastern
Caribbean Supreme Court in the High Court of Justice of the British Virgin Islands appointed
Kenneth Krys and Christopher Stride as Joint Official Liquidators of Defendant Fairfield Sentry.
Defendant Fairfield Sigma Limited (“Sigma”) and Defendant Fairfield Lambda Limited
(“Lambda”) are two other FGG funds whose sole purpose was to invest all of their respective funds in Fairfield Sentry. Like Fairfield Sentry, both Sigma and Lambda are subject to liquidation proceedings in the British Virgin Islands. Mr. Krys and Mr. Stride were appointed by the Eastern Caribbean Supreme Court as Joint Official Liquidators of Sigma on the same day
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they were appointed as liquidators of Fairfield Sentry. On April 23, 2009, the Eastern Caribbean
Supreme Court appointed Mr. Stride as the Official Liquidator of Lambda.
23. This Amended Complaint includes new allegations and causes of action against the Feeder Funds, as well as claims against additional Defendants. The Feeder Funds are no longer directly in possession of the majority of the billions of dollars in transfers they received from BLMIS. They have transferred over one billion dollars to other FGG entities as payments for purported management, performance, and administrative fees. Those FGG entities then used hundreds of millions of those dollars to pay percentage distributions to each of FGG’s partners.
In addition, the Feeder Funds have transferred funds to their investors, which include other FGG entities, which redeemed shares or limited partnership interests in the Feeder Funds.
24. The newly named Defendants include additional FGG affiliated hedge funds that invested in the Feeder Funds to benefit from their investments with Madoff, and the investment managers and related affiliates that received over a billion dollars of management and performance fees for supposedly monitoring the funds’ investments with BLMIS (the “FGG
Affiliates”). Three of the FGG Affiliates, Fairfield Greenwich (Bermuda), Ltd. (“FGB”),
Fairfield Greenwich Limited (“FGL”), and Greenwich Bermuda Limited (“GBL”), served as general partners to GS and GSP and are liable for all avoidable transfers received by GS and
GSP during the periods in which FGB, FGL, and GBL served as general partners.
25. The Amended Complaint also names as Defendants individual partners and principal wrongdoers within the FGG organization who received hundreds of millions of dollars for orchestrating FGG’s extraordinary role in the scheme. These individuals fall into two categories: those in management positions (the “Management Defendants”) and those involved
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in marketing the funds (the “Sales Defendants”) (collectively the “FGG Individuals”). The
Feeder Funds, the FGG Affiliates, the Management Defendants, and the Sales Defendants are referred to, collectively, as the “Defendants.”
26. The Trustee brings this action against the Defendants to, among other things, recover all funds received, directly or indirectly, from the BLMIS IA Business.
27. BLMIS was insolvent at all times relevant to this proceeding. BLMIS’s liabilities were billions of dollars greater than its assets. Because BLMIS could not meet its obligations as they came due, BLMIS was insolvent at the time it made each of the transfers.
28. This Amended Complaint and similar complaints are being filed to recapture stolen monies as well as damages caused to customers through wrongful acts, and to require the
Defendants to disgorge the illegal profits by which they were unjustly enriched at the expense of the customers. All Customer Property recovered by the BLMIS estate shall first be distributed pro rata among BLMIS customers in accordance with SIPA § 78fff-2(c)(1).
IV. TRUSTEE’S POWERS AND STANDING
29. Pursuant to SIPA § 78fff-1(a), the Trustee has the general powers of a bankruptcy trustee in a case under the Bankruptcy Code. Chapters 1, 3, 5, and subchapters I and II of chapter 7 of the Bankruptcy Code are applicable to this case to the extent consistent with SIPA
§§ 8fff(b).
30. In addition to the powers of a bankruptcy trustee, the Trustee has broader powers granted by SIPA.
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31. The Trustee is a real party in interest and has standing to bring these claims pursuant to SIPA § 78fff-1 and the Bankruptcy Code, including sections 323(b) and 704(a)(1), because, among other reasons:
a. the Defendants received “Customer Property” as defined in SIPA
§ 78lll(4);
b. BLMIS incurred losses as a result of the conduct set forth herein;
c. BLMIS customers were injured as a result of the conduct detailed herein;
d. SIPC cannot by statute advance funds to the Trustee to fully reimburse all customers for all of their losses;
e. the Trustee will not be able to fully satisfy all claims;
f. the Trustee, as bailee of Customer Property, can sue on behalf of the customer-bailors;
g. as of this date, the Trustee has received multiple, express assignments of certain claims of the applicable accountholders, which they could have asserted. As assignee, the Trustee stands in the shoes of persons who have suffered injury-in-fact, and a distinct and palpable loss for which the Trustee is entitled to reimbursement in the form of monetary damages;
h. SIPC is the subrogee of claims paid, and to be paid, to customers of
BLMIS who have filed claims in the liquidation proceeding. SIPC has expressly conferred upon
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the Trustee enforcement of its rights of subrogation with respect to payments it has made and is making to customers of BLMIS from SIPC funds; and
i. the Trustee has the power and authority to avoid and recover transfers pursuant to sections 544, 547, 548, 550(a), and 551 of the Bankruptcy Code and SIPA § 78fff-
2(c)(3).
V. DEFENDANTS
A. The Feeder Funds
32. Fairfield Sentry: Defendant Fairfield Sentry is a hedge fund, currently in
liquidation, that is part of the FGG organization, and which maintained accounts at BLMIS. The
fund is organized as an international business company under the laws of the British Virgin
Islands. Its registered agent is Codan Trust Company (B.V.I.) Ltd., Romasco Place, Wickhams
Cay 1, P.O. Box 3140, Road Town, Tortola, B.V.I.
33. Fairfield Sentry opened its first account at BLMIS in November 1990 (Account
No. 1FN012) and a second account in October 1992 (Account No. 1FN045). The fund also
opened corresponding options accounts (Account Nos. 1FN069 and 1FN070). (A true and
accurate copy of exemplar account agreements for Fairfield Sentry is attached hereto as Ex. 1.) 3
All accounts were still open when Madoff was arrested on December 11, 2008. Prior to
Madoff’s arrest, Fairfield Sentry deposited almost $4.3 billion and withdrew approximately $3.3
billion from those accounts. (A summary chart of Fairfield Sentry’s withdrawals from its
BLMIS accounts is attached hereto as Ex. 2.)
3 All references to exhibits attached to this Amended Complaint will be indicated as “Ex. ___.”
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34. Fairfield Sentry is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York and entered into agreements in New York,
New York including agreements relating to its BLMIS accounts, which it delivered to BLMIS headquarters in New York, New York.
35. At all relevant times, Fairfield Sentry was a customer of BLMIS, which operated its principal place of business in New York, New York and maintained Fairfield Sentry’s account in New York, New York. At least one of Fairfield Sentry’s account agreements contained a choice of law provision indicating the agreement was made in New York and would be construed pursuant to New York law. (See Ex. 1.) Fairfield Sentry utilized New York banks when it redeemed funds distributed to it by BLMIS and when it invested additional funds with
BLMIS. Specifically, Fairfield Sentry wired funds to BLMIS’s account at JPMorgan Chase
Account # 000000140081703 (the “703 Account”), in New York, New York, for application to its accounts and for the conducting of trading activities. (Prior to 2008, the 703 Account’s complete account number was 140-081703.)
36. On May 12, 2009, FGG issued a press release stating that FGG professionals actively monitored FGG’s investments through Madoff and conducted due diligence both in
Bermuda and New York. (A true and accurate copy of the May 12, 2009 press release is attached hereto as Ex. 3.)
37. In addition, Fairfield Sentry filed customer claims seeking to recover funds it allegedly lost on its investments through BLMIS. By filing its customer claims, Fairfield Sentry submitted to the jurisdiction of this Court.
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38. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Fairfield Sentry based on the fund’s contacts with the U.S.
39. GS: Defendant GS is a hedge fund that is part of the FGG organization and that maintained an account at BLMIS. GS is a limited partnership organized under the laws of the
State of Delaware. Its registered agent is Corporation Service Company, 2711 Centreville Road,
Suite 400, Wilmington, Delaware 19808.
40. GS opened its account at BLMIS in November 1992 (Account No. 1G0092).
This account was still open when Madoff was arrested on December 11, 2008. (A true and accurate copy of exemplar account agreements for GS is attached hereto as Ex. 4.) Prior to
Madoff’s arrest, GS deposited approximately $420.6 million into this account and withdrew
$281.1 million from this account. (A summary chart of GS’s withdrawals from its BLMIS account is attached hereto as Ex. 5.)
41. GS is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York and entered into agreements in New York, New
York, which it delivered to BLMIS headquarters in New York, New York. At all relevant times,
GS was a customer of BLMIS, which operated its principal place of business in New York, New
York. GS utilized New York banks when it redeemed funds distributed to it by BLMIS and when it invested additional funds with BLMIS. Specifically, GS wired funds to the 703 Account in New York, New York, for application to its account and for the conducting of trading activities.
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42. As previously noted, on May 12, 2009, FGG issued a press release stating FGG
professionals actively monitored FGG’s investments through BLMIS and conducted due
diligence both in Bermuda and New York City. (See Ex. 3.)
43. In addition, GS filed a customer claim seeking to recover funds it allegedly lost on its investments through BLMIS, whereby it submitted to the jurisdiction of this Court.
44. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over GS based on the fund’s contacts with the U.S.
45. GSP: Defendant GSP is a hedge fund that is part of the FGG organization, and which maintained an account at BLMIS. GSP is a limited partnership organized under the laws of the State of Delaware. Its registered agent is Corporation Service Company, 2711 Centreville
Road, Suite 400, Wilmington, Delaware 19808.
46. GSP opened its account at BLMIS in May 2006 (Account No. 1G0371). (A true and accurate copy of exemplar account agreements for GSP is attached hereto as Ex. 6.) This account was still open when Madoff was arrested on December 11, 2008. Prior to Madoff’s arrest, GSP deposited nearly $9.5 million into this account and withdrew almost $6.0 million
from this account. (A summary chart of GSP’s withdrawals from its BLMIS account is attached
hereto as Ex. 7.)
47. GSP is subject to personal jurisdiction in this judicial district as it routinely
conducted business in New York, New York, and entered into agreements in New York, New
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York, which it delivered to BLMIS headquarters in New York, New York. At all relevant times,
GSP was a customer of BLMIS, which operated its principal place of business in New York,
New York. GSP utilized New York banks when it redeemed funds distributed to it by BLMIS
and when it invested additional funds with BLMIS. Specifically, GSP wired funds to the 703
Account in New York, New York, for application to its account and for the conducting of trading
activities.
48. As previously noted, on May 12, 2009, FGG issued a press release stating FGG
professionals actively monitored FGG’s investment through BLMIS and conducted due diligence
both in Bermuda and New York. (See Ex. 3.)
49. In addition, GSP filed a customer claim seeking to recover funds it allegedly lost on its investments through BLMIS, whereby it submitted to the jurisdiction of this Court.
50. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over GSP based on the fund’s contacts with the U.S.
B. FGG Affiliates
1. Other FGG Funds
51. Sigma: Defendant Sigma is an FGG fund wholly invested in Fairfield Sentry.
The fund was organized on November 20, 1990 under the British Virgin Islands’ International
Business Companies Act, and began operations in 1997. Its registered office is c/o Codan Trust
Company (B.V.I.) Ltd., Romasco Place, Wickhams Cay 1, P.O. Box 3140, Road Town, Tortola,
B.V.I.
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52. Sigma accepted investments in Euros, which it converted to U.S. Dollars and
invested in Fairfield Sentry. Fairfield Sentry then invested at least 95% of its assets in BLMIS.
Through its investment in Fairfield Sentry, Sigma was an indirect investor through BLMIS.
53. Between 2003 and 2008, Sigma redeemed approximately $752.3 million from
Fairfield Sentry. (A true and accurate copy of Sigma’s redemption confirmations is attached
hereto as Ex. 8.) Upon information and belief, in order to pay these redemptions, Fairfield
Sentry withdrew funds from its BLMIS accounts. As such, Sigma’s redemptions constitute
Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from
BLMIS recoverable by the Trustee.
54. Sigma is subject to personal jurisdiction in this judicial district because Sigma
filed a customer claim to recover funds it allegedly lost on its investments in Sentry, whereby it
submitted to the jurisdiction of this Court.
55. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal
jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has
personal jurisdiction over Sigma based on the fund’s contacts with the U.S.
56. Lambda: Defendant Lambda is an FGG fund wholly invested in Fairfield Sentry.
The fund was organized on December 7, 1990 under the British Virgin Islands’ International
Business Companies Act, and began operations in 1999. Its registered office is c/o Codan Trust
Company (B.V.I.) Ltd., Romasco Place, Wickhams Cay 1, P.O. Box 3140, Road Town, Tortola,
B.V.I.
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57. Lambda accepted investments in Swiss francs, which it converted to U.S. Dollars
and invested in Fairfield Sentry. Fairfield Sentry then invested at least 95% of its assets in
BLMIS. Through its investment in Fairfield Sentry, Lambda was an indirect investor through
BLMIS.
58. Between 2003 and 2008, Lambda redeemed over $52.9 million from Fairfield
Sentry. (A true and accurate copy of Lambda’s redemption confirmations are attached hereto as
Ex. 9.) Upon information and belief, in order to pay these redemptions, Fairfield Sentry
withdrew funds from its BLMIS accounts. As such, Lambda’s redemptions constitute Customer
Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS
recoverable by the Trustee.
59. Lambda is subject to personal jurisdiction in this judicial district because Lambda filed a customer claim to recover funds it allegedly lost on its investments in Sentry, whereby it submitted to the jurisdiction of this Court.
60. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Lambda based on the fund’s contacts with the U.S.
61. Chester Global Strategy Fund Limited (“Chester”): Defendant Chester is an
FGG fund partially invested in Fairfield Sentry. Chester was created as a fund of funds, and
placed its investors’ money with other hedge funds. The fund is organized as a limited liability company under the laws of the Cayman Islands and began operations on March 1, 2003.
Defendant Andrés Piedrahita (“Piedrahita”) is one of the fund’s directors.
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62. Union Bancaire Privée (“UBP”) acted as the fund’s investment adviser and
custodian. Chester borrowed 30–40% of the net asset value of the fund from UBP for the
purpose of making leveraged investments.
63. Between 2005 and 2007, Chester redeemed over $71.7 million from Fairfield
Sentry. Chester liquidated its remaining position in Fairfield Sentry on July 19, 2007 by
redeeming over $10.6 million. (A true and accurate copy of Chester’s redemption confirmations
is attached hereto as Ex. 10.) Upon information and belief, in order to pay these redemptions,
Fairfield Sentry withdrew funds from its BLMIS accounts. As such, Chester’s redemptions are
Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from
BLMIS recoverable by the Trustee.
64. Chester is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by undertaking significant commercial activity in New York, New York, and derived significant revenue from New York, New York. Specifically, Chester was managed out of
FGG’s New York City office.
65. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Chester based on the fund’s contacts with the U.S.
66. Chester Global Strategy Fund, LP (“Chester LP”): Defendant Chester LP is
an FGG fund partially invested in GS. Chester LP was created as a fund of funds, and placed its
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investors’ money with other hedge funds. The fund is organized as a Delaware limited partnership and maintained its principal place of business in New York, New York.
67. In November 2008, Chester LP redeemed over $853,000 from GS. (A true and accurate copy of Chester LP’s redemption confirmation is attached hereto as Ex. 11.) Upon information and belief, in order to pay this redemption, GS withdrew funds from its BLMIS
account. As such, Chester LP’s redemption is Customer Property subject to turnover to the
Trustee and/or an avoidable subsequent transfer from BLMIS recoverable by the Trustee.
68. Chester LP is subject to personal jurisdiction in this judicial district as it routinely
conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by undertaking significant commercial activity in New York, New York, and derived
significant revenue from New York, New York. Specifically, Chester LP was managed out of
FGG’s New York City office.
69. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal
jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has
personal jurisdiction over Chester LP based on the fund’s contacts with the U.S.
70. Irongate Global Strategy Fund Limited (“Irongate”): Defendant Irongate is an FGG fund partially invested in Fairfield Sentry. Irongate was created as a fund of funds, and
placed its investors’ money with other hedge funds. It was created as a limited liability company
under the laws of the Cayman Islands and began operations on July 1, 2004. The fund’s
registered office is c/o Citco Fund Services (Cayman Islands) Limited, Corporate Centre, West
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Bay Road, P.O. Box 31106SMB, George Town, Cayman Islands. Piedrahita is one of the fund’s directors.
71. In 2007, Irongate redeemed over $36.3 million from Fairfield Sentry. Irongate
liquidated its remaining position in Fairfield Sentry on July 19, 2007 by redeeming over $31.3 million. (A true and accurate copy of Irongate’s redemption confirmations is attached hereto as
Ex. 12.) Upon information and belief, in order to pay these redemptions, Fairfield Sentry withdrew funds from its BLMIS accounts. As such, Irongate’s redemptions constitute Customer
Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
72. Irongate is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by undertaking significant commercial activities in New York, New York, and derived significant revenue from New York, New York. Specifically, Irongate was managed out of FGG’s New York City office.
73. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Irongate based on the fund’s contacts with the U.S.
74. Fairfield Greenwich Fund (Luxembourg) (“FGF”): Defendant FGF is an FGG
fund partially invested in Fairfield Sentry. The fund was incorporated as a Société
d’Investissement à Capital Variable in Luxembourg on October 22, 2002. Its registered office is
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located at 28 Avenue Monterey, L-2163 Luxembourg. Defendant Walter Noel (“Noel”) serves as Chairman of the Board of Directors.
75. FGF was created as an umbrella fund that would provide investors with a choice of investment in several sub-funds. As of December 31, 2005, FGF had only one sub-fund,
Fairfield Guardian Fund (“Fairfield Guardian”). FGF was invested in Fairfield Sentry both
directly and through Fairfield Guardian.
76. Between 2004 and 2006, FGF redeemed approximately $2.8 million from
Fairfield Sentry. (A true and accurate copy of FGF’s redemption confirmations is attached
hereto as Ex. 13.) In addition, Fairfield Guardian redeemed from Fairfield Sentry throughout
2005. (A true and accurate copy of an internal FGG chart showing Fairfield Guardian’s
redemptions from Fairfield Sentry is attached hereto as Ex. 14.) Upon information and belief, in
order to pay these redemptions, Fairfield Sentry withdrew funds from its BLMIS accounts. As
such, FGF’s and Fairfield Guardian’s redemptions constitute Customer Property subject to
turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the
Trustee.
77. FGF is subject to personal jurisdiction in this judicial district as it routinely
conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by undertaking significant commercial activities in New York, New York, and
derived significant revenue from New York, New York. Specifically, FGF was managed out of
FGG’s New York City office.
78. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal
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jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has
personal jurisdiction over FGF based on the fund’s contacts with the U.S.
79. Fairfield Investment Fund Limited (“FIFL”): Defendant FIFL is an FGG fund
partially invested in Fairfield Sentry and GS. FIFL was created as a fund of funds which invested in other funds. It was created as a British Virgin Islands International Business
Company on July 27, 2000, and began operations on July 1, 2004. Its registered office is c/o
Codan Trust Company (B.V.I.) Ltd., Romasco Place, Wickhams Cay 1, P.O. Box 3140, Road
Town, Tortola, B.V.I. Noel and Defendant Jeffrey Tucker (“Tucker”) serve on the fund’s Board of Directors.
80. Between 2003 and 2008, FIFL redeemed approximately $288.1 million from
Fairfield Sentry. FIFL redeemed approximately $9.0 million in October 2008, which constituted a liquidation of FIFL’s entire remaining position in Fairfield Sentry. (A true and accurate copy of FIFL’s redemption confirmations is attached hereto as Ex. 15.) Upon information and belief, in order to pay these redemptions, Fairfield Sentry withdrew funds from its BLMIS accounts. As such, FIFL’s redemptions constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
81. FIFL is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by undertaking significant commercial activities in New York, New York, and derived significant revenue from New York. Specifically, FIFL was managed out of FGG’s New
York City office.
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82. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over FIFL based on the fund’s contacts with the U.S.
83. Fairfield Investors (Euro) Limited (“FIL-Euro”): Defendant FIL-Euro is an
FGG fund created as an international business company under the laws of the British Virgin
Islands. Its principal business office is c/o Codan Trust Company (B.V.I.) Ltd., Romasco Place,
Wickhams Cay 1, Road Town, Tortola, B.V.I. Defendant Cornelis Boele (“Boele”) serves on the
fund’s Board of Directors.
84. FIL-Euro was created to invest in and trade both securities and other financial
instruments. The fund allocated its assets principally to the purchase of shares of FIFL. As
explained above, FIFL invested assets in Fairfield Sentry and GS.
85. FIFL, the fund through which FIL-Euro invested in Fairfield Sentry and GS,
redeemed approximately $288.1 million from Fairfield Sentry between 2003 and 2008. (See Ex.
15.) Upon information and belief, in order to pay FIFL’s redemptions, Fairfield Sentry withdrew
funds from its BLMIS accounts. FIFL then transferred the funds to FIL-Euro when FIL-Euro
redeemed its shares of FIFL. As such, FIL-Euro’s redemptions from FIFL constitute Customer
Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS
recoverable by the Trustee.
86. FIL-Euro is subject to personal jurisdiction in this judicial district as it routinely
conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by conducting significant commercial activities in New York, New York, and derived
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significant revenue from New York, New York. Specifically, FIL-Euro was managed out of
FGG’s New York City office.
87. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over FIL-Euro based on the fund’s contacts with the U.S.
88. Fairfield Investors (Swiss Franc) Limited (“FIL-Swiss”): Defendant FIL-
Swiss is an FGG fund incorporated as an international business company under the laws of the
British Virgin Islands on June 6, 1996. Its registered office is located at Codan Trust Company
(B.V.I.) Ltd., P.O. Box 3140, Romasco Place, Wickhams Cay 1, Road Town, Tortola, B.V.I.
Boele serves on the fund’s Board of Directors.
89. FIL-Swiss was created to allocate its assets principally to the purchase of shares
of FIFL. As explained above, FIFL invested funds in Fairfield Sentry and GS.
90. FIFL, the fund through which FIL-Swiss invested in Fairfield Sentry and GS,
redeemed approximately $288.1 million from Fairfield Sentry between 2003 and 2008. (See Ex.
15.) Upon information and belief, to pay FIFL’s redemptions, Fairfield Sentry withdrew funds
from BLMIS. FIFL then transferred the funds to FIL-Swiss when FIL-Swiss redeemed its shares
of FIFL. As such, FIL-Swiss’s redemptions from FIFL constitute Customer Property subject to
turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the
Trustee.
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91. FIL-Swiss is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by conducting significant commercial activities in New York, New York, and derived significant revenue from New York, New York. Specifically, FIL-Swiss was managed out of
FGG’s New York City office, and the fund’s investment manager, Fairfield Greenwich Advisors
LLC (see infra ¶¶148-157), is located in New York, New York.
92. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over FIL-Swiss based on the fund’s contacts with the U.S.
93. Fairfield Investors (Yen) Limited (“FIL-Yen”): Defendant FIL-Yen is an FGG
fund incorporated as an international business company under the laws of the British Virgin
Islands on January 1, 2004. Its registered office is located at Codan Trust Company (B.V.I.)
Ltd., P.O. Box 3140, Romasco Place, Wickhams Cay 1, Road Town, Tortola, B.V.I. Tucker
serves on the fund’s Board of Directors.
94. FIL-Yen was created to allocate its assets principally to the purchase of shares of
FIFL. As explained above, FIFL invested funds in Fairfield Sentry and GS.
95. FIFL, the fund through which FIL-Yen invested in Fairfield Sentry and GS,
redeemed approximately $288.1 million from Fairfield Sentry between 2003 and 2008. (See Ex.
15.) Upon information and belief, to pay FIFL’s redemptions, Fairfield Sentry withdrew funds
from its BLMIS accounts. FIFL then transferred the funds to FIL-Yen when FIL-Yen redeemed
its shares of FIFL. As such, FIL-Yen’s redemptions from FIFL constitute Customer Property
26 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 34 of 229
subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable
by the Trustee.
96. FIL-Yen is subject to personal jurisdiction in this judicial district as it routinely
conducted business in New York, New York, and purposely availed itself of the laws of the State
of New York by conducting significant commercial activities in New York, New York, and
derived significant revenue from New York, New York. Specifically, FIL-Yen was managed out
of FGG’s New York City office, and the fund’s investment manager, FGA, is located in New
York, New York.
97. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over FIL-Yen based on the fund’s contacts with the U.S.
98. Fairfield Investment Trust (“FIT”): Defendant FIT is a multi-series unit trust established under the Trusts Law of the Cayman Islands on December 12, 2001. Citco Trustees
(Cayman) Limited acts as FIT’s trustee, and the trust’s registered office is located at Corporate
Center, Windward One, West Bay Road, P.O. Box 31106 SMB, Grand Cayman, Cayman
Islands, B.W.I.
99. FIT has established at least two series trusts: Fairfield GCI (USD) Fund and
Fairfield GCI (JPY) Fund (the “FIT Funds”). The FIT Funds were created as funds of funds, and placed their investors’ money with other hedge funds. One of the hedge funds the FIT Funds invested in was Fairfield Sentry.
27 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 35 of 229
100. Through Fairfield GCI (USD), FIT redeemed over $5.2 million from Fairfield
Sentry between 2003 and 2008. (A true and accurate copy of Fairfield GCI (USD)’s redemption
confirmations is attached hereto as Ex. 16.) Through Fairfield GCI (JPY), FIT redeemed
approximately $5.2 million from Fairfield Sentry between 2003 and 2007. (A true and accurate copy of Fairfield GCI (JPY)’s redemption confirmations is attached hereto as Ex. 17.) Upon information and belief, in order to pay these redemptions, Fairfield Sentry withdrew funds from its BLMIS accounts. As such, Fairfield GCI’s redemptions constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the
Trustee.
101. FIT is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by conducting significant commercial activities in New York, New York, and derived significant revenue from New York, New York. Specifically, FIT was managed out of FGG’s
New York City office.
102. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over FIT based on the trust’s contacts with the U.S.
103. FIF Advanced, Ltd. (“FIFA”): Defendant FIFA is an FGG fund partially invested in Fairfield Sentry. FIFA was created as a fund of funds, and placed its investors’ money with other hedge funds. FIFA was incorporated as an international business company under the laws of the British Virgin Islands. Its registered office is located at Romasco Place,
28 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 36 of 229
Wickhams Cay 1, P.O. Box 3140, Road Town, Tortola, B.V.I. Noel sits on the fund’s Board of
Directors.
104. Between 2004 and 2007, FIFA redeemed over $45.2 million from Fairfield
Sentry. Its redemption of $4.6 million in October 2007 constituted a complete liquidation of its
shares. (A true and accurate copy of FIFA’s redemption confirmations is attached hereto as Ex.
18.) Upon information and belief, in order to pay these redemptions, Fairfield Sentry withdrew
funds from its BLMIS accounts and then transferred the funds to FIFA. As such, FIFA’s
redemptions constitute Customer Property subject to turnover to the Trustee and/or avoidable
subsequent transfers from BLMIS recoverable by the Trustee.
105. FIFA is subject to personal jurisdiction in this judicial district as it routinely
conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by conducting significant commercial activities in New York, New York, and derived
significant revenue from New York, New York. Specifically, FIFA was managed out of FGG’s
New York City office, and the fund’s investment manager, FGA, is located in New York, New
York.
106. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal
jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has
personal jurisdiction over FIFA based on the fund’s contacts with the U.S.
107. Sentry Select Limited (“SSL”): Defendant SSL is an FGG fund partially invested in Fairfield Sentry. It was created as an international business company under the laws
of the British Virgin Islands. Its principal business office is c/o Citco B.V.I. Limited, P.O. Box
29 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 37 of 229
662, Road Town, Tortola, B.V.I. Noel serves on the fund’s Board of Directors.
108. SSL was created to allocate assets between two other FGG funds, Fairfield Sentry and Arlington International Fund (“AIF”). Eighty percent of the fund’s assets were invested in
Fairfield Sentry, and the remaining 20% went to AIF.
109. SSL redeemed at least $60,000 from Fairfield Sentry in 2004, and may have redeemed additional shares in other years. (A true and accurate copy of SSL’s redemption request is attached hereto as Ex. 19.) Upon information and belief, in order to pay these redemptions, Fairfield Sentry withdrew funds from its BLMIS accounts and then transferred the
funds to SSL. As such, SSL’s redemptions constitute Customer Property subject to turnover to
the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
110. SSL is subject to personal jurisdiction in this judicial district as it routinely
conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by conducting significant commercial activities in New York, New York, and derived
significant revenue from New York, New York. Specifically, SSL was managed out of FGG’s
New York City office.
111. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal
jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has
personal jurisdiction over SSL based on the fund’s contacts with the U.S.
112. Stable Fund LP (“Stable Fund”): Defendant Stable Fund was an FGG fund partially invested in GS. Stable Fund was created as a fund of funds, and placed its investors’
30 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 38 of 229
money with other hedge funds. Stable Fund was a Delaware limited partnership with its
registered office located at Fairfield Greenwich Partners, LLC, 919 Third Avenue, 11th Floor,
New York, New York 10022.
113. Upon information and belief, the only investors allowed to purchase limited
partnership interests in Stable Fund were FGG partners and employees, and their respective
spouses.
114. In October 2008, Stable Fund redeemed $4.4 million from GS. (A true and
accurate copy of Stable Fund’s redemption confirmation is attached hereto as Ex. 20.) Upon
information and belief, in order to pay this redemption, GS withdrew funds from its BLMIS
accounts and then transferred the funds to Stable Fund. As such, Stable Fund’s redemption
constitutes Customer Property subject to turnover to the Trustee and/or an avoidable subsequent
transfer from BLMIS recoverable by the Trustee.
115. Stable Fund is subject to personal jurisdiction in this judicial district as it
routinely conducted business in New York, New York, purposely availed itself of the laws of the
State of New York by conducting significant commercial activities in New York, New York, and
derived significant revenue from New York, New York. Specifically, Stable Fund was managed
out of FGG’s New York City office, and Stable Fund’s general partner, Fairfield Greenwich
Partners, LLC (“FGP”) (see infra ¶¶163-167), is located in New York, New York.
116. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Stable Fund based on the fund’s contacts with the U.S.
31 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 39 of 229
2. FGG Investment Managers and Other Administrative Entities
117. By marketing Madoff’s strategy, the FGG investment managers and other FGG administrative entities received large sums of money.
118. According to FGG’s records, its assets under management increased as follows:
Assets Under Management by FGG
Year AUM 2002 $5 billion 2003 $5 billion 2004 $8 billion 2005 $9 billion 2006 $10 billion 2007 $16 billion 2008 $14 billion
119. This growth in assets under management resulted in increasing fees to the various
FGG investment managers and administration entities. FGG later modified its fee structure to be
among the most aggressive in the hedge fund industry.
120. The Defendants established a broad network of investment managers and administrative entities in order to maximize fee revenue derived from BLMIS. Those entities
passed monies through two principal entities – FGB and FGL. The FGG entities generated fees
from their relationships with BLMIS totaling in excess of one billion dollars.
121. Fairfield Greenwich (Bermuda) Ltd. (“FGB”): Along with FGL, Defendant
FGB is one of the two principal FGG operating entities. FGB is a company incorporated in
Bermuda on June 13, 2003, with its principal place of business at 131 Front Street, First Floor,
32 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 40 of 229
Hamilton, Bermuda, HM 11. FGB’s mailing address is 12 Church Street, Suite 606, Hamilton,
Bermuda, HM 11.
122. Prior to 2003, FGL served as the investment manager to Fairfield Sentry, Sigma, and Lambda. In 2003 FGL assigned these management agreements to FGB. A potential investor communicated his belief that the change in management structure was an “attempt by
Madoff to avoid SEC scrutiny of his firm and market making activities. This concern seems to be prevalent in Switzerland and has been expressed by a good number of other investor or potential investors in Fairfield Sentry.” (A true and accurate copy of the July 2, 2003 email to
Tucker and Boele is attached hereto as Ex. 21.)
123. FGB was, until 2007, a wholly-owned subsidiary of FGL. In 2007, ownership of
FGB was transferred from FGL to FGL’s shareholders. The shareholders included Fairfield
International Managers, Inc. (“FIM”) (36.8%) − co-owned by Noel and Tucker, Safehand
Investment (27.5%) – owned exclusively by Piedrahita, and many of the other Management
Defendants and Sales Defendants. (A true and accurate copy of an excerpt from an FGG chart that contains the proposed shareholder register for FGL is attached hereto as Ex. 22.)
124. FGB has been registered with the SEC as an investment adviser since at least
2003. As a registered investment adviser, FGB filed Form 13Fs with the SEC. FGB’s 13Fs were signed by Defendant Mark McKeefry (“McKeefry”), as FGB’s general counsel, from
FGG’s New York offices.
125. FGB acted as the investment manager to Fairfield Sentry from July 1, 2003 to
December 11, 2008. As compensation for these services, FGB received a management fee equal to 1% of the net asset value of the fund, as well as a performance fee equal to 20% of net profits
33 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 41 of 229
from the fund. Unlike other hedge funds that paid fees on an annual basis, to increase the fees
paid to FGB, Fairfield Sentry paid the management fee monthly and the performance fee
quarterly.
126. According to Fairfield Sentry’s financial statements, between 2003 and the first half of 2008, FGB received the following fees from Fairfield Sentry:
Fees Earned by FGB for Serving as Investment Manager to Fairfield Sentry4
Year Management Fees Performance Fees Total Fees 2003 $5,221,000 $80,515,000 $85,736,000 2004 $21,549,000 $81,278,000 $102,827,000 2005 $51,127,000 $87,225,000 $138,352,000 2006 $50,465,000 $107,779,000 $158,244,000 2007 $67,322,000 $116,157,000 $183,479,000 2008 $36,134,000 $46,070,000 $82,204,000 TOTAL $231,818,000 $519,024,000 $750,842,000
127. Upon information and belief, in order to pay FGB’s fees, Fairfield Sentry
withdrew funds from BLMIS and then transferred the funds to FGB; as such, the fee payments
constitute Customer Property subject to turnover to the Trustee and/or are avoidable subsequent
transfers from BLMIS recoverable by the Trustee.
128. FGB acted as manager to Irongate, for which it received a 0.8% management fee
and 10% performance fee. Irongate’s financial statements indicate these fees totaled:
4 All fees described herein have been rounded here to the nearest thousand.
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Fees Earned by FGB While Serving as Manager to Irongate
Year Management Fees Performance Fees Total Fees 2005 $2,387,000 $2,532,000 $4,918,000 2006 $7,493,000 $7,986,000 $15,479,000 2007 $14,189,000 $18,012,000 $32,201,000 TOTAL $24,069,000 $28,529,000 $52,599,000
129. Upon information and belief, in order to pay FGB’s fees, Irongate redeemed
shares of Fairfield Sentry. In order to pay Irongate’s redemptions, Fairfield Sentry withdrew
funds from BLMIS and transferred the funds to Irongate, which in turn transferred the funds to
FGB to pay its fees. As such, the Irongate redemptions and FGB fee payments constitute
Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from
BLMIS recoverable by the Trustee.
130. FGB also served as general partner to GS and GSP. In its role as general partner,
FGB was responsible for directing GS’s and GSP’s investment and trading activities. FGB began serving as general partner to GS on June 13, 2003, and continued to serve in that capacity
until 2004. GBL served as GS’s general partner between 2004 and 2006. FGB then resumed as
general partner in 2006. The performance fees for 2004 and 2006 were split between GBL and
FGB based upon when each served as general partner. FGB has served as general partner to
GSP since the fund commenced operations on May 1, 2006.
131. FGB earned management and performance fees from GS and GSP. In 2003, as
general partner to GS, FGB earned a performance fee equal to 20% of capital appreciation and a
management fee equal to 0.1% of assets under management. The management fee was removed
in 2004, and the 0.1% fee was instead passed along to FGA for expense reimbursement. After
GSP was created in 2006, FGB returned as GS’s general partner and began charging an increased
35 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 43 of 229
management fee equal to 1% of the assets under management, in addition to the 20% performance fee, for both GS and GSP. GS’s and GSP’s financial statements indicate FGB earned the following fees while serving as general partner to GS and GSP:
Fees Earned by FGB While Serving as General Partner to GS
Year Management Fees Performance Fees Total Fees 2003 $59,000 $2,620,000 $2,679,000 2004 N/A $2,644,000 $2,644,000 2005 N/A N/A N/A 2006 $282,000 $2,929,000 $3,211,000 2007 $987,000 $3,054,000 $4,041,000 TOTAL $1,328,000 $11,247,000 $12,575,000
Fees Earned by FGB While Serving as General Partner to GSP
Year Management Fees Performance Fees Total Fees 2006 $16,000 $93,000 $109,000 2007 $57,000 $186,000 $243,000 TOTAL $73,000 $278,000 $351,000
132. Upon information and belief, FGB received the management fees and performance fees in the form of limited partnership interests. During the years in which FGB served as general partner to GS and GSP, FGB redeemed limited partnership interests worth:
Redemptions from GS by FGB
Year Redemptions by FGB 2003 $2,500,000 2004 $4,000,000 2005 $0 2006 $4,200,000 2007 $3,304,000 2008 $259,000 TOTAL $14,263,000
36 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 44 of 229
Redemptions from GSP by FGB
Year Redemptions by FGB 2006 $0 2007 $248,000 2008 $40,000 TOTAL $288,000
133. Upon information and belief, in order to pay FGB’s fees and redemptions, GS and
GSP withdrew funds from BLMIS and transferred the funds to FGB. As such, FGB’s redemptions and fee payments constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee. In addition, as the general partner to GS and GSP, FGB is liable for the repayment of GS’s and GSP’s debts and obligations. During the years in which FGB acted as general partner, GS withdrew more than
$124.0 million from BLMIS, and GSP withdrew more than $6.0 million. FGB is directly liable for the repayment of these withdrawals which constitute Customer Property subject to turnover to the Trustee and/or avoidable transfers recoverable by the Trustee.
134. FGB is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by conducting significant commercial activities in New York, New York, and derived significant revenue from New York, New York. Specifically, FGB was managed out of FGG’s
New York City office. In addition, FGB filed customer claims, whereby it submitted to the jurisdiction of this Court.
135. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal
37 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 45 of 229
jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has
personal jurisdiction over FGB based on the entity’s contacts with the U.S.
136. Fairfield Greenwich Limited (“FGL”): Defendant FGL was originally
incorporated under the laws of Ireland in 1997 and was reorganized as a Cayman Islands limited
liability company on January 1, 2002. FGL’s mailing address is c/o Charles, Adams, Ritchie &
Duckworth, Second Floor, Zephyr House, P.O. Box 709, George Town, Grand Cayman, Cayman
Islands, B.W.I. FGL is registered to do business in the State of New York and lists its principal
executive office as FGG’s offices in New York, New York.
137. FGL owned 100% of FGA and, until 2007, owned 100% of FGB. FGL was also
a 100% owner of Fairfield Heathcliff Capital LLC (“FHC”) (see infra ¶¶168-172). As owner of these entities, FGL received the benefit of fees these entities earned through their association with the Feeder Funds.
138. FGL served as investment manager and placement agent to a number of FGG funds. Between 1999 and 2003, FGL acted as investment manager to Fairfield Sentry. In this capacity, FGL received a 20% performance fee. In 2002 and 2003, FGL also received a 1% management fee. In total, according to Fairfield Sentry’s financial statements, FGL received the following fees:
38 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 46 of 229
Fees Earned by FGL While Serving as Investment Manager to Fairfield Sentry
Year Management Fees Performance Fees Total Fees 1999 N/A $68,833,000 $68,833,000 2000 N/A $73,575,000 $73,575,000 2001 N/A $84,664,000 $84,664,000 2002 $3,844,000 $83,591,000 $87,435,000 2003 $5,221,000 $80,515,000 $85,736,000 TOTAL $9,065,000 $391,178,000 $400,243,000
139. Based upon information and belief, in order to pay FGL’s fees, Fairfield Sentry
withdrew funds from its BLMIS account and then transferred the funds to FGL. As such, FGL’s
fees constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
140. In addition, FGL served as the investment adviser to the FIT Funds, for which it received a 0.1% expense reimbursement, and as the placement agent to FIFL and FIFA, for which it received a 1% placement fee. FIFL’s financial statements show FGL earned placement fees totaling:
Fees Earned by FGL While Serving as Placement Agent to FIFL
Year Placement Fees 2005 $9,070,000 2006 $5,409,000 2007 $4,985,000 TOTAL $19,464,000
141. Based upon information and belief, in order to pay FGL’s fees, FIFL redeemed
shares of Fairfield Sentry. In order to pay FIFL’s redemptions, Fairfield Sentry withdrew funds
from BLMIS and then transferred the funds to FIFL, which in turn transferred the funds to FGL.
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As such, FIFL’s redemptions and FGL’s fees constitute Customer Property subject to turnover to
the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
142. FGL also served as general partner to GS from 1999 to 2003, for which it earned
a 20% performance fee. Financial statements for GS indicate these fees totaled:
Fees Earned by FGL While Serving as General Partner to GS
Year Performance Fees 1999 $3,406,000 2000 $3,252,000 2001 $3,144,000 2002 $2,736,000 2003 $2,620,000 TOTAL $15,158,000
143. FGL and FGB each acted as general partner of GS for half of 2003. The fees paid
in 2003 were split between FGL and FGB based upon when each served as general partner.
144. FGL received its performance fees in the form of limited partnership interests, of
which it redeemed the following amounts:
Redemptions from GS by FGL
Year Redemptions by FGL 1999 $1,725,000 2000 $1,850,000 2001 $12,129,000 2002 $895,000 2003 $2,500,000 TOTAL $19,099,000
145. Upon information and belief, in order to pay FGL’s redemptions, GS withdrew
funds from BLMIS and transferred the funds to FGL. As such, FGL’s redemptions constitute
Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from
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BLMIS recoverable by the Trustee. In addition, as general partner to GS, FGL is directly liable for the repayment of GS’s withdrawals from 1999 to 2003, totaling in excess of $58.0 million, which constitute Customer Property subject to turnover to the Trustee and/or avoidable transfers recoverable by the Trustee.
146. FGL is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by undertaking significant commercial activities in New York, New York, and derived significant revenue from New York, New York. Specifically, FGL was managed out of
FGG’s New York City office. In addition, FGL is licensed to do business in the State of New
York and maintained its principal executive office in New York, New York.
147. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over FGL based on the entity’s contacts with the U.S.
148. Fairfield Greenwich Advisors LLC (“FGA”): Defendant FGA is a Delaware
limited liability company and a wholly-owned subsidiary of FGL. FGA is also registered as an investment adviser with the SEC. Its offices are located in New York, New York.
149. FGA provided administrative services and back-office support to GS, GSP,
Sigma, and Lambda. According to financial statements issued by those funds, FGA received the following fees:
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Fees Earned by FGA for Providing Administrative Services to GS
Year Fees 2004 $41,000 2005 $171,000 2006 $137,000 2007 $109,000 TOTAL $458,000
150. Based upon information and belief, in order to pay FGA’s fees, GS withdrew funds from its BLMIS account and then transferred the funds from BLMIS to FGA. As such,
GS’s withdrawals and FGA’s fees constitute Customer Property subject to turnover to the
Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
Fees Earned by FGA for Providing Administrative Services to GSP
Year Fees 2006 $4,000 2007 $7,000 TOTAL $11,000
151. Based upon information and belief, in order to pay FGA’s fees, GSP withdrew funds from its BLMIS account and then transferred the funds from BLMIS to FGA. As such,
FGA’s fees constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
Fees Earned by FGA for Providing Administrative Services to Sigma
Year Fees 2003 € 247,200 2004 € 247,000 2005 € 459,000 2006 € 562,000 2007 € 960,000 TOTAL € 2,273,000
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Fees Earned by FGA for Providing Administrative Services to Lambda
Year Fees 2004 CHF 59,000 2005 CHF 72,000 2006 CHF 61,000 2007 CHF 61,000 TOTAL CHF 254,000
152. Upon information and belief, in order to pay FGA’s fees, Sigma and Lambda
redeemed shares of Fairfield Sentry. Upon information and belief, in order to pay Sigma’s and
Lambda’s redemptions, Fairfield Sentry withdrew funds from BLMIS and transferred the funds
to Sigma and Lambda. In turn, Sigma and Lambda transferred the funds to FGA. As such,
Sigma’s and Lambda’s redemptions and FGA’s fees constitute Customer Property subject to
turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the
Trustee.
153. FGA provided similar services to SSL, for which it received a fee equal to 0.1% of assets under management.
154. FGA also served as investment manager to a number of FGG funds. These funds included: Chester LP, for which FGA received a management fee equal to 0.8%; Stable Fund, for which FGA received a 1% management fee; FIL-Yen, for which FGA received a 0.1% expense reimbursement; FIL-Swiss, for which FGA received a 0.1% expense reimbursement; and FIFL and FIFA, for which FGA received an expense reimbursement of 0.15% and 0.1%, respectively.
155. Upon information and belief, some if not all of these fees were paid with funds originally withdrawn from the Feeder Funds’ accounts at BLMIS. As such, these fees constitute
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Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from
BLMIS recoverable by the Trustee.
156. FGA is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by undertaking significant commercial activities in New York, New York, and derived significant revenue from New York, New York. Specifically, FGA’s principal place of business is located in New York, New York.
157. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over
FGA based on the entity’s contacts with the U.S.
158. Fairfield Greenwich GP, LLC (“FGGP”): Defendant FGGP is a Delaware
limited liability company. Its principal office is located at 575 Madison Avenue, New York,
New York 10022. FGGP is a wholly-owned subsidiary of FGL.
159. FGGP acted as general partner to Chester LP, for which it earned a 10%
performance fee in the form of limited partnership interests in Chester LP. Upon information
and belief, FGGP redeemed some of the limited partner interests it received as payment from
Chester LP. Chester LP was invested in Fairfield Sentry. In order to pay FGGP’s redemptions,
Chester LP redeemed shares of Fairfield Sentry. Upon information and belief, to pay Chester
LP’s redemptions Fairfield Sentry withdrew funds from BLMIS and then Chester transferred the funds to FGGP. As such, the redemptions FGGP received from Chester LP constitute Customer
Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS
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recoverable by the Trustee.
160. Because FGGP served as general partner to Chester LP, it is directly liable for all avoidable transfers from BLMIS to Chester LP.
161. FGGP is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by undertaking significant commercial activities in New York, New York, and derived significant revenue from New York, New York. Specifically, FGGP’s principal place of business is located in New York, New York.
162. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over FGGP based on the entity’s contacts with the U.S.
163. Fairfield Greenwich Partners, LLC (“FGP”): Defendant FGP is a Delaware
limited liability company organized in 2003. Its principal office is located at 575 Madison
Avenue, New York, New York.
164. FGP acted as general partner to Stable Fund, for which it received a 10%
performance fee in the form of limited partnership interests in Stable Fund. Upon information
and belief, FGP redeemed some of the limited partnership interests it received as payment from
the Stable Fund. As explained above, Stable Fund was partially invested in GS. Upon
information and belief, in order to pay the Stable Fund redemptions, GS withdrew funds from
BLMIS and then Stable Fund transferred the funds to FGP. As such, FGP’s redemptions
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constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent
transfers from BLMIS recoverable by the Trustee.
165. Because FGP served as general partner to Stable Fund, it is directly liable for all
amounts Stable Fund redeemed from GS. Upon information and belief, some if not all of those
redemptions were paid by funds withdrawn from GS’s accounts at BLMIS. As such, they
constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent
transfers from BLMIS recoverable by the Trustee.
166. FGP is subject to personal jurisdiction in this judicial district as it routinely
conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by undertaking significant commercial activities in New York, New York, and
derived significant revenue from New York, New York. Specifically, FGP was managed out of
FGG’s New York City office and maintained its principal place of business in New York, New
York.
167. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has
personal jurisdiction over FGP based on the entity’s contacts with the U.S.
168. Fairfield Heathcliff Capital LLC (“FHC”): Defendant FHC is a Delaware
limited liability company and a broker-dealer registered with the SEC. It is also an affiliate of
FGGP.
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169. FHC served as placement agent to Chester LP and oversaw the marketing of the
fund’s limited partnership interests. As placement agent, FHC received a fee equal to 5% of the
capital contributions it solicited.
170. Upon information and belief, some if not all of these fees were paid with funds that were originally withdrawn from the Feeder Funds’ accounts at BLMIS. As such, FHC’s fees constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
171. FHC is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by undertaking significant commercial activities in New York, New York, and derived significant revenue from New York, New York. Specifically, FHC was managed out of
FGG’s New York City office.
172. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over FHC based on the entity’s contacts with the U.S.
173. Fairfield International Managers, Inc. (“FIM”): Defendant FIM is a Delaware
corporation formed on January 4, 1988. The purpose of FIM is to act as an investment manager
and to engage in all phases of the securities business.
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174. The original directors of FIM were Noel, Tucker, and Kolber, who later left FIM.
As of 2003, Defendants Noel and Tucker each owned 50% of the shares of FIM. FIM owns significant shares in both FGB and FGL.
175. FIM received funds from the Feeder Funds’ BLMIS accounts through its direct and indirect ownership of FGB and FGL. Upon information and belief, some, if not all, of the monies paid to FIM were paid with funds that were originally withdrawn from the Feeder Funds’ accounts at BLMIS. As such, they constitute Customer Property subject to turnover to the
Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
176. FIM is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by undertaking significant commercial activities in New York, New York, and derived significant revenue from New York, New York. Specifically, FIM was managed out of
FGG’s New York City office.
177. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over FIM based on the entity’s contacts with the U.S.
178. Fairfield Greenwich (UK) Limited (“Fairfield-UK”): Defendant Fairfield-UK
is an FGG entity incorporated in England and Wales in 1997. Its registered office is located at
Fifth Floor, 32 Dover Street, London W1X 3RA, England.
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179. Fairfield-UK served as investment manager to Chester, for which it received fees
from Chester Management. Fairfield-UK also served as investment manager to FGF.
Depending on the FGF share class Fairfield-UK received a management fee of between 0.55%
and 1%, a performance fee of between 0% and 10%, and an expense reimbursement equal to
0.1%.
180. Upon information and belief, some if not all of Fairfield-UK’s fees were paid with
funds that were originally withdrawn from the Feeder Funds’ accounts at BLMIS. As such, they
constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent
transfers from BLMIS recoverable by the Trustee.
181. Fairfield-UK is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the
State of New York by undertaking significant commercial activities in New York, New York, and derived significant revenue from New York, New York. Specifically, Fairfield-UK was
managed out of FGG’s New York City office.
182. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Fairfield-UK based on the entity’s contacts with the U.S.
183. Greenwich Bermuda Limited (“GBL”): Defendant GBL is a Bermuda
corporation. GBL served as the general partner of GS from December 23, 2004 to March 1,
2006. GS’s financial statements indicate that, during that time, GBL earned the following
performance fees:
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Fees Earned by GBL While Serving as General Partner to GS
Year Performance Fees 2004 $2,644,000 2005 $2,451,000 2006 $2,929,000 TOTAL $8,024,000
184. The performance fees for 2004 and 2006 were split between GBL and FGB based
upon when each served as general partner.
185. GBL received its fees in the form of limited partnership interests in GS. Upon
information and belief, GBL redeemed some of its GS limited partnership interests. Upon
information and belief, in order to pay GBL’s redemptions, GS withdrew funds from its BLMIS account and then transferred the funds to GBL. As such, they constitute Customer Property
subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable
by the Trustee.
186. GBL is subject to personal jurisdiction in this judicial district as it routinely
conducted business in New York, New York, purposely availed itself of the laws of the State of
New York by undertaking significant commercial activities in New York, New York, and
derived significant revenue from New York, New York. Specifically, GBL was managed out of
FGG’s New York City office.
187. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over GBL based on the entity’s contacts with the U.S.
50 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 58 of 229
188. Chester Management (Cayman) Limited (“Chester Management”):
Defendant Chester Management is an FGG entity incorporated in the Cayman Islands on
February 12, 2003 as a limited liability company. Its registered office is located at P.O. Box 309,
Ugland House, George Town, Cayman Islands, B.W.I.
189. Chester Management served as manager to Chester, for which it received a 0.8%
management fee and 10% performance fee. According to Chester’s financial statements,
between 2003 and 2007, these fees totaled:
Fees Earned by Chester Management While Serving as Manager to Chester
Year Management Fees Performance Fees Total Fees 2003 $1,322,000 $1,404,000 $2,726,000 2004 $6,017,000 $4,788,000 $10,804,000 2005 $8,292,000 $8,997,000 $17,289,000 2006 $13,442,000 $14,004,000 $27,446,000 2007 $18,400,000 $20,330,000 $38,730,000 TOTAL $47,472,000 $49,523,000 $96,995,000
190. Upon information and belief, some if not all of these fees were paid with funds
that were originally withdrawn from the Feeder Funds’ accounts at BLMIS. As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
191. Chester Management is subject to personal jurisdiction in this judicial district as it routinely conducted business in New York, New York, purposely availed itself of the laws of the
State of New York by undertaking significant commercial activities in New York, New York, and derived significant revenue from New York, New York. Specifically, Chester Management was managed out of FGG’s New York City office.
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192. Finally, where a federal statute provides for nationwide service of process, as does
Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Chester Management based on the entity’s contacts with the U.S.
3. Management Defendants
193. Walter Noel: Defendant Noel is a founding partner of FGG and sat on its Board
of Directors. He also served as a director of Fairfield Sentry, Sigma, and FGB and as a general
partner to GS from 1992 to 1998. Noel is also an indirect shareholder in FGB.
194. As one of FGG’s founding partners, Noel was intimately involved with its
operations. Noel made day-to-day management decisions regarding the Feeder Funds and the
FGG Affiliates. He was also involved in marketing the Feeder Funds, as well as the preparation
and review of sales and marketing materials.
195. As further described below, Noel was acutely aware of many facts and red flags,
that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to
conduct any proper, independent and reasonable due diligence or follow up.
196. Noel and his immediate and extended family became exceptionally wealthy due
to FGG’s de facto partnership with Madoff. Noel took for himself and his family hundreds of
millions of dollars of Customer Property in the form of fees and profits. This unjust enrichment
enabled him, and his family, to live what has been publicly described as a life of grandeur,
including a mansion in Greenwich, Connecticut, a tropical retreat in Mustique, and extravagant
vacation homes in Palm Beach and Southampton. (A true and accurate copy of the April 2009
Vanity Fair article entitled, “Greenwich Mean Time,” is attached hereto as Ex. 23.)
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197. Partners of FGG received three types of compensation. In addition to standard salaries and bonuses, they also received “partnership distributions.” Each partner was assigned a specific percentage of the profits earned from all of the FGG entities. When the profits were gathered, they were then distributed to the partners based on their percentage allocation.
198. As a founding partner, Noel received some of the largest distributions. Between
2002 and 2008 alone, Noel received the following partnership distributions: $11.4 million in
2002, $10.6 million in 2003, $21.7 million in 2004, $25.4 million in 2005, $29.7 million in 2006,
$28.2 million in 2007, and $12.3 million in 2008, for a total of approximately $114 million between 2002 and 2008. Upon information and belief, Noel received these distributions, as well as additional compensation in the form of salary and bonuses, during each year the Feeder Funds maintained accounts at BLMIS.
199. Upon information and belief, Noel and his family also received the benefit of redemptions from GS made by the Walter M. Noel Jr. IRA and the Noel Family, LLC. Upon information and belief, the former redeemed $2.5 million in 2006, and the latter redeemed
$400,000 in 2008. In addition, as an indirect shareholder in FGL and FGB, Noel received the benefit of many payments to FGL and FGB, which were paid by funds withdrawn from the
Feeder Funds’ BLMIS accounts.
200. Upon information and belief, some if not all of the above-referenced payments and distributions were made with funds that were originally withdrawn from the Feeder Funds’ accounts at BLMIS. As such, they constitute Customer Property subject to turnover to the
Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
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201. Noel is also personally responsible for repayment to the Trustee of all avoidable
transfers received by GS while he was the general partner. During that time, between 1992 and
1998, GS redeemed approximately $37 million from its BLMIS account.
202. Noel is subject to personal jurisdiction in this judicial district as he routinely conducted business in New York, New York, purposely availed himself of the laws of the State of New York by conducting significant commercial activities in New York, New York, and derived significant income from New York, New York. In addition, Noel filed customer claims, whereby he submitted to the jurisdiction of this Court. Finally, where a federal statute provides for nationwide service of process, as does Rule 7004 of the Federal Rules of Bankruptcy
Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Noel based on his contacts with the
U.S.
203. Jeffrey Tucker: Defendant Tucker is a founding partner of FGG and sits on its
Board of Directors. He served as a director of FGB and FGL, and as a principal of FGL. He also served, along with Noel, as general partner of GS from 1992 to 1998. Tucker is an indirect shareholder in FGB.
204. Tucker was intimately involved with FGG’s operations, including the operation of the Feeder Funds. As a director, Tucker was involved in making day-to-day management
decisions regarding the Feeder Funds and the FGG Affiliates. He also reviewed and helped
prepare sales and marketing materials.
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205. As further described below, Tucker was acutely aware of many facts and red
flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet
failed to conduct any proper, independent and reasonable due diligence or follow up.
206. Tucker and his immediate and extended family became exceptionally wealthy due
to FGG’s de facto partnership with Madoff. Prized racehorses, private jets, and luxurious
mansions were just a few of the riches amassed by Tucker from management and partnership
fees received for facilitating the fraud.
207. Tucker received substantial partnership distributions, including $11.4 million in
2002, $10.6 million in 2003, $21.7 million in 2004, $25.4 million in 2005, $29.7 million in 2006,
$28.2 million in 2007, and $12.3 million in 2008, for a total of approximately $114 million
between 2002 and 2008. Upon information and belief, Tucker received these distributions, as
well as additional compensation in the form of salaries and bonuses, during each year FGG
maintained accounts with BLMIS beginning from 1990 forward.
208. In addition, as an indirect shareholder in FGL and FGB, Tucker received the
benefit of many payments to FGL and FGB which were paid by funds withdrawn from the
Feeder Funds’ BLMIS accounts. Tucker is also personally responsible for repayment to the
Trustee of any avoidable transfers received by GS while he was the general partner.
209. Upon information and belief, some if not all of the above-referenced payments and distributions were made with funds that were originally withdrawn from the Feeder Funds’ accounts at BLMIS. As such, they constitute Customer Property subject to turnover to the
Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
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210. Tucker is subject to personal jurisdiction in this judicial district as he routinely
conducted business in New York, New York, purposely availed himself of the laws of the State
of New York by conducting significant commercial activities in New York, New York, and
derived significant income from New York, New York. In addition, Tucker is subject to
personal jurisdiction in this judicial district as he is a resident of New York, New York, and
Tucker filed a customer claim, whereby he submitted to the jurisdiction of this Court. Finally,
where a federal statute provides for nationwide service of process, as does Rule 7004 of the
Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any
defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over
Tucker based on his contacts with the U.S.
211. Andrés Piedrahita: Defendant Piedrahita is a founding partner of FGG, a
member of the Board of Directors, and Chairman of its Executive Committee. He has served on
FGG’s Executive Committee since its inception in 2007. He also served as Director and
President of FGB and owned, directly or indirectly, between 10% and 25% of FGB. In 2007 and
2008, Piedrahita was the highest paid partner at FGG.
212. Piedrahita was intimately involved with FGG’s operations, including the
operations of the Feeder Funds. As a member of the Executive Committee and Chairman of the
Board of Directors, Piedrahita was deeply involved in making day-to-day management decisions regarding the FGG entities.
213. As further described below, Piedrahita was acutely aware of many facts and red flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to conduct any proper, independent and reasonable due diligence or follow up.
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214. Piedrahita became exorbitantly rich by serving as a Madoff globetrotting
salesman. According to published reports, he lived a whirlwind lifestyle of Gulfstream jets,
multi-million dollar yachts, extravagant parties, pheasant hunting with royalty, and spent tens of millions of dollars on homes around the world. (A true and accurate copy of the March 31, 2009
Wall Street Journal article entitled, “The Charming Mr. Piedrahita Finds Himself Caught in the
Madoff Storm,” is attached hereto as Ex. 24.) Public comments attributed to Piedrahita such as
“[my job was] ‘to live better than any of my clients,’” (id.) manifest his prevailing motivation –
do nothing that might upset the Madoff relationship that made his lavish lifestyle possible. His
motivation was one of limitless greed, without regard for any interest other than his own.
215. Piedrahita received substantial partnership distributions including approximately
$9.4 million in 2002, $12.3 million in 2003, $21.3 million in 2004, $25.1 million in 2005, $31.6
million in 2006, $36.0 million in 2007, and $26.4 million in 2008, for a total of approximately
$162 million between 2002 and 2008. Upon information and belief, Piedrahita has received
these distributions, as well as additional compensation in the form of salaries and bonuses, every
year since he joined FGG in 1997.
216. As a direct or indirect shareholder of FGL and FGB, Piedrahita received the
benefit of many payments to FGL and FGB which were paid by funds withdrawn from the
Feeder Funds’ BLMIS account.
217. Upon information and belief, some if not all of the above-referenced payments
and distributions were made with funds that were originally withdrawn from the Feeder Funds’
BLMIS accounts. As such, they constitute Customer Property subject to turnover to the Trustee
and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
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218. Piedrahita is subject to personal jurisdiction in this judicial district as he routinely
conducted business in New York, New York, purposely availed himself of the laws of the State
of New York by conducting significant commercial activities in New York, New York, and
derived significant income from New York, New York. In addition, Piedrahita routinely
received payments from FGG’s New York City office and regularly attended meetings of FGG’s
Executive Committee and Board of Directors in New York, New York. Finally, where a federal
statute provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Piedrahita based on his contacts with the U.S.
219. Mark McKeefry: Defendant McKeefry joined FGG in 2003. He became a
partner in 2005 and served on FGG’s Executive Committee since its inception in 2007. He also
acted as FGG’s Chief Compliance Officer; FGB’s Chief Legal Officer (“CLO”), Assistant
Secretary, and Director; FGL’s Executive Director, Chief Operating Officer, President, and Vice
President; FGA’s President; and Director of Fairfield-UK. As FGG’s CLO, McKeefry was
responsible for legal and compliance issues. He was also responsible for maintaining FGG’s
relationship with Madoff in 2007 and 2008.
220. In his role as CLO, as well as in his numerous other roles within the FGG entities,
McKeefry was responsible for approving and signing various documents on FGG’s behalf. Such
documents included: letters to investors; Form 13F filings with the SEC; agreements with
BLMIS, including customer agreements and option-trading agreements; Form ADV Applications
for Investment Adviser Registration; subscription agreements; confidentiality agreements;
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distribution agreements; letters of understanding; written resolutions; delegation agreements;
selling agreements; and certificates of incumbency.
221. As further described below, McKeefry was acutely aware of many facts and red
flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet
failed to conduct any proper, independent and reasonable due diligence or follow up.
222. McKeefry benefited greatly from FGG’s de facto partnership with Madoff.
McKeefry received approximately $600,000 in partnership distributions in 2005, $1.6 million in
2006, $3.4 million in 2007, and $3.4 million in 2008, for a total of $9.0 million between 2005
and 2008. Upon information and belief, McKeefry also received significant salary and bonuses.
223. Upon information and belief, some if not all of the above-referenced payments and distributions were made with funds originally withdrawn from the Feeder Funds’ BLMIS accounts. As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
224. McKeefry is subject to personal jurisdiction in this judicial district as he routinely conducted business in New York, New York, purposely availed himself of the laws of the State of New York by conducting significant commercial activities in New York, New York, and derived significant income from New York, New York. In addition, upon information and belief, McKeefry is a resident of New York, New York. Finally, where a federal statute provides for nationwide service of process, as does Rule 7004 of the Federal Rules of Bankruptcy
Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over McKeefry based on his contacts with the U.S.
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225. Daniel Lipton (“Lipton”): Defendant Lipton joined FGG in 2002. During his employment with FGG, he served as Chief Financial Officer (“CFO”) and Assistant Secretary of
FGB, and Vice President and CFO of FGA. Lipton has been a partner of FGG since 2005.
226. As CFO, Lipton was principally responsible for overseeing the annual FGG audits. Lipton also assisted in managing FGG’s operations, including: authorizing and requesting wire transfers into FGG accounts; communicating with FGG investors regarding audits of FGG’s financial statements; and approving and signing numerous documents on FGG’s behalf. Such documents included: letters to clients regarding amendments to their agreements with FGG and their statements for various FGG funds; the Feeder Funds’ customer, option, and trading authorization agreements with BLMIS; numerous loan requests on behalf of FGG; agreements establishing FGG entities as investment managers and placement agents; requests for wire transfers redeeming money from the Feeder Funds’ BLMIS accounts; and letters requesting a confirmation of assets in a number of the Funds.
227. As further described below, Lipton was acutely aware of many facts and red flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to conduct any proper, independent and reasonable due diligence or follow up.
228. As a partner, Lipton was compensated handsomely due to FGG’s relationship with Madoff. Lipton received partnership distributions of $200,000 in 2005, $757,000 in 2006,
$1.8 million in 2007, and $1.1 million in 2008, for a total of approximately $3.8 million between
2005 and 2008. Upon information and belief, Lipton also received significant salary and bonuses.
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229. Upon information and belief, some if not all of the above-referenced payments and distributions were made with funds that were originally withdrawn from the Feeder Funds’
BLMIS accounts. As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
230. Lipton is subject to personal jurisdiction in this judicial district as he routinely conducted business in New York, New York, purposely availed himself of the laws of the State of New York by conducting significant commercial activities in New York, New York, and derived significant income from New York, New York. In addition, upon information and belief, Lipton is a resident of New York, New York. Finally, where a federal statute provides for nationwide service of process, as does Rule 7004 of the Federal Rules of Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S.
Thus, this Court has personal jurisdiction over Lipton based on his contacts with the U.S.
231. Amit Vijayvergiya (“Vijayvergiya”): Defendant Vijayvergiya joined FGG on
June 9, 2003 as FGB’s Risk Manager. He quickly became a key player at FGB, and held the title
of Vice President and Head of Risk Management in 2005, where he focused primarily on hedge
fund manager selection and risk management. On January 1, 2007, Vijayvergiya became a
partner and Head of FGG’s Risk Management Division in the Investment Group, reporting directly to the Executive Committee.
232. Vijayvergiya was responsible for conducting due diligence, initial risk modeling
and ongoing risk analysis on investments, fund operations services, supervising staff, and shareholder communications. He was also charged with assessing the risk of the Feeder Fund
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investments. (A true and accurate copy of Vijayvergiya’s employment offer letter is attached hereto as Ex. 25.)
233. As further described below, Vijayvergiya was acutely aware of many facts and red flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to conduct any proper, independent and reasonable due diligence or follow up.
234. FGG’s de facto partnership with Madoff proved lucrative for Vijayvergiya. After becoming a partner, Vijayvergiya received partnership distributions of $1.8 million in 2007 and
$800,000 in 2008. Upon information and belief, Vijayvergiya also received significant salary and bonuses.
235. Upon information and belief, some if not all of the above-referenced payments and distributions were made with funds that were originally withdrawn from the Feeder Funds’
BLMIS accounts. As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
236. Vijayvergiya is subject to personal jurisdiction in this judicial district as he routinely conducted business in New York, New York, purposely availed himself of the laws of the State of New York by conducting significant commercial activities in New York, New York, and derived significant income from New York, New York. In addition, where a federal statute provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Vijayvergiya based on his contacts with the U.S.
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237. Gordon McKenzie (“McKenzie”): Defendant McKenzie was a Director and
Controller at FGB, and a member of the Fund Accounting Division in FGG’s Operations Group.
McKenzie joined FGG in 2003.
238. McKenzie was responsible for accounting and back-office operations for Fairfield
Sentry, Sigma, Lambda, Chester, and Irongate. He joined FGG as a Finance Associate and was
eventually elevated to Controller of FGB. McKenzie was also part of FGG’s Finance Group,
whose core duties included conducting mini-audits of monthly financial statements and preparing and coordinating audits. He worked closely with PricewaterhouseCoopers (“PwC”) when it conducted audits of FGG’s funds and reviewed the financial statements PwC prepared.
239. As further described below, McKenzie was acutely aware of many facts and red flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to conduct any proper, independent and reasonable due diligence or follow up.
240. McKenzie received significant salary and bonuses during his employment at
FGB. For instance, in 2007, he received a $180,000 bonus, in 2008, McKenzie received a salary of over $150,000 and a bonus of over $200,000. He also received over $100,000 in deferred compensation. Upon information and belief, McKenzie received comparable amounts each year since he joined FGG in 2003.
241. Upon information and belief, some if not all of these payments were made with funds originally withdrawn from the Feeder Funds’ BLMIS accounts. As such, they constitute
Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from
BLMIS recoverable by the Trustee.
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242. McKenzie is subject to personal jurisdiction in this judicial district as he routinely
conducted business in New York, New York, purposely availed himself of the laws of the State
of New York by conducting significant commercial activities in New York, New York, and
derived significant income from New York, New York. In addition, where a federal statute
provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over McKenzie based on his contacts with the U.S.
243. Richard Landsberger (“Landsberger”): Defendant Landsberger joined FGG in
2001, and became an FGG partner in 2002. He was a member of FGG’s Executive Committee,
Director of Fairfield-UK, and Head of Sales of FIFL.
244. As further described below, Landsberger was acutely aware of many facts and red flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to conduct any proper, independent and reasonable due diligence or follow up.
245. Landsberger received substantial partner distributions, including $32,000 in 2002,
$690,000 in 2003, $1.6 million in 2004, $2.7 million in 2005, $3.9 million in 2006, $5.4 million in 2007, and $4.0 million in 2008, for a total of approximately $18.3 million. Upon information and belief, Landsberger also received significant salary and bonuses.
246. Upon information and belief, these payments and distributions were paid with funds that were originally withdrawn from the Feeder Funds’ BLMIS accounts. As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
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247. Landsberger is subject to personal jurisdiction in this judicial district as he
routinely conducted business in New York, New York, purposely availed himself of the laws of the State of New York by conducting significant commercial activities in New York, New York, and derived significant income from New York, New York. In addition, where a federal statute provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Landsberger based on his contacts with the U.S.
248. Philip Toub (“Toub”): Defendant Toub, one of Noel’s sons-in-law, joined FGG
in 1997 in its New York office. Toub was a partner and member of FGG’s Executive
Committee. Throughout his employment with FGG, Toub served as a Director of FGL and as a
member of FGG’s Client Development Group.
249. Toub’s responsibilities included developing new products and marketing FGG’s
offshore funds. His product development activities focused on markets in Brazil and the Middle
East. These activities necessarily required Toub to establish relationships with a number of FGG
investors and thereafter respond to customer inquiries related to Madoff.
250. As further described below, Toub was acutely aware of many facts and red flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to conduct any proper, independent and reasonable due diligence or follow up.
251. After becoming a partner on January 1, 2001, Toub received the following partnership distributions, totaling over $25 million: $822,000 in 2002, $892,000 in 2003, $1.5
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million in 2004, $3.9 million in 2005, $7.5 million in 2006, $8.4 million in 2007, and $3.3
million in 2008. Upon information and belief, Toub also received significant salary and bonuses.
252. Upon information and belief, some if not all of the payments and distributions
were made with funds that were originally withdrawn from the Feeder Funds’ BLMIS accounts.
As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
253. Toub is subject to personal jurisdiction in this judicial district as he routinely
conducted business in New York, New York, purposely availed himself of the laws of the State
of New York by conducting significant commercial activities in New York, New York, and
derived significant income from New York, New York. In addition, where a federal statute
provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with
minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Toub based on
his contacts with the U.S.
254. Charles Murphy (“Murphy”): Defendant Murphy joined FGG as a partner on
April 1, 2007. Based in FGG’s New York office, Murphy served on FGG’s Executive
Committee and focused on strategy and capital markets for FGG.
255. Murphy was heavily involved in important strategic decisions involving Madoff.
Such decisions included the amount of money FGG should invest through BLMIS, which FGG funds should invest through BLMIS, and whether FGG should leverage its investor funds by borrowing cash in order to increase investments through BLMIS. Murphy also was often
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involved in email correspondence about Madoff, which included discussions about important
client redemptions that were requested due to client concerns about Madoff risks.
256. As further described below, Murphy was acutely aware of many facts and red
flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet
failed to conduct any proper, independent and reasonable due diligence or follow up.
257. Murphy received approximately $2.4 million in partnership distributions in 2007
and $2.7 million in 2008, for a total of approximately $5.1 million. Upon information and belief,
Murphy also received significant salary and bonuses.
258. Upon information and belief, some if not all of these payments and distributions
were made with funds that were originally withdrawn from the Feeder Funds’ BLMIS accounts.
As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable
subsequent transfers from BLMIS recoverable by the Trustee.
259. Murphy is subject to personal jurisdiction in this judicial district as he routinely conducted business in New York, New York, purposely availed himself of the laws of the State of New York by conducting significant commercial activities in New York, New York, and derived significant income from New York, New York. In addition, where a federal statute provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Murphy based on his contacts with the U.S.
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260. Robert Blum (“Blum”): Defendant Blum served as a Managing Partner at FGG and the Chief Operating Officer of FGB and FGA. He started at FGG in 2000 and made partner on January 1, 2002. Blum resigned from his FGG positions in June of 2005. Because Blum’s
partnership interest had fully vested at the time of his departure, he will continue to receive
distributions through 2010.
261. While serving as a Managing Partner of FGG, Blum oversaw or assisted in all
aspects of FGG’s activities. Blum was involved in making day-to-day management decisions
related to the Feeder Funds and FGG Affiliates. He also reviewed FGG sales and marketing
materials, including webcasts and monthly commentaries.
262. As further described below, Blum was acutely aware of many facts and red flags,
that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to
conduct any proper, independent and reasonable due diligence or follow up.
263. Blum received substantial profit distributions and other compensation, including
approximately $605,000 in 2002, $1.5 million in 2003, $2.8 million in 2004, $4.2 million in
2005, $3.7 million in 2006, $4.3 million in 2007, and $3.8 million in 2008, for a total of
approximately $21 million. Upon information and belief, Blum also received significant salary
and bonuses.
264. Upon information and belief, some if not all of these payments and distributions
were paid with funds that were originally withdrawn from the Feeder Funds’ BLMIS accounts.
As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable
subsequent transfers from BLMIS recoverable by the Trustee.
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265. Blum is subject to personal jurisdiction in this judicial district as he routinely
conducted business in New York, New York, purposely availed himself of the laws of the State
of New York by conducting significant commercial activities in New York, New York, and
derived significant income from New York, New York. In addition, Blum filed customer claims,
whereby he submitted to the jurisdiction of this Court. Finally, where a federal statute provides
for nationwide service of process, as does Rule 7004 of the Federal Rules of Bankruptcy
Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts
with the U.S. Thus, this Court has personal jurisdiction over Blum based on his contacts with the
U.S.
266. Andrew Smith (“Smith”): Defendant Smith was an Executive Director and
partner at FGG in the Fund of Funds Division of the Investment Group. Smith also served as a
Portfolio Manager and oversaw all operations for Chester and Irongate. Smith became a partner
on January 1, 2006. He left FGG in April 2009 and joined Sciens, the company now managing
Chester, Chester LP, and Irongate, as a member of the Sciens Investment Committee and a
Portfolio Manager.
267. As a member of FGG’s Executive Committee, Smith worked closely with
Piedrahita, McKeefry, Landsberger, Toub, and Murphy to make day-to-day management decisions regarding the Feeder Funds and FGG Affiliates. As the representative from FGG’s
Investment Group on the Executive Committee, Smith played an integral role in making decisions regarding investor and potential investor requests for information about BLMIS and
Madoff.
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268. As further described below, Smith was acutely aware of many facts and red flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to
conduct any proper, independent and reasonable due diligence or follow up.
269. Smith received substantial compensation as a result of his partnership position at
FGG, including approximately $1.1 million in partnership distributions in 2006, $3.8 million in
2007, and $785,000 in 2008, totaling approximately $5.6 million. Upon information and belief,
Smith also received significant salary and bonuses.
270. Upon information and belief, some if not all of these payments and distributions were made with funds that were originally withdrawn from the Feeder Funds’ BLMIS accounts.
As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
271. Smith is subject to personal jurisdiction in this judicial district as he routinely conducted business in New York, New York, purposely availed himself of the laws of the State
of New York by conducting significant commercial activities in New York, New York, and
derived significant income from New York, New York. In addition, where a federal statute
provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Smith based on his contacts with the U.S.
272. Harold Greisman (“Greisman”): Defendant Greisman joined FGG in 1990 in
the New York office. He served as FGG’s Chief Investment Officer and was a member of the
Executive Committee. Beginning on January 1, 2002, Greisman was a partner of FGG.
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273. Greisman was responsible for overseeing the day-to-day investment activities of
FGG. This required him to monitor the investment decision-making process, from initial manager search and selection to research and ongoing manager oversight. Greisman utilized
Vijayvergiya and Smith, as well as additional FGG employees, to assist him in his duties as
Chief Investment Officer. Both Vijayvergiya and Smith reported directly to Greisman.
274. As further described below, Greisman was acutely aware of many facts and red flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to conduct any proper, independent and reasonable due diligence or follow up.
275. Greisman received partnership distributions of approximately $600,000 in 2002,
$900,000 in 2003, $ 1.6 million in 2004, $2.3 million in 2005, $3.7 million in 2006, $3.9 million in 2007, and $2.5 million in 2008 for a total of over $15 million. Upon information and belief,
Greisman also received significant salary and bonuses.
276. Upon information and belief, some if not all of these payments and distributions were made with funds that were originally withdrawn from the Feeder Funds’ BLMIS accounts.
As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
277. Greisman is subject to personal jurisdiction in this judicial district as he routinely conducted business in New York, New York, purposely availed himself of the laws of the State of New York by conducting significant commercial activities in New York, New York, and derived significant income from New York, New York. In addition, upon information and belief, Greisman is a resident of New York, New York. Finally, where a federal statute provides for nationwide service of process, as does Rule 7004 of the Federal Rules of Bankruptcy
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Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts
with the U.S. Thus, this Court has personal jurisdiction over Greisman based on his contacts
with the U.S.
278. Gregory Bowes (“Bowes”): Defendant Bowes was a partner of FGG and served
on FGG’s Executive Committee. He joined FGG in 2000 and became partner in 2002. Bowes
resigned from his FGG position in 2003. But because his partnership interest had already vested,
he continued to receive multi-million dollar partnership distributions.
279. As further described below, Bowes was acutely aware of many facts and red
flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to conduct any proper, independent and reasonable due diligence or follow up.
280. While he was still at FGG, Bowes received partnership distributions of $605,000 in 2002 and $1.5 million in 2003. After leaving FGG, he received partnership distributions of
$2.8 million in 2004, $4.2 million in 2005, $3.8 million in 2006, $4.3 million in 2007, and $3.8 million in 2008. Upon information and belief, Bowes also received significant salary and bonuses.
281. Upon information and belief, some if not all of these payments and distributions were made with funds that were originally withdrawn from the Feeder Funds’ BLMIS accounts.
As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
282. Bowes is subject to personal jurisdiction in this judicial district as he routinely conducted business in New York, New York, purposely availed himself of the laws of the State
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of New York by conducting significant commercial activities in New York, New York, and
derived significant income from New York, New York. In addition, where a federal statute
provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Bowes based on his contacts with the U.S.
283. Corina Noel Piedrahita (“Noel Piedrahita”): Defendant Noel Piedrahita,
daughter of Defendant Noel and wife of Defendant Piedrahita, joined FGG as a partner on
January 1, 2002. Noel Piedrahita was Head of Client Services and Investor Relations and was
part of FGG’s Corporate Center before she retired in 2007.
284. Noel Piedrahita was intimately involved with FGG’s enterprise, including the
operation of its Feeder Funds. Among other things, she was responsible for approving
subscriptions in and redemptions from various FGG funds, and worked closely with Tucker on a variety of issues, including how much money was to be funneled to BLMIS.
285. As further described below, Noel Piedrahita was acutely aware of many facts and red flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet
failed to conduct any proper, independent and reasonable due diligence or follow up.
286. Independent of her husband’s earnings, Noel Piedrahita received approximately
$300,000 in 2002, $325,000 in 2003, $800,000 in 2004, $800,000 in 2005, $1 million in 2006,
$900,000 in 2007, and $1.1 million 2008, totaling over $5 million. Upon information and belief,
Noel Piedrahita also received significant salary and bonuses.
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287. Upon information and belief, some if not all of these payments and distributions were made with funds that were originally withdrawn from the Feeder Funds’ BLMIS accounts.
As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
288. Noel Piedrahita is subject to personal jurisdiction in this judicial district as she
routinely conducted business in New York, New York, purposely availed herself of the laws of
the State of New York by conducting significant commercial activities in New York, New York,
and derived significant income from New York, New York. In addition, where a federal statute
provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Noel Piedrahita based on her contacts with the U.S.
4. Sales Defendants
289. Lourdes Barreneche (“Barreneche”): Defendant Barreneche joined FGG in
1997, and became an FGG partner in 2002. She was based in FGG’s New York office, and
worked in FGG’s Business Development Group. She was an international sales specialist who
coordinated FGG’s sales efforts in Latin America, Spain, Portugal, and Switzerland.
290. As further described below, Barreneche was acutely aware of many facts and red
flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet
failed to conduct any proper, independent and reasonable due diligence or follow up.
291. As a partner of FGG, Barreneche received substantial profit distributions
including $1.0 million in 2002, $1.2 million in 2003, $1.9 million in 2004, $2.8 million in 2005,
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$6.6 million in 2006, $7.8 million in 2007, and $5.6 million in 2008, or approximately $27
million. Upon information and belief, Barreneche also received significant salary and bonuses.
292. Upon information and belief, some if not all of these payments and distributions
were made with funds that were originally withdrawn from the Feeder Funds’ BLMIS accounts.
As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
293. Barreneche is subject to personal jurisdiction in this judicial district as she
routinely conducted business in New York, New York, purposely availed herself of the laws of
the State of New York by conducting significant commercial activities in New York, New York,
and derived significant income from New York, New York. In addition, where a federal statute
provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
Bankruptcy, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Barreneche based on her contacts with the U.S.
294. Cornelis Boele: Defendant Boele joined FGG in 1997, and became an FGG
partner in 2002. Boele oversaw FGG’s marketing efforts for offshore funds in Belgium, the
Netherlands, Luxembourg, and throughout Europe. He was responsible for structuring and
raising assets, and worked for FGG’s Business Development Group.
295. As further described below, Boele was acutely aware of many facts and red flags,
that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to
conduct any proper, independent and reasonable due diligence or follow up.
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296. Boele received approximately $493,000 in partnership distributions in 2002,
$986,000 in 2003, $2.0 million in 2004, $3.7 million in 2005, $5.4 million in 2006, $5.2 million
in 2007, and $4.7 million in 2008, for a total of approximately $23.5 million. Upon information
and belief, Boele also received significant salary and bonuses.
297. Upon information and belief, some if not all of these payments and distributions
were made with funds that were originally withdrawn from the Feeder Funds’ BLMIS accounts.
As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable subsequent transfers from BLMIS recoverable by the Trustee.
298. Boele is subject to personal jurisdiction in this judicial district as he routinely conducted business in New York, New York, purposely availed himself of the laws of the State of New York by conducting significant commercial activities in New York, New York, and derived significant income from New York, New York. In addition, where a federal statute provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Boele based on his contacts with the U.S.
299. Santiago Reyes (“Reyes”): Defendant Reyes joined FGG in 1996, and became a partner on January 1, 2002. Reyes was the head of FGG’s Miami office where he was
responsible for marketing FGG’s offshore funds worldwide. Reyes was in charge of business
development and held a position on FGG’s sales team, where he was responsible for
communicating with clients and convincing them and prospective investors to invest in FGG’s
products, including those funds invested in BLMIS, such as Fairfield Sentry.
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300. Reyes was responsible for communicating with clients and convincing them and prospective investors to invest in FGG’s products, including those funds invested in BLMIS, such as Fairfield Sentry. Reyes often asked Vijayvergiya and other FGG employees for advice on how to field client questions or respond to client concerns about Madoff and Fairfield Sentry.
In fact, Reyes worked closely with Vijayvergiya, requesting information on Madoff’s investment
strategy and Fairfield Sentry’s performance.
301. As further described below, Reyes was acutely aware of many facts and red flags,
that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to
conduct any proper, independent and reasonable due diligence or follow up.
302. Reyes received partnership distributions of approximately $300,000 in 2002,
$550,000 in 2003, $1.2 million in 2004, $1.5 million in 2005, $2.3 million in 2006, $2.2 million
in 2007, and $2.0 million in 2008, for a total of approximately $10 million. Upon information
and belief, Reyes also received significant salary and bonuses.
303. Upon information and belief, some if not all of these payments and distributions
were made with funds that were originally withdrawn from the Feeder Funds’ BLMIS accounts.
As such, they constitute Customer Property subject to turnover to the Trustee and/or avoidable
subsequent transfers from BLMIS recoverable by the Trustee.
304. Reyes is subject to personal jurisdiction in this judicial district as he routinely
conducted business in New York, New York, purposely availed himself of the laws of the State
of New York by conducting significant commercial activities in New York, New York, and
derived significant income from New York, New York. In addition, where a federal statute
provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
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Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Reyes based on his contacts with the U.S.
305. Jacqueline Harary (“Harary”): Defendant Harary was a partner at FGG who marketed the Feeder Funds worldwide, focusing on Latin America. She joined FGG in 1997 as part of FGG’s merger with Littlestone Associates and became partner on January 1, 2002.
306. Harary’s role combined both sales responsibilities and projects related to manager selection and project development. She also coordinated FGG’s relationship with investors that were charitable, as well as non-profit organizations. Having been a member of the FGG team for over ten years, Harary was very familiar with FGG policies, procedures, and politics, especially related to Madoff.
307. Harary worked very closely with Vijayvergiya, communicating with him on a frequent basis regarding her client inquiries and concerns about Madoff and BLMIS.
Vijayvergiya worked with Harary to craft responses to the due diligence inquires she received -
responses designed to deflect straightforward questions about the lack of transparency and
potential conflicts of interest at BLMIS.
308. Harary also fielded and responded to investor concerns after Madoff’s arrest.
Harary had knowledge about how much money was lost and how much damage was done to the
Feeder Funds that had invested directly or indirectly in BLMIS.
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309. As further described below, Harary was acutely aware of many facts and red flags, that put him on actual and/or inquiry notice that BLMIS was engaging in fraud, and yet failed to conduct any proper, independent and reasonable due diligence or follow up.
310. As an FGG partner, Harary received substantial partnership distributions, including approximately $100,000 in 2002, $200,000 in 2003, $700,000 in 2004, $1.1 million in
2005, $1.5 million in 2006, $1.6 million in 2007, and $1.1 in 2008, totaling approximately $6.3
million. Upon information and belief, Harary also received significant salary and bonuses.
311. Upon information and belief, some if not all of these payments and distributions
were made with funds that were originally withdrawn from the Feeder Funds’ accounts at
BLMIS. As such, they constitute Customer Property subject to turnover to the Trustee and/or
avoidable subsequent transfers from BLMIS and are recoverable by the Trustee.
312. Harary is subject to personal jurisdiction in this judicial district as she routinely
conducted business in New York, New York, purposely availed herself of the laws of the State of
New York by conducting significant commercial activities in New York, New York, and derived
significant income from New York, New York. In addition, Harary filed a customer claim,
whereby she submitted to the jurisdiction of this Court. In addition, where a federal statute
provides for nationwide service of process, as does Rule 7004 of the Federal Rules of
Bankruptcy Procedure, a federal court has personal jurisdiction over any defendant with
minimum contacts with the U.S. Thus, this Court has personal jurisdiction over Harary based on
her contacts with the U.S.
VI. FGG AND ITS HISTORICAL RELATIONSHIP WITH FGG
313. Prior to forming FGG, Noel worked in the management consulting and
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international private banking businesses. He created the international private banking group at
Chemical Bank and helped establish a network of offices around the world focused on asset management. In 1983, Noel left Chemical Bank to start his own consulting firm to advise foreign investors regarding U.S.-based alternative investments. Noel acted as a third-party marketer of investment products to wealthy individuals located around the world.
314. Tucker worked as an attorney for the SEC from 1970 to 1978, after which he entered the private practice of law as a partner at Tucker, Globermand & Feinsand. While in private practice, Tucker represented Fred Kolber (“Kolber”) on securities related matters. In
1987, Tucker became a general partner of Fred Kolber & Co., a registered broker-dealer. In his position as general partner, Tucker was responsible for developing and administering the firm’s private investment funds. After Tucker became a general partner, Tucker and Kolber launched a domestic hedge fund, the Greenwich Options Fund (“GOF”). Kolber handled the money management and Tucker helped administer and market the fund. During this time, Tucker and
Kolber sublet their offices from Noel. Through this landlord-tenant relationship, Noel became acquainted with Tucker and Kolber.
315. In 1988, Noel, Tucker, and Kolber joined forces to create an offshore counterpart to GOF, the Fairfield Investment Fund, Ltd. Through this association, Noel and Tucker decided to become partners in what became FGG. FGG started providing marketing services for Fred
Kolber & Co., and the firms merged.
316. Eventually, Noel, Tucker, and Kolber decided to outsource the management of some portion of their funds. Tucker and Kolber started the search for a fund manager.
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A. Noel and Tucker Meet Madoff and Make Their First Investments With BLMIS
317. In 1989, Tucker’s father-in-law, Norman Schneider, introduced Madoff to Noel and Tucker. Madoff explained that his returns were more modest than some competitors, such as
George Soros and Julian Robertson, but that he provided low volatility. In July of that year,
Noel, Tucker, and Kolber pooled $1.5 million and invested it with BLMIS on behalf of an entity called the Fairfield Strategies Ltd. The fund then invested another $1 million with BLMIS in
January 1990.
318. Based on the returns from their initial investments, Noel and Tucker decided to place more money with Madoff and, in 1990, created Fairfield Sentry. Fairfield Sentry made its
first deposit of $4 million into its account at BLMIS on November 29, 1990. Noel and Tucker
offered shares of Fairfield Sentry to non-U.S. investors at a minimum initial investment of
$100,000. Pursuant to the fund’s offering memorandum, Fairfield Sentry’s investment manager
was required to invest no less than 95% of the fund’s assets directly through BLMIS, which
supposedly would manage the fund’s money according to BLMIS’s self-proclaimed “split-strike
conversion strategy” (“SSC Strategy”), described in detail below.
319. Over the next eighteen years, as a result of additional investments by Fairfield
Sentry and alleged profits produced by BLMIS, Fairfield Sentry’s assets grew exponentially.
According to Fairfield Sentry’s account statements, between November 1990 and December
2008, the fund’s assets invested through BLMIS increased from $4 million to approximately $6
billion.
B. Noel and Tucker Expand FGG’s Offerings to U.S. Investors and Piedrahita Joins the Partnership
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320. Shortly after Fairfield Sentry was established, Noel and Tucker formed
Aspen/Greenwich Limited Partners (“Aspen/Greenwich”), a Delaware limited partnership, in order to provide a domestic vehicle to funnel U.S. investor monies into BLMIS.
Aspen/Greenwich eventually changed its name to GS, gave its first deposit to BLMIS on
November 20, 1992, and began operations in January 1993.
321. In 1997, FGG acquired Littlestone Associates (“Littlestone”), founded by
Piedrahita, Noel’s son-in-law. With this acquisition, Piedrahita became a partner in FGG and
Littlestone’s clients became clients of FGG.
322. Noel, Tucker, and Piedrahita essentially shared the responsibilities of managing and supervising the business of FGG. Tucker emphasized operations and was considered the founder and engineer of FGG’s Madoff investments, and the person responsible for FGG’s direct relationship with Madoff. Noel and Piedrahita traveled the world marketing and securing billions of dollars from investors to invest through BLMIS. Noel carried with him short summaries of the SSC Strategy to assist him in touting the Feeder Funds’ consistent returns. (A true and accurate copy of an SSC Strategy summary sheet is attached hereto as Ex. 26.)
323. Seeking to expand the reach of its funds to foreign currency investors, FGG launched Sigma in 1997 and Lambda in 1999. These funds accepted investments in Euros and
Swiss francs, respectively, and then invested those funds in Fairfield Sentry, which in turn gave the money to BLMIS.
324. Based on what FGG determined to be certain legal restrictions limiting the number of U.S. investors in GS, FGG formed a Delaware limited partnership, GSP, in 2006.
GSP opened its BLMIS account with a deposit on May 1, 2006.
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325. As late as December 2008, Tucker and Piedrahita were working to gather
additional funds to invest through BLMIS. The so-called “Emerald Funds” were supposed to
apply a higher volatility, high return strategy, and were to be marketed for BLMIS exclusively
by FGG.
C. FGG’s Operations
326. On paper, FGG appeared to be a group of discrete entities. In reality, FGG
operated as one cohesive unit with Noel, Tucker, and Piedrahita at the helm. Along with a core
group of other individuals at FGG, Noel, Tucker, and Piedrahita oversaw all of FGG’s
operations.
327. The compensation structure at FGG was similarly consolidated. The profits
“earned” by all FGG entities passed through FGB and FGL, and then were distributed to the
various partners. Compensation documents called “Partner Comp Worksheets 2008,” contained
details of partnership distributions for each Defendant that was an FGG partner. (A true and
accurate copy of such worksheets is attached hereto as Ex. 27.)
328. The inter-relations among the FGG entities is clear from the multiple roles played
by individuals across the entities. For instance, Tucker was a director of FGB, and general
partner of GS and FGL. Tucker also sat on the Management Committee and the Board of
Directors of these entities. In addition, he co-owned FIM, the legal entity through which Tucker
and Noel owned between 25-50% of FGB. Likewise, Tucker was extensively involved in operations at Fairfield Sentry. He participated in countless discussions within FGG regarding the fund, responded to investors’ inquiries relating to the fund, and was for many years Fairfield
Sentry’s principal contact with Madoff.
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329. The Feeder Funds and FGG Affiliates are similarly interconnected. For example,
FGL served as placement agent to Defendants Fairfield Sentry, Sigma, and Lambda; general partner to GS (from January 1, 2002 to June 30, 2003); investment manager to Fairfield Sentry
(from December 31, 2001 to June 1, 2003); and investment adviser and placement agent to other
FGG funds further discussed below.
330. Each FGG entity had its own roster of officers drawn from the same group of
FGG employees and operations. All of the entities were run by the same group of individuals:
Noel, Tucker, and Piedrahita, the FGG “Founding Partners;” McKeefry, FGG’s Chief Legal
Officer and Chief Operating Officer; Lipton, FGG’s Chief Financial Officer; Vijayvergiya,
FGG’s Head of Risk Management; McKenzie, Controller for FGB; Blum, FGG’s Chief
Operating Officer until 2005; Greisman, FGG’s Chief Investment Officer; Noel Piedrahita,
FGG’s Head of Client Services and Investor Relations; and the remaining members of the
Executive Committee, Landsberger, Toub, Murphy, Smith, and Bowes. With the exception of
Defendant McKenzie, all of the Management Defendants were partners of FGG and received partnership distributions. These individuals constitute the Management Defendants.
331. The Sales Division of FGG was responsible for marketing the Feeder Funds to potential investors and then directing that money to BLMIS. The Sales Division was headed by the following FGG partners: Barreneche, Boele, Reyes, and Harary. These individuals constitute the Sales Defendants.
332. Each of these individuals was assigned a title at a number of FGG entities, but those were distinctions in name only.
VII. THE DEFENDANTS’ ROLE IN FACILITATING THE FRAUD
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333. Madoff initially operated by luring in individual investors. His early success
came through money deposited from individuals as well as the efforts of various feeder entities
such as Avellino & Bienes, a small Fort Lauderdale-based accounting firm that sold to investors
notes that were backed by BLMIS’s returns.
334. For BLMIS to survive as a Ponzi scheme it needed massive, regular injections of
cash to fuel the scheme. Madoff could have raised money directly from U.S. institutional
investors but he knew that such an approach might have subjected BLMIS to strict regulatory
scrutiny applicable to banks and pension funds. By contrast, the hedge fund arena, in which the
Feeder Funds operated, was largely unregulated. This friendlier regulatory environment led
Madoff to turn to “intermediaries” – hedge funds and funds of funds, like the Feeder Funds, which could, and did, deliver large amounts of cash.
335. The relationship between FGG and Madoff was a de facto partnership. FGG and the Defendants procured billions of dollars that Madoff stole over many years, and the alleged returns generated by the Feeder Funds’ BLMIS accounts were the engine that drove FGG’s success. Simply put, BLMIS needed FGG and other large investors to help it survive and FGG needed BLMIS to make the Defendants their ill-gotten fortunes.
A. The Defendants’ Investment Strategy
336. Outwardly, Madoff attributed the consistent investment success of the BLMIS IA
Business to the SSC Strategy. Madoff promised customers such as Fairfield Sentry that: (a) their funds would be invested in a basket of approximately 35 to 50 common stocks selected from the
S&P 100 Index which consists of publicly listed stocks of the 100 largest companies in terms of their market capitalization traded on the New York Stock Exchange (“NYSE”) and NASDAQ;
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(b) the basket of stocks would closely mimic the price movements of the S&P 100; (c) the investments would be hedged by option contracts related to the S&P 100 Index, thereby limiting potential losses caused by unpredictable changes in stock prices; (d) he would opportunistically time the entry and exit from the strategy; and (e) when account funds were not invested in the
basket of stocks and options described above, they would be invested in money market funds and
Treasurys.
337. Beyond the purchases of equities, the other key component of the SSC Strategy
was the hedge of the purchased basket of stocks with S&P 100 Index option contracts. Madoff
purported to purchase out-of-the-money S&P 100 put options, and sell out-of-the-money S&P
100 call options, corresponding to the notional amount of the stocks in the basket he claimed he was buying. The put options would theoretically control the downside risk of price changes in the basket of stocks. The call options he purported to sell would likewise limit the potential upside gain in the basket, but were sold so that the premium from their sale could be used to finance the cost of purchasing the put options. Madoff represented that when he believed or sensed it was time to exit the market, he would sell the basket of stocks, close out the options positions, and invest the resulting cash in Treasurys or mutual funds holding Treasurys. BLMIS would purportedly enter and exit the market a few times a year.
338. FGG embraced the SSC Strategy as its own and went to great lengths to downplay, and, in fact, conceal Madoff’s key role in its business. For nearly two decades, the
Feeder Funds, with the help and complicity of the Management and Sales Defendants, raised billions of dollars for Madoff’s scheme while making hundreds of millions of dollars for themselves in management and performance fees for selling a fraudulent scheme. The
Defendants knew, and/or should have known, that all aspects of the strategy were a fabrication.
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B. The Defendants Facilitate the Scheme Through Marketing and Sales
339. The Defendants repeatedly told investors and potential investors they actively monitored Madoff, his auditor, the execution of the SSC Strategy, and BLMIS’s performance.
The Defendants claimed to have verified that trading actually occurred and that the assets in
BLMIS custody actually existed. Nothing could have been further from the truth.
340. In exchange for the hundreds of millions of dollars in fees, partnership interests, distributions, and other earnings the Defendants garnered from their de facto partnership with
Madoff, the Defendants provided extraordinary marketing and customer relations services, as well as important cover and legitimacy to Madoff’s operations.
C. The Defendants Serve as a Gatekeeper for Madoff to Ensure Investors Would Not Find Out the Truth
341. Madoff could not have survived, much less prospered for as long as he did
without the Defendants’ substantial assistance. While securing money from new investors for
Madoff with one hand, with the other, the Defendants needed to prevent their investors, new and old, from communicating directly with Madoff. The reason for the Defendants’ actions was simple: the more people who contacted Madoff directly, the more likely it was one of them might realize that Madoff and FGG were frauds.
342. The Defendants went to great lengths to keep their investors far away from
Madoff. They determined early on that they had to keep their clients away from Madoff because requests to meet and conduct real due diligence on him were bound to “end up in a standoff.” (A true and accurate copy of the May 22, 2003 email from Landsberger to Tucker is attached hereto as Ex. 28.) The Defendants told investors they were “monitoring” Madoff so as “to avoid them
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feeling the need to go see Madoff” themselves. (A true and accurate copy of the July 15, 2004
email from Toub to Vijayvergiya is attached hereto as Ex. 29.)
343. Defendant Blum advised his colleagues at FGG that just because investors wanted
information, did not mean that FGG had to give it to them. Giving out more detail would upset
Madoff. (A true and accurate copy of the March 25, 2003 email from Blum to Tucker, Bowes, and Greisman is attached hereto as Ex. 30.) He also directed FGG personnel, “always keep in
mind the prime directive and downplay Madoff’s role – never to have his name within 30
words of the word ‘manage’. . . . He is extremely sensitive to this and wants to be referred
to merely as our broker and custodian.” (A true and accurate copy of the August 22, 2003
email from Blum to Vijayvergiya and Landsberger is attached hereto as Ex. 31 (emphasis
added).)
344. The Defendants also misled investors by making false excuses when the investors
requested meetings with Madoff. By way of example, after explaining that Madoff did not meet
with clients, FGG would reassure investors, “if there is a window of opportunity in the future we
shall give priority to [you].” (A true and accurate copy of the April 5, 2004 email to Tucker is
attached hereto as Ex. 32.) The Defendants gave these types of assurances knowing full well that
there would never be any such “window of opportunity.”
345. The Defendants’ refusal to allow their clients or prospective investors to contact
Madoff was just one of many elements they employed to hide the inner workings of BLMIS
from investors. The Defendants always knew and understood that BLMIS exercised discretion
in managing their accounts, and was not simply an “executing broker.”
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346. In 2002, the Defendants decided that it would be best to just remove all references
to BLMIS from their marketing materials. This strategy started with the deletion of all mentions of both Madoff and BLMIS from the investment adviser description on FGG’s website and quickly grew into something broader. (A true and accurate copy of the June 24, 2004 email from
Vijayvergiya to Lipton and McKeefry is attached hereto as Ex. 33.) The Defendants went on to
remove all references to BLMIS from their offering memoranda. They also refused to provide
their customers with the Feeder Funds’ BLMIS Trading Authorization agreements. (A true and
accurate copy of the August 7, 2004 email from Vijayvergiya to Landsberger and McKenzie is
attached hereto as Ex. 34.)
347. “[I]n sensitivity to various issues regarding Bernie” the Defendants made the
conscious decision to serve as a gatekeeper, declaring that “Bernie investors do not need
transparency.” (A true and accurate copy of the January 14, 2003 email from Blum to Tucker,
Bowes and Greisman is attached hereto as Ex. 35 (emphasis added).) They held strategy
meetings to discuss, among other things, the need to “haze up the details” for investors and hold
“heavily scripted” investor teleconferences. (A true and accurate copy of the March 25, 2003
email from Blum to Lipton and Tucker is attached hereto as Ex. 36 (emphasis added).)
348. FGG actively and repeatedly “blocked” investors wishing to obtain more
information about the Funds’ investments with BLMIS, as well as preventing such investors
from accessing key BLMIS employees. Aware of investor concerns that Madoff was “churning
the portfolio” (a true and accurate copy of the April 9, 2004 email to Boele, Vijayvergiya,
Tucker, Blum, Greisman, Lipton, and Smith is attached hereto as Ex. 37), FGG ignored all such
concerns and continued to aggressively market the Feeder Funds which had direct or indirect
investments in BLMIS.
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349. When Fairfield Sentry was told by institutional investors that FGG was mysterious, that FGG had little transparency, and that there were numerous concerns about
Madoff’s family, BLMIS’s auditor, the lack of incentive fees for Madoff, and his self-custodying of assets, the Defendants chose not to address or investigate the concerns, instead focusing on
“how to spin” a response. (A true and accurate copy of the March 15, 2008 email from
Landsberger to Smith, Toub, della Schiava, Vijayvergiya, Tucker, and the Executive Committee
is attached hereto as Ex. 38 (emphasis added).)
D. FGG Conspires with Madoff to Hide from the SEC Madoff’s True Involvement with the Feeder Funds
350. From inception until 2006, because registration would mean greater regulatory
scrutiny, Madoff did not register BLMIS with the SEC as an investment adviser even though
BLMIS was required to register. The Defendants went to great lengths to attempt to cover up
Madoff’s actual role with the FGG funds.
351. In 2006, the SEC began an investigation into allegations that BLMIS may have
been a Ponzi scheme or illegally front-running the market.5 In connection with its investigation,
the SEC contacted FGG. The SEC sought an interview regarding, among other things, the
Feeder Funds’ actual relationship with BLMIS, transparency as to BLMIS’s actual role in the
Feeder Funds’ operations, as well as who was making investment decisions and implementing the SSC Strategy on behalf of the Feeder Funds.
352. Throughout 2006, the Defendants helped Madoff try to deceive the SEC.
Individual Defendants McKeefry and Vijayvergiya worked directly with Madoff to script false
5 Front-running occurs when a broker-dealer “runs in front” of customers by executing transactions for itself that are pending and unexecuted for customers, thereby unlawfully taking for itself market gain that would have accrued to
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responses to the SEC to throw the investigators off the trail of the fraud. After being contacted
by the SEC, Vijayvergiya and McKeefry called Madoff to inform him of the upcoming interview. They then forwarded Madoff some of FGG’s marketing materials and a list of potential issues they felt they should discuss before the interview. Madoff, McKeefry, and
Vijayvergiya agreed to defraud the SEC and then had a strategic conference call to work out the details. Vijayvergiya recorded the call.
353. The parties first agreed that no one was ever to know they were scripting their responses:
Mr. Madoff: Obviously, first of all, this conversation never took place, Mark, okay?
Mr. Vijayvergiya: Yes, of course.
Mr. Madoff: All right. There are a couple of things that, you know, could come [up with the SEC] . . . number one . . . we never want to be looked at as the investment manager . . . .
Mr. Vijayvergiya: Right.
***************************
Mr. Madoff: So the -- you know, the less that you know about how we execute, and so on and so forth, the better you are . . . if they asked do you know . . . if Madoff has Chinese walls, and you say, yes, look -- you know, your position is say, listen, Madoff has been in business for 45 years . . . you know, he’s a well known broker. You know, we make the assumption that he’s -- he’s doing everything properly.
***************************
customers had their transactions been executed first.
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Mr. Madoff: [O]ur role has always been defined as the executing broker for our clients . . . .
***************************
Mr. Madoff: The objective of the fund is to achieve capital appreciation . . . but don’t say -- consistent monthly returns.
Mr. Vijayvergiya: Okay. You can delete that, yeah.
(A true and accurate copy of the transcript of the call between McKeefry, Vijayvergiya, and
Madoff is attached hereto as Ex. 39.)
354. Madoff then gave precise instructions on how to respond to the SEC’s questions in order to mislead the SEC as to the true nature of Feeder Funds’ accounts, as to whom the actual investment adviser was, and anything else that might have allowed the SEC to potentially discover that BLMIS and the Defendants were perpetrating a fraud. Madoff specifically told
McKeefry and Vijayvergiya to tell the SEC he was merely “the executing broker,” and all investment decisions were made by FGG. All participants to the conversation knew this to be false.
355. The Feeder Funds’ account agreements explicitly characterized their BLMIS accounts as discretionary accounts. In June 2001, in a letter to investors, FGG described
Fairfield Sentry’s account with Madoff as a “discretionary cash account.” (A true and accurate copy of the June 2001 letter to Fairfield Sentry’s investors is attached hereto as Ex. 40.) Madoff had unfettered discretion as to when to trade, what to trade, with whom to trade, when to leave the market, and when to shift customer investments to Treasurys. The Defendants never knew with whom Madoff was contracting or trading purportedly on their behalf and could not, and did
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not, understand the SSC Strategy. As late as August 2008, Vijayvergiya acknowledged that
BLMIS’s operations remained somewhat of a mystery to FGG. (A true and accurate copy of the
August 2008 emails from Vijayvergiya to Murphy, Piedrahita, Landsberger, Toub, Tucker, and
the Executive Committee is attached hereto as Ex. 41.)
356. The Defendants knew that the fewer people who knew about the true nature of
their partnership with Madoff, especially the SEC, the better it would be for the Defendants’
financial interests. The Defendants also knew that if based on FGG’s responses, the SEC
grasped Madoff’s true discretion over FGG’s accounts and inquired further, Madoff could
become very angry, which could upset the Feeder Funds’ preferred status.
357. The Defendants were also concerned that if the SEC knew the true nature of the
relationship, the SEC would require Madoff to register, expose him to heightened regulation, and
remove the secrecy that allowed the fraud to flourish for so many years. For these and other reasons, Defendants Vijayvergiya and McKeefry knowingly agreed to conspire with Madoff to deceive the SEC.
358. The day after the three spoke, the SEC interviewed Vijayvergiya and McKeefry
by telephone, with Vijayvergiya providing nearly all of the responses. At the beginning of the
interview, the SEC personnel requested the interview be kept confidential. Vijayvergiya
dutifully fed the SEC the false information Madoff required. Two days after the interview, in
order to keep their false stories straight – and despite the SEC’s express request for
confidentiality – someone at FGG transmitted to Madoff detailed notes of the interview. (A true
and accurate copy of the notes dated December 21, 2005 found by the Trustee in BLMIS’s files
is attached hereto as Ex. 42.)
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359. During the first half of 2006 the SEC continued a dialogue with McKeefry,
Madoff, and other individuals relevant to their investigation. (A true and accurate copy of the
SEC phone log is attached hereto as Ex. 43.) Like the confidential interview, FGG continued to share the information from its SEC calls directly with Madoff.
360. Ultimately, despite FGG’s and Madoff’s coordinated efforts in 2006, the SEC required BLMIS to register as an investment adviser. The SEC also determined FGG had to modify its Feeder Funds’ marketing materials – which had previously been revised to remove all mention of both Madoff and BLMIS – to make clear that the strategy the Feeder Funds were selling was being managed and executed in all respects by Madoff. The SEC required the Feeder
Funds and BLMIS to execute new customer agreements because the existing agreements did not limit Madoff to acting merely as an executing broker, as had been for years, falsely claimed by
FGG.
361. The scheme to defraud the SEC succeeded insofar as, apart from these requirements, the SEC closed any further investigation of BLMIS. (A true and accurate copy of the SEC Case Closing Recommendation is attached hereto as Ex. 44.)
E. The Defendants Deceive Their Investors by Telling Them They Were Performing Extensive and Top of the Line Due Diligence, But They Were Doing No Such Thing
362. The Defendants deceived their investors and the investment community, in order
to enhance the fraud, enrich themselves, and protect their status as a leading BLMIS feeder fund.
The Defendants sold the false assurance that they conducted superior due diligence, far beyond
any due diligence performed by their peers. The Defendants justified their extraordinary fees
based upon this allegedly superior due diligence. The Defendants conveyed these falsehoods for
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nearly 20 years throughout FGG’s sales, offering, and marketing materials, as well as in direct
responses to questions from their investors and prospective investors.
363. FGG claimed among other things that it had full transparency into its investments,
conducted monthly quantitative analyses, and only used counterparties for the OTC options they
identified on an approved list. (A true and accurate copy of FGG’s October 2002 marketing
brochure for Fairfield Sentry is attached hereto as Ex. 45.) All of these claims were false.
364. The Defendants never knew who any of their OTC options counterparties were. It
was also impossible for the Defendants to accurately reconcile trades on a same-day basis
because they did not receive paper trade confirmations until three or four days after the alleged
trades supposedly had been executed, a delay which permitted back-dating – itself another red
flag of possible fraud. Had the Defendants accurately reconciled Madoff’s trade confirmations,
they also would have discovered any number of anomalies concerning the volumes and prices at
which Madoff supposedly purchased stocks and options.
365. The Defendants’ sales pitch about their due diligence process, their knowledge of
Madoff and his operations, conflicted with the reality of how little they actually knew. (A true
and accurate copy of the December 19, 2003 email from Vijayvergiya is attached hereto as Ex.
46.) The Defendants did not know the exact amount of Madoff’s assets under management, and
admitted that “there [was] no check on the amount of money he manages.” (A true and
accurate copy of the September 19, 2003 email from Blum to Tucker is attached hereto as Ex. 47
(emphasis added).)
366. FGG also emphasized to investors it confirmed the adequacy of FGG’s investment managers, staff, as well as the investment manager’s technological capabilities. FGG
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did not know the names of Madoff’s alleged traders or how many traders were responsible for
executing their SSC Strategy. They also did not perform independent, reasonable due diligence
or follow up on the viability or adequacy of BLMIS’s technology. Had the Defendants
meaningfully investigated the technological capabilities of BLMIS, they would, or should have, been suspicious because there were strong indications of fraud – the BLMIS IA Business computers lacked the ability to send real-time electronic trade confirmations to its customers.
367. The Defendants never investigated the contradiction between Madoff’s market- making business, well-known for cutting-edge technology, and the more primitive back-office systems used by the BLMIS IA Business. The BLMIS IA Business could not generate electronic trade tickets, had no website where investors could view their accounts and assets in real-time, and could only deliver paper confirmations by mail days after trades were supposedly executed.
These attributes were commonly recognized in the investment advisory industry to be rife with the risk of fraud, yet the Defendants ignored all of them.
368. Candid internal FGG discussions in 2003 revealed a far different due diligence picture than the “rigorous” processes the Defendants’ touted:
[T]here is an enormous amount that we have to do to meet the higher level of diligence and documentation and fulfillment of the investment process/risk monitoring and portfolio allocation aspects that even the most lazy of institutional and family office investors require to see . . .
This industry is moving to higher levels of perceived quality of process fast, and we are going to have to sprint to keep up. trying [sic] to bullshit clients will only result in our bs-ing ourselves . . . .
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(A true and accurate copy of the November 24, 2003 email from Blum to Landsberger,
Greisman, Tucker, and Piedrahita is attached hereto as Ex. 48 (emphasis added).)
369. In May of 2005, as part of “sales training,” Lipton and Vijayvergiya conducted a mock investor phone interview. Lipton played the role of a potential or existing Fairfield Sentry investor and Vijayvergiya acted as an FGG sales person. Lipton questioned Vijayvergiya as to the due diligence advertised by Fairfield Sentry. In particular, Lipton asked about the due diligence completed by FGG before investing in BLMIS, as well as the ongoing monitoring and diligence of its portfolio manager, Madoff.
370. In response to certain questions posed by Lipton and other audience members,
Vijayvergiya made misstatements about FGG’s knowledge of Madoff and his operations, including: (i) “we have a number of options counterparties;” (ii) for options-trading there is a
“very well capitalized, well established series of counterparties, which number between 8 to 12”;
(iii) FGG is the investment manager; (iv) from time-to-time FGG representatives visit BLMIS, verify that trades are on Depository Trust & Clearing Corporation (“DTCC”), and verify the existence of the Feeder Funds’ assets; and (v) Madoff has no discretion except with respect to the price and timing of trade execution, for which he has limited discretion. (A true and accurate copy of the transcript of the training session led by Vijayvergiya is attached hereto as Ex. 49.)
371. Each one of those statements, disguised as verified due diligence, was false. The
Defendants knew nothing about Madoff’s imaginary options counterparties except for Madoff’s claim they were a group of large European financial institutions – a claim which the Defendants never tried to independently verify. The Defendants never reviewed any counterparty’s option agreement and there was no list of counterparties. The Defendants never called anyone at any
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reputable financial institution, or anyone at all, to learn more, even though they stated they had done so. The Defendants also knew BLMIS was the investment adviser and that Madoff exercised all investment discretion. The Defendants never asked Madoff for permission to independently confirm their holdings with the DTCC, nor did they conduct any independent and reasonable due diligence, or follow up, to verify the actual existence of their assets.
372. In response to an audience query wondering how, over the last three years, there were times when FGG made money when to the questioner it seemed like they should not have,
Vijayvergiya stated, “I can honestly say that, hand on heart that . . . we know what is going
on.” (Id. (emphasis added).) This statement contradicted Vijayvergiya’s admission three years later that many things at BLMIS remained a mystery to him. (See Ex. 41.)
373. When speaking to an investor in May 2008, Vijayvergiya and McKenzie admitted they still did not know many basic things about Madoff’s operations. They expressed concerns about credit risks due to the options and option counterparty exposure, as well as the fact that
“they ultimately do not really know whether Madoff has the proper systems and controls,
segregation of duties, etc.” (A true and accurate copy of a memorandum summarizing the May
7, 2008 meeting is attached hereto as Ex. 50 (emphasis added).)
VIII. THE DEFENDANTS WERE CONSTANTLY FACED WITH EVIDENCE OF A FRAUD, BUT CHOSE NOT TO REVEAL THAT EVIDENCE
374. It did not require an extraordinary due diligence process for the Defendants to discover that Madoff was operating an illegitimate enterprise. Ordinary, independent, and reasonable due diligence by investment professionals would have, and should have, revealed the likelihood of fraud. The Defendants knew of, and were presented with significant red flags from many sources, including, but not limited to: financial and quantifiable information; performance
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and trade information; market rumors; industry articles; publicly stated investor concerns; market
and industry experts who expressed the possibility of fraud; FGG customers who communicated
that Madoff was possibly a fraud; FGG’s own internal statements and serious doubts; their years
of hedge fund experience; and their own common sense.
375. The totality of the information known and available to the Defendants pointed to
the strong likelihood that they were enabling a fraud. At a minimum, the Defendants knew of
countless red flags which required proper, independent, and reasonable due diligence and follow
up investigation. Not only did the Defendants fail to conduct the required due diligence, they
willfully ignored information that was right in front of them, and then lied about it.
376. The Defendants also knew what other highly reputable institutions were saying
directly about them. One representative of Credit Suisse told Fairfield Sentry that it “would
never do business with FGG as a firm” because FGG was “not going ‘by the rules’ and
soon[er] or later . . . will wind up in jail!!” (A true and accurate copy of the December 2, 2003
email from della Schiava to Noel, Piedrahita, Tucker, and Blum is attached hereto as Ex. 51
(emphasis added).)
A. The Defendants Learn that BLMIS’s Auditor is a Single Person in a Strip Mall Office. Instead of Treating This Red Flag as an Indicator of Fraud, They Lie to Comfort Their Investors and Sell Their Superior Diligence
377. Madoff had false audit reports prepared by Friehling & Horowitz (“Friehling”).
Those audits were filed with the SEC and copies were given to the Defendants. Friehling was a
one-man firm from Rockland County, New York consisting of David Friehling, a Certified
Public Accountant. The other two employees were an administrative assistant and a semi-retired accountant living in Florida.
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378. On November 3, 2009, David Friehling pled guilty to seven counts of securities
fraud, investment adviser fraud, obstructing or impeding the administration of Internal Revenue
laws, and making false filings with the SEC, in connection with the services he performed for
BLMIS.
379. By 2005 the Feeder Funds had invested billions of dollars with BLMIS. From
1990 to 2005, the Defendants accepted Friehling as a bona fide auditor without conducting any
meaningful, independent due diligence or inquiry.
380. During 2005, the Defendants were confronted about Friehling when the $400
million Bayou Group hedge fund Ponzi scheme became public. In the early part of the decade,
Bayou rode the rise in the stock market following the burst of the dot-com bubble. Bayou also displayed a number of major red flags similar to those exhibited by BLMIS. Both Bayou and
BLMIS delivered steady annual returns with almost no volatility. Neither Bayou nor Madoff charged a management fee based on the assets under management. This fee structure was atypical of hedge fund and other alternative investment managers. Finally, both Bayou and
BLMIS had obscure, non-independent auditors – Bayou an in-house accountant and BLMIS,
Friehling.
381. When the Bayou fraud came to light in 2005, a Fairfield Sentry investor raised parallels between Madoff and Bayou, questioning FGG about “the risk [of] investing in Sentry” in light of “certain similarities with Bayou.” The investor expressly identified the conflict of interest in Madoff acting as the self-clearing broker and receiving commission-based fees, and pointed out that BLMIS employed a small auditor rather than using one of the “big four.” (A
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true and accurate copy of the September 5, 2005 email from Capital Research to Castillo is
attached hereto as Ex. 52.)
382. An investor relations employee for FGG, Carla Castillo (“Castillo”), forwarded
information regarding Bayou to Vijayvergiya, joking “[d]oes this ‘perceived conflict of interest
with the two relationships (brokerage and auditing)’ sound familiar? Hehehe.” (A true and accurate copy of the September 1, 2005 email from Castillo to Vijayvergiya is attached hereto as
Ex. 53 (emphasis added).) At the same time, Castillo was telling the investor there were
important differences between Fairfield Sentry and Bayou. (See Ex. 52.) With regard to the
potential conflict of interest, Castillo responded that FGB, not BLMIS, was Fairfield Sentry’s
investment manager, FGB maintained an arm’s-length relationship with BLMIS, and Bayou used a very small accounting firm, whereas PwC conducted audits of Fairfield Sentry. (Id.)
383. The investor pressed for direct answers to the questions about Madoff and
BLMIS’s auditor. At that point the investor’s questions were escalated within FGG to Tucker,
McKeefry, Lipton, and McKenzie. Tucker, despite having served as the Madoff relationship partner for fifteen years, could not answer the investor’s question regarding BLMIS’s auditor.
He asked Lipton and McKenzie to investigate so he could respond to the investor’s concerns. (A true and accurate copy of the September 12, 2005 email from Castillo to Lipton is attached hereto as Ex. 54.)
384. At the time of Tucker’s request, Lipton had been FGG’s CFO for over three years.
Lipton was a nine-year veteran of a Big Four accounting firm, Ernst & Young. Lipton placed a call to Friehling’s office. Lipton also contacted the State of New York and learned David
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Friehling was licensed in New York and there were no disciplinary actions against him. Based
on the short call with Friehling’s office, Lipton subsequently reported to Tucker:
Frehling [sic] & Horowitz, CPAs are a small to medium size financial services audit and tax firm, specializing in broker-dealers and other financial services firms. They are located in Rockland County, NY. They have [hundreds] of clients and are well respected in the local community.
(Id.)
385. Lipton never made any attempt to independently verify this information. While under oath before the Office of the Secretary of the Commonwealth of Massachusetts, Lipton could not remember with whom he spoke when he called the auditor. He claimed all he could remember is that he spoke with someone who “said they were a partner in the firm.” (A true and accurate copy of excerpts from the transcript of Lipton’s testimony is attached hereto as Ex. 55.)
386. Following Lipton’s call with Friehling, the next day Tucker somehow “addressed
all the clients’ questions, and gave them the comfort they were seeking.” (See Ex. 52.)
387. Later on the same day that Tucker spoke with the investor, McKenzie obtained
and distributed internally a Dun & Bradstreet report on Friehling that validated the investor’s
concerns. The report, reflecting information provided by Friehling, showed Friehling only had
one employee and annual receipts of $180,000. Tucker’s response upon learning that Lipton had
been lied to and that BLMIS’s auditor was similar to Bayou’s auditor was “thank you.” (See Ex.
54.)
388. McKenzie then called Frank DiPascali (“DiPascali”) at BLMIS to ask about
Friehling. DiPascali was unable, or unwilling, to answer any questions about Friehling, and
directed McKenzie to Madoff. Because DiPascali was often the principal source of information
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regarding the Feeder Funds’ accounts and BLMIS’s operations, his inability and/or
unwillingness to answer simple questions about BLMIS’s auditor was a major red flag.
McKenzie, knowing Madoff would not speak to him, sent an email to Tucker asking him to bring
up the topic the next time Tucker spoke with Madoff. (See id.)
389. The Defendants did nothing to independently confirm if Friehling was equipped or capable of performing large scale domestic and international auditing services at a time when they were estimating Madoff was managing approximately $10 billion.
390. Tucker, Lipton, and McKenzie all knew that false information regarding Friehling had been communicated to the investor that had raised the concern. They did not communicate truthfully to investors or prospective investors about Madoff’s auditor. They did not disclose what they learned about Madoff’s auditor, or that DiPascali had been unwilling or unknowledgeable about Friehling.
391. Basic due diligence would have further revealed Madoff’s auditor was a fraud.
Lipton knew or should have known that all accounting firms that perform audit work must enroll in the American Institute of Certified Public Accountants’ (“AICPA”) peer review program.
This program involves having experienced auditors assess a firm’s audit quality each year.
Friehling, while a member of the AICPA, had not been peer reviewed since 1993. The results of these peer reviews are on public file with the AICPA. Friehling never appeared on the public peer review list because he had notified the AICPA he did not perform audits. His absence on the list was another major red flag.
392. The Defendants were not satisfied to hide the unknown auditor red flag of fraud from investors and potential investors. The Defendants chose to market around the Bayou
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scandal, stressing to their investors how a Bayou fraud could never happen to FGG’s investors
due to its impressive due diligence and risk management processes.
393. Beginning in late 2005 through 2008, FGG generated and distributed marketing
materials profiling the Bayou fraud as “Due Diligence: Headlines to Avoid.” The Defendants
highlighted the falsehood that a Bayou-like fraud could never happen to FGG because, unlike the misguided funds that invested with Bayou, FGG would have “question[ed] Bayou’s obscure
auditing firm.” (A true and accurate copy of the November 2, 2005 FGG Investment Team
Presentation is attached hereto as Ex. 56 (emphasis added).)
394. The Defendants also misled potential investors about Madoff’s auditor in direct communications with them. For example, in 2006, when a consultant performing due diligence for a client considering an investment in Fairfield Sentry questioned Vijayvergiya about
BLMIS’s auditor, Vijayvergiya lied, stating that Friehling had twenty partners and focused on broker-dealers. (A true and accurate copy of notes taken during the meeting is attached hereto as
Ex. 57.) McKenzie participated in this discussion. He remained silent when Vijayvergiya
described Friehling. He did not disclose that Friehling was the same firm he had confirmed had
only one employee, and not twenty partners.
395. FGG also reassured its investors by falsely suggesting that Friehling was not the
only firm auditing BLMIS. PwC did not conduct a single independent audit of BLMIS.
396. FGG also represented to investors that PwC (who conducted audits of the Feeder
Funds), accompanied by Lipton, performed biannual visits to BLMIS. (A true and accurate copy of the 2007 Fairfield Sentry Due Diligence Questionnaire is attached hereto as Ex. 58.) These representations were also false. PwC briefly visited BLMIS twice over the course of many
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years, attending information gathering sessions at BLMIS in 2002 and 2004, in connection with
its engagements for several Madoff feeder funds. After each visit, PwC summarized its findings
and explained in writing that it had not conducted audits of BLMIS. After 2004, PwC did not
conduct any visit, inquiry, or investigation of BLMIS in association with any Fairfield Sentry engagement. Lipton only accompanied PwC during its visit of BLMIS on one occasion, in 2002.
(See Ex. 55.)
397. The facts about PwC’s actual involvement with Madoff did not prevent FGG from falsely representing PwC’s role. FGG told investors in an October 2007 Due Diligence
Questionnaire for Fairfield Sentry – a document it routinely gave to prospective investors or consultants – that, “[t]he CFO has accompanied PwC’s auditors on a bi-annual basis to review
BLMIS’s internal accounts for the Sentry fund.” (See Ex. 58.)
398. In August 2008, in response to a detailed “HSBC Sentry Operational Due
Diligence” questionnaire, Lipton confirmed the Defendants’ failure to conduct proper, independent, and reasonable due diligence on BLMIS’s auditor. Lipton asked Vijayvergiya:
“[d]o we know any of the other client of BLM’s auditors? Or how big they are? I remember we called over there a while ago.” (A true and accurate copy of the August 20,
2008 email from Lipton to Vijayvergiya is attached hereto as Ex. 59 (emphasis added).)
B. The Defendants Regularly Received Information That Made It Clear Madoff Was Lying About His Alleged Trades and Performance
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399. The Defendants had access to vast amounts of information about Madoff that was
not available to the public. The account statements and trade confirmations they received from
Madoff showed that Madoff was likely a fraud. The Defendants knew, among other things, that
Madoff’s returns were so consistent they were virtually impossible; Madoff alone traded suspiciously large percentages of the total amount of securities that were reported as trading on the entire NYSE, NASDAQ and CBOE, and, did so without any impact on the prices of those securities; Madoff was supposedly executing billion-dollar options transactions on the Feeder
Funds’ behalf with anonymous counterparties who never asked for the Feeder Funds’ identity or collateral and the Feeder Funds never asked for theirs; Madoff often provided FGG with contradictory and sometimes nonsensical explanations of his market transactions on its behalf; and quantitative information the Defendants trumpeted in their sales, offering, and other marketing materials demonstrated that Madoff’s consistent returns were so improbable they appeared impossible.
1. FGG’s Returns Were Too Consistent for Too Many Years
400. Both FGG and BLMIS appeared immune from any number of market catastrophes, enjoying steady rates of return at times when the rest of the market was experiencing financial crises. FGG and BLMIS maintained consistent and seemingly impossible positive rates of return during events that otherwise devastated the S&P 100 – the performance of which formed the core tenet of the Defendants’ SSC Strategy. In fact, between 1996 and
2008, the Feeder Funds did not experience a single quarter of negative returns.
401. During the burst of the dotcom “bubble” in 2000, the September 11, 2001 terrorists attacks, and the recession and housing crisis of 2008, the SSC Strategy purported to
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produce positive returns, outperforming the S&P 100 by 20 to 40 percent in each instance where the S&P 100 suffered double-digit losses.
402. FGG’s own marketing materials contain the following rates of returns:
Year Fairfield Sentry S&P 100 Rate of Return Rate of Return 1990 2.77% (5.74%) 1991 17.64% 24.19% 1992 13.72% 2.87% 1993 10.75% 8.28% 1994 10.57% (0.19%) 1995 12.04% 36.69% 1996 12.08% 22.88% 1997 13.10% 27.677% 1998 12.52% 31.33% 1999 13.29% 31.26% 2000 10.67% (13.42%) 2001 9.82% (14.88%) 2002 8.43% (23.88%) 2003 7.27% 23.84% 2004 6.44% 4.45% 2005 7.26% (0.92%) 2006 9.38% 15.86% 2007 7.34% 3.82% 20086 4.50% (32.30%)
(A true and accurate copy of Fairfield Sentry’s October 2008 marketing tear sheet is attached
hereto as Ex. 60.)
403. These consistent rates of return enabled FGG to attract many more investors and
dramatically expand investments into BLMIS, including by accepting investments in foreign currencies through Sigma and Lambda into Fairfield Sentry. FGG also directed that the
6 Through October 2008.
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remaining 5% of “discretionary” Sentry funds be indirectly invested back into Fairfield Sentry
and other FGG funds with direct or indirect BLMIS accounts.
404. The FGG Affiliates and the Management Defendants failed to conduct proper,
independent, and reasonable due diligence or follow up as to how such returns could be achieved
legally, or in accordance with their SSC Strategy. The Defendants knowingly and purposefully turned a blind eye to the fact that this strategy, dependent in large part on how stocks in the S&P
100 performed, continued to yield positive returns without any correlation to the S&P 100. The
Defendants simply marketed to the world FGG’s extraordinary and consistent performance.
2. The Defendants’ Account Statements Showed the Likelihood of Fraudulent Activity
405. The Defendants repeatedly claimed they verified that all trades were consistent
with the SSC Strategy and that all trades were legitimate. The Defendants justified their large
management and performance fees based, in part, on their alleged daily monitoring of trade
activity.
406. The Defendants knew or should have known of multiple red flags in the trade
confirmations and account statements they received. First, Madoff was known as a pioneer of
electronic record-keeping in the BLMIS market-making business. For clients of the BLMIS IA
Business, Madoff never sent one electronic trade confirmation, and for many years, did not
provide electronic account statements. Second, the volumes of securities reported on the Feeder
Funds trade confirmations, as well as the month-end account statements, so exceeded reported
exchange volumes that they were a strong and recurrent indicia of fraud.
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407. The Defendants understood BLMIS did not make separate trades for each of the
BLMIS IA Business customer accounts. Madoff purchased large baskets of stocks and options,
and proportionately allocated them to each account. For many years, Madoff did not tell the
Defendants the amount of assets under his management. The Defendants estimated as early as
2003 that Madoff was managing approximately $10 billion. In August 2003, in response to a
due diligence query being performed on Fairfield Sentry by a prospective investor, Vijayvergiya
told the investor, who had heard Madoff was managing close to $20 billion, that FGG estimated
that Madoff was managing about $8-10 billion. (A true and accurate copy of the August 6, 2003
email from Vijayvergiya is attached hereto as Ex. 61.)
408. When BLMIS was forced to register as an investment adviser in August 2006, it
reported that it had $11.7 billion under management at the end of July 2006. Later filings stated
that BLMIS was managing $13.2 billion at the end of 2006, and $17.1 billion at the end of 2007.
At the same time, the Feeder Funds’ accounts reported balances of $4.9 billion through July
2006, $5.5 billion at the end of 2006, and $7.2 billion at the end of 2007, or approximately 42%
of the assets BLMIS reported it was managing. Because the Defendants knew that Madoff
allocated his baskets of stocks and options proportionately, the Defendants reasonably should
have calculated or estimated the amounts of stocks and options that BLMIS would have had to
purchase or sell for all its IA customer accounts.
409. The Feeder Funds’ account statements regularly indicated that BLMIS’s trades in
a particular stock for Feeder Funds’ accounts alone accounted for a large percentage of that
stock’s trading volume on the listed markets. This meant that BLMIS’s trades for all of its IA
customers often approached, or exceeded the entire volume of trades on the listed markets.
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410. Each time Madoff supposedly entered the market, he purportedly purchased
between 35 and 50 S&P 100 stocks for the Feeder Funds’ accounts. There were over 150
occasions on which the stocks Madoff purchased for Fairfield Sentry alone accounted for over
20% of the trading volume for those stocks on the entire NYSE. BLMIS, as a single investment adviser, was by itself purportedly trading for all of the BLMIS IA Business customers nearly
50% of all market trading in those stocks. There were also 50 instances in which Fairfield
Sentry’s account was responsible for over 25% of market trading in a particular stock (meaning trading for all of the BLMIS IA Business customers rising to over 60%), and 19 times when
Fairfield Sentry accounted for over 30% of the trading in a particular stock (meaning the BLMIS
IA Business customer trading constituting over 75% of market activity). On at least 3 occasions,
BLMIS would have had to engage in more trading than occurred on the entire exchange for a particular stock to execute the purported trades for Fairfield Sentry and the other customers of the BLMIS IA Business.
411. Even using the OTC market, a single investment adviser could not ever reasonably be responsible for over half of the reported trading of a particular S&P 100 stock.
That Madoff could be responsible for more trading than occurred on an entire trading exchange was seemingly impossible. Sophisticated hedge fund professionals such as the Defendants, seeing such extraordinary percentages in trading patterns by their investment manager – with billions of dollars under his management – were required to undertake proper, independent, and reasonable due diligence or follow up into such indicia of fraud. The Defendants chose not to investigate these trading patterns.
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3. Madoff’s Extraordinary Trading Volumes Never Affected the Market
412. The SSC Strategy marketed by FGG involved moving money into the market over
the course of one or more days, and then selling off all of those securities over a similar time span. According to the Defendants, over the course of many years, tens of billions of dollars moved into and then out of the U.S. stock and options markets over the course of just a few days, six-to-eight times a year. The Defendants never independently investigated how these trades could be accomplished without any impact on the price of the securities bought and sold, without any market footprint, and without anyone “on the Street” knowing or even hearing about
Madoff’s alleged trading activity.
413. The sale of tens of billions of dollars of stocks in a short period of time would result in a decreased price of those stocks, cutting into the alleged profits from the sales of such stock. The Defendants did not conduct independent or reasonable due diligence into the non- impact of Madoff’s large trading.
414. When Madoff exited the market, he claimed to have placed his customers’ assets in Treasurys or mutual funds invested in Treasurys. The movement of tens of billions of dollars in and out of the market should have materially affected the price of Treasurys. Lipton even remarked how BLMIS had “every angle covered” and was “playing over my head” when he attempted to explain how Madoff “rolled 6-7BN of Tbills on the last day of the year” with “the cost and the market value of investments . . . the exact same” in consecutive years. (A true and accurate copy of April 2008 emails between Lipton and McKenzie is attached hereto as Ex. 62.)
The Defendants did not conduct independent or reasonable due diligence into the Treasurys aspect of the SSC Strategy.
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4. The Feeder Funds’ Account Statements Showed That BLMIS Was Trading More Options Than Were Available on the CBOE
415. The Defendants could have applied the same calculation they used to determine the universe of BLMIS’s equities trading to determine the number of options BLMIS was trading for all of its customers. S&P 100 Index options are traded on the Chicago Board of Exchange
(“CBOE”) under the symbol OEX100. BLMIS nearly always traded more OEX100 options than were traded on the entire CBOE.
416. From 2001 to 2008, when comparing the volume of OEX100 options that BLMIS was purportedly trading on behalf of the Feeder Funds, with the CBOE volume, BLMIS traded more OEX100 options than the entire volume of the CBOE 97.6% of the time. During those eight years, BLMIS traded fewer options than were traded on the options exchange on a given day only 18 times.
417. A comparison between the volume of OEX100 put options BLMIS traded on behalf of the Feeder Funds and the volume of those same put options traded on the entire exchange is striking, as demonstrated on the next page.
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418. The volume of OEX100 put options BLMIS traded on behalf of the Feeder Funds
(the red line) completely dwarfs the volume of OEX100 put options traded on the entire CBOE
(the black line). Almost every time BLMIS entered the market to trade put options for the
Feeder Funds, it traded more OEX100 put options than all trades on the CBOE combined.
419. Based upon FGG’s belief that the Feeder Funds accounted for 42% of BLMIS’s trading, BLMIS would have been executing for all of its customers approximately 2.4 times as many trades as he was executing for the Feeder Funds alone. This means that FGG must have believed that, for instance, when BLMIS was trading 140,000 options for the Feeder Funds’ accounts in late 2008, BLMIS was trading over 300,000 options for all of his accounts.
420. The amount by which BLMIS’s trading overshadows the trades made by every
other person who traded OEX100 put options on the CBOE is unbelievable, as shown below.
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421. The Defendants did not perform independent and reasonable due diligence or follow up concerning the put option trading BLMIS purportedly conducted on their behalf.
422. As shown below, the volume of OEX100 call options BLMIS traded on behalf of the Feeder Funds, and on behalf of all of BLMIS’s customers, versus the volume of those same call options traded on the entire exchange, is equally telling. There was rarely a time when
BLMIS traded fewer OEX100 call options than were traded on the CBOE.
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423. The Defendants did not perform independent and reasonable due diligence or follow up as to the trading volume for their accounts. Had the Defendants conducted proper due diligence they would have confirmed that their account statements, their strategy, and BLMIS were all a sham.
5. The Defendants Agreed to Enter into Billions of Dollars in Options Contracts With Unidentified Counterparties
424. In the OTC marketplace, where Madoff claimed to be trading, each transaction requires a private contract between the two parties. In order to allegedly perform the options trades, Madoff had the Feeder Funds execute a Master Agreement for OTC Options. (A true and accurate copy of an excerpt from BLMIS’s Master Agreement for OTC Options is attached hereto as Ex. 63.) Under that agreement, Madoff served as the Feeder Funds’ agent in executing any options trade. The agreement explicitly states the Feeder Funds could not look to Madoff if the counterparty failed to perform. (See id.) Thus, unless the counterparties were reliable, sufficiently capitalized, and liquid, the options could be rendered useless in hedging the Feeder
Funds’ investments. As a result, under the Master Agreement, if a counterparty failed to perform, it was the Feeder Funds, and not Madoff, who were exposed.
425. The Defendants did not review, comment, modify, negotiate, or reject any form of draft or final counterparty agreement or OTC transaction confirmation. Despite bearing the risk of the counterparties’ failure to perform, the Defendants had no knowledge of the counterparties’ identities. Madoff refused to identify the counterparties claiming he had to prevent his clients from dealing directly with the counterparties, and that the names of parties were proprietary.
Madoff would eventually state that the counterparties were large European financial institutions.
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426. Vijayvergiya and Tucker knew Madoff’s counterparty explanations were
suspicious. In response to a financial institution that told Vijayvergiya “that his contacts at two
of the largest investment firms on Wall Street had no knowledge of the options business
(Citi and CSFB),” Vijayvergiya told Tucker that the investor “seemed fine with my response re: options counterparties.” He noted the investor was “OK for now - but I may still pose the casual question to Frank [DiPascali] at some point . . . .” (A true and accurate copy of Vijayvergiya’s
May 26, 2005 email to Tucker is attached hereto as Ex. 64 (emphasis added).)
427. After Bear Stearns collapsed in February 2008, inquiries regarding counterparty risk under the SSC Strategy intensified. Investors wanted to know what counterparties were trading options with Madoff, and whether those counterparties were stable and reliable. In the nearly 20 years FGG had been invested with Madoff it had never been provided the name of a single counterparty that bought options from or sold options to BLMIS. The Defendants failed
to perform any proper, independent, or reasonable due diligence or follow up to understand and
verify any aspect of the options counterparty component of their SSC Strategy.
428. As the stock market continued to weaken, and FGG was threatened with hundreds
of millions of dollars in investor redemptions, Vijayvergiya contacted Madoff in June 2008.
During the call, Vijayvergiya asked Madoff about BLMIS’s counterparties. Madoff told
Vijayvergiya that the options counterparties with whom BLMIS were required to post Treasurys
as a performance assurance, and that no one counterparty accounted for more than 10% of the
options trades. Madoff reiterated that he did not want FGG providing their investors with too
much information regarding BLMIS. (A true and accurate copy of the June 4, 2008
memorandum summarizing the meeting is attached hereto as Ex. 65.)
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429. The Defendants never inquired of Madoff as to why past counterparties needed to
be concealed to protect operations or execution of the strategy. The Defendants also never
sought to independently confirm, outside of Madoff himself, what exactly were the options
“performance assurance,” or where, when, or by whom the assurances were posted. The
Defendants instead chose to accept Madoff’s suspicious explanations.
430. Noel, Tucker, McKeefry, and Vijayvergiya met with Madoff in October 2008 and
asked him to provide additional information about his options counterparties. Madoff told them
his options counterparties were large institutions and that he performed credit checks on each of
them. Even though they were FGG’s counterparties and not his, Madoff again refused to
provide the names of any counterparties. The Defendants continued to do nothing to
independently verify any of Madoff’s statements, taking Madoff solely at his word. The
Defendants did not see or review a single document for these contractual relationships on their own accounts.
431. With the massive purported volume of BLMIS-related options trades, there were only a limited number of institutions that could have satisfied Madoff’s and FGG’s trading needs. The Defendants regularly communicated with many large European financial institutions
– Madoff’s alleged counterparties. Despite their regular contacts with institutions which fit
Madoff’s options counterparts profile, the Defendants never asked any of these institutions if they were trading options with Madoff. In fact, FGG never independently contacted any institutions to determine if they were trading S&P 100 options with Madoff.
6. The Supposed Options Trading Structure Under the SSC Strategy Was Inconsistent With Industry Practice
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432. The purported BLMIS-Feeder Funds options trading was inconsistent with
industry practice. Both Madoff and FGG claimed the options counterparties entered into
agreements that were identical to the agreements the Feeder Funds entered into with BLMIS
serving as each parties’ agent. As a result, any resulting OTC trade would result in a contract
between the options counterparty and the Feeder Fund.
433. FGG and Madoff claimed Madoff traded large blocks of options contracts and
then allocated them proportionately to each of the BLMIS IA Business customers, like the
Feeder Funds. Under normal industry practice, a block trade and allocation process requires the broker to trade as a principal and not an agent, with all transactions consisting of two trades: one
between the one party and broker and then a second trade between broker and the other party.
The two-trade process is required for block trade and later allocation transactions because OTC option trades are contracts between the two parties and the identity of the customer being allocated the option agreement is unknown at the time of the trade. In order that the SSC
Strategy be consistent with industry practice, BLMIS would have been the principal in the two trades, one with the counterparty and the second with the BLMIS customer.
434. Other structural issues which were readily apparent included the alleged collateralization of the options trading. Madoff told the Defendants that he limited each counterparty’s exposure to 10% of his overall position, and required each counterparty to post
Treasurys in escrow accounts to serve as collateral to guarantee performance of the put options.
When asked what collateral the counterparties required of the Feeder Funds in order to guarantee the performance of the call option sold to them, Madoff claimed none was required because his customers held the equities.
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435. Madoff’s explanation was facially false for several reasons: (1) the basket of the
35 to 50 equities did not perfectly match the entire S&P 100 Index – the basis of the call option;
(2) Madoff was free to sell the equities, which he did on occasion, prior to the expiration of the call, leaving the counterparty with no collateral at all; and (3) Madoff stated that the option counterparty had no lien against its allocated equities which, if true, meant the counterparties had no collateral protecting their position.
436. Madoff’s purported options trading structure, leaving the BLMIS IA Business customer’s counterparty exposed to large credit risk without ever knowing the identity of the
BLMIS IA Business customer, was irregular and inconsistent with industry practice. FGG never
conducted independent or reasonable due diligence about this aspect of its own SSC Strategy,
accepting instead Madoff’s implausible explanations without asking any questions.
7. The Options Trade Confirmations the Defendants Received From BLMIS Did Not Comply With Industry Standards
437. The Feeder Funds’ options trade confirmations contained certain abnormalities.
The options trade under the SSC Strategy was supposed to be a private contract between two
parties in the OTC market and the counterparty should have been expressly identified on the
confirmation statement. None of Madoff’s options trade confirmations identified the
counterparty.
438. By contract, options traded on the CBOE have an identifier number known as a
“CUSIP” (Committee on Uniform Security Identification Procedures). The CUSIP allows
traders to quickly access electronic information regarding a particular option by simply inputting
the CUSIP number into data terminals. Because OTC options are private transactions, the
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options are not assigned any CUSIP number. Madoff’s trade confirmations – reviewed by FGG
– included a CUSIP indicating that they were traded on the CBOE.
439. The master options agreement stated Madoff was acting as the agent of the Feeder
Funds when he entered into options trades, however each confirmation indicated BLMIS was trading as a principal. More importantly, once BLMIS was registered as an investment adviser with the SEC in 2006, SEC regulations prevented BLMIS from trading for a customer account as a principal without written authorization from the customer for each trade. The Feeder Funds never transmitted any authorizations permitting BLMIS to trade as a principal. Nevertheless, every trading confirmation the Feeder Funds received from BLMIS indicated BLMIS acted as a principal, even after he registered as an investment adviser.
440. The Defendants knew of and ignored these red flags. Simply put, the Defendants did not perform independent or reasonable due diligence into their own trading confirmations.
8. Madoff’s Inconsistent Stories Were Ignored by the Defendants
441. Madoff’s explanations about the SSC Strategy often changed according to circumstances, and with whom he was talking. The Defendants knew Madoff made inconsistent statements about the SSC Strategy but did nothing in response.
a. Options Trading
442. When Madoff first began trading options pursuant to the purported SSC Strategy, he claimed he traded the options contracts on the CBOE. When confronted by customers questioning whether the volume of his options trading activity was too large for the CBOE,
Madoff shifted his story and claimed he had moved to OTC trades without telling his customers.
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The Defendants never investigated Madoff’s statements. Instead, the Defendants falsely
repeated whatever Madoff told them about where he was trading options.
443. When FGG’s investors expressed concern that Madoff could purchase equities but
might not find counterparties from whom to purchase the put options to protect the equities
purchases from a market drop, Madoff reassured FGG by claiming that he spoke to option
counterparties to determine option availability before he purchased any equities. (A true and
accurate copy of the Vijayvergiya’s July 23, 2008 email to Barreneche is attached hereto as Ex.
66.)
444. By contrast, during the 2006 SEC investigation Madoff expressed concern that the
SEC would conclude that the SSC Strategy would promote front-running. During the “scripting” call with Vijayvergiya and McKenzie, Madoff discussed the need not to say anything that might
allow the SEC to conclude one party could front-run the trades. When Vijayvergiya asked
Madoff whether he spoke to counterparties to assure puts were available before he purchased
equities, Madoff replied that he did not contact the options counterparties ahead of time because
it would be too easy for them to front-run his trades. (See Ex. 39.) As was customary, the
Defendants did not perform independent or reasonable due diligence or follow up when Madoff
made these contradictory statements.
b. Madoff’s Auditor
445. The Defendants knew that Madoff told changing stories about the relationship
between BLMIS and its auditor. When questioned about Friehling, Madoff sometimes told
customers, including FGG, that he did not change auditors because there was a family
connection to Friehling. Internal FGG communications discussed the fact that BLMIS’s auditor
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was a member of Madoff’s family. (See Ex. 38.) This lack of independence between the auditor and audit client would be a conflict of interest and itself a huge red flag of fraud. The
Defendants did not conduct due diligence as to this conflict of interest. Later when the so-called
“family auditor” conflict of interest issue arose, Madoff claimed he had no family ties to
Friehling. The Defendants conducted no due diligence into this changing story.
c. Number of People at BLMIS Executing the Strategy
446. At times, FGG repeated Madoff’s claims of having dozens of PhD traders and
administrative personnel involved in executing the SSC Strategy. However, in 2006, when
BLMIS filed its ADV form as independent advisor, BLMIS reported it had only five employees
in the BLMIS IA Business. After obtaining the ADV form, the Defendants took no action to
reconcile Madoff’s prior representations and the information he provided to the SEC. Instead,
the Defendants simply repeated what Madoff told them about the traders in the BLMIS IA
Business operation.
9. The Defendants’ Own Due Diligence Procedures Should Have Uncovered Anomalies in Madoff’s Trading
447. The Defendants told their investors that as part of their due diligence procedures
they reconciled trade confirmations immediately. The Defendants knew or should have known
of certain trading anomalies through their trade reconciliation efforts.
448. There were days when the Feeder Funds’ trade confirmations indicated Madoff traded stocks at prices that were outside the daily ranges of prices for those stocks. As an example, Fairfield Sentry’s account statements for October 2003 reported purchases of Intel
Corporation (INTC) of 1,082,543 shares, 1,097,173 shares, and 67,837 shares. BLMIS’s records
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indicate these stocks were purchased on October 2, 2003 for $27.63 per share. The daily price
range for Intel Corporation stock purchased and sold on October 2, 2003 in fact ranged from a
low of $28.41 to a high of $28.95.
449. Fairfield Sentry’s and GSP’s account statements for December 2006 reported
sales of Merck (MRK) of 267,035 shares, 261,266 shares, 15,386 shares, and 786 shares.
BLMIS’s records and the Feeder Funds’ trade confirmations reflect that these stocks were sold
on December 22, 2006 for $44.61. The price range for Merck stock in fact bought and sold on
December 22, 2006 was between $42.78 and $43.42.
450. According to the Defendants, they created procedures and employed them every day for the specific purpose of catching such indicators of fraudulent behavior. That in fact never occurred.
10. The Quantitative Analysis the Defendants Touted to Their Own Investors Proved Madoff’s Returns Were Virtually Impossible.
451. Quantitative analysis that is standard in the hedge fund industry revealed that
Madoff’s positive, consistent returns were, statistically, highly improbable. FGG told its investors that it performed such analysis, but refused to recognize the implications of their findings – BLMIS was a fraud.
452. FGG’s marketing materials emphasized that Vijayvergiya and his risk management team performed exacting quantitative analysis of the Feeder Funds’ investments.
This analysis included utilizing an industry standard known as the Sharpe ratio to gauge portfolio performance. The Sharpe ratio, developed by William Sharpe, winner of the Nobel Prize in
Economic Sciences, measures how well a trading strategy compensates the investor for the risk
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taken. A higher Sharpe ratio indicates the strategy provides a higher return relative the
associated risk. For funds with monthly net asset values (“NAV”), such as the Feeder Funds, the
Sharpe ratio is calculated as follows:
(The Fund’s Average Monthly Rate of Return) – (That Month’s Risk-Free Rate) Standard Deviation of the Fund’s Monthly Returns
453. BLMIS’s Sharpe ratio was remarkable. When compared to the over 800 other
hedge funds that reported data to major hedge fund databases, the probability Madoff could maintain such high Sharpe ratios by providing positive returns with very little volatility, was less
than 1%. When compared to funds that employed comparable strategies to Madoff’s SSC
Strategy, that probability drops to less than 0.1%. In selling his services to FGG, Madoff noted
that other star managers might have higher returns, but he produced steady returns without the
volatility of those star managers. In fact, for a 13-year period, Fairfield Sentry had a higher
Sharpe ratio than Warren Buffett, George Soros, Bruce Kovner, and John Paulson in all but six of 52 quarters between 1995 and 2007. The probability of Fairfield Sentry’s Sharpe ratio outperforming these star money managers in almost every quarter for nearly 13 years is approximately 1 in 200,000,000.
454. Such an understanding and detailed analysis of the Sharpe ratio was what
Defendants touted to be part of their exceptional due diligence procedures. The Feeder Funds’ nearly impossible Sharpe ratio was in fact one of the factors that led quantitative analysts, such as Edward Thorp and Harry Markopolos to conclude that Madoff was operating a Ponzi scheme.
455. Independent analysts viewed the Feeder Funds’ Sharpe ratio with a great deal of skepticism because the Feeder Funds’ Sharpe ratio always remained high. The Feeder Funds’
year-over-year Sharpe ratio was driven by the low volatility of the Feeder Funds’ performance in
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often highly volatile markets, and without any meaningful correlation between the two. The
Defendants did not perform any reasonable or independent due diligence into the fact that it was nearly impossible for the Feeder Funds to have retained such a consistently high Sharpe ratio.
456. FGG claimed that Madoff had great market timing based on his “feel” for the flow of the market, premised on short-term market timing. Vijayvergiya responded to critics of
Madoff’s market timing abilities by claiming Madoff had unique access to market flow information through his market-making business.
457. Independent analysts rejected the Defendants’ explanations about Madoff’s ability
to perfectly time the market for over 20 years. Many analysts viewed Madoff’s perfect timing
based on market flow as indicative of illegal front-running. The Defendants knew that front- running was a “[t]ypical Madoff rumor[],” but they never tried to investigate. (A true and accurate copy of the February 27, 2004 email from Vijayvergiya to FGG’s Marco Musciacco is
attached hereto as Ex. 67.)
458. Moreover, despite employing a market timing strategy, Madoff would artificially
take his customers’ cash out of the market near the end of the quarter for reasons having nothing
to do with the SSC Strategy. Madoff claimed to move his customers’ funds, like the Feeder
Funds, in order to avoid what he understood to be the disclosure requirements of a Form 13F
filing under the SEC rules requiring those who exercise discretion over accounts having more
than $100 million in exchange-traded or NASDAQ securities to report their holdings.
459. The Defendants knew Madoff’s desire to avoid reporting requirements was the
reason for his end-of-quarter positions. The Defendants also knew that Madoff’s reason for
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going to cash would raise concerns among institutional investors. Vijayvergiya and other FGG sales personnel were directed to provide other reasons for the end-of-quarter cash positions.
460. After Yanko della Schiava, another Noel son-in-law, asked Vijayvergiya why
Madoff moved all customer accounts out of the market at the end of the year, Vijayvergiya gave two nonsensical responses based on purported trading strategy. Della Schiava responded, “I remember Jeffrey [Tucker] once specifically mentioning about the last days of the year to be in cash so he [Madoff] did not have to fill certain tax forms . . [sic] or something similar.”
Vijayvergiya then responded, “Yes – that is a third possible reason but I have been advised not to emphasize this.” Vijayvergiya went on to write, “I am told that the rule to which Jeffrey
[Tucker] is referring requires that if Madoff ends the year invested on December 31, then they are required by law to report their holdings in these same positions for the next four quarters. I am further told that Madoff has been reluctant to do this . . . .” (A true and accurate copy of the
December 11, 2003 email from Vijayvergiya to della Schiava is attached hereto as Ex. 68.)
461. The Defendants performed no independent or reasonable due diligence as to why a strategy based on market timing would pull itself out of the market for reasons having nothing to do with market timing and instead gave cover to Madoff’s real reason he was out of the market – avoiding 13F filings that would lead sophisticated investors to conclude he was a fraud.
IX. THE DEFENDANTS WERE WILLING TO IGNORE THE RED FLAGS; THEIR INVESTORS AND CONSULTANT WERE NOT
462. The Defendants looked away when faced with red flags about BLMIS. The
Feeder Funds’ investors, who paid the Defendants to conduct proper, independent, and reasonable due diligence on BLMIS, and the funds’ potential investors were far more concerned than the Defendants when they learned of Friehling; BLMIS’s unusual fee structure; the fact that
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BLMIS was the investment manager, self-clearing prime broker, and custodian; and the
Defendants’ own lack of transparency and limited understanding of their own investment
strategy.
463. For example, in February 2005 one investment group explained that it had
“decided to NOT invest in the Fairfield Sentry fund” due to the non pure independence between
the true manager of the fund and the prime broker/Custodian of the fund.” One of Fairfield-
UK’s employees told Tucker, Landsberger, and Vijayvergiya, “at least their reason was was [sic]
a good one.” (A true and accurate copy of the February 1, 2005 email to Tucker is attached
hereto as Ex. 69.) Instead of investigating the issue further, Piedrahita was still saying over two
years later that “there is absolutely nothing we can do about it . . . .” (A true and accurate copy
of the June 21, 2007 email from Piedrahita to Landsberger, Vijavergiya, Lipton, and the
Executive Committee is attached hereto as Ex. 70.)
A. FGG Does Everything It Can to Mollify Investor Concerns as Opposed to Performing Independent Inquiry Into the Possibility of Fraud
464. Throughout the 2000s and increasingly in the 2006–08 period, the Defendants knew that “concerns about lack of transparency” troubled the Feeder Funds’ investors and potential investors, causing them to redeem from the Feeder Funds. (A true and accurate copy of the June 10, 2008 email from Vijayvergiya to McKenzie is attached hereto as Ex. 71.) The
Defendants tried to stem the tide of redemptions, and tried to convince investors there was nothing about which to be concerned, rather than independently or reasonably investigate or follow up to determine whether Madoff’s lack of transparency was an indicia of fraud.
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465. To respond to concerns about Madoff’s lack of transparency, the Feeder Funds’
sales force was provided with “talking points.” Vijayvergiya sent an e-mail to McKenzie and
others in which he suggested that Fairfield Sentry personnel ask its customers whether
redemptions from the fund were related specifically to the lack of transparency or any other
concerns over BLMIS. The Feeder Funds’ sales force was to try to convince investors not to
redeem their interests in Fairfield Sentry by emphasizing FGG’s knowledge, monitoring and
insight into Madoff, his operations, the performance, and the SSC Strategy.
466. In May 2008, the Defendants received basic questions from an institutional client
asking the Defendants to confirm how Fairfield Sentry’s accounts were segregated at BLMIS.
(A true and accurate copy of FGG’s May 2008 internal notes in response to investor questions is
attached hereto as Ex. 72.) The Defendants could not answer these basic questions because they
had never independently confirmed that any trades were being made or that BLMIS was in fact
holding their assets. Murphy recommended that, “we confirm, but not sure we answer
directly their questions on how our account is segregated and how this can be confirmed?”
(See Ex. 41 (emphasis added).) Murphy also admitted that he did not know whether the
Defendants had copies of the audit reports for BLMIS or whether “we get to talk with the
auditors?” (Id. (emphasis added).)
467. As of May 2008, FGG had invested billions of dollars into Madoff and received over a billion in fees from the Feeder Funds, yet the Defendants still did not know whether
client funds were segregated or whether anyone knew anything about Madoff’s auditor.
Vijayvergiya also admitted that “there are certain aspects of BLM’S operations that remain
unclear. . . .” (Id. (emphasis added).) In internal email discussions that followed the investor’s
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redemption, Vijayvergiya stated that the client may have heard “certain rumors,” which caused it to backpedal on its Fairfield Sentry investments. (Id.)
468. In June 2008, FGG partner and Chief Global Strategist of FGG, David Horn, emailed Vijayvergiya about a prospective client. The email stated that the client “has always heard about Madoff, but hears things that scare her . . . so neutralize the scare with our transparency . . . this will be a piece of cake . . . .” (A true and accurate copy of the June 2,
2008 email from Horn to Vijayvergiya is attached hereto as Ex. 73 (emphasis added) (alteration in original).) The Defendants’ stated objective was to neutralize investor or prospective investor fears. The Defendants did not conduct proper, independent, and reasonable due diligence in connection with the red flags raised by potential investors.
469. In October 2008, Fairfield Sentry sought an investment from Merrill Lynch
(“ML”). ML declined, explaining that BLMIS’s unwillingness “to sit down with our due diligence team and open the books and operations” kept ML from investing. The ML representative stated, “I realize the track record speaks for itself, but ML has a process and it involves a lot of due diligence and learning. So I admire you[r] track record but it does not help me do business with your fund.” (A true and accurate copy of the October 21, 2008 email from
ML to Barreneche is attached hereto as Ex. 74.)
B. FGG’s Consultant Tells the Defendants Madoff May Be a Fraud
470. FGG’s investors, industry experts, other fiduciaries, and money managers were not the only ones flagging indicia that Madoff was a fraud. An FGG consultant, Gil Berman
(“Berman”), also told the Defendants Madoff might be a fraud. On several occasions Berman raised serious concerns regarding BLMIS and Madoff.
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471. When reviewing the trade tickets and account statements, Berman noticed that
Madoff was at times taking actions inconsistent with the SSC Strategy he was required to execute. The Feeder Funds’ Options Agreement with BLMIS indicated that BLMIS would “only write (sell) covered calls against long stock positions, and buy stock index puts or puts on the individual stocks that the account owns.” Berman noticed that Madoff was occasionally purchasing double the notional amount of put options to cover a single basket of stocks, a trade not consistent with the SSC Strategy. Doubling the put option position would actually be detrimental because BLMIS had to pay for put options, and thus was wasting money by purchasing excess puts.
472. In May of 2008, this over-hedging strategy accounted for approximately $95 million of Sentry’s total earnings. (A true and accurate copy of the spreadsheet accompanying
Berman’s report is attached hereto as Ex. 75.) In a June 13, 2008 email to Vijayvergiya, Berman stated that “there were several unusual transactions” in May 2008 and that “[a]ll of the [options] trades produced excess profits . . . .” (A true and accurate copy of the June 13, 2008 email from
Berman to Vijayvergiya is attached hereto as Ex. 76.)
473. Later that month, in a telephone call with FGG, Berman noted plainly that even
Madoff could not win 100% of the trades. Berman expressed concern that Madoff might be backdating trade confirmations. He recommended the Defendants require same-day trading tickets, obtain information on the options counterparties, and verify that BLMIS was actually holding all of the assets purportedly in the Feeder Funds’ accounts. (A true and accurate copy of Berman’s notes from the June 25, 2008 call with FGG is attached hereto as Ex. 77.)
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474. However, the Defendants did not take any of Berman’s due diligence recommendations – all of which should have been done regularly for years and any one of which would have disclosed the fraud. The Defendants ignored Berman’s recommendation.
475. At another point in time Berman also noticed at least one risky “naked call position,” where BLMIS had sold an S&P 100 call option but did not hold the underlying stock.
A naked call position occurs when the seller of the call does not own the shares underlying the call option. In Madoff’s SSC Strategy this would occur if he sold a call option for the S&P 100
Index but did not own the basket of stocks correlated to the index. If the index rose, the call would be exercised by the buyer and the Feeder Funds would be exposed to significant losses because they would not have hedged the risk.
476. Berman brought these activities to Tucker’s and Vijayvergiya’s attention because they were inconsistent with the SSC Strategy, and, depending on how the market moved, potentially harmful to the Feeder Funds’ positions. The real reason the Feeder Funds’ statements showed these unusual positions was that during certain down months, it was extremely difficult, even for Madoff, to fabricate trades that could justify his returns. Madoff created fictitious options trades inconsistent with his mandate and trading authority in order to create a consistently positive returns.
477. This type of options speculation violated the terms of BLMIS’s investment agreement with the Feeder Funds, where Madoff agreed to invest all of the Feeder Funds’ money pursuant to the SSC Strategy.
478. Armed with Berman’s analysis and recommendations, and even though their own documents showed otherwise, when Noel, Tucker, McKeefry, and Vijayvergiya met with
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Madoff in October 2008, they did not question Madoff’s responses when he stated the value of the options would never exceed the notional amount of the equities.
479. The Defendants did not independently or reasonably investigate or follow up on any of these indicia of fraud made known to them by Berman.
X. DESPITE YEARS OF SEEING INDICIA OF FRAUD, THE DEFENDANTS CONTINUED TO FUNNEL BILLIONS TO MADOFF
480. For years, the Defendants had overwhelming evidence that Madoff was not a legitimate investment manager. Instead of performing as fiduciaries and protecting investors from fraud, the Defendants employed a number of ways to raise capital for Madoff, in order to enrich themselves, including, inter alia, creating new funds that would then invest a portion of their assets back into Fairfield Sentry; forming GSP to accommodate new investors; working with JPMorgan Chase & Co. (“JPMC”), Natixis, Nomura, BBVA, and many other financial institutions to create leveraged note programs based on Feeder Funds’ returns, fully expecting the financial institutions to hedge their exposure by investing directly in Feeder Funds; and finally, when massive redemptions were pushing Madoff to the brink, agreeing to serve as the exclusive marketers for a “new” BLMIS strategy.
A. 2006: GS Is Expanded and GSP Is Created
481. The Defendants created GS to accommodate U.S. investors that wished to invest their money with BLMIS. By 2006, FGG decided it wanted to further accommodate U.S. investors and on May 1, 2006 created GSP for those investors that did not qualify to invest in
GS.
B. 2007: Leveraged Note Programs
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482. More money invested with Madoff translated to more FGG fees and, in 2007, the
Defendants expanded aggressively into many types of leveraged products. Madoff’s commercial banker, JPMC, for example, structured about $250 million in leveraged notes based on the returns of Fairfield Sentry and Sigma. Others such as Natixis, Nomura, and BBVA did the same.
483. Purchasers of these notes would be entitled to receive returns based on a multiple of the returns of the underlying Feeder Fund. As an example, in February 2007, JPMC offered a
3x leveraged certificate on Sigma. Individual investors who purchased a note for this product would invest a specific sum (e.g., $100), and would earn returns as if they had actually invested three times that sum (e.g., $300). Each of these products was time restricted. Investors who purchased a note from JPMC in 2007 would not have been able to collect their profits until the note matured, generally sometime between five and eight years after the initial investment.
484. The benefit to the Feeder Funds of these note programs was the potential investment from the financial institutions structuring the notes. For instance, if JPMC structured a note on Sigma, and thereby guaranteed returns based on Sigma’s performance, JPMC would be expected to hedge that exposure by purchasing shares of Sigma. And that is what happened.
The financial institutions invested hundreds of millions of dollars in the Feeder Funds and
Sigma, from which the Defendants reaped even greater fees.
C. 2008: The Emerald Funds
485. In late 2008, the Defendants were still working with Madoff to inject additional funds into BLMIS. In November 2008, Madoff contacted the Defendants about setting up new
Madoff feeder funds. In a short telephone conversation with Tucker, Madoff stated without
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much specificity he had a new strategy which would be similar to the SSC Strategy, but would
produce higher volatility with higher returns.
486. Madoff offered this new strategy to the Defendants, who would serve as the exclusive marketer. In order to launch the new strategy, Madoff asked that the Defendants raise
$500 million, with $200 million to be raised by the end of 2008. The Defendants agreed.
487. After nothing more than a brief telephone conversation describing the new strategy and a one-page performance report purporting to show the strategy’s simulated pro forma performance over the previous year, the Defendants began raising money for the new funds BBHF Emerald and Greenwich Emerald (“the Emerald Funds”). The Defendants tried to raise this capital even though they had not issued a private placement memoranda, offering
documents, or other fund documentation, and had not received any details regarding, nor
conducted any due diligence on, this new strategy.
488. On December 10, 2008, Tucker drafted a letter to Madoff outlining the steps FGG was taking to slow withdrawals from BLMIS:
We have taken a number of steps with our other funds in order to put all of our investable capital in Sentry and the new split strike strategy which we call Emerald. While the full results of this strategy will take a few months to take effect, they will include:
investments in Sentry by existing Fairfield funds (~$100mm)
liquidating other Fairfield funds and transferring the assets to Sentry and Emerald (up to ~$150mm)
purchases by the firm of Sentry positions from clients rather than having them redeem from Sentry (~$150mm)
investments by individual partners of the firm in
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Sentry and Emerald (~$50mm)
We are, as would be expected, aggressively cutting fees for new subscriptions and offering significant fee-sharing incentives to our agents and finders.
(A true and accurate copy of the December 10, 2008 draft letter from Tucker to Madoff is
attached hereto as Ex. 78.)
489. The Defendants and Madoff were partners until the bitter end.
XI. THE AFTERMATH
490. On December 11, 2008, the world’s largest Ponzi scheme was uncovered and
Madoff was arrested. The Defendants’ failure to conduct proper, independent, and reasonable
due diligence and follow up on Madoff, and their willful ignorance of information readily available to them for nearly two decades helped facilitate the scheme and allow billions to be lost as a result.
491. By the time Madoff was arrested, the Management Defendants had only a few million dollars invested with Madoff. Piedrahita had no investments with Madoff, Tucker had approximately $900,000 and Noel had a slight percentage of his wealth, $9 million, invested through Madoff. The Defendants retained every other cent of the fees, partnership distributions, and other monies they unjustly “earned” and had collected over nearly two decades. They have to-date kept millions of dollars of stolen Customer Property.
492. On December 12, 2008, the day after Madoff’s arrest, Tucker faxed withdrawal notices to BLMIS for all of the Feeder Funds’ monies. The small fraction of assets left in
BLMIS’s account was not sufficient to fulfill the redemptions. The result of the FGG Affiliates and Management and Sales Defendants’ actions was a precipitous drop in the Net Asset Value
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(“NAV”) of the Feeder Funds. The NAV of the Feeder Funds is defined as the value of their cash, stocks, and options, less any liabilities. When Madoff admitted he had never purchased any stocks or options with the money his customers gave him, the NAV of the Feeder Funds dropped to almost nothing. The Feeder Funds and their investors lost billions. The remaining
Defendants, on the other hand, whose fees and profits were based directly on the previous, wrongly calculated NAVs, had already walked away with over a billion dollars.
493. Shortly after the Madoff scheme collapsed, the Defendants publicly claimed they were innocent and had no reason to suspect anything was amiss at BLMIS. (A true and accurate copy of the December 12, 2008 FGG press release is attached hereto as Ex. 79.) These statements were false.
494. As alleged support for their claims of innocence, certain Management Defendants proclaimed FGG had created a new feeder fund and funded it with $10 million of personal funds sent to Madoff days before his arrest. However, their statement was not the complete story.
495. These Management Defendants did not mention the Stable Fund, which was limited to the FGG partners and their spouses. In October 2008, the Stable Fund liquidated and redeemed its remaining $4.4 million in assets out of Fairfield Sentry. On December 8, 2008, the
Defendants informed Madoff that it would be forwarding another major redemption. Madoff reacted to this news by suggesting that the Defendants were not a suitable partner for his investment services. When faced with Madoff’s threat, through their new Emerald Funds, the
Management Defendants put back the $4.4 million they had taken out of BLMIS through the
Stable Fund.
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496. After the scheme was revealed, Lipton immediately emailed his personal broker
and asked that a new account be set up in his wife’s name, where he transferred all of his
municipal bonds and treasury investments. Piedrahita and his wife sold their U.S. residence and
moved from country to country after Piedrahita took delivery of a $12 million yacht.
497. Even after Madoff was arrested, the Defendants continued to lie about the due diligence they purportedly had performed. As late as February 2009, FGG proclaimed that it
regularly reviewed DTCC records. (A true and accurate copy of the February 5, 2009 Wall
Street Journal article entitled, “Markopolos Testifies Fairfield Knew Little About Madoff,” is attached hereto as Ex. 80.) The Defendants’ statements were not and could not be true. If any of
the Defendants had examined a DTCC record, they would have immediately discovered not a
single security had ever been traded on their behalf.
XII. “PEOPLE WILL TELL: OH THIS WAS FRAUD, THERE IS NOTHING WE COULD HAVE DONE. BUT THIS IS SIMPLY NOT TRUE! YOU SHOULD HAVE DONE DUE DILIGENCE!”7
498. There was nothing special about the kind of due diligence that needed to be done
to unearth signs that Madoff was possibly a fraud. Many fund managers, due diligence research
and consulting firms, consultants, banks, and other industry professionals, with far less access to
BLMIS than the Defendants, concluded many years prior to Madoff’s arrest that the consistency
of his returns was virtually impossible and likely the result of fraud. The FGG Affiliates,
Management Defendants, and Sales Defendants knew this too. Because these Defendants were
earning millions of dollars year after year based solely on their relationship with Madoff, they
knowingly chose to ignore the likelihood of fraud.
7 (A true and accurate copy of the December 14, 2008 Salus Alpha Group press release is attached hereto as Ex. 81.)
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499. The claim that no one saw signs that Madoff was a fraud or that the Defendants
were not on actual and/or constructive notice of fraud, is false. The Defendants saw the signs
and they summarily ignored them.
A. The Barron’s and MAR/Hedge Articles Are Published in 2001
500. During 2001, two industry analysts published articles that called into question the legitimacy of BLMIS’s operations. A May 2001 MAR/Hedge newsletter entitled, “Madoff tops charts; skeptics ask how,” reported on Fairfield Sentry’s consistent returns stating that experts were bewildered as to how such returns could be achieved so consistently and for so long. The article observed that “others who use or have used the strategy . . . are known to have had nowhere near the same degree of success.” (A true and accurate copy of the May 2001
MAR/Hedge article entitled, “Madoff tops charts; skeptics ask how,” is attached hereto as Ex.
82.) The MAR/Hedge newsletter is widely read by participants in the fund of funds and hedge
fund industry.
501. Barron’s published a similar article on May 7, 2001. The article, entitled “Don’t
Ask, Don’t Tell, Bernie Madoff is so secretive, he even asks investors to keep mum,” noted the
heavy skepticism on Wall Street surrounding Madoff, as well as the lack of transparency around
the BLMIS IA Business as a result of Madoff’s unwillingness to answer basic questions about
his SSC Strategy. (A true and accurate copy of the May 7, 2001 Barron’s article entitled, “Don’t
Ask, Don’t Tell,” is attached hereto as Ex. 83.) Noel and Tucker testified in the proceeding brought by the Commonwealth of Massachusetts against certain FGG entities that they read the articles questioning BLMIS’s very legitimacy, but were not concerned. Noel testified that the author of the Barron’s article had mischaracterized the strategy. He explained, “I mean, anyone who knew what he was doing, like we did, would have said that was not an accurate description,
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but nothing came of it afterwards.” (A true and accurate copy of excerpts from the transcript of
Noel’s testimony is attached hereto as Ex. 84.) Tucker described the Barron’s article as “just irresponsible journalism . . . .” (A true and accurate copy of excerpts from the transcript of
Tucker’s testimony is attached hereto as Ex. 85.)
502. Despite having responsibility for billions under management in their Feeder
Funds, the Defendants performed no meaningful, independent inquiry or due diligence in response to the dramatic assertions made in these articles. The Defendants did not call the authors to better understand the red flags being raised. The Defendants did not speak to other institutions. The Defendants did nothing to see if there were OTC counterparties. Instead, the
Defendants sent a newsletter to the Feeder Funds’ investors claiming the articles were wrong.
(See Ex. 40.)
503. The Defendants simply went about their business of aggressively touting,
marketing, and effectively co-opting Madoff’s “fool-proof” strategy as their own. The reason
was simple – without Madoff, the Defendants would not continue to reap the hundreds of
millions paid to them as Madoff’s de facto partners. The Defendants consistently did whatever
they felt they needed to in order to keep their lucrative relationship with Madoff.
504. The Defendants marketed the Feeder Funds in the face of investor skepticism. For
instance, after reviewing Fairfield Sentry’s performance information, one analyst warned a
potential Fairfield Sentry investor: “along with many other investment professionals in business,
we are skeptical regarding the source and repeatability of [Fairfield Sentry’s] returns . . .
Therefore, by definition, we have no quantitative or qualitative rationale for believing in the persistence of this strategy.” The Defendants became aware of the analyst’s assessment when it
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was forwarded to them. (A true and accurate copy of the May 23, 2005 email to Vijayvergiya is attached hereto as Ex. 86.)
505. FGG internally joked about red flags suggesting Madoff was a fraud. Years after the Barron’s article questioned both Fairfield Sentry’s and Madoff’s legitimacy, FGG’s Yanko della Schiava responded to an investor’s inquiries by stating that the investor was “probably a reader of Barrons!” (A true and accurate copy of the September 24, 2003 email from della
Schiava is attached hereto as Ex. 87.)
B. Tightening Industry Standards
506. During the late 1990s and early 2000s, hedge fund frauds and other financial scandals like Barings, Daiwa, Allied Irish Bank, Lipper, Manhattan Investment Fund, and
Bayou, confirmed the recognized need for initial and ongoing reviews of operational risk factors among investment managers. Reasonable investment professionals knew and market events drove home the fact that a high proportion of hedge fund failures resulted from operational problems.
507. By 2002, according to a well-known industry report, approximately 50% of all hedge fund failures resulted in full or in part from poor operational controls, and 91% of these failures had one or more of the following problems in common:
Misappropriation of funds and outright fraud by investment managers who knowingly took money for personal use or to cover trading or other losses;
Misrepresentation of investments through false account reports, valuations and other misleading information;
Unauthorized trading by making investments outside of stated portfolio strategies; and
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Infrastructure insufficiency and inadequate technology or personnel that are not able to accommodate or handle the types of investments and supporting activities engaged in by the investment manager.
(A true and accurate copy of the March 2003 article entitled, “Understanding and Mitigating
Operational Risk in Hedge Fund Investments,” is attached hereto as Ex. 88.)
508. Additional industry articles, “Valuation issues and operational risk in hedge funds” (a true and accurate copy of the 2004 article is attached hereto as Ex. 89), and “Hedge fund operational risk: meeting the demand for higher transparency and best practice” (a true and accurate copy of the 2006 article is attached hereto as Ex. 90), stressed important due diligence standards and processes. Key operational standards included: (i) robust internal controls and procedures over each stage of the trading cycle; (ii) adequate segregation of duties between those who are responsible for trading and those who are responsible for recording trade activities; and
(iii) segregation of signing authority and authority over cash and securities transfers, deposits and withdrawals. Independent checks and balances throughout the trading cycle, the movement of cash, and the custody process were all seen as critical areas of inquiry for those performing independent and reasonable due diligence on investment managers.
509. FGG and the Defendants failed to adhere to these due diligence standards, or virtually any other sound industry practices, when it came to the due diligence and follow up it was required to perform on BLMIS. When it came to Madoff, the FGG Individuals simply made up their own, self-serving rules in order to maintain FGG’s preferred status and its hundreds of millions of dollars in fees.
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C. It Was All Over the Street: Madoff Was Suspected of Being a Fraud
510. The Barron’s and Mar/HEDGE articles were based on publicly available
information and their authors were not outliers. They were among a large group of industry
experts who reviewed public information about the SSC Strategy, saw that it did not make any
sense, and then advised their clients to keep their money far away from BLMIS, and far away from funds like the Feeder Funds. For many years – well before Madoff was arrested – many industry professionals spotted the likelihood of fraud.
511. Edward Thorp, “the grandfather of quantitative analysis,” concluded over the course of a single day, as far back as 1991, Madoff’s claimed returns were nearly impossible, and he was likely a fraud. All Thorp needed to do was check the number of listed options in the account of one BLMIS customer against the number of the same options traded on the CBOE.
512. Later, in 2001, in response to the MAR/Hedge and Barron’s articles, Thorp wrote to a fund manager friend expressing serious concerns about Madoff, and about his friend’s fund being invested in BLMIS:
Just read the Barron’s article. All it does is reinforce my previous suspicions. Do you have access to the “actual” trades done in any one account? If so, can you establish that they could be real? That means checking to see if they are reported on a timely basis, rather than substantially delayed, that they are on listed options, that those options could have traded at those prices and in the volumes reported on the exchanges where the confirms said the trades occurred, and ditto with the stocks.
What if you scale up your representative account to 7bn$. Could the volume of imputed trading in the options markets, in the “universe” traded, actually have been done?
Hope you don’t have a major position, or that you are trading
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on “profits”.
(A true and accurate copy of the May 11, 2001 email from Thorp is attached hereto as Ex. 91
(emphasis added).)
513. Thorp laid out simple, independent, and reasonable due diligence queries that the
Defendants could have, and should have, undertaken. The Defendants did no such due diligence,
asked no such questions, and instead defended Madoff.
514. As early as 1998, Cambridge Associates recommended that clients stay away from Madoff and Madoff-related feeders due to lack of transparency, a fear of front-running the market, and a general inability to understand how the strategy could produce cash-like, bond-like consistency of returns, in an equity strategy. In 2004, Cambridge was more pointed in its discomfort, stating: “it ‘felt illegal’ and that Madoff gave no transparency,” suggesting that
“[i]t might be interesting to compile some historic hedge fund fraud/scams for them to mull
over.” (A true and accurate copy of the redacted public version of the November 11, 2004
Cambridge Associates internal email is attached hereto as Ex. 92 (emphasis added).)
515. In 2003, a team from Société Génerale’s investment bank was sent to New York
to perform due diligence on BLMIS. What Société Génerale discovered was that BLMIS’s
numbers simply “did not add up.” Madoff explained to the Société Génerale team how his
investment strategy worked, but when the team tested the strategy, they could not match
Madoff’s returns. Another red flag made the due diligence team anxious - Madoff’s brother,
Peter, was serving as chief compliance officer of BLMIS. Société Génerale immediately forbade
its investment bank from doing business with BLMIS and discouraged its private banking clients
from investing with Madoff. After uncovering obvious red flags during its due diligence visit,
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Société Génerale blacklisted Madoff. (A true and accurate copy of the December 17, 2008 New
York Times article entitled, “European Banks Tally Losses Linked to Fraud,” is attached hereto as Ex. 93.)
516. Shortly after Madoff’s arrest, Robert Rosenkranz of Acorn Partners, a fund of funds, and an investment adviser to high net worth individuals, reflected in email that Acorn had done due diligence on Madoff and concluded “that fraudulent activity was highly likely.” (A
true and accurate copy of the December 15, 2008 email from Rosenkranz is attached hereto as
Ex. 94.)
517. Acorn succinctly described the indicia of fraud that led it to conclude years prior
that Madoff was a fraud.
We had considered investing in a Madoff managed account, and decided to pass for reasons that give a useful insight into our due diligence process.
First, we ascertained that the description of the strategy (purchase of large cap stocks versus sale of out of the money calls) appeared to be inconsistent with the pattern of returns in the track record, which showed no monthly losses.
Second, we persuaded a Madoff investor to share with us several months of his account statements with Madoff. These revealed a pattern of purchases at or close to daily lows and sales at or close to daily highs, which is virtually impossible to achieve. Moreover, the trading volumes reflected in the account (projected to reflect his account’s share [of] Madoff’s purported assets under management at the time) were vastly in excess of actually reported trading volumes.
Third, we noted that Madoff operated through managed accounts, rather than by setting up a hedge fund of his own. That was suspicious inasmuch as hedge fund fees are typically much higher than the brokerage commissions Madoff was meant to be charging. We suspected the requirement for annual hedge fund audits was the reason he wanted to avoid that approach. We knew that when his clients are audited, their auditors simply look at the account
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statements and transaction reports generated by the brokerage firm; they don’t investigate the books of the brokerage firm itself.
Fourth, although brokerage firms are required to provide annual audit reports, the investor appeared not to have received any. With considerable perseverance, we obtained audit reports filed with the SEC, which were prepared by an utterly obscure accounting firm located in Rockland County New York.
Fifth, we reviewed the audit report itself, which showed no evidence of customer activity whatsoever, neither accounts payables to or accounts receivable from customers. They appeared to be the reports of a market maker, not of a firm that at the time was meant to have some $20 billion of customer accounts.
Taken together, these were not merely warning lights, but a smoking gun. The only plausible explanation we could conceive was that the account statements and trade confirmations were not bona fide but were generated as part of some sort of fraudulent or improper activity.
(A true and accurate copy of the December 12, 2008 email from Acorn to its investors is attached hereto as Ex. 95 (emphasis added).)
518. All of the information flagged by Acorn through proper, independent, and reasonable due diligence, was information that was known or should have been known by the
Defendants. The Defendants did not conduct the type of due diligence performed by Acorn. In fact they conducted no reasonable or independent due diligence at all, even when on both actual and inquiry notice of possible fraud.
519. Media reports following Madoff’s arrest, as well as emails between FGG employees, indicate that in 2004, Mr. Oswald Gruebel, formerly of Credit Suisse and now of
UBS, felt uncomfortable with Madoff and Fairfield Sentry after a meeting between FGG personnel and Credit Suisse representatives. (A true and accurate copy of the February 25, 2004 email from Noel to Piedrahita, Tucker, Toub and Landsberger is attached hereto as Ex. 96.)
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During that meeting, Mr. Gruebel raised serious concerns about Madoff’s obscure auditor who had only one client, BLMIS, and the fact that BLMIS was the self-custodian of its investment clients, such as the Feeder Funds. After Madoff refused to provide answers to such basic questions as to how much money he was managing in the SSC Strategy or further, who worked with him to implement the strategy, Gruebel quickly urged customers to withdraw their funds from BLMIS and redeem their shares from feeder funds, like the FGG funds. (A true and accurate copy of the January 7, 2009 Bloomberg article entitled, “Credit Suisse Urged Clients to
Dump Madoff Funds,” is attached hereto as Ex. 97.)
520. In 2005, ML continued its long-standing policy of not investing in Fairfield
Sentry or any other Madoff feeder fund. ML identified major red flags associated with Fairfield
Sentry and stated conclusively that “the prime broker [Madoff] was an affiliate of the company, the custodian wasn’t independent,” published articles stated the fund’s “affiliated broker was subsidizing the fund,” and “[t]he fund manager refuses to meet potential clients.” (A true and accurate copy of the June 15, 2005 internal ML email is attached hereto as Ex. 98.) A year later,
ML once again expressed its discomfort with Madoff and Fairfield Sentry stating, “Madoff is known for keeping the source of his returns a secret. This caused a lot of speculation on Wall
Street about the true sources of the admittedly impressive returns.” ML also commented internally that “Fairfield is a fund that is unusually opaque to its investors and doesn't accept detailed due diligence which automatically disqualif[ies] it. . . .” (A true and accurate copy of the December 2006 internal ML emails is attached hereto as Ex. 99.) ML emphasized that they were not the only company refusing to get involved with Fairfield Sentry or other Madoff feeder funds. Most of their competitors had taken similar positions. (A true and accurate copy of the
February 6, 2008 internal ML email is attached hereto as Ex. 100.)
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521. In 2007, Aksia, LLC, an independent hedge fund research and advisory firm,
advised clients against investing with BLMIS, Madoff, or any of his feeder funds. (A true and
accurate copy of Aksia’s 2007 report is attached hereto as Ex. 101.) Jim Vos, Chief Operating
Officer and head of research at Aksia, concluded that the stock holdings reported in the quarterly
statements BLMIS filed with the SEC appeared too small to support the size of the assets BLMIS claimed to be managing. (A true and accurate copy of the December 11, 2008 letter from Vos to his clients and friends is attached hereto as Ex. 102.) Aksia also spoke with Mr. Michael Ocrant
(the author of the 2001 MAR/Hedge article), who reaffirmed that Madoff was “definitely a
Ponzi,” is as “bogus as a three dollar bill,” and that “[i]t’s rather easy to come out looking good when you’re a Ponzi.” (A true and accurate copy of the August 14, 2007 email from Ocrant to
Vos is attached hereto as Ex. 103.)
522. Aksia made the simple effort as part of its due diligence to do a background check
on BLMIS’s auditor, as well as having Friehling’s office physically inspected. What was discovered was a simple, closed office in a strip mall with what appeared to be a conference room, secretary space, and two offices. Friehling’s office neighbors told Aksia’s investigator the office did not have regular hours. (A true and accurate copy of the August 23, 2007 email to Vos is attached hereto as Ex. 104.)
523. In a post-Madoff arrest letter to clients Aksia summarized why its due diligence led it to not recommend Madoff feeders:
[T]here were a host of red flags, which taken together made us concerned about the safety of client assets should they invest in these feeders. Consequently, every time we were asked by clients, we waved them away from the Madoff feeder funds.
. . .
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As a research firm we are forced to make difficult judgments about the hedge funds we evaluate for clients. This was not the case with the Madoff feeder funds. Our judgment was swift given the extensive list of red flags. Some of these red flags were as follows:
. . .
It seemed implausible that the S&P100 options market that Madoff purported to trade could handle the size of the combined feeder funds’ assets which we estimated to be $13 billion.
The feeder funds had recognized administrators and auditors but substantially all of the assets were custodied with Madoff Securities. This necessitated Aksia checking the auditor of Madoff Securities, Friehling & Horowitz . . . After some investigating, we concluded that Friehling & Horowitz had three employees, of which one was 78 years old and living in Florida, one was a secretary, and one was an active 47 year old accountant (and the office in Rockland County, NY was only 13ft x 18ft large). This operation appeared small given the scale and scope of Madoff’s activities.
There was at least $13 billion in all the feeder funds, but our standard 13F review showed scatterings of small positions in small (non-S&P100) equities. The explanation provided by the feeder fund managers was that the strategy is 100% cash at every quarter end.
Madoff’s website claimed that the firm was technologically advanced (“the clearing and settlement process is rooted in advanced technology”) and the feeder managers claimed 100% transparency. But when we asked to see the transparency during our onsite visits, we were shown paper tickets that were sent via U.S. mail daily to the managers. The managers had no demonstrated electronic access to their funds accounts at Madoff. Paper copies provide a hedge fund manager with the end of the day ability to manufacture trade tickets that confirm the investment results.
Conversations with former employees indicated a high degree of secrecy surrounding the trading of these feeder fund accounts. Key Madoff family members (brother, daughter, two sons) seemed to control all the key positions at the firm. Aksia is consistently negative on firms where key and control positions are held by family members.
Madoff Securities, through discretionary brokerage agreements, initiated trades in the accounts, executed the trades, and custodied and administered the assets. This seemed to be a clear conflict of interest and a lack of segregation of duties is high on our list of red flags.
(See Ex. 102 (emphasis added).)
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524. In 2007, David Giampaolo, the chief executive of Pi Capital, a money- management firm based in the United Kingdom, met with Piedrahita and other potential investors in London to discuss an FGG Madoff-related fund. During this meeting, Piedrahita stressed the “longevity and the consistency” of the fund’s returns, but was unable to give substantive details regarding the strategy of the fund. When questions arose regarding how the fund generated its performance, Giampaolo recalls “there was no deep scientific or intellectual response” from Piedrahita. (A true and accurate copy of the December 19, 2008 email summarizing the meeting is attached hereto as Ex. 105.)
525. In 2007, Neil Chelo, a portfolio manager at Benchmark Plus Partners, a hedge fund with its headquarters in Washington State, conducted due diligence on FGG. Chelo and
Vijayvergiya had a 45-minute conference call. During this call, Chelo asked Vijayvergiya a list of due diligence questions and concluded that FGG “was not asking any of [the] questions one would expect of a firm purporting to conduct due diligence.” (A true and accurate copy of the February 4, 2009 summary of the call is attached hereto as Ex. 106 (emphasis added).)
Specifically, Chelo asked multiple risk management questions that Vijayvergiya was unable to answer in a satisfactory manner.
526. London due diligence firm Albourne Partners (“Albourne”) stated publicly that it had long-standing concerns about Madoff’s investment strategy and consistent returns, and had been urging clients for a decade to avoid Madoff-related funds. (A true and accurate copy of the
December 31, 2008 Bloomberg Businessweek article entitled, “The Madoff Case Could Reel in
Former Investors,” is attached hereto as Ex. 107.) Albourne emphasized that the consistency of
Madoff’s returns was “too good to be true,” Madoff refused to meet with investors, and Madoff charged no management or performance fees for his services, resulting in his leaving hundreds of
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millions of dollars of money on the table each year. (A true and accurate copy of the December
15, 2008 Albourne press release entitled, “Albourne on Madoff,” is attached hereto as Ex. 108.)
Like others, Albourne flagged as possible fraud the fact that Madoff required that his investors never reveal to anyone that they invested with him. (See Ex. 83.)
527. The above are some of the many illustrations showing that “the street” fully and
openly suspected Madoff was a fraud. These Defendants – who represented nearly half of
Madoff’s billions of dollars of reported assets under management – chose to ignore these well-
recognized suspicions.
XIII. THE DEFENDANTS’ MOTIVATION WAS BOUNDLESS AVA RICE
528. For years the Defendants looked away when faced with repeated signs that
Madoff’s operations and performance could not be legitimate. The reason was simple: greed.
529. The Defendants had an extraordinary and lucrative financial arrangement with
BLMIS. Their sole job was to sell a fund that had returns that were so consistently positive, they
were seemingly impossible. In exchange for selling Madoff’s strategy, the Defendants received
in the aggregate over a billion dollars in fees. The Defendants in their role as fiduciaries had no
desire to perform their duties based on known information because if they did, they knew it
could and would result in an abrupt end to this lucrative financial relationship.
530. The Defendants also knew that without Madoff they could not survive. The funds
the Defendants tried to create without Madoff’s assistance, making their own choices about
which investment managers to place money, were all failures.
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531. The Defendants repeatedly lied about why Madoff would personally leave hundreds of millions of dollars in management and performance fees for FGG Affiliates and
Individual Defendants. Hedge funds typically collect management fees of approximately 1% of assets under management and performance fees of 20%.
532. Unlike virtually everyone in the money-management world, Madoff charged no fees for his investment management services. Madoff sometimes explained his decision not charge fees by stating they he was “perfectly happy to just earn commissions.” In reality,
Madoff was happy to forgo typical performance and management fees, and only earn commissions, as long as his investors remained mum about the source of their inflated returns.
And hedge funds like the Defendant Feeder Funds kept procuring billions of dollars to prolong and prop up the Ponzi scheme so they could continue to reap their enormous fees.
533. A number of professional investors noticed Madoff’s failure to charge fees, in addition to the multitude of other red flags, and made the decision to invest their money elsewhere. (A true and accurate copy of excerpts from the August 2009 SEC Office of Inspector
General’s report on Madoff is attached hereto as Ex. 109.) Madoff’s decision to not collect traditional investment manager’s fees should have raised red flags with FGG given the sheer amount of money that Madoff was foregoing. Madoff could easily have earned an additional
$200 to $400 million plus in annualized management and performance fees. Investment professionals reasonably concluded that a fee structure where the true investment manager voluntarily chose to pass on massive amount of fees was a major red flag of fraud. Defendants knew that the very compensation structure from their relationship with Madoff, which permitted them to be so unjustly enriched, was itself a massive sign of fraud.
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534. The Defendants were not victims. They were enablers. They were facilitators.
They deepened the pain of Madoff’s customers and their own investors. The effect of their actions was a catastrophic continuation of the Ponzi scheme, the worsening of the BLMIS insolvency, and billions of dollars in additional damages. They cannot be allowed to keep the many hundreds of millions of dollars in stolen Customer Property they received from BLMIS.
XIV. THE TRANSFERS
A. Transfers from BLMIS to the Feeder Funds
535. Prior to the Filing Date, the Feeder Funds invested approximately $4.7 billion
with BLMIS through over 300 separate transfers via check and wire directly into the 703
Account.
536. During the six years preceding the Filing Date, BLMIS made transfers to the
Feeder Funds in the collective amount of approximately $3.2 billion (the “Six Year Initial
Transfers”). The Six Year Initial Transfers included transfers of approximately $3.0 billion to
Fairfield Sentry (the “Fairfield Six Year Initial Transfers”), $206.0 million to GS, and $6.0 million to GSP (collectively, the “Greenwich Six Year Initial Transfers”). (See Exs. 2, 5, 7.)
The Six Year Initial Transfers were and continue to be Customer Property within the meaning of
SIPA § 78lll(4) and are subject to turnover to the Trustee pursuant to SIPA § 78fff-2(c)(3) and section 542 of the Bankruptcy Code. The Six Year Initial Transfers are avoidable and recoverable under sections 544, 550, and 551 of the Bankruptcy Code, applicable provisions of
SIPA, particularly SIPA §78fff-2(c)(3), and sections 273-279 of New York Debtor and Creditor
Law.
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537. The Six Year Initial Transfers include approximately $1.7 billion BLMIS
transferred to the Feeder Funds during the two years preceding the Filing Date, (the “Two Year
Initial Transfers”). The Two Year Initial Transfers included transfers of approximately $1.6 billion to Fairfield Sentry (the “Fairfield Two Year Initial Transfers”), $81.7 million to GS, and
$5.4 million to GSP (collectively, the “Greenwich Two Year Initial Transfers”). (See Exs. 2, 5,
7.) The Two Year Initial Transfers were and continue to be Customer Property within the meaning of SIPA §78lll(4) and are subject to turnover to the Trustee pursuant to SIPA §78fff-
2(c)(3) and section 542 of the Bankruptcy Code. The Two Year Initial Transfers are avoidable
and recoverable under sections 548(a)(1), 550, and 551 of the Bankruptcy Code, and applicable
provisions of SIPA, particularly SIPA §78fff-2(c)(3).
538. The Six Year Initial Transfers and Two Year Initial Transfers include $1.2 billion
BLMIS transferred to the Feeder Funds during the 90 days preceding the Filing Date (the
“Preference Period Initial Transfers”). The Preference Period Initial Transfers included transfers of approximately $1.1 billion to Fairfield Sentry (the “Fairfield Preference Period Transfers”) and $23.0 million to GS (the “Greenwich Preference Period Transfers”). (See Exs. 2, 5.) The
Preference Period Initial Transfers were and are Customer Property subject to turnover to the
Trustee pursuant to SIPA §78fff-2(c)(3) and Section 542 of the Bankruptcy Code. The
Preference Period Initial Transfers are avoidable and recoverable under sections 547, 550(a)(1), and 551 of the Bankruptcy Code, and applicable provisions of SIPA, particularly SIPA § 78fff-
2(c)(3).
539. The Trustee has filed this action against the Feeder Funds to avoid and recover the
Initial Transfers and/or seek the turnover of Customer Property to the Trustee.
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540. The Trustee may recover the transfers to GS and GSP from all entities and individuals that served as general partner at the time the transfers were made. GS’s and GSP’s
April, 2006 partnership agreements provide that the general partner “shall have unlimited liability for the repayment and discharge of all debts and obligations of the Partnership attributable to any fiscal year during which they are or were General Partners of the Partnership.”
(True and accurate copies of GS’s and GSP’s Partnership Agreements are attached hereto as Exs.
110, 111.) Upon information and belief, prior and preceding limited partnership agreements of
GS and GSP contained similar provisions regarding the liability of the general partner.
541. Both GS and GSP were formed as limited partnerships under the laws of the State of Delaware. The entities and individuals that served as general partner are also liable under the
Delaware Code provisions governing limited partnerships. Under Delaware law, general partners of limited partnerships have the same liability as partners in general partnerships. Del.
Code Ann. tit. 6, § 17-403(b). Partners in general partnerships are “liable jointly and severally for all obligations of the partnership.” Del. Code Ann. tit. 6, § 15-306(a).
542. Noel and Tucker served as general partners of GS from 1990 to 1998, FGL served as general partner from 1998 to 2003, FGB served as general partner from 2003 to 2004, and then again from 2006 to the present, and GBL served as general partner from 2004 to 2006.
FGB has served as GSP’s general partner since its inception in 2006.
B. Transfers from the Feeder Funds to the FGG Affiliates, Management Defendants, and Sales Defendants
543. Much of the money transferred from BLMIS to the Feeder Funds was
subsequently transferred by the Feeder Funds to the FGG Affiliates, Management Defendants,
and Sales Defendants. These payments from the Feeder Funds constitute subsequent transfers of
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the Initial Transfers from BLMIS to the Feeder Funds. Because the FGG Affiliates,
Management Defendants, and Sales Defendants did not take the funds in good faith or without
knowledge of the voidability of the initial transfers, all transfers from BLMIS to the Feeder
Funds, which the Feeder Funds subsequently transferred, either directly or indirectly, to the FGG
Affiliates, Management Defendants, and Sales Defendants (the “Subsequent Transfers”), were and remain Customer Property subject to turnover to the Trustee and/or are avoidable and recoverable by the Trustee.
544. The portion of the Six Year Initial Transfers that the Feeder Funds subsequently transferred to the FGG Affiliates and FGG Individuals will be referred to as the “Six Year
Subsequent Transfers.”
545. The portion of the Two Year Initial Transfers that the Feeder Funds subsequently transferred to the FGG Affiliates, Management Defendants, and Sales Defendants will be referred to as the “Two Year Subsequent Transfers.”
546. The portion of the Preference Period Initial Transfers that the Feeder Funds subsequently transferred to the FGG Affiliates, Management Defendants, and Sales Defendants will be referred to as the “Preference Period Subsequent Transfers.”
547. To the extent that any of the recovery counts may be inconsistent with each other, they are to be treated as being pled in the alternative.
548. The Trustee’s investigation is on-going and the Trustee reserves the right to (i) supplement the information on the Initial Transfers, Subsequent Transfers, and any additional transfers, and (ii) seek recovery of such additional transfers.
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COUNT ONE: TURNOVER AND ACCOUNTING – 11 U.S.C. § 542
Against All the Defendants
549. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
550. The Initial Transfers and the Subsequent Transfers constitute Customer Property of the estate to be recovered and administered by the Trustee pursuant to sections 541 and 542 of the Bankruptcy Code and SIPA § 78fff-2(c)(3) and § 78lll(4).
551. The Trustee has filed a case on behalf of BLMIS’s estate.
552. As recipients of the Initial Transfers and the Subsequent Transfers, the
Defendants are in possession, custody or control of property the Trustee may use, sell, or lease
under section 363 of the Bankruptcy Code, or that BLMIS may exempt under section 522 of the
Bankruptcy Code.
553. The Defendants are not custodians of the Initial Transfers or the Subsequent
Transfers.
554. The Initial Transfers and the Subsequent Transfers are not of inconsequential
value or benefit to the estate.
555. As a result of the foregoing, pursuant to section 542 of the Bankruptcy Code and
SIPA § 78fff-2(c)(3), the Trustee is entitled to the immediate payment and turnover from the
Defendants of any and all Initial Transfers and Subsequent Transfers made, directly or indirectly,
to the Defendants.
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556. As a result of the foregoing, pursuant to section 542 of the Bankruptcy Code and
SIPA § 78fff-2(c)(3), the Trustee is also entitled to an accounting of any and all Initial Transfers and Subsequent Transfers made, directly or indirectly, to the Defendants.
COUNT TWO: PREFERENTIAL TRANSFERS (INITIAL TRANSFEREE) – 11 U.S.C. §§ 547(b), 550(a)(1), AND 551
Against the Feeder Funds
557. The Trustee incorporates by reference the allegations contained in the previous paragraphs of this Amended Complaint as if fully rewritten herein.
558. At the time of each of the Preference Period Initial Transfers, the Feeder Funds were each a “creditor” of BLMIS within the meaning of section 101(10) of the Bankruptcy Code and pursuant to SIPA § 78fff-2(c)(3).
559. Each of the Preference Period Initial Transfers constitutes a transfer of an interest
of BLMIS in property within the meaning of section 101(54) of the Bankruptcy Code and pursuant to SIPA § 78fff-2(c)(3).
560. Each of the Preference Period Initial Transfers was to or for the benefit of the
Feeder Funds.
561. Each of the Preference Period Initial Transfers was made for or on account of an antecedent debt owed by BLMIS before such transfer was made.
562. Each of the Preference Period Initial Transfers was made while BLMIS was insolvent.
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563. Each of the Preference Period Initial Transfers was made during the preference period under section 547(b)(4) of the Bankruptcy Code.
564. Each of the Preference Period Initial Transfers enabled Fairfield Sentry, GS, and/or GSP to receive more than each of the Feeder Funds would receive if (i) this case was a case under chapter 7 of the Bankruptcy Code, (ii) the transfers had not been made, and (iii) the applicable fund received payment of such debt to the extent provided by the provisions of the
Bankruptcy Code.
565. Each of the Preference Period Initial Transfers constitutes a preferential transfer avoidable by the Trustee pursuant to section 547(b) of the Bankruptcy Code and recoverable from the Feeder Funds as initial transferees or the entities for whose benefit such transfers were made pursuant to section 550(a)(1) of the Bankruptcy Code.
566. As a result of the foregoing, pursuant to sections 547(b), 550(a)(1), and 551 of the
Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of Title 6 of the
Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Preference
Period Initial Transfers, (b) directing that the Preference Period Initial Transfers be set aside, and
(c) recovering the Preference Period Initial Transfers, or the value thereof, from the Feeder
Funds for the benefit of the estate of BLMIS.
COUNT THREE: PREFERENTIAL TRANSFERS (INITIAL TRANSFEREE) – 11 U.S.C. §§ 547(b), 550(a)(1), AND 551
Against FGB
567. The Trustee incorporates by reference the allegations contained in the previous paragraphs of this Amended Complaint as if fully rewritten herein.
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568. At the time of each of the Greenwich Preference Period Initial Transfers, GS was
a “creditor” of BLMIS within the meaning of section 101(10) of the Bankruptcy Code and pursuant to SIPA § 78fff-2(c)(3).
569. Each of the Greenwich Preference Period Initial Transfers constitutes a transfer of an interest of BLMIS in property within the meaning of section 101(54) of the Bankruptcy Code and pursuant to SIPA § 78fff-2(c)(3).
570. Each of the Greenwich Preference Period Initial Transfers was to or for the benefit of GS.
571. Each of the Greenwich Preference Period Initial Transfers was made for or on account of an antecedent debt owed by BLMIS before such transfer was made.
572. Each of the Greenwich Preference Period Initial Transfers was made while
BLMIS was insolvent.
573. Each of the Greenwich Preference Period Initial Transfers was made during the
preference period under section 547(b)(4) of the Bankruptcy Code.
574. Each of the Greenwich Preference Period Initial Transfers enabled GS to receive
more than it would receive if (i) this case was a case under chapter 7 of the Bankruptcy Code, (ii)
the transfers had not been made, and (iii) GS received payment of such debt to the extent
provided by the provisions of the Bankruptcy Code.
575. Each of the Greenwich Preference Period Initial Transfers constitutes a
preferential transfer avoidable by the Trustee pursuant to section 547(b) of the Bankruptcy Code
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and recoverable from GS as a direct transferee pursuant to section 550(a)(1) of the Bankruptcy
Code.
576. FGB served as general partner to GS during the Preference Period. As general
partner to GS, FGB is liable, pursuant to sections 15-306(a) and 17-403(b) of Title 6 of the
Delaware Code, for all obligations GS incurred while FGB was serving as general partner.
577. FGB did not take the Preference Period Initial Transfers for value, in good faith,
or without knowledge of the voidability of the Preference Period Initial Transfers.
578. As a result of the foregoing, pursuant to sections 547(b), 550(a)(1), and 551 of the
Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware
Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich
Preference Period Initial Transfers, (b) directing that the Greenwich Preference Period Initial
Transfers be set aside, and (c) recovering the Greenwich Preference Period Initial Transfers, or
the value thereof, from FGB for the benefit of the estate of BLMIS, and to return to injured
customers.
COUNT FOUR: PREFERENTIAL TRANSFERS (SUBSEQUENT TRANSFEREE) – 11 U.S.C. §§ 547(b), 550(a)(2), AND 551
Against the FGG Affiliates, Management Defendants, and Sales Defendants
579. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
580. At the time of each of the Preference Period Initial Transfers, Fairfield Sentry and
GS were each a “creditor” of BLMIS within the meaning of section 101(10) of the Bankruptcy
Code and pursuant to SIPA § 78fff-2(c)(3).
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581. Each of the Preference Period Initial Transfers constitutes a transfer of an interest
of BLMIS in property within the meaning of section 101(54) of the Bankruptcy Code and pursuant to SIPA § 78fff-2(c)(3).
582. Each of the Preference Period Initial Transfers was to or for the benefit of
Fairfield Sentry or GS.
583. Each of the Preference Period Initial Transfers was made for or on account of an antecedent debt owed by BLMIS before such transfer was made.
584. Each of the Preference Period Initial Transfers was made while BLMIS was insolvent.
585. Each of the Preference Period Initial Transfers was made during the preference period under section 547(b)(4) of the Bankruptcy Code.
586. Each of the Preference Period Initial Transfers enabled Fairfield Sentry and/or GS to receive more than each of the funds would receive if (i) this case was a case under chapter 7 of the Bankruptcy Code, (ii) the transfers had not been made, and (iii) the applicable fund received
payment of such debt to the extent provided by the provisions of the Bankruptcy Code.
587. Each of the Preference Period Initial Transfers constitutes a preferential transfer
avoidable by the Trustee pursuant to section 547(b) of the Bankruptcy Code.
588. The Trustee has filed a lawsuit against Fairfield Sentry and GS to avoid the
Preference Period Initial Transfers pursuant to section 547 of the Bankruptcy Code, and to
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recover the Preference Period Initial Transfers from Fairfield Sentry and GS pursuant to section
550(a)(1) of the Bankruptcy Code.
589. The FGG Affiliates, Management Defendants, and Sales Defendants were immediate or mediate transferees of some portion of the Preference Period Initial Transfers pursuant to section 550(a)(2) of the Bankruptcy Code.
590. As a result of the foregoing, the Trustee is entitled to a judgment pursuant to
sections 547(b), 550(a)(2), and 551 of the Bankruptcy Code and SIPA § 78fff-2(c)(3) recovering
the Preference Period Subsequent Transfers, or the value thereof, from the FGG Affiliates and
FGG Individuals for the benefit of the estate of BLMIS.
591. As a result of the foregoing, pursuant to sections 547(b), 550(a)(2), and 551 of the
Bankruptcy Code and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding
and preserving the Preference Period Initial Transfers, (b) directing that the Preference Period
Initial Transfers be set aside and (c) recovering the Preference Period Subsequent Transfers, or
the value thereof, from the FGG Affiliates, Management Defendants, and Sales Defendants for
the benefit of the estate of BLMIS, and to return to injured customers.
COUNT FIVE: FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – 11 U.S.C. §§ 548(a)(1)(A), 550(a)(1), AND 551
Against the Feeder Funds 592. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
593. The Two Year Initial Transfers were made on or within two years before the
Filing Date.
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594. The Two Year Initial Transfers were made by BLMIS with the actual intent to hinder, delay, or defraud some or all of BLMIS’s then existing or future creditors.
595. Each of the Two Year Initial Transfers constitutes a fraudulent transfer avoidable by the Trustee pursuant to section 548(a)(1)(A) of the Bankruptcy Code and recoverable from
Fairfield Sentry, GS, and GSP as direct transferees pursuant to section 550(a)(1) of the
Bankruptcy Code and SIPA § 78fff-2(c)(3).
596. As a result of the foregoing, pursuant to sections 548(a)(1)(A), 550(a)(1), and 551 of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of Title 6 of the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Two
Year Initial Transfers, (b) directing that the Two Year Initial Transfers be set aside, and (c) recovering the Two Year Initial Transfers, or the value thereof, from the Feeder Funds for the benefit of the estate of BLMIS, and to return to injured customers.
COUNT SIX: FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – 11 U.S.C. §§ 548(a)(1)(A), 550(a)(1), AND 551
Against FGB 597. The Trustee incorporates by reference the allegations contained in the previous paragraphs of this Amended Complaint as if fully rewritten herein.
598. The Greenwich Two Year Initial Transfers were made on or within two years before the Filing Date.
599. The Greenwich Two Year Initial Transfers were made by BLMIS with the actual intent to hinder, delay, or defraud some or all of BLMIS’s then existing or future creditors.
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600. Each of the Greenwich Two Year Initial Transfers constitutes a fraudulent
transfer avoidable by the Trustee pursuant to section 548(a)(1)(A) of the Bankruptcy Code and
recoverable from GS and GSP as direct transferees pursuant to section 550(a)(1) of the
Bankruptcy Code and SIPA § 78fff-2(c)(3).
601. FGB served as general partner to GS and GSP during the two years preceding the
Filing Date. As general partner of GS and GSP, FGB is liable, pursuant to sections 15-306(a) and 17-403(b) of the Delaware Code, for all obligations GS and GSP incurred while FGB was serving as general partner.
602. As a result of the foregoing, pursuant to sections 548(a)(1)(A), 550(a)(1), and 551 of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the
Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich
Two Year Initial Transfers, (b) directing that the Greenwich Two Year Initial Transfers be set aside, and (c) recovering the Greenwich Two Year Initial Transfers, or the value thereof, from
FGB for the benefit of the estate of BLMIS, and to return to injured customers.
COUNT SEVEN: FRAUDULENT TRANSFERS (SUBSEQUENT TRANSFEREE) – 11 U.S.C. §§ 548(a)(1)(A), 550(a)(2), AND 551
Against the FGG Affiliates, Management Defendants, and Sales Defendants 603. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
604. The Two Year Initial Transfers were made on or within two years before the
Filing Date.
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605. The Two Year Initial Transfers were made by BLMIS with the actual intent to hinder, delay, or defraud some or all of BLMIS’s then existing or future creditors.
606. Each of the Two Year Initial Transfers constitutes a fraudulent transfer avoidable by the Trustee pursuant to section 548(a)(1)(A) of the Bankruptcy Code and recoverable from the FGG Affiliates and FGG Individuals pursuant to section 550(a)(2) and SIPA § 78fff-2(c)(3).
607. The Trustee has filed a lawsuit against Fairfield Sentry, GS, and GSP to avoid the
Two Year Initial Transfers pursuant to section 548(a)(1)(A) of the Bankruptcy Code, and to recover the Two Year Initial Transfers from Fairfield Sentry, GS, and GSP pursuant to section
550(a)(1) of the Bankruptcy Code.
608. The FGG Affiliates, Management Defendants, and Sales Defendants were immediate or mediate transferees of some portion of the Two Year Initial Transfers pursuant to section 550(a)(2) of the Bankruptcy Code.
609. As a result of the foregoing, pursuant to sections 548(a)(1)(A), 550(a)(2), and 551 of the Bankruptcy Code and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the Two Year Initial Transfers, (b) directing that the Two Year Initial
Transfers be set aside, and (c) recovering the Two Year Subsequent Transfers, or the value thereof, from the FGG Affiliates, Management Defendants, and Sales Defendants for the benefit of the estate of BLMIS, and to return to injured customers.
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COUNT EIGHT: FRAUDULENT TRANSFER (INITIAL TRANSFEREE) – 11 U.S.C. §§ 548(a)(1)(B) , 550(a)(1), AND 551
Against the Feeder Funds 610. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
611. The Two Year Initial Transfers were made on or within two years before the
Filing Date.
612. BLMIS received less than a reasonably equivalent value in exchange for each of the Two Year Initial Transfers.
613. At the time of each of the Two Year Initial Transfers, BLMIS was insolvent, or became insolvent as a result of the Two Year Initial Transfer in question.
614. At the time of each of the Two Year Initial Transfers, BLMIS was engaged in a business or a transaction, or was about to engage in a business or a transaction, for which any property remaining with BLMIS was an unreasonably small capital.
615. At the time of each of the Two Year Initial Transfers, BLMIS intended to incur, or believed that it would incur, debts that would be beyond BLMIS’s ability to pay as such debts
matured.
616. Each of the Two Year Initial Transfers constitutes a fraudulent transfer avoidable
by the Trustee pursuant to section 548(a)(1)(B) of the Bankruptcy Code and recoverable from
Fairfield Sentry, GS, and GSP pursuant to section 550(a)(1) of the Bankruptcy Code and SIPA §
78fff-2(c)(3).
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617. As a result of the foregoing, pursuant to sections 548(a)(1)(B), 550(a)(1), and 551
of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of Title 6 of
the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Two
Year Initial Transfers, (b) directing that the Two Year Initial Transfers be set aside, and (c)
recovering the Two Year Initial Transfers, or the value thereof, from the Feeder Funds for the
benefit of the estate of BLMIS, and to return to injured customers.
COUNT NINE: FRAUDULENT TRANSFER (INITIAL TRANSFEREE) – 11 U.S.C. §§ 548(a)(1)(B) , 550(a)(1), AND 551
Against FGB 618. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
619. The Greenwich Two Year Initial Transfers were made on or within two years
before the Filing Date.
620. BLMIS received less than a reasonably equivalent value in exchange for each of
the Greenwich Two Year Initial Transfers.
621. At the time of each of the Greenwich Two Year Initial Transfers, BLMIS was
insolvent, or became insolvent as a result of the Greenwich Two Year Initial Transfer in
question.
622. At the time of each of the Greenwich Two Year Initial Transfers, BLMIS was engaged in a business or a transaction, or was about to engage in a business or a transaction, for which any property remaining with BLMIS was an unreasonably small capital.
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623. At the time of each of the Greenwich Two Year Initial Transfers, BLMIS intended to incur, or believed that it would incur, debts that would be beyond BLMIS’s ability to
pay as such debts matured.
624. Each of the Greenwich Two Year Initial Transfers constitutes a fraudulent
transfer avoidable by the Trustee pursuant to section 548(a)(1)(B) of the Bankruptcy Code and
recoverable from GS and GSP pursuant to section 550(a)(1) of the Bankruptcy Code and SIPA §
78fff-2(c)(3).
625. FGB served as general partner to GS and GSP during the two years preceding the
Filing Date. As general partner of GS and GSP, FGB is liable, pursuant to sections 15-306(a)
and 17-403(b) of Title 6 of the Delaware Code, for all obligations GS and GSP incurred while
FGB was serving as general partner.
626. As a result of the foregoing, pursuant to sections 548(a)(1)(B), 550(a)(1), and 551
of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of Title 6 of
the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the
Greenwich Two Year Initial Transfers, (b) directing that the Greenwich Two Year Initial
Transfers be set aside, and (c) recovering the Greenwich Two Year Initial Transfers, or the value
thereof, from FGB for the benefit of the estate of BLMIS, and to return to injured customers.
COUNT TEN: FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE) – 11 U.S.C. §§ 548(a)(1)(B) , 550(a)(2), AND 551
Against the FGG Affiliates, Management Defendants, and Sales Defendants
627. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
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628. The Two Year Initial Transfers were made on or within two years before the
Filing Date.
629. BLMIS received less than a reasonably equivalent value in exchange for each of the Two Year Initial Transfers.
630. At the time of each of the Two Year Initial Transfers, BLMIS was insolvent, or became insolvent as a result of the Two Year Initial Transfers in question.
631. At the time of each of the Two Year Initial Transfers, BLMIS was engaged in a business or a transaction, or was about to engage in a business or a transaction, for which any property remaining with BLMIS was an unreasonably small capital.
632. At the time of each of the Two Year Initial Transfers, BLMIS intended to incur, or believed that it would incur, debts that would be beyond BLMIS’s ability to pay as such debts matured.
633. Each of the Two Year Initial Transfers constitutes a fraudulent transfer avoidable by the Trustee pursuant to section 548(a)(1)(B) of the Bankruptcy Code and recoverable from the
FGG Affiliates and FGG Individuals pursuant to section 550(a)(2) and SIPA § 78fff-2(c)(3).
634. The Trustee has filed a lawsuit against Fairfield Sentry, GS, and GSP to avoid the
Two Year Initial Transfers pursuant to section 548(a)(1)(B) of the Bankruptcy Code, and to recover the Two Year Initial Transfers from Fairfield Sentry, GS, and GSP pursuant to section
550(a)(1) of the Bankruptcy Code and SIPA § 78fff-2(c)(3).
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635. The FGG Affiliates, Management Defendants, and Sales Defendants were
immediate or mediate transferees of some portion of the Two Year Initial Transfers pursuant to
section 550(a)(2) of the Bankruptcy Code.
636. As a result of the foregoing, pursuant to sections 548(a)(1)(B), 550(a)(2), and 551
of the Bankruptcy Code and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a)
avoiding and preserving the Two Year Initial Transfers, (b) directing that the Two Year Initial
Transfers be set aside, and (c) recovering the Two Year Subsequent Transfers, or the value
thereof, from the FGG Affiliates, Management Defendants, and Sales Defendants for the benefit
of the estate of BLMIS, and to return to injured customers.
COUNT ELEVEN: FRAUDULENT TRANSFER (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551
Against the Feeder Funds 637. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
638. At all times relevant to the Six Year Initial Transfers, there have been one or more
creditors who have held and still hold matured or unmatured unsecured claims against BLMIS that were and are allowable under section 502 of the Bankruptcy Code or that were and are not allowable only under section 502(e).
639. The Six Year Initial Transfers were made by BLMIS and transferees with the actual intent to hinder, delay, or defraud the creditors of BLMIS. BLMIS made the Six Year
Initial Transfers to or for the benefit of Fairfield Sentry, GS, and/or GSP in furtherance of a fraudulent investment scheme.
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640. The Six Year Initial Transfers were received by the Feeder Funds with actual
intent to hinder, delay, or defraud creditors of BLMIS at the time of each of the transfers and/or future creditors of BLMIS.
641. As a result of the foregoing, pursuant to sections 276, 276-a, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b), 550(a)(1), and 551 of the Bankruptcy
Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the
Trustee is entitled to a judgment: (a) avoiding and preserving the Six Year Initial Transfers, (b) directing that the Six Year Initial Transfers be set aside, (c) recovering the Six Year Initial
Transfers, or the value thereof, from the Feeder Funds for the benefit of the estate of BLMIS, , and to return to injured customers, and (d) recovering attorneys’ fees from the Feeder Funds.
COUNT TWELVE: FRAUDULENT TRANSFER (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551
Against FGB, FGL, and GBL 642. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
643. At all times relevant to the Greenwich Six Year Initial Transfers, there have been
one or more creditors who have held and still hold matured or unmatured unsecured claims
against BLMIS that were and are allowable under section 502 of the Bankruptcy Code or that
were and are not allowable only under section 502(e).
644. The Greenwich Six Year Initial Transfers were made by BLMIS and the
transferees with the actual intent to hinder, delay, or defraud the creditors of BLMIS. BLMIS
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made the Greenwich Six Year Initial Transfers to or for the benefit of GS and/or GSP in
furtherance of a fraudulent investment scheme.
645. The Greenwich Six Year Initial Transfers were received by GS and GSP with the
actual intent to hinder, delay, or defraud creditors of BLMIS at the time of each of the transfers and/or future creditors of BLMIS.
646. FGB, FGL, and GBL each served as general partner to GS and/or GSP during the six years preceding the Filing Date. As general partner of GS and GSP, FGB, FGL, and GBL are each liable, pursuant to sections 15-306(a) and 17-403(b) of the Delaware Code, for all obligations GS and GSP incurred while FGB, FGL, and GBL were each serving as general partner.
647. As a result of the foregoing, pursuant to sections 276, 276-a, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b), 550(a)(1), and 551 of the Bankruptcy
Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the
Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich Six Year Initial
Transfers, (b) directing that the Greenwich Six Year Initial Transfers be set aside, (c) recovering the Greenwich Six Year Initial Transfers, or the value thereof, from FGB, FGL, and GBL for the benefit of the estate of BLMIS, and to return to injured customers, and (d) recovering attorneys’
fees from FGB, FGL and GBL.
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COUNT THIRTEEN: FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(2), AND 551
Against the FGG Affiliates, Management Defendants, and Sales Defendants 648. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
649. At all times relevant to the Six Year Initial Transfers, there have been one or more
creditors who have held and still hold matured or unmatured unsecured claims against BLMIS that were and are allowable under section 502 of the Bankruptcy Code or that were and are not allowable only under section 502(e).
650. The Six Year Initial Transfers were made by BLMIS and the transferees with the actual intent to hinder, delay, or defraud the creditors of BLMIS. BLMIS made the Six Year
Initial Transfers to or for the benefit of Fairfield Sentry, GS, and/or GSP in furtherance of a fraudulent investment scheme.
651. The Trustee has filed a lawsuit against Fairfield Sentry, GS, and GSP to avoid the
Six Year Initial Transfers pursuant to section 544 of the Bankruptcy Code, and sections 276-9 of the New York Debtor and Creditor Law, and to recover the Six Year Initial Transfers from
Fairfield Sentry, GS, and GSP pursuant to section 550(a)(1) of the Bankruptcy Code and SIPA §
78fff-2(c)(3).
652. The FGG Affiliates, Management Defendants, and Sales Defendants were immediate or mediate transferees of some portion of the Six Year Initial Transfers pursuant to section 550(a)(2) of the Bankruptcy Code.
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653. As a result of the foregoing, pursuant to sections 276, 276-a, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b), 550(a)(2), and 551 of the Bankruptcy
Code, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the Six Year Initial Transfers, (b) directing that the Six Year Initial Transfers be set aside, (c) recovering the Six Year Subsequent Transfers, or the value thereof, from the FGG
Affiliates, Management Defendants, and Sales Defendants for the benefit of the estate of
BLMIS, and to return to injured customers, and (d) recovering attorneys’ fees from the FGG
Affiliates, Management Defendants, and Sales Defendants.
COUNT FOURTEEN: FRAUDULENT TRANSFER (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 273 AND 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551
Against the Feeder Funds 654. The Trustee incorporates by reference the allegations contained in the previous paragraphs of the Amended Complaint as if fully rewritten herein.
655. At all relevant times there was and is at least one or more creditors who held and hold matured or unmatured unsecured claims against BLMIS that were and are allowable under section 502 of the Bankruptcy Code or that were and are not allowable only under section
502(e).
656. BLMIS did not receive fair consideration for the Six Year Initial Transfers.
657. BLMIS was insolvent at the time it made each of the Six Year Initial Transfers or, in the alterative, BLMIS became insolvent as a result of each of the Six Year Initial Transfers.
658. As a result of the foregoing, pursuant to sections 273, 278, and/or 279 of the New
York Debtor and Creditor Law, sections 544(b), 550(a)(1), 551 of the Bankruptcy Code, SIPA
178 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 186 of 229
§ 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Six Year Initial Transfers, (b) directing that the Six Year Initial Transfers be set aside, and (c) recovering the Six Year Initial Transfers, or the value thereof, from the Feeder Funds for the benefit of the estate of BLMIS, and to return to injured customers.
COUNT FIFTEEN: FRAUDULENT TRANSFER (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 273 AND 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551
Against the FGB, FGL, and GBL 659. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of the Amended Complaint as if fully rewritten herein.
660. At all relevant times there was and is at least one or more creditors who held and
hold matured or unmatured unsecured claims against BLMIS that were and are allowable under
section 502 of the Bankruptcy Code or that were and are not allowable only under section
502(e).
661. BLMIS did not receive fair consideration for the Greenwich Six Year Initial
Transfers.
662. BLMIS was insolvent at the time it made each of the Greenwich Six Year Initial
Transfers or, in the alterative, BLMIS became insolvent as a result of each of the Greenwich Six
Year Initial Transfers.
663. FGB, FGL and GBL each served as general partner to GS and/or GSP during the
six years preceding the Filing Date. As general partner of GS and GSP, FGB, FGL, and GBL are
each liable, pursuant to sections 15-306(a) and 17-403(b) of the Delaware Code, for all
179 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 187 of 229
obligations GS and GSP incurred while FGB, FGL, and GBL were each serving as general
partner.
664. As a result of the foregoing, pursuant to sections 273, 278, and/or 279 of the New
York Debtor and Creditor Law, sections 544(b), 550(a)(1), 551 of the Bankruptcy Code, SIPA
§ 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich Six Year Initial Transfers, (b) directing that the Greenwich Six Year Initial Transfers be set aside, and (c) recovering the
Greenwich Six Year Initial Transfers, or the value thereof, from FGB, FGL, and GBL for the benefit of the estate of BLMIS, and to return to injured customers.
COUNT SIXTEEN: FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 273 AND 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(2), AND 551
Against the FGG Affiliates, Management Defendants, and Sales Defendants 665. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of the Amended Complaint as if fully rewritten herein.
666. At all relevant times there was and is at least one or more creditors who held and
hold matured or unmatured unsecured claims against BLMIS that were and are allowable under
section 502 of the Bankruptcy Code or that were and are not allowable only under section
502(e).
667. BLMIS did not receive fair consideration for the Six Year Initial Transfers.
668. BLMIS was insolvent at the time it made each of the Six Year Initial Transfers or,
in the alterative, BLMIS became insolvent as a result of each of the Six Year Initial Transfers.
180 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 188 of 229
669. The Trustee has filed a lawsuit against Fairfield Sentry, GS, and GSP to avoid the
Six Year Initial Transfers pursuant to section 544 of the Bankruptcy Code, and sections 273, 278,
and/or 279 of the New York Debtor and Creditor Law, and to recover the Six Year Initial
Transfers from Fairfield Sentry, GS, and GSP pursuant to section 550(a)(1) of the Bankruptcy
Code.
670. The FGG Affiliates, Management Defendants, and Sales Defendants were immediate or mediate transferees of some portion of the Six Year Initial Transfers pursuant to section 550(a)(2) of the Bankruptcy Code.
671. As a result of the foregoing, pursuant to sections 273, 278, and/or 279 of the New
York Debtor and Creditor Law, sections 544(b), 550(a)(2), 551 of the Bankruptcy Code, and
SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the Six
Year Initial Transfers, (b) directing that the Six Year Initial Transfers be set aside, and (c)
recovering the Six Year Subsequent Transfers, or the value thereof, from the FGG Affiliates,
Management Defendants, and Sales Defendants for the benefit of the estate of BLMIS, and to
return to injured customers.
COUNT SEVENTEEN: FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 274, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551
Against the Feeder Funds 672. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of the Amended Complaint as if fully rewritten herein.
673. At all relevant times there was and is at least one or more creditors who held and
hold matured or unmatured unsecured claims against BLMIS that were and are allowable under
181 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 189 of 229
section 502 of the Bankruptcy Code or that were and are not allowable only under section
502(e).
674. BLMIS did not receive fair consideration for the Six Year Initial Transfers.
675. At the time BLMIS made each of the Six Year Initial Transfers, BLMIS was engaged or was about to engage in a business or transaction for which the property remaining in its hands after each of the Six Year Initial Transfers was an unreasonably small capital.
676. As a result of the foregoing, pursuant to §§ 274, 278, and/or 279 of the New York
Debtor and Creditor Law, sections 544(b), 550(a)(1) and 551 of the Bankruptcy Code, SIPA
§ 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Six Year Initial Transfers, (b) directing that the Six Year Initial Transfers be set aside, and (c) recovering the Six Year Initial Transfers, or the value thereof, from the Feeder Funds for the benefit of the estate of BLMIS, and to return to injured customers.
COUNT EIGHTEEN: FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 274, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551
Against FGB, FGL, and GBL 677. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of the Amended Complaint as if fully rewritten herein.
678. At all relevant times there was and is at least one or more creditors who held and
hold matured or unmatured unsecured claims against BLMIS that were and are allowable under
section 502 of the Bankruptcy Code or that were and are not allowable only under section
502(e).
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679. BLMIS did not receive fair consideration for the Greenwich Six Year Initial
Transfers.
680. At the time BLMIS made each of the Greenwich Six Year Initial Transfers,
BLMIS was engaged or was about to engage in a business or transaction for which the property remaining in its hands after each of the Greenwich Six Year Initial Transfers was an unreasonably small capital.
681. FGB, FGL, and GBL each served as general partner to GS and/or GSP during the six years preceding the Filing Date. As general partner of GS and GSP, FGB, FGL, and GBL are each liable, pursuant to sections 15-306(a) and 17-403(b) of the Delaware Code, for all obligations GS and GSP incurred while FGB, FGL, and GBL were each serving as general partner.
682. As a result of the foregoing, pursuant to sections 274, 278, and/or 279 of the New
York Debtor and Creditor Law, sections 544(b), 550(a)(1), and 551 of the Bankruptcy Code,
SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich Six Year Initial Transfers, (b) directing that the Greenwich Six Year Initial Transfers be set aside, and (c) recovering the
Greenwich Six Year Initial Transfers, or the value thereof, from FGB, FGL, and GBL for the benefit of the estate of BLMIS, and to return to injured customers.
COUNT NINETEEN: FRAUDULENT TRANSFERS (SUBSEQUENT TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 274, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(2), AND 551
Against the FGG Affiliates, Management Defendants, and Sales Defendants 683. The Trustee incorporates by reference the allegations contained in the previous
183 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 191 of 229
paragraphs of the Amended Complaint as if fully rewritten herein.
684. At all relevant times there was and is at least one or more creditors who held and
hold matured or unmatured unsecured claims against BLMIS that were and are allowable under
section 502 of the Bankruptcy Code or that were and are not allowable only under section
502(e).
685. BLMIS did not receive fair consideration for the Six Year Initial Transfers.
686. At the time BLMIS made each of the Six Year Initial Transfers, BLMIS was engaged or was about to engage in a business or transaction for which the property remaining in its hands after each of the Six Year Initial Transfers was an unreasonably small capital.
687. The Trustee has filed a lawsuit against Fairfield Sentry, GS, and GSP to avoid the
Six Year Initial Transfers pursuant to section 544 of the Bankruptcy Code, and sections 274, 278, and/or 279 of the New York Debtor and Creditor Law, and to recover the Six Year Initial
Transfers from Fairfield Sentry, GS, and GSP pursuant to section 550(a)(1) of the Bankruptcy
Code and SIPA § 78fff-2(c)(3).
688. The FGG Affiliates, Management Defendants, and Sales Defendants were immediate or mediate transferees of some portion of the Six Year Initial Transfers pursuant to section 550(a)(2) of the Bankruptcy Code.
689. As a result of the foregoing, pursuant to sections 274, 278, and/or 279 of the New
York Debtor and Creditor Law, sections 544(b), 550(a)(2), and 551 of the Bankruptcy Code, and
SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the Six
Year Initial Transfers, (b) directing that the Six Year Initial Transfers be set aside, and (c)
184 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 192 of 229
recovering the Six Year Subsequent Transfers, or the value thereof, from the FGG Affiliates,
Management Defendants, and Sales Defendants for the benefit of the estate of BLMIS, and to
return to injured customers.
COUNT TWENTY: FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 275, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551
Against the Feeder Funds 690. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of the Amended Complaint as if fully rewritten herein.
691. At all relevant times there was and is at least one or more creditors who held and
hold matured or unmatured unsecured claims against BLMIS that were and are allowable under
section 502 of the Bankruptcy Code or that were and are not allowable only under section
502(e).
692. BLMIS did not receive fair consideration for the Six Year Initial Transfers.
693. At the time BLMIS made each of the Six Year Initial Transfers, BLMIS had incurred, was intending to incur, or believed that it would incur debts beyond its ability to pay
them as the debts matured.
694. As a result of the foregoing, pursuant to sections 275, 278, and/or 279 of the New
York Debtor and Creditor Law, sections 544(b), 550(a)(1), and 551 of the Bankruptcy Code,
SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the Trustee is
entitled to a judgment: (a) avoiding and preserving the Six Year Initial Transfers, (b) directing
that the Six Year Initial Transfers be set aside, and (c) recovering the Six Year Initial Transfers,
185 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 193 of 229
or the value thereof, from the Feeder Funds for the benefit of the estate of BLMIS, and to return
to injured customers.
COUNT TWENTY-ONE: FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 275, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551
Against FGB, FGL, and GBL 695. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of the Amended Complaint as if fully rewritten herein.
696. At all relevant times there was and is at least one or more creditors who held and hold matured or unmatured unsecured claims against BLMIS that were and are allowable under
section 502 of the Bankruptcy Code or that were and are not allowable only under section
502(e).
697. BLMIS did not receive fair consideration for the Greenwich Six Year Initial
Transfers.
698. At the time BLMIS made each of the Greenwich Six Year Initial Transfers,
BLMIS had incurred, was intending to incur, or believed that it would incur debts beyond its
ability to pay them as the debts matured.
699. FGB, FGL, and GBL each served as general partner to GS and/or GSP during the
six years preceding the Filing Date. As general partner of GS and GSP, FGB, FGL and GBL are each liable, pursuant to sections 15-306(a) and 17-403(b) of the Delaware Code, for all
obligations GS and GSP incurred while FGB, FGL, and GBL were each serving as general
partner.
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700. As a result of the foregoing, pursuant to sections 275, 278, and/or 279 of the New
York Debtor and Creditor Law, sections 544(b), 550(a)(1), and 551 of the Bankruptcy Code,
SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the Trustee is
entitled to a judgment: (a) avoiding and preserving the Greenwich Six Year Initial Transfers, (b)
directing that the Greenwich Six Year Initial Transfers be set aside, and (c) recovering the
Greenwich Six Year Initial Transfers, or the value thereof, from FGB, FGL, and GBL for the
benefit of the estate of BLMIS, and to return to injured customers.
COUNT TWENTY-TWO: FRAUDULENT TRANSFERS (SUBSEQUENT TRANSFEREE) – NEW YORK DEBTOR AND CREDITOR LAW §§ 275, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(2), 551
Against the FGG Affiliates, Management Defendants, and Sales Defendants
701. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of the Amended Complaint as if fully rewritten herein.
702. At all relevant times there was and is at least one or more creditors who held and
hold matured or unmatured unsecured claims against BLMIS that were and are allowable under
section 502 of the Bankruptcy Code or that were and are not allowable only under section
502(e).
703. BLMIS did not receive fair consideration for the Six Year Initial Transfers.
704. At the time BLMIS made each of the Six Year Initial Transfers, BLMIS had incurred, was intending to incur, or believed that it would incur debts beyond its ability to pay
them as the debts matured.
705. The Trustee has filed a lawsuit against Fairfield Sentry, GS, and GSP to avoid the
Six Year Initial Transfers pursuant to section 544 of the Bankruptcy Code, and sections 275, 278,
187 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 195 of 229
and/or 279 of the New York Debtor and Creditor Law, and to recover the Six Year Initial
Transfers from Fairfield Sentry, GS, and GSP pursuant to section 550(a)(1) of the Bankruptcy
Code and SIPA § 78fff-2(c)(3).
706. The FGG Affiliates, Management Defendants, and Sales Defendants were
immediate or mediate transferees of some portion of the Six Year Initial Transfers pursuant to
section 550(a)(2) of the Bankruptcy Code.
707. As a result of the foregoing, pursuant to sections 275, 278, and/or 279 of the New
York Debtor and Creditor Law, sections 544(b), 550(a)(2), and 551 of the Bankruptcy Code, and
SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the Six
Year Initial Transfers, (b) directing that the Six Year Initial Transfers be set aside, and (c)
recovering the Six Year Subsequent Transfers, or the value thereof, from the FGG Affiliates,
Management Defendants, and Sales Defendants for the benefit of the estate of BLMIS, and to
return to injured customers.
COUNT TWENTY-THREE: UNDISCOVERED FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – NEW YORK CIVIL PROCEDURE LAW AND RULES 203(g), 213(8), NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551
Against the Feeder Funds
708. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
709. At all times relevant to the Initial Transfers, the fraudulent scheme perpetrated by
BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS.
188 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 196 of 229
710. At all times relevant to the Initial Transfers, there have been one or more creditors
who have held and still hold matured or unmatured unsecured claims against BLMIS that were and are allowable under section 502 of the Bankruptcy Code or that were and are not allowable only under section 502(e).
711. The Initial Transfers were made by BLMIS and the transferees with the actual intent to hinder, delay, or defraud the creditors of BLMIS. BLMIS made the Initial Transfers to or for the benefit of Fairfield Sentry, GS, and GSP in furtherance of a fraudulent investment scheme.
712. Fairfield Sentry, GS, and GSP received the Initial Transfer with actual intent to hinder, delay, or defraud creditors of BLMIS at the time of each of the transfers and/or future creditors of BLMIS.
713. As a result of the foregoing, pursuant to NY CPLR 203(g), 213(8), sections 276,
276-a, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b), 550(a)(1), and 551 of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Initial
Transfers, (b) directing that the Initial Transfers be set aside, (c) recovering the Initial Transfers, or the value thereof, from the Feeder Funds for the benefit of the estate of BLMIS, and to return to injured customers, and (d) recovering attorneys’ fees from the Feeder Funds.
189 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 197 of 229
COUNT TWENTY-FOUR: UNDISCOVERED FRAUDULENT TRANSFERS (INITIAL TRANSFEREE) – NEW YORK CIVIL PROCEDURE LAW AND RULES 203(g), 213(8), NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(1), AND 551
Against FGB, FGL, GBL, Noel, and Tucker
714. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
715. At all times relevant to the Greenwich Initial Transfers, the fraudulent scheme
perpetrated by BLMIS was not reasonably discoverable by at least one unsecured creditor of
BLMIS.
716. At all times relevant to the Greenwich Initial Transfers, there have been one or more creditors who have held and still hold matured or unmatured unsecured claims against
BLMIS that were and are allowable under section 502 of the Bankruptcy Code or that were and are not allowable only under section 502(e).
717. The Greenwich Initial Transfers were made by BLMIS and the transferees with
the actual intent to hinder, delay, or defraud the creditors of BLMIS. BLMIS made the
Greenwich Initial Transfers to or for the benefit of GS and GSP in furtherance of a fraudulent investment scheme.
718. GS and GSP received the Greenwich Initial Transfers with actual intent to hinder, delay, or defraud creditors of BLMIS at the time of each of the transfers and/or future creditors of BLMIS.
719. FGB, FGL, GBL, Noel, and Tucker each served as general partner to GS and/or
GSP during the six years preceding the Filing Date. As general partner of GS and GSP, FGB,
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FGL, GBL, Noel, and Tucker are each liable, pursuant to sections 15-306(a) and 17-403(b) of
the Delaware Code, for all obligations GS and GSP incurred while FGB, FGL, GBL, Noel, and
Tucker were each serving as general partner.
720. As a result of the foregoing, pursuant to NY CPLR 203(g), 213(8), sections 276,
276-a, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b), 550(a)(1),
and 551 of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of
the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the
Greenwich Initial Transfers, (b) directing that the Greenwich Initial Transfers be set aside, (c)
recovering the Greenwich Initial Transfers, or the value thereof, from FGB, FGL, GBL, Noel,
and Tucker for the benefit of the estate of BLMIS, and to return to injured customers, and (d)
recovering attorneys’ fees from FGB, FGL, GBL, Noel, and Tucker.
COUNT TWENTY-FIVE: UNDISCOVERED FRAUDULENT TRANSFERS (SUBSEQUENT TRANSFEREE) – NEW YORK CIVIL PROCEDURE LAW AND RULES 203(g), 213(8), NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a)(2), AND 551
Against the FGG Affiliates, Management Defendants, and Sales Defendants
721. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
722. At all times relevant to the Initial Transfers, the fraudulent scheme perpetrated by
BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS.
723. At all times relevant to the Initial Transfers, there have been one or more creditors
who have held and still hold matured or unmatured unsecured claims against BLMIS that were and are allowable under section 502 of the Bankruptcy Code or that were and are not allowable only under section 502(e).
191 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 199 of 229
724. The Initial Transfers were made by BLMIS and the transferees with the actual intent to hinder, delay, or defraud the creditors of BLMIS. BLMIS made the Initial Transfers to or for the benefit of Fairfield Sentry, GS, and GSP in furtherance of a fraudulent investment scheme.
725. The Trustee has filed a lawsuit against Fairfield Sentry, GS, and GSP to avoid the
Initial Transfers pursuant to section 544 of the Bankruptcy Code, sections 275, 278, and/or 279 of the New York Debtor and Creditor Law, and Rule 203(g) of the New York Civil Procedure
Law and Rules, and to recover the Initial Transfers from Fairfield Sentry, GS, and GSP pursuant to section 550(a)(1) of the Bankruptcy Code.
726. The FGG Affiliates, Management Defendants, and Sales Defendants were immediate or mediate transferees of some portion of the Initial Transfers pursuant to section
550(a)(2) of the Bankruptcy Code.
727. As a result of the foregoing, pursuant to NY CPLR 203(g) and 213(8), sections
276, 276-a, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b),
550(a)(2), and 551 of the Bankruptcy Code, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the Initial Transfers, (b) directing that the Initial
Transfers be set aside, (c) recovering the Subsequent Transfers, or the value thereof, from the
FGG Affiliates, Management Defendants, and Sales Defendants for the benefit of the estate of
BLMIS, and to return to injured customers, and (d) recovering attorneys’ fees from the FGG
Affiliates, Management Defendants, and Sales Defendants.
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COUNT TWENTY-SIX: OBJECTION TO THE DEFENDANTS’ CUSTOMER CLAIMS
Against Fairfield Sentry, GS, GSP, Sigma, Lambda, FGB, Noel, Tucker, Blum, and Harary
728. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
729. Fairfield Sentry, GS, GSP, Sigma, Lambda, FGB, Noel, Tucker, Blum, and
Harary have filed customer claims.
730. These claims (the “Claims”) are not supported by the books and records of
BLMIS nor the claim materials submitted by the claimants, and, therefore, should be disallowed
pursuant to sections 502(d) of the Bankruptcy Code.
731. The Claims also should not be allowed as customer claims or as general
unsecured claims. Fairfield Sentry, GS, GSP, Sigma, Lambda, FGB, Noel, Tucker, Blum, and
Harary are the recipients, as direct, immediate, and/or mediate transferees, of transfers of customers’ property that are available and recoverable under sections 502(a), 544(b), 547, 548, and 550 of the Bankruptcy Code, NY Debtor and Creditor Law 270 et seq., NYCPLR 203(g) and
213(8), and applicable sections of SIPA, including § 78fff-2(c)(3), and Fairfield Sentry, GS,
GSP, Sigma, Lambda, FGB, Noel, Tucker, Blum, and Harary have not returned the Initial
Transfers or the Subsequent Transfers to the Trustee. As a result, pursuant to section 502(d), the
Claims must be disallowed unless and until Fairfield Sentry, GS, GSP, Sigma, Lambda, FGB,
Noel, Tucker, Blum, and Harary return the Initial Transfers and the Subsequent Transfers to the
Trustee.
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732. As a result of the foregoing, the Trustee is entitled to an order disallowing the
Claims and/or that Fairfield Sentry, GS, GSP, Sigma, Lambda, FGB, Noel, Tucker, Blum, and
Harary are not entitled to customer status.
COUNT TWENTY-SEVEN: UNJUST ENRICHMENT
Against the FGG Affiliates, Management Defendants, and Sales Defendants (“Non-Feeder Fund Defendants”)
733. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
734. The Non-Feeder Funds Defendants have all been unjustly enriched. They have
wrongfully and unconscionably benefited from the receipt of stolen money from BLMIS and
from the Feeder Funds’ investors, for which they did not in good faith provide fair value. These
Defendants were further unjustly enriched as a result of aiding, abetting, enabling, and
substantially participating in a fraudulent scheme.
735. The FGG Affiliates earned over a billion dollars in fees. The Management
Defendants and Sales Defendants received hundreds of millions of dollars in partnership
distributions, salaries, bonuses, and other compensation. None of this money has been returned
to the Trustee for equitable distribution to BLMIS customers who lost billions of dollars in the
Ponzi scheme.
736. As described above, the Non-Feeder Fund Defendants were constantly faced with
evidence that BLMIS was a fraud. For example, in 2005 they confirmed Madoff’s auditor lied
about his capacities and ability to audit the billions of dollars in BLMIS’s customer accounts.
(See supra ¶¶377-398.) They also knew the consistency of Madoff’s returns were, statistically,
194 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 202 of 229
too good to be true. (See supra ¶¶400-404, 451-461.) They knew Madoff’s purported trading structure was inconsistent with industry practices and produced trading volumes that were virtually impossible. (See supra ¶¶412-440.) Their own investors and paid consultants, along with numerous industry professionals, raised these concerns over and over again. (See supra
¶¶462-479, 498-527.)
737. Instead of warning their investors and Madoff’s other customers, and reporting
Madoff to regulators, the Non-Feeder Fund Defendants helped Madoff market BLMIS to their own investors, helped shield him from FGG investors who wanted to meet with him, and protected him by making misrepresentations to the SEC. (See supra ¶¶350-361.) Confronted with a plethora of red flags, these Defendants continued to try to raise billions of dollars from investors to enrich themselves. (See supra ¶¶480-489.)
738. Faced with the prospect of losing hundreds of millions of dollars in fees, the Non-
Feeder Fund Defendants chose to cover up the compelling evidence of Madoff’s fraud. As a result, they have been unjustly enriched by over one billion dollars that rightfully belongs to
BLMIS customers.
739. Equity and good conscience require full restitution of the monies received by the
Non-Feeder Fund Defendants, directly and indirectly, from BLMIS and any assets derived from that money.
COUNT TWENTY-EIGHT: CONVERSION
Against Noel, Tucker, Piedrahita, McKeefry, Lipton, Vijayvergiya, McKenzie, Landsberger, Toub, Blum, and Smith
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740. The Trustee incorporates by reference the allegations in the previous paragraphs
of this Amended Complaint as if fully rewritten herein.
741. The Trustee has the possessory right and interest to all property in the
Defendants’ possession that went to the Defendants by virtue of the Ponzi scheme. This property
reflects money and other interests, which originated from and were co-mingled with other
BLMIS customer accounts.
742. The Trustee’s possessory interest in this Customer Property is governed by SIPA.
The Trustee has the superior right of possession to all fees, distributions, and other monies that
the Defendants possess and that originated from BLMIS. The Defendants’ dominion over and
interference with the Trustee’s interest in the Customer Property is in derogation of the Trustee’s
right and obligation to return this property on an equitable basis to BLMIS customers.
743. The Defendants are not authorized, and have never been authorized, to exercise
dominion and control over Customer Property. These specifically identified funds have been
wrongfully converted by the Defendants.
744. As a result of the foregoing, the Defendants are liable to the Trustee for having wrongfully converted this Customer Property and are obligated to return all such monies.
COUNT TWENTY-NINE: MONEY HAD AND RECEIVED
745. The Trustee incorporates by reference the allegations of the preceding paragraphs of this Amended Complaint as if fully rewritten herein.
746. The Defendants are currently in possession of, or have control over, money that originated from BLMIS. These monies are Customer Property and belong to the customer fund
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under the Trustee’s control. The Defendants have no lawful or equitable right to these monies,
having obtained the monies through fraud, deceit, and/or mistake.
747. In equity and good conscience, the Defendants may not retain possession or control of these monies, which rightfully belong to the customer fund under the Trustee’s control. The Defendants are obligated to return all such monies to the Trustee.
COUNT THIRTY: AIDING AND ABETTING FRAUD
Against Noel, Tucker, Piedrahita, McKeefry, Lipton, Vijayvergiya, McKenzie, Landsberger, Toub, Blum, and Smith
748. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
749. By virtue of their individual functions and responsibilities within FGG, their
communications with investors, and all of the information of which they had knowledge, each of
Defendants Noel, Tucker, Piedrahita, McKeefry, Lipton, Vijayvergiya, McKenzie, Landsberger,
Toub, Blum, and Smith knew Madoff was engaged in fraudulent behavior. Noel, Tucker,
Piedrahita, McKeefry, Lipton, Vijayvergiya, McKenzie, Landsberger, Toub, Blum, and Smith actively and substantially assisted Madoff in perpetrating the fraud by, among other things, providing marketing; protection from due diligence inquiries; credibility; sales support; and an influx of billions of dollars to keep the Ponzi scheme going. (See supra ¶¶333-489.) These individual Defendants each knew of material information that demonstrated Madoff was engaged in fraudulent activities. (See id.) Instead of reporting Madoff’s fraudulent activities to the SEC or their investors, Noel, Tucker, Piedrahita, McKeefry, Lipton, Vijayvergiya, McKenzie,
Landsberger, Toub, Blum, and Smith substantially assisted Madoff in continuing to grow the fraud. Each of these Defendants intentionally and knowingly helped Madoff deceive the SEC
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for many years, and repeatedly misled investors, prospective investors, and others, all of which
directly and substantially aided Madoff in maintaining the fraud. (See supra ¶¶333-373.)
750. Noel, Tucker, Piedrahita, McKeefry, Lipton, Vijayvergiya, McKenzie,
Landsberger, Toub, Blum, and Smith each knew that Madoff’s returns were statistically too good
to be true. (See supra ¶¶400-404, 451-461.) These Defendants also knew that Madoff’s
purported trading structure was inconsistent with industry practices and produced trading
volumes that were virtually impossible. (See supra ¶¶412-440.)
751. In addition, Noel, Tucker, Piedrahita, McKeefry, Lipton, Vijayvergiya,
McKenzie, Landsberger, Blum, Toub, and Smith conspired to enter into explicit and implicit
agreements with BLMIS to help perpetuate Madoff’s fraud. These agreements were corrupt in
their purpose to raise billions of dollars in the face of fraudulent activity. Each of these
Defendants took intentional and overt actions pursuant to these agreements and participated in
the fraud, causing billions of dollars in damages to BLMIS customers.
752. Noel, Tucker, Piedrahita, McKeefry, Lipton, Vijayvergiya, McKenzie,
Landsberger, Toub, Blum, and Smith explicitly agreed to market BLMIS, and the market the
SSC Strategy as their own investment scheme, resulting in billions of dollars of capital to maintain the Ponzi scheme. They each explicitly agreed to protect Madoff from direct inquiries
from the Feeder Funds’ investors, and to provide the investors with misleading information
where necessary. They also each explicitly agreed to help mislead the SEC in order to protect
Madoff from having to register as an investment adviser. (See supra ¶¶350-361.)
753. Noel, Tucker, Piedrahita, McKeefry, Lipton, Vijayvergiya, McKenzie,
Landsberger, Toub, Blum, and Smith acted pursuant to these implicit and explicit agreements by
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traveling the world to market BLMIS and the Feeder Funds and by providing false and
misleading responses to customer concerns that Madoff might be a fraud. (See supra ¶¶339-349,
362-373.) Noel, Tucker, Piedrahita, McKeefry, Lipton, Vijayvergiya, McKenzie, Landsberger,
Toub, Blum, and Smith purposely and knowingly discouraged investors from performing due diligence and helped Madoff by working to remove all references to BLMIS from the Feeder
Funds’ marketing materials. (See id.)
754. Defendant Noel is a founding partner of FGG and was involved in the day-to-day
management decisions that resulted in FGG falsely marketing the Feeder Funds. He procured
billions of dollars from investors to hand to Madoff; deceived the Feeder Funds’ investors by
providing them with information about BLMIS that was untrue; and made misrepresentations to
the SEC about how BLMIS and the Feeder Funds operated. (See supra ¶¶193-202.)
755. Noel substantially assisted Madoff by leading and engineering FGG’s global
marketing efforts to sell Madoff. Noel traveled around with his Feeder Funds summary sheets,
convincing investors to give Madoff billions of dollars. Noel knew those summary sheets
contained false and misleading information regarding BLMIS and he knowingly misled investors
when he parroted the misstatements contained on those sheets. (See supra ¶¶193-202, 339-349,
362-373.)
756. Noel also knew of the inconsistent and contradictory information Madoff
provided during FGG’s “due diligence” visits. He knew Madoff refused to provide critical
information including the identity of the options counterparties. He also knew FGG trained its
sales force to provide false answers to investor queries. (See supra ¶¶339-349, 362-373.)
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757. All of Noel’s intentional and overt actions concerning Madoff and BLMIS substantially assisted Madoff in perpetrating a fraud.
758. Defendant Tucker is a founding partner of FGG and was involved in the day-to- day management decisions that resulted in FGG falsely marketing the Feeder Funds. He procured billions of dollars from investors to hand to Madoff; deceived the Feeder Funds investors by providing them with information about BLMIS that was untrue; and made misrepresentations to the SEC about how BLMIS and the Feeder Funds operated. (See supra
¶¶203-210.)
759. Tucker frequently fielded investor questions and provided them with misleading responses. Tucker also knew Madoff’s auditor was a sham and never disclosed this information to investors or the SEC, which substantially aided Madoff in perpetrating the fraud. By intentionally lying to the Feeder Funds’ investors, Tucker substantially assisted Madoff in maintaining the fraud. (See supra ¶¶350-361.)
760. Tucker also intentionally and overtly instigated the cover-up of damning information showing BLMIS’s auditor lied to FGG’s CFO and was not capable of performing proper audits on the billions of dollars under Madoff’s management. Tucker specifically directed others to provide false answers to investors when they questioned Madoff’s market timing strategy. Tucker also readily assisted Madoff by deflecting criticism, claiming PwC reviewed BLMIS, and by hiding Madoff’s options trading structure, which was not in accord with industry practices. (See supra ¶¶333-373, 412-440.)
761. All of Tucker’s intentional and overt actions concerning Madoff and BLMIS substantially assisted Madoff in perpetrating a fraud.
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762. Defendant Piedrahita is a founding partner and Chairman of the Board of
Directors of FGG. He was involved in the day-to-day management decisions that resulted in
FGG falsely marketing the Feeder Funds; procuring billions of dollars from investors to hand to
Madoff; deceiving the Feeder Funds’ investors by providing them with information about
BLMIS that was untrue; and making misrepresentations to the SEC about how BLMIS and the
Feeder Funds operated. (See supra ¶¶211-218.)
763. Piedrahita substantially assisted Madoff by directing all of FGG’s operations as
the Chairman of the Board of Directors and head of the Executive Committee. Piedrahita had
knowledge of fraud evidenced by Madoff’s trade confirmations, his auditor’s lies, and the
statistical improbability of the returns reported to the Feeder Funds. Despite his knowledge of
fraud, Piedrahita substantially assisted Madoff by selling Madoff to any and all would-be
investors. (See supra ¶¶211-218.)
764. Piedrahita also entered into explicit and implicit agreements with Madoff to
provide false and misleading information to investors. The information Piedrahita provided
helped convince investors to give billions of dollars to the Feeder Funds, which then sent the
money to Madoff. Piedrahita also agreed with Madoff to do everything he could to provide billions of dollars to Madoff, which allowed Madoff to further the Ponzi scheme for his own and the Defendants’ benefit. Piedrahita acted pursuant to these agreements in routinely providing
false information about Madoff to potential Feeder Funds investors during his global marketing
trips. (See supra ¶¶333-373.)
765. All of Piedrahita’s intentional and overt actions concerning Madoff and BLMIS
substantially assisted Madoff in perpetrating a fraud.
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766. Defendant McKeefry served as FGG’s COO and CLO, is a member of the
Executive Committee of FGG, and was involved in the day-to-day management decisions that resulted in FGG falsely marketing the Feeder Funds. He procured billions of dollars from investors to hand to Madoff; deceived the Feeder Funds’ investors by providing them with information about BLMIS that was untrue; and made misrepresentations to the SEC about how
BLMIS and the Feeder Funds operated. (See supra ¶¶219-224.)
767. As COO, McKeefry was responsible for reviewing and approving FGG’s marketing materials. McKeefry approved FGG’s marketing materials with knowledge they contained false and misleading information. As CLO, he reviewed the regulatory filings for the
Feeder Funds and the FGG Affiliates, as well as the Feeder Funds’ agreements with Madoff.
With full knowledge of the terms of the agreements with BLMIS, McKeefry agreed to make misrepresentations to the SEC about the nature of the Feeder Funds’ relationship with BLMIS in an attempt to stop the SEC from applying additional regulations to BLMIS, and thereby, delaying any discovery of the fraud. (See supra ¶¶219-224, 350-361.)
768. McKeefry entered into explicit and implicit agreements with Madoff to provide false and misleading information to investors. The information McKeefry provided helped convince investors to invest billions of dollars in the Feeder Funds, which was then delivered to
Madoff. McKeefry also agreed to conspire with Madoff to provide false and misleading information to the SEC about the true role BLMIS and Madoff played in managing the Feeder
Funds’ investments. McKeefry acted pursuant to these agreements when he approved the publication of marketing materials that contained erroneous information; approved fund agreements that contained similarly erroneous information; and misled the SEC. (See supra
¶¶219-224, 350-361.)
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769. All of McKeefry’s intentional and overt actions concerning Madoff and BLMIS substantially assisted Madoff in perpetrating a fraud.
770. Defendant Lipton acted as FGG’s CFO and, in that capacity, was involved in upper-level management decisions regarding investor redemptions. Lipton was frequently involved in discussions about how to respond to investor concerns about Madoff, and intentionally devised ways to provide investors false and misleading responses. (See supra
¶¶225-230, 339-349, 362-373.)
771. When faced with the knowledge he had been lied to about the real nature of
Madoff’s auditing firm, as well as the capabilities of that firm, Lipton did not inform FGG’s investors or the SEC that BLMIS’s auditor was a sham. By protecting Madoff’s fraud from the
SEC and FGG’s own investors, Lipton substantially assisted Madoff in perpetrating the fraud.
(See supra ¶¶350-361.)
772. Lipton also entered into explicit and implicit agreements with Madoff to conspire with him to hide the fact that BLMIS’s auditor, Friehling, was a sham. He intentionally acted pursuant to these agreements when he provided false information regarding the auditor to other
FGG personnel that Lipton knew would distribute the same false information to the Feeder
Funds’ investors. Lipton also purposely did not disclose to investors or regulatory authorities that Madoff’s auditor had lied to Lipton about the firm’s size and reputation. (See supra ¶¶377-
398.)
773. All of Lipton’s intentional and overt actions concerning Madoff and BLMIS substantially assisted Madoff in perpetrating a fraud.
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774. Defendant Vijayvergiya knowingly and intentionally assisted Madoff in
perpetrating his fraud by routinely providing false and misleading information to investors about
FGG’s knowledge of Madoff’s operations and FGG’s own due diligence process. Vijayvergiya
lied stating Madoff’s auditors had twenty partners. He also conspired with Madoff to purposely
deceive the SEC in 2006 by knowingly providing false information to the SEC regarding the
Feeder Funds’ relationship with BLMIS. (See supra ¶¶231-236, 333-373, 377-398.)
775. Vijayvergiya intentionally and overtly provided false answers to investors
regarding Madoff’s market timing strategy. He also personally trained FGG’s sales personnel to
provide false statements about the Feeder Funds’ relationship with BLMIS including, among
other things, telling the sales personnel that FGG had a list of approved options trade
counterparties for Madoff’s trades, that FGG verified trades at the DTCC, and that PwC
reviewed BLMIS. (See supra ¶¶333-373.)
776. All of Vijayvergiya’s intentional and overt actions concerning Madoff and
BLMIS substantially assisted Madoff in perpetrating a fraud.
777. Defendant McKenzie knowingly participated in misleading investors. His
intentional acts substantially assisted Madoff in perpetrating the fraud and helped prevent others
from uncovering Madoff’s fraud. McKenzie knew Madoff’s auditor had provided false
information to CFO Lipton and then allowed Vijayvergiya to provide false and misleading information about Madoff’s auditor. By his actions, McKenzie shielded Madoff from due diligence or investigations by third parties that could have uncovered the fraud. (See supra
¶¶237-242, 377-398.)
778. McKenzie also entered into explicit and implicit agreements with Madoff to hide
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the fact that Madoff’s auditor was a sham. He acted pursuant to these agreements when he did
not inform investors or regulatory authorities that he knew that the auditor was a fraud. (See
supra ¶¶377-398.)
779. All of McKenzie’s intentional and overt actions concerning Madoff and BLMIS
substantially assisted Madoff in perpetrating a fraud.
780. Defendant Landsberger is a member of the Executive Committee of FGG and was
involved in the day-to-day management decisions that resulted in FGG falsely marketing the
Feeder Funds. He procured billions of dollars from investors to hand to Madoff; deceived the
Feeder Funds’ investors by providing them with information about BLMIS that was untrue; and made misrepresentations to the SEC about how BLMIS and the Feeder Funds operated. (See supra ¶¶243-247.)
781. Landsberger addressed investor concerns about possible fraud at BLMIS by working with his colleagues to provide answers that were not only careful not disclose the fraud, but were designed to bury the fraud from inquiry or discovery. Landsberger substantially assisted Madoff by allowing him to avoid additional due diligence investigations that could have led to the discovery of the fraud well before December 2008. (See supra ¶¶339-349, 362-373.)
782. Landsberger also entered into explicit and implicit agreements with Madoff to provide false and misleading information to investors. These agreements served two primary purposes. They allowed Landsberger to help raise billions of dollars for Madoff to replenish the
Ponzi scheme and they prevented investors from conducting additional, independent due diligence that might have uncovered the fraud. Landsberger intentionally and overtly acted
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pursuant to these agreements when he allowed other FGG personnel to provide information to
investors which Landsberger knew to be false. (See supra ¶¶339-349, 362-373.)
783. All of Landsberger’s intentional and overt actions concerning Madoff and BLMIS
substantially assisted Madoff in perpetrating a fraud.
784. Defendant Toub is a member of the Executive Committee of FGG and was
involved in the day-to-day management decisions that resulted in FGG marketing the Feeder
Funds. He procured billions of dollars from investors to hand to Madoff; deceived the Feeder
Funds’ investors by providing them with information about BLMIS that was untrue; and made
misrepresentations to the SEC about how BLMIS and the Feeder Funds operated. (See supra
¶¶248-253.)
785. Toub also substantially assisted Madoff in perpetrating a fraud by falsely
addressing investor concerns that BLMIS was involved in fraudulent activities and by working
with his colleagues to prevent the fraud from being discovered. Toub substantially assisted
Madoff by purposely shielding him from additional due diligence investigations that could have
led to the discovery of the fraud well before December, 2008. (See supra ¶¶339-349, 362-373.)
786. Toub entered into explicit and implicit agreements with Madoff to provide false
and misleading information to investors. These agreements served two purposes. They allowed
Toub to help procure billions of dollars for Madoff to use in the Ponzi scheme and they
prevented investors from conducting additional, independent due diligence that might have
uncovered the fraud. Toub also acted pursuant to these agreements when he allowed other FGG
personnel to provide information to investors which Toub knew to be false. (See supra ¶¶339-
349, 362-373.)
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787. All of Toub’s intentional and overt actions concerning Madoff and BLMIS substantially assisted Madoff in perpetrating a fraud.
788. Defendant Blum was involved in marketing the funds and responding to investor concerns about Madoff. Blum reviewed FGG’s marketing materials and approved the publication of those materials even though he knew they contained false or misleading statements. Blum also substantially assisted Madoff in perpetrating a fraud by working with his colleagues at FGG to limit transparency to Madoff and to avoid delivering to investors accurate
information about Madoff. (See supra ¶¶260-265, 339-349, 362-373.)
789. Blum entered into explicit and implicit agreements with Madoff to limit
transparency into BLMIS and to limit investors’ access to Madoff. He intentionally and overtly
acted pursuant to these agreements. All of Blum’s activities concerning Madoff substantially
assisted in Madoff perpetrating the fraud. (See supra ¶¶339-349, 362-373.)
790. All of Blum’s intentional and overt actions concerning Madoff and BLMIS
substantially assisted Madoff in perpetrating a fraud.
791. Defendant Smith actively responded to investors concerns about Madoff. Like his
fellow partners, Smith substantially assisted Madoff in perpetrating a fraud by devising schemes
to appease investors’ concerns about Madoff being a fraud. Smith intentionally and overtly
assisted Madoff in escaping due diligence and investigation that could have uncovered the
fraudulent activities. (See supra ¶¶266-271, 339-349, 362-373.)
792. Smith also entered into explicit and implicit agreements with Madoff to provide false and misleading information to investors. These agreements served two primary purposes.
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They allowed Smith to help deliver billions of dollars to Madoff to use in the Ponzi scheme and
they prevented investors from conducting additional, independent due diligence that might have
uncovered the fraud. Smith purposely acted pursuant to these agreements when he misled
investors regarding Madoff’s lack of transparency by providing false information. (See supra
¶¶339-349, 362-373.)
793. All of Smith’s intentional and overt actions concerning Madoff and BLMIS substantially assisted Madoff in perpetrating a fraud.
COUNT THIRTY-ONE: AIDING AND ABETTING BREACH OF FIDUCIARY DUTY
Against Noel, Tucker, Piedrahita, McKeefry, Lipton, Vijayvergiya, McKenzie, Landsberger, Toub, Blum, and Smith
794. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Amended Complaint as if fully rewritten herein.
795. BLMIS owed a fiduciary duty to its customers. BLMIS breached that fiduciary duty by perpetrating a massive Ponzi scheme. Noel, Tucker, Piedrahita, McKeefry, Lipton,
Vijayvergiya, McKenzie, Landsberger, Toub, Blum, and Smith knowingly participated in that breach, which resulted in billions of dollars of damage to BLMIS customers.
796. BLMIS owed a fiduciary duty to act in the best interests of investors. In this role,
BLMIS held a superior position over investors in the Feeder Funds, which required investors to repose trust and confidence with BLMIS. (See supra ¶6.)
797. Noel, Tucker, Piedrahita, McKeefry, Lipton, Vijayvergiya, McKenzie,
Landsberger, Toub, Blum, and Smith knew of Madoff’s fraudulent activity that was breaching
BLMIS’s fiduciary duties. They substantially assisted Madoff in breaching his duties by, among
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other things: traveling the world to market BLMIS and the Feeder Funds; avoiding customer
inquiries and providing false answers that all knew would discourage investors from asking
additional questions; removing references to BLMIS from their marketing materials; and providing the SEC with answers Madoff gave them, knowing that those answers were not true, but would serve to protect Madoff from further regulatory scrutiny. (See supra ¶¶333-489.)
798. The intentional and overt actions by Noel, Tucker, Piedrahita, McKeefry, Lipton,
Vijayvergiya, McKenzie, Landsberger, Toub, Blum, and Smith to substantially assist Madoff in
breaching his fiduciary duties to customers exacerbated BLMIS’s monumental insolvency. The
intentional and overt actions of Noel, Tucker, Piedrahita, McKeefry, Lipton, Vijayvergiya,
McKenzie, Landsberger, Toub, Blum, and Smith to substantially assist Madoff in breaching his
fiduciary duties to customers was a proximate cause of loss of billions of dollars of Customer
Property.
WHEREFORE, the Trustee respectfully requests that this Court enter judgment in favor
of the Trustee and against the Defendants as follows:
i. On the First Claim for Relief, pursuant to section 542 of the Bankruptcy Code and
SIPA § 78fff-2(c)(3), the Trustee is also entitled to an accounting of any and all Initial Transfers and Subsequent Transfers made, directly or indirectly, to the Defendants;
ii. On the Second Claim for Relief, pursuant to sections 547(b), 550(a)(1), and 551 of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the
Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Preference
Period Initial Transfers, (b) directing that the Preference Period Initial Transfers be set aside, and
(c) recovering the Preference Period Initial Transfers, or the value thereof, from the Feeder
Funds for the benefit of the estate of BLMIS;
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iii. On the Third Claim for Relief, pursuant to sections 547(b), 550(a)(1), and 551 of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the
Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich
Preference Period Initial Transfers, (b) directing that the Greenwich Preference Period Initial
Transfers be set aside, and (c) recovering the Greenwich Preference Period Initial Transfers, or the value thereof, from FGB for the benefit of the estate of BLMIS;
iv. On the Fourth Claim for Relief, pursuant to sections 547(b), 550(a)(2), and 551 of the Bankruptcy Code and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the Preference Period Initial Transfers, (b) directing that the Preference
Period Initial Transfers be set aside and (c) recovering the Preference Period Subsequent
Transfers, or the value thereof, from the FGG Affiliates and FGG Individuals for the benefit of the estate of BLMIS;
v. On the Fifth Claim for Relief, pursuant to sections 548(a)(1)(A), 550(a)(1), and
551 of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the
Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Two Year
Initial Transfers, (b) directing that the Two Year Initial Transfers be set aside, and (c) recovering the Two Year Initial Transfers, or the value thereof, from the Feeder Funds for the benefit of the estate of BLMIS;
vi. On the Sixth Claim for Relief, pursuant to sections 548(a)(1)(A), 550(a)(1), and
551 of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the
Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich
Two Year Initial Transfers, (b) directing that the Greenwich Two Year Initial Transfers be set
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aside, and (c) recovering the Greenwich Two Year Initial Transfers, or the value thereof, from
FGB for the benefit of the estate of BLMIS;
vii. On the Seventh Claim for Relief, pursuant to sections 548(a)(1)(A), 550(a)(2), and 551 of the Bankruptcy Code and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment:
(a) avoiding and preserving the Two Year Initial Transfers, (b) directing that the Two Year
Initial Transfers be set aside, and (c) recovering the Two Year Subsequent Transfers, or the value thereof, from the FGG Affiliates and FGG Individuals for the benefit of the estate of BLMIS;
viii. On the Eighth Claim for Relief, pursuant to sections 548(a)(1)(B), 550(a)(1), and
551 of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the
Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Two Year
Initial Transfers, (b) directing that the Two Year Initial Transfers be set aside, and (c) recovering the Two Year Initial Transfers, or the value thereof, from the Feeder Funds for the benefit of the estate of BLMIS;
ix. On the Ninth Claim for Relief, pursuant to sections 548(a)(1)(B), 550(a)(1), and
551 of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the
Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich
Two Year Initial Transfers, (b) directing that the Greenwich Two Year Initial Transfers be set aside, and (c) recovering the Greenwich Two Year Initial Transfers, or the value thereof, from
FGB for the benefit of the estate of BLMIS;
x. On the Tenth Claim for Relief, pursuant to sections 548(a)(1)(B), 550(a)(2), and
551 of the Bankruptcy Code and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the Two Year Initial Transfers, (b) directing that the Two Year Initial
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Transfers be set aside, and (c) recovering the Two Year Subsequent Transfers, or the value thereof, from the FGG Affiliates and FGG Individuals for the benefit of the estate of BLMIS;
xi. On the Eleventh Claim for Relief, pursuant to sections 276, 276-a, 278, and/or
279 of the New York Debtor and Creditor Law, sections 544(b), 550(a)(1), and 551 of the
Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware
Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Six Year Initial
Transfers, (b) directing that the Six Year Initial Transfers be set aside, (c) recovering the Six
Year Initial Transfers, or the value thereof, from the Feeder Funds for the benefit of the estate of
BLMIS, and (d) recovering attorneys’ fees from the Feeder Funds;
xii. On the Twelfth Claim for Relief, pursuant to sections 276, 276-a, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b), 550(a)(1), and 551 of the
Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware
Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich Six Year
Initial Transfers, (b) directing that the Greenwich Six Year Initial Transfers be set aside, (c) recovering the Greenwich Six Year Initial Transfers, or the value thereof, from FGB, FGL, and
GBL for the benefit of the estate of BLMIS, and (d) recovering attorneys’ fees from FGB, FGL, and GBL;
xiii. On the Thirteenth Claim for Relief, pursuant to sections 276, 276-a, 278, and/or
279 of the New York Debtor and Creditor Law, sections 544(b), 550(a)(2), and 551 of the
Bankruptcy Code, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the Six Year Initial Transfers, (b) directing that the Six Year Initial Transfers be set aside, (c) recovering the Six Year Subsequent Transfers, or the value thereof, from the FGG
212 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 220 of 229
Affiliates and FGG Individuals for the benefit of the estate of BLMIS, and (d) recovering
attorneys’ fees from the FGG Affiliates and FGG Individuals;
xiv. On the Fourteenth Claim for Relief, pursuant to sections 273, 278, and 279 of the
New York Debtor and Creditor Law, sections 544(b), 550(a)(1), 551 of the Bankruptcy Code,
SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the Trustee is
entitled to a judgment: (a) avoiding and preserving the Six Year Initial Transfers, (b) directing
that the Six Year Initial Transfers be set aside, and (c) recovering the Six Year Initial Transfers, or the value thereof, from the Feeder Funds for the benefit of the estate of BLMIS;
xv. On the Fifteenth Claim for Relief, pursuant to sections 273, 278, and 279 of the
New York Debtor and Creditor Law, sections 544(b), 550(a)(1), 551 of the Bankruptcy Code,
SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich Six Year Initial Transfers, (b) directing that the Greenwich Six Year Initial Transfers be set aside, and (c) recovering the
Greenwich Six Year Initial Transfers, or the value thereof, from FGB, FGL, and GBL for the benefit of the estate of BLMIS;
xvi. On the Sixteenth Claim for Relief, pursuant to sections 273, 278, and 279 of the
New York Debtor and Creditor Law, sections 544(b), 550(a)(2), 551 of the Bankruptcy Code, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the
Six Year Initial Transfers, (b) directing that the Six Year Initial Transfers be set aside, and (c) recovering the Six Year Subsequent Transfers, or the value thereof, from the FGG Affiliates and
FGG Individuals for the benefit of the estate of BLMIS;
xvii. On the Seventeenth Claim for Relief, pursuant to sections 274, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b) and 550(a)(1) of the Bankruptcy Code,
213 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 221 of 229
SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Six Year Initial Transfers, (b) directing that the Six Year Initial Transfers be set aside, and (c) recovering the Six Year Initial Transfers, or the value thereof, from the Feeder Funds for the benefit of the estate of BLMIS;
xviii. On the Eighteenth Claim for Relief, pursuant to sections 274, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b) and 550(a)(1) of the Bankruptcy Code,
SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich Six Year Initial Transfers, (b) directing that the Greenwich Six Year Initial Transfers be set aside, and (c) recovering the
Greenwich Six Year Initial Transfers, or the value thereof, from FGB, FGL, and GBL for the benefit of the estate of BLMIS;
xix. On the Nineteenth Claim for Relief, pursuant to sections 274, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b) and 550(a)(2) of the Bankruptcy Code, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the
Six Year Initial Transfers, (b) directing that the Six Year Initial Transfers be set aside, and (c) recovering the Six Year Subsequent Transfers, or the value thereof, from the FGG Affiliates and
FGG Individuals for the benefit of the estate of BLMIS;
xx. On the Twentieth Claim for Relief, pursuant to sections 275, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b), 550(a)(1), and 551 of the Bankruptcy
Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware Code, the
Trustee is entitled to a judgment: (a) avoiding and preserving the Six Year Initial Transfers, (b) directing that the Six Year Initial Transfers be set aside, and (c) recovering the Six Year Initial
Transfers, or the value thereof, from the Feeder Funds for the benefit of the estate of BLMIS;
214 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 222 of 229
xxi. On the Twenty-First Claim for Relief, pursuant to sections 275, 278, and/or 279
of the New York Debtor and Creditor Law, sections 544(b), 550(a)(1), and 551 of the
Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-403(b) of the Delaware
Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich Six Year
Initial Transfers, (b) directing that the Greenwich Six Year Initial Transfers be set aside, and (c)
recovering the Greenwich Six Year Initial Transfers, or the value thereof, from FGB, FGL and
GBL for the benefit of the estate of BLMIS;
xxii. On the Twenty-Second Claim for Relief, pursuant to sections 275, 278, and/or
279 of the New York Debtor and Creditor Law, sections 544(b), 550(a)(2), and 551 of the
Bankruptcy Code, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding
and preserving the Six Year Initial Transfers, (b) directing that the Six Year Initial Transfers be
set aside, and (c) recovering the Six Year Subsequent Transfers, or the value thereof, from the
FGG Affiliates and FGG Individuals for the benefit of the estate of BLMIS;
xxiii. On the Twenty-Third Claim for Relief, pursuant to NY CPLR 203(g), sections
276, 276-a, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b),
550(a)(1), and 551 of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-
403(b) of the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving
the Initial Transfers, (b) directing that the Initial Transfers be set aside, (c) recovering the Initial
Transfers, or the value thereof, from the Feeder Funds for the benefit of the estate of BLMIS, and
(d) recovering attorneys’ fees from the Feeder Funds;
xxiv. On the Twenty-Fourth Claim for Relief, pursuant to NY CPLR 203(g), sections
276, 276-a, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b),
550(a)(1), and 551 of the Bankruptcy Code, SIPA § 78fff-2(c)(3), and sections 15-306(a) and 17-
215 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 223 of 229
403(b) of the Delaware Code, the Trustee is entitled to a judgment: (a) avoiding and preserving the Greenwich Initial Transfers, (b) directing that the Greenwich Initial Transfers be set aside, (c) recovering the Greenwich Initial Transfers, or the value thereof, from FGB, FGL, GBL, Noel, and Tucker for the benefit of the estate of BLMIS, and (d) recovering attorneys’ fees from FGB,
FGL, GBL, Noel, and Tucker;
xxv. On the Twenty-Fifth Claim for Relief, pursuant to NY CPLR 203(g), sections
276, 276-a, 278, and/or 279 of the New York Debtor and Creditor Law, sections 544(b),
550(a)(2), and 551 of the Bankruptcy Code, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the Initial Transfers, (b) directing that the Initial
Transfers be set aside, (c) recovering the Subsequent Transfers, or the value thereof, from the
FGG Affiliates and FGG Individuals for the benefit of the estate of BLMIS, and (d) recovering attorneys’ fees from the FGG Affiliates and FGG Individuals;
xxvi. On the Twenty-Sixth Claim for Relief, a judgment that the SIPA claims filed by
Fairfield Sentry, GS, GSP, Sigma, Lambda, FGB, Noel, and Tucker be disallowed;
xxvii. On all Claims for Relief, a judgment pursuant to common law and NY CPLR
5001 and 5004, awarding the Trustee prejudgment interest from the date on which the
Subsequent Transfers were received by the Defendants; xxviii. On all Claims for Relief, establishment of a constructive trust over the proceeds of the Initial Transfers, Subsequent Transfers and unjust enrichment to the Defendants in favor of the Trustee for the benefit of BLMIS’s estate;
xxix. On all Claims for Relief, assignment of the Defendants’ right to seek refunds from the government for federal, state, and local taxes paid on Fictitious Profits during the course of the scheme;
216 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 224 of 229
xxx. On the Twenty-Seventh, Twenty-Eighth, Twenty-Ninth, Thirtieth, and Thirty-
First Claims for Relief, compensatory, exemplary, and punitive damages in excess of $3.6 billion, with the specific amount to be determined at trial;
xxxi. Awarding the Trustee all applicable interest, costs, and disbursements of this action; and
xxxii. Granting Plaintiff such other, further, and different relief as the Court deems just, proper, and equitable.
Date: New York, New York July 20, 2010
s/Marc E. Hirschfield Baker & Hostetler LLP 45 Rockefeller Plaza Of Counsel: New York, New York 10111 Telephone: (212) 589-4200 Thomas L. Long Facsimile: (212) 589-4201 Jessie M. Gabriel David J. Sheehan Baker & Hostetler LLP E-mail: [email protected] 65 East State Street, Suite 2100 Marc E. Hirschfield Columbus, Ohio 43215 E-mail: [email protected] Telephone: (614) 228-1541 Mark A. Kornfeld Facsimile: (614) 462-2616 E-mail: [email protected] Thomas L. Long E-mail: [email protected] Attorneys for Irving H. Picard, Esq., Trustee Jessie M. Gabriel for the Substantively Consolidated SIPA E-mail: [email protected] Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff
217 Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 225 of 229
In re: Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff, Debtors
Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC,
v.
Fairfield Sentry Limited, et al.
Adv. Pro. No. 09-1239 (BRL)
Exhibits 1-111 to the Amended Complaint as listed on the attached index are available for review upon written or telephonic request to:
Baker & Hostetler LLP 45 Rockefeller Plaza New York, NY 10111 Attn: Nikki Landrio Tel: (212) 589-4221 Email: [email protected] Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 226 of 229
Exhibit Exhibit Description Number 1 Exemplar BLMIS account agreements for Fairfield Sentry Limited 2 Summary chart of Fairfield Sentry Limited’s withdrawals from its BLMIS accounts 3 FGG press release dated May 12, 2009 4 Exemplar BLMIS account agreements for Greenwich Sentry, L.P. 5 Summary chart of Greenwich Sentry, L.P.’s withdrawals from its BLMIS account 6 Exemplar BLMIS account agreements for Greenwich Sentry Partners, L.P. Summary chart of Greenwich Sentry Partners, L.P.’s withdrawals from its BLMIS 7 account Fairfield Sigma Limited’s redemption confirmations for withdrawals from Fairfield 8 Sentry Limited Fairfield Lambda Limited’s redemption confirmations for withdrawals from Fairfield 9 Sentry Limited Chester Global Strategy Fund Limited’s redemption confirmations for withdrawals 10 from Fairfield Sentry Limited Chester Global Strategy Fund, L.P.’s redemption confirmation for a withdrawal from 11 Greenwich Sentry, L.P. Irongate Global Strategy Fund Limited’s redemption confirmations for withdrawals 12 from Fairfield Sentry Limited Fairfield Greenwich Fund (Luxembourg)’s redemption confirmations for withdrawals 13 from Fairfield Sentry Limited Internal FGG chart showing Fairfield Guardian Fund’s redemptions from Fairfield 14 Sentry Limited Fairfield Investment Fund Limited’s redemption confirmations for withdrawals from 15 Fairfield Sentry Limited Fairfield Investment Trust’s redemption confirmations, made through Fairfield GCI 16 (USD) Fund, for withdrawals from Fairfield Sentry Limited Fairfield Investment Trust’s redemption confirmations, made through Fairfield GCI 17 (JPY) Fund, for withdrawals made from Fairfield Sentry Limited FIF Advanced, Ltd.’s redemption confirmations for withdrawals made from Fairfield 18 Sentry Limited Sentry Select Limited’s redemption confirmation for a withdrawal from Fairfield 19 Sentry Limited Stable Fund’s redemption confirmation for the October 2008 withdrawal made from 20 Fairfield Sentry Limited 21 July 2, 2003 email from FGG’s Thomann to Tucker and Boele Excerpt from an FGG chart that contains the proposed shareholder register for 22 Fairfield Greenwich Limited 23 April 2009 Vanity Fair article entitled, “Greenwich Mean Time” March 31, 2009 Wall Street Journal article entitled, “The Charming Mr. Piedrahita 24 Finds Himself Caught in the Madoff Storm” 25 FGG employment offer letter to Vijayvergiya 26 FGG’s split-strike conversion strategy summary Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 227 of 229
Exhibit Exhibit Description Number 27 Worksheets detailing FGG partner compensation for 2008 28 May 22, 2003 email from Landsberger to Tucker 29 July 15, 2004 email from Toub to Vijayvergiya 30 March 25, 2003 email from Blum to Tucker, Bowes, Greisman, and FGG’s Ludwig 31 August 22, 2003 email from Blum to Vijayvergiya and Landsberger 32 April 5, 2004 email from FGG’s Chaudhuri to Tucker 33 June 24, 2004 email from Vijayvergiya to Lipton, McKeefry, and FGG’s Ludwig 34 August 7, 2004 email from Vijayvergiya to Landsberger and McKenzie 35 January 14, 2003 email from Blum to Tucker, Bowes, Greisman, and FGG’s Nevin 36 March 25, 2003 email from Blum to Lipton and Tucker April 9, 2004 email from FGG’s Boncompagni to Boele, Vijayvergiya, Tucker, Blum, 37 Greisman, Lipton, Smith, and others at FGG March 15, 2008 email from Landsberger to Smith, Toub, della Schiava, Vijayvergiya, 38 Tucker, and the Executive Committee 39 Transcript of the telephone call between McKeefry, Vijayvergiya, and Madoff 40 June 2001 letter to Fairfield Sentry Limited’s investors August 2008 emails between Vijayvergiya, Murphy, Piedrahita, Landsberger, Toub, 41 Tucker, and the Executive Committee 42 Notes of the SEC’s telephone interview of Vijayvergiya and McKeefry 43 SEC phone log exhibit from the SEC Office of Inspector General’s Report on Madoff 44 SEC Case Closing Recommendation for BLMIS 45 October 2002 marketing brochure for Fairfield Sentry Limited 46 December 19, 2003 email from Vijayvergiya to FGG’s Musciacco 47 September 19, 2003 email from Blum to Tucker November 24, 2003 email from Blum to Landsberger, Greisman, Tucker, and 48 Piedrahita May 2005 transcript of mock investor phone interview between Lipton and 49 Vijayvergiya during a sales team training session 50 May 7, 2008 memorandum summarizing an investor meeting with FGG December 2, 2003 email from FGG’s della Schiava to Noel, Piedrahita, Tucker, and 51 Blum 52 September 5, 2005 email from Capital Research’s Jan Buren to FGG’s Carla Castillo 53 September 1, 2005 email from FGG’s Castillo to Vijayvergiya 54 September 12, 2005 email from FGG’s Castillo to Lipton Excerpts from the transcript of Lipton’s testimony before the Office of the Secretary 55 of the Commonwealth of Massachusetts 56 November 2, 2005 FGG Investment Team Presentation 57 Notes taken during a 2006 due diligence meeting on Fairfield Sentry Limited 58 Fairfield Sentry Limited Due Diligence Questionnaire 59 August 20, 2008 email from Lipton to Vijayvergiya 60 Fairfield Sentry Limited’s October 2008 marketing tear sheet 61 August 6, 2003 email from Vijayvergiya to CBG Investment Advisors Inc.'s Martin 62 April 15, 2008 email from Lipton to McKenzie Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 228 of 229
Exhibit Exhibit Description Number 63 BLMIS’s Master Agreement for OTC Options 64 May 26, 2005 email from Vijayvergiya to Tucker June 4, 2008 memorandum summarizing Vijayvergiya’s telephone conference with 65 Madoff 66 July 23, 2008 email from Vijayvergiya to Barreneche 67 February 27, 2004 email from Vijayvergiya to FGG’s Musciacco 68 December 11, 2003 email from Vijayvergiya to della Schiava 69 February 1, 2005 email from FGG’s Perry to Tucker June 21, 2007 email from Piedrahita to Landsberger, Vijavergiya, Lipton, and the 70 Executive Committee 71 June 10, 2008 email from Vijayvergiya to McKenzie and FGG’s Attavar 72 May 2008 internal FGG notes in response to investor questions 73 June 2, 2008 email from FGG’s Horn to Vijayvergiya 74 October 21, 2008 email from Merrill Lynch’s Craane to Barreneche 75 Spreadsheet accompanying a May 2008 report from Berman 76 June 13, 2008 email from Berman to Vijayvergiya 77 Berman’s notes from a June 25, 2008 telephone call with FGG 78 December 10, 2008 draft letter from Tucker to Madoff 79 December 12, 2008 FGG press release February 5, 2009 Wall Street Journal article entitled, “Markopolos Testifies Fairfield 80 Knew Little About Madoff” 81 December 14, 2008 Salus Alpha Group press release 82 May 2001 MAR/Hedge article entitled, “Madoff tops charts; skeptics ask how” 83 May 7, 2001 Barron’s article entitled, “Don’t Ask, Don’t Tell” Excerpts from the transcript of Noel’s testimony before the Office of the Secretary of 84 the Commonwealth of Massachusetts Excerpts from the transcript of Tucker’s testimony before the Office of the Secretary 85 of the Commonwealth of Massachusetts 86 May 23, 2005 email from FGG’s Ross to Vijayvergiya 87 September 24, 2003 email from della Schiava to FGG’s Barco March 2003 article entitled, “Understanding and Mitigating Operational Risk in Hedge 88 Fund Investments” 89 2004 article entitled, “Valuation issues and operational risk in hedge funds” 2006 article entitled, “Hedge fund operational risk: meeting the demand for higher 90 transparency and best practice” 91 May 11, 2001 email from Thorp to Dillon November 11, 2004 redacted email from Cambridge Associates LLC’s Sherman to 92 Cambridge Associates LLC’s Kleeblatt and Woolston December 17, 2008 New York Times article entitled, “European Banks Tally Losses 93 Linked to Fraud” December 15, 2008 email from Acorn Partners LP’s Rosenkranz to Zuckerman and 94 Probert 95 December 12, 2008 email from Acorn Partners LP to its investors Case 1:11-cv-05905-AT Document 29-1 Filed 02/28/14 Page 229 of 229
Exhibit Exhibit Description Number February 25, 2004 email from Noel to Piedrahita, Tucker, Toub, Landsberger, and 96 Caledon Partners’ Horne January 7, 2009 Bloomberg article entitled, “Credit Suisse Urged Clients to Dump 97 Madoff Funds” 98 June 15, 2005 email from Merrill Lynch’s El Hicheri to Dutruit 99 December 2006 email from Merrill Lynch’s El Hicheri to Fuehrer 100 February 6, 2008 email from Merrill Lynch's Personne to Homes and Alberici 101 2007 report by Aksia 102 December 11, 2008 letter from Aksia’s Vos to his clients and friends 103 August 14, 2007 email from Institutional Investor Inc.’s Ocrant to Vos 104 August 23, 2007 email from Aksia’s Gray to Vos 105 December 19, 2008 email from Sitrick and Company’s Kabrin to FGG’s Ludwig 106 February 5, 2009 email from Sitrick and Company’s Kabrin to Thorne December 31, 2008 Bloomberg Businessweek article entitled, “The Madoff Case 107 Could Reel in Former Investors” 108 December 15, 2008 Albourne press release entitled, “Albourne on Madoff” 109 August 2009 SEC Office of Inspector General’s report on Madoff 110 April 2004 Limited Partnership Agreement for Greenwich Sentry, L.P. 111 April 2004 Limited Partnership Agreement for Greenwich Sentry Partners, L.P. Case 1:11-cv-05905-AT Document 29-2 Filed 02/28/14 Page 1 of 12
EXHIBIT 2 Case 1:11-cv-05905-AT Document 29-2 Filed 02/28/14 Page 2 of 12 JAMES CLARKSON (JC-7697) ACTING REGIONAL DIRECTOR Andrew M. Calamari (AC-4864) Alexander M. Vasilescu (AV-2575) Israel Friedman (IF-1958) Preethi Krishnamurthy (PK-2809) Attorneys for Plaintiff dlIUDGE STAMTON SECURITIES AND EXCHANGE COMMISSION New York Regional Office 3 World Financial Center New York, NY 10281 (212) 336-1100
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE COMMISSI( #U&)' I Plaintiff,
- against - ,
BERNARD L. MADOFF, BERNARD L .MADOFF INVESTMENT SECURITIES LLC,
Defendants.
...... X
COMPLAINT
Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint against
defendants Bernard L. Madoff ("Madoff ') and Bernard L. Madoff Investment Securities LLC
("BMIS"), alleges:
SUMMARY
1. The Commission brings this emergency action to halt ongoing fraudulent
offerings of securities and investment advisory fraud by Madoff and BMIS, a broker dealer and
investment adviser registered with the Commission. From an indeterminate period through the
present, Madoff and BMSI has committed fraud through the investment adviser activities of Case 1:11-cv-05905-AT Document 29-2 Filed 02/28/14 Page 3 of 12
BMIS. Yesterday, Madoff admitted to one or more employees of BMIS that for many years he has been conducting a Ponzi-scheme through the investment adviser activities of BMIS and that
BMIS has liabilities of approximately $50 billion. Madoff told these employees that he intends to distribute any remaining funds at BMIS to employees and certain investors in the investment advisor business, such as family and friends. Such a distribution will be unfair and inequitable to other investors and creditors of BMIS.
2. Expedited relief is needed to halt the fraud and prevent the Defendants from unfairly distributing the remaining assets in an unfair and inequitable manner to employees, friend and relatives, at the expense of other customers.
3. To halt the ongoing fraud, maintain the status quo and preserve any assets for injured investors, the Commission seeks emergency relief, including temporary restraining orders and preliminary injunctions, and an order: (i) imposing asset freezes against the
Defendants; (ii) appointing a receiver over BMIS; (iii) allowing expedited discovery and preventing the destruction of documents; and (iv) requiring the Defendants to provide verified accountings. The Commission also seeks permanent injunctions, disgorgement of ill-gotten gains, plus prejudgment interest and civil monetary penalties against all of the Defendants.
VIOLATIONS
4. By virtue of the conduct alleged herein:
a. All Defendants directly or indirectly, singly or in concert, have engaged,
and are engaging, in acts, practices, schemes and courses of business that
constitute violations of Sections 206(1) and 206(2) of the Advisers Act of
1940 ("Advisers Act") [15 U.S.C. $9 80b-6(1), (2)], and Section 17(a) of 2 Case 1:11-cv-05905-AT Document 29-2 Filed 02/28/14 Page 4 of 12
the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. $ 77q(a) and
Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange
Act"), 15 U.S.C. $ 78j(b), and Rule lob-5 thereunder, 17 C.F.R. 5
240.10b-5.
NATURE OF THE PROCEEDINGS AND RELIEF SOUGHT
7. The Commission brings this action pursuant to the authority conferred upon it by
Section 20(b) of the Securities Act, 15 U.S.C. 5 77t(b), and Section 2l(d)(l) of the Exchange
Act, 15 U.S.C. $ 78u(d)(l), seeking to restrain and enjoin permanently the Defendants from engaging in the acts, practices and courses of business alleged herein.
8. In addition to the injunctive and emergency relief recited above, the Commission seeks: (i) final judgments ordering Defendants to disgorge their ill-gotten gains with prejudgment interest thereon; and (ii) final judgments ordering the Defendants to pay civil penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. fj 77t(d), and Section 21(d)(3) of the Exchange
Act, 15 U.S.C. $ 78u(d)(3).
JURISDICTION AND VENUE
10. This Court has jurisdiction over this action pursuant to Section 214 of the
Advisers Act [15 U.S.C. 5 80b-141, Section 22(a) of the Securities Act [ 15 U.S.C. $ 77v(a)] and
Sections 21(e) and 27 of the Exchange Act [ 15 U.S.C. $5 78u(e) and 78aal.
11. Venue is proper in the Southern District of New York pursuant to 28 U.S.C.
$ 1391. The Defendants, directly and indirectly, have made use of the means and instrumentalities of interstate commerce, or of the mails, in connection with the transactions, acts, practices and courses of business alleged herein. A substantial part of the events 3 Case 1:11-cv-05905-AT Document 29-2 Filed 02/28/14 Page 5 of 12
comprising Defendants7fraudulent scheme that gives rise to the Commission's claims occurred in the Southern District of New York, including that BMIS is located and headquared in this
District and certain of Madoff and BMIS committed their fraudulent securities and adviser activities in this District.
THE DEFENDANTS
12. Madoff is a resident of New York City and is the sole owner of BMIS. BMIS' website indicates that Madoff founded BMIS in the early 1960s and that he is an attorney.
Madoff is a former Chairman of the board of directors of the NASDAQ stock market. BMIS is both a broker-dealer and investment adviser registered with the Commission. Madoff oversees and controls the investment adviser services at BMIS as well at the overall finances of BMIS.
13. BMIS is a broker-dealer and investment advisor registered in both capacities with the Commission. BMIS engages in three different operations, which include investment adviser services, market making services and proprietary trading. BMIS7website states that it has been providing quality executions for broker-dealers, banks and financial institutions since its inception in 1960;" and that BMIS,"[w]ith more than $700 million in firm capital, Madoff currently ranks among the top 1% of US Securities firms." The most recent Form ADV for
BMIS filed in January 2008 with the Commission stated that BMIS had over $17 billion in assets under management, and 23 clients. BMIS represented that its trading strategy for adviser accounts involved trading in baskets of equity securities and options thereon.
FACTS
14. From an indeterminate time to the present, Madoff and BMIS have been conducting a Ponzi-scheme through the investment adviser services of BMIS. 4 Case 1:11-cv-05905-AT Document 29-2 Filed 02/28/14 Page 6 of 12
15. Madoff conducts certain investment advisory business for clients that is separate fiom the BMIS' proprietary trading and market making activities.
16. Madoff ran his investment adviser business fiom a separate floor in the New York offices of BMIS.
17. Madoff kept the financial statements for the firm under lock and key, and was
"cryptic" about the firm's investment advisory business when discussing the business with other employees of BMIS.
18. In or about the first week of December 2008, Madoff told a senior employee that there had been requests fiom clients for approximately $7 billion in redemptions, that he was struggling to obtain the liquidity necessary to meet those obligations, but that he thought that he would be able to do so. According to this senior employee, he had previously understood that the investment advisory business had assets under management on the order of between approximately $8-15 billion.
19. On or about December 9,2008, Madoff informed another senior employee that he wanted to pay 2008 bonuses to employees of the firm in December, which was earlier than employee bonuses are usually paid.
20. Bonuses traditionally have been paid at BMIS in February of each year for the pervious year's work.
21. On or about December 10,2008, the two senior employees referenced above visited Madoff at the offices of BMIS to discuss the situation hrther, particularly because
Madoff had appeared to these two senior employees to have been under great stress in the prior weeks. 5 Case 1:11-cv-05905-AT Document 29-2 Filed 02/28/14 Page 7 of 12
22. At that time, Madoff informed the senior employees that he had recently made profits through business operations, and that now was a good time to distribute it. When the senior employee challenged his explanation, Madoff said that he did not want to talk to them at the office, and arranged a meeting at Madoff s apartment in Manhattan. At that meeting Madoff stated, in substance, that he "wasn't sure he would be able to hold it together" if they continued to discuss the issue at the ofice.
23.- At Madoff s Manhattan apartment, Madoff informed the two senior employees, in substance, that his investment advisory business was a fraud. Madoff stated that he was
"finished," that he had "absoIutely nothing," that "it's all just one big lie," and that it was
"basically, a giant Ponzi scheme." In substance, Madoff communicated to the senior employees that he had for years been paying returns to certain investors out of the principal received from other, different, investors. Madoff stated that the business was insolvent, and that it had been for years. Madoff also stated that he estimated the losses from this fraud to be approximately $50 billion. One of the senior employees has a personal account at BMIS in which several million had been invested under the management of Madoff.
24. At Madoff s Manhattan apartment, Madoff fkrther informed the two senior employees referenced above that, in approximately one week, he planned to surrender to authorities, but before he did that, he had approximately $200-300 million left, and he planned to use that money to make payments to certain selected employees, family, and fiiends.
.v Case 1:11-cv-05905-AT Document 29-2 Filed 02/28/14 Page 8 of 12
FIRST CLAIM FOR RELIEF
Violations of Sections 206(1) and 206(2) of the Advisers Act (Against Madoff and BMIS) (Fraud Upon Advisory Clients and Breach of Fiduciary Duty by Investment Adviser)
25. Paragraphs 1 through 24 are realleged and incorporated by reference as if set forth fully herein.
26. Madoff and BMIS at all relevant time were investment advisers within the meaning of Section 201(11) of the Advisers Act [15 U.S.C. $ 80b-2(1 l)]
27. Madoff and BMIS directly or indirectly, singly or in concert, knowingly or recklessly, through the use of the mails or any means or instrumentality of interstate commerce, while acting as investment advisers within the meaning of Section 202(11) of the Advisers Act
[15 U.S.C. $80b-2(1I)]: (a) have employed, are employing, or are about to employ devices, schemes, and artifices to defraud any client or prospective client; or (b) have engaged, are engaging, or are about to engage in acts, practices, or courses of business which operates as a fraud or deceit upon any client or prospective client.
28. As described in the paragraphs above, Madoff and BMIS violated Sections 206(1) and 206(2) of the Advisers Act[15 U.S.C. $5 80b-6(1), (2)] and unless enjoined will continue to violate Sections 206(1) and 206(2) of the Advisers Act [15 U.S.C. $6 80b-6(1), (2)].
SECOND CLAIM FOR RELIEF
Violations of Section 17(a)(l) of the Securities Act (Against all Defendants) (Antifraud violations)
29. Paragraphs 1 through 24 are realleged and incorporated by reference as if set forth Case 1:11-cv-05905-AT Document 29-2 Filed 02/28/14 Page 9 of 12
fully herein.
30. From at least 2005 through the present, the Defendants, in the offer and sale of securities, by the use of the means and instruments of transportation and communication in interstate commerce or by the use of the mails, directly and indirectly, have employed and are employing devices, schemes and artifices to defraud.
31. The Defendants knew or were reckless in not knowing of the activities described above.
32. By reason of the activities herein described, the Defendants have violated and are violating Section 17(a)(l) of the Securities Act [15 U.S.C. $77q(a)(l)].
THIRD CLAIM FOR RELIEF
Violations of Section 17(a)(2) and 17(a)(3) of the Securities Act (Against all Defendants) (Antifraud violations)
33. Paragraphs 1through 24 are realleged and incorporated by reference as if set forth fully herein.
34. From at least 2005, the Defendants, in the offer and sale of securities, by the use of the means and instruments of transportation and communication in interstate commerce or by the use of the mails, directly and indirectly, have obtained and are obtaining money and property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and have engaged and are engaging in transactions, practices or courses of business which have operated and will operate as a fraud and deceit upon investors.
35. By reason of the activities herein described, the Defendants have violated and are 8 Case 1:11-cv-05905-AT Document 29-2 Filed 02/28/14 Page 10 of 12
violating Sections 17(a)(2) and 17(a)(3) of the Securities Act [15 U.S.C. §77q(a)(2) and
§77q(a)(3)1.
FOURTH CLAIM FOR RELIEF
Violations of Section lo@) of the Exchange Act and Rule 10b-5 (Against all Defendants) (Antifraud violations)
36. Paragraphs 1through 24 are realleged and incorporated by reference as if set forth fully herein.
37. From at least 2005 through the present, the Defendants, in connection with the purchase and sale of securities, directly and indirectly, by the use of the means and instrumentalities of interstate commerce or of the mails, have employed and are employing devices, schemes and artifices to defraud; have made and are making untrue statements of material fact and have and are omitting to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and have engaged and are engaging in acts, practices and courses of business which operated as a fiaud and deceit upon investors.
38. Defendants knew or were reckless in not knowing of the activities described above.
39. By reason of the activities herein described, the Defendants have violated and are violating Section 10(b) of the Exchange Act [15 U.S.C. §§78j(b)] and Rule 10b-5 [17 C.F.R.
4240.10b-51 promulgated thereunder. Case 1:11-cv-05905-AT Document 29-2 Filed 02/28/14 Page 11 of 12
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court grant the following relief:
Enter judgment in favor of the Commission finding that the Defendants each violated the securities laws and rules promulgated thereunder as alleged herein;
An Order temporarily and preliminarily, and Final Judgments permanently, restraining and permanently enjoining the Defendants, their agents, servants, employees and attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from committing future violations of Section Sections 206(1) and 206(2) of the Advisers Act [15 U.S.C. $§Sob-6(1) and 80b-6(2)].
An Order temporarily and preliminarily, and Final Judgments permanently, restraining and permanently enjoining the Defendants, their agents, servants, employees and attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from committing future violations of Section 17(a) of the Securities Act, 15 U.S.C. $ 77q(a), Section 10(b) of the Exchange Act, 15
U.S.C. $ 78j(b) and Rule lob-5, 17 C.F.R. $ 240.10b-5. Case 1:11-cv-05905-AT Document 29-2 Filed 02/28/14 Page 12 of 12
IV.
An order directing the Defendants to disgorge their ill-gotten gains, plus prejudgment interest thereon.
Final Judgments directing the Defendants to pay civil money penalties pursuant to
Section 209(e) of the Advisers Act [15 U.S.C. 5 80b-91, Section 20(d) of the Securities Act [15
U.S.C. tj 77t(d)] and Section 21(d)(3) of the Exchange Act 115 U.S.C. 5 78u(d)(3)].
VII.
Granting such other and further relief as to this Court seems just and proper.
Dated: New York, New York December 11,2008
SECURITIES AND EXCHANGE COMMISSION . 3 World Financial Center New York, NY 10281 - 1022 (212) 336-0178
Of Counsel: Andrew M. Calamari Alexander M. Vasilescu Israel Friedman Preethi Krishnarnurthy Case 1:11-cv-05905-AT Document 29-3 Filed 02/28/14 Page 1 of 25
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EXHIBIT 7
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UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
Minutes of Proceedings
______
Date: July 22, 2010 ------In re:
Fairfield Sentry Limited, et al. Chapter 15
Case No. 10-13164 (BRL)
Jointly Administered Debtors in Foreign Proceedings. ------
Present: Hon. Burton R. Lifland Monica Saenz de Viteri ECRO______Bankruptcy Judge Courtroom Deputy Court Reporter
Proceedings:
Chapter 15 Petitions of Fairfield Sentry Limited (“Sentry”), Fairfield Sigma Limited (“Sigma”) and Fairfield Lambda Limited (“Lambda”) for Recognition of Foreign Proceedings
Orders: Relief sought in the Motion: 9 Denied Granted 9 Dismissed 9 Awarded by Default 9 Matter taken under advisement 9 Formal order or Judgment to enter 9 Confirmation/modification of plan 9 granted 9 denied : As per the record of the hearing held on July 22, 2010, and based on Exhibit A attached hereto, the Court finds that (1) the Sentry British Virgin Islands (“BVI”) liquidation proceeding is a foreign main proceeding as defined in section 1517(b)(1) of the Bankruptcy Code; (2) the Sigma and Lambda BVI liquidation proceedings are recognized as foreign main proceedings; and (3) the Petitioners’ request for specific relief under section 1521 of the Bankruptcy Code, with the limited exception of the BLMIS Trustee’s pending adversary proceeding against Sentry (Adv. Proc. No. 09-1239), as described in Exhibit A to this Minute Order, is hereby granted.
It is So Ordered.
BY THE COURT FOR THE COURT: Vito Genna, Clerk
_/s/ Burton R. Lifland______July 22, 2010 By: /s/ Monica Saenz de Viteri United States Bankruptcy Judge Date Deputy Clerk Case 1:11-cv-05905-AT Document 29-7 Filed 02/28/14 Page 3 of 12
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------X In re: Chapter 15
FAIRFIELD SENTRY LIMITED, et al., Case No. 10-13164 (BRL)
Jointly Administered Debtors in Foreign Proceedings. ------X APPEARANCES:
BROWN RUDNICK LLP Seven Times Square New York, New York 10036 Tel.: (212) 209-4800 David J. Molton William R. Baldiga Daniel J. Saval May Orenstein Tally M. Wiener Attorneys for Petitioners
MILBERG LLP One Pennsylvania Plaza New York, New York 10119 Tel.: (212) 594-5300 Robert A. Wallner Kent A. Bronson Kristi Stahnke McGregor
SEEGER WEISS LLP One William Street New York, New York 10004 Tel.: (212) 584-0700 Stephen A. Weiss James A. O’Brien III Christopher M. Van de Kieft Parvin Aminolroaya Attorneys for Morning Mist Holdings Limited and Miguel Lomeli
1
Case 1:11-cv-05905-AT Document 29-7 Filed 02/28/14 Page 4 of 12
Before: Hon. Burton R. Lifland United States Bankruptcy Judge
EXHIBIT A - BENCH MEMORANDUM AND ORDER GRANTING CHAPTER 15 PETITIONS OF FAIRFIELD SENTRY LIMITED, FAIRFIELD SIGMA LIMITED, AND FAIRFIELD LAMBDA LIMITED FOR RECOGNITION OF FOREIGN PROCEEDINGS
Before the Court is the petition (the “Petition”)1 of Kenneth Krys and Christopher Stride
(the “Petitioners” or “Liquidators”), Liquidators of Fairfield Sentry Limited (“Sentry”) and
Fairfield Sigma Limited (“Sigma”), and Mr. Stride as Liquidator of Fairfield Lambda Limited
(“Lambda,” and together with Sentry and Sigma, the “Debtors”), for foreign recognition of each
of the Debtors’ liquidation proceedings (collectively, the “BVI Liquidation Proceedings”)
pending before the Commercial Division of the High Court of Justice, British Virgin Islands (the
“BVI Court”). The Debtors were established as vehicles for mainly non-U.S. persons and certain
tax-exempt United States entities to invest with Bernard L. Madoff Investment Securities LLC
(“BLMIS”). Between February and April 2009, shareholders and creditors of the Debtors
applied for the appointment of liquidators for each of the Debtors in the BVI Court. Mr. Stride
was appointed liquidator of Lambda pursuant to an April 23, 2009 Order of the BVI Court. On
July 11, 2009, the Sentry and Sigma BVI Liquidation Proceedings were commenced, followed
by the appointment of the Petitioners as joint liquidators of Sentry and Sigma on July 21, 2009.
The Petitioners seek recognition of the BVI Liquidation Proceedings as foreign main
proceedings under section 1517(b)(1) of the Bankruptcy Code (the “Code”), or in the alternative,
as foreign nonmain proceedings under section 1517(b)(2) of the Code. The only objection to the
Petition was filed with respect to Sentry by Morning Mist Holdings Limited and Miguel Lomeli
1 The Court’s June 16, 2010 Order authorizes the joint administration of the Sentry, Sigma, and Lambda chapter 15 proceedings. See Dkt. No. 10.
2
Case 1:11-cv-05905-AT Document 29-7 Filed 02/28/14 Page 5 of 12
(collectively, the “Objectors”), who are investors in Sentry and plaintiffs in a putative derivative action on Sentry’s behalf in New York State Supreme Court. At bottom, the main point of contention between the parties seems to be whether, as the Petitioners argue, citing Lavie v. Ran,
No. 09-20288, 2010 WL 2106638, at *7 (5th Cir. May 27, 2010), the Debtors’ center of main interests (“COMI”) should be measured as of the date of the Petition and the Court should consider the liquidation proceeding as ongoing business activities, or, as the Objectors argue,
COMI should include the period prior to and leading up to the filing of the Petition and the Court should focus only on the Debtors’ business activities prior to the liquidation, as those were the economic and business functions contemplated by their charters. The contentions of both parties are misplaced, as a review of the relevant factors places the COMI focus in the BVI for the pre- and post-liquidation periods.
DISCUSSION
Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 1011(a) and (b) relates to
contested petitions for recognition of a foreign proceeding, as is the case here. Thus, it would
not appear that a hearing is usually necessary, as Bankruptcy Rule 1011(b) treats the matter as a
“motion” under Federal Rule of Civil Procedure (“Rule”) 12 with no other pleadings permitted.
FED. R. BANKR. P. 1011(a), (b), (e). Nevertheless, the parties have amplified the proceedings by an evidentiary hearing and submissions, not all of which are relevant to the basic issue of recognition.
As a preliminary matter, and based upon the relevant evidence, the Court finds that the
BVI Liquidation Proceedings are foreign proceedings under section 101(23) of the Code, as they are “collective judicial or administrative proceeding[s] in a foreign country . . . under a law relating to insolvency . . . in which . . . the assets and affairs of the debtor are subject to control 3
Case 1:11-cv-05905-AT Document 29-7 Filed 02/28/14 Page 6 of 12
or supervision by a foreign court for the purpose of . . . liquidation.” 11 U.S.C. § 101(23).
Section 1517(a) of the Code requires recognition of the BVI Liquidation Proceedings if
(1) they are main or nonmain proceedings within the meaning of section 1502; (2) the foreign representative applying for recognition is a person or body; and (3) the petition meets the requirements of section 1515. Requirements (2) and (3) are undisputed and clearly satisfied, as the Petitioners are “persons,” and the Petition includes the necessary certifications under section
1515(b) of the Code. See, e.g., Verified Petition, Ex. A, Dkt. No. 2. In addition, the Petitioners have filed updated statements under section 1515(c) of the Code apprising the Court of Sentry’s pending foreign recognition proceeding in Ireland, where Sentry apparently maintains an account holding approximately $73 million. The parties have agreed on the record that this case concerns
(i) whether the BVI Liquidation Proceedings should be recognized as main proceedings or, in the alternative, foreign nonmain proceedings pursuant to Chapter 15 of the Bankruptcy Code, and
(ii) if the Debtors’ foreign proceedings are so recognized, whether Petitioners are entitled to other relief as requested in the Verified Petition filed by the Petitioners. Dkt. No. 2. Therefore, the Court will focus solely on whether under requirement (1) the proceedings are main or nonmain.
a. Recognition of the BVI Liquidation Proceedings as Foreign Main Proceedings
Courts will recognize a liquidation proceeding as a “foreign main proceeding” if it is
“pending in the country where the debtor has the center of its main interests.” 11 U.S.C. §
1517(b)(1). It is the Petitioners’ burden to persuade the Court by a preponderance of the evidence that the Debtors’ COMI is in the BVI. Section 1516(c) of the Code recognizes the importance of the debtor’s place of registration in determining COMI by creating a rebuttable presumption that “[i]n the absence of evidence to the contrary, the debtor’s registered
4
Case 1:11-cv-05905-AT Document 29-7 Filed 02/28/14 Page 7 of 12
office . . . is presumed to be [its COMI].” 11 U.S.C. § 1516(c). Here, it is undisputed that the
Debtors are incorporated and maintain their registered offices in the BVI.2 However, as the
Objectors have advanced evidence in support of their position that New York is the proper
COMI, the Court cannot rely solely upon this presumption, but rather must consider all of the relevant evidence. See In re Bear Stearns High-Grade Structured Credit Strategies Master
Fund, Ltd., 374 B.R. 122, 128 (Bankr. S.D.N.Y. 2007), aff’d, 389 B.R. 325 (S.D.N.Y. 2008); In re Betcorp Ltd., 400 B.R. 266, 285–86 (Bankr. D. Nev. 2009).
In this case, it is apparent from all of the relevant evidence that the Debtors effectively ceased doing business more than 18 months before their Petition and 7 months before the BVI
Liquidation Proceedings commenced. Upon the revelation of the notorious Madoff fraud in
December of 2008, the Debtors discontinued the transfer of funds for investment with BLMIS in
New York, which comprised 95% of Sentry’s investments. The board of representatives at the
Debtors’ New York-based investment managers, Fairfield Greenwich Group (“FGG”), resigned shortly thereafter, and the Debtors’ contracts with FGG were severed in 2009, still long before the filing of the Petition. As a result, the Debtors have no place of business, no management, and no tangible assets located in the United States. Rather, the Debtors’ activities for an extended period of time have been conducted only in connection with winding up the Debtors’ business.
Under these circumstances, it is appropriate for the Court to consider this extended period in determining COMI. The Court finds that the facts now extant provide a sufficient basis for
2 The Objectors point out that Sentry’s Memorandum of Association (the “MOA”) restricts Sentry from “carry[ing] on business with persons resident in the [BVI]” or “own[ing] an interest in real property situate[d] in the [BVI]” other than “for use as an office from which to communicate with members or where books and records of the Company are prepared or maintained.” Decl. of Kenneth Krys, Ex. E, at 1–2, ¶ 4. In response, the Petitioners argue that “the MOA in no way restricts the conduct of COMI-determinative activities in the BVI, including management activities and the maintenance and administration of assets,” nor does it restrict “any of the activities of the liquidators in the BVI in furtherance of the liquidation of Sentry.” Reply at 25–26, ¶¶ 36–37. 5
Case 1:11-cv-05905-AT Document 29-7 Filed 02/28/14 Page 8 of 12
finding that the Debtors’ COMI for the purpose of recognition as a main proceeding is in the
BVI, and not elsewhere.
Although the Debtors’ assets and investors are international, the facts before the Court suggest that the Debtors’ most feasible administrative “nerve center” has existed for some time in the BVI. See Hertz Corp. v. Friend, 130 S. Ct. 1181, 1193–94 (2010). In the approximately 7 months between December 2008 and the commencement of the BVI Liquidation Proceedings, an independent litigation committee governed Sentry’s affairs. This committee was comprised of non-United States-based directors, and the majority of its administrative decision-making originated in the BVI. Although one board meeting was held in New York days after the Madoff fraud disclosure, 41 meetings were conducted telephonically by Sentry’s counsel, Forbes Hare, in the BVI. Further, since the commencement of the BVI Liquidation Proceedings in July 2009, the BVI-based Liquidators have been directing and coordinating the Debtors’ affairs. The
Debtors maintain liquid assets of approximately $17.5 million in a BVI account, and United
States citizens hold less than 10% of the equity in Sentry and comprise only approximately 17% of all record Sentry shareholders. At oral argument today, it became apparent that out of 1100 record shareholders, 195 are based in the United States, which is a substantial number, but clearly not a majority. The Liquidators continue to garner assets from various international locations, including Ireland and England, to administer in the BVI. The Liquidators have BVI- resident employees and offices, and have undertaken to transfer significant books and records to office space leased by the Debtors in the BVI. It has been held that where, by necessity and in good faith, a foreign representative “relocates all of the primary business activities of the debtor to his location (or brings business to a halt), thereby causing other parties to look to the judicial manager as the location of [the] debtor's business,” the debtor’s COMI may “become lodged 6
Case 1:11-cv-05905-AT Document 29-7 Filed 02/28/14 Page 9 of 12
with the foreign representative.” See In re British Am. Ins. Co. Ltd., 425 B.R. 884, 914 (Bankr.
S.D. Fla. 2010). 3 There being no showing of bad faith on the part of the BVI Liquidators, and given that the Debtors are incorporated in and maintain their registered offices in the BVI, the
Court finds it more compelling that the Debtors’ COMI lies in the BVI than in New York, or in any of the Debtors’ other various international contacts.
Furthermore, while the Objectors argue that the Debtors presently maintain substantial intangible assets in New York, these primarily consist of contingent and disputed litigation claims. The BLMIS Trustee seeks to have the Debtors’ claims of over $6.2 billion against
BLMIS disallowed, and the Petitioners dispute the Objectors’ putative derivative claim pending in the New York State Supreme Court against Sentry’s managers and advisors on the bases that, inter alia, (i) the Objectors lack standing and (ii) the actions were commenced in violation of
BVI law. Based on the facts before the Court at this time, these unliquidated, contingent, and disputed claims should be given no greater weight for COMI purposes than any of the Debtors’ other substantial litigations relating to assets that are pending in Ireland and the BVI.4
In any proceeding for foreign recognition, of great concern to the Court is the potential for mischief and COMI manipulation, as recently expressed by the Fifth Circuit in In re Ran,
2010 WL 2106638, at *8 (recognizing, in dicta, that the case before it, involving an individual and not an entity, “d[id] not involve a recent change of domicile by the party in question, [and]
3 Some commentators would treat COMI like a migrating concept that—roulette wheel-like—gets measured at the moment (the “foreign proceeding commencement date”) when the wheel stops. This concept leaves the door open for an untoward gaming of the proceedings (a situation contemplated recently by court in In re Ran, 2010 WL 2106638, at *8).
4 The Petitioners are seeking relief in Ireland for $73 million and have commenced 6 sets of proceedings in the BVI against 160 defendants seeking recovery of redemptions paid out of Sentry before the exposure of the BLMIS fraud. In addition, as of the Petition date, approximately 85% of all actions against redeemers were directed at non-U.S. defendants. 7
Case 1:11-cv-05905-AT Document 29-7 Filed 02/28/14 Page 10 of 12
[a] similar case brought immediately after the party’s arrival in the United States following a long period of domicile in the country where the bankruptcy is pending would likely lead to a different result”). The Court is mindful that some consolidated BVI-focused activity occurred during the 11-month period between the Liquidators’ appointment and the Petition, and that the
Debtors are no longer doing business in accordance with the original Sentry charter. However, the record as to the relevant time period beginning December 2008, which straddles the
Liquidators’ appointment dates, does not support a finding of an opportunistic shift of the
Debtors’ COMI or any biased activity or motivation to distort factors to establish a COMI in the
BVI.5 Indeed, during this key period between December 2008 and the BVI Liquidation
Proceedings, the Debtors’ administrative nerve center existed in the BVI. See Hertz Corp., 130
S. Ct. at 1193–94.
Accordingly, and bearing in mind that “non-recognition where recognition is due may forestall needed inter-nation cooperation,” the Petition for recognition of the BVI Liquidation
Proceedings as a foreign main proceeding is hereby granted, subject to a further review under sections 1517(d) and 1522(c) of the Code should other contrary factors come to light to indicate that a different holding is warranted.6 In re Betcorp, 400 B.R. at 291.
5 Of note, the procurement of the Sentry BVI Liquidation Proceedings was at the behest of shareholders, and not management.
6 Section 1517(d) of the Code states:
the provisions of this subchapter do not prevent modification or termination of recognition if it is shown that the grounds for granting it were fully or partially lacking or ceased to exist, but in considering such action the court shall give due weight to possible prejudice to parties that have relied upon the order granting recognition.
Section 1522(c) of the Code states:
The court may, at the request of the foreign representative or an entity affected by relief granted 8
Case 1:11-cv-05905-AT Document 29-7 Filed 02/28/14 Page 11 of 12
b. The Petitioners’ Requested Relief Under Section 1521(a) of the Code
Furthermore, even if the Court were to alternatively recognize the BVI Liquidation
Proceedings as nonmain proceedings, the Court is constrained to grant the specific relief the
Petitioners separately request under section 1521 of the Code as a supplement to the automatic relief accorded under section 1520. The Petitioners seek relief under section 1521 of the Code, inter alia, staying the Objectors’ purported derivative action, as well as all actions concerning the
Debtors’ rights and assets, with the limited exception of recognizing and implementing the stipulation entered into in the BLMIS Trustee’s adversary proceeding against Sentry, with respect to which the parties continue to engage in good faith efforts to facilitate settlement.
The Court is empowered to grant relief under section 1521 of the Code upon its recognition of a foreign proceeding, “whether main or nonmain, where necessary to effectuate the purpose of [chapter 15] and to protect the assets of the debtor or the interests of the creditors.” 11 U.S.C. § 1521(a). Such relief includes “staying . . . proceeding[s] concerning the debtor’s assets, rights . . . or obligations” and “entrusting the . . . realization of the debtor’s assets within the territorial jurisdiction of the United States to the foreign representative.” Granting the specific relief sought by the Petitioners with regard to the BLMIS Trustee’s adversary proceeding does not violate United States public policy under section 1506 of the Code, which should be narrowly construed. See In re RSM Richter Inc. v. Aguilar (In re Ephedra Prods. Liab.
Litig.) 349 B.R. 333 (S.D.N.Y. 2006). The Petitioners and the BLMIS Trustee represent that they have been engaged in good faith, bilateral settlement discussions. The Court finds currency in the Petitioners’ assessment of the continuation of the adversary proceeding as “wasteful,
under section 1519 or 1521, or at its own motion, modify or terminate such relief.
9
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unnecessary and value destructive litigation” that would derail potential BLMIS-Sentry settlement. United States policy considerations, including the need for efficiency and judicial economy, favor promoting the Debtors’ and the BLMIS Trustee’s stated intent to consensually resolve the adversary proceeding. Finally, granting the requested relief under section 1521 of the
Code fosters the “fair and efficient administration of [the Debtors’] cross-border insolvencies” by ensuring that only one unbiased party—the Liquidators—quarterback the Debtors’ causes of action “in the interests of all creditors and other interested entities, including the debtor.” See 11
U.S.C. § 1501(a)(3).
In conclusion, the Court finds that (1) the Sentry BVI Liquidation Proceeding is a foreign main proceeding as defined in section 1517(b)(1) of the Code; (2) with respect to Sigma and
Lambda, there being no rebuttal to the registered office presumption, nor any objection to their recognition, the Sigma and Lambda BVI Liquidation Proceedings are recognized as foreign main proceedings; and (3) the Petitioners’ request for specific relief under section 1521 of the Code, with the limited exception of the BLMIS Trustee’s pending adversary proceeding against Sentry, is hereby granted.
IT IS SO ORDERED.
Dated: New York, New York July 22, 2010
/s/ Burton R. Lifland UNITED STATES BANKRUPTCY JUDGE
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EXHIBIT 8
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BROWN RUDNICK LLP Seven Times Square New York, New York 10036 David J. Molton Telephone: (212) 209-4800
Attorneys for the Foreign Representatives
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
) In re: ) Chapter 15 Case ) FAIRFIELD SENTRY LIMITED, et al., ) Case No.10-13164 (BRL) ) Debtors in Foreign Proceedings. ) ) Jointly Administered ) FAIRFIELD SENTRY LIMITED (IN ) LIQUIDATION), ) ) Plaintiff, ) -against- ) Adv. Pro. No. 10-03800 ) (BRL) FAIRFIELD GREENWICH GROUP, FAIRFIELD ) GREENWICH (BERMUDA) LIMITED, ) FAIRFIELD GREENWICH ADVISORS, LLC, ) FAIRFIELD GREENWICH LIMITED, ) FIRST AMENDED FAIRFIELD INTERNATIONAL MANAGERS, ) COMPLAINT INC., WALTER M. NOEL, JR., JEFFREY ) TUCKER, ANDRES PIEDRAHITA, AMIT ) VIJAYVERGIYA, LURDES BARRENCHE, ) CORNELIS BOELE, PHILIP TOUB, RICHARD ) LANDSBERGER, CHARLES MURPHY, ) ANDREW SMITH, DANIEL LIPTON, MARK ) MCKEEFRY, HAROLD GREISMAN, SANTIAGO ) REYES, JACQUELINE HARARY, ROBERT ) BLUM, CORINA NOEL PIEDRAHITA, MARIA ) TERESA PULIDO MENDOZA, and JOHN DOES ) 1-20. ) ) Defendants. ) 10-03800-brlCase 1:11-cv-05905-AT Doc 12 Filed 10/27/11 Document Entered 29-8 10/27/11 Filed 02/28/14 16:10:20 Page Main 3 of Document 25 Pg 2 of 24
Fairfield Sentry Limited (“Sentry” or the “Fund”), by and through Kenneth Krys
and Joanna Lau (together with their predecessors, the “Foreign Representatives”), solely in
their capacities as the Foreign Representatives and Liquidators of the Fund in liquidation
proceedings pending before the Commercial Division of the Eastern Caribbean High Court of
Justice, British Virgin Islands (the “BVI Court”), allege the following based on personal
knowledge or information derived from the books and records of the Fund or from other
sources, including, inter alia, court filings and statements of governmental agencies and other
parties.
NATURE OF THE ACTION
1. The Fund, the largest victim of the fraud perpetrated by Bernard L.
Madoff (“Madoff”), brings this action to recover, among other things, in excess of $919
million in investment management and performance fees that the Fund mistakenly paid to
Defendants Fairfield Greenwich Limited (“FGL”) and Fairfield Greenwich (Bermuda) Ltd.
(“FGBL”). As explained herein, FGL and FGBL were formerly the Fund’s investment
managers and were paid these fees by the Fund based on the supposed existence of billions of
dollars of assets under management owned by the Fund as shown on account statements
issued by Bernard L. Madoff Investment Securities LLC (“BLMIS”), Madoff’s brokerage and
investment advisory entity. In reality, as is now widely known, Madoff used BLMIS to
operate a massive Ponzi scheme, and none of the assets supposedly held by BLMIS for the
Fund existed in fact. Accordingly, the Fund is entitled to restitution, with interest, from FGL
and FGBL, as well as from the other Defendants, each of whom received some of the fees paid
by the Fund, of all investment management and performance fees paid by the Fund, together
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with damages sustained by the Fund as a result of Defendants’ breaches of their contractual
and fiduciary duties.
PARTIES
The Fund
2. The Fund was incorporated on October 30, 1990 under the International
Business Companies Act of the British Virgin Islands, automatically re-registered on January
1, 2007 as a business company under the BVI Business Companies Act of 2004 of the British
Virgin Islands, and recognized as a professional fund under the 1996 Mutual Funds Act of the
British Virgin Islands. The Fund commenced operations on December 1, 1990.
3. Shares of the Fund were redeemable at the option of investors for the
per share “Net Asset Value.” Net Asset Value was to be calculated in accordance with the
Fund’s governing documents pursuant to which Net Asset Value was defined, as a general
matter, as the Fund’s total assets including all cash and cash equivalents, securities positions
valued at closing prices, the liquidation value of option positions, less total liabilities of the
Fund.
4. The Fund is currently in liquidation in proceedings commenced on
April 21, 2009 in the Commercial Division of the High Court of Justice, British Virgin Islands
(the “BVI Court”).
The Fairfield Entity Defendants
5. Defendant Fairfield Greenwich Group (“FGG”) was founded in 1983
and is a de facto partnership or partnership by estoppel. This de facto partnership or
partnership by estoppel comprises domestic and foreign corporations, general and limited
partnerships, limited liability companies and trusts. “Fairfield Greenwich Group” was
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marketed by FGG as an experienced alternative asset manager and an independent employee-
owned firm with 23 partners. As of October 2008, FGG claimed to have $16 billion of assets
under management -- $7.3 billion of which was purportedly in the Fund and the rest in various
other investment funds. FGG’s principal place of business is in New York where it
maintained or formerly maintained an office at 919 Third Avenue, New York, New York
10022.
6. Defendant Fairfield Greenwich Limited (“FGL”) is a company
incorporated and existing under the laws of the Cayman Islands. From at least December 31,
2001 to July 1, 2003, FGL served as the Fund’s investment manager pursuant to an investment
management agreement, under which it was compensated in the form of management and
performance fees. From July 1, 2003 to December 11, 2008, FGL was compensated as the
Fund’s placement agent in connection with the offering of the Fund’s shares pursuant to
private placement memoranda. Further, as the parent company of FGBL (as defined below),
FGL has also received a portion of investment and performance fees paid to FGBL since July
2003. FGL is registered as a foreign company authorized to conduct business in New York
County. FGL maintains, or formerly maintained, an office in New York.
7. Defendant Fairfield Greenwich (Bermuda) Ltd. (“FGBL”) is a company
incorporated and existing under the laws of Bermuda with its principal place of business at 12
Church Street, Suite 606, Hamilton, Bermuda, HM 11. FGBL is a wholly owned subsidiary of
FGL. From at least July 1, 2003 to December 11, 2008, FGBL was the Fund’s investment
adviser pursuant to an investment management agreement, under which it was paid
management and performance fees. FGBL conducts business in New York and certain of its
employees are, or formerly were, based in New York.
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8. Defendant Fairfield Greenwich Advisors LLC (“FGA”) is a limited
liability company organized under the laws of the State of Delaware and is registered to do
business in New York. FGL is the sole member and owner of FGA. From at least July 1,
2003 to December 11, 2008, pursuant to investment management agreements, FGA received a
percentage of the management fees paid to FGBL for bearing certain of the Fund’s internal
and operational expenses. FGA’s principal place of business is, or formerly was, in New
York.
9. Fairfield International Managers, Inc. (“FIM”) is a company organized
in Delaware. FIM served as the Fund’s initial investment manager starting in November 1990
under an investment management agreement. FIM is an owner of FGL. As an owner of FGL,
and as the Fund’s previous investment and risk manager, FIM has been paid management and
performance fees on the SSC Investments (as hereinafter defined). FIM conducts business in
New York.
10. FGG, FGL, FGBL, FGA, and FIM are referred to herein as the
“Fairfield Entity Defendants.”
The Fairfield Individual Defendants
11. Defendant Walter M. Noel, Jr. (“Noel”) is a founding partner of FGG
and serves on the Fund’s Board of Directors. Based on Defendants’ business records, Noel is
a principal and/or controlling person of the Fairfield Entity Defendants and has an equity share
of FGG and/or investment funds managed by FGG. Accordingly, Noel has received a
percentage of the management and performance fees paid to the Fairfield Entity Defendants,
and he is liable to the Fund in his capacity as a principal and/or controlling person of the
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Fairfield Entity Defendants. Noel maintains a residence in New York and conducts business
in New York.
12. Defendant Jeffrey Tucker (“Tucker”) is a founding partner of FGG and
oversees FGG’s business operations. Based on Defendants’ business records, Tucker is a
principal and/or controlling person of the Fairfield Entity Defendants and has an equity share
of FGG and/or investment funds managed by FGG. Accordingly, Tucker has received a
percentage of the management and performance fees paid to the Fairfield Entity Defendants.
Tucker maintains a residence in New York and conducts business in New York.
13. Defendant Andres Piedrahita (“Piedrahita”) is controlling partner of
FGG and serves as the President and Director of FGBL. Based on Defendants’ business
records, Piedrahita is a controlling person and/or owner of the Fairfield Entity Defendants and
has an equity share of FGG and/or investment funds managed by FGG. Accordingly,
Piedrahita has received a percentage of the management and performance fees paid to the
Fairfield Entity Defendants. Piedrahita conducts business in New York.
14. Defendant Amit Vijayvergiya (“Vijayvergiya”) is a citizen of Canada.
Vijayvergiya is the Managing Director and Chief Risk Officer of FGBL. Vijayvergiya joined
FGBL in 2003 and was responsible for the Fund’s risk management. Based on Defendants’
business records, Vijayvergiya has an equity share of FGG and/or investment funds managed
by FGG. Accordingly, Vijayvergiya has received a share of the management and performance
fees paid to the Fairfield Entity Defendants. Vijayvergiya conducted business in New York.
15. Lourdes Barranche (“Barranche”) is a partner in FGG. According to
Defendants’ business records, Barranche has been with FGG since 1997, and she is an
international sales specialist and has marketed FGG’s investment funds. Barranche has an
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equity share of FGG and/or investment funds managed by FGG. Accordingly, Barranche has
received a share of the management and performance fees paid to the Fairfield Entity
Defendants. Barranche is based in FGG’s New York office.
16. Cornelis Boele (“Boele”) is a partner of FGG. According to
Defendants’ business records, Boele has been with FGG since 1997 and oversees the
marketing efforts of the offshore funds of FGG in the Benelux region and markets throughout
Europe. Boele has an equity share of FGG and/or investment funds managed by FGG.
Accordingly, Boele has received a share of the management and performance fees paid to the
Fairfield Entity Defendants. Boele is based in FGG’s New York office.
17. Philip Toub (“Toub”) is a partner in FGG. According to Defendants’
business records, Toub has been with FGG since 1997 and is a member of FGG’s Executive
Committee. Toub markets FGG’s offshore funds and assists in the development of new
products. Toub has an equity share of FGG and/or investment funds managed by FGG.
Accordingly, Toub has received a share of the management and performance fees paid to the
Fairfield Entity Defendants. Toub is based in FGG’s New York office.
18. Richard Landsberger (“Landsberger”) is a partner in FGG. According
to Defendants’ business records, Landsberger joined FGG in 2001 and he is a member of
FGG’s Executive Committee. Landsberger is responsible for business development and
general management issues in Europe and Asia and directly markets products to FGG’s global
institutional client base. Landsberger has an equity share of FGG and/or investment funds
managed by FGG. Accordingly, Landsberger has received a share of the management and
performance fees paid to the Fairfield Entity Defendants. Landsberger is based in FGG’s
London office. On information and belief, Landsberger conducts business in New York.
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19. Charles Murphy (“Murphy”) is a partner in FGG. On information and
belief, Murphy joined FGG in 2007. According to Defendants’ business records, Murphy is a
member of FGG’s Executive Committee and is responsible for strategy and capital markets
business for FGG. Murphy has an equity share of FGG and/or investment funds managed by
FGG. Accordingly, Murphy has received a share of the management and performance fees
paid to the Fairfield Entity Defendants. Murphy is based in FGG’s New York office.
20. Daniel Lipton (“Lipton”) is a partner in FGG. According to
Defendants’ business records, Lipton joined FGG in 2002 and he serves as its Chief Financial
Officer. Lipton was involved in preparing the Fund’s financial statements and reports stating
the Net Asset Value of shares of the Fund (“Net Asset Value Reports”). Lipton has an equity
share of FGG and/or investment funds managed by FGG. Accordingly, Lipton has received a
share of the management and performance fees paid to the Fairfield Entity Defendants. Lipton
is based in FGG’s New York office.
21. Mark McKeefry (“McKeefry”) is a partner in FGG. According to
Defendants’ business records, McKeefry joined FGG in 2003 and he serves as its Chief
Operating Officer and General Counsel. McKeefry has an equity share of FGG and/or
investment funds managed by FGG. Accordingly, McKeefry has received a share of the
management and performance fees paid to the Fairfield Entity Defendants. McKeefry is based
in FGG’s New York office.
22. Harold Greisman (“Greisman”) is a partner in FGG. According to
Defendants’ business records, Greisman joined FGG in 1990 and he evaluates alternative asset
investment and managers. Greisman has an equity share of FGG and/or investment funds
managed by FGG. Accordingly, Greisman has received a share of the management and
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performance fees paid to the Fairfield Entity Defendants. Greisman is based in FGG’s New
York and London offices.
23. Santiago Reyes (“Reyes”) is a partner in FGG. According to
Defendants’ business records, Reyes joined FGG in 1996 and is head of FGG’s Miami office.
Reyes markets FGG’s offshore funds worldwide. Reyes has an equity share of FGG and/or
investment funds managed by FGG. Accordingly, Reyes has received a share of the
management and performance fees paid to the Fairfield Entity Defendants. On information
and belief, Reyes conducts business in New York.
24. Jacqueline Harary (“Harary”) is a partner in FGG. According to
Defendants’ business records, Harary markets FGG’s funds worldwide and is involved with
the selection of investment managers and product development. Harary joined FGG in 1997
and has an equity share of FGG and/or investment funds managed by FGG. Accordingly,
Harary has received a share of the management and performance fees paid to the Fairfield
Entity Defendants. Harary is based in FGG’s New York office.
25. Robert Blum (“Blum”) was a Managing Partner and Chief Operating
Officer of FGG from 2000 to 2005. According to Defendants’ business records, Blum
continues to share in the profits of FGG and/or investment funds managed by FGG.
Accordingly, Blum has received a share of the management and performance fees paid to the
Fairfield Entity Defendants. Blum was based in FGG’s New York office.
26. Corina Noel Piedrahita (“Corina Piedrahita”) is a partner in FGG.
According to Defendants’ business records, Corina Piedrahita markets FGG’s funds and has
an equity share of FGG and/or investment funds managed by FGG. Accordingly, Corina
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Piedrahita has received a share of the management and performance fees paid to the Fairfield
Entity Defendants. Corina Piedrahita conducts business in New York.
27. Maria Teresa Pulido Mendoza (“Mendoza”) is a partner in FGG. On
information and belief, Mendoza is head of FGG’s global sales and is based in New York.
According to Defendants’ business records, Mendoza has an equity share of FGG and/or
investment funds managed by FGG, and she has received a share of the management and
performance fees paid to the Fairfield Entity Defendants.
28. John Does 1-20 are unknown partners, officers or employees of FGG
who received a share of the management and performance fees paid to the Fairfield Entity
Defendants.
29. The FGG partners referred in paragraphs 19 through 28 are hereinafter
referred to as the “Fairfield Individual Defendants,” and are named herein for, among other
reasons, because they received management and performance fees which were based on non-
existent assets supposedly under management by the Fairfield Entity Defendants.
JURISDICTION AND VENUE
30. Jurisdiction is proper in this Court pursuant to 28 U.S.C. § 1334(b).
31. This is a core proceeding under 28 U.S.C. § 157(b)(2).
32. Defendants either reside, conduct, or conducted business, within the
State of New York. Further, FGG, FGA and FGL maintain or formerly maintained their
principal place of business in New York.
33. Venue is proper in this Court pursuant to 28 U.S.C. § 1409(a).
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ALLEGATIONS OF FACT
34. The Fund was created as a means for private investment in managed
accounts with Bernard L. Madoff Investment Securities LLC (“BLMIS”), the brokerage
business that Madoff used to perpetrate his massive Ponzi scheme.
35. The Fund raised money for investment in BLMIS through the sale of
shares. Substantially all of the money (some 95%) that the Fund raised, net of fees and
expenses, was transferred to BLMIS, through Sentry, and supposedly credited to accounts held
in the name of Sentry. According to private placement memoranda issued from time to time
on behalf of the Fund, proceeds of the sales of Fund shares were invested in securities
purchased by BLMIS to implement an investment strategy referred to as “split strike
conversion.” The Fund’s investments with BLMIS are referred hereinafter as the “SSC
Investments.” On January 12, 1995, shares of the Fund were listed on the Irish Stock
Exchange in Dublin, Ireland.
36. FIM was the Fund’s first investment manager under an investment
management agreement dated November 15, 1990 (the “November 15, 1990 IMA”). Under
that agreement, FIM established a brokerage account on behalf of the Fund with C&M
Trading, an investment vehicle operating in association with Madoff (“CMT”), which received
an allocation of the Fund’s assets for the purpose of trading in equity and options on securities.
See November 15, 1990 IMA ¶ 1. The November 15, 1990 IMA provided, inter alia, that FIM
“shall use its best efforts to monitor the performance and activities of CMT.” Id. ¶ 2. FIM was
paid a 20% performance fee on appreciation of the Fund’s Net Asset Value from investments
with Madoff. Id. ¶ 7. No management fee was charged. The November 15, 1990 IMA
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provides that it “shall be governed and construed in accordance with the laws of New York.”
Id. ¶ 8. A copy of the November 15, 1990 IMA is attached as Ex. 1.
37. On or about October 1, 2002, the Fund and FGL entered into an
Amended and Restated Investment Management Agreement, which was in effect until June
30, 2003 (the “October 1, 2002 IMA”). Under that agreement, FGL agreed, among other
things, to manage the SSC Investments and use its “best efforts to monitor the activities and
performance of [BLMIS] and any [non-BLMIS] investments.” October 1, 2002 IMA ¶ 2. The
Fund paid FGL a 20% performance fee based on the Fund’s net asset appreciation generated
from the SSC Investments. Id. at ¶ 7(a). No management fee was charged under the
agreement. Id. Like the November 15, 1990 IMA, the October 1, 2002 IMA provided that it
shall be construed and governed in accordance with the laws of the State of New York,
without regard to the principles of conflicts of laws thereof. Id. at ¶ 14. A copy of the
October 1, 2002 IMA is attached as Ex. 2.
38. On October 1, 2004, the Fund executed an Investment Management
Agreement with FGBL (the “October 1, 2004 IMA”). The October 1, 2004 IMA superseded
an investment management agreement entered into between the Fund and FGBL on July 1,
2003 (the “July 1, 2003 IMA”) and contained revisions reflecting the conversion of Class B
Shares into Class A Shares and the redesignation of Class A Shares as Shares of the Fund.1
Prior to October 1, 2004, Class B Shares were charged both a 20% performance fee and a 1%
management fee. Class A Shares were charged only the 20% performance fee. Effective
October 1, 2004, on the recommendation of the Fairfield Entity Defendants, it was decided
that a 1% monthly management fee and a 20% quarterly performance fee shall be charged to
all of the Fund’s shares. Pursuant to these provisions, the Fairfield Entity Defendants were to
1 The October 1, 2004 IMA and July 1, 2003 IMA provide that they shall be construed under the laws of Bermuda.
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be paid a management fee based on the Fund’s assets under management regardless of
whether a profit on those assets were realized. Copies of the July 1, 2003 IMA and the
October 1, 2004 IMA are attached as Ex. 3 and Ex. 4, respectively.
39. Under the October 1, 2004 IMA, FGBL was required to use “best
efforts” to (a) manage the Fund’s investment portfolio, (b) oversee the Fund’s day-to-day
investment operations, (c) act as the Fund’s investment adviser, (d) provide information to the
Fund and Shareholders, and (e) arrange for and oversee services of the Fund’s auditors,
custodian(s) and administrators. See October 1, 2004 IMA, ¶ 2. Section 2 of the July 1, 2003
IMA mirrors that of the October 1, 2004 IMA.
40. Under the October 1, 2004 IMA, FGBL was paid a fixed monthly
management fee in an amount equal to one-twelfth of one percent (0.833%) of the Net Asset
Value of the Fund.
41. FGBL paid FGA a monthly fee in an amount equal to one-fortieth of
one percent of the amount calculated as the Fund’s Net Asset Value for bearing certain of the
Fund’s internal accounting and operational expenses. See October 1, 2004 IMA ¶ 9.
42. Under all of the investment management agreements between the Fund
and the Fairfield Entity Defendants, the investment manager was to be paid a quarterly
performance fee in an amount equal to 20% of the amount of the net realized and unrealized
appreciation in the Fund’s Net Asset Value of each Share in such calendar quarter.
43. BLMIS provided periodic account statements and other data to the
Fairfield Entity Defendants. These account statements listed the securities and options that
Madoff had purportedly purchased and sold on the Fund’s account. These account statements
and/or other materials provided by BLMIS to the Fairfield Entity Defendants were used to
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calculate the Net Asset Value of the Fund for purposes of redemptions of Shares and the
calculation of management and performance fees to be paid under the investment management
agreements.
44. The Net Asset Value of the Fund, calculated using the false BLMIS
statements, was included in the Net Asset Value Reports and in the Fund’s unaudited financial
and audited financial statements.
45. Financial statements of the Fund for the period from fiscal year 2002
through November 2008 show payments made to the Fairfield Entity Defendants in respect of
such period in the amount of $919,476,832 supposedly representing payments of management
and performance fees:
Year Performance Fees Management Total Fees Through $97,373,819 $65,930,013 $163,303,832 November 2008 2007 $116,257,000 $67,322,000 $183,579,000
2006 $107,779,000 $50,465,000 $158,244,000
2005 $87,225,000 $51,127,000 $138,352,000
2004 $81,278,000 $21,549,000 $102,827,000
2003 $80,515,000 $5,221,000 $85,736,000
2002 $83,591,000 $3,844,000 $87,435,000
Total for the $654,018,819 $265,458,013 $919,476,832 above period
46. In addition, under certain deferred fee agreements, the Fairfield Entity
Defendants elected to defer certain management and performance fees derived from the SSC
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Investments, which were recorded on the Fund’s financial statements as a liability in the
amount of $26 million.
47. Based on FGG’s business records, for 2007 alone, Piedrahita was paid
$45.60 million, Tucker was paid $30.67 million, Noel paid $30.67 million, which amounts
were, in part, derived from the fees paid by the Fund on the account of the SSC Investments.
48. Further, each of the Fairfield Individual Defendants received
compensation derived from fees paid by the Fund on the account of the SSC Investments.
49. On December 11, 2008, Madoff was arrested and charged with running
a “Ponzi” scheme in violation of United States securities laws. The SEC also filed a civil
complaint in the United States District Court for the Southern District of New York seeking
injunctive relief and to have BLMIS placed in receivership. SEC v. Madoff, 08 Civ 1079
(S.D.N.Y.).
50. By Order dated December 15, 2008, Irving Picard, Esq. was appointed
the Trustee in charge of presiding over the liquidation of BLMIS under the Securities Investor
Protection Act, 15 U.S.C. § 78aaa, et seq. (“SIPA”) and the United States Bankruptcy Code.
51. On February 20, 2009, during a public meeting with customers and
creditors of BLMIS held in the United States Bankruptcy Court for the Southern District of
New York, the Trustee reported that his investigation had revealed, among other things, that
BLMIS had not traded or purchased any securities on the account of any customer, including
the Fund, for at least the past 13 years.
52. Subsequent to his February 20, 2009 report, the Trustee has represented
in pleadings with the United States Bankruptcy Court that there are no records of BLMIS
having cleared a single purchase or sale of securities at the Depository Trust Company or any
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other trading platform on which BLMIS could have reasonably traded securities. Nor has the
Trustee found evidence that BLMIS ever purchased or sold any of the options that Madoff
claimed to have purchased on customer statements. See e.g., Picard v. Fairfield Sentry
Limited, et al., Adv. Proc. No. 09-1239 (BRL) (Docket No. 1, Complaint ¶ 20).
53. On March 18, 2009, the SEC charged the auditors of BLMIS, David G.
Friehling and his firm, Friehling & Horowitz, CPAs, P.C. (“F&H”), with committing
securities fraud by representing that they had conducted legitimate audits, when in fact they
had not. According to the SEC, F&H enabled Madoff’s Ponzi scheme by falsely stating, in
annual audit reports, that F&H had audited the financial statements of BLMIS when in fact,
F&H “merely pretended to conduct minimal audit procedures,” and “failed to document his
purported findings” which would have shown BLMIS owed “tens of billions of dollars in
additional liabilities to its customers and was therefore insolvent.” See SEC Charges Madoff
Auditors with Fraud, Litigation Release No. 20959 (March 18, 2009).
54. On March 18, 2009, the United States Attorney for the Southern District
of New York charged David G. Friehling, the auditor of BLMIS, with securities fraud, aiding
and abetting investment adviser fraud, and four counts of filing false audit reports with the
SEC.
55. In sum, Madoff’s admission of guilt reveals that the Net Asset Value
Reports contained false information, and the Fund mistakenly paid hundreds of millions of
dollars in the form of management and performance fees to Defendants based on non-existent
assets. Based on the actual amount of assets under management, Defendants were not entitled
to the payment of any management or performance fees.
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56. By notice dated May 29, 2009, the Fund formally terminated its
investment and risk advisory relationship with the Fairfield Entity Defendants.
FIRST CLAIM
(Breach of Contract as against the Fairfield Entity Defendants)
57. Plaintiff realleges paragraphs 1 through 56.
58. The Fund entered into certain investment management agreements, all
of which provided, inter alia, that the Fairfield Entity Defendants shall use their “best efforts”
to supervise Madoff, BLMIS and CMT and to perform other duties and functions. See
November 15, 1990 IMA, ¶ 2; October 1, 2002 IMA ¶ 2; July 1, 2003 IMA, ¶ 2; and October
1, 2004 IMA, ¶ 2.
59. Pursuant to ¶ 2 of the July 1, 2003 IMA and the October 1, 2004 IMA,
the Fairfield Entity Defendants were required to use “best efforts” to oversee the Fund’s day-
to-day investment activities, act as the Fund’s investment adviser, provide accurate
information to the Fund, and supervise the activities of the Fund’s auditors and its
administrator.
60. The Fairfield Entity Defendants did not use “best efforts” in supervising
BLMIS and Madoff and carrying out their duties under the investment management
agreements. Instead, the Fairfield Entity Defendants’ performance of their duties under the
investment management duties was grossly negligent.
61. As a result of the gross negligence by the Fairfield Entity Defendants in
the performance of their duties, the exculpatory and indemnification provisions of the October
1, 2002 IMA (§ 9), July 1, 2003 IMA (§ 10), and the October 1, 2004 IMA (§ 10) are
inapplicable and unenforceable.
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62. By reason of the Fairfield Entity Defendants breach of the investment
management agreements, the Fund is entitled to compensatory damages in an amount to be
calculated at trial, but not less than $919,476,832, including the return of all performance and
management fees paid dating back to November 1990.
SECOND CLAIM
(Mistaken Payment as against all Defendants)
63. Plaintiff realleges paragraphs 1 through 62.
64. As described above, the Fund paid performance and management fees
to the Fairfield Entity Defendants under the mistaken belief that the assets shown on
statements from BLMIS represented actual securities and other assets of the Fund.
65. Amounts paid to the Fairfield Entity Defendants by the Fund were paid
to other Fairfield Entity Defendants and to the Fairfield Individual Defendants.
66. BLMIS did not hold any securities or interests in securities on account
for the Fund and statements showing such assets as being held on account were false.
67. Because the assets upon which the management and performance fees
paid to the Fairfield Entity Defendants were supposedly based did not in fact exist, the
Fairfield Entity Defendants were not entitled to receive any of the amounts paid to them.
68. The Defendants did not provide valuable consideration for the payments
they received, directly or indirectly, from the Fund.
69. It would offend principles of equity and good conscience to permit the
Defendants to retain any of the payments of fees they received, directly or indirectly, from the
Fund.
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70. The Plaintiff is entitled to recover from the Defendants all of the
payments received by them, directly or indirectly, from the Fund.
THIRD CLAIM
(Breach of Fiduciary Duty and Duty of Care against the Fairfield Investment Advisor Defendants and the Fairfield Individual Fiduciary Defendants)
71. Plaintiff realleges paragraphs 1 through 70.
72. Independent of the investment management agreements, FIM, FGL and
FGBL (the “Fairfield Investment Advisor Defendants”) owed a fiduciary obligation and a duty
of care to the Fund as investment advisers from November 1990 to May 29, 2009.
73. In addition, Noel, Tucker and Vijayvergiya (the “Fairfield Individual
Fiduciary Defendants”) owed fiduciary obligations and a duty of care to the Fund by virtue of
their positions and roles vis-à-vis the investment and risk operations of the Fund as described
and represented in the Fund’s private placement memorandum.
74. In connection with the management of its investment portfolio and risk
management operations, the Fund reposed confidence in the Fairfield Investment Advisor
Defendants and the Fairfield Individual Fiduciary Defendants, and the Fund reasonably relied
on their expertise and knowledge.
75. The Fairfield Investment Advisor Defendants and the Fairfield
Individual Fiduciary Defendants were grossly negligent and recklessly disregarded their
fiduciary duties by their conduct and inaction, including, but not limited to:
(a) Failing to take appropriate steps over the course of 18 years to
independently verify that trades on the Fund’s accounts were actually executed and option
contracts were actually sold and purchased as reflected in the monthly account statements and
trade tickets issued by Madoff, BLMIS and CMT;
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(b) Failing to safeguard the Fund’s assets in the custody of Madoff, BLMIS,
CMT, and conduct risk oversight over Madoff, BLMIS and CMT;
(c) Failing to perform adequate due diligence on Madoff, BLMIS and CMT;
(d) Collecting management and performance fees based on inflated Net Asset
Values Reports prepared by, or prepared under the supervision of, the Fairfield Investment
Advisor Defendants; and
76. By reason of the foregoing, the Fund is entitled to compensatory
damages from the Fairfield Investment Advisor Defendants and the Fairfield Individual
Fiduciary Defendants in an amount to be calculated at trial, but not less than $919,476,832,
including the return of all performance and management fees paid dating back to November
1990.
FOURTH CLAIM
(Unjust Enrichment as against all Defendants)
77. Plaintiff realleges paragraphs 1 through 76.
78. From the outset of their relationship, the Fund has paid, and Defendants
have received, directly from the Fund or indirectly through other Defendants or persons,
management and performance fees paid based on non-existent assets purportedly held for the
Fund on account with BLMIS. In fact, at all relevant times, the Fund had no assets on account
at BLMIS.
79. As owners, controlling persons and partners of the Fairfield Entity
Defendants, each of the Individual Fairfield Defendants received a share of the management
and performance fees that the Fund paid to the Fairfield Entity Defendants.
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80. Because each of the Defendants received a share of the more than $919
million dollars of fees which the Fund mistakenly paid based on purported but non-existent
assets shown on Net Asset Value Reports, the Defendants have been unjustly enriched at the
Fund’s expense and are holding monies, which in good conscience and under principles of
equity, should be returned to the Fund.
81. Plaintiff is entitled to restitution with interest from the Defendants of all
management and performance fees paid.
FIFTH CLAIM
(Constructive Trust as against all Defendants)
82. Plaintiff realleges paragraphs 1 through 81.
83. The Defendants owed fiduciary obligations and a duty of care to the
Fund, and they have been unjustly enriched as a result of receiving management and
performance fees based on overstated Net Asset Value Reports.
84. Under agreements and other promises, the Fairfield Entity Defendants
represented to the Fund that they would use their best efforts to supervise the activities of
Madoff, BLMIS and CMT, and that they would independently verify the underlying
information of the Net Asset Value Reports on which management and performance fees were
calculated and paid.
85. Relying on inflated Net Asset Value Reports, the Fund paid
management and performance fees to the Fairfield Entity Defendants for approximately 18
years which were then distributed to the Fairfield Individual Defendants. Therefore,
Defendants are holding monies, which in good conscience and under principles of equity,
should be returned to the Fund.
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86. By reason of the foregoing, the Fund is entitled to a constructive trust
imposed on all moneys and other property within the possession, custody or control of each
Defendant, including on (a) all management fees received by Defendants, (b) all performance
fees received by Defendants, and (c) all assets or compensation received by Defendants in
connection with the business of FGG and all of its affiliates.
SIXTH CLAIM
(Accounting as against all Defendants)
87. Plaintiff realleges paragraphs 1 through 86.
88. Under Section 2 of the October 1, 2004 IMA, the Fund is entitled to an
accounting of all financial information relating to the Fund, including compensation paid to
each Defendant. The Fund has requested information as to all fees paid on the account of the
SSC Investments. Defendants have refused to provide it.
89. Moreover, given that the Fund and each Defendant enjoyed a
confidential relationship of trust, each Defendant must account for the management and
performance fees that they each have received based on the illusory Net Asset Value Reports.
90. The payment of management and performance fees was not justified
and a complete accounting should be ordered.
SEVENTH CLAIM
(Declaratory Judgment as against the Fairfield Entity Defendants)
91. Plaintiff realleges paragraphs 1 through 90.
92. Under the Amended and Restated Deferred Fee Agreement, dated July
1, 2003, and the Second Amended and Restated Deferred Fee Agreement, dated December 31,
2008, between the Fund and FGBL (the “Deferred Fee Agreement”), the Fairfield Entity
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Defendants elected to defer the payment of certain management and performance fees derived
from the SSC Investments (the “Deferred Fees”).
93. As of December 31, 2008, the Fairfield Entity Defendants estimated
that the Deferred Fees were approximately $26 million, and they were recorded on the Fund’s
books as a liability.
94. By reason of the foregoing, because the Deferred Fees are based on
non-existent assets, the Fund is entitled to a judgment declaring that (a) the Fund does not owe
Deferred Fees to the Fairfield Entity Defendants under the investment management
agreements an/or the Deferred Fee Agreement, and (b) the Deferred Fees are an asset of the
Fund.
RELIEF REQUESTED
WHEREFORE, the Fund requests that the Court grant judgment as follows:
(1) For claim one against the Fairfield Entity Defendants, compensatory
damages in an amount to be calculated at trial, but not less than $919,476,832, including the
return of all management and performance fees, plus statutory interest;
(2) For claim two against all Defendants, restitution in the amount of no less
than $919,476,832, plus statutory interest;
(3) For claim three against the Fairfield Investment Advisor Defendants and
the Fairfield Individual Fiduciary Defendants, compensatory damages in an amount to be
calculated at trial, but not less than $919,476,832, including the return of all management and
performance fees, plus statutory interest;
(4) For claim four against all Defendants, restitution in the amount of no less
than $919,476,832, plus statutory interest;
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(5) For claim five against all Defendants, a constructive trust over all assets,
property, and/or cash currently in the custody and control of each Defendant;
(6) For claim six against all Defendants, an accounting of all of the
management and performance fees received by each Defendant from the Fund;
(7) For claim seven against the Fairfield Entity Defendants, a judgment
declaring that (a) the Fund does not owe any Deferred Fees to any of the Fairfield Entity
Defendants, and (b) the Deferred Fees are an asset of the Fund; and
(8) Such other, further and different relief as the Court deems just and proper,
including costs, and attorneys’ fees, and disbursement of this action.
Dated: New York, New York October 27, 2011 BROWN RUDNICK LLP
By: /s/ David. J. Molton David J. Molton
Seven Times Square New York, New York 10036 Telephone: (212) 209-4800
Attorneys for the Foreign Representatives
24 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 1 of 40
EXHIBIT 9
Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 2 of 40
Hearing Date: October 26, 2010 at 10:00 a.m. Objection Deadline: October 12, 2010 at 4:00 p.m.
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
) In re: ) Chapter 15 Case ) Fairfield Sentry Limited, et al., ) Case No. 10-13164 (BRL) ) Debtors in Foreign Proceedings. ) Jointly Administered ) ) Related Adversary ) Proceedings Listed in Exhibit A )
MOTION OF FOREIGN REPRESENTATIVES SEEKING (1) CONSOLIDATION OF CERTAIN ADVERSARY PROCEEDINGS; (2) IMPLEMENTATION OF A COORDINATED SCHEDULE FOR THOSE PROCEEDINGS AND (3) ENTRY OF A CASE MANAGEMENT ORDER TO GOVERN ALL ADVERSARY PROCEEDINGS AND CONTESTED MATTERS RELATED TO THESE CHAPTER 15 CASES
BROWN RUDNICK LLP David J. Molton May Orenstein Daniel J. Saval Kerry L. Quinn Seven Times Square New York, NY 10036 (212) 209-4800
September 23, 2010
Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 3 of 40
TABLE OF CONTENTS
PRELIMINARY STATEMENT ...... 1
JURISDICTION AND VENUE ...... 5
FACTUAL BACKGROUND...... 5
Background to the Debtors’ Investments with BLMIS ...... 5
Calculation of Net Asset Value and Mistaken Payments to Redeemers ...... 6
Exposure of Madoff Fraud...... 7
Procedural History of Debtors’ Liquidations...... 8
ARGUMENT...... 9
I. THE REDEEMER ACTIONS SHOULD BE CONSOLIDATED FOR PRE- TRIAL AND DISCOVERY PURPOSES ...... 9
A. The Redeemer Actions Involve Common Issues of Fact...... 10
B. The Redeemer Actions Involve Common Issues of Law ...... 11
C. Consolidation Will Promote Efficiency...... 12
D. The Court May Consolidate Future Related Redeemer Actions ...... 12
II. THE REDEEMER ACTIONS SHOULD PROGRESS ON A COORDINATED SCHEDULE...... 13
III. CASE MANAGEMENT PROCEDURES SHOULD BE IMPLEMENTED TO PROMOTE THE EFFICIENT ADMINISTRATION OF ALL ADVERSARY PROCEEDINGS AND CONTESTED MATTERS RELATED TO DEBTORS’ CHAPTER 15 CASES...... 13
CONCLUSION...... 14
Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 4 of 40
TABLE OF AUTHORITIES
Caselaw
BD v. DeBuono, 193 F.R.D. 117 (S.D.N.Y. 2000) ...... 10-11
Devlin v. Transp. Commc’n Int’l Union, 175 F.3d 121 (2d Cir. 1999)...... 12
Equal Employment Opportunity Comm’n v. Die Fliedermaus, L.L.C., 77 F. Supp. 2d 460 (S.D.N.Y. 1999)...... 10, 12
In re Fairfield Sentry Limited, et al., No. 10-13164 (BRL)...... 1
Internet Law Library, Inc. v. Southridge Capital Mgmt., LLC, 208 F.R.D. 59 (S.D.N.Y. 2002) ...... 10, 12
Johnson v. Celotex Corp., 899 F.2d 1281 (2d Cir. 1990)...... 9-10
Nationsrent, Inc. v. Sheffield (In re NationsRent, Inc.), 2003 WL 21414667 (Bankr. D. Del. June 18, 2003)...... 12
Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Labranche & Co., 229 F.R.D. 395 (S.D.N.Y. 2004) ...... 12
Primavera Familienstiftung v. Askin, 173 F.R.D. 115 (S.D.N.Y. 1997)...... 9
Sec. Investor Protection Corp. v. Bernard L. Madoff Inv. Sec. LLC, SIPA Liquidation No. 08-1789 (BRL)...... 8
Skwortz v. Crayfish Co. Ltd., 2001 WL 1160745 (S.D.N.Y. Sept. 28, 2001) ...... 10
Statutes and Rules
11 U.S.C. § 105(a) ...... 1, 4, 5, 13-14
11 U.S.C. § 105(d) ...... 4
11 U.S.C. § 1501...... 5
11 U.S.C. § 1521(a) ...... 1, 4, 5, 14
28 U.S.C. § 157...... 5
28 U.S.C. § 1334...... 2, 5
28 U.S.C. § 1408...... 5 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 5 of 40
28 U.S.C. § 1409(a) ...... 5
28 U.S.C. § 1452...... 2
Fed. R. Civ. P. 42(a) ...... 9, 11
Fed. R. Bankr. P. 7042...... 1, 3, 5
Fed. R. Bankr. P. 9014...... 5
Fed. R. Bankr. P. 9017...... 5
ii Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 6 of 40
Kenneth Krys and Joanna Lau (together with their predecessors, the “Foreign
Representatives” or “Liquidators”), in their capacities as foreign representatives and liquidators
of Fairfield Sentry Limited (“Sentry”), Fairfield Sigma Limited (“Sigma”) and Fairfield Lambda
Limited (“Lambda,” and together with Sentry and Sigma, the “Debtors”) respectfully move for
(1) consolidation of the adversary proceedings listed in Exhibit A, and any other actions now
pending or later filed in this district that arise out of or are related to the same facts, for pretrial and discovery purposes, pursuant to 11 U.S.C. §§ 105(a) and 1521(a)(7) and Rule 7042 of the
Federal Rules of Bankruptcy Procedure (a proposed order is attached as Exhibit B); (2) entry of a
preliminary scheduling order to govern the adversary proceedings listed in Exhibit A (a proposed order is attached as Exhibit C), and (3) entry of a case management order to govern all adversary proceedings and contested matters related to the Debtors’ Chapter 15 cases, captioned In re
Fairfield Sentry Limited, et al., No. 10-13164 (BRL) (a proposed order is attached as Exhibit D).
In support of the Motion, the Foreign Representatives respectfully represent as follows:
PRELIMINARY STATEMENT
1. Sentry, like its sister funds, Lambda and Sigma, is presently in liquidation
proceedings pending before the Commercial Division of the High Court of Justice, British Virgin
Islands (the “BVI Court”). Pursuant to an Order of this Court issued July 22, 2010 (the
“Recognition Order”), these foreign liquidation proceedings have been recognized by this Court
as “foreign main proceedings” under Chapter 15.
2. Sentry was the largest of all the so-called “feeder funds” to invest with Bernard L.
Madoff (“Madoff”) through Bernard L. Madoff Investment Securities LLC (“BLMIS”). As of
December 2008, when Madoff’s fraud was discovered, over $6 billion of assets were purportedly
held on account with BLMIS for Sentry. In order to maximize recovery for creditors and other
entities and persons with valid claims in the Debtors’ BVI liquidation proceedings, the Foreign Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 7 of 40
Representatives have directed the filing of numerous action on behalf of the Debtors, including
actions (the “Redeemer Actions”) brought against entities and individuals (“Redeemers”) who,
prior to the disclosure of the Madoff fraud, received payments upon the redemption of shares issued by the Debtors (“Redemption Payments”). As alleged in the complaints filed in the
Redeemer Actions, such payments were made by the Debtors in mistaken reliance on false account statements rendered by BLMIS and on the mistaken belief that the monies paid by
BLMIS to Sentry and then by Sentry to Redeemers represented the liquidated proceeds of sales of assets belonging to the Debtors.
3. The Foreign Representatives began commencing Redeemer Actions in the United
States in April 2010, with the first such Redeemer Action filed in the Supreme Court of the State
of New York (“New York State Court” ) in early April. Prior to that, the Foreign
Representatives had been filing protective writs in the British Virgin Islands to prevent claims from becoming time barred. Since April 2010, all actions against Redeemers are, to the extent
possible, being pursued in the United States. From April 2010 until July 2010, prior to the
Recognition Order, the Foreign Representatives directed the filing of numerous actions against
Redeemers in New York State Court. Following the Recognition Order, all actions against
Redeemers have been commenced as Adversary Proceedings in connection with the Funds’
Chapter 15 cases. Further, all of the Redeemer Actions that had been previously commenced in
New York State Court (to the extent the Foreign Representatives decided to pursue the actions)
were removed pursuant to Sections 1334 and 1452 of Title 28 of the United States Code.
4. As of today’s date, the Foreign Representatives have filed 32 adversary
proceedings against Redeemers in this Court, and removed an additional 59 of these actions from
New York State Court. Of these, all but one have already been referred to this Court, and the
2 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 8 of 40
remaining one is subject to the same referral request. Putting aside the one exception, 90
Redeemer Actions are pending or will soon be pending before this Court, with more actions to
follow in the future based on the Foreign Representatives’ ongoing investigation and analysis.
The amount claimed in the actions currently pending exceeds $3.6 billion.
5. Generally speaking, the Foreign Representatives have been commencing
Redeemer Actions on a “rolling” basis, so as to commence each action as soon as practicable,
given the timing of Redemption Payments and the application of the relevant statutes of
limitations. The instant motion seeks (i) consolidation of the Redeemer Actions for discovery
and pre-trial purposes; (ii) entry of a preliminary scheduling order in the Redeemer Actions; and
(iii) implementation of certain case management procedures to govern all adversary proceedings
and contested matters filed in connection with the Debtors’ Chapter 15 cases.
6. All of the Redeemer Actions involve common facts and legal issues. Among
other similarities, all of the Redeemer Actions arise from payments made to Redeemers by the
Debtors for redemptions of Shares of Debtors. These Redemption Payments were mistakenly
believed at the time to represent each Redeemer’s pro rata interest in assets of the Debtors, based
on the “Net Asset Value” of the Debtors as it was then calculated. All the Redeemer Actions seek recovery of those payments based on the same equitable and legal causes of action. As such, the Redeemer Actions involve “common issues of law or fact,” sufficient to satisfy the standard for consolidation set forth in Bankruptcy Rule 7042.
7. Based on the number of Redeemer Actions filed to date – and those expected to
be filed in the future – the consolidation of these actions for pre-trial and discovery purposes will
promote the convenient and economical disposition of these matters. Indeed, the actions would
3 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 9 of 40
be practically unmanageable without such consolidation. A proposed order to consolidate the
Redeemer Actions is attached as Exhibit B.
8. The orderly and efficient administration of the Redeemer Actions would greatly
benefit from coordination. Although the actions have been commenced on a rolling basis over
the course of the last few months, all of the Redeemer Actions are still in similar procedural
postures, with complaints filed in all the actions (or ready to be filed in all the actions once
adversary proceeding numbers are assigned) and with responses still outstanding in almost all of
the actions. In this situation, a scheduling order to coordinate the timing of responses to
complaints in the Redeemer Actions would promote the efficient administration of the Redeemer
Actions. A proposed scheduling order for the Redeemer Actions is attached as Exhibit C.
9. Similarly, the Foreign Representatives also seek, pursuant to 11 U.S.C. §§ 105(a),
105(d) and 1521(a)(7), the entry of a case management order to govern all adversary proceedings
and contested matters filed in connection with Debtors’ Chapter 15 cases in order to foster the
efficient administration of all such proceedings. In addition to the removed Redeemer Actions,
the Foreign Representatives have removed two other actions to this Court: (i) an action against
entities and persons that purported to provide investment advisory services to the Debtors
including Fairfield Greenwich Group and related entities and individuals, captioned Fairfield
Sentry Limited v. Fairfield Greenwich Group, et al., 10-CV-06873 (GBD), and (ii) a purported
shareholder derivative action brought by two alleged investors of Sentry, naming Sentry as a
nominal defendant, entitled Morning Mist Holdings Limited v. Fairfield Greenwich Group, et al.
No. 10-CV-06874 (GBD). The Fairfield Greenwich Group action was originally commenced in
New York State Court at the direction of Sentry’s board of directors prior to the Foreign
Representatives’ appointment; it was removed to this Court at the same time as the Redeemer
4 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 10 of 40
Actions. Similarly, the Morning Mist action was commenced in New York State Court and
removed to this Court with the other actions. In connection with the Recognition Order and
pursuant to the automatic stay of the Bankruptcy Code, the Morning Mist action is presently
stayed. The Foreign Representatives are currently evaluating claims against other potential
defendants and may commence additional actions in the future. A proposed order implementing
case management procedures is attached as Exhibit D.
JURISDICTION AND VENUE
10. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and
1334 and section 1501 of the Bankruptcy Code. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). The statutory predicates for relief are Sections 105(a)&(d) and 1521(a) of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 7042, 9014,
9017. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409(a).
FACTUAL BACKGROUND
Background to the Debtors’ Investments with BLMIS
11. The Debtors were created as a means for private investment in managed accounts established with BLMIS, a broker dealer purportedly providing investment advisory services.
Sentry invested directly in BLMIS, while Sigma and Lambda invested indirectly through Sentry.
Sigma was established for investments in Euros (EUR), and Lambda was similarly established
for investment in Swiss Francs (CHF). As mentioned above, Sentry was the largest of all so-
called “feeder funds” to maintain accounts with BLMIS. Its BLMIS account statements as of the
end of October 2008 showed in excess of $6 billion of assets.
12. Debtors raised money for investment in BLMIS through the sale of voting
participating shares (the “Shares”). Substantially all of the money (some 95%) that the Debtors
raised, net of fees and expenses, was transferred to BLMIS, through Sentry, and supposedly
5 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 11 of 40
credited to accounts held in the name of Sentry with BLMIS, purportedly for use in a split-strike
conversion investment strategy. All of the money invested by the Debtors with BLMIS is
believed to have been used by Madoff in his perpetration of a massive Ponzi scheme.
13. The Foreign Representatives, as the BVI Court-appointed liquidators of the
Debtors, represent the interests of the Debtors’ creditors and others with claims against the
Debtors, including holders of their Shares. In contrast to claims brought by entities and persons
deemed to have been “customers” of BLMIS within the meaning of the Securities Investor
Protection Act (“SIPA”), the Madoff Trustee has disallowed claims asserted by indirect investors in BLMIS, including shareholders of Debtors.1 In the event such disallowance is upheld, these
Madoff victims may have no other remedy other than through recoveries realized by the Foreign
Representatives.
Calculation of Net Asset Value and Mistaken Payments to Redeemers
14. Prior to disclosure of the Madoff fraud in December 2008, the Shares were
redeemed by the Debtors at the election of holders for a price believed to be equivalent to the
“Net Asset Value” of the Shares, on a per Share basis. Net Asset Value was to be determined, in
accordance with applicable accounting standards, as the value of the respective assets of Sentry,
Sigma and Lambda divided by the number of shares outstanding in each fund, net of certain expenses.
15. In accordance with its Articles of Association and other governing documents, from time to time, Sentry paid shareholders (including Sigma and Lambda) an amount, for each
Share tendered for redemption, based on the Net Asset Value for that Share, as it was then calculated. Sigma and Lambda similarly paid their shareholders, for each share tendered in
6 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 12 of 40
redemption, an amount that was based on those funds’ Net Asset Value, as it was then
calculated.
16. In order to make payments believed by the Debtors to be due upon redemption of
Shares, Sentry made withdrawals from time to time from its BLMIS account. At all relevant
times, the Debtors mistakenly believed that payments received by Sentry from BLMIS were the proceeds from the sale of securities held by BLMIS for Sentry’s account. The Debtors also mistakenly believed that the amount, per share, paid by them for each Share redeemed was equal to the per share Net Asset Value.
17. Upon information and belief, the purchases and sales of securities and other
transactions shown on the account statements provided by BLMIS as having been made for the
account of Sentry never in fact occurred and no investments were ever made by BLMIS.
Further, upon information and belief, monies deposited by Sentry with BLMIS for the purchase of securities were used by Madoff to pay other BLMIS account holders that had made requests for payments or redemptions or were otherwise misappropriated by Madoff for unauthorized uses. Upon information and belief, all assets shown on BLMIS account statements rendered to
Sentry were entirely fictitious. As a result, at all relevant times, the Net Asset Value of each
Share redeemed was miscalculated, and Redemption Payments were mistakenly made for amounts far in excess of actual Net Asset Value.
Exposure of Madoff Fraud
18. On December 11, 2008, the FBI arrested Madoff for violation of federal securities laws.
1 As this Court is aware, the Madoff Trustee has taken the position that the SIPA “customer claims” asserted against the BLMIS estate by indirect investors in BLMIS, such as the Debtors’ investors, should be disallowed. This issue is presently scheduled for hearing before the Court on October 19, 2010.
7 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 13 of 40
19. On December 11, 2008, the United States Securities and Exchange Commission
(“SEC”) filed an emergency action in the Southern District of New York to halt ongoing
fraudulent offerings of securities and investment advisory fraud by Madoff and BLMIS. SEC v.
Madoff, No. 08-cv-10791 (S.D.N.Y. filed Dec. 11, 2008). On February 9, 2009, the SEC
submitted to the Court a proposed partial judgment, to which Madoff consented, imposing a
permanent injunction and continuing relief against him, including a permanent freezing of his
assets.
20. In March 2009, Madoff pleaded guilty to the criminal charges brought against
him, and he is now serving a 150-year sentence in federal prison.
Procedural History of Debtors’ Liquidations
21. Following the revelation of the fraud in December 2008, the Debtors’ boards of
directors suspended the calculation of the Net Asset Value and any further redemptions of
Sentry, Sigma and Lambda shares. As of December 2008 and presently, Sentry, Sigma and
Lambda had and have, respectively, approximately 4.7 million, 3.9 million and 0.2 million
shares outstanding.
22. On December 15, 2008, a trustee was appointed for the liquidation of the BLMIS
estate (the “Madoff Trustee”). Proceedings for such liquidation are pending in this Court under
the caption Securities Investor Protection Corporation v. Bernard L. Madoff Investment
Securities LLC, SIPA Liquidation No. 08-1789 (BRL). Among the adversary proceedings that
the Madoff Trustee has commenced is an adversary proceeding against Sentry and other defendants seeking to recover approximately $3.5 billion in connection with transfers that
BLMIS allegedly made to Sentry during the six year period preceding the filing of the BLMIS liquidation proceedings. These transfers are alleged to have been preferential transfers under
8 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 14 of 40
Section 547 of the Bankruptcy Code and/or fraudulent transfers under Sections 544 and 548 of
the Bankruptcy Code and applicable state law.
23. While the liquidation of the BLMIS estate was pending, the Debtors were also put into liquidation. The BVI court appointed a liquidator for Lambda on April 23, 2009, and liquidators for Sentry and Sigma on July 21, 2009.
24. Upon their appointment, the Foreign Representatives obtained, among other rights and powers, custody and control of the Debtors’ assets, the power to do all acts and execute, in the name and on behalf of the Debtors, any deeds, receipts or other documents, and the power to compromise claims, commence litigation and to dispose of property on behalf of the Debtors.
25. Acting in accordance with authority afforded to them as Liquidators under BVI law, and with the consent of the BVI Court, the Foreign Representatives have filed or directed the filing of numerous actions on the Debtors’ behalf, including the Redeemer Actions, in order to recover the assets of the Debtors for ultimate distribution to all claimants of the Debtors in accordance with law applicable to the BVI liquidation proceedings.
ARGUMENT
I. THE REDEEMER ACTIONS SHOULD BE CONSOLIDATED FOR PRE-TRIAL AND DISCOVERY PURPOSES
26. Rule 42(a) of the Federal Rules of Civil Procedure2 sets forth the standard for consolidating adversary proceedings. It provides:
If actions before the court involve a common question of law or fact, the court may: (1) join for hearing or trial any or all matters at issue in the actions; (2) consolidate the actions; or (3) issue any other orders to avoid unnecessary cost or delay.
2 Rule 42(a) of the Federal Rules of Civil Procedure is made applicable to adversary proceedings by Fed. R. Bankr. P. 7042.
9 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 15 of 40
Fed. R. Civ. P. 42(a). The trial court “has broad discretion to consolidate actions” under this
rule, Primavera Familienstiftung v. Askin, 173 F.R.D. 115, 129 (S.D.N.Y. 1997), with a
preference for consolidation where it would promote judicial economy. Johnson v. Celotex
Corp., 899 F.2d 1281, 1285 (2d Cir. 1990) (“[C]ourts have taken the view that considerations of
judicial economy favor consolidation.”). So long as any confusion or prejudice does not
outweigh efficiency considerations, consolidation is appropriate. Equal Employment
Opportunity Comm’n v. Die Fliedermaus, L.L.C., 77 F. Supp. 2d 460, 466 (S.D.N.Y. 1999);
Internet Law Library, Inc. v. Southridge Capital Mgmt., LLC, 208 F.R.D. 59, 61 (S.D.N.Y.
2002). Moreover, as long as there are common questions of law and fact, consolidation is
appropriate even when parties differ. Skwortz v. Crayfish Co. Ltd., 2001 WL 1160745, at *2
(S.D.N.Y. Sept. 28, 2001).
A. The Redeemer Actions Involve Common Issues of Fact
27. The Redeemer Actions easily satisfy the standard for consolidation because they
involve common questions of both fact and law. The Redeemer Actions share the following
common facts: (1) each Redeemer was a registered holder of shares of the Debtors; (2) each
Redeemer tendered shares for redemption between April 2004 and December 2008 on behalf of itself and/or for beneficiaries on whose behalf the Redeemer was acting as a nominee, custodian, trustee or other representative; and (3) each Redeemer received payments based on a mistaken and miscalculated Net Asset Value. Additionally, most of the Redeemers are foreign entities who have signed a subscription agreement consenting to New York jurisdiction and simplified service methods in connection with any proceedings arising out of or asserted with respect to its subscription for Shares.
28. These common factual issues alone are more than sufficient to warrant consolidation. See BD v. DeBuono, 193 F.R.D. 117, 141 (S.D.N.Y. 2000) (“It is well-settled
10 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 16 of 40
that even one substantial common question of law or fact is enough for commonality under Rule
42(a).”).
29. Given the substantial overlap of factual issues in the Redeemer Actions, discovery
in each of the actions is likely to involve many of the same issues. Indeed, in response to
substantially identical document requests served in actions filed in New York State Court prior to
removal, Redeemers made nearly identical objections based upon nearly identical positions regarding jurisdiction, service of process and the purported confidentiality of information sought.
Consolidation would allow the resolution of such objections on a coordinated and consolidated
basis, rather than in a piecemeal fashion.
B. The Redeemer Actions Involve Common Issues of Law
30. The Redeemer Actions also involve common legal issues, claims and defenses,
further demonstrating that consolidation is warranted.
31. To begin with, jurisdiction over most of the Redeemers is premised, in part, on subscription agreements executed by Redeemers on their own behalf and on behalf of any beneficiaries (collectively, the “Subscription Agreements”). In these Subscription Agreements,
Redeemers consented to jurisdiction in New York and to service of process by certified or
registered mail.3 A significant number of Redeemers have indicated their intention to dispute the sufficiency of service of process made pursuant to these Subscription Agreements.
32. In addition to common issues involving jurisdiction and service of process, the
Redeemer Actions will require the resolution of common legal issues regarding the amounts recoverable on nearly identical causes of action asserted against each Redeemer, consisting of claims for unjust enrichment, money had and received, mistaken payment, and constructive trust.
3 For the Redeemers that did not execute this type of Subscription Agreement, jurisdiction is based on the contacts that those Redeemers have in the United States.
11 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 17 of 40
See Equal Employment Opportunity Comm’n v. Die Fliedermaus, L.L.C., 77 F. Supp. 2d at 466
(consolidation appropriate, in part, because actions involved the same legal theories).
33. Given the identity of legal issues – including similarities in jurisdictional and service issues, potential choice of law issues, legal claims and defenses – pre-trial motion practice is likely to be similar across all the Redeemer Actions.
C. Consolidation Will Promote Efficiency
34. Consolidation of the Redeemer Actions will promote the efficient and economical disposition of these matters. Given the common legal and factual issues, there is no need to burden the parties and the Court with duplicative briefing and repetitive argument on the same
legal issues arising from the same set of facts. NationsRent, Inc. v. Sheffield (In re NationsRent,
Inc.), 2003 WL 21414667, at *2 (Bankr. D. Del. June 18, 2003). Moreover, discovery is at a
relatively early stage in all of the actions, nullifying any claims of prejudice as a result of
consolidation. See, e.g., Internet Law Library, Inc., 208 F.R.D. at 61-62 (where actions involved
the same stock purchase agreement, court authorized consolidation despite possibility that
discovery in one case could be held up).
D. The Court May Consolidate Future Related Redeemer Actions
35. The Foreign Representatives anticipate that additional related Redeemer Actions
will be filed in the future. In the interests of efficient case management, the Foreign
Representatives request that these additional Redeemer Actions be consolidated automatically
without the need for a further motion. See, e.g., Devlin v. Transp. Commc’n Int’l Union, 175
F.3d 121, 130 (2d Cir. 1999); Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v.
Labranche & Co., 229 F.R.D. 395, 402 (S.D.N.Y. 2004); see also Internet Law Library, Inc., 208
F.R.D. at 61-62 (“[S]hort of cases ready for trial, cases at different stages of litigation are
12 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 18 of 40
routinely consolidated.”). The Foreign Representatives will notify the Court promptly when any
such actions are filed.
II. THE REDEEMER ACTIONS SHOULD PROGRESS ON A COORDINATED SCHEDULE
36. As part of the consolidation, the Redeemer Actions should progress on a
coordinated schedule. As an initial matter, responses to complaints should be coordinated.
Notwithstanding the fact that the Redeemer Actions have not, heretofore, been consolidated, the
Foreign Representatives have been working with counsel for Redeemers to coordinate the initial
procedural phases of the actions, with most responses to complaints currently due, per agreement
or stipulations executed by parties to individual actions, on October 25, 2010. In order to
promote efficient case management, the Foreign Representatives are willing to agree to extend
the deadline for responses to complaints until December 3, 2010, giving Defendants in all actions
currently on file more than sixty (60) days (and in some cases much longer) to respond to complaints. To the extent that any Defendant files a motion in response to the complaints, the
Foreign Representatives propose a deadline of February 3, 2011 to oppose any such motion, and a deadline of March 3, 2011 to reply. A proposed scheduling order is attached as Exhibit C. As
appropriate, the Foreign Representatives will propose a revised scheduling order to govern
discovery following the responses to complaints.
III. CASE MANAGEMENT PROCEDURES SHOULD BE IMPLEMENTED TO PROMOTE THE EFFICIENT ADMINISTRATION OF ALL ADVERSARY PROCEEDINGS AND CONTESTED MATTERS RELATED TO DEBTORS’ CHAPTER 15 CASES
37. The Foreign Representatives also respectfully request that the Court enter an
order substantially in the form of Exhibit D in order to establish procedures that will promote the
13 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 19 of 40
efficient and economical disposition of the Redeemer Actions and other adversary proceedings and contested matters filed in connection with the Debtors’ Chapter 15 cases. Section 105(a) of the Bankruptcy Code provides in relevant part that “[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C.
§ 105(a) see also 11 U.S.C. § 1521(a)(7) (“where necessary to effectuate the purposes of this chapter . . . the court may, at the request of the foreign representative, grant any appropriate relief, including . . . (7) granting any additional relief that may be available to a trustee . . .”). In light of the number of adversary proceedings filed to date (and those expected to be filed in the future), as well as other contested matters relating to the Debtors’ Chapter 15 cases that the
Liquidators anticipate will be pending before this Court, the Liquidators believe that implementation of case management procedures are necessary and appropriate to assist the parties and the Court in effectively managing these proceedings. The Liquidators also believe that the proposed procedures will significantly reduce the costs of administering these cases. See
In re Basis Yield Alpha (Master) (on its own motion, the court established case management procedures similar to the proposed case management order attached as Exhibit D), Case No.07-
12762 (D.I. 8).
CONCLUSION
38. WHEREFORE, the Foreign Representatives respectfully request entry of Orders of this Court substantially in the form annexed hereto (i) consolidating the Redeemer Actions,
(ii) setting a schedule for responding to complaints; and (iii) implementing certain case management procedures for these Chapter 15 cases and related adversary proceedings and contested matters.
Dated: New York, New York September 23, 2010
14 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 20 of 40
Respectfully submitted,
BROWN RUDNICK LLP
By: /s/ David J. Molton David J. Molton May Orenstein Daniel J. Saval Kerry L. Quinn 7 Times Square New York, New York 10036 Tel.: (212) 209-4800 Fax: (212) 209-4801
Counsel to the Foreign Representatives
15 Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 21 of 40 EXHIBIT A
CASE NAME ADV. P. NO. / CIVIL ACTION NO. (if ADV. P. NO. is pending) 1. Fairfield Sentry Ltd. v. ABN AMRO Schweiz AG, et al. 10-03635-BRL 2. Fairfield Sentry Ltd., et al. v. ABN AMRO Schweiz AG, et al. 10-03636-BRL 3. Fairfield Sentry Ltd. v. Al Nahyan Mansour B. Zayed et al. 10-cv-06769-GBD 4. Fairfield Sentry Ltd. v. Almel Ltd./Pacific Inter. et al. 10-cv-06768-GBD 5. Fairfield Sentry Ltd. v. Alton Select Ltd., et al. 10-03541-BRL 6. Fairfield Sentry Ltd. v. AXA Isle of Man A/C L & C, et al. 10-03623-BRL 7. Fairfield Sentry Ltd. v. Banco Atlantico (Bah.) et al. 10-cv-06761-GBD 8. Fairfield Sentry Ltd., et al. v. Banco Atlantico (Gib.), et al. 10-cv-06767-GBD 9. Fairfield Sentry Ltd. v. Banco Bilbao Vizcaya Argentaria, S.A. 10-03515-BRL 10. Fairfield Sentry Ltd. et al. v. Banco Itau Europa Lux. SA et al. 10-cv-06558-GBD 11. Fairfield Sentry Ltd., et al. v. Banco Santander (Suisse) S.A., et al. 10-03509-BRL 12. Fairfield Sentry Ltd., et al. v. Bank Hapoalim (Suisse) Ltd., et al. 10-03510-BRL 13. Fairfield Sentry Ltd. v. Bank of Am. Nat’l Trust & Sav. Ass’n, et 10-03615-BRL al. 14. Fairfield Sentry Ltd. v. Banque de Commerce et de Placements, et 10-cv-06564-GBD al. 15. Fairfield Sentry Ltd., et al. v. Banque de Lux., et al. 10-03616-BRL 16. Fairfield Sentry Ltd., et al. v. Banque Piguet & Cie SA., et al. 10-03514-BRL 17. Fairfield Sentry Ltd., et al. v. Banque Privee Edmond De 10-03505-BRL Rothschild (Eur.), et al. 18. Fairfield Sentry Ltd., et al. v. Banque Sudameris, et al. 10-03586-BRL 19. Fairfield Sentry Ltd., et al. v. Banque Sudameris, et al. 10-cv-06565-GBD 20. Fairfield Sentry Ltd., et al. v. Banque Syz & Co. SA, et al. 10-03513-BRL 21. Fairfield Sentry Ltd. et al. v. Blubank Ltd., et al. 10-cv-06566-GBD 22. Fairfield Sentry Ltd. v. BNP Paribas Lux. , et al. 10-03626-BRL 23. Fairfield Sentry Ltd., et al. v. BNP Paribas Sec. Servs. Lux., et al. 10-03627-BRL 24. Fairfield Sentry Ltd. v. Brown Brothers Harriman & Co. et al. 10-cv-06568-GBD 25. Fairfield Sentry Ltd., et al. v. Caceis Bank Lux., et al. 10-03624-BRL 26. Fairfield Sentry Ltd., et al. v. Cathay United Bank, et al. 10-03506-BRL 27. Fairfield Sentry Ltd. v. CDC IXIS et al. 10-cv-06557-GBD 28. Fairfield Sentry Ltd. v. Citibank NA London, et al. 10-03622-BRL 29. Fairfield Sentry Ltd., et al. v. Citibank (Switz.) Zurich, et al. 10-03640-BRL 30. Fairfield Sentry Ltd., et al. v. Clarks Fork Found., et al. 10-03511-BRL 31. Fairfield Sentry Ltd. et al. v. Credit Suisse (Bah.), et al. 10-cv-06760-GBD 32. Fairfield Sigma Ltd. v. Credit Suisse Int’l, et al. 10-03620-BRL 33. Fairfield Sentry Ltd. v. Creditio Privato Commerciale SA, et al. 10-cv-06771-GBD 34. Fairfield Sentry Ltd. v. Delta Nat’l Bank, et al. 10-03589-BRL 35. Fairfield Sentry Ltd. v. Delta Nat’l Bank, et al. 10-cv-06603-GBD 36. Fairfield Sentry Ltd. v. Deutsche Bank AG Sing. et al. 10-cv-06560-GBD Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 22 of 40 EXHIBIT A
CASE NAME ADV. P. NO. / CIVIL ACTION NO. (if ADV. P. NO. is pending) 37. Fairfield Sentry Ltd. v. Deutsche Bank (Cayman) et al. 10-cv-06553-GBD 38. Fairfield Sentry Ltd. et al. v. Deutsche Bank (Suisse) SA Geneve et 10-cv-06570-GBD al. 39. Fairfield Sentry Ltd. v. Deutsche Bank Trust Co. Am. et al. 10-cv-06569-GBD 40. Fairfield Sentry Ltd. et al. v. Dresdner Bank LateinAmerika AG et 10-cv-06556-GBD al. 41. Fairfield Sentry Ltd., et al. v. EFG Bank, et al. 10-03625-BRL 42. Fairfield Sentry Ltd. v. FIBI Bank (Switz.) et al. 10-cv-06758-GBD 43. Fairfield Sentry Ltd. v. Fidulex Mgmt. et al. 10-cv-06567-GBD 44. Fairfield Sentry Ltd. v. Fortis (Isle of Man) Nominees Ltd et al. 10-cv-06593-GBD 45. Fairfield Sentry Ltd., et al. v. FS ABN AMRO Global Custody, et 10-03504-BRL al. 46. Fairfield Sentry Ltd., et al. v. FS/AND Banc Andorra, et al. 10-03632-BRL 47. Fairfield Sentry Ltd. v. FS/BBVA Miami, et al. 10-03618-BRL 48. Fairfield Sentry Ltd. et al. v. FS/CBESSA et al. 10-cv-06584-GBD 49. Fairfield Sentry Ltd. v. FS/HSBC Private Banking Nom, et al. 10-03629-BRL 50. Fairfield Sentry Ltd., et al. v. FS Mizrahi Tefahot Bank Ltd., et al. 10-03512-BRL 51. Fairfield Sigma Ltd. v. FS Oddo & Cie, et al. 10-03621-BRL 52. Fairfield Sentry Ltd. v. Fund Nominees Ltd., et al. 10-03525-BRL 53. Fairfield Sentry Ltd. v. Hambros Guernsey Nominees et al. 10-cv-06886-GBD 54. Fairfield Sentry Ltd. v. HSBC Institutional Trust Srvs. (Asia) Ltd., 10-03619-BRL et al. 55. Fairfield Sentry Ltd., et al. v. HSBC Private Bank (Guernsey) Ltd., 10-03631-BRL et al. 56. Fairfield Sentry Ltd. v. HSBC Private Bank (Suisse) SA et al. 10-03633-BRL 57. Fairfield Sentry Ltd. v. HSBC Sec. Servs. (Lux.) SA et al. 10-03630-BRL 58. Fairfield Sentry Ltd. et al. v. ING Bank (Suisse) SA et al. 10-cv-06604-GBD 59. Fairfield Sentry Ltd. v. JP Morgan Trust Co. (Cayman) et al. 10-cv-06597-GBD 60. Fairfield Sentry Ltd. v. Juan Jose Lacroze, et al. 10-03528-BRL 61. Fairfield Sentry Ltd. v. Juan Jose Lacroze, et al. 10-cv-06428-VM 62. Fairfield Sentry Ltd. v. Kookmin Bank et al. 10-cv-06594-GBD 63. Fairfield Sentry Ltd. et al. v. Lombard Odier Darier Hentsch & Cie, 10-cv-06601-GBD et al. 64. Fairfield Sentry Ltd., et al. v. Lombardy Props. Ltd., et al. 10-03521-BRL 65. Fairfield Sentry Ltd., et al. v. Meritz Fire & Marine Ins. Co. Ltd., et 10-03507-BRL al. 66. Fairfield Sentry Ltd. v. Merrill Lynch Bank (Suisse) SA et al. 10-cv-06598-GBD 67. Fairfield Sentry Ltd., et al. v. Merrill Lynch, Pierce, Fenner & 10-03516-BRL Smith, Inc., et al. 68. Fairfield Sentry Ltd. v. Monte Paschi Ireland Ltd et al. 10-cv-06599-GBD
ii Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 23 of 40 EXHIBIT A
CASE NAME ADV. P. NO. / CIVIL ACTION NO. (if ADV. P. NO. is pending) 69. Fairfield Sentry Ltd., et al. v. Neue Bank AG, et al. 10-03519-BRL 70. Fairfield Sentry Ltd. et al. v. Nomura Int’l plc et al. 10-cv-06600-GBD 71. Fairfield Sentry Ltd. v. Northern Navigation Am. Inc. et al 10-cv-06759-GBD 72. Fairfield Sentry Ltd. v. Pictet & Cie et al. 10-cv-06627-GBD 73. Fairfield Sentry Ltd., et al. v. RBC Dominion Sec. Sub A/C, et al. 10-03502-BRL 74. Fairfield Sentry Ltd., et al. v. Robinson & Co., et al. 10-03628-BRL 75. Fairfield Sentry Ltd., et al. v. Schroder & Co. (Asia) Ltd., et al. 10-03508-BRL 76. Fairfield Sentry Ltd., et al. v. SG Private Banking (Suisse) SA et al. 10-cv-06765-GBD 77. Fairfield Sentry Ltd., et al. v. SG Private Banking (Suisse) SA et al. 10-03595-BRL 78. Fairfield Sentry Ltd. v. Sherli Elghanian Krayem, et al. 10-03614-BRL 79. Fairfield Sentry Ltd. et al. v. SNS Global Custody, et al. 10-cv-06585-GBD 80. Fairfield Sentry Ltd. v. State Street Bank Lux. SA et al. 10-cv-06587-GBD 81. Fairfield Sentry Ltd. v. Strina Luisa et al. 10-cv-06772-GBD 82. Fairfield Sentry Ltd., et al. v. Tercas – Cassa di Risparmio della 10-03503-BRL Provincia di Teramo S.P.A., et al. 83. Fairfield Sentry Ltd., et al. v. Theodoor GGC Amsterdam, et al. 10-03496-BRL 84. Fairfield Sentry Ltd. v. UBS AG New York et al. 10-cv-06596-GBD 85. Fairfield Sentry Ltd. v. UBS Cayman REF Greenlake Arbitrage et 10-cv-06586-GBD al. 86. Fairfield Sentry Ltd. v. Vontobel Asset Mgmt., et al. 10-03540-BRL 87. Fairfield Sentry Ltd. v. Wall Street Sec. SA, et al. 10-cv-06595-GBD 88. Fairfield Sentry Ltd. v. Weston Sec. Ltd., et al. 10-cv-06762-GBD 89. Fairfield Sentry Ltd. v. ZCM Asset Holding Co. (Berm.) Ltd., et al. 10-cv-06770-GBD 90. Fairfield Sentry Ltd. v. Zurich Capital Mkts. Co., et al. 10-03634-BRL
iii
Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 24 of 40
EXHIBIT B
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------X Chapter 15 In re: Case No. 10-13164 (BRL) FAIRFIELD SENTRY LIMITED, et al.,
Debtors in Foreign Proceedings. Jointly Administered
------X
ORDER AUTHORIZING THE CONSOLIDATION OF THE REDEEMER ACTIONS PURSUANT TO FEDERAL RULE OF BANKRUPTCY PROCEDURE 7042
Upon the motion (the “Motion”)4 of Kenneth Krys and Joanna Lau (the “Foreign Representatives”), in their capacities as the foreign representatives and liquidators of Fairfield Sentry Limited (“Sentry”) and Fairfield Sigma Limited (“Sigma”) and Fairfield Lambda Limited (“Lambda,” together with Sentry and Sigma, the “Debtors”), for the entry of an Order authorizing the consolidation of certain adversary proceedings pending in connection with the above captioned matter (the “Redeemer Actions”), as defined in Exhibit A of the Foreign Representatives’ Motion, pursuant to Federal Rule of Bankruptcy Procedure 7042, for pretrial and discovery purposes. Upon consideration of the Motion and the arguments contained therein; and the Court having found sufficient cause appearing therefore, it is hereby ORDERED:
1. The Redeemer Actions shall be consolidated for pretrial purposes, including coordination of all fact and expert discovery and motions concerning issues of law and fact common to these matters, in accordance with the terms of this Order.
2. Any other actions now pending or later filed in this district that arise out of or are related to the same facts as alleged in the Redeemer Actions shall be consolidated for pretrial and discovery purposes.
3. Counsel shall call to the attention of the Clerk of this Court the filing of any case that might be consolidated as part of the Court’s Order.
4. All non-evidentiary hearings and conferences held with respect to the Redeemer Actions shall be treated as a joint hearing or conference.
5. All parties to the Adversary Proceedings shall adhere to the rules and procedures to be outlined in any Case Management Order entered by the Court;
4 Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Motion.
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6. A docket entry shall be made in each of the Redeemer Actions, substantially as follows:
An Order has been entered in this Proceeding directing the procedural consolidation of this action and other Redeemer Actions filed in connection with the jointly administered Chapter 15 cases of Fairfield Sentry Limited, Fairfield Sigma Limited, and Fairfield Lambda Limited (Case No. 10-13164); the docket for Fairfield Sentry Limited et al. v. Theodoor GGC Amsterdam et al., AP No. 10-03496, should be consulted for all matters covered under the Court’s Order.
7. Nothing herein is to be construed as requiring the consolidation of these Redeemer Actions for the purposes of evidentiary hearings or trial. All parties to the Redeemer Actions reserve their respective rights concerning the consolidation of the proceedings for trial and evidentiary hearings.
8. Service of this Order as provided in the Motion shall be deemed good and sufficient notice
9. This Court shall retain jurisdiction to hear and determine all matters arising from or related to the implementation and/or interpretation of this Order.
Dated: September ___, 2010 New York, New York
______UNITED STATES BANKRUTPCY JUDGE
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EXHIBIT C
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------X Chapter 15 In re: Case No. 10-13164 (BRL) FAIRFIELD SENTRY LIMITED, et al.,
Debtors in Foreign Proceedings. Jointly Administered
------X PRELIMINARY SCHEDULING ORDER FOR REDEEMER ACTIONS
Upon the motion (the “Motion”)5 of Kenneth Krys and Joanna Lau (the “Foreign Representatives”), in their capacities as the foreign representatives and liquidators of Fairfield Sentry Limited (“Sentry”) and Fairfield Sigma Limited (“Sigma”) and Fairfield Lambda Limited (“Lambda,” together with Sentry and Sigma, the “Debtors”), for the entry of an Order establishing a schedule for responding to complaints in certain adversary proceedings currently pending in this Court in connection with the above captioned matter (the “Redeemer Actions”), as defined in Exhibit A of the Foreign Representatives’ Motion. Upon consideration of the Motion and the arguments contained therein; and the Court having found sufficient cause appearing therefore, it is hereby ORDERED:
1. The deadline for filing responses to complaints in the Redeemer Actions, whether by answer, motion or otherwise, shall be December 3, 2010.
2. The deadline for submitting opposing briefs in response to any motions filed in response to the complaints shall be February 3, 2011.
3. The deadline for submitting reply briefs in further support of any motions shall be March 3, 2011.
5. Service of this Order as provided in the Motion shall be deemed good and sufficient notice.
6. This Court shall retain jurisdiction to hear and determine all matters arising from or related to the implementation and/or interpretation of this Order.
Dated: September ___, 2010 New York, New York
______UNITED STATES BANKRUTPCY JUDGE
5 Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Motion.
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EXHIBIT D
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------X Chapter 15 In re: Case No. 10-13164 (BRL) FAIRFIELD SENTRY LIMITED, et al.,
Debtors in Foreign Proceedings. Jointly Administered
------X
Case Management Order
Upon the motion (the “Motion”)6 of Kenneth Krys and Joanna Lau, in their capacities as the foreign representatives and liquidators of Fairfield Sentry Limited (“Sentry”) and Fairfield
Sigma Limited (“Sigma”) and Fairfield Lambda Limited (“Lambda,” together with Sentry and
Sigma, the “Debtors”), for the entry of an Order authorizing the implementation of case
management procedures pursuant to Sections 105(a)&(d) and 1521(a)(7) of the Bankruptcy
Code, Federal Rules of Bankruptcy Procedure 9014 and 9017, and Federal Rule of Civil Procedure
43; and upon consideration of the Motion and the arguments contained therein;
And the Court finding that supplemental procedures should be implemented to permit it
effectively to manage its caseload; to permit it effectively to prepare for hearings; and to minimize
costs of administration, particularly with respect to litigation costs;
And the Court believing that a clarification of procedures that the Court will follow in this
case, particularly with respect to contested matters and adversary proceedings, is in the interests of
justice, and the Court having found that no other notice be given, and sufficient cause appearing
therefore, is in the interests of justice, it is hereby:
6 Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Motion.
Case 1:11-cv-05905-AT Document 29-9 Filed 02/28/14 Page 28 of 40
ORDERED that pursuant to 11 U.S.C. §§ 105(a)&(d) and 1521(a)(7) of the Bankruptcy
Code, and Rules 9014 and 9017 of the Federal Rules of Bankruptcy Procedure that in these
Chapter 15 cases, and adversary proceedings and contested matters relating to these Chapter 15
cases (including, without limitation, the Redeemer Actions), the following procedures shall apply:
Rule 2004 Examinations
1. Applications for examinations under Fed. R. Bankr. P. 2004 shall be made only on notice. If no opposition is expected, an application may be made on presentment.
Procedures in Contested Matters7
2. Normally the Court will hold evidentiary hearings on motions and applications
(hereafter, “Motions”) in contested matters if, but only if, it determines that there exist material disputed issues of fact. It may, however, nevertheless order an evidentiary hearing if the
motion papers do not address all arguably relevant facts; in such event, parties will be notified in
advance of the hearing. To obviate the expense of drafting supporting affidavits, declarations
and similar statements under oath (hereafter, “Affidavits”), and the expense of preparing, transporting, and presenting live witnesses on matters not likely to be disputed, the Court will take representations in Motions duly signed by counsel subject to Rule 9011, or verified or
sworn to by non-counsel, as true, except to the extent disputed in responsive papers by an
opposing party. Proffers at hearings will be unnecessary, and should not be used, provided that
the facts to be proffered are appropriately set forth in the Motion papers.
3. The initial hearing on all Motions in contested matters will be a non-evidentiary
hearing, unless:
(a) the Motion is noticed as an evidentiary hearing;
(b) the opposing parties agree that it should be an evidentiary hearing, and so
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advise the Court;
(c) the Motion is of a type specified in Local Bankruptcy Rule 9014-2 (b), (c),
(d) or (e); or
(d) the Court otherwise directs in advance of the hearing.
If, upon or after the filing of a Motion, any party wishes an evidentiary hearing on a Motion not covered under Local Bankruptcy Rule 9014-2, such party shall confer with all other parties involved to determine whether there is agreement that an evidentiary hearing is appropriate. In the absence of an ability to agree, the Court will consider requests for an evidentiary hearing by conference call. Where bona fide disputes exist as to the need for an evidentiary hearing, requests for an evidentiary hearing will normally be granted. Notwithstanding Local
Bankruptcy Rule 9014-2, the Court may, upon advance request and for cause shown, order that the initial hearing on a Motion of the type specified in Local Bankruptcy Rule 9014-2(c), (d) or
(e) will be a non-evidentiary hearing. Normally, interests of judicial economy and the absence of disputed material issues of fact will collectively provide cause shown for holding a non- evidentiary hearing on Motions subject to Local Bankruptcy Rule 9014-2(c), (d) or (e).
4. Concurrently with any determination that an evidentiary hearing is necessary or desirable, Chambers must be notified with an estimate of expected trial time; parties may be informed that a different return date is necessary if the available time on the requested day is insufficient. Any motion noticed as an evidentiary hearing shall state, just below the return date in the upper right-hand corner, and prominently (such as with underlining or bold face),
“Evidentiary Hearing Requested.”
5. Pretrial orders are not required with respect to evidentiary hearings in contested matters unless otherwise ordered by the Court. However, on any evidentiary hearing in a
7 For purposes of this Order, a “contested matter” is any matter other than one in an adversary proceeding.
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contested matter, the parties are to exchange witness lists, trial exhibits, and designations of
deposition testimony (in each case with a copy to Chambers) no later than 3 full business days
before the hearing, except as otherwise ordered by the Court. Any of the foregoing not listed or exchanged, whether characterized as “rebuttal” or otherwise, will not be permitted absent a showing of cause and a showing as to why it could not have been previously listed and exchanged.
6. Except as otherwise ordered by the Court for cause shown before the hearing, all direct testimony in contested matters other than duly designated deposition testimony shall be submitted by Affidavit, and all cross-examination and subsequent examination shall be taken live. Unless otherwise ordered by the Court, all Affidavits shall be submitted to the adversary and the Court no later than 3 full business days before the hearing. Notwithstanding the foregoing, litigants may, if they are so advised, (1) introduce the testimony of witnesses who reasonably can be expected not to be cooperative (such as employees or agents of adversaries) by calling them as adverse witnesses and taking their testimony on “adverse direct,” or (2) by agreement, or by order of the Court for cause shown, agree that direct testimony will be “live.”
The Court will normally regard taking direct testimony “live” as appropriate if, but only if, matters of credibility are important in the particular case, and credibility on direct, as well as on cross-examination, is at issue; the Court will normally regard “live” direct as inappropriate where the bulk of the testimony is historical or involves more than minimal discussion of accounting information or other financial or numerical analysis. In any instances where direct testimony too will proceed “live,” the proponent(s) of such testimony will be responsible for so advising the Court‘s chambers in advance, and taking such steps (e.g. subpoenas) as are
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necessary to secure the attendance of any non-cooperating witnesses. Nothing in this Order
precludes taking, or introducing, deposition testimony on videotape.
7. Counsel are reminded that, unless otherwise ordered by the Court, Fed. R. Civ. P.
26(a)(1) (initial disclosures), 26(a)(2) (disclosures with respect to expert testimony), 26(a)(3)
(additional pretrial disclosures) and 26(f) (mandatory meeting before scheduling
conference/discovery plan) are inapplicable in contested matters in this case.
8. Expedited discovery in contested matters is authorized without further Court order.
This authorization is without prejudice to the rights of any party or witness to seek protective order relief if the time to respond or appear, or the burden of the requested discovery, is unreasonable, or for other cause shown. Litigants are expected to work informally and cooperatively to effect any necessary discovery, with due recognition of the time exigencies that are typical in bankruptcy litigation. Document requests by letter, fax or e-mail are authorized.
9. Where the evidentiary hearing in a contested matter is anticipated to be unusually extensive or complex, the parties (after conferring among themselves to prepare joint recommendations, if possible) may request revisions in these procedures (e.g., to provide for a pretrial order, exchanges of expert reports, or other measures of the type utilized in plenary litigation), or the Court may do so on its own motion. The parties should agree in advance, and with specificity, as to how expert testimony will be presented, and what, if any, materials upon which experts based their opinions will be exchanged. If, after good faith efforts to agree, differences remain, any party may seek a determination with respect to procedures for experts by conference call.
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10. Upon request in advance, the Court will permit out-of-town counsel and
stakeholders to participate by telephone, so long as the phone system is not overloaded, on
matters requiring only remarks of counsel. Presence in the courtroom will be necessary on
evidentiary hearings. Those participating by phone may not use speakerphones, unless first
authorized by the Court; by reason of technical limitations of the equipment, and the way
speakerphones disrupt proceedings in the courtroom, speakerphone authorizations usually will not be granted. Persons so participating are to put their phones on “mute” except when they need to be heard. Persons so participating are not to put their phones on “hold” under any circumstances.
11. The Foreign Representatives shall be authorized to schedule, in cooperation with the
Court, periodic omnibus hearings (“Omnibus Hearings”) at which motions, applications and other
requests for relief shall be heard.
Procedures in Adversary Proceedings
12. Unless otherwise ordered by the Court, the procedures in those adversary proceedings
that have been or are hereafter filed will be governed by Fed. R. Bankr. P. 7001-7087 and 9001-
9036 (except that Rules 9013 and 9014 shall not apply), and Local Bankruptcy Rules 7005-1
through 7087-1. As a result, except as provided otherwise by the Federal Rules of Bankruptcy
Procedure, the Local Bankruptcy Rules and this Order, the procedures in adversary proceedings
will approximate the practices and procedures typically followed in plenary actions in the United
States District Courts.
13. Pre-trial conferences for adversary proceedings shall be scheduled on Omnibus
Hearing dates; provided, however, that initial pre-trial conferences scheduled in connection with
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adversary proceedings involving the Foreign Representatives or any of the Debtors shall be set on
a date that is at least forty-five (45) days after the filing of the complaint.
14. Pleadings filed in connection with, and trials related to, adversary proceedings shall be scheduled upon request of a party to the adversary proceeding and approval of the Court. After a
hearing date has been set by the Court, unless otherwise ordered by the Court, the parties to the
adversary proceeding shall confer and agree upon a briefing schedule for all adversary matters,
which shall be submitted for approval of the Court. If a briefing schedule cannot be agreed upon,
the parties to the adversary proceeding shall appear at the next scheduled pre-trial conference or
some other date set by the Court.
15. Factual assertions on motions in adversary proceedings must be supported by
Affidavits. Affidavits may be used to offer other admissible evidence (such as transcripts of
deposition or other testimony, or relevant documents), so long as any other applicable evidentiary
requirements are satisfied. Unless the Court orders otherwise in advance, the initial hearing on a
Motion in an adversary proceedings will be non-evidentiary. If, after review of opposing
Affidavits, or consideration of points made at the initial hearing, the Court determines that an
evidentiary hearing is necessary on a motion in an adversary proceeding, counsel will be so
advised.
16. Practitioners are reminded that Fed. R. Civ. P. 26(a)(1) (initial disclosures), 26(a)(2)
(disclosures with respect to expert testimony), 26(a)(3) (additional pretrial disclosures) and 26(f)
(mandatory meeting before scheduling conference/discovery plan) are applicable in adversary
proceedings unless otherwise ordered by the Court.
17. Except as otherwise ordered by the Court, pretrial orders are required in all adversary
proceedings. They will cover, among other things, stipulations as to undisputed facts; contentions
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of fact and law; trial witnesses; trial exhibits; designations of deposition testimony; evidentiary
objections; experts; submission of briefs; and estimates of trial time. Respective parties must work
together to submit a jointly prepared pretrial order (which may include portions prepared only by one side or the other, such as statements of contentions), and are not to submit separate pretrial orders, or pretrial order fragments, based on stated difficulties in reaching agreement, “time pressures,” or otherwise. The Court has determined not to otherwise order under Local
Bankruptcy Rule 7016-1, and thus submission of marked pleadings is not required.
18. Except as otherwise ordered by the Court for cause shown before the trial, all direct testimony in trials in adversary proceedings shall be submitted by Affidavit, and all cross- examination and subsequent examination shall be taken “live.” Unless otherwise ordered by the
Court, all Affidavits shall be submitted to the adversary and the Court at the time(s) prescribed
under the pretrial order. Notwithstanding the first sentence of this paragraph, litigants may, if they
are so advised, (1) introduce the testimony of witnesses who reasonably can be expected to be non-
cooperative (such as employees or agents of adversaries) by calling them as adverse witnesses and
taking their testimony on “adverse direct,” or (2) by order of the Court for cause shown, provide that direct testimony will be “live” as well. The Court will normally regard taking direct testimony
“live” as appropriate if, but only if, matters of credibility are important in the particular case, and
credibility on direct, as well as on cross-examination, is at issue; the Court will normally regard
“live” direct as inappropriate where the bulk of the testimony is historical or involves more than
minimal discussion of accounting information or other financial or numerical analysis. In any
instances where direct testimony too will proceed “live,” the proponent(s) of such testimony will
be responsible for so advising the Court’s chambers in advance, and taking such steps (e.g.
subpoenas) as are necessary to secure the attendance of any non-cooperating witnesses.
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19. Where the evidentiary hearing in a contested matter is anticipated to be unusually
extensive or complex, the parties (after conferring among themselves to prepare joint
recommendations, if possible) may request revisions in these procedures (e.g., to provide for a
pretrial order, exchanges of expert reports, or other measures of the type utilized in plenary
litigation), or the Court may do so on its own motion. The parties should agree in advance, and
with specificity, as to how expert testimony will be presented, and what, if any, materials upon
which experts based their opinions will be exchanged. If, after good faith efforts to agree,
differences remain, any party may seek a determination with respect to procedures for experts by
conference call.
20. Upon request in advance, the Court will permit out-of-town counsel and stakeholders to
participate by telephone, so long as the phone system is not overloaded, on matters requiring only
remarks of counsel. Presence in the courtroom will be necessary on evidentiary hearings. Those
participating by phone may not use speakerphones, unless first authorized by the Court; by reason
of technical limitations of the equipment, and the way speakerphones disrupt proceedings in the
courtroom, speakerphone authorizations usually will not be granted. Persons so participating are to
put their phones on “mute” except when they need to be heard. Persons so participating are not to
put their phones on “hold” under any circumstances.
Motions, Briefs and Legal Memoranda
21. On Motions that reasonably may be expected to engender opposition and as to which
the movant will wish the opportunity to reply, the movant should confer with any expected adversaries to agree on a briefing schedule. If efforts to agree are unsuccessful or if circumstances make that impractical, the movant may unilaterally set the schedule, but if it is unreasonable, the opposing party may apply to the Court for modifications in the schedule, and where it appears that
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the schedule unilaterally set was not a reasonable one, requests for modification will presumptively
be granted. Counsel are expected to provide for a sufficient time for the Court’s review of reply
papers, and to advise Chambers as to when reply papers will be forthcoming. In the absence of
extraordinary circumstances, the Court will not accept papers “handed up” at the time of a hearing.
22. Parties may, if they wish, include citations of legal authority within Motions, and when
they do so, Local Bankruptcy Rule 9013-1(b)’s requirements for the submission of a memorandum
of law will be deemed to have been satisfied.
23. Counsel are reminded that as stated in Local Bankruptcy Rule 7056-1, no motion for
summary judgment shall be made without first seeking a pre-motion conference. The request for
such shall be made by letter, filed on the Court’s ECF system, setting forth, in general terms, and in
as non-argumentative a manner as practicable, the issues to be presented under the motion.
24. Motions for reargument must identify with particularity the matter required under Local
Bankruptcy Rule 9023-1. If, after review of the motion, the Court determines that it wishes a
response, and/or a hearing, it will then notify counsel accordingly.
25. Parties are reminded of the requirements of Local Bankruptcy Rule 9004-2, calling for
the return date and time of a motion to be included in the upper right-hand corner of the caption of
the motion and all related pleadings. By way of clarification and implementation of that Rule, the
return date and time shall be noted on the first page of all submissions to this Court, including, without limitation, Motions; affidavits, affirmations and declarations; Briefs; exhibit packages; and proposed orders.
26. “Backs” (sometimes referred to as “Blue Backs” or “covers”) are not required, and are not to be used, on either Motion papers or Briefs, on Chambers copies and elsewhere. Papers must, however, be securely stapled or otherwise fastened, preferably by a means that allows open
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documents to lie flat as, for example, spiral binding does, and “Velo” binding does not. In lieu of
backs, every submission (including Briefs) must include, on the first page, the name, address, and phone number of the firm submitting the papers, the party for whom it is acting, the attorney(s) with principal responsibility for the submission, and, if different, the attorney most likely to argue the matter (who should be identified as such). Bar numbers are not required. However, inclusion of an attorney’s name on the papers shall be deemed to be a representation that the attorney in question is a member in good standing of at least one federal court, and if the attorney is not admitted to practice in this Court, that an application to appear pro hace vice has been or promptly will be filed.
Temporary Restraining Orders
27. The requirements of Fed. R. Civ. P. 65(b) with respect to an application for a temporary restraining order (“TRO”) -- including, in particular, requirements as to notice of the application -- will be strictly enforced. Applications for TROs will be heard in open court, on the record, with a court reporter or audio recording. Parties wishing to be heard in opposition will be heard by telephone upon request. Applicants seeking TROs are reminded of the need to submit with their motion papers the written Affidavit required under Rule 65(b) confirming the notice provided to anyone who might wish to oppose the application. Any assertions that notice cannot or should not be given must likewise be supported by Affidavit.
28. Any request for a TRO shall be preceded by a telephone call to the Court’s Chambers, advising Chambers of the nature of the controversy; the need for emergency relief; why a noticed hearing for a preliminary injunction would be insufficient; when a hearing on the TRO application is needed; and when the papers will be forthcoming. Except in those rare cases where advance notice of the TRO application would vitiate the purpose of the TRO (and where that will be
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established by Affidavit), immediate telephonic notice of the prospective application shall be
provided to all parties reasonably expected to be affected by entry of the TRO, or provisions
therein -- and, in addition, the papers on the application shall be hand delivered or faxed to any such parties at the same time that the papers are delivered or faxed to Chambers. Litigants are reminded of the requirements of Paragraph 12 above, under which factual assertions on motions in adversary proceedings must be supported by affidavit; requests for TROs and preliminary injunctions are in this category.
Discovery and Due Diligence Disputes
29. Counsel are encouraged to resolve discovery and due diligence disputes by negotiation
in good faith, and, if necessary, conference call with the Court. The Court will make itself available
for such calls, but they may not be scheduled until and unless the parties have first tried and failed
to resolve the disputed matters themselves. Unless otherwise ordered by the Court, no motion with
respect to a discovery or due diligence dispute shall be filed unless counsel have first conferred in
good faith to resolve it, and also sought to resolve the matter by conference call. Accordingly, the
Court will not sign Orders to Show Cause with respect to discovery disputes, except upon an
affidavit establishing why the Court’s normal procedures, as set forth in this paragraph, are unsatisfactory. If practical, the Court will resolve the dispute in the conference call, without submission of papers.
Appeals
30. In the event of any appeal or motion for leave to appeal where the transcript of the proceedings and/or of the decision is to be part of the record, and no later than the time prescribed for initial designation of the record, the appellant(s) and appellee(s) must jointly contact Chambers
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to discuss the mechanism for corrections to the transcript, and means for anyone with differences as to proposed corrections to have notice and opportunity to be heard.
Conference Calls and Chambers Conferences
31. The Court will be available for chambers conferences and conference calls to address procedural or case administration matters not involving substantive rights. Any and all parties wishing to participate, or who reasonably can be expected to desire to be heard, must be given notice. While such conferences will normally be off the record, any participant may request that the conference be recorded, and such requests will presumptively be granted.
Agendas
32. Submission of hearing agendas is required in this case. In each such agenda:
(a) Disputed matters are to be shown first.
(b) The listings of filings with respect to matters on the agenda shall be limited to
submissions of substance - motions, opposing pleadings and briefs -and need not, and shall
not, include the supporting affidavits, exhibit binders, or miscellaneous filings, such as
notices of adjournment and affidavits of service.
(c) The Agenda must be submitted, and served, by 5:00 p.m. of the day before the
hearing. It can and must be updated if there are changes.
(d) Settlements of disputed matters are encouraged. If discussions as to settlement
are ongoing and are proceeding constructively, telephonic notice of such to Chambers (by
joint call or by one representative with the authority of anyone else concerned) is
required. To minimize the Court’s expenditure of preparation time on settled matters,
counsel must call or fax Chambers immediately (even if before or after traditional
business hours) when an agreement in principle as to settlement is reached.
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Conflicts with Local Bankruptcy
33. In the event of any actual or perceived conflict between the provisions of this order and the Local Bankruptcy Rules, litigants and their adversaries shall jointly call Chambers for guidance and/or rulings.
Clarifications and Modifications
34. Requests for clarifications, modifications, and/or improvements to this order are
entirely appropriate; they may be made in connection with any status conference, or upon Motion.
Dated: New York, New York ______September __, 2010 United States Bankruptcy Judge
xiv Case 1:11-cv-05905-AT Document 29-10 Filed 02/28/14 Page 1 of 20
EXHIBIT 10
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EXHIBIT 11
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2 UNITED STATES BANKRUPTCY COURT
3 SOUTHERN DISTRICT OF NEW YORK
4 ------x
5 In the Matter of:
6 SECURITIES INVESTOR PROTECTION CORPORATION,
7 Plaintiff, Main Case No.
8 - against - 08-01789-brl
9 BERNARD L. MADOFF INVESTMENT SECURITIES, LLC,
10 Defendant.
11 ------x
12 IRVING H. PICARD, TRUSTEE FOR THE LIQUIDATION OF B,
13 Plaintiff,
14 - against - Adv. Case No.
15 09-01239-brl
16 FAIRFIELD SENTRY LIMITED. (IN LIQUIDATION), et al.,
17 Defendant.
18 ------x
19 IRVING H. PICARD, TRUSTEE FOR THE LIQUIDATION OF B,
20 Plaintiff,
21 - against - Adv. Case No.
22 09-01161-brl
23 KINGATE GLOBAL FUND, LTD., et al.,
24 Defendant.
25 ------x
VERITEXT REPORTING COMPANY 212-267-6868 www.veritext.com 516-608-2400 09-01239-brlCase 1:11-cv-05905-AT Doc 93 Filed 06/08/11 Document Entered 29-11 06/09/11 Filed 02/28/14 11:28:32 Page Main 3 ofDocument 43 Pg 2 of 42 Page 2
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2 U.S. Bankruptcy Court
3 One Bowling Green
4 New York, New York
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6 June 7, 2011
7 10:06 AM
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23 B E F O R E:
24 HON. BURTON R. LIFLAND
25 U.S. BANKRUPTCY JUDGE
VERITEXT REPORTING COMPANY 212-267-6868 www.veritext.com 516-608-2400 09-01239-brlCase 1:11-cv-05905-AT Doc 93 Filed 06/08/11 Document Entered 29-11 06/09/11 Filed 02/28/14 11:28:32 Page Main 4 ofDocument 43 Pg 3 of 42 Page 3
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2 MOTION to File Third Amended Complaint (ADV 09-01661-brl)
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4 MOTION for Entry of Order Pursuant to Section 105(a) of the
5 Bankruptcy Code and Rules 2002(a)(3) and 9019(a) of the Federal
6 Rules of Bankruptcy Procedure Approving An Agreement By and
7 Between the Trustee and Kenneth Krys and Joanna Lau, Solely in
8 Their Respective Capacities as the Foreign Representatives for
9 and Joint Liquidators of Fairfield Sentry Limited, Fairfield
10 Sigma Limited and Fairfield Lambda Limited. (ADV. 09-01239-
11 brl)
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25 Transcribed by: Linda Ferrara
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2 A P P E A R A N C E S :
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4 BAKER & HOSTETLER LLP
5 Attorneys for Irving H. Picard, Esq., Trustee for the
6 Substantively Consolidated SIPA Liquidation of
7 Bernard L. Madoff Investment Securities LLC and
8 Bernard L. Madoff
9 45 Rockefeller Plaza
10 New York, NY 10111
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12 BY: DAVID J. SHEEHAN, ESQ.
13 MICHELLE R. KAPLAN, ESQ.
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17 BROWN RUDNICK
18 Attorneys for Fairfield Sentry
19 Seven Times Square
20 New York, New York 10036
21 BY: DAVID J. MOLTON, ESQ.
22 DANIEL J. SAVAL, ESQ.
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2 MILBERG, LLP
3 Attorneys for Derivative Plaintiffs
4 One Pennsylvania Plaza
5 New York, New York 10119
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7 BY: ROBERT A. WALLNER, EQS.
8 CHARLES SLIDDERS, ESQ.
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1 P R O C E E D I N G S
2 THE COURT: Be seated, please.
3 THE CLERK: SIPC v. BLMIS.
4 MR. SHEEHAN: Good morning, Your Honor.
5 THE COURT: Good morning.
6 MR. SHEEHAN: Your Honor, on today's calendar there's
7 two items for BLMIS. The first deals with Kingate, the second
8 with Fairfield Sentry. I would like to introduce my colleague,
9 Michelle Kaplan and she will address the Court with regard to
10 the Kingate matter. Thank you, Your Honor.
11 THE COURT: Certainly.
12 MS. KAPLAN: Good morning, Your Honor.
13 THE COURT: Good morning.
14 MS. KAPLAN: On behalf of the trustee, we move for
15 leave to file a third amended complaint in the Kingate matter.
16 The deadline for objections was June 2 and no objections were
17 filed. I would also like to note that Exhibit 3 to the third
18 amended complaint submitted with the motion -- I'm sorry,
19 Exhibit C -- was inadvertently omitted from the filing and if
20 leave is granted, we would like to request permission to
21 include Exhibit C with the third amended complaint.
22 THE COURT: Does anyone want to be heard with respect
23 to the application?
24 (No response.)
25 THE COURT: There's no response. Your application is
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1 granted.
2 MS. KAPLAN: Thank you, Your Honor. And this is the
3 proposed order.
4 THE COURT: I'll entertain the proposed orders. The
5 order is approved.
6 MS. KAPLAN: Thank you, Your Honor.
7 MR. SHEEHAN: Your Honor, the next item is a motion by
8 the trustee, joined in by the liquidator for Fairfield Sentry
9 to have approved the settlement that's been arrived at between
10 the liquidator and the trustee.
11 At the outset, I'd like to make one observation here.
12 We've presented Your Honor with many settlements over the last
13 several months, some of them are rather notable such as Picower
14 for five billion dollars. In some ways, I see this settlement
15 here today as combining some of the best elements that can
16 occur within a fraud of the magnitude of Mr. Madoff.
17 What we have here is the BLMIS trustee joining
18 together with the liquidators for the Fairfield funds in what I
19 believe is a very well thought-out, hard-earned and hard
20 negotiated agreement, an agreement that will benefit not only
21 the customers and victims of BLMIS but also those who have
22 claims against the liquidators themselves and BVI.
23 As Your Honor knows, Fairfield Sentry is the largest
24 feeder front here and what I'd like to do before I get to it,
25 there are several objections which I will address but before I
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1 do that, I'd like to just highlight the significant aspects of
2 this. I know Your Honor's familiar with it because we have
3 submitted fairly extensive papers. But I think to view these
4 objections in context, it's worthwhile outlining some of the
5 major elements of this.
6 Probably most important from the standpoint of the
7 customer fund allocation and the benefit to the BLMIS creditors
8 and customers is, in fact, the reduction of the claim by the
9 amount of 730 million dollars. For the record, Your Honor, I'd
10 like to note that we had originally indicated that the amount
11 of the claim reduction was in excess of a billion but we're
12 wrong about that. We actually corrected it and we've conferred
13 with Mr. Molton and his client and the amount actually is
14 960,000 dollars, is the total amount of the claim which will be
15 reduced by 730 million dollars, Your Honor.
16 And as a result of that, the percentage of the allowed
17 claim will not be 19.2 percent but actually twenty-four
18 percent. We went over this with the liquidator and his counsel
19 and they are in agreement with this and for the record, we
20 amend our application in that regard.
21 Next and perhaps most important, is that we will have
22 a judgment against Fairfield Sentry for 3.054 billion dollars,
23 Fairfield Sigma for 752.3 million dollars and Fairfield Lambda
24 52.9 million dollars. Sigma and Lambda being basically feeder
25 funds created to put money into Fairfield Sentry.
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1 At the same time what the trustee will receive and
2 BLMIS is seventy million dollars; twenty-four million dollars
3 upon the entry of this order and it being not appealed from.
4 And then an additional balance of forty-six million, depending
5 upon certain elements, focusing principally upon the CITGO
6 account, which has been maintained in the Netherlands since the
7 outset of the liquidation which are significant funds but out
8 of which we would partake in forty-six million dollars. There
9 are other ways to pay that, Your Honor, in case the CITGO funds
10 are tied up. They're outlined in the settlement, the 9019.
11 Last and perhaps most importantly what I would like to
12 highlight is what we're emphasizing in this application is the
13 cooperation of two fiduciaries confronted with a sea of
14 inequity and fraud working together, collaboratively to follow
15 their best causes of action and work together to make that
16 happen.
17 As Your Honor well knows, Fairfield Liquidator is
18 here. Indeed, under Chapter 15, and operating within this
19 courtroom, and pursuing claims that he has, we will work in
20 concert with him and pursue the claims that we have as well as
21 claims that we can pursue now that we are armed with the
22 judgment that will be entered into as a result of this
23 settlement. As a result, I think we bring together all of the
24 elements that are necessary for both fiduciaries to be well-
25 armed to pursue their claims.
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1 We have an unfortunate -- we do have two objections,
2 however and before I even get to the objections, I would you to
3 know two things about them; one, neither objection actually
4 addressed the reasonableness which is the standard here, have
5 we reached the lowest rung of reasonableness on the ladder of
6 reasonableness with regard to this application?
7 Neither objector has suggested that this is not a
8 reasonable settlement and does not benefit both sides. What
9 they have objected to, first of all, is to Bank Safra and
10 another bank, BBVA, Banco Bilbao, have objected to certain of
11 the language which we tried to craft very carefully to preserve
12 our rights with regard to pursuing subsequent transferees.
13 What we have worked out, Your Honor, and Your Honor
14 should know this, with the counsel for Bank Safra is to amend
15 the order to include certain language which I think satisfies
16 our needs and his with regard to this somewhat difficult topic.
17 And the order will now be amended to provide that nothing in
18 the agreement shall restrict, interfere, or otherwise affect
19 any rights, defenses and/or remedies that may be asserted by
20 the trustee, designated subsequent transferees and non-
21 designated subsequent transferees in connection with the
22 designated subsequent transferee claims and non-designated
23 subsequent transferee claims commenced or to be commenced by
24 the trustee.
25 With that clarification, Your Honor, we have a
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1 withdrawal of the objection by Bank Safra. I haven't heard
2 from counsel for BBVA but I believe they joined in the
3 objection of Bank Safra and so therefore, I believe that both
4 of those objections are satisfied by this amendment to the
5 order.
6 The other objection, Your Honor, emanates from the
7 derivative plaintiffs. As Your Honor is very familiar with
8 that matter, Your Honor held a hearing with regard to the
9 Cohmad issues months ago. And as a matter of fact, one could
10 suggest that what is happening here this morning is a
11 revisitation of that motion in an attempt to quite frankly,
12 interject that into these proceedings in which they have no
13 place.
14 As we have said in our papers, Your Honor, our
15 agreement with the Fairfield Sentry liquidators is in no way
16 contingent upon your recognition order being affirmed or
17 otherwise dealt with. We will proceed together on the basis of
18 this agreement with or without the recognition order.
19 Obviously, it will have an impact on how we proceed if that
20 recognition order were to be reversed but in a real sense, this
21 agreement is in no way contingent upon that recognition order.
22 I submit to Your Honor that what's actually happening
23 here is an attempt to quite frankly, have a second appeal, a
24 second bite at the apple.
25 I'm going to let Mr. Molton who handled the Cohmad
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1 matter address all those issues, Your Honor. But we submit
2 that it has no impact whatsoever on the settlement and since
3 there is no real objection to it on the basis of reasonableness
4 and appropriateness and that we've met all the other criteria
5 associated with 9019, we would submit, Your Honor, that an
6 order should be entered approving this settlement. Thank you,
7 Your Honor.
8 MR. MOLTON: Good morning, Your Honor. David Molton
9 with Dan Saval of Brown Rudnick here for the Fairfield
10 liquidators. And I do want to note, Your Honor, that the --
11 one of the co-liquidators at Fairfield and one of the foreign
12 representatives, Ken Krys, is the courtroom today in the first
13 row. Here for the first time, I think, since the recognition
14 order hearing last July. And I do also want to inform Your
15 Honor that we have two summer associates with us, Michelle
16 Padulsky (ph.) and Arkady Goldenstein (ph.).
17 I want to join Mr. Sheehan in everything he said and
18 I'm not going to repeat it, other than the fact that this is a
19 -- it's a pleasure to stand up here really arm in arm with the
20 BLMIS trustee to go forward with a very, very heavily
21 negotiated and we think ultimately fair settlement of the
22 various issues between us, various complex issues between us
23 which I think as Mr. Sheehan said, benefits not only the direct
24 investors in BLMIS but reflects that trustee's acknowledgement
25 and desire to provide remedies by which indirect investors
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1 through the Fairfield funds can maintain some recovery out of
2 this grand fraud.
3 I think Mr. Sheehan is absolutely correct that what we
4 have here, Your Honor, is basically the derivative plaintiffs
5 who were unhappy with Your Honor's decision on July 22,
6 standing here and attempting to reargue or rehash issues that
7 first of all have no basis here and second of all, have no
8 relevance here and second (sic) of all were rejected by Your
9 Honor.
10 You heard from Mr. Sheehan about the benefits of the
11 settlement to the BLMIS estate. There are also substantial
12 benefits to the Fairfield funds estate including a 230 million
13 dollar allowed customer claim in the BLMIS estate where the
14 trustee had objected to Sentry's filed claim and fall under
15 Section 502(d) of the code and had also threatened equitable
16 subordination of that claim.
17 Receipt of -- number two, receipt of significant
18 proceeds recovered from the trustee's subsequent transferee
19 actions in which we participate, cooperating jointly with the
20 BLMIS trustee and also significantly, the release of the claims
21 by the trustee against the funds' estates and as Mr. Sheehan
22 noted, there will be an adjudicated judgment. However, the
23 recoveries and satisfaction of that judgment comes through the
24 settlement agreement and is governed by the terms thereof.
25 Tomorrow, Your Honor, the liquidators will with their
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1 BVI counsel, and myself, to answer any questions from Justice
2 Bannister, will be in front of the BVI court for approval of
3 the settlement agreement of the Fairfield funds estates.
4 The BVI court oversees the Fairfield funds activities
5 and administers the Fairfield funds estates. The BVI court
6 will determine tomorrow whether the settlement is a good deal
7 for the Fairfield funds estates and whether the liquidator
8 should be permitted to proceed with that settlement. That is
9 the proper venue for dealing with the reasonableness of this
10 settlement under applicable law in connection with the
11 fiduciary duties of the Fairfield liquidators.
12 The liquidators notified all of their known registered
13 shareholders and creditors of the BVI hearing. The liquidators
14 also on May 13, Your Honor, of this year filed a notice of the
15 BVI hearing in the Chapter 15 cases which provided information
16 to parties wishing to appear before the BVI court or to make a
17 submission to the Court in connection with the settlement.
18 I want to note, Your Honor, that counsel for the
19 derivative plaintiff objectors was served with a copy of that
20 notice on May 13. However, they've refused to appear, file an
21 objection with the BVI court or direct counsel to appear
22 therein.
23 As far as we can tell, Judge, they want to argue that
24 matter here in front of you. And they do not want to go down
25 there. I can speculate the reason why is because they believe
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1 by taking advantage of the full and fair procedural
2 opportunities that the BVI law and the BVI court allows them
3 will somehow compromise their pending appeal. And as some
4 people have recently said, the simplest answer is always most
5 often the correct answer. But for whatever reason, our friends
6 have decided not to partake of those procedural rights and
7 remedies that they have in the BVI court.
8 I know Mr. Wallner submitted with his papers certain
9 e-mail that he elicited from us in response to questions over
10 the weekend. What he didn't give you, Your Honor, is the last
11 e-mail where BVI counsel contacted him directly on Sunday and
12 said -- and I have a copy just for the sake of completeness, I
13 will hand it to your clerk and to Your Honor, I'll give it to
14 Mr. Wallner, although he has it.
15 "Mr. Wallner, I am in court tomorrow morning but I'm
16 happy to discuss this with you at a mutually convenient point
17 this week. Please let me know. If you have instructed BVI
18 counsel, please let me know who they are and I will contact
19 them directly." Then gives a switchboard number and contact
20 information. As far as we can know, this e-mail to Mr. Wallner
21 has not been answered.
22 May I, Judge?
23 THE COURT: Sure.
24 MR. MOLTON: Instead, they take the objection here. I
25 think in our papers and I'm not going to cover what Mr. Sheehan
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1 said but I think that in the context of the motion here, Your
2 Honor, Mr. Wallner's client don't have standing. The Refco
3 case decided by the Second Circuit that dealt with investors in
4 the Sphinx funds held that investors of a creditor of a debtor
5 do not have standing to object to a 9019 settlement motion on
6 behalf of the debtor. I'm a little familiar with that case as
7 Judge Rakoff has appointed me liaison counsel in the MDL for
8 all plaintiffs and I also am co-counsel for the Sphinx funds in
9 that case.
10 But what's most significant, Your Honor, is not what
11 Mr. Wallner's objection says but what it doesn't say. As Mr.
12 Sheehan said it doesn't say anything about how this settlement
13 is not a good deal for the BLMIS estate but it also doesn't
14 really talk about how this deal, to the extent they claim it's
15 relevant and we say it isn't, is not a good deal for the
16 Fairfield funds.
17 Other than some vague speculation that some time
18 period difference between our tolling agreements with the
19 service providers and their -- what we believe to be a
20 defective derivative suit that was filed in May 2009, may
21 create statute of limitations issues and, of course, they don't
22 tell us how or why or give us any information or analysis as to
23 how that prejudices the funds. They don't go into all the
24 benefits that accrue and they don't address the benefits that
25 are going to accrue to the Fairfield investors, which they
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1 purport to represent.
2 Clearly, the only thing that they seem to be
3 interested in is claims brought by their counsel here in the
4 United States and preserving those claims for the benefit of
5 their counsel.
6 In any event, Your Honor, the recognition order was
7 decided over ten months ago and the derivative plaintiffs never
8 sought a stay of that recognition order pending appeal. They
9 knew full well when we stood here on July 22, as well as when
10 we came in here right after the petition for recognition was
11 filed in June, what we were seeking. We were seeking -- we
12 announced it. We told the world and we told Your Honor
13 repeatedly at some hearings over the past year dealing with our
14 redeemer friends, that we were engaged in good faith settlement
15 negotiations with Mr. Picard and that they were progressing and
16 I think Your Honor at the hearing in July asked Mr. Long or Mr.
17 Kornfeld to confirm it and I think they did.
18 Also, Your Honor knows that we asked and were given in
19 the recognition order, authority over -- we were given -- that
20 the liquidator was recognized and had the ability to deal with
21 claims and that means settle claims, that means prosecute
22 claims, that means settle claims that the derivative plaintiffs
23 had sought to bring. And accordingly, Your Honor, they knew
24 full well almost a year ago that what the settlement agreement
25 does and what we could have done over the past year, settle
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1 with any of these people, was something that could happen.
2 They didn't do anything until now. I'll get to that.
3 They make a, what we believe to be an improper stay
4 motion. I'll just point out on the standing issue, Your Honor,
5 that they cite some cases that we don't believe are pertinent;
6 the Zupnik case. Actually, the Court denied the standing there
7 with respect to non-settling defendants, not derivative
8 plaintiffs. And Masters and Mates case which they cite deals
9 with the settlement of a class action claims in ERISA context.
10 The Court reversed and remanded because of new standards
11 evaluating the ERISA law were implicated.
12 What they don't do is they don't deal with the Refco
13 case from the Second Circuit. And as Mr. Sheehan said, they
14 don't deal with the effect of the estate or its lack of
15 reasonableness for the lowest common denominator of
16 reasonableness on the BLMIS estate.
17 Objectors have a right to be heard. They have a right
18 to be heard in the BVI court. They could have been there
19 tomorrow if they wanted to. They chose not to. In any event,
20 their attempt to further interfere with the Fairfield funds
21 liquidators and foreign representatives' fiduciary duties
22 should not be allowed.
23 The stay pending appeal as we said in our papers is
24 defective. First of all, it is barred by laches, Judge. No
25 matter how hard Mr. Wallner tries to get around it, the alleged
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1 prejudice that he says occurs to him by way of the settlement
2 was clearly well-known and indeed laid out in detail to him a
3 year ago, as to what the liquidators would do. The settlement
4 doesn't affect the fact that over the past year, the Fairfield
5 funds foreign representatives have dealt with the people that
6 he claims to be suing or his plaintiffs have sued or purported
7 to sue and could at any time reach an agreement with them one
8 way or another.
9 So we believe that this is a tardy stay request,
10 wholly tardy and it should not be allowed. It's made pursuant
11 to 805 of the Bankruptcy Rules. And accordingly, that appeal
12 was made, I believe, last August. The stay, to the extent --
13 Mr. Wallner wanted to make it, it should have been made then,
14 the stay request.
15 The Fairfield funds will experience substantial
16 prejudice if the stay is granted. Again, we have a substantial
17 customer claim that will be allowed. I know that in Mr.
18 Picard's latest report, he indicates that even assuming the
19 denominator remains at 19 million dollars, that they're at
20 about a fifty percent recovery as it is right now. So even
21 assuming that, you can do the math as to the value of this
22 claim.
23 Second of all, and I think it's important to note from
24 Mr. Picard's point of view, what the settlement does do is it
25 reduces the denominator for the benefit of all BLMIS investors,
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1 thereby allowing whatever distributions to be sent out to be
2 increased and the reserve not to be lessened.
3 From the point of view of our perspective, it
4 basically provides upon approval significant proceeds to be
5 paid to the Fairfield investors by the BLMIS trustee. With
6 respect to subsequent transferee claims, Mr. Wallner wants to
7 stay that.
8 And also most significantly or equally as
9 significantly, the release of substantial claims by the BLMIS
10 trustee against the funds estates. I know Your Honor is
11 familiar with Mr. Picard's claims against the funds. There's a
12 billion dollar preference claim. And there's also a two
13 billion dollar fraudulent transfer claim. And if Mr. Wallner
14 takes a look at Your Honor's Merkin decision, as well as the
15 Bayou decisions, he might understand the jeopardy that's
16 attendant to the Fairfield funds foreign representatives in the
17 context of those claims, especially if his allegations as to
18 FGG's (ph.) conduct prove out to be true.
19 We believe there's no substantial possibility on
20 appeal, just going through the stay factors. In British
21 American, Judge Kimball, we cited you the case, looked to your
22 case and basically dealing with another BVI case, we believe
23 provides further authority supporting the Cohmad issue.
24 With respect to the sealing issue, Judge, again we
25 believe that this is a red herring. Basically, the Ephedra
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1 case from Judge Rakoff commands us to that, the proceedings are
2 according -- must be according to a course of civilized
3 jurisprudence that is fair and impartial. Mr. Wallner has
4 procedural safeguards. His clients have had procedural
5 safeguards. The BVI Insolvency Act is a pretty thick Act,
6 given -- that incorporates the civil practice rules. It's
7 commonwealth jurisdiction and at any time, including tomorrow,
8 he could take advantage of his procedural rights giving him
9 procedural fairness to go down and participate in the BVI
10 proceeding and either to object to the liquidator's action or
11 seek documents that he believes he's entitled to.
12 Again, this issue was actually dealt with almost
13 comprehensively by Judge Kimball in British American where he
14 said the BVI proceeding in a similar context is governed by
15 comprehensive provisions of the act -- that's the BVI Act --
16 addressing the liquidation of the debtor as is apparent from
17 the orders appointing the liquidator and the act itself, the
18 BVI court all -- receives all actions of the petitioner in the
19 liquidation of the debtor, the exact circumstance here.
20 And then Judge Kimball in rejecting a 1506 attack
21 says, "In any case, the Act, the British Virgin Islands Act
22 provides the objector with the right to be heard in the BVI
23 court on this issue and again, the objector did not address its
24 concern with the BVI court." In this light, Judge Kimball
25 holds that procedural fairness under 1506 is there.
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1 In any event, again we believe that this whole play
2 that's being raised to Your Honor in the context of an alleged
3 and tardy stay motion is again an effort by Mr. Wallner to
4 somehow push forth his appeal issue and again, the reason that
5 he's not taking advantage of his rights and his clients
6 absolute rights under the BVI law, we believe is a calculated
7 tactic, so as to preserve his appeal position.
8 We believe that again, looking at the context of the
9 elements of the stay that he asked for, again there's no reason
10 -- there's no showing of irreparable harm, first of all as
11 we've outlined and the Chapter 15 papers are significant
12 impediments that even give Mr. -- the derivative plaintiffs an
13 ability to move derivatively or to act derivatively on behalf
14 of a fund that now has court-appointed liquidators.
15 Further, the Brewel (ph.) v. Kingate case that's in
16 our Chapter 15 papers said they had to go to BVI court to get
17 authorization. They didn't do that, of course.
18 Second, the liquidators, Mr. Wallner makes hay of the
19 tolling agreements and makes some speculative argument that
20 somehow he's got timely claims and we don't. We dispute that.
21 He's made no showing of that. It's his burden. And he also
22 fails to -- he mentions, well, we sued PWC International and
23 you didn't. Well, what he doesn't tell the Court is Judge
24 Marrero last August dismissed the Sentry Investor class action
25 investors class action claims against PWC International from
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1 the Anwar action, 728 F.Supp. 2d. 372 458 to 462, on the
2 grounds that the theory that was utilized by our friends at
3 Boies Schiller on behalf of the Anwar plaintiffs, the Anwar
4 class plaintiffs which as we can see, no identifiable
5 difference from what Mr. Wallner is asserting wasn't legally
6 sufficient.
7 In any event, Judge, he also doesn't apparently
8 realize that Your Honor issued an order two weeks ago that
9 gives the liquidators a Section 108 toll under Chapter 15 with
10 respect to any claims here in the United States. I believe
11 there are no appeals from that as of yesterday at midnight or
12 at 11:59. And accordingly, we believe although we've got to
13 check the docket because there was a lot of activity, we
14 believe that that is a final order now.
15 Third, Judge, the in pari delicto issues, Mr. Wallner
16 made hay of that in his papers. We believe that's a red
17 herring. A clear reading of Kirshner shows that in pari is
18 applicable to him. Second of all as we showed, one of the
19 reasons why we needed to stay his action is because his own
20 pleadings, we believe pleads him into in pari delicto issues
21 vis-a-vie the very people -- the very claims he says that were
22 impacting by the settlement.
23 And although Mr. Wallner says in his sur-reply of
24 yesterday that -- well that, it's an affirmative defense and we
25 can do discovery on it and the liquidators are bound by an
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1 affirmative standing rule under Wagner. I'm very familiar with
2 all that again, Judge. I'm very involved in the Refco
3 litigation. And the Court of Appeals in Kirshner put that
4 whole issue on the side, dealt with it as an affirmative
5 defense and said guess what, Mr. Kirshner, you've pled yourself
6 into in pari delicto dismissal, notwithstanding the fact that
7 it's an affirmative defense. And also the fact is that the
8 liquidators unlike Mr. Kirshner and not a trustee in bankruptcy
9 and accordingly, it's arguable of whether the Wagner rule
10 applies to the trustee. But besides that point, again all we
11 have is speculation.
12 And finally, Judge, there's been no showing that the
13 management claims are in any way compromised in any way by this
14 deal. There's real harm, as I said, to BLMIS and the funds
15 stakeholders. The Fairfield fund stakeholders reduced interim
16 distributions to BLMIS stakeholders, the loss or the stay on a
17 230 million dollar customer claim, immediate payouts to the
18 Fairfield estate per the settlement agreement and very
19 importantly interference and a freeze on joint prosecution and
20 settlement and litigation strategies which is embedded within
21 this very complex but actually very creative settlement
22 agreement that allows the liquidators and the trustee, as Mr.
23 Sheehan said, to pursue action against people they have claims
24 against for the benefit of all Madoff victims.
25 And I think I mentioned when I appeared first in front
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1 of you last year, that it was the goal of the liquidators to
2 come seek recognition for the purpose of providing better
3 distributions to their stakeholders and I think this settlement
4 does that.
5 The stay also would be against the public interest for
6 the reasons that I mentioned. And if Your Honor doesn't have
7 any questions, I think I've fulfilled my obligation to go
8 through the why Mr. Wallner's request for a stay should not be
9 granted. Thank you.
10 MR. WALLNER: Good morning, Your Honor. My name is
11 Robert Wallner from Milberg. I'm here with my colleague Mr.
12 Slidders and we represent the derivative plaintiffs who have
13 filed an objection to the proposed settlement as well as a
14 motion to stay any approval of the settlement.
15 And let me first start by saying that my colleagues,
16 Mr. Sheehan and Mr. Molton are correct in one important
17 respect. This objection and motion for a stay is about the
18 Chapter 15 appeal. We're not trying to relitigate what we lost
19 before Your Honor last July. We've appealed that decision.
20 The appeal is pending before Judge Daniels in the Southern
21 District of New York. It has been fully briefed. It has been
22 argued.
23 And our application today is designed to protect the
24 appellate process because the fact of the matter is, Your
25 Honor, that if the Court approves the proposed settlement and
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1 if Mr. Krys, as the liquidator takes certain actions going
2 forward such as settling claims that we've previously brought
3 against Price Waterhouse or CITGO or if he assigns the
4 management claims to Mr. Picard and those claims are then
5 settled and we ultimately prevail on appeal and the derivative
6 action is back pending, we could witness billions of dollars of
7 lost claims. And that's irreparable injury.
8 So we're here, Your Honor, to ask for a stay if Your
9 Honor is otherwise inclined to approve the settlement, so that
10 the appellate process will be able to protect the outcome of
11 that appeal if we win. The Court is aware of the standards for
12 a stay. There's been some dispute in the papers whether we
13 have to show each of the four elements or whether it's a
14 balancing test, but I submit, Your Honor, that we satisfy each
15 of the elements.
16 We believe there is a strong possibility that we will
17 prevail on the appeal. To be frank, Your Honor, I am in
18 somewhat of an awkward position --
19 THE COURT: Aren't you making any argument on the
20 merits of the settlement? Your entire pitch them is a request
21 for a stay which is something that was obtained in connection
22 with the recognition order of last year. And by the way, even
23 if that recognition order was not a finding of a foreign main
24 proceeding, it might very well have been a non-main and also I
25 would have had before me a request, I am sure, under 1519 for
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1 provisional relief which again would constitute a request for a
2 stay.
3 So as I understand your pitch this morning, it's
4 purely in connection with obtaining a stay relating to the
5 Chapter 15 recognition order and really has nothing at all to
6 do with the merits of the settlement.
7 MR. WALLNER: Your Honor, I would submit that it does
8 relate to the proposed settlement. We could not have --
9 THE COURT: Well if it does, why aren't you appearing
10 in the BVI court?
11 MR. WALLNER: Because the stay -- pardon me -- because
12 the settlement --
13 THE COURT: Well, we're talking about the merits. If
14 indeed your pitch goes to the merits, you have two places to
15 deal with that; one here, which I haven't seen you do at all so
16 far and also in the BVI court. These are the courts of
17 competent jurisdiction over BLMIS on one hand and Fairfield
18 Sentry on the other hand. So, am I correct then or if I'm not,
19 please disabuse me but you're only pitching for a stay here
20 today.
21 MR. WALLNER: We are pitching for a stay because the
22 proposed settlement, if approved, could irreparably injure the
23 derivative claim that we have previously brought. And if we
24 prevail on appeal, and the derivative action --
25 THE COURT: Isn't one of the parties to the settlement
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1 here, a beneficiary of any derivative claim? The BLMIS
2 trustee, as I understand it, is the largest creditor of the
3 Fairfield Sentry.
4 MR. WALLNER: That's his argument.
5 THE COURT: Yes.
6 MR. WALLNER: And what Mr. Picard has stated is that
7 if the derivative claim produces value, he would lay claim to
8 all of those proceeds. Mr. Picard can claim all he wants, Your
9 Honor, but he hasn't proven anything and there are important
10 defenses. Indeed, Mr. Picard in his own affidavit indicated
11 that from his perspective, the outcome of the litigation that
12 he brought against Fairfield Sentry is quote, "uncertain." And
13 the settlement agreement and Mr. Picard's motion for approval
14 underscores the point that there is a dispute by Mr. Krys as to
15 whether these claims are valid.
16 THE COURT: And that's why we have 9019.
17 MR. WALLNER: That's -- the point, Your Honor, is that
18 it doesn't matter that Mr. Picard made claim entitlement to the
19 proceeds. At this point he hasn't proved anything and these
20 are issues which there are two sides or three sides to. So
21 simply saying where Mr. Picard says, "Well, I would be entitled
22 those proceeds," Your Honor is not waiting until he proves and
23 he hasn't proved anything.
24 In terms of whether we should have sought a stay back
25 in July of 2010, we understand that one of the elements of a
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1 stay is the possibility of -- pardon me -- is irreparable
2 injury and Mr. Hirschfield at that hearing got up and said in
3 effect, they were having discussions. But it took them a whole
4 year, about a whole year, to come to the point where they are
5 today of proposing a settlement.
6 THE COURT: This is not a itsy bitsy matter. There's
7 four billion dollars involved.
8 MR. WALLNER: It --
9 THE COURT: So it could take a year by anybody's
10 calculation to resolve some of these issues. They are weighty
11 indeed.
12 MR. WALLNER: I'm not criticizing the timing. What
13 I'm saying, Your Honor, is that that was not the time to seek a
14 stay because there was no settlement on the table. When Mr.
15 Krys and Mr. Picard submitted the proposed settlement to Your
16 Honor, we moved expeditiously. We filed papers expeditiously
17 to put our position on the record and we moved for a stay at
18 that time. Indeed, if anyone could be criticized for timing,
19 we could be criticized because we expected Mr. Krys to say that
20 we moved prematurely because Your Honor has not yet approved
21 the settlement.
22 We moved expeditiously to provide that any approval
23 order should be stayed. That is not laches, Your Honor. It is
24 appropriate timing. It is a responsible way to move forward.
25 In terms of the irreparable injury, Your Honor, there
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1 are transactions contemplated under the proposed settlement
2 that if taken before we have a ruling on the appeal, could
3 destroy in large part the value of the derivative claims.
4 Take, for example, the claims against management. This is the
5 Fairfield Greenwich group, Mr. Noel, Mr. Tucker, so on.
6 Under the proposed settlement, Mr. Krys wants to
7 assign those claims to Mr. Picard while retaining some residual
8 interests. And as the Court knows there is now pending in the
9 district court both in Picard v. HSBC and in Picard v.
10 JPMorgan, the issue of the validity of assignments of claims to
11 Mr. Picard; indeed, just several days ago the motion to dismiss
12 in JPMorgan was filed.
13 THE COURT: You're conflating several different areas
14 here and the issue there involves standing perhaps under SIPA
15 but what we have here is the normal kind of assignment of a
16 claim, almost in a contractual basis. They are two different
17 things.
18 MR. WALLNER: We also have the irreparable injury,
19 Your Honor, of -- if the claims against Price Waterhouse and
20 CITGO are treated as they will be under the proposed
21 settlement, we have standing issues under Wagner. And you
22 heard my colleague, Mr. Molton say it is -- I think his words
23 are, "It is arguable whether Wagner applies." There is an
24 argument here. And if Wagner applies to the service provider
25 claims in the hands of Mr. Krys, those claims can be destroyed.
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1 Wagner does not apply in the derivative action.
2 Now what Mr. Molton says is that there may be an in
3 pari delicto defense. Your Honor, we are prepared to meet that
4 in pari delicto defense. There's no allegation in the
5 derivative action of fraud. In pari delicto is a doctrine that
6 arises in cases alleging fraud and we haven't alleged that.
7 We also believe that we have superior statute of
8 limitations viability in our case because we sued before. Mr.
9 Molton's client did or Sentry did and we also sued Price
10 Waterhouse International. Mr. Molton doesn't have a tolling
11 agreement with Price Waterhouse International. Judge Marrero
12 in a class action suit, not in our suit, held that the class
13 there in the Anwar case had not stated a claim. He never
14 addressed the issue on the merits as to whether a claim could
15 be asserted against Price Waterhouse and, of course, the
16 derivative pleadings were never tested. They weren't part of
17 that Anwar decision.
18 In terms of harm to others, there has been no showing
19 of any harm to others. You heard Mr. Molton say that under the
20 proposed settlement, Fairfield Sentry will get a 230 million
21 dollar allowed claim. Well, we asked Mr. Picard's counsel,
22 what is your plan, if any, in terms of the timing? When would
23 that allowed claim be paid, in part or in whole? And as we
24 attached to our papers, there's an e-mail which is Exhibit C
25 from Mr. Mark Kornfeld where he says we're not going to
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1 speculate. We can't speculate.
2 The fact of the matter is, Your Honor, that under the
3 record there is no schedule for one penny of payment on that
4 allowed claim. And the only way, if at all, that Mr. Molton
5 could show any harm with respect to that allowed claim is if
6 Mr. Picard were prepared to pay on that allowed claim during
7 the period of the proposed stay.
8 Now if that stay lasts until the appeal is decided,
9 and Judge Daniels decides next week on the appeal, that stay
10 can be the shortest stay ever. But there's no showing that any
11 cash is coming to Mr. Krys by virtue of that allowed claim.
12 There is as Your Honor knows, a motion by Mr. Picard
13 to make an interim distribution of claims of four percent of
14 the allowed claims as he calculates them. But paragraph 5 of
15 that so-called four percent motion provides that the four
16 percent interim distribution would be made only in respect of
17 claims allowed as of March 2011. So the proposed 230 million
18 dollar claim that we're talking about here will not even get a
19 four percent payment under the motion that Mr. Picard has
20 filed.
21 In addition, Your Honor, we've addressed other issues
22 on the harm to the others, you heard Mr. Molton talk about the
23 British American Venice case and the viability of the BVI
24 proceedings. That case involved an alleged conflict of
25 interest by a foreign representative.
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1 Here we're talking about secrecy. And indeed, Your
2 Honor, perhaps what was very interesting to note is that down
3 in the BVI, Mr. Krys who is here with us in court, submitted a
4 witness statement and guess what? That statement is under
5 seal. Compare that with what Mr. Picard did, Mr. Picard has an
6 affidavit in support of this motion which is publicly filed.
7 That's where we found his statement that the outcome is -- of
8 the litigation is uncertain. That's why we think his notion
9 that he'll lay claim to all our derivative proceeds is just a
10 claim. It proves nothing.
11 But the point is that Mr. Picard using the procedures
12 and culture of this bankruptcy court files his affidavit
13 publicly. Mr. Krys files his declaration or affidavit under
14 seal. Let me refer very briefly, Your Honor, to the public
15 interest test. And again, I don't want to regurgitate
16 everything in our papers but there is a public interest and a
17 protecting of the integrity of an appeal, particularly in this
18 case, because one of the critical issues on appeal is the
19 public policy issue under 11 U.S.C. 1506, namely whether
20 sealing arrangements in the BVI court violate -- manifestly
21 violate U.S. public policy. And that is an issue which we think
22 the U.S. appellate courts should address. And we also address
23 the balancing of interest.
24 Your Honor, I'd be happy to answer any questions but I
25 think that what we're seeking here --
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1 THE COURT: You know, it's interesting that you raise
2 the public policy issue. I am one of the participants in the
3 drafting of what's become 1506 and very frankly, after
4 reviewing all of the papers and hearing all of your arguments,
5 a public policy preclusion which is really due process and
6 procedural blockages, are a very high, high hurdle, as Judge
7 Rakoff found in Ephedra, as been documented elsewhere. There
8 is nothing that I see in the due process and procedural
9 fairness present in the BVI that is anything but abundantly in
10 accordance with our own notions of due process and fairness.
11 And your public policy objection is not well-founded here.
12 MR. WALLNER: I understand that, Your Honor.
13 THE COURT: There is nothing offensive about the BVI
14 law. As a matter of fact, even part of your argument before me
15 right now with respect to the sealing is somewhat confusing.
16 There is nothing at all stopping you from going under BVI law
17 and seeking an application to open up what you think is
18 offensive. You are obviously eschewing that opportunity and
19 pitching only before me. Perhaps that's the wrong forum.
20 MR. WALLNER: We understand Your Honor's comments. We
21 are proceeding here in the U.S. courts and the public policy
22 issue is one of the issues presently on appeal.
23 Your Honor, if the Court has no further questions, I
24 thank the Court for this opportunity.
25 THE COURT: Sure.
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1 MR. WALLNER: Thank you.
2 MR. SHEEHAN: Your Honor, I've heard nothing I need to
3 respond to unless you have any questions.
4 MR. MOLTON: Same for the liquidators.
5 THE COURT: Well, if there has to be equal time, I'm
6 going to keep everybody here for a long period of time. I
7 don't intend to do that. I have fully considered the position
8 of the parties both for the settlement and those expressed by
9 the few objectors here and actually it's only one at this
10 point. And after carefully reviewing the extensive submissions
11 and hearing argument, I find that the record overwhelming
12 supports the approval of the settlement and the objection is
13 overruled.
14 I will read in an abstract of a ruling which I intend
15 to hand down later on today with more complete cites and the
16 like but I will give you the guts of it right now.
17 Before me is the motion of the trustee of the SIPA
18 liquidation of BLMIS. Let's remember what ballpark we're in
19 and what case we're involved in. This is the case of BLMIS.
20 It's not the case of Fairfield Sentry, Chapter 15. And we're
21 here with respect to the BLMIS trustee's request seeking an
22 approval of a settlement of his suit or his adversary against
23 Fairfield Sentry, Sigma and Lambda, the Fairfield funds.
24 The Fairfield funds as I've indicated and as
25 recognized, are currently the subject of separate proceedings
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1 in this court commenced under Chapter 15. The Court
2 administering the Fairfield funds, the foreign main insolvency
3 proceedings in the British Virgin Islands and not this court,
4 has been called upon to evaluate the settlement from the
5 perspective of the Fairfield funds estate and is scheduled to
6 do so tomorrow, June 8, 2011.
7 So the issue presented by this motion is whether the
8 proposed settlement is fair and equitable above quote, and it's
9 perhaps trite to keep repeating this but it has become a
10 standard, "above the lowest point in the range of
11 reasonableness," unquote and in the best interest of the BLMIS
12 estate. In Re: Liu, 166 F.3d 1200 (2d. Cir. 1998) citing TMT
13 Trailer Ferry v. Anderson, 390 U.S. 414, 424. In determining
14 reasonableness, courts consider (1) the probability of success
15 in the litigation, (2) the difficulties associated with
16 collection. Even though I haven't been talking, I could use
17 some water. (3) the complexity of the litigation and abundant
18 expense, inconvenient delay and (4) paramount interest of
19 creditors. In Re: Refco S.D.N.Y 2006, Drexel Burnham, also at
20 Second Circuit 1992.
21 I do find the settlement represents a complete, good
22 faith compromise of all claims and is well-above the lowest
23 rung in a range of reasonableness. And in fact, offers
24 significant value to the BLMIS estate for distribution to
25 victims of the Madoff Ponzi scheme.
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1 The trustee submits in his good faith business
2 judgment that continued litigation would be costly and complex.
3 Collection of any potential award from the domestic and foreign
4 entities involved would be difficult. And the outcome of the
5 litigation is uncertain. See the affidavit of Picard. And
6 indeed, as we all know, the outcome of any litigation in this
7 court or other courts where we have some -- such highly
8 qualified advocates is always uncertain. Otherwise, I would be
9 met more often with requests for sanctions.
10 So as a result, the continued prosecution would
11 substantially and unduly delay the trustee's efforts to obtain
12 recovery from the Fairfield funds for creditors and customers
13 of the BLMIS estate. The settlement insures judgment in favor
14 of BLMIS totaling some four billion dollars and a cash infusion
15 of seventy million dollars into customer property fund.
16 The trustee has allowed the Fairfield funds customer
17 claim in an amount reduced by nearly one billion dollars or
18 something south of one billion. Moreover, the trustees and
19 foreign representatives proposed joint litigation strategies
20 provide for the assignment of claims and allocation of
21 recoveries to the BLMIS estate enhancing the trustee's ability
22 to seek from third parties substantially greater sums for
23 ultimate distribution to customers and creditors.
24 It is also clear to the Court, reviewing the
25 settlement, that there are very substantial benefits likewise
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1 accruing to the Fairfield Sentry BVI proceeding and the
2 creditors that are involved there.
3 The only outstanding objection to the settlement is
4 filed by the plaintiffs in a purported derivative action on
5 behalf of Fairfield Sentry which was stayed upon recognition of
6 the Fairfield funds foreign proceedings and by stipulation of
7 the parties. See the Morning Mist Holdings v. Fairfield
8 Greenwich -- I won't go into the numbers, you'll get them in
9 the written memo. The objectors do not claim to be customers
10 or creditors of the BLMIS estate but rather hold a de minimis
11 stake in Fairfield Sentry, a non-debtor settling party. As the
12 objectors are not directly and adversely affected pecuniarily
13 because they do not hold a direct interest in the debtor, they
14 lack the standing to object to the trustee's motion before this
15 court. In Re: Refco, 2006 Westlaw 3409088 at 2, holding that
16 interest holders in and perhaps creditors of the non-debtor
17 parties to the settlement lack standing to object to the
18 settlement under Bankruptcy Rule 9019.
19 Notably, they have not lodged their objection before
20 the BVI court which will properly evaluate the settlement with
21 respect to the Fairfield funds in which the objectors have
22 their interests.
23 Even if the objectors were parties-in-interest here,
24 the objection on its merits does not challenge the value
25 conferred on the BLMIS estate or for that matter, any ground
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1 relevant to the settlement's approval. The hypothetical harm
2 to the objector's ability which is itself legally uncertain to
3 pursue derivative actions on behalf of Fairfield Sentry is not
4 a basis for denying the settlement.
5 The objector's alternative request to stay the
6 enforcement of the settlement pending resolution of their
7 unrelated appeal of the recognition of the Fairfield Funds
8 insolvency proceedings is also unwarranted and inappropriate
9 here. Bankruptcy Rule 8005 allows for a stay of the
10 enforcement of a judgment pending appeal of that judgment. It
11 does not, as the objectors seek, provide a basis for this court
12 to stay enforcement of the settlement pending an appeal of a
13 separate decision entered over ten months ago in a separate
14 case involving separate parties.
15 Indeed, the trustee and the BLMIS estate would be
16 unfairly prejudiced and the goals of the settlement thwarted if
17 this court were to indefinitely stay the enforcement of an
18 agreement that promises substantial value to the BLMIS estate
19 and customers and victims of the Madoff Ponzi scheme and I will
20 leave it to the BVI court to make its own determination as to
21 the value of the settlement to the interested parties in the
22 BVI.
23 Accordingly, I overrule the objection and the motion
24 is granted.
25 MR. SHEEHAN: Your Honor, may I submit the order?
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1 THE COURT: Well, I will be handing down a more formal
2 memorandum.
3 MR. SHEEHAN: Okay. All right. Why don't I do that
4 after we get the --
5 THE COURT: But essentially, you may submit an order
6 based upon the bench ruling.
7 MR. SHEEHAN: Well, I'll submit an order that is
8 consonant with Your Honor's decision. I'll get that to you
9 this afternoon.
10 THE COURT: Very well.
11 MR. SHEEHAN: Thank you, Judge.
12 THE COURT: Thank you, all.
13 MR. SHEEHAN: Thank you.
14 (Whereupon these proceedings were concluded at 11:04 AM)
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2 I N D E X
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7 granted.
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9 Motion to Approve Agreement granted, 23 39
10 objection denied
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2 C E R T I F I C A T I O N
3
4 I, Linda Ferrara, certify that the foregoing transcript is a
5 true and accurate record of the proceedings.
6 Digitally signed by Linda Ferrara DN: cn=Linda Ferrara, o, ou, 7 [email protected], Linda Ferrara c=US 8 ______Date: 2011.06.08 16:46:39 -04'00'
9 LINDA FERRARA
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11 Veritext
12 200 Old Country Road
13 Suite 580
14 Mineola, NY 11501
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16 Date: June 7, 2011
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EXHIBIT 12
Case 1:11-cv-05905-AT Document 29-12 Filed 02/28/14 Page 2 of 7
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------X SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant, No. 08-01789 (BRL) v. SIPA Liquidation BERNARD L. MADOFF INVESTMENT (Substantively Consolidated) SECURITIES, LLC, Defendant. ------X IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. Adv. Pro. No. 09-01239
FAIRFIELD SENTRY LTD., et al.,
Defendants. ------X ARGUING ON THE MOTION:
BAKER & HOSTETLER LLP 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 By: David Sheehan Mark A. Kornfeld Thomas L. Long Marc E. Hirschfield Keith R. Murphy Jessie M. Gabriel Melissa L. Kosack Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff
BROWN RUDNICK LLP Seven Times Square New York, New York 10036 Telephone: (212) 209-4800 By: David J. Molton May Orenstein
1
Case 1:11-cv-05905-AT Document 29-12 Filed 02/28/14 Page 3 of 7
Daniel J. Saval Kerry L. Quinn Attorneys for the Foreign Representatives
MILBERG LLP One Pennsylvania Plaza New York, New York 10119 Telephone: (212) 594-5300 By: Robert A. Wallner Kent A. Bronson Kristi Stahnke McGregor -and- SEEGER WEISS LLP One William Street New York, New York 10004 Telephone: (212) 584-0700 By: Stephen A. Weiss Christopher M. Van de Kieft Parvin Aminolroaya Attorneys for Morning Mist Holdings Limited and Miguel Lomeli
Before: Hon. Burton R. Lifland United States Bankruptcy Judge
BENCH MEMORANDUM AND ORDER GRANTING TRUSTEE’S MOTION FOR ENTRY OF ORDER APPROVING AGREEMENT
Before the Court is the Motion of the Trustee of the SIPA liquidation of BLMIS seeking approval of a Settlement of the Trustee’s instant adversary proceeding (the “Action”) as against
Fairfield Sentry, Sigma and Lambda (the “Fairfield Funds”) pursuant to, inter alia, Bankruptcy
Rule 9019.1 While the Fairfield Funds are currently the subject of separate proceedings before
this Court under chapter 15 of the Code, the court administering the Fairfield Funds’ foreign
main insolvency proceedings in the British Virgin Islands (the “BVI Court”), and not this Court,
1 A proposed settlement of the Trustee’s adversary proceeding as against a second group of defendants is scheduled to be heard before this Court, in the context of this adversary proceeding as well as the separate chapter 11 case of Greenwich Sentry, L.P., on June 21, 2011. See In re Greenwich Sentry, L.P., Case No. 10-16229 (BRL), Dkt. No. 118.
2
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has been called upon to evaluate the Settlement from the perspective of the Fairfield Funds’ foreign estates (the “Fairfield Estate”), and is scheduled to do so tomorrow, June 8, 2011. See
Notice of Hearing, Case No. 10-13164 (BRL), Dkt. No. 411.
Thus, the issue presented by this Motion is solely whether the proposed Settlement is fair
and equitable, above “the lowest point in the range of reasonableness,” and in the best interests of the BLMIS estate. Liu v. Silverman (in re Liu), 166 F.3d 1200, at *1 (2d Cir. 1998) (citing
Protective Comm. For Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S.
414, 424 (1968)). In determining reasonableness, courts consider a number of factors, including
(i) the probability of success in the litigation; (ii) the difficulties associated with collection; (iii)
the complexity of the litigation and attendant expense, inconvenience, and delay; and (iv) the
paramount interests of creditors. In re Refco, Inc., No. 06-CIV-5596, 2006 WL 3409088, at *7
(S.D.N.Y. Nov. 16, 2006), aff’d, 505 F.3d 109 (2d Cir. 2007); Air Line Pilots Assoc., Int’l v. Am.
Nat’l Bank & Trust Co. (In re Ionosphere Clubs, Inc.), 156 B.R. 414, 428 (S.D.N.Y. 1993), aff'd,
17 F.3d 600 (2d Cir. 1994); see also In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285,
292 (2d Cir. 1992).
The Court finds that the Settlement represents a complete, good faith compromise of the
Trustee’s claims, is well above the lowest rung in a range of reasonableness, and in fact offers significant value to the BLMIS estate for distribution to victims of the Madoff Ponzi scheme.
The Trustee has submitted, in his good faith business judgment, that continued multi- jurisdictional litigation would be costly and complex, collection of any potential award from the domestic and foreign entities involved would be difficult, and the outcome of the litigation is uncertain. See Affidavit of Irving H. Picard, Dkt. No. 69, ¶ 4. The proposed Settlement, on the
other hand, ensures judgments against the largest Madoff feeder funds in favor of the BLMIS
3
Case 1:11-cv-05905-AT Document 29-12 Filed 02/28/14 Page 5 of 7
estate totaling over $4 billion,2 and a cash infusion of $70 million into the customer property fund. The customer claims asserted by the Fairfield Funds have been reduced by south of $1 billion. Moreover, the Trustee’s and Foreign Representatives’ proposed joint litigation strategies provide for the assignment of claims, and allocation of recoveries, to the BLMIS estate, enhancing the Trustee’s ability to achieve substantially greater sums from third parties for ultimate distribution to creditors and customers of the BLMIS estate.
The only objection before the Court was raised not by creditors of the BLMIS estate, but by certain plaintiffs (the “Objectors”) in a self-styled derivative action on behalf of Fairfield
Sentry, which has been stayed before this Court since recognition of the Fairfield foreign proceedings on July 22, 2010. See Morning Mist Holdings Ltd. v. Fairfield Greenwich Group, et al., 10-03765 (BRL). In a transparent, backdoor attempt to usurp causes of action belonging to
the Fairfield Estate, the Objectors present hypothetical, self-serving arguments that the Foreign
Representatives and/or Trustee would be less effective than themselves in prosecuting such
claims. They therefore argue that the Settlement is prejudicial to the Fairfield Estate. They
additionally request that enforcement of the Settlement be stayed pending resolution of their
appeal of this Court’s order recognizing the Fairfield proceedings and triggering the stay of their
action.
As the Objectors’ arguments and speculative pecuniary interests relate only to the
Fairfield Estate, they lack standing to be heard with respect to the Motion before this Court. As
the Second Circuit found, “[b]ankruptcy courts are primarily courts of equity, but they are not
empowered to address any equitable claim tangentially related to the bankruptcy proceeding.” In
2 According to the proposed Settlement, with respect to the Trustee’s judgment against Sentry, the Trustee agrees to forbear exercising any right to collect $1.13 billion, leaving a judgment against Sentry not subject to forbearance in the amount of $1.924 billion. The Trustee has an admitted claim in Fairfield Sentry’s estate provable in the Fairfield proceedings for the full amount of the judgment. Mot., Dkt. No. 69, Ex. A (Form of Agreement), ¶ 1.
4
Case 1:11-cv-05905-AT Document 29-12 Filed 02/28/14 Page 6 of 7
re Refco Inc., 505 F.3d at 118. The Objectors do not purport to be customers or creditors of the
BLMIS estate, but rather hold a de minimis stake in Fairfield Sentry. They have not raised their objection before the BVI Court, which will evaluate the Settlement as it relates to the Objectors’ interests. While the Objectors contend that the Settlement damages their derivative action on behalf of Fairfield Sentry, they are “not directly and adversely affected pecuniarily . . . because they do not hold a direct interest in the Debtor, [BLMIS],” and therefore lack standing to object to the Trustee’s Motion. In re Refco Inc., 2006 WL 3409088, at *2, *6 (holding that “interest holders in and, perhaps, creditors of the non-debtor parties to the settlement” lacked standing to object to the settlement under Bankruptcy Rule 9019).
Assuming, arguendo, that the Objectors have standing, they have not established any basis for denying the Settlement or staying its enforcement. The objection on its merits does not challenge the Settlement’s value to the BLMIS estate or, for that matter, any ground relevant to its approval. A hypothetical harm to the Objectors’ right, which itself is legally uncertain, to pursue derivative actions on behalf of Fairfield Sentry, is insufficient to find the Settlement unreasonable as to the BLMIS estate. The Objectors’ request to stay the enforcement of the
Settlement pending resolution of their independent appeal is also unwarranted and inappropriate.
While Bankruptcy Rule 8005 allows a party to seek a stay of the enforcement of a judgment pending appeal of that judgment, the Objectors have made a novel request, without legal support, that “the proposed stay . . . remain in effect pending determination of the appeal of the
Recognition Order – not the appeal (if any) from any order approving the Settlement.” Obj.,
Dkt. No. 76, p. 5. The Objectors have not established a basis under Bankruptcy Rule 8005 for a stay of the Settlement pending an appeal of an independent decision, entered over 10 months ago, in a separate case, involving separate parties. Indeed, the Trustee and the BLMIS estate
5
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would be unfairly prejudiced, and the goals of the Settlement thwarted, if this Court were to indefinitely stay the enforcement of an agreement promising substantial value to the BLMIS estate and customers and victims of the Madoff Ponzi scheme. The merits of the Settlement as to the Fairfield Estate are left to the expertise of the BVI Court.
Accordingly, as approval of the Settlement is in the best interests of the BLMIS estate
and the Objectors have not established otherwise, the Trustee’s Motion is hereby GRANTED,
and the objection is overruled.
The Trustee is directed to submit an order consistent with this record.
IT IS SO ORDERED.
Dated: New York, New York June 7, 2011 /s/ Burton R. Lifland United States Bankruptcy Judge
6
Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 1 of 14
EXHIBIT 13
Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 2 of 14
BROWN RUDNICK LLP Seven Times Square New York, New York 10036 (212) 209-4800 David J. Molton May Orenstein Daniel J. Saval Kerry L. Quinn
Attorneys for the Foreign Representatives
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
In re: ) ) Chapter 15 Case Fairfield Sentry Limited, et al., ) ) Case No. 10-13164 (BRL) Debtors in Foreign Proceedings. ) ) Jointly Administered )
NOTICE OF ENTRY OF ORDERS BY THE COMMERCIAL DIVISION OF THE HIGH COURT OF JUSTICE, BRITISH VIRGIN ISLANDS, APPROVING THE AGREEMENT BY AND AMONG KENNETH KRYS AND JOANNA LAU, SOLELY IN THEIR RESPECTIVE CAPACITIES AS THE FOREIGN REPRESENTATIVES FOR AND JOINT LIQUIDATORS OF FAIRFIELD SENTRY LIMITED, FAIRFIELD SIGMA LIMITED, AND FAIRFIELD LAMBDA LIMITED, AND IRVING PICARD, AS TRUSTEE FOR THE SUBSTANTIVELY CONSOLIDATED LIQUIDATIONS OF BERNARD L. MADOFF INVESTMENT SECURITIES LLC AND BERNARD L. MADOFF
Kenneth Krys and Joanna Lau (together with their predecessors, the “Foreign
Representatives” or “Liquidators”), in their capacities as the duly appointed foreign
representatives for, and joint liquidators of, Fairfield Sentry Limited (in liquidation), Fairfield
Sigma Limited (in liquidation), and Fairfield Lambda Limited (in liquidation) (collectively, the
“Debtors”), debtors in these jointly administered Chapter 15 cases, through their United States
attorneys Brown Rudnick LLP, hereby provide notice of the following: Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 3 of 14
1. On or about May 9, 2011, the Foreign Representatives and the Debtors, on the one hand, and Irving H. Picard, as trustee for the substantively consolidated liquidations (the
“SIPA Proceeding”) of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and Bernard
L. Madoff, on the other hand, entered into an agreement (the “Settlement Agreement”) resolving
their respective claims against one another according to the terms set forth in the Settlement
Agreement.
2. The Settlement Agreement was subject to the approval of the Commercial
Division of the High Court of Justice, British Virgin Islands (the “BVI Court”), on behalf of the
Debtors’ estates, and this Court, on behalf of the BLMIS estate in the SIPA Proceeding.1 On
May 13, 2011, the Foreign Representatives filed applications before the BVI Court, on behalf of each of the Debtors, seeking approval of the Settlement Agreement (the “Applications”).
3. On June 8, 2011, the BVI Court considered the Applications.
4. On June 24, 2011, the BVI Court entered an order approving the Settlement
Agreement for each of the Debtors (the “BVI Approval Orders”). True and accurate copies of
the BVI Approval Orders are attached hereto as Exhibit A.
1 On June 10, 2011, this Court entered an order approving the Settlement Agreement with respect to the BLMIS estate. See Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019(a) of the Federal Rules of Bankruptcy Procedure Approving an Agreement by and Among the Trustee and Kenneth Krys and Joanna Lau, Solely in their Respective Capacities as the Foreign Representatives for and Joint Liquidators of Fairfield Sentry Limited, Fairfield Sigma Limited, and Fairfield Lambda Limited [Adv. Pro. No. 09-01239 (BRL), Dkt. 95].
--2 Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 4 of 14
EXHIBIT A Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 5 of 14 Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 6 of 14 Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 7 of 14 Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 8 of 14 Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 9 of 14 Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 10 of 14 Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 11 of 14 Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 12 of 14 Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 13 of 14 Case 1:11-cv-05905-AT Document 29-13 Filed 02/28/14 Page 14 of 14
Dated: June 27, 2011 New York, New York
BROWN RUDNICK LLP
By: _/s/ David J. Molton____ David J. Molton May Orenstein Daniel J. Saval Kerry L. Quinn
Seven Times Square New York, New York 10036 (212) 209-4800
Attorneys for the Foreign Representatives
--3 Case 1:11-cv-05905-AT Document 29-14 Filed 02/28/14 Page 1 of 4
EXHIBIT 14
12-02047-brlCase 1:11-cv-05905-AT Doc 5 Filed 11/29/12 Document Entered 29-14 11/29/12 Filed 02/28/1420:51:04 Page Main 2Document of 4 Pg 1 of 3 12-02047-brlCase 1:11-cv-05905-AT Doc 5 Filed 11/29/12 Document Entered 29-14 11/29/12 Filed 02/28/1420:51:04 Page Main 3Document of 4 Pg 2 of 3 12-02047-brlCase 1:11-cv-05905-AT Doc 5 Filed 11/29/12 Document Entered 29-14 11/29/12 Filed 02/28/1420:51:04 Page Main 4Document of 4 Pg 3 of 3 Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 1 of 17
EXHIBIT 15
Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 2 of 17
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
SECURITIES INVESTOR PROTECTION CORPORATION, Adv. Pro. No. 08-01789 (BRL) Plaintiff,
V. SIP A LIQUIDATION
BERNARD L. MADOFF INVESTMENT SECURITIES LLC, (Substantively Consolidated)
Defendant.
12 MC 0115 In re: ORDER MADOFF SECURITIES (Relates to consolidated proceedings on Standing and SLUSA issues)
PERTAINS TO CASES LISTED IN EXHIBIT A
JED S. RAKOFF, U.S.D.J.:
WHEREAS:
A. Pending before the Court are various adversary proceedings commenced by Irving
H. Picard, as trustee ("Trustee") in connection with the substantively consolidated liquidation proceedings of Bernard L. Madoff Investment Securities LLC ("BLMIS") and the estate of
Bernard L. Madoff under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa et seq., in which certain defendants (the "Standing and SLUSA Withdrawal Defendants") have sought withdrawal of the reference from the Bankruptcy Court to this Court arguing, among other grounds, that (i) the Trustee lacks standing to assert common law claims and/or (ii) the Trustee's claims are barred by the Securities Litigation Uniform Standards Act ("SLUSA").
1 Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 3 of 17
B. Exhibit A hereto, prepared by the Trustee's counsel, identifies single cases or, in certain instances, the lead case of related adversary proceedings where defendants are represented by common counsel, in which Standing and SLUSA Withdrawal Defendants have filed motions to withdraw the reference (or joinders in such motions, as the case may be, which are deemed included in the scope of this Order unless expressly stated otherwise on Exhibit A) based on, among other grounds, the Trustee's standing to bring common law claims and/or the application ofSLUSA to the Trustee's claims (the "Adversary Proceedings").
C. The Court, over the objections of the Trustee and the Securities Investor
Protection Corporation ("SIPC"), previously withdrew the reference from the Bankruptcy Court to consider issues concerning the Trustee's standing and the application of SLUSA raised by certain defendants. See Picard v. HSBC Bank PLC, 450 B.R. 406 (S.D.N.Y. 2011) (the "Prior
Standing and SLUSA Withdrawal Ruling").
D. On April 17, 2012, a telephonic conference (the "Telephone Conference") was held among counsel for the Trustee, SIPC and counsel for movants in certain adversary proceedings, which was prompted by counsel's submission of proposed briefing schedules in connection with three pending motions to withdraw the reference. The actions and relevant counsel that participated in the Telephone Conference are listed in Exhibit B hereto. During the
Telephone Conference, the Court directed the Trustee to propose a form of order consistent with the Order dated April 13, 2012, No. 12 MC 0115 (S.D.N.Y. Apr. 13, 2012) (ECF No. 4), to provide that all currently pending motions to withdraw the reference in the Adversary
Proceedings based on the Trustee's standing to assert common law claims and/or the application of SLUSA will be granted in part solely to address the Withdrawn Standing and SLUSA Issues
2 Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 4 of 17
(as defined below), for the same reasons for withdrawal of the reference stated in the Prior
Standing and SLUSA Withdrawal Ruling, but otherwise remain sub judice.
E. During the Telephone Conference, the Court directed the Trustee to advise all
Standing and SLUSA Withdrawal Defendants, regardless of when the Court granted a motion to withdraw the reference, that the Court preferred to address the Withdrawn Standing and SLUSA
Issues (as defined below) on the merits at this time in a common proceeding.
F. During the Telephone Conference, the Court directed the Trustee to advise all
Standing and SLUSA Withdrawal Defendants, regardless of when the Court granted a motion to withdraw the reference, that the Court preferred that all Standing and SLUSA Withdrawal
Defendants choose one attorney to act as lead counsel at the oral argument at which the Court shall address the Withdrawn Standing and SLUSA Issues (as defined below), and the Trustee's counsel has represented that it so notified the Standing and SLUSA Withdrawal Defendants via email to the parties at the email addresses listed on Exhibit A hereto.
G. On April 18, 2012, a second telephonic conference (the "Second Telephone
Conference") was convened at the request of certain counsel that were party to the original
Telephone Conference to seek clarification of the Court's directives during the Telephone
Conference. The actions and relevant counsel that participated in the Second Telephone
Conference are listed in Exhibit C hereto. During the Second Telephone Conference, the Court clarified its prior directives and made the following ruling providing, inter alia, that the Court was withdrawing the reference, in part, solely as set forth herein, in order to address, among other issues, the merits of the Withdrawn Standing and SLUSA Issues (as defined below).On
April 19, 2012, the Court issued an order directing common briefing on the following issues raised in pending motions to withdraw the reference: (1) whether 11 U.S.C. § 546(e) limits the
3 Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 5 of 17
Trustee's ability to avoid transfers made by Madoff Securities; (2) whether provisions of the
Internal Revenue Code that tax undistributed portions of IRAs prevent the Trustee from avoiding
IRA distributions that would otherwise be taxed; (3) whether the Trustee may, consistent with
non-bankruptcy law, avoid transfers that Madoff Securities purportedly made in order to satisfy
antecedent debts; (4) whether the Trustee has standing to pursue common law claims and, if so,
whether the Securities Litigation Uniform Standards Act preempts the Trustee's common law
claims. (See Order, In re: Madof!Securities, No. 12-MC-00115 (JSR) (S.D.N.Y. April19, 2012)
(ECF No. 22).
H. The Withdrawn Standing and SLUSA Issues (as defined below) may be affected
by decisions in the following appeals currently pending before the Second Circuit Court of
Appeals: Picard v. JPMorgan Chase & Co., et al. (2d Cir. 11-5044), Picard v. UBS Fund
Services (Luxembourg) et al. (2d Cir. 11-5051), Picard v. UniCredit S.p.A., et al. (2d Cir. 11-
517 5), Picard v. HSBC Bank plc, et al. (2d Cir. 11-5207), Trezziova v. Kahn, et al. (In re Herald)
(2d Cir. 12-156), and Criterium Capital Funds B. V. v. Tremont (Bermuda) Limited, et al. (In re
Kingate) (2d Cir. 11-1397). The Standing and SLUSA Withdrawal Defendants believe that judicial economy favors awaiting possible appellate guidance in those cases with regard to the
Withdrawn Standing and SLUSA Issues (as defined below).
BASED ON THE FOREGOING, IT IS HEREBY ORDERED AS FOLLOWS:
1. The reference of the Adversary Proceedings is withdrawn from the Bankruptcy
Court, in part and solely with respect to the Standing and SLUSA Withdrawal Defendants, to
this Court for the limited purpose of deciding the following issues (the "Withdrawn Standing
and SLUSA Issues"):
(a) whether the Trustee has standing to bring common law claims; and
4 Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 6 of 17
(b) whether SLUSA preempts the Trustee's common law claims.
Except as otherwise provided herein or in orders of this Court, the reference to the Bankruptcy
Court is otherwise maintained for all other purposes.
2. The Trustee and SIPC are deemed to have raised, in response to all pending
motions for withdrawal of the reference based on the Withdrawn Standing and SLUSA Issues,
all arguments previously raised by either or both of them in opposition to all such motions
granted by the Prior Standing and SLUSA Withdrawal Ruling, and such objections or
arguments are deemed to be overruled, solely with respect to the Withdrawn Standing and
SLUSA Issues, for the reasons stated in the Prior Standing and SLUSA Withdrawal Ruling.
3. All objections that could be raised by the Trustee and/or SIPC to the pending
motions to withdraw the reference in the Adversary Proceedings, and the defenses and
responses thereto that may be raised by the affected defendants, are deemed preserved on all
matters.
4. The Standing and SLUSA Withdrawal Defendants shall file one consolidated opening brief, not to exceed forty (40) pages, addressing the Withdrawn Standing and SLUSA
Issues on or before August 3, 2012. Separately, on or before August 3, 2012, certain Standing and SLUSA Withdrawal Defendants as to whom the Trustee asserts the applicability of the
"insider exception" to the in pari delicto I Wagoner doctrine may submit a brief, not to exceed seven (7) pages, on that part of the standing issue.
5. The Trustee and SIPC shall each file an opposition brief, not to exceed forty (40) pages each, addressing the Withdrawn Standing and SLUSA Issues on or before September 14,
2012. Separately, on or before September 14, 2012, the Trustee may submit a separate brief, not
5 Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 7 of 17
to exceed seven (7) pages, regarding the effect of the "insider exception" on the in pari delicto I
Wagoner doctrine.
6. The Standing and SLUSA Withdrawal Defendants shall file one consolidated reply brief, not to exceed twenty (20) pages, on or before October 5, 2012. Separately, on or before October 5, 2012, certain Standing and SLUSA Withdrawal Defendants as to whom the
Trustee asserts the applicability of the "insider exception" to the in pari delicto I Wagoner doctrine may submit a separate reply brief, not to exceed five (5) pages, on that part of the standing issue.
7. The Court will hold oral argument concerning the Withdrawn Standing and
SLUSA Issues on October 15, 2012, at 4:00 p.m. (the "Hearing Date").
8. On or before October 5, 2012, the Standing and SLUSA Withdrawal Defendants shall designate one lead counsel to advocate their position at oral argument on the Hearing Date.
Separately, on or before October 5, 2012, the certain Standing and SLUSA Withdrawal
Defendants as to whom the Trustee asserts the applicability of the "insider exception" to the in pari delicto I Wagoner doctrine shall designate one counsel to advocate their position on that part of the standing issue at oral argument on the Hearing Date.
9. The caption displayed on this Order shall be used as the caption for all pleadings, notices and briefs to be filed pursuant to this Order.
10. All communications and documents (including drafts) exchanged between and among any of the defendants in the Adversary Proceedings listed on Exhibit A, and/or their respective attorneys, shall be deemed to be privileged communications and/or work product, as the case may be, subject to a joint interest privilege.
6 Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 8 of 17
11. This Order is without prejudice to any and all grounds for withdrawal of the reference (other than the Withdrawn Standing and SLUSA Issues) raised in the Adversary
Proceedings by the Standing and SLUSA Withdrawal Defendants, all of which are preserved.
12. Nothing in this Order shall: (a) waive or resolve any issue raised by any party other than the withdrawal of the reference solely with respect to the Standing and SLUSA Issues;
(b) limit, restrict or impair any defense or argument that has been raised or could be raised by any Standing and SLUSA Withdrawal Defendant in a motion to dismiss under Fed. R. Civ. P. 12 or Fed. R. Bankr. P. 7012, or any other defense or right of any nature available to any Standing and SLUSA Withdrawal Defendant (including, without limitation, all defenses based on lack of personal jurisdiction or insufficient service of process), or any argument or defense that could be raised by the Trustee or SIPC in response thereto; and (c) be deemed or construed as the submission of a motion to dismiss under Fed. R. Civ. P. 12 or Fed. R. Bankr. P. 7012.
13. Nothing in this Order shall constitute an agreement or consent by any Standing and SLUSA Withdrawal Defendant to pay the fees and expenses of any attorney other than such defendant's own retained attorney. This paragraph shall not affect or compromise any rights of the Trustee or SIPC.
14. This Order is without prejudice to and preserves all objections of the Trustee and
SIPC to timely-filed motions for withdrawal of the reference currently pending before this Court
(other than the withdrawal of the reference solely with respect to the Withdrawn Standing and
SLUSA Issues) with respect to the Adversary Proceedings, and the defenses and responses thereto that may be raised by the affected defendants, are deemed preserved on all matters.
15. The procedures established by this Order shall constitute the sole and exclusive procedures for determination of the Withdrawn Standing and SLUSA Issues in the Adversary
7 Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 9 of 17
Proceedings, and this Court shall be the forum for such determination. To the extent that briefing or argument schedules were previously established with respect to the Withdrawn
Standing and SLUSA Issues in any of the Adversary Proceedings, this Order supersedes all such schedules solely with respect to the Withdrawn Standing and SLUSA Issues. To the extent that briefing or argument schedules are prospectively established with respect to motions to withdraw the reference or motions to dismiss in any of the Adversary Proceedings, the Withdrawn
Standing and SLUSA Issues shall be excluded from such briefing or argument. Except as stated in this paragraph, this Order shall not be deemed or construed to modify, withdraw or reverse any prior Order of the Court that granted withdrawal of the reference in any Adversary
Proceeding for any reason.
SO ORDERED.
Dated: New York, New York May 15_, 2012 ｾ ｄ Ｎ ｊ Ｎ
8 Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 10 of 17
EXHIBIT A
1. Picard v. Trotanoy Inv. Company 11-cv-07112-JSR Katten Muchin Rosenman LLP (for Access Ltd., et al. International Advisors Ltd.) I Robert W. Gottlieb I ([email protected]) Brian L. Muldrew (brian.muldrew@kattenlaw .com) 2. Picard v. Federico Ceretti, et al. 11-cv-07134-JSR Paul Hastings LLP (as filed by Federico Ceretti, Carlo Jodi Kleinick Grosso, FIM Limited and FIM [email protected]) Advisers LLP) Barry Sher ([email protected]) Mor Wetzler ([email protected]) 3. Picard v. Federico Ceretti, et al. 11-cv-07256-JSR Cleary Gottlieb Steen & Hamilton LLP (as filed by Citi Hedge Fund Carmine D. Boccuzzi, Jr. Services, Ltd.) ( [email protected]) David Y. Livshiz ( [email protected]) 4. Picard v. Oreades Sicav, et al. (as 11-cv-07763-JSR Cleary Gottlieb Steen & Hamilton LLP filed by BNP Paribas Investment Lawrence B. Friedman Partners Luxembourg S.A., BGL ([email protected]) BNP Paribas S.A. and BNP Paribas Breon S. Peace Securities Services S.A.) ([email protected]) 5. Picard v. Equity Trading Portfolio 11-cv-0781 0-JSR Cleary Gottlieb Steen & Hamilton LLP Ltd., et aL (as filed by BNP Paribas Lawrence B. Friedman Arbitrage SNC) ([email protected]) Breon S. Peace I I ([email protected]) I 6. Picard v. Square One Fund Ltd., et 12-cv-02490-JSR Tannenbaum Helpern Syracuse & Hirschtritt LLP; • al. Brune & Richard LLP. Tannenbaum Helpern Syracuse & Hirschtritt LLP Tammy P. Bieber ([email protected]) Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 11 of 17
Brune & Richard LLP David Elbaum ( [email protected])
Bernfeld, DeMatteo & Bernfeld, LLP David Bernfeld ( [email protected]) 7. Picard v. Fairfield Sentry Limited, 12-cv-02619 Simpson Thacher & Bartlett LLP eta/. (as filed by Chester Global Mark G. Cunha Strategy Fund Limited, Chester ([email protected]) Global Strategy Fund, LP, Irongate Peter E. Kazanoff Global Strategy Fund Limited, ([email protected]) Fairfield Greenwich Fund (Luxembourg), Wollmuth Maher & Deutsch LLP Fairfield Investment Fund Limited, Frederick R. Kessler Fairfield Investors (Euro) Ltd., and ([email protected]) Stable Fund LP) Paul R. DeFilippo ([email protected]) Michael P. Burke ([email protected])
Debevoise & Plimpton LLP Mark P. Goodman
([email protected]) ' '
O'Shea Partners LLP Sean F. O'Shea ([email protected]) Michael E. Petrella ([email protected])
White & Case LLP Glenn M. Kurtz ([email protected]) Andrew W. Hammond ( ahammon
Covington & Burling LLP Bruce A. Baird ([email protected])
Kasowitz, Benson, Torres & Friedman LLP Daniel J. Fetterman ( [email protected])
Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C. Edward M. Spiro ( espiro@maglaw .com)
Dechert LLP Andrew J. Levander ( [email protected]) David S. Hoffner ( [email protected]) 8. Picard v. Fairfield Sentry Limited, 12-cv-02638 Simpson Thacher & Bartlett LLP et at. (Joint Memorandum filed by Mark G. Cunha various defendants) ([email protected]) Peter E. Kazanoff ([email protected])
W ollmuth Maher & Deutsch LLP Frederick R. Kessler ( fkessler@wmd-law .com) Paul R. DeFilippo ([email protected]) Michael P. Burke ([email protected])
Debevoise & Plimpton LLP Mark P. Goodman ([email protected]) Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 13 of 17
O'Shea Partners LLP Sean F. O'Shea ( [email protected]) Michael E. Petrella ([email protected])
White & Case LLP Glenn M. Kurtz ([email protected]) Andrew W. Hammond ( [email protected])
Covington & Burling LLP Bruce A. Baird ([email protected])
Kasowitz, Benson, Torres & Friedman LLP Daniel J. Fetterman ( [email protected])
Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C. Edward M. Spiro ( [email protected])
Dechert LLP Andrew J. Levander (andrew [email protected]) David S. Hoffner ( [email protected]) 9. Picard v. Kohn (as filed by Redcrest 12-cv-02661 Kirkland & Ellis LLP Investments, Inc., Line Group Ltd., Jay P. Lefkowitz, P.C. Line Management Services Ltd., and [email protected]) Line Holdings Ltd.) Joseph Serino, Jr. [email protected]) Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 14 of 17
David S. Flugman ( [email protected])
10. Picard v. Peter B. Madoff, et al. 12-cv-02752 Cohen & Gresser LLP (as filed by Deborah Madoft) Mark S. Cohen ([email protected]) Daniel H. Tabak ( dtabak@cohengresser .com)
11. Picard v. Peter B. Madoff, et al. 12-cv-02883 Cooley LLP (as filed by Stephanie Mack) Alan Levine ( [email protected]) Lawrence C. Gottlieb ([email protected]) Laura Grossfield Birger ([email protected]) Michael A. Klein ([email protected])
12. Picard v. Defender Limited, et a/ 12-cv-02800 Klestadt & Winters LLP (Defender Limited, Reliance Tracy L. Klestadt Management (BVI) Limited, ( [email protected]) Reliance Management (Gibraltar) Brendan M. Scott Limited and Tim Brockmann- ([email protected]) Moving Parties) 13. Picard v. UBS A G, et al. (Reliance 12-cv-02802 Klestadt & Winters LLP Management (BVI) Limited and Tracy L. Klestadt Reliance Management (Gibraltar) ([email protected]) Limited- Moving Parties) Brendan M. Scott (bscott@_klestadt.com) 14. Picard v. Defender Limited, et al 12-cv-02871- Seward & Kissel LLP (Reliance International Research Mark J. Hyland LLC and Justin Lowe -Moving ([email protected]) Parties) Mandy DeRoche ( [email protected]) 15. Picard v. Leon Flax, et al. 12-cv-02928 Katten Muchin Rosenman LLP Anthony L. Paccione Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 15 of 17
anthony. [email protected] Brian L. Muldrew brian.muldrew(a}kattenlaw .com 16. Picard v. UBS AG, et al. (M&B 12-cv-02483 Cravath, Swaine & Moore LLP Capital Advisers Sociedad de David Greenwald Valores, S.A., M&B Capital ( [email protected]) Advisers Gestion SGIIC, S.A. - Richard Levin Moving Parties) [Amended Motion ([email protected]) to Withdraw] Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 16 of 17
EXHIBITB
Participants To April17, 2012 Telephonic Conference
Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madofflnvestment Securities LLC and Bernard L. Madoff
BAKER HOSTETLER, LLP Oren J. W arshavsky ( [email protected]) Nicholas Cremona ([email protected])
SECURITIES INVESTOR PROTECTION CORPORATION Kevin Bell ([email protected]) Lauren Attard ([email protected])
Picard v. Lake Drive LLC, et al, 11-cv-093 71-JSR; Picard v. Bear Lake Partners, et al, 11-cv-093 72-JSR
KATTEN MUCHIN ROSENMAN LLP Anthony L. Paccione (anthony. [email protected])
Picard v. Mosaic Fund L.P. , et al, 11-cv-09444-JSR
MACHT, SHAPIRO, AARATO & ISSERLES LLP Eric S. Olney ( [email protected]) Case 1:11-cv-05905-AT Document 29-15 Filed 02/28/14 Page 17 of 17
EXHIBIT C
Participants To April18, 2012 Telephonic Conference
Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation o(Bernard L. Madofjlnvestment Securities LLC and Bernard L. Madoff
BAKER HOSTETLER, LLP Oren J. Warshavsky ( [email protected]) Nicholas Cremona ( ncremona@bakerlaw .com)
SECURITIES INVESTOR PROTECTION CORPORATION Kevin Bell ([email protected]) Lauren Attard (lattard@si pc. or g)
Picard v. Lake Drive LLC, et al, 11-cv-093 71-JSR; Picard v. Bear Lake Partners, et al, 11-cv-093 72-JSR
KATTEN MUCHIN ROSENMAN LLP Anthony L. Paccione (anthony. paccione@kattenlaw .com)
Picard v. Mosaic Fund L.P. , et al, 11-cv-09444-JSR
MACHT, SHAPIRO, AARA TO & ISSERLES LLP Eric S. Olney ( [email protected])
Picard v. Goldstein, et al, 11-cv-08491-JSR
KRAMER LEVIN NAFTALIS & FRANKEL LLP Elise Scherr Frejka ( [email protected])
Picard v. Elins Family Trust, et al., 11-cv-04 772-JSR
KLEINBERG, KAPLAN, WOLFF & COHEN P.C. Matthew J. Gold ([email protected]) David Parker ( [email protected])
300242822 Case 1:11-cv-05905-AT Document 29-16 Filed 02/28/14 Page 1 of 11
EXHIBIT 16
Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-16 270 Filed 02/28/1408/03/12 Page 21 of 1110
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
------x SECURITIES INVESTOR PROTECTION CORPORATION,
Plaintiff, 12-mc-00115 (JSR)
v.
BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Defendant.
------x
In re:
MADOFF SECURITIES (Relates to consolidated proceedings on Standing and SLUSA issues) ------x
NOTICE OF MOTION TO DISMISS
PLEASE TAKE NOTICE that, pursuant to the Court’s May 15, 2012 Order, and upon the accompanying memorandum of law, the Declaration of Andrew D. W. Cattell and the exhibits appended thereto, and all prior pleadings and proceedings herein, the defendants listed on Exhibit A hereto will move before the Honorable Jed S. Rakoff, United States District Judge, at the United States Courthouse, 500 Pearl Street, New York, New York 10007, on October 15,
2012 at 4:00 p.m. for an order dismissing the common law claims asserted against them pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6).
PLEASE TAKE FURTHER NOTICE that, also pursuant to the Court’s May 15,
2012 Order, answering papers, if any, must be filed on or before September 14, 2012 and served upon the counsel listed below. Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-16 270 Filed 02/28/1408/03/12 Page 32 of 1110
PLEASE TAKE FURTHER NOTICE that, also pursuant to the Court’s May 15,
2012 Order, notwithstanding Federal Rule of Civil Procedure 12(g)(2) or Federal Rule of
Bankruptcy Procedure 7012, this motion is without prejudice to any other defense or right of any nature available to movants (including, without limitation, all defenses based on lack of personal jurisdiction or insufficient service of process) and shall not be deemed or construed to prevent movants from moving under Federal Rule of Civil Procedure 12 or Federal Rule of Bankruptcy
Procedure 7012 subsequent to this motion.
Dated: August 3, 2012 New York, New York
SIMPSON THACHER & BARTLETT LLP
By: /s/ Mark G. Cunha
Mark G. Cunha [email protected] Peter E. Kazanoff [email protected] Andrew D. W. Cattell [email protected] 425 Lexington Avenue New York, New York 10017 Tel: (212) 455-2000 Fax: (212) 455-2502
Attorneys for Fairfield Greenwich Limited, Fairfield Greenwich (Bermuda) Limited, Fairfield Greenwich Advisors LLC, Fairfield Heathcliff Capital LLC, Fairfield International Managers, Inc., Fairfield Greenwich (UK) Limited, Chester Management Cayman Limited, Mark McKeefry, Daniel Lipton, Gordon McKenzie, Richard Landsberger, Philip Toub, Charles Murphy, Andrew Smith, Harold Greisman, Lourdes Barreneche, Santiago Reyes, Jacqueline Harary, and Corina Noel Piedrahita
2 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-16 270 Filed 02/28/1408/03/12 Page 43 of 1110
BERNFELD, DEMATTEO & BERNFELD, LLP BRUNE & RICHARD LLP
By: /s/ David Bernfeld By: /s/ David Elbaum
David Bernfeld David Elbaum [email protected] [email protected] 600 Third Avenue, 15th Floor One Battery Park Plaza New York, NY 10016 New York, NY 10004 (212) 661-1661 (212) 668-1900
Attorneys for Defendant Circle Partners Attorneys for Defendant Kathryn R. Siggins
CHAFFETZ LINDSEY LLP CLEARY GOTTLIEB STEEN & HAMILTON LLP
By: /s/ Peter R. Chaffetz By: /s/ Lawrence B. Friedman Peter R. Chaffetz [email protected] Lawrence B. Friedman Jennifer Gorskie [email protected] [email protected] Carmine D. Boccuzzi, Jr. 505 Fifth Avenue, 4th Floor [email protected] New York, NY 10017 Breon S. Peace (212) 257-6960 [email protected] David Y. Livshiz Attorneys for Kingate Management Limited [email protected] One Liberty Plaza New York, New York 10006 (212) 225-2000
Attorneys for Defendants Citi Hedge Fund Services Ltd.; BNP Paribas Investment Partners Luxembourg S.A., BGL BNP Paribas S.A., BNP Paribas Securities Services S.A., and BNP Paribas Arbitrage SNC
3 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-16 270 Filed 02/28/1408/03/12 Page 54 of 1110
COHEN & GRESSER LLP COOLEY LLP
By: /s/ Mark S. Cohen By: /s/ Alan Levine
Mark S. Cohen Alan Levine [email protected] [email protected] Daniel H. Tabak Laura Grossfield Birger [email protected] [email protected] 800 Third Avenue Nicholas Flath New York, NY 10022 [email protected] (212) 957-7600 The Grace Building 1114 Avenue of the Americas Attorneys for Defendant Deborah Madoff New York, NY 10036 (212) 479-6000
Attorneys for Defendant Stephanie Mack
COVINGTON & BURLING LLP CRAVATH, SWAINE & MOORE LLP
By: /s/ Bruce A. Baird By: /s/ David Greenwald
Bruce A. Baird David Greenwald [email protected] [email protected] 1201 Pennsylvania Avenue, NW Richard Levin Washington, DC 20004 [email protected] (212) 662-6000 Worldwide Plaza 825 Eighth Avenue Attorneys for Defendant Gregory Bowes New York, NY 10019 (212) 474-1000
Attorneys for M&B Capital Advisers Sociedad de Valores, S.A. and M&B Capital Advisers Gestion SGIIC, S.A.
4 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-16 270 Filed 02/28/1408/03/12 Page 65 of 1110
DECHERT LLP DEBEVOISE & PLIMPTON LLP
By: /s/ Andrew J. Levander By: /s/ Mark P. Goodman
Andrew J. Levander Mark P. Goodman [email protected] [email protected] David S. Hoffner 919 Third Avenue [email protected] New York, NY 10022 1095 Avenue of the Americas (212) 909-6000 New York, NY 10036 (212) 698-3500 Attorneys for Defendant Amit Vijayvergiya
Attorneys for Defendant Andres Piedrahita
KASOWITZ BENSON TORRES & FRIEDMAN KATTEN MUCHIN ROSENMAN LLP LLP
By: /s/ Anthony L. Paccione By /s/ Daniel J. Fetterman Anthony L. Paccione Daniel J. Fetterman [email protected] [email protected] Brian L. Muldrew 1633 Broadway [email protected] New York, NY 10019 575 Madison Avenue (212) 506-1700 New York, NY 10022 (212) 940-8800 Attorneys for Defendant Jeffrey Tucker Attorneys for Defendant Leon Flax
5 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-16 270 Filed 02/28/1408/03/12 Page 76 of 1110
KIRKLAND & ELLIS LLP KLESTADT & WINTERS LLP
By: /s/ Jay P. Lefkowitz, P.C. By: /s/ Tracy L. Klestadt
Jay P. Lefkowitz, P.C. Tracy L. Klestadt [email protected] [email protected] Joseph Serino, Jr. Brendan M. Scott [email protected] [email protected] David S. Flugman 570 Seventh Avenue, 17th Floor [email protected] New York, NY 10018 601 Lexington Avenue (212) 972-3000 New York, NY 10022 (212) 446-4800 Attorneys for Defendants Defender Limited, Reliance Management (BVI) Limited, Reliance Attorneys for Defendants Redcrest Investments, Management (Gibraltar) Limited, and Tim Inc., Line Group Ltd., Line Management Services Brockman Ltd., and Line Holdings Ltd.
MORVILLO, ABRAMOWITZ, GRAND, O’SHEA PARTNERS LLP IASON, ANELLO & BOHRER, P.C.
By: /s/ Sean F. O’Shea By: /s/ Edward M. Spiro Sean F. O’Shea Edward M. Spiro [email protected] [email protected] Michael E. Petrella 565 Fifth Avenue [email protected] New York, NY 10017 521 Fifth Avenue, 25th Floor (212) 856-9600 New York, NY 10175 (212) 682-4426
Attorneys for Defendant Robert Blum Attorneys for Defendant Cornelis Boele
6 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-16 270 Filed 02/28/1408/03/12 Page 87 of 1110
PAUL HASTINGS LLP SEWARD & KISSEL LLP
By: /s/ Jodi Kleinick By: /s/ Mark J. Hyland
Jodi Kleinick Mark J. Hyland [email protected] [email protected] Barry Sher Mandy DeRoche [email protected] [email protected] Mor Wetzler One Battery Park Plaza [email protected] New York, NY 10004 75 East 55th Street (212) 574-1200 New York, NY 10022 (212) 318-6600 Attorneys for Defendants Reliance International Research LLC and Justin Lowe Attorneys for Defendants FIM Limited, FIM Advisers LLP, Carlo Grosso and Federico Ceretti
TANNENBAUM HELPERN SYRACUSE & WHITE & CASE LLP HIRSCHTRITT LLP
By: /s/ Glenn Kurtz By: /s/ Tammy P. Bieber Glenn Kurtz Tammy P. Bieber [email protected] [email protected] Andrew Hammond 900 Third Avenue [email protected] New York, NY 10022 1155 Avenue of the Americas (212) 508-6700 New York, NY 10036 (212) 819-8200 Attorneys for Defendants Square One Fund Ltd., Luc D. Estenne, Square Asset Management Ltd., Attorneys for Defendant Walter Noel and Partners Advisers S.A.
7 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-16 270 Filed 02/28/1408/03/12 Page 98 of 1110
WOLLMUTH MAHER & DEUTSCH LLP
By: /s/ Frederick R. Kessler
Frederick R. Kessler [email protected] Paul R. DeFilippo [email protected] Michael P. Burke mburke@wmd_law.com 500 Fifth Avenue New York, NY 10110 (212) 382-3300
Attorneys for Chester Global Strategy Fund Limited, Chester Global Strategy Fund, LP, Irongate Global Strategy Fund Limited, Fairfield Greenwich Fund (Luxembourg), Fairfield Investment Fund Limited, Fairfield Investors (Euro) Ltd., and Stable Fund LP.
8 CaseCase 1:11-cv-05905-AT1:12-mc-00115-JSR Document Document 29-16 270 Filed Filed 02/28/14 08/03/12 Page Page 10 9 ofof 1011
EXHIBIT A
Case Name Withdrawal Motion Adversary Moving Defendants Docket Number Proceeding Docket Number Picard v. Federico Ceretti, et 11-cv-07134 09-1161 Federico Ceretti, Carlo al. Grosso, FIM Limited, FIM Advisers LLP, and Kingate Management Limited Picard v. Federico Ceretti, et 11-cv-07256 09-1161 Citi Hedge Fund al. Services, Ltd. Picard v. Oreades Sicav, et al. 11-cv-07763 10-5120 BNP Paribas Investment Partners Luxembourg S.A., BGL BNP Paribas S.A. and BNP Paribas Securities Services S.A. Picard v. Equity Trading 11-cv-07810 10-4457 BNP Paribas Arbitrage, SNC Portfolio Ltd., et al. Picard v. Square One Fund 12-cv-02490 10-4330 Partners Advisers S.A., Luc Ltd., et al. D. Estenne, Square Asset Management Ltd., Kathryn R. Siggins, and Square One Fund Ltd. Picard v. Fairfield Sentry 12-cv-02619 09-1239 Chester Global Strategy Fund Limited, et al. Limited, Chester Global Strategy Fund, LP, Irongate Global Strategy Fund Limited, Fairfield Greenwich Fund (Luxembourg), Fairfield Investment Fund Limited, Fairfield Investors (Euro) Ltd., and Stable Fund LP Picard v. Fairfield Sentry 12-cv-02638 09-1239 Fairfield Greenwich Limited, Limited, et al. Fairfield Greenwich (Bermuda) Limited, Fairfield Greenwich Advisors LLC, Fairfield Heathcliff Capital LLC, Fairfield International Managers, Inc., Fairfield Greenwich (UK) Limited, Chester Management Cayman Limited, Mark McKeefry, Daniel Lipton, Gordon McKenzie, Richard Landsberger, Philip Toub, Charles Murphy, Andrew Smith, Harold Greisman, Lourdes Barreneche, Santiago Reyes, Jacqueline Harary, and Corina Noel Piedrahita Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-16 270 Filed 02/28/1408/03/12 Page 1110 of 1110
Picard v. Kohn, et al. 12-cv-02661 10-5411 Redcrest Investments, Inc., Line Group Ltd., Line Management Services Ltd., and Line Holdings Ltd. Picard v. Peter B. Madoff, et 12-cv-02752 09-1503 Deborah Madoff al. Picard v. Peter B. Madoff, et 12-cv-02883 09-1503 Stephanie Mack al. Picard v. Defender Limited, et 12-cv-02800 10-5229 Defender Limited, Reliance al . Management (BVI) Limited, Reliance Management (Gibraltar) Limited, and Tim Brockmann Picard v. UBS AG, et al. 12-cv-02802 10-5311 Reliance Management (BVI) Limited and Reliance Management (Gibraltar) Limited Picard v. Defender Limited, et 12-cv-02871 10-5229 Reliance International al Research LLC and Justin Lowe Picard v. Leon Flax, et al. 12-cv-02928 10-5267 Leon Flax Picard v. UBS AG, et al. 12-cv-02483 10-5311 M&B Capital Advisers Sociedad De Valores, S.A. and M&B Capital Advisers Gestion SGIIC, S.A.
A - 2 Case 1:11-cv-05905-AT Document 29-17 Filed 02/28/14 Page 1 of 40
EXHIBIT 17
Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 21 of 4039
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
------x SECURITIES INVESTOR PROTECTION CORPORATION,
Plaintiff, 12-mc-00115 (JSR)
v.
BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Defendant.
------x
In re:
MADOFF SECURITIES (Relates to consolidated proceedings on Standing and SLUSA issues) ------x
CONSOLIDATED BRIEF ON BEHALF OF THE STANDING AND SLUSA WITHDRAWAL DEFENDANTS REGARDING ISSUES RAISED BY ORDER OF THE COURT ENTERED ON MAY 15, 2012 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 32 of 4039
TABLE OF CONTENTS
PRELIMINARY STATEMENT...... 1 BACKGROUND...... 2 Argument...... 3 I. The Trustee Lacks Standing to Bring Common Law Claims...... 3 A. The Trustee Lacks Standing Under Wagoner ...... 4 B. SIPA Does Not Provide the Trustee Standing to Bring His Claims on Behalf of BLMIS Customers...... 5 C. Collateral Estoppel and the “Law of the Case” Both Require Dismissal of the Trustee’s Common Law Claims...... 12 II. SLUSA Bars the Common Law Claims Asserted by the Trustee on Behalf of Thousands of BLMIS Customers ...... 14 A. The Common Law Actions Meet the Criteria for SLUSA Preclusion...... 15 B. The Trustee’s Pleadings Confirm SLUSA’s Applicability...... 26 Conclusion...... 27
i Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 43 of 4039
TABLE OF AUTHORITIES
Cases
Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y. 2010)...... 15, 26 Artra Grp., Inc. v. Salomon Bros. Holding Co., No. 93 B 319, 1996 WL 637595 (N.D. Ill. Oct. 31, 1996) ...... 13 Atkinson v. Morgan Asset Mgmt., Inc., 658 F.3d 549 (6th Cir. 2011)...... 14 Barron v. Igolnikov, No. 09 Civ. 4471, 2010 WL 882890 (S.D.N.Y. Mar. 10, 2010)...... 14, 23, 24, 26 Bogart v. Israel Aerospace Indus. Ltd., No. 09 Civ. 4783, 2010 WL 517582 (S.D.N.Y. Feb. 5, 2010) ...... 3 Bourdeau Bros. Inc. v. Montagne (In re Montagne), No. 08-10916, 2010 WL 271347 (Bankr. D. Vt. Jan. 22, 2010)...... 13 Brown v. Kelly, 609 F.3d 467 (2d Cir. 2010)...... 8 Cape Ann Investors LLC v. Lepone, 296 F. Supp. 2d 4 (D. Mass. 2003) ...... 15, 19, 22 Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416 (1972) ...... 4 Cary Oil Co. v. MG Ref. & Mktg., Inc., 230 F. Supp. 2d 439 (S.D.N.Y. 2002)...... 22 Cohen v. Bucci, 905 F.2d 1111 (7th Cir. 1990)...... 13 Demings v. Nationwide Life Ins. Co., 593 F.3d 486 (6th Cir. 2010)...... 19 Gelb v. Royal Globe Ins. Co., 798 F.2d 38 (2d Cir. 1986)...... 12 Giddens v. D.H. Blair & Co. (In re A.R. Baron & Co.), 280 B.R. 794 (Bankr. S.D.N.Y. 2002) ...... 12 Gutierrez v. Fox, 141 F.3d 425 (2d Cir. 1998)...... 7 Hirsch v. Arthur Anderson & Co., 72 F.3d 1085 (2d Cir. 1995)...... 4 In re Beacon Assocs. Litig., 745 F. Supp. 2d 386 (S.D.N.Y. 2010)...... 14, 23, 26
ii Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 54 of 4039
In re CBI Holding Co., 529 F.3d 432 (2d Cir. 2008)...... 11 In re Herald, Primeo, & Thema Sec. Litig., No. 09 Civ. 289, 2011 WL 5928952 (S.D.N.Y. Nov. 29, 2011)...... 14, 23, 24 In re J.P. Jeanneret Assocs., Inc., 769 F. Supp. 2d 340 (S.D.N.Y. 2011)...... 14, 23, 26 In re Kingate Mgmt. Ltd. Litig., No. 09 Civ. 5386, 2011 WL 1362106 (S.D.N.Y. Mar. 30, 2011)...... 14, 24, 25, 26 In re Merkin, 817 F. Supp. 2d 346 (S.D.N.Y. 2011)...... 15 In re Pilgrim’s Pride Corp., 442 B.R. 522 (Bankr. N.D. Tex. 2010) ...... 13 Instituto de Prevision Militar v. Merrill Lynch, 546 F.3d 1340 (11th Cir. 2008)...... 24 Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101 (2d Cir. 2001)...... 26 LaSala v. Bordier et Cie, 519 F.3d 121 (3d Cir. 2008)...... passim Lee v. Marsh & McLennan Cos., No. 06 Civ. 6523, 2007 WL 704033 (S.D.N.Y. Mar. 7, 2007)...... 18 Luzinski v. Peabody & Arnold LLP (In re Gosman), 382 B.R. 826 (S.D. Fla. 2007)...... 13 Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006) ...... 14, 19, 24 Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531 (S.D.N.Y. 1990)...... 7, 9, 12 Newdow v. Rio Linda Union Sch. Dist., 597 F.3d 1007 (9th Cir. 2010)...... 7 Newman v. Family Mgmt. Corp., 748 F. Supp. 2d 299 (S.D.N.Y. 2010)...... 14, 26 O’Connor v. Donaldson, 422 U.S. 563 (1975) ...... 8 Picard v. Fox, No. 10 Civ. 4652, 2012 WL 990829 (S.D.N.Y. Mar. 26, 2012)...... 15 Picard v. Franitza, No. 11 Civ. 4505, 2012 WL 2524513 (S.D.N.Y. June 26, 2012) ...... 16 Picard v. HSBC Bank PLC, 450 B.R. 406 (S.D.N.Y. 2011) ...... 16
iii Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 65 of 4039
Picard v. HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011) ...... passim Picard v. JPMorgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011) ...... passim Picard v. Katz, No. 11 Civ. 3605, 2012 WL 691551 (S.D.N.Y. Mar. 5, 2012)...... 26 Picard v. Kohn, No. 11 Civ. 1181, 2012 WL 566298 (S.D.N.Y. Feb. 22, 2012) ...... 3 Picard v. Taylor (In re Park S. Sec., LLC), 326 B.R. 505 (Bankr. S.D.N.Y. 2005) ...... 12 Pivar v. Graduate Sch. of Figurative Art of the N.Y. Acad. of Art, 290 A.D. 2d 212 (1st Dep’t 2002.)...... 8 Proctor v. Vishay Intertech, Inc., 584 F.3d 1208 (9th Cir. 2009)...... 24 Redington v. Touche Ross & Co., 592 F.2d 617 (2d Cir. 1978)...... 6 RGH Liquidating Trust v. Deloitte & Touche LLP, 71 A.D.3d 198 (1st Dep’t 2009)...... 15, 19, 21 RGH Liquidating Trust, 955 N.E.2d 329 (N.Y. 2011) ...... 19, 20, 22, 23 Romano v. Kazacos, 609 F.3d 512 (2d Cir. 2010)...... 24 Rowinski v. Salomon Smith Barney, Inc., 398 F.3d 294 (3d Cir. 2005)...... 25 SEC v. Zandford, 535 U.S. 813 (2002) ...... 23 Sec. Investor Prot. Corp. v. BDO Seidman, LLP, 49 F. Supp. 2d 644 (S.D.N.Y. 1999)...... 8, 10, 12 Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, Adv. Pro. No. 08-1789, 2012 WL 2377787 (Bankr. S.D.N.Y. June 20, 2012) ...... 15 Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, No. 12-mc-115, 2012 WL 1505349 (S.D.N.Y. Apr. 30, 2012)...... 12 Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991)...... 4 Touche Ross & Co. v. Redington, 442 U.S. 560, 579 (1979) ...... 7, 8 Virgin Atlantic Airways, Ltd. v. Nat’l Mediation Bd., 956 F.2d 1245 (2d Cir. 1992)...... 13
iv Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 76 of 4039
Wight v. BankAmerica Corp., 219 F.3d 79 (2d Cir. 2000)...... 3, 4 Wolf Living Trust v. FM Multi-Strategy Inv. Fund, LP, No. 09 Civ. 1540, 2010 WL 4457322 (S.D.N.Y. Nov. 2, 2010)...... 14, 26
Statutes
15 U.S.C. § 77p ...... 16, 17, 18 15 U.S.C. § 77r...... 23 15 U.S.C. § 78bb ...... 16, 17, 18 15 U.S.C. § 78eee ...... 5 15 U.S.C. § 78fff ...... 5 15 U.S.C. § 78lll...... 9 Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq...... passim Securities Litigation Uniform Standards Act, Pub. L. No. 105-353, 112 Stat. 3227 (codified in 15 U.S.C.) ...... 14
Other Authorities
S. Rep. No. 105-182 (1998)...... 20 U.S. Gov’t Accountability Office, GAO-12-414, Securities Investor Protection Corporation: Interim Report on the Madoff Liquidation Proceeding 34-35 (2012)...... 18
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This consolidated brief is respectfully submitted on behalf of all defendants
(“Defendants”) whose motions to withdraw the reference and joinders in those motions were
granted by order of this Court dated May 15, 2012 (the “Order” or “Standing and SLUSA
Order”).1 That Order directed Defendants to address the issues of standing to prosecute common
law claims and SLUSA preemption arising from certain motions made to withdraw the reference
of adversary proceedings brought by Irving H. Picard, the trustee (“Trustee”) appointed under
the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. (“SIPA”), for the liquidation
of the business of Bernard L. Madoff Investment Securities LLC (“BLMIS”), substantively
consolidated with the estate of Bernard L. Madoff (“Madoff”), in which the Trustee asserts, inter
alia, common law claims for money damages (the “Common Law Actions”).
PRELIMINARY STATEMENT
Three decisions in this District have held that the Trustee lacks standing to prosecute
common law claims, including the decision of this Court just over a year ago in Picard v. HSBC.
That decision, which was firmly grounded on the Second Circuit’s Wagoner ruling, applies with equal force to the claims here and mandates dismissal of the common law claims against the
Defendants encompassed by this Court’s Standing and SLUSA Order. As the Court recognized, the Trustee lacks standing under the language and legislative history of SIPA to prosecute common law claims either originating with him or acquired by him by assignment, and the
Trustee’s efforts to manufacture standing by posturing as a bailee or a subrogee are unavailing.
1 See Order, Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff Sec.), No. 12-mc-00115 (S.D.N.Y. May 15, 2012), ECF No. 114, annexed as Exhibit A to Declaration of Andrew D. W. Cattell, submitted herewith, exhibits to which are cited as “Ex. __.” Notwithstanding the foregoing, on July 6, 2012, the Court dismissed adversary proceeding 10- 05208 (“Trotanoy”) and closed docket 12-cv-7112 as to all defendants in that action. Accordingly, this brief is not submitted on behalf of any Trotanoy defendants.
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The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) also precludes the
Trustee from asserting common law claims. All but one of the Madoff-related cases to consider whether SLUSA precludes the prosecution of common law claims by “feeder fund” investors have held that it does, and the one outlier has been questioned by subsequent decisions. The majority is correct, the Trustee’s common law claims are analogous to investors’ common law claims, and those common law claims fall squarely within SLUSA’s ambit. While not styled as
a “class action,” the Trustee’s claims qualify as a “covered class action” under SLUSA. And the common law claims all are based on alleged material misrepresentations and/or omissions regarding covered securities trades. Simply put, all the prerequisites for SLUSA preclusion are met and the BLMIS customer claims asserted by the Trustee should be dismissed pursuant to that statute.
Defendants respectfully request that the Court dismiss the Trustee’s common law claims against Defendants on each of the independent grounds of lack of standing and SLUSA preclusion.
BACKGROUND
The facts of the Trustee’s appointment, the Trustee’s filing of over 700 adversary
proceedings, and related issues that have already been the subject of significant litigation before this Court will not be reiterated here.
The Trustee has asserted, inter alia, common law claims for money damages against the
Defendants. These claims cover the spectrum of alleged culpability from aiding and abetting fraud to quasi-contract claims for unjust enrichment. Nevertheless, they all rest on fundamental
underlying allegations that each of the Defendants (other than Stephanie Mack and Deborah
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Madoff) engaged in culpable conduct that facilitated BLMIS’s fraud in connection with its
purported securities transactions.2
ARGUMENT
I. The Trustee Lacks Standing to Bring Common Law Claims
The Trustee bears the burden of establishing that he meets the threshold constitutional
and prudential limitations of Article III of the United States Constitution. See Wight v.
BankAmerica Corp., 219 F.3d 79, 86 (2d Cir. 2000). Article III requires that a plaintiff
demonstrate a concrete and particularized “injury in fact” that (1) can be fairly traced to the
defendant’s conduct, and (2) likely will be redressed by a favorable decision. Bogart v. Israel
Aerospace Indus. Ltd., No. 09 Civ. 4783, 2010 WL 517582, at *3 (S.D.N.Y. Feb. 5, 2010). To
satisfy prudential limitations on standing, “a party must assert his own legal rights and interests,
and cannot rest his claim to relief on the legal rights or interests of third parties.” Wight, 219 F.3d
at 86 (internal quotation marks omitted).
This Court has already held as a matter of law that the Trustee lacks standing to bring
common law claims like those asserted against Defendants here. See Picard v. Kohn, No. 11
Civ. 1181, 2012 WL 566298, at *2-4 (S.D.N.Y. Feb. 22, 2012); Picard v. HSBC Bank PLC, 454
B.R. 25, 37 (S.D.N.Y. 2011). Judge McMahon agreed with this Court and also dismissed for
lack of standing common law claims asserted by the Trustee. See Picard v. JPMorgan Chase &
Co., 460 B.R. 84, 106 (S.D.N.Y. 2011). There is no reason for the Court to stray from its previous rulings.
2 The Trustee contends that the “insider exception” to the Wagoner rule applies to Mrs. Mack and Mrs. Madoff because the Trustee alleges that their spouses (but not they) were corporate insiders of BLMIS. Whether the “insider exception” applies derivatively to the spouses of alleged corporate insiders will be addressed in a separate brief. See Standing and SLUSA Order at 5.
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A. The Trustee Lacks Standing Under Wagoner
The two holdings in the Second Circuit’s Wagoner decision control here. First, Wagoner
reaffirmed the settled rule “that a bankruptcy trustee has no standing generally to sue third
parties on behalf of the estate’s creditors, but may only assert claims held by the bankrupt
corporation itself.” Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir.
1991); see also Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416, 434
(1972). Second, Wagoner held that “when a bankrupt corporation has joined with a third party in
defrauding its creditors, the trustee cannot recover against the third party for the damage to the creditors.” Wagoner, 944 F.2d at 118. Wagoner’s second holding, which restricts a trustee’s ability to sue a bankrupt corporation’s alleged joint-tortfeasor, comports with the doctrine of in pari delicto: “because a trustee stands in the shoes of the corporation, the Wagoner rule bars a trustee from suing to recover for a wrong that he himself essentially took part in.” Wight, 219
F.3d at 87.
The Second Circuit reaffirmed Wagoner in Hirsch v. Arthur Anderson & Co., 72 F.3d
1085 (2d Cir. 1995). In Hirsch, the Second Circuit applied Wagoner to common law claims
brought by a bankruptcy trustee against third parties for alleged participation in the bankrupt
debtor’s Ponzi scheme. The Second Circuit held that claims arising from fraud on investors in
the Ponzi scheme “are the property of those investors, and may be asserted only by them and to the exclusion of [the trustee].” Id. at 1094. The court further held that the trustee could not bring claims against third parties on behalf of the debtors because the debtors participated in the Ponzi scheme. Id.
Here, under a straightforward application of Wagoner and Hirsch, the Trustee lacks
standing to assert common law claims against Defendants. It is beyond dispute that BLMIS is a
wrongdoer within the meaning of Wagoner, and the underlying premise of each of the Trustee’s
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common law claims against Defendants is that they facilitated or otherwise benefited from
BLMIS’s fraud. The Trustee, who must stand in the shoes of BLMIS, is barred from suing (on behalf of customers) others for their alleged involvement in BLMIS’s own misdeeds.
B. SIPA Does Not Provide the Trustee Standing to Bring His Claims on Behalf of BLMIS Customers
The Trustee attempts to escape the effect of binding authority by arguing that, as a SIPA
trustee, he holds “broader powers” to bring claims against third parties. See, e.g., Compl. ¶ 32,
Picard v. UBS AG, Adv. Pro. No. 10-05311 (Bankr. S.D.N.Y. Dec. 7, 2010), ECF No. 1 (Ex. B).
Specifically, the Trustee alleges in the Common Law Actions – just as he did in HSBC and
JPMorgan – that he has standing to sue the Defendants as a bailee of customer property, as a subrogee of customer claims paid by SIPC, or as an assignee of customer claims. See, e.g., id. at
¶ 33.
The Court should reaffirm its rejection of these misguided attempts to circumvent the
Wagoner rule. As a SIPA trustee, the Trustee has limited, specific statutory powers. See 15
U.S.C. § 78eee(b)(3) (providing for appointment of SIPA trustee); 15 U.S.C. § 78fff-1 (setting forth “Powers and duties of a [SIPA] trustee”). As the Court recognized in HSBC, “[n]either the language nor the structure of SIPA supports” the Trustee’s assertion that he may bring common law claims against third parties on behalf of brokerage customers. 454 B.R. at 30. Instead, a
SIPA trustee is only “vested with the same powers . . . as a trustee in a case under title 11,” and, in addition, may hire and fix the compensation of the broker’s personnel, utilize SIPC employees for purposes of the liquidation, and maintain customer accounts. 15 U.S.C. § 78fff-1(a).
In sum, SIPA confers the Trustee no broader authority than an ordinary bankruptcy trustee to assert common law claims against third parties. Wagoner and Hirsch are controlling and the common law claims asserted by the Trustee must be dismissed for lack of standing.
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1. The Trustee Lacks Bailee Standing
In the majority of the Common Law Actions, the Trustee has alleged that he, “as bailee of
Customer Property, can sue on behalf of the customer-bailors.” E.g. Third Am. Compl. ¶ 48(f),
Picard v. Certetti, Adv. Pro. No. 09-1161 (Bankr. S.D.N.Y. June 8, 2011), ECF No. 32 (Ex. C).
In others, the Trustee has alleged that he is bringing common law claims as a bailee on behalf of
a fund of customer property. See, e.g., Second Am. Compl. ¶ 71(g), Picard v. Kohn, Adv. Pro.
No. 10-05411 (Bankr. S.D.N.Y. Apr. 6, 2012), ECF No. 97 (Ex. D).
Whether on behalf of customers or a fund of customer property, the Trustee lacks bailee
standing to assert common law claims. This Court previously observed that “the Trustee is not a
bailee in the common law sense, because he is not seeking to return any recovered bailments to
the individual bailers, as a bailee would, but instead is seeking to distribute customer property
pro rata pursuant to the SIPA distribution scheme.”3 HSBC, 454 B.R. at 32 (internal quotation
marks omitted). In addition, nothing in SIPA authorizes the Trustee to bring damages claims as
a bailee; indeed, the words “bailor,” “bailment,” and “bailee” do not appear in the statute. With
no statutory power to sue as a bailee, the Trustee’s purported bailee standing is a self-
proclaimed, empty title that does not and cannot undermine Wagoner’s general rule: a
bankruptcy trustee has no right to bring creditor claims. See Redington v. Touche Ross & Co.,
592 F.2d 617, 635 (2d Cir. 1978) (Mulligan, J., dissenting) (“I fail to see how denominating [the
3 The Trustee’s theory of bailee standing also is flawed because his claims seek to redress wrongs that allegedly occurred before any bailment could have existed. See HSBC, 454 B.R. at 35 (“The purported breach is alleged to have occurred prior to the bailment . . . .”): JPMorgan, 460 B.R. at 105 (“[T]he Trustee’s theory of common law bailment ignores that he was not in possession of the property when it was damaged by Defendants. He stands in no better position than the hypothetical parking garage operator, suing strangers for injuries that occurred before I ever parked my car with it.”).
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trustee] a bailee adds a jot or tittle to his statutorily created status as the representative of . . . an
entity . . . precluded from suing.”), rev’d on other grounds, 442 U.S. 560 (1979).
Previously, the Trustee relied on the Second Circuit’s decision in Redington to argue that he has standing to sue as a bailee. But Redington is no longer good law, as this Court and others in this District have recognized. See HSBC, 454 B.R. at 34-35; JPMorgan, 460 B.R. at 103-04;
Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 557-58 (S.D.N.Y. 1990). In
Redington, the Second Circuit held that a private right of action existed under Section 17 of the
Securities Exchange Act (“Section 17”) and further found that SIPC had standing to bring such claims as a subrogee of customers and as a bailee of customer property. 592 F.2d at 623-25.
The Supreme Court reversed the Second Circuit on the ground that Section 17 does not provide for an implied right of action and remanded for a determination as to whether there were other bases for exercising subject matter jurisdiction. See Touche Ross & Co. v. Redington, 442 U.S.
560, 579 (1979). Following the reversal by the Supreme Court, the Second Circuit vacated its earlier judgment. See Order at 1, Redington v. Touche Ross & Co., No. 77-7193 (2d Cir. Aug. 8,
1979) (Ex. E).
Although the Supreme Court did not reach the standing issue, the reversal of the threshold subject matter jurisdiction issue deprived the Second Circuit’s decision in Redington of any precedential effect. See Gutierrez v. Fox, 141 F.3d 425, 426 (2d Cir. 1998) (“Without jurisdiction, any decision or ruling by the court would be a nullity.”); Newdow v. Rio Linda
Union Sch. Dist., 597 F.3d 1007, 1041 (9th Cir. 2010) (holding that a reversal on a threshold issue deprives the entire decision of precedential effect, because to “hold otherwise would give precedential effect to the determination of an issue that should never have been decided.”).
Moreover, the Second Circuit’s act of vacating its earlier judgment following the reversal
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stripped Redington of any precedential value. See O’Connor v. Donaldson, 422 U.S. 563, 577
n.12 (1975); Brown v. Kelly, 609 F.3d 467, 476 (2d Cir. 2010).4
The reasoning behind the Supreme Court’s reversal of Redington strongly suggests that the Supreme Court would also find that the Trustee lacks standing to sue as a bailee. In declining to recognize an implied private cause of action under Section 17, the Supreme Court rejected the SIPA trustee’s argument that an implied private remedy was necessary to “effectuate the purpose” of the statute. The Supreme Court held that “[t]he ultimate question is one of congressional intent, not one of whether this Court thinks that it can improve upon the statutory scheme that Congress enacted.” 442 U.S. at 575, 578. Similarly here, the Trustee asks the Court to recognize an implied power under SIPA for it to bring claims as a bailee of customer property, but the Trustee has not pointed to any support in the statutory text or legislative history for this purportedly implied power. This Court should deny the Trustee’s request: “Had Congress intended to enable SIPC or the trustee to bring suit against a third party, it would have done so.”
See Sec. Investor Prot. Corp. v. BDO Seidman, LLP, 49 F. Supp. 2d 644, 654 (S.D.N.Y. 1999).
The Trustee’s theory of bailee standing also fails for the independent reason that “no bailment can exist where the would-be bailee is a thief.” HSBC, 454 B.R. at 32-33. Under New
York law, a bailment arises only where the bailee obtains “lawful possession” of property
“without present intent to appropriate” it. Pivar v. Graduate Sch. of Figurative Art of the N.Y.
Acad. of Art, 290 A.D. 2d 212, 213 (1st Dep’t 2002.). Here, it is undisputed that BLMIS obtained customer property with the intent to appropriate it.
4 The Trustee has admitted that a vacated decision is “automatically erase[d]” of precedential effect. Brief for Trustee-Appellant Irving H. Picard at 25, In re Bernard L. Madoff Inv. Sec. LLC, No. 11-5175-bk (2d Cir. Feb. 16, 2012), ECF No. 76 (Ex. F).
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2. The Trustee Lacks Subrogee Standing
The Trustee alleges that he has standing to assert customer claims against third parties as
a subrogee of customer claims that have been satisfied in whole or in part by SIPC. But this,
again, would be an unauthorized expansion of SIPA. SIPA explicitly provides SIPC certain statutory subrogation rights. Those narrow subrogation rights do not include the right to assert
customer claims against third parties. Specifically, SIPA provides that, to the extent SIPC
advances moneys “to pay or otherwise satisfy the claims of customers, in addition to all other
rights it may have at law or in equity, SIPC shall be subrogated to the claims of such customers
with the rights and priorities provided in this chapter.”5 15 U.S.C. § 78fff-3(a). The “claims of
customers” that SIPC pays and to which it has subrogation rights are “net equity claims against
the debtor,” not claims against third parties. Mishkin, 744 F. Supp. at 556; see 15 U.S.C.
§ 78lll(11) (defining claims of customers as net equity claims against the debtor only). Thus, as
this Court correctly held in HSBC, “SIPC is only subrogated to customer net equity claims against the estate, not to all customer claims against third parties.” 454 B.R. at 33; see also
Mishkin, 744 F. Supp. at 556.
Moreover, the Trustee’s theory of subrogee standing is at odds with SIPA’s provisions
detailing the priority of customer property distributions. In 1978 – after the Second Circuit’s
Redington decision on which the Trustee relies (but before the Supreme Court’s reversal thereof)
– SIPA was amended to provide that “SIPC cannot recover as subrogee until customers are made
5 Section 78fff-3(a)’s reference to “all other rights [the Trustee] may have at law or in equity” does not imply that the Trustee has standing under a theory of common law subrogation. SIPA explicitly provides the Trustee a limited subrogation remedy and “this catch-all phrase . . . cannot be read to contradict a more specific provision of SIPA.” HSBC, 454 B.R. at 34. As Judge McMahon noted in JPMorgan, “Congress must be assumed to have provided a limited remedy for a reason,” and thus the recognition of “an additional remedy . . . risks undermining the Congressional scheme.” JPMorgan, 460 B.R. at 105.
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whole.” HSBC, 454 B.R. at 33 (citing 15 U.S.C. § 78fff-2(c)(1)). The Trustee has admitted that
“he will not be able to fully satisfy all claims.” E.g., Compl. ¶ 15(e), Picard v. Defender Ltd.,
Adv. Pro No. 10-05229 (Bankr. S.D.N.Y. Dec. 5, 2010), ECF No. 1 (Ex. G). If customer claims
have not and cannot be fully satisfied, court recognition of subrogee standing would undermine
SIPA’s preference system. BDO Seidman, 49 F. Supp. 2d at 654 (allowing trustee to bring
common law claims against third parties as subrogee “defeats the purpose of the preference
system of creditors set up by SIPA”); see also HSBC, 454 B.R. at 33; JPMorgan, 460 B.R. at
105.
3. The Trustee Lacks Assignee Standing
The Trustee claims that he has standing to sue Defendants because he “has received
multiple, express assignments of certain claims of the applicable accountholders, which they
could have asserted.” E.g., Compl. ¶ 15(g), Defender Ltd., Adv. Pro No. 10-05229 (Ex. G).
While the Trustee has not specifically pled the identity of the assignors or the scope of the alleged assignments, he likely is relying on the “Assignment and Release” forms he required
customers to execute as a condition for receiving SIPC payments. Those forms purported to
assign to the Trustee “any and all rights, including causes of action or claims, that Assignor now
may have against BLMIS and/or any third party arising out of or relating to any fraudulent or
illegal activity with respect to Assignor’s BLMIS account.” Partial Assignment and Release at
1-2, Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, Adv. Pro. No. 08-1789
(Bankr. S.D.N.Y. Aug. 3, 2009), ECF No. 351 (Ex. J). He also presumably is relying on assignments of common law claims made to him by feeder funds in connection with settlements he has reached with those funds.6 Regardless of the source or scope of the assignment, the
6 See, e.g., Consent Judgment, Fairfield Sentry, Adv. Pro. No. 09-1239 (Apr. 17, 2012), ECF No. 126 (Ex. K); Consent Judgment, Fairfield Sentry, Adv. Pro. No. 09-1239 (Apr. 17, 2012),
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Trustee lacks standing to assert common law claims against the Defendants as an assignee
because SIPA confers him neither the authority to receive such assignments nor the standing to assert them.
The Trustee’s previous reliance on In re CBI Holding Co., 529 F.3d 432 (2d Cir. 2008) to support his assignment argument is misplaced. That case did not involve SIPA. There, the
Second Circuit held that a Chapter 11 trustee could take assignment of creditor claims because
Section 541(a)(7) of the Code includes as property of the estate “[a]ny interest in property that the estate acquires after the commencement of the case.” Id. at 457, 459 (internal quotation marks omitted). Here, the Trustee cannot rely on Section 541(a)(7) of the Code (or caselaw interpreting it) as the basis for receiving assignments of customer claims against third parties, because it is inconsistent with SIPA.
Unlike Title 11, SIPA contains language defining the scope of the Trustee’s assignee rights. Specifically, Section 78fff-2(b) permits a trustee to obtain assignments from customers as a condition to payments on “net equity” claims against the estate. Accordingly, courts consistently have held that “the assignments authorized by section 78fff-2(b) of SIPA do not
ECF No. 125 (Ex. L); Consent Judgment, Fairfield Sentry, Adv. Pro. No. 09-1239 (S.D.N.Y. July 13, 2011), ECF No. 110 (Ex. M). In Picard v. Fairfield Sentry Ltd., Adv. Pro. No. 09- 01239 (Bankr. S.D.N.Y.), the Trustee alleges that he has standing to pursue common law claims as an assignee of customer claims. Am. Compl. ¶ 31(g) (July 20, 2010), ECF No. 23 (Ex. H). Subsequent to the filing of the Amended Complaint in Fairfield Sentry, the Trustee entered into settlement agreements with five funds in that action, pursuant to which those funds agreed to assign to the Trustee their claims against Fairfield Greenwich management companies and related individuals (the “FG Defendants”). Mem. of Law in Supp. of Defs.’ Mot. for Withdrawal of the Bankruptcy Reference 4 n.2, Fairfield Sentry, Adv. Pro. No. 09-01239 (Apr. 2, 2012), ECF No. 121 (Ex. I). The FG Defendants moved to withdraw the reference on the issue of whether the Trustee has standing to assert either his own alleged common law claims asserted against the FG Defendants in the Amended Complaint, or the common law claims subsequently assigned to the Trustee by the funds. For the reasons set forth herein, the Trustee lacks standing to pursue common law claims against the FG Defendants regardless of the source, and those claims should be dismissed and precluded.
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extend to all claims of customers against third parties, but, rather, only to a customer’s net equity claim” against the estate. Picard v. Taylor (In re Park S. Sec., LLC), 326 B.R. 505, 514 (Bankr.
S.D.N.Y. 2005); see also Giddens v. D.H. Blair & Co. (In re A.R. Baron & Co.), 280 B.R. 794,
803 (Bankr. S.D.N.Y. 2002) (holding that section 78fff-2(b) makes clear that “the only claims
that customers could have assigned to the Trustee are their net equity claims and not claims
against [third parties]”); BDO Seidman, LLP, 49 F. Supp. 2d at 654 n.7; Mishkin, 744 F. Supp. at
554. Because the Trustee’s authority to receive assignments under SIPA is expressly limited to
net equity claims of BLMIS customers, he lacks standing to bring their common law claims
against third parties.7
C. Collateral Estoppel and the “Law of the Case” Both Require Dismissal of the Trustee’s Common Law Claims
Under the doctrine of collateral estoppel, the Trustee may not relitigate whether he has
standing to pursue common law claims because that issue was already actually litigated by him
in HSBC, JPMorgan and Kohn. See Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 44 (2d Cir.
1986) (collateral estoppel precludes a party from relitigating an issue decided against him which
he had a full and fair opportunity to litigate). In all three of those cases, the Trustee had a full
and fair opportunity to advocate his position, and that issue was decided on the merits. Collateral
estoppel therefore requires that the Trustee’s lack of standing again be recognized here. See Sec.
Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, No. 12-mc-115, 2012 WL 1505349, at
*2 (S.D.N.Y. Apr. 30, 2012) (observing that “[u]nder ordinary principles of collateral estoppel,”
the Court’s previous decision on the applicability of 11 U.S.C. § 546(e) “likely bars the Trustee
7 Moreover, the Trustee’s strong-arm tactic of requiring customers to assign him claims against third parties as a condition of receiving SIPC payments clearly conflicts with his obligation to “distribute customer property . . . and otherwise satisfy net equity claims” in accordance with the statute. 15 U.S.C. § 78fff(a)(1)(B).
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from relitigating the issue” against other defendants who are similar situated “for all relevant
purposes”).
Separate and apart from collateral estoppel, the doctrine of the “law of the case” also bars
the Trustee from pursuing common law claims against Defendants. This doctrine applies across
adversary proceedings arising out of the same liquidation. See, e.g., Cohen v. Bucci, 905 F.2d
1111, 1112 (7th Cir. 1990) (stating that “[a]dversary proceedings in bankruptcy are not distinct
pieces of litigation; they are components of a single bankruptcy case,” and suggesting that law of
the case might have applied had it been raised by the parties); Bourdeau Bros. Inc. v. Montagne
(In re Montagne), No. 08-10916, 2010 WL 271347, at *6 (Bankr. D. Vt. Jan. 22, 2010) (“[T]his
Court finds it appropriate to apply the summary judgment findings entered in a related adversary proceeding . . . to the extent they are relevant in this adversary proceeding, under the law of the case doctrine.”); In re Pilgrim’s Pride Corp., 442 B.R. 522, 530 (Bankr. N.D. Tex. 2010) (“In
the bankruptcy context, the law of the case doctrine should be applied to disputes arising in the
main bankruptcy case as well as all of its related adversary proceedings.”); Artra Grp., Inc. v.
Salomon Bros. Holding Co., No. 93 B 319, 1996 WL 637595, at *5 (N.D. Ill. Oct. 31, 1996);
Luzinski v. Peabody & Arnold LLP (In re Gosman), 382 B.R. 826, 841-42 (S.D. Fla. 2007).
There are no “extraordinary circumstances” here that would require a different conclusion. See
Virgin Atlantic Airways, Ltd. v. Nat’l Mediation Bd., 956 F.2d 1245, 1255 (2d Cir. 1992)
(“‘[W]here litigants have once battled for the court’s decision, they should neither be required,
nor without good reason permitted, to battle for it again’.”) (quoting Zdanok v. Glidden Co., 327
F.2d 944, 953 (2d Cir. 1964)).
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II. SLUSA Bars the Common Law Claims Asserted by the Trustee on Behalf of Thousands of BLMIS Customers
The Trustee’s common law claims should be dismissed for the independent reason that
they are precluded by SLUSA, Pub. L. No. 105-353, 112 Stat. 3227 (codified in sections of 15
U.S.C.) .8 SLUSA was enacted as part of Congress’s efforts to ensure “national standards for
securities class action lawsuits involving nationally traded securities.” Merrill Lynch, Pierce,
Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 86-87 (2006) (quoting SLUSA § 2(5)); see also
Atkinson v. Morgan Asset Mgmt., Inc., 658 F.3d 549, 554 (6th Cir. 2011) (“Congress enacted
SLUSA to ensure that [the Private Securities Litigation Reform Act’s] standards govern fraud-
based class actions involving securities.”). SLUSA does so by “preventing securities plaintiffs
from using the class-action vehicle to prosecute state-law securities claims.” LaSala v. Bordier
et Cie, 519 F.3d 121, 128 (3d Cir. 2008).
SLUSA applies here because the Trustee has chosen to bring securities-related claims sounding in misrepresentation and fraud against Defendants under color of state law (rather than the federal securities laws), and has impermissibly sought to bring such claims on behalf of thousands of BLMIS customers.
Courts in this District have almost unanimously dismissed common law claims arising out of Madoff’s Ponzi scheme on SLUSA preclusion grounds.9 The principal issue presented
8 In HSBC, the Court found it unnecessary to address whether the Trustee’s common law claims are precluded by SLUSA because it first concluded that the Trustee lacked standing to assert those claims. HSBC, 454 B.R. at 29.
9 See, e.g., In re J.P. Jeanneret Assocs., Inc., 769 F. Supp. 2d 340, 378 (S.D.N.Y. 2011) (McMahon, J.); In re Herald, Primeo, & Thema Sec. Litig., No. 09 Civ. 289, 2011 WL 5928952, at *2 (S.D.N.Y. Nov. 29, 2011); In re Kingate Mgmt. Ltd. Litig., No. 09 Civ. 5386, 2011 WL 1362106, at *6-9 (S.D.N.Y. Mar. 30, 2011) (Batts, J.); Wolf Living Trust v. FM Multi-Strategy Inv. Fund, LP, No. 09 Civ. 1540, 2010 WL 4457322 at *3 (S.D.N.Y. Nov. 2, 2010) (Sand, J.); Newman v. Family Mgmt. Corp., 748 F. Supp. 2d 299, 311-13 (S.D.N.Y. 2010) (Sand, J.); In re Beacon Assocs. Litig., 745 F. Supp. 2d 386, 428-31 (S.D.N.Y. 2010) (Sand, J.); Barron v.
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here is whether a different result should obtain because the claims have been aggregated and are
being pursued by a trustee rather than by a purported shareholder class representative.10
Defendants respectfully submit that this distinction does not make a difference under
SLUSA. See, e.g., Cape Ann Investors LLC v. Lepone, 296 F. Supp. 2d 4, 10 (D. Mass. 2003)
(SLUSA applied where trustee’s role was “no different than that of any shareholder class
representative”); RGH Liquidating Trust v. Deloitte & Touche LLP, 71 A.D.3d 198, 215 (1st
Dep’t 2009) (“[A] class representative by any other name would offend SLUSA as much.”),
rev’d 955 N.E.2d 329 (N.Y. 2011). The Common Law Actions’ resemblance to traditional class
actions is highlighted by decisions in this District that enjoined attempts by BLMIS customers to
assert class actions on the grounds that they “were duplicative of claims brought by the Trustee
and that belonged to the Trustee on behalf of all the creditors of BLMIS.” See Picard v. Fox,
No. 10 Civ. 4652, 2012 WL 990829, at *1 (S.D.N.Y. Mar. 26, 2012); see also Sec. Investor Prot.
Corp. v. Bernard L. Madoff Inv. Sec. LLC, Adv. Pro. No. 08-1789, 2012 WL 2377787, at *2
(Bankr. S.D.N.Y. June 20, 2012) (rejecting attempt to “repeat[], repackage[], and relabel[] the
wrongs alleged by the Trustee”).
A. The Common Law Actions Meet the Criteria for SLUSA Preclusion
“SLUSA requires the dismissal of a ‘covered class action’ that is (1) based on state law
and (2) either alleges ‘an untrue statement or omission of a material fact in connection with the
purchase or sale of a covered security’ or alleges that ‘the defendant used or employed any
Igolnikov, No. 09 Civ. 4471, 2010 WL 882890, at *3-5 (S.D.N.Y. Mar. 10, 2010) (Griesa, J.). But see Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 397-399 (S.D.N.Y. 2010) (Marrero, J.). To the extent In re Merkin, 817 F. Supp. 2d 346 (S.D.N.Y. 2011) (Batts, J.), did not dismiss unjust enrichment claims on SLUSA grounds, Defendants respectfully submit that this was an inadvertent oversight by the District Court.
10 SLUSA, by itself, does not interfere with the Trustee’s ability to bring his state law claims on behalf of less than 51 persons or to instead pursue claims under the federal securities laws.
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manipulative or deceptive device or contrivance in connection with the purchase or sale of a
covered security’.” Picard v. HSBC Bank PLC, 450 B.R. 406, 413 (S.D.N.Y. 2011) (citing 15
U.S.C. § 77p). Here, the Trustee cannot reasonably dispute that his common law claims are based upon state law. And as discussed further below, the other elements for SLUSA preclusion also are met.
1. The Common Law Actions Are “Covered Class Actions”
(a) Plain Meaning of the Statute
In defining a “covered class action,” SLUSA reaches beyond lawsuits formally styled as
“class actions” to encompass any action in which “damages are sought on behalf of more than 50 persons or prospective class members” and common questions of law or fact, other than reliance, predominate. 15 U.S.C. § 77p(f)(2)(A); 15 U.S.C. § 78bb(f)(5)(B)(i); see also LaSala, 519 F.3d at 128 (SLUSA reaches lawsuits that “make use of a procedural vehicle akin to a class action”).
The actions at issue here plainly fit within the definition. In the Trustee’s own words, he is suing
“on behalf of” BLMIS customers, of which there are thousands.11 See, e.g., Compl. ¶ 33(f),
UBS, Adv. Pro. No. 10-05311 (Ex. B). The Trustee alleges that “as bailee of customer property,
[he] can sue on behalf of the customer-bailors.” Id. (emphasis added). Similarly, the Trustee
alleges that “[a]s assignee, the Trustee stands in the shoes of persons who have suffered injury-
in-fact.” Id. at ¶ 33(g) (emphasis added). Indeed, this Court noted that in a similar case against
HSBC the Trustee had “purported to bring common law claims on behalf of Madoff Securities’
customers.” Picard v. Franitza, No. 11 Civ. 4505, 2012 WL 2524513, at *3 (S.D.N.Y. June 26,
2012) (citing Picard v. HSBC Bank PLC, 450 B.R. 406, 410 (S.D.N.Y. 2011)); see also LaSala,
519 F.3d at 134 (“[T]he phrase ‘on behalf of 50 or more persons’ seems to refer to someone
11 As of July 27, 2012, the Trustee has allowed 2,436 claims. See The Madoff Recovery Initiative, http://www.madofftrustee.com/claims-03.html (last visited August 1, 2012).
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bringing a claim on behalf of 50 or more injured persons. In other words, the phrase refers to the assignors of a claim, not to the assignee.”).
The Court should reject any attempt by the Trustee to argue that SLUSA’s “Counting” provision transforms thousands of BLMIS customers into one person. The “Counting” provision instructs that “a corporation, investment company, pension plan, partnership, or other entity, shall be treated as one person or prospective class member, but only if the entity is not established for the purpose of participating in the action.” 15 U.S.C. § 77p(f)(2)(C); 15 U.S.C.
§ 78bb(f)(5)(D). The “Counting” provision does not apply in this context. First, the provision only applies to entities. Here, the person asserting the BLMIS customer claims is the individual
Irving H. Picard. See Compl. ¶ 33, UBS, Adv. Pro. No. 10-05311 (Ex. B) (“The Trustee is a real party in interest.”).
Second, the “Counting” provision does not address the situation where, as here, the representative is seeking to assert claims belonging to completely distinct entities and individuals. Rather, that provision merely preserves entities’ rights to assert claims on their own behalf – regardless of the number of persons associated with those entities, such as employees, shareholders, and pensioners. See, e.g., LaSala, 519 F.3d at 132-33 (interpreting “Counting” provision to mean that “the court is to follow the usual rule of not looking through an entity to its constituents unless the entity was established for the purpose of bringing the action, i.e., to circumvent SLUSA.”). There is nothing in SLUSA’s language or its legislative history to suggest that Congress intended through the “Counting” provision to confer additional rights to entities by allowing them to act as a vehicle through which claims belonging to more than 50 separate persons can be aggregated and asserted in a single lawsuit.
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Third, by the statute’s plain terms, the “Counting” provision does not apply where, as here, the Trustee claims that his purpose is to pursue this litigation. See 15 U.S.C. § 77p(f)(2)(C)
(entity treated as one person only if it is “not established for the purpose of participating in the
action.”); 15 U.S.C. § 78bb(f)(5)(D) (same). The Trustee asserts that he is “statutorily-
mandated” to bring these types of actions. See Trustee’s Mem. of Law in Opp. to Mot. to
Dismiss at 64, Picard v. JPMorgan Chase & Co., No. 1:11-cv-00913 (S.D.N.Y. Sept. 1, 2011),
ECF No. 64 (Ex. N). Moreover, Mr. Picard’s activities to date show that the Trustee’s primary
function has been to pursue litigation. Within the first six months of his appointment, the
Trustee filed at least eight adversary proceedings. See Trustee’s First Interim Report for the
Period Dec. 11, 2008 through June 30, 2009 at 32-39, Sec. Investor Prot. Corp. v. Bernard L.
Madoff Inv. Sec. LLC, Adv. Pro. No. 08-1789 (Bankr. S.D.N.Y. July 9, 2009), ECF No. 314 (Ex.
O). Nearly four years later, the Trustee has filed over 700 adversary proceedings, and he has
incurred hundreds of millions of dollars in litigation-related fees. The amount of money spent on
the adversary proceedings dwarfs all other activities in which the Trustee is engaged. See U.S.
Gov’t Accountability Office, GAO-12-414, Securities Investor Protection Corporation: Interim
Report on the Madoff Liquidation Proceeding 34-35 (2012), available at
http://www.gao.gov/assets/590/589087.pdf (“[T]he Trustee’s costs alone are relatively small
compared to the trustee’s counsel costs. Within this larger category, costs for litigation to
recover assets have risen sharply to account for a large majority of the trustee’s counsel costs.”).
The fact that the Trustee has other responsibilities, and that he might not have contemplated
these specific Common Law Actions at the time of his appointment, is irrelevant. See Lee v.
Marsh & McLennan Cos., No. 06 Civ. 6523, 2007 WL 704033, at *4 (S.D.N.Y. Mar. 7, 2007)
(“A trust whose primary purpose is to pursue causes of action on behalf of its beneficiaries is not
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entitled to entity treatment, whether or not the trust was formed with particular litigation in
mind.”); Cape Ann, 296 F. Supp. 2d at 10 (same).12
(b) Legislative History
Permitting common law claims to escape SLUSA’s reach solely because they are being
asserted by a trustee rather than a lead securities plaintiff would be inconsistent with
Congressional intent. Congress enacted SLUSA in 1998 to “prevent certain State private
securities class action lawsuits alleging fraud from being used to frustrate the objectives” of the
Private Securities Litigation Reform Act of 1995. Dabit, 547 U.S. at 86 (quoting SLUSA
§§ 2(5), 112 Stat. 3227). The United States Supreme Court has instructed lower courts to give
SLUSA a “broad construction” because a “narrow reading of the statute would undercut the
effectiveness of the 1995 Reform Act and thus run contrary to SLUSA’s stated purpose.” Id. at
85-86. It is “inappropriate for courts to create additional, implied exceptions [to SLUSA].” Id.
at 88; see also Demings v. Nationwide Life Ins. Co., 593 F.3d 486, 492 (6th Cir. 2010)
(“Congress meant SLUSA’s preclusive effect to be broad and far reaching, which counsels in
favor of interpreting exceptions to SLUSA preclusion as having a limited reach.”).
Specifically with respect to the “covered class action” prong, “the statutory text and
legislative history signal that the definition was designed to prevent securities-claims owners
from bringing what are, in effect, class actions by assigning claims to a single entity. Put simply,
12 Although some courts have limited the exception to the “Counting” provision to instances where the “primary” purpose of the entity is to pursue litigation, the New York Appellate Division correctly noted in RGH Liquidating Trust that the word “purpose” is not so modified in the statute. 71 A.D.3d at 210. “Hence, if an entity was established for the purpose of participating in the subject action, it is irrelevant that the entity also has other purposes, or that participation in the action is not the entity’s primary purpose.” Id. at 210. The New York Court of Appeals did not agree with the appellate court’s analysis and reversed. See RGH Liquidating Trust v. Deloitte & Touche LLP, 955 N.E.2d 329, 413 (N.Y. 2011). This Court need not resolve this issue here because the reality is that the Trustee’s primary function has been to pursue litigation.
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Congress’s goal was to prevent a class of securities plaintiffs from running their claims through a single entity.” LaSala, 519 F.3d at 136 (citation omitted). The report of the Senate Committee on Banking, Housing and Urban Affairs makes clear that Congress intended the “class action” definition to be interpreted broadly: “[W]hile the Committee believes that it has effectively reached those actions that could be used to circumvent the reforms enacted by Congress in 1995 as part of the Private Securities Litigation Reform Act, it remains the Committee’s intent that the bill be interpreted broadly to reach mass actions and all other procedural devices that might be used to circumvent the class action definition.” S. Rep. No. 105-182, at 8 (1998). Particularly in light of SLUSA’s stated purpose of closing the PSLRA’s loopholes, the Trustee should not be allowed to serve as a conduit through which Madoff customers can collectively pursue state law claims that otherwise would have to be pled under the federal securities laws. See RGH
Liquidating Trust, 955 N.E.2d 329, 342 (N.Y. 2011) (Smith, J. dissenting) (“Nothing in either the language or the legislative history of SLUSA suggests that Congress meant to grant an exemption to any ‘liquidation vehicle’ that is doing precisely what SLUSA was enacted to prevent.”).
Moreover, SLUSA’s legislative history does not support a special, unwritten exception for trustees. To be sure, the Senate Committee report confirms that Congress did not mean to interfere with the traditional function of a bankruptcy trustee to sue on behalf of the estate. See
S. Rep. No. 105-182, at 8 (“[A] trustee in bankruptcy, a guardian, a receiver, and other persons or entities duly authorized by law . . . to seek damages on behalf of another person or entity would not be covered by this provision.”). But it does not follow that Congress meant to bestow trustees with SLUSA immunity when they seek to take the novel approach of asserting claims that the estate never owned, for which the estate never suffered any injury, and which belong to
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persons unassociated with the estate. See LaSala, 519 F.3d at 135 (interpreting reference to
bankruptcy trustees in Senate Committee report as reflecting Congress’s “intent not to reach
claims asserted by a bankruptcy trustee on behalf of a bankruptcy estate”); RGH Liquidating
Trust, 71 A.D.3d at 214 (“Congress did not intend that SLUSA would limit a bankruptcy trustee’s power to sue on causes of action belonging to the bankruptcy estate. This principle does not avail the [trust] with respect to the bondholders’ claims, however, because the power to sue on those claims is not a necessary incident of the liquidation of the assets of the . . . bankruptcy estate.”).13
(c) Case Law
The Third Circuit’s decision in LaSala v. Bordier et Cie, 519 F.3d 121 (3d Cir. 2008)
supports Defendants’ position here. LaSala stands for the proposition that trusts should not be
deemed single entities when they assert claims that belong to more than 50 persons. In LaSala,
the Third Circuit explicitly distinguished between (a) claims belonging to the corporate debtor
and (b) claims belonging to purchasers of the debtor’s stock and assigned to a state-law trust.
With respect to the corporate claims asserted by the trust “on behalf of the corporation alone,”
the court held that they did not take the form of a “covered class action.” Id. at 137. On the
other hand, the court explained that the claims originally owned by purchasers “likely are
brought to recover damages ‘on behalf of more than 50 persons’ so they would seem to take the
form of a covered class action.” Id. at 137-38 (internal citations omitted).14
13 Nor is there anything to suggest that a SIPC-appointed trustee should be exempt from SLUSA. To the contrary, as discussed in Section I, SIPA does not confer standing on the Trustee to bring any common law claims on behalf of any customers against third parties, much less standing to bring state law securities fraud claims on behalf of 51 or more persons. 14 The court ultimately concluded that SLUSA did not apply to the purchaser claims because they were based on foreign law rather than state law. See LaSala, 519 F.3d at 143.
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Also instructive is Cape Ann Investors LLC v. Lepone, 296 F. Supp. 2d 4, 10 (D. Mass.
2003), where the District of Massachusetts dismissed on SLUSA grounds the trustee’s common
law claims because the trustee sought damages on behalf of more than 50 shareholders. The
court aptly noted that in pursuing claims held by the underlying shareholders, the trustee’s “role
is no different than that of any shareholder class representative.” Id. The court also rejected the
trust’s argument that it should be deemed one person under the “Counting” provision, ruling that
the trust was disqualified from single entity status because it had been created for the purpose of
litigation. Id. It did not matter, in the court’s view, that the specific case at issue had not been
contemplated at the time of the trust’s origination. Id.
The New York Court of Appeals’ opinion in RGH Liquidating Trust v. Deloitte &
Touche LLP, 955 N.E.2d 329 (2011) is not to the contrary.15 There, the Court held that the
“debtor’s estate owned the creditors’ (i.e., the bondholders’) claims and enlisted the Trust to
prosecute the estate’s claims for their benefit.” Id. at 340; see also id. at 342-43 (Smith, J.
dissenting) (explaining “the majority’s belief that the claims of the bondholders here were
momentarily included in ‘the bankruptcy estate’s assets’ – i.e., that the claims passed through the estate’s hands on their way from the bondholders to the Trust, rather than being directly assigned to the Trust by the bondholders”) (internal citations omitted). Thus, in the Court’s estimation, the claims at issue were owned by the bankruptcy estate. The Court recognized that there could
be a different result if the creditors owned the claims and directly enlisted the trust to prosecute
them for their benefit. See id. at 340 (distinguishing LaSala because there the purchasers’ claims
had not been included within the bankruptcy estate). This alternative fact pattern maps closer to
15 Moreover, “[t]he State Court’s interpretation of federal law is clearly not binding on this Court.” Cary Oil Co. v. MG Ref. & Mktg., Inc., 230 F. Supp. 2d 439, 492 (S.D.N.Y. 2002).
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LaSala and this case. The common law claims at issue here never became part of the BLMIS estate; they remain the claims of BLMIS’s customers.16
2. The Trustee Alleges Misrepresentations and Omissions in Connection with Covered Securities Trades
(a) Madoff Purportedly Traded Covered Securities
SLUSA’s “covered security” prong is satisfied here because Madoff purportedly traded securities listed on the New York Stock Exchange. See In re J.P. Jeanneret Assocs., Inc., 769 F.
Supp. 2d 340, 363 (S.D.N.Y. 2011) (“[A]ll of my colleagues who have encountered this issue in
Madoff-related cases have concluded that, in the context of his Ponzi scheme, the ‘in connection with’ requirement is satisfied by his phony purchases and sales.”) (collecting cases). Those stocks are “covered securities” for purposes of SLUSA. See 15 U.S.C. § 77r(b). The fact that
Madoff never actually traded the securities is irrelevant. See SEC v. Zandford, 535 U.S. 813,
819-20 (2002) (citing with approval the SEC’s position that “a broker who accepts payment for securities that he never intends to deliver…violates §10(b) and Rule 10b-5”); accord In re
Herald, Primeo, & Thema Sec. Litig., No. 09 Civ. 289, 2011 WL 5928952, at *8 (S.D.N.Y. Nov.
29, 2011) (to satisfy the “in connection with” requirement “it is not necessary that the securities transaction actually transpired”) (internal quotations and citation omitted); Barron v. Igolnikov,
No. 09 Civ. 4471, 2010 WL 882890, at *4 (S.D.N.Y. Mar. 10, 2010) (same); In re Beacon
Assocs. Litig., 745 F. Supp. 2d 386, 430 (S.D.N.Y. 2010).
16 RGH Liquidating Trust also is distinguishable because the court concluded the litigation purpose exception to the “Counting” provision did not apply after examining the specific language of the Plan and the Trust Agreement. Id. at 339. Here, by contrast, the Trustee claims that he is “statutorily-mandated” to prosecute these common law claims.
23 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 3130 of 4039
(b) The Trustee Alleges Misrepresentations and Omissions that Coincide with Madoff’s Purported Trades
In order to meet the “in connection with” prong of SLUSA, the United States Supreme
Court has held that “it is enough that the fraud alleged ‘coincide’ with a securities transaction.”
Dabit, 547 U.S. at 85 (citation omitted). The Second Circuit has added that the “in connection
with” prong is met “where plaintiff’s claims ‘necessarily allege,’ ‘necessarily involve,’ or ‘rest
on’ the purchase or sales of securities.” Romano v. Kazacos, 609 F.3d 512, 522 (2d Cir. 2010).
This test is easily satisfied here. These Common Law Actions “allege,” “necessarily involve,” and “rest on” the fact that Madoff lied about his trading in covered securities. See, e.g., Compl.
¶ 1, UBS, Adv. Pro. No. 10-05311 (Ex. B) (“The Defendants’ willful blindness substantially aided, enabled, and helped sustain the massive Ponzi scheme masterminded by Madoff.”).
Courts in this District have found similar claims brought by Madoff investors precluded
by SLUSA because such claims are “integrally tied to the underlying fraud committed by
Madoff.” In re Herald, 2011 WL 5928952, at *7; see also In re Kingate Mgmt. Ltd. Litig., No.
09 Civ. 5386, 2011 WL 1362106, at *9 (S.D.N.Y. Mar. 30, 2011) (“Madoff’s fraud is at the heart
of the case.”). Given these facts and circumstances, Madoff’s misrepresentations and omissions
count for SLUSA purposes even though Madoff is not named as a defendant. See, e.g., Proctor
v. Vishay Intertech, Inc., 584 F.3d 1208, 1222-23 (9th Cir. 2009) (SLUSA barred claims against
defendant where misrepresentations were attributed to co-conspirator); Instituto de Prevision
Militar v. Merrill Lynch, 546 F.3d 1340, 135 (11th Cir. 2008) (stating misrepresentation by third
party sufficient because plaintiff alleged that defendant failed to stop misrepresentation); Barron,
2010 WL 882890, at *5 (finding SLUSA barred claims against bank based on Madoff’s
misstatements).
24 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 3231 of 4039
In addition to Madoff’s fraud, the “in connection with” test is satisfied by the Trustee’s allegations that Defendants made their own purportedly material misrepresentations and omissions coinciding with Madoff’s fake trades. See, e.g., Compl. ¶ 70, Picard v. Square One
Fund Ltd., Adv. Pro. No. 10-04330 (Bankr. S.D.N.Y. Nov. 29, 2010), ECF No. 1 (Ex. P)
(alleging defendants misrepresented to investors their monitoring of Madoff’s purported trades in covered securities).17
The Trustee cannot be heard to complain that Defendants’ alleged wrongdoing is too remote from Madoff’s sham trades to satisfy the “in connection with” requirement. Such an argument would be inconsistent with the Trustee’s own pleadings, which go to great lengths in their attempts to tie Defendants to Madoff’s Ponzi scheme. See, e.g., Second Am. Compl. at 74,
Kohn, Adv. Pro. No. 10-05411 (Ex. D) (“Kohn and the Medici Enterprise sustained the [Madoff]
Ponzi Scheme”); Second Am. Compl. ¶ 7, Picard v. Peter B. Madoff, Adv. Pro. No. 09-1503
(Bankr. S.D.N.Y. May 4, 2012), ECF No. 113 (Ex. Q) (suit filed against Peter B. Madoff in his capacity as BLMIS’s Chief Compliance Officer); Compl. ¶ 42, Picard v. Oreades SICAV, Adv.
Pro. No. 10-05120 (Bankr. S.D.N.Y. Dec. 2, 2010), ECF No. 1 (Ex. R) (“[T]he BNP Paribas
17 The Trustee cannot avoid SLUSA’s application on the grounds that certain of his common law claims are not labeled as fraud claims. SLUSA extends to “garden-variety state law claims that sound in fraud.” In re Kingate Mgmt. Ltd. Litig., 2011 WL 1362106, at *6 (S.D.N.Y. Mar. 30, 2011) (quotation marks and citation omitted). “A claim sounds in fraud when, although not an essential element of the claim, the plaintiff alleges fraud as an integral part of the conduct giving rise to the claim.” Id. (citation omitted); see also Rowinski v. Salomon Smith Barney, Inc., 398 F.3d 294, 300 (3d Cir. 2005) (“Where . . . allegations of a material misrepresentation serve as the factual predicate of a state law claim, the misrepresentation prong is satisfied under SLUSA.”). Here, the Trustee’s common law claims incorporate by reference allegations of securities fraud in the factual sections of the complaints.
25 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 3332 of 4039
Entities facilitated Madoff’s fraud by funneling hundreds of millions of dollars into BLMIS
while turning a blind eye to troubling indicia of fraud at BLMIS.”).18
B. The Trustee’s Pleadings Confirm SLUSA’s Applicability
The Trustee’s inflammatory allegations against Defendants – heavy on rhetoric and thin on facts – are precisely the sort that Congress meant to ensure, through the enactment of the
PSLRA and SLUSA, receive closer scrutiny before they be allowed to advance past the pleadings stage. Cf. Picard v. Katz, No. 11 Civ. 3605, 2012 WL 691551, at *1 (S.D.N.Y. Mar.
5, 2012) (“Conclusions are no substitute for facts, and too much of what the parties characterized as bombshells proved to be nothing but bombast.”). It is difficult to escape the conclusion that the Trustee continues to maintain common law allegations purely as an attempt to strengthen his settlement position. This is the very sort of abuse of the litigation process that the PSLRA and
SLUSA were designed to curb. See Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101,
107 (2d Cir. 2001) (“PSLRA was intended to prevent ‘strike suits’ – meritless class actions that allege fraud in the sale of securities.”) (citing H.R. Conf. Rep. No. 105-803 (1998)).
18 The overwhelming majority of courts examining the “in connection with” test in the Madoff context have found it satisfied. See, e.g., In re Beacon, 745 F. Supp. 2d at 430; In re J.P. Jeanneret, 769 F. Supp. 2d at 360-63; In re Kingate, 2011 WL 1362106, at *7-9; Newman, 748 F. Supp. 2d at 312-13; Barron, 2010 WL 882890 at *4-5; Wolf Living Trust, 2010 WL 4457322 at *3. Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 397-399 (S.D.N.Y. 2010) is an outlier. See In re Kingate, 2011 WL 1362106, at *8 (“Anwar II is the sole case in which a court within the Southern District found that SLUSA did not preempt fraud claims related to a Madoff feeder fund.”).
26 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 3433 of 4039
CONCLUSION
For the foregoing reasons, Defendants respectfully request that the Court dismiss the
Trustee’s common law claims on the grounds of (1) lack of standing and (2) SLUSA preclusion.
Dated: August 3, 2012 New York, New York
SIMPSON THACHER & BARTLETT LLP
By: /s/ Mark G. Cunha
Mark G. Cunha [email protected] Peter E. Kazanoff [email protected] Andrew D. W. Cattell [email protected] 425 Lexington Avenue New York, New York 10017 Tel: (212) 455-2000 Fax: (212) 455-2502
Attorneys for Fairfield Greenwich Limited, Fairfield Greenwich (Bermuda) Limited, Fairfield Greenwich Advisors LLC, Fairfield Heathcliff Capital LLC, Fairfield International Managers, Inc., Fairfield Greenwich (UK) Limited, Chester Management Cayman Limited, Mark McKeefry, Daniel Lipton, Gordon McKenzie, Richard Landsberger, Philip Toub, Charles Murphy, Andrew Smith, Harold Greisman, Lourdes Barreneche, Santiago Reyes, Jacqueline Harary, and Corina Noel Piedrahita
27 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 3534 of 4039
BERNFELD, DEMATTEO & BERNFELD, LLP BRUNE & RICHARD LLP
By: /s/ David Bernfeld By: /s/ David Elbaum
David Bernfeld David Elbaum [email protected] [email protected] 600 Third Avenue, 15th Floor One Battery Park Plaza New York, NY 10016 New York, NY 10004 (212) 661-1661 (212) 668-1900
Attorneys for Defendant Circle Partners Attorneys for Defendant Kathryn R. Siggins
CHAFFETZ LINDSEY LLP CLEARY GOTTLIEB STEEN & HAMILTON LLP
By: /s/ Peter R. Chaffetz By: /s/ Lawrence B. Friedman Peter R. Chaffetz [email protected] Lawrence B. Friedman Jennifer Gorskie [email protected] [email protected] Carmine D. Boccuzzi, Jr. 505 Fifth Avenue, 4th Floor [email protected] New York, NY 10017 Breon S. Peace (212) 257-6960 [email protected] David Y. Livshiz Attorneys for Kingate Management Limited [email protected] One Liberty Plaza New York, New York 10006 (212) 225-2000
Attorneys for Defendants Citi Hedge Fund Services Ltd.; BNP Paribas Investment Partners Luxembourg S.A., BGL BNP Paribas S.A., BNP Paribas Securities Services S.A., and BNP Paribas Arbitrage SNC
28 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 3635 of 4039
COHEN & GRESSER LLP COOLEY LLP
By: /s/ Mark S. Cohen By: /s/ Alan Levine
Mark S. Cohen Alan Levine [email protected] [email protected] Daniel H. Tabak Laura Grossfield Birger [email protected] [email protected] 800 Third Avenue Nicholas Flath New York, NY 10022 [email protected] (212) 957-7600 The Grace Building 1114 Avenue of the Americas Attorneys for Defendant Deborah Madoff New York, NY 10036 (212) 479-6000
Attorneys for Defendant Stephanie Mack
COVINGTON & BURLING LLP CRAVATH, SWAINE & MOORE LLP
By: /s/ Bruce A. Baird By: /s/ David Greenwald
Bruce A. Baird David Greenwald [email protected] [email protected] 1201 Pennsylvania Avenue, NW Richard Levin Washington, DC 20004 [email protected] (212) 662-6000 Worldwide Plaza 825 Eighth Avenue Attorneys for Defendant Gregory Bowes New York, NY 10019 (212) 474-1000
Attorneys for M&B Capital Advisers Sociedad de Valores, S.A. and M&B Capital Advisers Gestion SGIIC, S.A.
29 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 3736 of 4039
DECHERT LLP DEBEVOISE & PLIMPTON LLP
By: /s/ Andrew J. Levander By: /s/ Mark P. Goodman
Andrew J. Levander Mark P. Goodman [email protected] [email protected] David S. Hoffner 919 Third Avenue [email protected] New York, NY 10022 1095 Avenue of the Americas (212) 909-6000 New York, NY 10036 (212) 698-3500 Attorneys for Defendant Amit Vijayvergiya
Attorneys for Defendant Andres Piedrahita
KASOWITZ BENSON TORRES & FRIEDMAN KATTEN MUCHIN ROSENMAN LLP LLP
By: /s/ Anthony L. Paccione By /s/ Daniel J. Fetterman Anthony L. Paccione Daniel J. Fetterman [email protected] [email protected] Brian L. Muldrew 1633 Broadway [email protected] New York, NY 10019 575 Madison Avenue (212) 506-1700 New York, NY 10022 (212) 940-8800 Attorneys for Defendant Jeffrey Tucker Attorneys for Defendant Leon Flax
30 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 3837 of 4039
KIRKLAND & ELLIS LLP KLESTADT & WINTERS LLP
By: /s/ Jay P. Lefkowitz, P.C. By: /s/ Tracy L. Klestadt
Jay P. Lefkowitz, P.C. Tracy L. Klestadt [email protected] [email protected] Joseph Serino, Jr. Brendan M. Scott [email protected] [email protected] David S. Flugman 570 Seventh Avenue, 17th Floor [email protected] New York, NY 10018 601 Lexington Avenue (212) 972-3000 New York, NY 10022 (212) 446-4800 Attorneys for Defendants Defender Limited, Reliance Management (BVI) Limited, Reliance Attorneys for Defendants Redcrest Investments, Management (Gibraltar) Limited, and Tim Inc., Line Group Ltd., Line Management Services Brockman Ltd., and Line Holdings Ltd.
MORVILLO, ABRAMOWITZ, GRAND, O’SHEA PARTNERS LLP IASON, ANELLO & BOHRER, P.C.
By: /s/ Sean F. O’Shea By: /s/ Edward M. Spiro Sean F. O’Shea Edward M. Spiro [email protected] [email protected] Michael E. Petrella 565 Fifth Avenue [email protected] New York, NY 10017 521 Fifth Avenue, 25th Floor (212) 856-9600 New York, NY 10175 (212) 682-4426
Attorneys for Defendant Robert Blum Attorneys for Defendant Cornelis Boele
31 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 3938 of 4039
PAUL HASTINGS LLP SEWARD & KISSEL LLP
By: /s/ Jodi Kleinick By: /s/ Mark J. Hyland
Jodi Kleinick Mark J. Hyland [email protected] [email protected] Barry Sher Mandy DeRoche [email protected] [email protected] Mor Wetzler One Battery Park Plaza [email protected] New York, NY 10004 75 East 55th Street (212) 574-1200 New York, NY 10022 (212) 318-6600 Attorneys for Defendants Reliance International Research LLC and Justin Lowe Attorneys for Defendants FIM Limited, FIM Advisers LLP, Carlo Grosso and Federico Ceretti
TANNENBAUM HELPERN SYRACUSE & WHITE & CASE LLP HIRSCHTRITT LLP
By: /s/ Glenn Kurtz By: /s/ Tammy P. Bieber Glenn Kurtz Tammy P. Bieber [email protected] [email protected] Andrew Hammond 900 Third Avenue [email protected] New York, NY 10022 1155 Avenue of the Americas (212) 508-6700 New York, NY 10036 (212) 819-8200 Attorneys for Defendants Square One Fund Ltd., Luc D. Estenne, Square Asset Management Ltd., Attorneys for Defendant Walter Noel and Partners Advisers S.A.
32 Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-17 271 Filed 02/28/1408/03/12 Page 4039 of 4039
WOLLMUTH MAHER & DEUTSCH LLP
By: /s/ Frederick R. Kessler
Frederick R. Kessler [email protected] Paul R. DeFilippo [email protected] Michael P. Burke mburke@wmd_law.com 500 Fifth Avenue New York, NY 10110 (212) 382-3300
Attorneys for Chester Global Strategy Fund Limited, Chester Global Strategy Fund, LP, Irongate Global Strategy Fund Limited, Fairfield Greenwich Fund (Luxembourg), Fairfield Investment Fund Limited, Fairfield Investors (Euro) Ltd., and Stable Fund LP.
33 Case 1:11-cv-05905-AT Document 29-18 Filed 02/28/14 Page 1 of 38
EXHIBIT 18
CAFJSEC1Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document Motions 29-18 404 Filed 02/28/1410/24/12 Page 21 of 3837 1 1 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK 2 ------x
3 SECURITIES INVESTOR PROTECTION CORPORATION, 4 Plaintiff, 5 v. 12 MC 115 JSR 6 BERNARD L. MADOFF, 7 Defendant. 8 ------x 9
10
11
12 October 15, 2012 4:25 p.m. 13
14
15
16 Before:
17 HON. JED S. RAKOFF,
18 District Judge
19
20
21
22
23
24
25
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 CAFJSEC1Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document Motions 29-18 404 Filed 02/28/1410/24/12 Page 32 of 3837 2 1 (In open court)
2 (Case called)
3 THE COURT: All right. I don't think it would be
4 fruitful to have argument on the standing issue except on the
5 assignee issue.
6 I also think that in arguing the SLUSA issue, it
7 should be argued in terms of on the assumption, the
8 hypothetical assumption that the only standing will be assignee
9 standing, and on the insider exception you're free to argue
10 anything.
11 Let me hear first from whoever is going to start on
12 the defense side.
13 MR. CUNHA: Your Honor, I would like to make a couple
14 of preliminary remarks and dive into the issues your Honor
15 wants to hear argument on.
16 I think it is important, standing at 30,000 feet
17 looking at what the trustee is trying to do here with respect
18 to prosecution of common law claims is to see, if, in fact, the
19 trustee is putting himself into competition with the investors
20 rather than carrying out what is the purpose of SIPA, which is
21 to protect. There is nothing about the structure or language
22 of SIPA, nothing about underlying legislative history of SIPA
23 which suggests or implies in any way that the trustee should be
24 putting himself into competition with or working at
25 cross-purposes with investors and with the customers. In fact,
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 CAFJSEC1Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document Motions 29-18 404 Filed 02/28/1410/24/12 Page 43 of 3837 3 1 by trying to prosecute common law claims, either his own common
2 law claims or common law claims taken by assignment, that is
3 precisely what the trustee is doing.
4 I think it is most obvious, of course, in the case of
5 claims, common law claims that the trustee develops on his own.
6 There, in fact, he is in direct and raw competition with the
7 underlying customers who have brought the same claims against
8 the same defendants, seeking the same recoveries and, in fact,
9 seeking recovery from the same pool of limited assets.
10 So, for example, if you look at the Enmar case,
11 pending in the Southern District of New York before Judge
12 Marrero, a class action brought by the investors in various
13 Fairfield funds, they have brought the exact same common law
14 claims against the same defendants that the trustee has
15 brought. In fact, if the trustee is allowed to pursue those
16 claims, what we have is a rather unseemly race to the
17 courthouse and race to a judgment to try to collect from these
18 defendants who have very limited resources, particularly the
19 individual defendants.
20 THE COURT: I am not sure how that cuts. Supposing
21 there is some claim that the trustee is bringing that the
22 investors didn't bring, does that mean that we should allow
23 that just because the investors didn't bring it? And should
24 disallow it because the investor did bring it?
25 MR. CUNHA: No, I don't think so, your Honor.
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 CAFJSEC1Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document Motions 29-18 404 Filed 02/28/1410/24/12 Page 54 of 3837 4 1 THE COURT: So I think it is irrelevant.
2 MR. CUNHA: Well, it is not irrelevant here because I
3 do think we have to focus on the specific pleadings here and
4 what is at issue before your Honor.
5 Here we don't have claims that are different. In
6 fact, the common law claims overlap. So while it may be an
7 issue in another case, it is not an issue here on this motion
8 to dismiss which, of course, my clients are intensely
9 interested in.
10 I do think, though, that even if the claims are
11 somewhat different, there will still be competition for the
12 same pool of assets. Perhaps they will be competing based on a
13 different legal theory, but here there is absolutely no doubt
14 the pool of assets which are being sought are far less than the
15 dollar amount of the claims that are brought, and the kind of
16 damages that are sought are the same and will be the same.
17 Here it is for fees and for losses on the underlying
18 investment.
19 That is always going to be the same, and there is no
20 doubt that there will be a competition for limited resources on
21 the part of the defendants. So that's number one, your Honor.
22 It would seem to be absolutely at cross-purposes if not
23 completely contrary to the purpose of SIPA of trying to protect
24 investors and making investors a favored class of claimants in
25 the liquidation proceeding.
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 CAFJSEC1Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document Motions 29-18 404 Filed 02/28/1410/24/12 Page 65 of 3837 5 1 With respect to the assigned claims, the trustee is in
2 competition on the assigned claims as well in a couple of ways.
3 Notwithstanding that the underlying customers did assign those
4 claims; and, therefore, could be said in some sense to have
5 consented to it, by allowing the assignments to go forward, we
6 give the trustee, we would give the trustee an incentive to, in
7 fact, squeeze the underlying customers in order to extract
8 these assignments from them.
9 In fact, we have seen that occur here. There are
10 three particular assignments involving Sentry funds, Fairfield
11 Sentry, Greenwich Sentry and Greenwich Sentry Partners, where
12 in the same settlement agreement in which the trustee obtained
13 assignment of the claims of those funds against their managers,
14 the trustee also forced in those negotiations those funds to
15 take a very severe haircut on the amount of their claims.
16 So the Sentry Fund was --
17 THE COURT: You say forced? As far as I am aware, no
18 one was putting a gun to anyone.
19 MR. CUNHA: It is not force in the sense that there
20 was coercion or anything unlawful, and that is not our claim at
21 all. When I say "forced," it is forced economically because
22 the trustee's position in those cases was we are not going to
23 recognize your claim at all unless you agree to the following
24 conditions. Those conditions included assignment of the common
25 law claims by those customers and included those customers
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 CAFJSEC1Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document Motions 29-18 404 Filed 02/28/1410/24/12 Page 76 of 3837 6 1 agreeing to take again a very severe haircut on the amount of
2 their claim.
3 Again there is something unseemly about this and
4 something contrary to the purpose of the statute and language
5 of the statute and its legislative history where we have the
6 trustee engaging in strong-arm tactics effectively in
7 negotiations, tough positions with its customers. That is not
8 what --
9 THE COURT: Is any of that before me?
10 Do I have to hold a hearing, evidentiary hearing to
11 determine whether there were, "strong-arm tactics" here?
12 MR. CUNHA: No, I don't think you do. I think you
13 need only look at the terms of the settlements which are on
14 file in those proceedings. There are a matter on public
15 record.
16 We can strip it of the pejorative language. I don't
17 think we need to characterize it that way for your Honor to
18 rule. The point is this: The terms themselves show that what
19 the trustee was prepared to do in this case is to allow claims
20 on a very diminished basis along with the entire package of the
21 deal which included assignment by those customers of their
22 claims to the trustee.
23 Again there is nothing in the language of SIPA which
24 would encourage any reader to think that the purpose of this
25 statute is to allow and encourage the trustee to enter into
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 CAFJSEC1Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document Motions 29-18 404 Filed 02/28/1410/24/12 Page 87 of 3837 7 1 these hard-fought, hard bargained, difficult negotiations with
2 the customers.
3 THE COURT: I guess I am still missing your legal
4 argument. You're not claiming that these assignments were
5 invalid as a matter of law, are you?
6 MR. CUNHA: Well, I am, actually, and I will get to
7 that, your Honor.
8 THE COURT: All right. But not at least on the
9 grounds that you've just told me?
10 MR. CUNHA: No.
11 THE COURT: So if it is a valid assignment, to the
12 extent he is not precluded by other statutes or whatever, he
13 can exercise the rights given him by assignment, yes?
14 MR. CUNHA: Correct. My remarks so far were just a
15 preface towards looking at the language of the statute and how
16 we ought to read the language of the statute.
17 The language of the statute, of course, gives the
18 trustee certain powers. The powers are limited by the language
19 of the SIPA statute, and the statute with respect to the
20 assignment that is in the statute has been uniformly
21 interpreted by the courts by allowing the trustee to take
22 assignments from customers only with respect to those
23 customers' net equity claims as against the estate. That makes
24 sense because the section of the statute in which we find it is
25 the section that has to do with payments by SIPA to the
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 CAFJSEC1Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document Motions 29-18 404 Filed 02/28/1410/24/12 Page 98 of 3837 8 1 customers.
2 So it makes sense in the statutory scheme that SIPA
3 would be providing advances to these customers and then SIPA
4 would have the ability to require those customers, to the
5 extent of those advances, to assign back their right of
6 recovery from the estate in that amount on their net equity
7 claim. That is what the statute says, that is what the
8 structure suggested, that is what the placement of the language
9 in the statute suggests and that is how the language has been
10 uniformly held by the courts to mean.
11 Addressing your Honor's earlier question, yes, the
12 statute does not allow the kinds of assignments that the
13 trustee is trying to pursue here. My earlier remarks were to
14 claim why there is a reasonable rationale why Congress would
15 not go there. Now, your Honor doesn't have to endorse that
16 reasoning. Your Honor can rest on the language of the statute.
17 In fact, that is what the courts have done up to this point.
18 SIPA provides circumscribed powers to the trustee.
19 One of them is this narrow power of assignment. If Congress
20 wanted to give the trustee a more broad power of assignment,
21 Congress knew how to do that, but it did not do it. We must
22 presume and assume Congress knew what it was doing when it
23 assigned the trustee limited powers.
24 THE COURT: All right.
25 MR. CUNHA: Another issue here, your Honor, which is
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 CAFJSEC1CaseCase 1:11-cv-05905-AT1:12-mc-00115-JSR Document Document Motions 29-18 404 Filed Filed 02/28/14 10/24/12 Page Page 10 9 ofof 3738 9 1 not in the briefs, but arises from the discussion in the briefs
2 is that the in pari delicto/Wagoner rule comes into effect with
3 respect to the assigned claims here as well, because the
4 trustee, if it seeks to prosecute the assigned claims at issue
5 here, the ones assigned by the funds, stands in the shoes of
6 the funds.
7 Yet the trustee in his own briefing as against those
8 funds, the trustee has sued those funds. He has sued Greenwich
9 Sentry Partners, he sued the other Sentry Fund, and he has
10 indicated in Paragraph 338 of his amended complaint that the
11 feeder funds worked with and were complicit with the other
12 defendants and pursuing and in furthering the fraudulent
13 scheme.
14 He has alleged the funds themselves were defrauding
15 Sentry Partners, working hand-in-hand with other defendants and
16 participating in the fraud; and, accordingly, Wagoner in pari
17 delicto are directly implicated there as well. Even were the
18 court to find that there was statutory authority for the
19 trustee to pursue assigned claims, which we believe the court
20 should not find and which no court has ever found, but even if
21 the court were to find that, in this instance by the trustee's
22 own pleadings, those claims are going to be barred by Wagoner
23 and you in pari delicto not because the trustee himself is in
24 pari delicto, but because the funds are in pari delicto under
25 the trustee's pleading, and he stands in the shoes of the funds
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 CAFJSEC1Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document Motions 29-18 404 Filed 02/28/1410/24/12 Page 1110 of 3837 10 1 with respect to the claims that they have assigned to him.
2 Your Honor, there are a couple of other issues that
3 come into play here. Judge McMahon, in her JPM decision on the
4 justiciability issue, there are justiciability issues with
5 respect to the trustee trying to pursue these assigned claims
6 which are common law claims on behalf of the funds or their
7 underlying investors. There are reliance issues. There are
8 causation issues much better pursued by the persons who
9 actually suffered the losses and who have knowledge of the
10 underlying facts and ability to get at those facts than to
11 allow a SIPA trustee who is a stranger to these facts because
12 after all, the claims are the claims of the underlying
13 customers, and they arise out of facts and circumstances that
14 existed before the trustee came into existence.
15 There is also the issue which your Honor has alluded
16 to which we believe is correct, that allowing to pursue
17 assigned claims would also interfere with SIPA's preference
18 claim. These claims would allow recovery on common law claims
19 and effectively payment on common law claims prior to payment
20 of the entire amount of the net equity claims, and again that's
21 contrary to the preference scheme and timing scheme set forth
22 on the face of the statute.
23 Your Honor, in sum, for all these reasons, both
24 because of the language of the statute, that which language has
25 been uniformly interpreted by the courts in accordance with
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2 other arguments we pointed out, your Honor, we believe the
3 court was quite right and that every court to consider the
4 issue is quite right. The trustee simply does not have
5 authority to take or prosecute common law claims by way of
6 assignment from customers.
7 THE COURT: All right. Let me, before we go to other
8 issues, let me hear from the trustee on the issue of -- I
9 should mention to everyone at 5:00 o'clock I have to take a
10 conference call with a judge from Texas. I don't think that
11 will take more than two or three minutes.
12 MR. LONG: I hope to be quick, your Honor.
13 Your Honor, again I am Thomas Long on behalf of the
14 trustee, and I'll address the arguments that were made by the
15 defendants.
16 Let's begin by what are the powers of the SIPA
17 trustee. They make great deal out of the fact there is a
18 specific provision included in the SIPA statute under 78fff2-B,
19 which permits the trustee in the claims process to ask a
20 claimant as they're being paid in full to assign their net
21 equity claims to the trustee.
22 There is no question about it, that is an express
23 power given to the trustee. It was not a limitation of power
24 regarding assignments. In fact, 78fff-1 gives the trustee all
25 the powers of a Chapter 11 trustee, and those powers include
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2 assignments properly.
3 I'd like to point out --
4 THE COURT: What about the issue that was raised, and
5 your adversary notes that it was raised for the first time here
6 today, so that if he makes use of these assignments at least in
7 certain other circumstances, he will be barred by pari delicto.
8 MR. LONG: I am more than willing to address that,
9 your Honor, because I think that misstates exactly how these
10 funds operated and who we are pursuing in this particular
11 instance.
12 What we are dealing with, for example, let's turn
13 first to the Fairfield funds. The Fairfield funds were
14 operated out of the British Virgin Islands. There was nothing
15 there, your Honor. It was a mail drop. That's it. Everything
16 was contracted out to one of the other Fairfield entities for
17 management purposes called Fairfield Greenwich Bermuda, which
18 in turn through a series of I sometimes refer to it as a
19 labyrinth of partnerships back to people who had offices here
20 in New York City. They're the people that we have alleged to
21 be the wrongdoers.
22 They had contractual duties, not negligent duties, but
23 contractual duties to the fund to perform in certain ways.
24 Those rights have been assigned to the trustee. We don't
25 believe in that instance that Wagoner would apply and cut off
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2 assert those claims. As noted, the trustee stands in the shoes
3 of the fund, so that's the difference there, your Honor.
4 THE COURT: All right.
5 MR. LONG: I would like point out in Greenwich Sentry,
6 I think there is Greenwich Sentry and Greenwich Sentry
7 Partners, both were Delaware limited partnerships where again
8 Fairfield Greenwich Bermuda was the general partner, all
9 investors were limited partners. The trustee's claims were
10 assigned by both funds that were at the time in Chapter 11
11 proceedings as debtors in possession before Judge Lifland.
12 What I find interesting is, your Honor, the very
13 defendants that are here raising these arguments were the ones
14 who negotiated that settlement and now are trying to claim that
15 we shouldn't be allowed to use the assignment.
16 To give you an idea of the details of those
17 negotiations, one of the things that they argued for and
18 bargained for and received, they had certain claims against the
19 fund for setoff, for indemnification, for certain payments that
20 way. The trustee expressly agreed that in the process of
21 litigation, they could still assert those as against the
22 assigned claims.
23 This certainly wasn't a situation where anybody had a
24 gun to their head when we negotiated these agreements. In
25 fact, if you take their arguments to the extreme, what we are
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2 assets. This was the way they could pay the claims the trustee
3 had against them.
4 For example, if you look at some of the other feeder
5 funds, we didn't put guns to anybody's heads. A number of them
6 paid the trustee's claims. They not only got their claims
7 allowed in full, they were even given in the situation where
8 there was a preference a spring-in claim. They received their
9 full claim. They weren't discounted down.
10 You can look at the Tremont case. They paid a billion
11 dollars. That case is unfortunately still on appeal by one
12 little objector, but they're going to have a claim for over $2
13 billion when it is all said and done.
14 In this particular instance, they didn't have the
15 ability to pay the claims with cash, so they looked to others'
16 assets. Your Honor, this court in the Katz case dealt with the
17 settlement that was negotiated where some of the defendants in
18 the Katz case, what they did is they assigned not their net
19 equity claims to the trustee, but they took certain monies that
20 were due to them and assigned them back to the trustee. It was
21 an asset that they had available to them to effectively pay the
22 claims.
23 The other thing that I find so interest today in these
24 arguments, and I just wish everybody would try to take the
25 position and stick by it, because the Amfar case was the case
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2 the investors in Fairfield Sentry, Greenwich Sentry and
3 Greenwich Sentry Partners, the defendants argued you don't own
4 those claims, those are owned by the fund. You're really
5 trying to do something that should have been a derivative
6 action that should have been filed by the fund. Yet here it
7 seems to be oh, no, those with are the claims owned by the
8 individual investors.
9 Your Honor, we believe based upon the clear law there
10 is no limitation on the part of the trustee in terms of the
11 SIPA proceeding. That certain provision within SIPA is
12 something that would be necessary to deal with certain
13 procedures that go on itself. In a normal bankruptcy, a
14 Chapter 11 trustee wouldn't need those powers.
15 Instead of being an exclusionary power, this was an
16 additional power that was given to a SIPA trustee in addition
17 to the powers that are given to them under the normal trustee's
18 powers in Chapter 11 proceeding.
19 Your Honor, the other thing they say is all the cases
20 have always ruled this way. The fact of the matter is, your
21 Honor, the other cases that they cited in their brief were
22 dealing with the type of claims that if you can bear with me,
23 my way of describing it is under 78fff2-B as sort of claims
24 assignments, they were dealt with a claims process versus a
25 settlement assignment, somebody who was using their assets.
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2 with were the 78fff2-B type of assignments. This Court has
3 already ruled whether or not they're allowed to do that. We
4 respectfully disagree. We preserved our claims, and the Second
5 Circuit, your Honor, has now said set argument on that for
6 November 21. We will all hear what they have to say here
7 shortly.
8 THE COURT: No, no, no. They'll hear what you have to
9 say.
10 MR. LONG: I think that's right.
11 THE COURT: I notice there was a sort of suggestion
12 from both sides that I await the Second Circuit's decision. If
13 I had confidence that their decision would be forthcoming soon,
14 that would make perfect sense, but having had the great
15 privilege of having sat by designation on the Second Circuit, I
16 am inclined to replace that hope with the voice of experience,
17 so it might be years before you would get a decision from the
18 Second Circuit. So I think I will move ahead irrespective of
19 that. If they come down with a decision, great; if they don't,
20 that's their business.
21 MR. LONG: I was only trying to give that for
22 informational purposes. This is something you wouldn't know
23 about personally. My wife, who is an appellate judge in Ohio,
24 has said you might be having an argument then, but that doesn't
25 mean you get a decision that day.
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2 Second Circuit. I wouldn't dare do that because they wouldn't
3 invite me back again.
4 Anyway, go ahead.
5 MR. LONG: I'll wrap up.
6 On the Michigan case what I find interesting about
7 that, Judge Pollack was dealing with a very different
8 assignment involved there. It wasn't a customer that was
9 involved. It is hard to understand by reading the court record
10 what was involved there. It appeared to be almost a situation
11 where some person didn't have any claims, and they assigned
12 them to the trustee as a way they could get paid and maybe the
13 trustee would get money.
14 However, in that case what Judge Pollack said is under
15 78fff2-B, you can't do that, that is not what that is all
16 about. On the other hand, there was no discussion under 541
17 (a)(7), and I think if you look historically at the court's
18 decisions, this Court's decisions and the Second Circuit's
19 decisions as set out in the CBI case, there is a history
20 regarding assigned claims to trustees.
21 For the longest time under New York State Law, it had
22 been held by the Barnes decision, which I believe was a 1925
23 case, that such assignments could not have taken place. That
24 was based upon the old bankruptcy code. When the modern
25 bankruptcy code was passed, clearly it was interpreted that
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2 not push that issue. More recently Judge Scheindlin had a case
3 in the Merrill Lynch Love funding case where these issues came
4 up as well, an issue whether this would violate the law of New
5 York Chambertree.
6 She dismissed the case. It went up to the Second
7 Circuit. They certified the question as well to the New York
8 Court of Appeals, who held they did not violate Chambertree and
9 it is time for the courts to no longer look at Barnes, it is no
10 longer good law even if we don't technically overrule it. They
11 said in the Semitech case it shouldn't be pursued.
12 As a result, if you look at the history of the type of
13 what I referred to for shorthand the settlement assignments,
14 clearly they're valid. The trustee has standing to assert
15 them. These were assets given to the trustee as a means to pay
16 what people believed monies were owed to them.
17 I think it is interesting that Judge Lifland, when he
18 had the 9019 hearings in both these cases and especially with
19 the Fairfield Funds, because of their liquidation in the PBI,
20 there had to be a hearing there as well. Both judges
21 recognized it was a hard-fought, bargained-settlement
22 negotiations that resulted in the ultimate settlement.
23 THE COURT: I will hear from the defendant in
24 response, but I need to take that, and hear from SIPIC, too,
25 but I need to take this five minute call and I am sure it won't
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2 were up to.
3 MR. LaROSA: First, in response to some of the remarks
4 made by defendants' counsel, we think it would be wrong to
5 extrapolate from the circumstances of this case all SIPA
6 litigation. We point out there are many, many instances where
7 the trustee is effectively the only party with the financial
8 resources sufficient to bring claims like the ones that have
9 been brought here. Of course, the trustee is backed by SIPA
10 funds, which makes complex litigation possible for the trustee
11 where it would not be for many private plaintiffs.
12 It is also important that the trustee have the power
13 to take assignments for claims against third parties because
14 recoveries when the trustees recovers are shared by all
15 recoveries, which often is not the case. That is absolutely
16 consistent with, in furtherance of, the purposes of the
17 statute.
18 THE COURT: I take it that is what you would have said
19 about the argument that you were in competition. The trustee
20 is trying to work out a resolution that is fair to all
21 customers under a method that's been approved by the Second
22 Circuit. Therefore, the specific needs of any given customer
23 are neither here nor there because they have a more specific
24 focus than the trustee does.
25 MR. LaROSA: That's correct, your Honor. The only
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2 78fff-2(b) has been uniformly held not to allow the claims
3 against third parties is inaccurate. The Albert & Maguire
4 case, SEC v. Albert & Maguire, an older case that dealt with an
5 earlier version of the statute but essentially the same
6 language, held that that provision did allow the taking of
7 assignments of claims from third parties. In fact, the court
8 used language that very much buttresses the argument we are
9 making here. I'm quoting at 560 F.2d, the case is at 569. The
10 language is at page 573.
11 THE COURT: "Nothing in the statutory language
12 restricts the form or purpose of the assignments to use against
13 the debtor."
14 MR. LaROSA: Yes, indeed.
15 THE COURT: Dot dot dot "If the trustee recovers on
16 customers' claims against third parties, the single and
17 separate fund is augmented and additional money becomes
18 available to satisfy claims of all the customers." Is that
19 what you had in mind?
20 MR. LaROSA: You're way ahead of me, your Honor.
21 Thank you.
22 THE COURT: Very good. Let me hear from defense
23 counsel.
24 MR. CUNHA: Just a few points, your Honor. With
25 respect to the CBI case, of course, it's not a SIPA case, so it
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2 to seems. It of course does not arise in a SIPA context, so
3 the contextual arguments with respect to SIPA do not apply in
4 the CBI situation.
5 The justiciability issues that we raise of course are
6 not raised there. It's based on section 541(a)(7). 541(a)(7),
7 your Honor, of the code, the bankruptcy code, simply indicates
8 that the estate is comprised of the following property: "Any
9 interest in property that the estate acquires after the
10 commencement of the case." That language begs the question
11 which is before the Court, which is was it proper, is this
12 particular interest in property an interest that is proper for
13 the trustee to acquire at all.
14 Again, we don't think that CBI is on point. It has to
15 do with bankruptcy, trustee powers, not with the powers
16 specifically of the SIPA trustee, and here we do have language
17 specifically on point in SIPA, which we think makes CBI
18 inapposite. Of course, under general statutory construction
19 principles, the specific rules over the general.
20 THE COURT: Thank you very much.
21 MR. CUNHA: I would make one other point, your Honor,
22 that I think is important. I think it is important for the
23 Court not to conflate the funds with the funds' underlying
24 investors here. What happened here is these assignments were
25 made by the funds. The funds are themselves entities. They
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2 veil piercing issue. We did provide those assignments to your
3 Honor as exhibits to our initial submission, so your Honor has
4 them.
5 The claim that the funds didn't do anything wrong, and
6 therefore in pari delicto should not apply. It comes, frankly,
7 as a mystery to us, since trustee has sued the funds. In his
8 complaints they are defendants in the complaint, and he
9 includes allegations specifically in their complaint that they
10 are participants in the underlying fraud.
11 Not only that, but two of the funds are partnerships.
12 The general partner is one of the management companies that in
13 fact has been sued by the trustee and against which wrongdoing
14 is alleged. The other fund, the large one, the offshore fund,
15 Century, was run by a three-person board of directors. One of
16 those directors is Walter Noel, who was one of the management
17 individuals, one of the principals of the management companies,
18 and also a target defendant in the trustee's suit.
19 I, frankly, just don't understand the trustee's
20 argument in that regard, your Honor. By his own pleadings he
21 has claimed the same wrongdoing by the funds as he claims on
22 the part of the management defendants, and in pari delicto is
23 clearly going to apply to those entities. Thank you.
24 THE COURT: Thank you very much.
25 Let's turn to SLUSA. Does anyone want to be heard on
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2 MR. CUNHA: Yes, your Honor, happy to address it.
3 THE COURT: This only comes into play, of course, if
4 the trustee has the power to pursue creditors' claims against
5 third parties. Implicit in my not hearing argument on the
6 nonassignment argument for that is that I haven't changed my
7 mind about my earlier view of that. But I am happy to hear
8 whether SLUSA would come into play assuming arguendo that there
9 were claims that could be brought by virtue of the assignment.
10 MR. CUNHA: Yes, your Honor. I'll limit my remarks to
11 the assigned claims.
12 We think SLUSA does come into effect with respect to
13 the assigned claims if your Honor finds that the assignments
14 were valid and that the trustee is allowed to take and pursue
15 those assigned claims.
16 The statute provides that it applies to covered class
17 actions. Covered class actions are defined as a single lawsuit
18 in which damages are sought on behalf of more than 50 persons.
19 It is all over the trustee's complaint in this case, your
20 Honor, all over his complaints I should say, that his
21 complaints are brought on behalf of the underlying customers.
22 So, by the trustee's own pleading, he has pled himself
23 into coverage under SLUSA. If he seeks to prosecute those
24 assigned claims, he will be seeking to prosecute them on behalf
25 of a group of more than 50 persons, to wit, the customers of
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2 After that point, your Honor, the other SLUSA
3 arguments are the same with respect to assigned claims as they
4 are with respect to his own claims. I guess the trustee would
5 point to the entity exception and try to take refuge there. It
6 doesn't apply.
7 First of all, all it says is that the entity gets
8 treated as a single person for purposes of counting under
9 SLUSA. But that begs the question. The point is that the
10 statute defines a covered class action to mean where damages
11 are sought on behalf of more than 50 persons. Whether you
12 consider the trustee a single person or not a single person,
13 that's not where the inquiry is. That's not where the focus
14 is, the focus is on whose behalf is he seeking the damages.
15 That is the underlying customers.
16 If for some reason the Court were to adopt the
17 trustee's thinking there, then you get to the second prong of
18 the counting aspect of the SLUSA statute, which is that you
19 count it as a single entity only if the entity is not
20 established for the purpose of participating in the action.
21 There, frankly, courts have come out different ways in
22 examining what's meant by the purpose. Does it have to be the
23 sole purpose, does it have to be the primary purpose, or does
24 it have to be a purpose? We think the courts have reasoned
25 through this, have reasoned better that it need only be a
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2 has argued that it's a statutorily mandated purpose. Clearly,
3 at least one purpose for which the trustee was formed was to
4 pursue this litigation.
5 THE COURT: And SLUSA is supposed to be given a broad
6 construction.
7 MR. CUNHA: Absolutely, your Honor. Which takes is me
8 to my final point. The trustee argues, really without giving a
9 reason, that for some reason he as trustee is different than,
10 say, a class representative of a plaintiff class seeking to
11 end-run the PSLRA requirements for pleading by bringing state
12 common law claims. But he doesn't give any reason for that,
13 nor is any reason apparent why it should be different.
14 In fact, the trustee is trying to do the same thing as
15 a class plaintiff would try to do here, which is to avoid more
16 stringent pleading requirements which are required by the
17 federal securities laws where there are claims sounding in
18 misrepresentation than the much easier to satisfy pleading
19 requirements of state common law.
20 This situation falls well within the purpose of the
21 statute, which is that Congress did not want to give the
22 ability to plaintiffs operating as a group of more than 50,
23 where damages are sought by more than 50, to end run the
24 standards that they think ought to govern misrepresentation
25 type claims in a securities context.
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2 MR. LONG: Thank you, your Honor. I'll be very brief.
3 First, when you look at which claims we're talking
4 about, I believe we have to only focus on the 78fff-2(b)
5 claims. Claims that would have been assigned to us as part of
6 the settlements clearly would not be brought into the SLUSA
7 operation, because we are standing in the shoes of those
8 particular claimants asserting the claims they would have had.
9 Turning then to what I referred to earlier in the
10 argument as the claim settlements, first, their argument in the
11 papers was that the trustee couldn't be entitled to the entity
12 exception because he is a person. I find that somewhat
13 ridiculous in that clearly none of this money is going to
14 Irving Picard. It goes into the estate. And that's the
15 purpose of it.
16 If you look at the legislative history of SLUSA, one
17 of the things that was specifically talked about in dealing
18 with the entity exception was they did not want to put any
19 bankruptcy trustee -- they didn't use the words, and I would
20 readily admit this, SIPA trustee -- but a bankruptcy trustee
21 wouldn't be forced out. That's why they took the entity
22 exception.
23 Second, your Honor, they claim that the trustee was
24 organized for purposes of pursuing the litigation. Originally,
25 they relied upon the RH Holdings case. That case was reversed.
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2 at the primary purpose for why the entity exists.
3 This isn't a case where you have had several courts
4 hold where an entity is just formed for one single purpose and
5 that's to litigate claims. Here the trustee was appointed by
6 Judge Stanton and was given a variety of tasks. We have set
7 those out in the brief. I don't want to take much of your
8 time. They include marshaling the assets, selling the assets,
9 determining claims, taking the distribution of claims,
10 allocating the moneys, and so forth.
11 As a result, nowhere can it be alleged that the
12 primary purpose for why Mr. Picard was appointed trustee in
13 this case was simply to pursue common law litigation.
14 Certainly one of the things that he has done, in addition to a
15 certain and a relatively small number of common law claims,
16 he's pursued the avoidance and recovery claims that he is
17 permitted to do under the bankruptcy code.
18 Finally, your Honor, the fact of the matter is the
19 trustee is pursuing these claims to go into the fund of
20 customer property. It is not being passed along directly to
21 the various customers. It will go in and be allocated properly
22 within the SIPA proceeding. As a result, we do not believe
23 SLUSA would apply in this instance.
24 THE COURT: Did SIPC want to be heard?
25 MR. LaROSA: No, your Honor.
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2 MR. CUNHA: Very quickly, your Honor. In the RGH
3 Liquidating Trust case, we would point out that there the Court
4 was able to reach its findings by finding that the claims at
5 issue were owned by the bankrupt estate and therefore was able
6 to limit it to the single person. We don't have that at play
7 here. We also frankly think that the dissent had by far the
8 better part of the argument there. Of course, that court is
9 not binding on this Court. We'll leave it at that.
10 THE COURT: Let's turn finally to the insider
11 exception. Let me hear from defense counsel.
12 MS. BIRGER: Your Honor, it's a different question
13 with respect to the spouse defendants. For the spouses this is
14 a plain vanilla application of in pari delicto. Whatever the
15 Court may conclude about the validity of the asset need theory,
16 that has no application to the spouses. There are no claims on
17 behalf of customers against the spouses. There's nothing to
18 have been assigned. And there is no claim that the spouses
19 engaged in any long doing.
20 The only claim against the spouses is that they
21 received transfers from BLMIS that they weren't entitled to.
22 That's the allegation. If that claim is viable, it can only be
23 on behalf of BLMIS, and then it's barred by a very straight-
24 forward application of in pari delicto.
25 It is against that backdrop that the trustee has
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2 says he has no standing to pursue the common law claims, he can
3 against the spouse defendants only because of that exception.
4 Your Honor, I think the scope and purpose of the
5 insider exception rule has been thoroughly covered in the
6 briefs by both sides. It was not my intention, unless the
7 Court has questions, to belabor those points. It is pretty
8 simple. The insider exception is restricted to insiders. The
9 spouses aren't insiders. Ergo, no exception.
10 The only thing I would add to the briefs, your Honor,
11 is that the thrust of the trustee's argument is that this Court
12 should ignore settled in pari delicto law and essentially carve
13 out a new exception just to permit him to pursue claims against
14 certain transfers. I just want to say that it is not accurate
15 to suggest that bringing a common law claim against the spouses
16 is the only potential avenue he has to pursue those funds.
17 The case against the spouses involved certain
18 transfers from BLMIS which went jointly to the husbands, to
19 Mark and Andrew, and the spouses. The trustee is bringing his
20 claims as preferences or fraudulent transfers against the
21 husbands themselves. He is trying to avoid those exact same
22 transfers under the bankruptcy code and under New York debtor/
23 creditor law. So, the transfers are still being challenged.
24 The issue under in pari delicto is whether he has
25 standing to pursue certain common law claims against certain
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Cafrsec2Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-18 404 Filed 02/28/1410/24/12 Page 3231 of 3837 31 1 defendants, not the sums of money. That is an unequivocal no,
2 as the Court knows. So, by saying he wants to recover money
3 from the spouses, he's mixing apples and oranges. He is
4 basically answering the wrong question.
5 In addition, in pari delicto would have posed no
6 obstacle to the trustee bringing avoidance claims under the
7 bankruptcy code against the spouses. He can't do that now,
8 because they are time-barred. But that was his choice.
9 So, in a nutshell, he is trying to resurrect the
10 claims that he has against the spouses. He is trying to ask
11 this Court to carve out an exception that doesn't exist. That
12 is the very nature of the in pari delicto doctrine, your Honor.
13 It bars plaintiffs from bringing claims they want to bring.
14 The fact that Mr. Picard really wants to bring this one doesn't
15 mean he has standing to do it.
16 THE COURT: Thank you very much.
17 Let me hear from the trustee.
18 MR. OPPENHEIM: Thank you, your Honor.
19 This attempt to withdraw the reference as to the
20 applicability of the insider exception is improper because
21 there is no motion pending before the bankruptcy court.
22 Movants are not arguing that there is an issue of sufficient
23 complexity requiring disposition by an Article III judge.
24 Instead, these movants, the spouse defendants, were
25 happy to make these arguments to the bankruptcy court in
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Cafrsec2Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-18 404 Filed 02/28/1410/24/12 Page 3332 of 3837 32 1 opposition to the trustee's motion for leave to further amend.
2 Movants opposed the trustee's motion without once arguing that
3 this issue was beyond the bankruptcy court's jurisprudence.
4 Instead they waited until briefing was completed, and once they
5 got a ruling they didn't like, they turned to this Court for a
6 second bite at the apple to complain that the bankruptcy court
7 never should have heard that argument in the first place.
8 That is not a motion to withdraw the residence, it is
9 an appeal of a decision that these defendants don't like. By
10 referencing the de novo standard of Ionosphere in their papers,
11 they are make their intentions obvious. They would like your
12 Honor to overturn the holding of the bankruptcy court without
13 requiring a formal court appeal and, critically, without
14 allowing the trustee to set forth substantive argument in
15 opposition to this.
16 This is a bait and switch. The trustee has argued
17 that these issues don't require withdrawal of the reference,
18 and movants have argued, just as they did to the bankruptcy
19 court, that the trustee's claims ought to be barred. There is
20 almost no explanation of what pending issue must be heard by
21 this Court.
22 This only explanation they offer is the last line of
23 their reply brief where they write, "There is no motion pending
24 because the parties have adjourned the spouse defendants time
25 to move or answer the second amend complaint pending this
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Cafrsec2Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-18 404 Filed 02/28/1410/24/12 Page 3433 of 3837 33 1 Court's decision." That is false. There is no motion pending
2 before the bankruptcy court, because the bankruptcy court has
3 already ruled on this issue.
4 Movants presented their arguments, the trustee
5 presented his arguments, and the bankruptcy court made its
6 ruling. Again, your Honor, they are not here because the
7 arguments weren't properly before the bankruptcy court. They
8 are here because they don't like the result.
9 The second thing is, to turn to the substance
10 argument, which I think it is important we do here, these
11 defendants shouldn't be permitted to circumvent the insider
12 exception, which is exactly what happened here. The first
13 thing we have to get out of the way is there are no reported
14 briefs cited in any of the briefs that confront this issue.
15 THE COURT: It is standard for people in bankruptcy or
16 facing bankruptcy to try to evade various provisions of the
17 bankruptcy code or in this case SIPA by making transfers to
18 relatives, spouses, and otherwise. That is always dealt with
19 as a question of fraudulent conveyance or preference or
20 something of that sort. Why isn't that the remedy for you if
21 there is some sort of circumvention rather than saying that
22 this Court should carve out a special exception to the in pari
23 delicto doctrine?
24 MR. OPPENHEIM: I would, your Honor, if there had been
25 transfers at issue here, but there are not. There are no
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Cafrsec2Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-18 404 Filed 02/28/1410/24/12 Page 3534 of 3837 34 1 transfers alleged in this complaint that are at all unique to
2 these defendants. The point we make is that during the
3 pendency of their marriages, as I think everyone's wife would
4 remind them, there were no transfers to Andrew; there were only
5 transfers to Andrew and Deborah while they were married.
6 In the case of transfers to these spouse defendants,
7 the trustee has done exactly what you suggest, which is why
8 these spouse defendants are also defendants in separate
9 proceedings initiated by the trustee to recover under the
10 bankruptcy code for those transfers.
11 But these claims arise out of the assertion of
12 property interest in transfers made to a husband and a wife.
13 It is a unity of interest which these spouse defendants are
14 trying to avoid. That's why, if I may, I would take issue with
15 my adversary's description of this as an attempt to carve out a
16 new exception. I see it as the opposite, frankly, your Honor.
17 In this situation there is a single transfer that was
18 made to a single husband and wife. That husband and wife are
19 similarly tainted by the very same insider exception that we
20 have successfully pled before the bankruptcy court.
21 It is only now that the spouse defendants are saying
22 that they shouldn't be considered married for purposes of those
23 transfers that came during the pendency of their marriage
24 because they would like to assert a property interest in those
25 transfers, whether they are the result of in some cases divorce
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Cafrsec2Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-18 404 Filed 02/28/1410/24/12 Page 3635 of 3837 35 1 or death. In neither case, however, would it be appropriate to
2 carve out a new way to get out from under the insider exception
3 because of the unity of these transfers.
4 Effectively, your Honor, this is very similar to what
5 happens in a civil or criminal forfeiture case. This is the
6 last thing I'm going to touch on because it is an argument the
7 trustee made in its papers, and it is effectively -- that is
8 the third time I have used that word, I will stop -- ignored in
9 these defendants' papers.
10 You can look to the case of SEC v. Cavanagh, which is
11 a Second Circuit opinion about SEC forfeiture that uses some
12 language that I think is important here. This is basically the
13 Mafia case. The point is you can't hide transfers of money by
14 allowing a spouse to assert an ownership interest in them all
15 of a sudden. In that case the Second Circuit held in fact that
16 was not a way to get around the recovery of certain assets.
17 That is why we think that should be the focus here.
18 These defendants are right, the insider exception does
19 focus on defendants and not transfers. But we have argued in
20 response and that response has been ignored, that these are the
21 same transfers. There is no other transfer to these spouse
22 defendants that magically transforms them into insiders. The
23 trustee readily concedes that they did not work at BLMIS.
24 However, during their marriage those transfers were one and the
25 same, and that's why the insider exception should allow us to
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Cafrsec2Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-18 404 Filed 02/28/1410/24/12 Page 3736 of 3837 36 1 bring these claims here.
2 THE COURT: Thank you very much.
3 Did SIPC want to be heard on this?
4 MR. LaROSA: No, thank you, your Honor.
5 THE COURT: Let me hear on rebuttal from defense
6 counsel.
7 MS. BIRGER: Very briefly, your Honor. First, it is a
8 misnomer to say that this issue has already been decided. The
9 issue before Judge Lifland was whether they could amend the
10 complaint to add the spouses. They tried to amend the
11 complaint to add fraudulent conveyance and preferential
12 transfer claims against the spouses as well as the common law
13 claim.
14 The decision that came down from the bankruptcy court
15 was: You are barred by the statute of limitations from
16 bringing the bankruptcy claims, the common law claim is an
17 issue of first impression, there is no case law on the insider
18 exception, so I can't hold that it is entirely futile for you
19 to bring the claims, so I'll let you amend the claim to add it.
20 He did not rule on the motion to dismiss standard.
21 Upon their filing the second amend complaint, we were about to
22 file a motion to dismiss when this Court withdrew the reference
23 to consider this issue, so the parties have adjourned that
24 briefing pending this Court's ruling.
25 It is also a red herring. You can move to withdraw
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Cafrsec2Case 1:12-mc-00115-JSR1:11-cv-05905-AT Document Document 29-18 404 Filed 02/28/1410/24/12 Page 3837 of 3837 37 1 the reference without a formal motion pending. Indeed, we did
2 not wait until we got the issue from the bankruptcy court. We
3 moved to withdraw the reference before this Court's April 2nd
4 deadline on the statute of limitations issue and this issue as
5 well. It wasn't until after that that Judge Lifland's ruling
6 came down. So he also the timing and the facts a bit off.
7 The only other thing I will say is that the trustee's
8 argument proved my point. He told you that there were only one
9 set of transfers at issue here and they were transfers that
10 went simultaneously to husband and wife. That just shows that
11 what he is really trying to do is to avoid the transfers.
12 That's not the right question here.
13 The question here is whether he has standing to pursue
14 certain defendants. It's not the transfers that are being
15 sued, it's Stephanie Mack and Deborah Madoff, and he doesn't
16 have standing to bring common law claims against them. They
17 may or may not have it against their husbands; he is contending
18 that he does, they are insiders. That's not before the Court.
19 He could pursue the transfers had they not been time-barred,
20 but the fact that the transfers are simultaneous does not
21 create standing.
22 THE COURT: Thank you very much. I will take all of
23 this under advisement. Is there anything else anyone needs to
24 raise this evening? Thanks so much.
25 (Adjourned)
SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Case 1:11-cv-05905-AT Document 29-19 Filed 02/28/14 Page 1 of 3
EXHIBIT 19
CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-19 1 Filed Filed 08/23/11 02/28/14 Page Page 1 of2 of2 3
MILBERG LLP One Pennsylvania Plaza New York, New York 10119 Tel.: (212) 594-5300
SEEGER WEISS LLP 77 Water Street New York, New York 10005 Tel.: (212) 584-0700
Attorneys for Morning Mist Holdings Limited and Miguel Lomeli
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK —————————————————––––––––x
In re: Chapter 15 Case
FAIRFIELD SENTRY LIMITED, et al., Case No. 10-13164 (BRL) Jointly Administered Debtors in Foreign Proceedings.
—————————————————––––––––x
DERIVATIVE PLAINTIFFS’ NOTICE OF MOTION FOR MANDATORY WITHDRAWAL OF THE REFERENCE
PLEASE TAKE NOTICE THAT Morning Mist Holdings Limited and Miguel Lomeli,
by their undersigned counsel, upon the accompanying memorandum of law, respectfully move
the United States District Court for the Southern District of New York for entry of an Order,
pursuant to 28 U.S.C. § 157(d), Federal Rule of Bankruptcy Procedure 5011, and Local
Bankruptcy Rule 5011-1, withdrawing the reference to the Bankruptcy Court of the above- captioned matter. CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-19 1 Filed Filed 08/23/11 02/28/14 Page Page 2 of3 of2 3
Dated: August 22, 2011 Respectfully submitted,
MILBERG LLP
By: /s/ Robert A. Wallner Robert A. Wallner Kent A. Bronson Kristi Stahnke McGregor One Pennsylvania Plaza New York, New York 10119 Tel.: (212) 594-5300 Fax: (212) 868-1229 [email protected] [email protected] [email protected]
SEEGER WEISS LLP Stephen A. Weiss Christopher M. Van de Kieft Parvin Aminolroaya 77 Water Street New York, New York 10005 Tel.: (212) 584-0700 Fax: (212) 584-0799 [email protected] [email protected] [email protected]
Attorneys for Morning Mist Holdings Limited and Miguel Lomeli
DOCS\568510v1
2 Case 1:11-cv-05905-AT Document 29-20 Filed 02/28/14 Page 1 of 66
EXHIBIT 20
CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2 Filed Filed 08/23/11 02/28/14 Page Page 1 2of of 9 66
MILBERG LLP One Pennsylvania Plaza New York, New York 10119 Tel.: (212) 594-5300
SEEGER WEISS LLP 77 Water Street New York, New York 10005 Tel.: (212) 584-0700
Attorneys for Morning Mist Holdings Limited and Miguel Lomeli
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK —————————————————––––––––x
In re: Chapter 15 Case
FAIRFIELD SENTRY LIMITED, et al., Case No. 10-13164 (BRL) Jointly Administered Debtors in Foreign Proceedings.
—————————————————––––––––x
DERIVATIVE PLAINTIFFS’ MEMORANDUM OF LAW IN SUPPORT OF MOTION FOR MANDATORY WITHDRAWAL OF THE REFERENCE CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2 Filed Filed 08/23/11 02/28/14 Page Page 2 3of of 9 66
TABLE OF CONTENTS
Page
BACKGROUND...... 1
ARGUMENT ...... 3
A. The Standard for Mandatory Withdrawal of the Reference ...... 3
B. Mandatory Withdrawal is Required ...... 4
CONCLUSION ...... 5
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TABLE OF AUTHORITIES
Page(s) CASES
Anwar v. Fairfield Greenwich Ltd., 676 F. Supp. 2d 285 (S.D.N.Y. 2009) ...... 1
In re Bernard L. Madoff Inv. Secs. LLC, No. 10-2378, 2011 U.S. App. LEXIS 16884 (2d Cir. Aug. 16, 2011)...... 1
David I. Ferber SEP IRA v. Fairfield Greenwich Group, 2010 NY Slip Op 51321[U] (Sup. Ct., NY County July 22, 2010)...... 1
In re Fairfield Sentry Ltd., 440 B.R. 60 (Bankr. S.D.N.Y. 2010)...... 2
In re Ionosphere Clubs, Inc., 922 F.2d 984 (2d Cir. 1990)...... 4
Picard v. HSBC Bank, PLC, No. 11 Civ. 763, 2011 U.S. Dist. LEXIS 82936 (S.D.N.Y. July 28, 2011)...... 5
Picard v. HSBC Bank, PLC, No. 11 Civ. 763, 2011 U.S. Dist. LEXIS 44126 (S.D.N.Y. Apr. 25, 2011)...... 4
Picard v. JPMorgan Chase Bank & Co., No. 11 Civ. 913, 2011 U.S. Dist LEXIS 57645 (S.D.N.Y. May 23, 2011)...... 4, 5
STATUTES
11 U.S.C. § 1501...... 2
15 U.S.C. § 78aaa...... 1
15 U.S.C. § 78bbb ...... 4
28 U.S.C. § 157(d)...... 1, 4
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Morning Mist Holdings Limited and Miguel Lomeli submit this memorandum in support
of their motion for mandatory withdrawal of the bankruptcy reference pursuant to 28 U.S.C. §
157(d). Withdrawal is required because the case raises significant issues under the Securities
Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. (“SIPA”).
BACKGROUND
This proceeding is one of many filed following the disclosure of the Ponzi scheme operated by Bernard Madoff and his firm, Bernard L. Madoff Investment Securities LLC
(“BLMIS”).1 Among BLMIS’ largest customers was Fairfield Sentry Ltd. (“Sentry”), a feeder
fund organized under the laws of the British Virgin Islands (“BVI”). Sentry invested billions of
dollars with BLMIS. BLMIS is currently in liquidation, and Irving H. Picard has been appointed
as trustee (“Trustee”) for BLMIS under SIPA.2
Movants, who are shareholders of Sentry, filed a derivative action on behalf of Sentry in
New York state court. The derivative action alleges, inter alia, that Sentry’s management
(including Fairfield Greenwich Group and associated persons) breached fiduciary duties to
Sentry.3
1 For a description of the scheme, see In re Bernard L. Madoff Inv. Secs. LLC, No. 10-2378, 2011 U.S. App. LEXIS 16884, at *5-9 (2d Cir. Aug. 16, 2011).
2 See In re Bernard L. Madoff Inv. Secs., 2011 U.S. App. LEXIS 16884, at *4-5 (describing Mr. Picard’s appointment under SIPA); see also Exh. 1 at 1 ¶ C (same). Referenced exhibits are in the accompanying Compendium of Exhibits.
3 The derivative action is discussed in Anwar v. Fairfield Greenwich Ltd., 676 F. Supp. 2d 285, 291, 294 (S.D.N.Y. 2009), and David I. Ferber SEP IRA v. Fairfield Greenwich Group, 2010 NY Slip Op 51321[U], at *1-3 (Sup. Ct., NY County July 22, 2010). The action has been removed to the bankruptcy court. CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2 Filed Filed 08/23/11 02/28/14 Page Page 5 6of of 9 66
Following the filing of the derivative action, a BVI court purportedly named Kenneth
Krys and Joanna Lau or their predecessors (collectively, “Krys”) as liquidators of Sentry, and
Krys subsequently filed a petition in the Southern District of New York bankruptcy court for
“recognition” under Chapter 15 of the bankruptcy code. See generally 11 U.S.C. §§ 1501, et seq.
The bankruptcy court (Lifland, J.) granted the petition over movants’ objection, and stayed the
derivative action. See In re Fairfield Sentry Ltd., 440 B.R. 60 (Bankr. S.D.N.Y. 2010)
(“Recognition Order”). Movants have appealed the Recognition Order to the district court. See
Dkt. 1 in 10 Civ. 7311 (pending before Judge Daniels).
In May 2011, Krys and the Trustee entered into a settlement agreement (Exh. 1) to
resolve claims that Sentry had asserted against the BLMIS estate, and that the Trustee had
asserted against Sentry.4
Movants filed an objection to the settlement in the bankruptcy court and, alternatively, a
motion to stay any approval of the settlement pending a determination of the appeal of the
Recognition Order (“Objection”).
On June 7, 2011, the bankruptcy court (Lifland, J.) approved the settlement agreement, and overruled the Objection. See Exh. 2. The bankruptcy court held that movants lacked standing because they are shareholders of Sentry -- not direct customers of BLMIS -- and the issue before the bankruptcy court was whether the Settlement Agreement was “in the best interests of the BLMIS estate.” Id. at 3 (emphasis in original); see also id. at 4-5. The
4 The Trustee’s amended complaint in Picard v. Fairfield Sentry Ltd. is Dkt. 23 in 09 AP 01239 (Bankr. S.D.N.Y.). The Trustee asserts that Sentry and its management “worked in conjunction with BLMIS and Madoff to commit, and exponentially expand, the single largest financial fraud in history.” Id. at ¶ 2.
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bankruptcy court did not evaluate the settlement agreement (including its fairness) from Sentry’s perspective. See id. at 2-3.5
One of the “principal terms” of the agreement is Sentry’s assignment -- to the Trustee --
of claims that Sentry had filed against its management in a prior lawsuit, including claims for
breach of fiduciary duty.6 Krys values those claims at over $919 million.7 Although the
bankruptcy court previously approved the Settlement Agreement, Krys has represented that, in
the future, he “will be moving before the Bankruptcy Court for approval of the assignment of the
management claims to the BLMIS Trustee under the terms of thee Settlement Agreement.”8
Krys has not yet filed that motion. Nonetheless, movants submit that it is prudent to
withdraw the reference at this time -- before resources are expending litigating the motion --
because the issue concerning the Trustee’s ability to take the assignment raises substantial issues
under SIPA.
ARGUMENT
A. The Standard for Mandatory Withdrawal of the Reference
Mandatory withdrawal of the reference is governed by 28 U.S.C. § 157(d), which
provides in pertinent part:
The district court shall, on timely motion of a party, … withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United
5 Movants have filed a motion before the district court to stay the approval of the settlement agreement [Dkt. 29 in 10 Civ. 7311 (S.D.N.Y.)]; that motion is pending before Judge Daniels.
6 Exh. 1 ¶ 5; Exh. 3 ¶ 22 (describing “principal terms and conditions”).
7 See Dkt. 1 in 10 AP 3800 (Bankr. S.D.N.Y.), Notice of Removal at ¶ 1.
8 Exh. 4 at 21 n.23; see id. (stating that movants “will have the opportunity to be heard by the Bankruptcy Court on that motion”).
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States regulating organizations or activities affecting interstate commerce.
28 U.S.C. § 157(d).
Mandatory withdrawal is appropriate “where substantial and material consideration of non-Bankruptcy Code federal statutes is necessary for the resolution of the proceeding.” Picard v. JPMorgan Chase Bank & Co., No. 11 Civ. 913, 2011 U.S. Dist LEXIS 57645, at *8 (S.D.N.Y.
May 23, 2011) (quoting In re Ionosphere Clubs, Inc., 922 F.2d 984, 995 (2d Cir. 1990))
(McMahon, J.); see Picard v. HSBC Bank, PLC, No. 11 Civ. 763, 2011 U.S. Dist. LEXIS 44126, at *8 (S.D.N.Y. Apr. 25, 2011) (withdrawal mandated to address issues that “require substantial and material interpretation of non-bankruptcy federal law”) (Rakoff, J.).
B. Mandatory Withdrawal is Required
SIPA is a non-bankruptcy federal statute. Picard v. HSBC, 2011 U.S. Dist. LEXIS
44126, at *9 (“SIPA expressly provides that it shall be considered an amendment to, and section of, the Securities Exchange Act of 1934 ….”) (citing 15 U.S.C. § 78bbb); Picard v. JPMorgan
Chase, 2011 U.S. Dist. LEXIS 57645, at *20-21 (“[A]n issue that requires significant interpretation of SIPA undoubtedly requires consideration of laws other than Title 11.”).
Moreover, the issue presented in this case -- whether Mr. Picard, as a SIPA trustee, may be assigned the claims -- involves a substantial and material consideration of SIPA, thus requiring mandatory withdrawal. Indeed, two recent decisions by the district court have so held.
See Picard v. HSBC, 2011 U.S. Dist. LEXIS 44126, at *16 (issue of assignability of claims to
Mr. Picard “will … require substantial interpretation of SIPA because it is far from clear that
SIPA permits as a broad a theory of assignee standing as is being asserted by the Trustee in this case.”); Picard v. JPMorgan Chase, 2011 U.S. Dist. LEXIS 57645, at *17 (“[B]ecause it is not clear that a SIPA trustee may sue parties other than the liquidated estate as an assignee of the
4 CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2 Filed Filed 08/23/11 02/28/14 Page Page 8 9of of 9 66
estate’s customers, determining if the Trustee has standing as an assignee of BMIS customers will require the bankruptcy court to engage in substantial interpretation of SIPA.”).
In HSBC, following mandatory withdrawal of the reference, Judge Rakoff held that Mr.
Picard has no authority under SIPA to take an assignment of customer claims. Picard v. HSBC
Bank, PLC, No. 11 Civ. 763, 2011 U.S. Dist. LEXIS 82936, at *29-31 (S.D.N.Y. July 28, 2011)
(citing authorities).
Of course, whether SIPA authorizes the assignment of the claims to Mr. Picard is beyond the scope of this motion. See Picard v. JPMorgan Chase, 2011 U.S. Dist. LEXIS 57645, at *9
(“[I]n determining whether withdrawal of the reference is mandatory, this Court need not evaluate the merits of the parties’ claims ….”). For present purposes, the critical fact is that the issue requires “substantial and material consideration” of a non-bankruptcy federal statute. That fact requires mandatory withdrawal of the reference.
CONCLUSION
The Court should withdraw the reference.
Dated: August 22, 2011 Respectfully submitted,
MILBERG LLP
By: /s/ Robert A. Wallner Robert A. Wallner Kent A. Bronson Kristi Stahnke McGregor One Pennsylvania Plaza New York, New York 10119 Tel.: (212) 594-5300 Fax: (212) 868-1229 [email protected] [email protected] [email protected]
5 CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2 Filed Filed 08/23/11 02/28/14 Page Page 9 10 of of9 66
SEEGER WEISS LLP Stephen A. Weiss Christopher M. Van de Kieft Parvin Aminolroaya 77 Water Street New York, New York 10005 Tel.: (212) 584-0700 Fax: (212) 584-0799 [email protected] [email protected] [email protected]
Attorneys for Morning Mist Holdings Limited and Miguel Lomeli
DOCS\568528v1
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MILBERG LLP One Pennsylvania Plaza New York, New York 10119 Tel.: (212) 594-5300
SEEGER WEISS LLP 77 Water Street New York, New York 10005 Tel.: (212) 584-0700
Attorneys for Morning Mist Holdings Limited and Miguel Lomeli
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK —————————————————––––––––x
In re: Chapter 15 Case
FAIRFIELD SENTRY LIMITED, et al., Case No. 10-13164 (BRL) Jointly Administered Debtors in Foreign Proceedings.
—————————————————––––––––x
COMPENDIUM OF EXHIBITS TO DERIVATIVE PLAINTIFFS’ MEMORANDUM OF LAW IN SUPPORT OF MOTION FOR MANDATORY WITHDRAWAL OF THE REFERENCE CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-1 Filed 02/28/1408/23/11 Page 122 of of 3 66
Morning Mist Holdings Limited and Miguel Lomeli submit this Compendium of Exhibits
to Derivative Plaintiffs’ Memorandum of Law in Support of Motion for Mandatory Withdrawal
of the Reference. The exhibits are described below:
Exhibit Description
1 Settlement Agreement (without exhibits), dated as of May 9, 2011 [part of Dkt. 69 in 09 AP 01239 (Bankr. S.D.N.Y.)]
2 Bench Memorandum and Order Granting Trustee’s Motion for Entry of Order Approving Agreement, dated June 7, 2011 [Dkt. 92 in 09 AP 01239 (Bankr. S.D.N.Y.)]
3 Motion of Irving H. Picard, Trustee, for approval of Settlement Agreement (without exhibits), dated May 9, 2011 [Dkt. 69 in 09 AP 01239 (Bankr. S.D.N.Y.)]
4 Selected pages from Foreign Representatives’ Memorandum of Law in Opposition to Appellants’ Motion to Stay Bankruptcy Court’s Orders Approving Settlement Agreement Between Appellees and Related Debtors and Irving H. Picard, Trustee [Dkt. 32 in 10 Civ. 7311 (S.D.N.Y.)]
Dated: August 22, 2011 Respectfully submitted,
MILBERG LLP
By: /s/ Robert A. Wallner Robert A. Wallner Kent A. Bronson Kristi Stahnke McGregor One Pennsylvania Plaza New York, New York 10119 Tel.: (212) 594-5300 Fax: (212) 868-1229 [email protected] [email protected] [email protected] CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-1 Filed 02/28/1408/23/11 Page 133 of of 3 66
SEEGER WEISS LLP Stephen A. Weiss Christopher M. Van de Kieft Parvin Aminolroaya 77 Water Street New York, New York 10005 Tel.: (212) 584-0700 Fax: (212) 584-0799 [email protected] [email protected] [email protected]
Attorneys for Morning Mist Holdings Limited and Miguel Lomeli
DOCS\568614v1
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EXHIBIT 1 CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-2 FiledFiled 08/23/1102/28/14 PagePage 215 of of 21 66
AGREEMÈNT
111is Agreement, dated as of May 9, 2011 ("Agreement"), is made by and among Irving H. Picard, in his capacity as Trustee for the liquidation under the Securities Investor. Proteciioii Act of i 970. as amended ("SIP A"), of Bernard L. Miidoff Investment Securities LLC
"Trustee"), on the one hand, (the and Kenneth Krys and Joana Lau (together with their predecessors, the '~Liguidators" otthe "Joint Liquidators"), solely in their respective capadtiesa,s the Foreign Representatives tòr and Joint Liquidators of Faitfeld Sentry Limited, a British Virgin Islands corporation (."FaIrfieIdSentr"), Fairfeld Sigma Limited,a British Virgin Islands corporation ("Fairfeld Sigma"), and Fairfield Lambda. Limited, a British Virgin Islancis corporation G'Faifieid Lambda" and, tógether with Faìi;field. Sentr and Fairtield Sigma; the "Fairfield Funds"), on the other hand (each of the Tnistee, tlw Liquidators, Fairfield Sentry, i~airt¡eld Sìgma and Fairfield Lan1bda, a "Pary" and, cOllé.ctively~ the '~Paities").
BACKGROUND
A. Be11ard L. Madôff Investment Setorties LLC ("BLMIS") was a registered broker-dealer and a memher of the Securities Investor Protection Cònipany ("SipC,i). B. On December 11, 2008 -(the. "Filng Date"), the Securities and Exchage Commission (the "SEC") :tièd acomplaînt in the "United' States Di!5trict Court for the Southern
District of New York (the "'Düitrict Cour';) against BLMIS 'and Bernard L. Madoff ("Madoff"j, On December 12, 2008, the DÍsttlct Court enieredan orderwhiçhamong other things appointed a receivei" tor the assets ofBLMIS (No. 08-CV ~ 10791 (L88)). C. On December .15, 2008, pursuant to section 5(a)(4)(A) of SIPA, the SEC consented to a combination of its own action with the application of SIPC. Thereafter.SIPC fied an applìcation in the Distrkt COU1't under seCtion 5 (a)(3)of SIPA alleging, infer aUa,. that BLMIS was not able to meetitsobHgations to secw"it,es Cl,stöniérs as they came due and, accordingly, its customers needed th protections afforded by SIPA. On December i 5.,.2008, the District Court granted the SIPC application and enteed an order lUder SIPA, which, in pertinent pan, appointed the Trustee.1òl' the liquidation of the business ofBLMIS under s~ction 5(b)(3) of
SIPAand removed the case to the United States Ba,nkruptcy c.ourt for the Southern District of New York (the "Banptcy Cour") under section 5(b )(4) of SIP A; where it is currently pending as Case No. 08-01789 (BRt) (the ~'SIP A Ptoceedinll"). The Trustee is duly qualified to serve and act on behalf of the estate of BLMIS (the "BLMIS Estate").. D. Fairfield Sentry is a British Virgin Islands ("BVI") company that at all relevant times, was a customer ofBLMIS. E, Fairfeld Sigma and Fairfièld Lambda are BYI companies that at all relevant times, had as their respective sole purposes to Invest funds in Fairfield Sentry.
F. Pursuant tó an Order entered on April 23. 2009, the Eastem Caribbean Supreme Court in the High Court of Justice of the Virgin Islands (the "BVl Court") appointed Christopher Stride to be the Liquidator for Fairfield Lambda, which appointment commenced the winding up of Fairtìeld Lanl,bda pursuanl to the BritIsh Virgin Islands Insolvency Act 2003 (the "Lambda Proceeding"). CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-2 FiledFiled 08/23/1102/28/14 PagePage 316 of of 21 66
G. Pursuant to an Order entered 011 July 21,2009, the BVI Court (i) permitted the commencement of the winding up of Fairfeld Sentry in accordance with the British Virgin Islands Insolvency Act 2003 (the "Sentr Proceeding"). and (ii) appointed Kenneth Krys and Christopher Stride as the Joint Liquidators for Fairfeld Sentry.
H. Pursuant to an Order entered on July2t. 2009, the BVI Court (i) pennitted the commencement of the winding up of Fairfield Sigma in accordance with tpe British Virgin Islands Insolvency Act 2003 (the i¡SigmaProceeding" and, together with the Lanbda Proçeeding and the Sentry Proceeding, 'the "BYl Proceedings")1 and (ii) appointed Kcmieth Krys and Christopher Stride to be the Joint Lìquìd,ators for Fairfield Sigma. i. On July 22,2010, in proceedings com:enced .by the Liquidators pursuant to Chapter 15 of the Bankuptcy Code (the "Chapter 15- Proceedings"), the Bankruptcy Court ehte:red an order recogniziIlgthe BVI Proceedings as foreign main proceedings and granting related relief to the Liqtiidatots.
J. On or about Sept~ntber 6, 2010, the BVl Court issued notices acknowledging Chris.topher Stride's resignationan4 Joanna Lau'.sappointrent as loÍilt Liquidator with Kenneth Krs of each of uie Fairfeld Fùnds.
K. Fairfe.d Sentr Was a eiistöinèrof BLMIS and maintained customer accounts,
Accounts 1 FNOI2, 1 FN045 , IFNQ69,IFN070 with BLMIS (the "Fairfìeld Sentry Accounts") commencing in or about t 990. The Fairfield Sentr ACcOlmts are listed as Exhibit A to this Agreement. According to the TnTstee.hetweeo then and the Filng Date, on an overailbasis Fairfield Sentry deposited liitq: the Fairfield Sentr Acc.öuntsa total of one billion; one hundted. ninety-two milion, five hwiPred thirty~six thousand, three hundred forty~two dollars ($1,192,53.6,342) in excess of the amount of withdrawals that Fairtield Sentry made from the accounts (the "Sentry Net Loss"). Accordig to the Trustee, Fairfeld Sentry withdrew on~ billion one hwidred thirty thousäid dollars ($.1;130,OOO;OOU) from. the Fairfield Sentry AcGourits within ninety days before the FU:Íng'Date ("90 Day Withdrawals") and ~n additiönal one bìlion nine hundred twenty four millön dollars ($1,924,000,000) from the Fairfield Sentry Accounts, during the period more tlian 90 days, builess than six years, before the Filing Date (the '.Pre 90- Dav Withdrawals" and, together with the 90 Day Withdrawals, the .'.Withdrawals").
1. Prior to the .appointment of the Liquidators, Fairfeld "Sentry fied three customer daims in the Sip A Proceèd.ing. (assigiied claim nW11bel's 008037, 007898 and I 1251, later amended by claim numbers 01 1234 ànd i 1429) (such claims; collectively, the "Sentr SlPA
Claim") alleging aggregate losses from the Fairfield Sentry Accounts of six billion, two hundred eighty-four milion, three hundred twenty-one thousand, five hundred e.ighty-one dollars ($9,284)21,581) (the "Last .Statement Amount"). The Sentry SIPA Clai. including the relevant BLMIS Account Numbers IFNOI2, IFN045, IFN069. 1 FN070, is included as Exhìbit B to this A!,1l"eement. The Sentry SIPA Claim, as fied, asserts that Fairfield Sentry is entitled tö allowance of a customer claim in tlie SlPA proceeding in an amount reflected on Fairfield Sentr's BLMIS account statements for the period ending November 30, 2008, i.e., the Last Statement Amount.
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M. The Trustee has disputed that Fairfield Se.ntry is entitled to liIlowance of a cusomer claù in the amount of the .Last Statement Amount. On March 1, 20 i 0, the Honorable Burton R. Lifhmd, of the Bankruptcy Cmut, issued an opinion applying the Trustee's '"net equity" calculation of customer claims as tiie difference between investment into BLMIS and amounts withdrawn (the "Net Equity Method"). On March 8, 2010 Judge LiJ1and entered an order implementing the ciecision and certfying it for i.ediate appeal for the United States Court of Appeals for the Secon.d Circuit. According to the Trustee, the amolUlt of the Sentr SIPA Claim based 011 the Net Equity Method is the Sentry Net Loss, i.e., One Billon, One Hundred Ninety-Two Milion, Five Hundred Thrt-Six Thousand, Three Hundred Forty-Two Dollars ($1,192,536,342) (the "Sen:trSIPANetEgUity Claim").
N. Prior to the appointment of the LiqlUdatots, Fairfeld Sigma fied tour customer claims in the SJPA Proeeedig (assigned claim nwnbers 011250, 011744, 011240 and . 01 1249) claiming aggregate losses of seven hundred sev~nty-thrêe nullon, six hundred thirty- five thous;:U1d,on,e huncled eighty-eight dollars ($773,635,188) (such claims, collectively, the "Sigma SIPA Ciai'mH). ön ot about De.cembet .S, 2009, the Ttustce issued a notice of denial of the Sigma SrPA Claim on the asserted b.asis that Sigma is hOt a customer of BLMlS with the. meanng of 15 U.S.C. § 781l(2)(the '''Sigma Denial Notice"). On or about Januar 7. 2010, the Liquidators fied a timely øbjecti6n to the 'Sigma Denial N atice in the SIP A Proceeding, and that objection I'emains pending. The Sigma srPA Claim. the Sigma Denial Notice and the
Liquidators' objection to the Sigma Denial Notice are included as Exhibit C to this Agreement.
O. Prior to the appo.irttniertt of the Liquidators, Fairfeld Lambda fied four cüstomer claiins. in the SIPA 'proc~edi)ig (iJsstgned claim numbers 014661, 014761, 014762 and 014795) chiirning aggregate losses uf tliirty-six.mìlion. six.hundred seventy-six thousand~ two
hundredancl five dcH1ars ($36,676,205) (such c1aims,col1i:çtiveIYi the "Lambda SIP A Claim"
ane!, together with the Sentr SIPA Claim and the Sigma SIPA Claim, the "Fairfeld SJPA "Caims"). On or about December 8, 2009, the Tru~lee jssued .a notice of denial ofthe Lambda SIPA Claim on the asserted basis that Lambda is not a customer of BLM1S within the meaning of 15 U.S.C. § 7811(2) (the "Lambda Denial Notice'l). On or about Januar 7, 2010, the
Liquidators fied a tìelyobjection to the Lambda Denial Notice in the SIPA Proce.eding, and that objection remains pending. The Lambda SIP A Claim. thë Laibda Denial Notice and the
Liquidators' objection to the Lambda Denîal Notice ar included as' EXhibit D to this Agreement.
P. The Trustee has brought an adversary ptoceeditig against Fairfeld Sentr, Fairfield Sigma, Fairfeld Lambda çitl .other defendants in the Bankuptcy Cour w1der the caption Picard v. Fairfield Sentry Ltd et al., Adv. Pro. No. 09-01239 (BRL) (the "Adversary Proceedinu"). In the Adversary Proceeding, the Trustee asserts that the Fairfield Funds are liable to the BLM1S Estate iincter 11 U.S.C. §§ 544, 547, 548, 550, SIPA § 78tff-(2)(c)(3) and
the New York FraudiilentConveyanc:e Act (New York Debtor. and Creditor Law §§ 270-281) for the Withdrawals made by Fairfield Sentry from BLMIS, and Fairfeld Sentry's subsequent transfer of.approxiinately Seven Hundred Fifty-Two Milion, Thee Hundred Thousand Dollars ($752,300.000) and Fift-Two Milion, Nine Hundred Thousand Dollars ($52.900,000) of the Wît11dtawals to Fairfield Sigma and Fairfield Lambda, respectively; specifically, the Trustee .seeks, inter alia, recovery from the Fairfield Funds of an amount totaling Three Bilion, Fift- Four Milion Dollars ($3,054,.UOO,OOO). The Trustee has also ¡iserted claims tor turnover and accounting ofthe Withdrawals, and for disallowance of the Fairfield SIP A Claims.
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Q. All claims of the Tnistee against the Fairfield Funds tidcr Ii U.S.C.§§ 544,
547,548 or 550, applicable provisions of SIPA, including § 78fff-(2)(c.)(3), and the New York Debtor and Creditor Law §§ 270-281 shall be referred to herein as the "Avoiding Power Claims." R. The Liquidators, on behalf of each of the fairfield Funds, have dÍsputed any liabilty to the .BLMIS Estate in connection with the Adversary Procecding and the Avoiding POWer Claims alleged therein.
S. The Th.stee, on the one hand, and the Liquid!31ors, for each ofthe estatestbat they represent, on the other hand, desìre to settle their disputes about the matters described .above without the "epense, de lay and unce:rtahity of Ii tigation.
AGREEMENT
1. Judgments'Regarding the Ttutee's Avoidiig Po-wer Claims. The Trustee and the Liquidators .agree they.shal Jointly request the BanptCY Court to (i) enter a jQ.dgttel1t a~ainst Fáirfield Sentr in the amomit of Three Billon,.. Fifty Four Milion Dollars ($3;054,000,000)" representing the ;settled amount of the Trustee's Avoiding Pqwer Claims against Faítfeld Sentry (the "Sentr Judgment"), (iî) enter a jiidgrrtent against Faìrfeld Sigma in thea,möunt of Severt Hundred Fift Two Milion, Three HtincIred Thousand Dollars
($752,300,000); representing the settled aiount of the Tnistee'g A voiding Power Claims ~gait fairfield Sigma (the "Sigma Judgment") ànd (iii) enter a judgment against Fair'field LambduÌn thearount of Fifty Two Million" Nine Hundred. Thousand DollRrs ($52~900,OOO), representIng. the settled amOllnt of the Trustee's Avoiding Power Claiinsagainst Fairfield Lambda (the "Lai"ba Judgment" and, together with the Sentry Judgment 11mi the Sigma Judgtetit.. the "Judgments"), eo,çh Judgment in the form attached heteto .as Exhibit E. By virtue of the mutual covenants and agrèemi;ilts .ÇQrttçiiilëd in, ánd the consideration provided by, this Agreement, including 0) the cash pàymi;nt to be made by the Liquidators to the Trustee as set fort below at
Paragraph 2, infra, aud (ii) the inutuaity agreed.to reduction of the Sentry SIPA Net Equity Claim from One. Billon, Oiie Hundred. Ninety-Two Millon, Five. Hundred ThirtywSix Thousand, Thrt
Hundred Forty-Two Dollars ($1,192.536,432) to an allowed SJPA claim of Two Himdretl Thirty
Mil1on Dollars ($230,000,000) as set fort below at Paragraph 13, infra, the Tnistee agrees to forbear exercising àny right to collect One Billion, One Hundred Thirty Milion Dollars ($1,130,000,000) on the SeritT Judgment from Liquidators, the Fairtield Funds or Their estate.s, leav.jng a llon-forbcaran.ce amount of One Bilion, Nine Hundred Twenty Four Millon ($~ ,924,000,000) (the "Non-:Forbearance Amount"). The Trustee shall have (i) an admitted c1aiin ín Fairiield Sentry's estate that is provable in the Sentry Proceeding for the full amount of the Sentry Judgment (the "Sentr Admtted Claim"), (ii).aI admitted claim in Fairfield Sigma's estate that is provable in the Sigma Proceeding for the full amount of the Sigma Judgment (the .'Sigma Admittcd ClaímH), and (iii) an admitted claim in Fairfeld Lambda's estate that is provable in the Lambda Proceeding for the full amount of the Lambda Judgment (the "Lambda Admitted Claim" and, together with the Sentry Admitted Claim and the Sigma Admined Claim, the "Admitted Claims"). Notwithstanding the foregoing, the Trustee's rights to enforce, collect on and/or satisfy the Judgments or any claims against the Liquidators ancVor as against any of the Fairfield Funds, induding, without limitation, the Admitted Claims, shall be limited solely to the
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rights, remedies and considerations expressly provided in, under and by this Agreement (and suç:h rights, remedies and considerations shall be the dividends paid to the Trustee on account of the Admitted Claims). Fot the avoidance of doubt, the Tl'ustee shall not be entitled to, nör shall he. seek, any distributions on accolJnt of the Admitted Claims in the BVI Proceedings or in .any other proceedingI'. Interest shall not accrue on the Judgments. The. Judgments shall be fied and entered by the Trustee 011 or after the Effective Date., defined below at Par;,graph 18.. The Judgments and the Admitted Clal"msshaU not be assignable. 2. Payment of Cash. The Liquidators shall pay to the Trustee a totaJ of Seventy Milion Dollars ($70,000,000) (the "Settlement Payment") of Fairfield Sentry's .cash às outlined in this Paragraph 2. On the Closing, as defined b.elow at Paragraph 20, the Liquidators. shall pay to the Trustee the sum of Twenty Four Milion DolIal's ($24.000;000). The Liqtridators .shaH .pay to the Trustee the balance of the Settlement Payment totaHng F011y Six Millon Dollars ($46,000.000) three (3) Business Days (as identi"Íed below) following the fist lò óccur of (ri) the tTrs.t date when Fairfield Sentr's. account at Citco Bank Nederland N.V.-Dublin branch (the
~'Citco Accoiiht") is no longer sUQ.íect to an order of attachment; (b) the sale. by the: Liqudatoi;s of any Allowed Claim as defined in Paragraph 1 J; or (c) the aggregate receipt by the Liquidators of fuds belongmg to Fairfeld Sentry equal to Forty Six MillOlt Dollars,($46.000,OOQ)frl1 ary .source, other than from a Sharing Claim (as defined below),a.ftet the Closing (as defined below). Notwíthstandí1i.g the foregoing, the Liguidators,in their sole discretion, may eleèt to pat the entire Settlement Payment to the Trustee prior to the occurences qutlined above.. For the. avoidace of doubt, none of Fairfield Sigma '8 cash shall be used to pay the Setth;ment Amoûtt.
Fot purposes of this Agreement, the term "'Business Day" shall mean any day other .than S:atutday, Sunday, or a day that is a legàl holiday in either New York City or the B'ritish Virgí Islands.
3. Teinùnation of Escrow Agreements. The escrow agreements betwe~ii the.
Tru.stee and the Liquidators dated as 01' September 24,2009 and JuneS, 2010, respectivelY (the "Escrow Agreements") (attached hereto as Exhibit F to this Agreement), shali terminate. aml be. of no further force or eflèct ùpon receipt by the Trustee of the. füll amount of the. Settlernerit Payment. Upon the temlÌnation of the Escrow Agreements, the Trutet shall have no intere$t in, rights to or control over any cash or cash equivalents or other property of the Liquidators or any of the Fairfield Funds, including, without linútation, the Fairfield Funds' no.n-BLMIS investments .ánd the proceeds thereof, except as otherwise provid,ed herein, Upon the receipt by tlê Trustee of the full amOtU1t of the Settlement Payment, the Paries shall joirttly instruct the rèspeçtive escrow agents Wlder the Escrow Agreements to release all propert thàt is si;bject thereto to the Liquidat()rs. The Tnistee hereby consents to 0) the transfer of aU unattached fuds of the Faírtield Funds in the Citco Account to Fairtield Sentry's accounts, and/or, as applicable, to Fa.irfield SigrIla's or Fairfield Lan1bda's accounts, in the BVI at Scotiabank Br.itish Virgin Islands and/or VP Ban and Trust Company (BVI) (such accounts, collectively, the "Fairfield BVI Accounts"), (ii) the tranfer of all funds of the Fairfield Funds in their Clydesdale Bank account in Great Britairl, established pursuant to September 24, 2009 Escrow Agreement between the Paries to the applicable Fairfield BVT Accounts of the Fairfeld Funds and (iii) the transfer of all proceeds of the Fairfield Funds' non-BLMIS investments to the applicable Fairfield BVI Accounts.
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4. Redeemer Action Recoveries, So long as the Non-Forbearance Amount of the Sentr Judgment, the Sigma Judgment and the Lambda Judgment have not been satisfied in fùll, the. Liquidritors shall pay to the Trustee fifteen percent (15%) of the Liquidators' Net Recoveiies from all claims and causes of a.Gtions, asserted by the Liquidators (eíther on their behalf or on behalf of any of the Fairtield Funds)" in any jurisdiction (including, without limitation, the State of New York and the British Virgin IsI~s) and based on any law (including, without limitation, the statutory a.nd common law of the British Virgin Islands), seeking to recover payments made by D.r behalf any of the Fairfeld FUl1ds in connectiOii with the redemption of shares in the. Fàirfield Funds ("Redeemer Actions"), and the Liqujdators shaH retain eighty-five percent (85%) of such Net Recoveries. The:Redeemer Actions include, but are not limited to, those pending aGiions identified on Exhibít G. attached heri~tú. The Liquidators shaH provide reasonable notice to, and reasonably confèr in göod faith with. the Trustee prior to commencing any Redeemer Action not identified on Exhibit G. The Liqiiiçlàtors ~hall retain one.hundred percent (100%) of the Net Recoveries from Redeemer A~tiónsthat tbe Liquidators receive ónce the Non-Forbearance. Amol,nt of the Sentiy Judgment, the Sigma Judgtent and the
Lambda Judgment are satisfied in fiill. Except as otherwise. provided herein, the Liquidators shall prosecute the Redeemer Actions at their sole expense, and the Ttustee shall not, and shall have no right to, (i) intervene in or otherwise interfere with the "Liquidators' prosecutÌ"on of any Redeemer Actions, other than the Trustee'S pi.siit of the Subsequent Transferee Claims pursuant to Paragraphs 7, Sand 9 helow, or (ii) fie, assert~ pwsi,e or prosecute any Chi.rtis or
.c:m1,sesofaction against.ai~y shareholder of any of the Fairfield Fimds,.or any beneficiar thereof, seeking tó. reCover payments made by Or on behalf of any otthe Fairfeld Funds in cpnnection ..vjth the redemption. of shares in the Fairfield Funds, other .than the Subl'equent Tri;feree CIaî pursuant to Paragraphs 7. 8.an.d 9 below. For purposes of this Agreement, the tenn "'Net Recoveries" shall mean the consideration of cash or a cash equivalent that i& paid. to the. Liqiiida.tors pursuant to a settement, judgment or other resolution ora claim or cause. öfaction, and less the an'iount of the Liquidators.' reasonable costs and/or expenseS (includíng profes~ionai fees and expenses) incurred iii connection with such claim or cailSe of actiOl1 other than and expressly excluding any contingency or success fees of the Liquidators' attorneys (the "Liquidator Expenses"'). The Liquidator Expenses (other than attorneys' contingency fees) shall be reasonably allocated to a partícular claim or cause of action. The TrtJstee shall have no right to object to or challenge the Liquidators' payment of any Liquidator Expenses reasonably incured and properly allocated. Further, for the avoidance of doübt, the Liquidators shali not be required to pay any amounts to the Tnl.tee. or provide any credit to the Trustee, on accQunt of the waiver, disallowance or reduction in amowit of any c;laims against the Fairfield Funds, a.d any such '\vaíver, disallowalice or reduction in amount wil not be credited against the Judgmerits. 5. Management Claim Recoveries. The Trustee, solely at the Trustee's expense, shall prosecute all claims. and causes of action he has asserted in the Adversary Proceeding against the Fairfeld Funds' former investment managers, investment advisors, managing entities, directors, pai1ners, and offcers. including but not limited to Fairfield Greeriwich Group, Fairfeld Greenwich (Bennuda) Limited, Fairfield Greenwich Advisors, LLC, Faield Risk Services Limited, Fairfield Greenwich Limited, Fairfe.ld Intemational Managers,
Inc., Walter M. Noel, Jr., Jeffrey Tucker, and all other individual persons named as defendants in the Adversary Proceeding (the "Adversary Proceeding Claims"). At the Closing, the Liquidators shall lUicQnditionally and irrevocably assign to the Trustee any and all claims asserted by, or on behalf ot: the Faírfeld Funds against Fairfield Greenwich Group, Fairfield Greenwich
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(Benmida) Limited, Fairfeld Greenwich Advisors. LLC, Fairfield Greenwich Limited, Faifield Investment Mangers, lnt:., Walter M. Noel, Jr., Jeffrey Tucker. Andres Piedrahita, Amit V ijayvergiya, Brain Francotiet, Lourdes Barenche, Cornelius Boele, Philp Tanb. Richard Landsberger, Charles Murhy, Andrew Smith, O~nìel Lipton, Mark McKeffrey, Hal'old Greisman, Santiago Reyes, Jacqueline Har¡irY, Robert Blum, Carina Noel.Piedrahita and Maria Teresa Pulido Mendoza in the actîon entitled FaÏ1:fìeld 8ent1y L.bnited ,? Fttbfi:eld Greenwich Group, et aL., cun'ently pending in the Banuptcy Court, Adv. Pta. Nò. 10.,Q3800 (BRL) (the "Liquidators' New York Actimn"), including but not limted to the 'Fairfeld Funds' claims for Breach of Fiduciary DutY, Breach of Contract, Unjust Enrichment, Constructive Trust, Rescission of Investment Manàget Contract based On Mutual Mistake, and Accounting (the "Assigned Claims;; and, together with the Adversar Prøceedig Claims; the "'Management
Claims"). For avoidance of doubt, the Manageinent Claims.sball not include claims or causes of action; if any, against the Liquidators or their agent5~ attorneys. i:mployees, rc¡prèsentatives or professionals.
In prosecuting the Assigned Claims, the Trustee shaUassert only those substantive law claims and allegations set forth and contained in the Liquidators~ New York Action and shall not .tlssert any other substantive law c.laims or :allegations as part of the' Assigned Claims without the Liqüidators' reasonable, "\vritten approvaL Prior to the assignent of the Management Claims to the Trustee, the Liquidators, III their discretion, niay amend their pleadings in the Liquidators' New YOrk Action â.d shall confer in good tàith with the Trustee with re~pect to the amendment in advance thereof: The Trustee shall retain one~~undred perc;ent (100%) of the consideration received by the Tiustee from the prosecution of tIie Management Claims lUtil the Trustee recovers. a gross amount of Two Hundred MiUion Dollars ($2QO:,OOO,OOO)in the aggregate from sùch claims. The Trustee shall pay to the Liqcidatóts fifteeh.përcent (15%) of the gross consideration received by the Trustee from prosecution o-fhe Mahageøënt Çlaims in excess of Two Htll:rdred Millon Dollars ($200,000,000) in the aggregate;æid the Trustee shall retain .the remaining eighty live percent (85%) of the gross consideration received by the Tmstee froni the
Managem.enL Claims in excess of Two Hundred Millon Dollars ($200iOOO,OOO) in the aggregate. Exc~pt as otherwise provided in this P(Uagraph 5, the Liquidators shall not, and ~hall have no right to, intervene in or otherwise interfere with the. Tnistee's prosecution of the Management Claims, and the Trustee shall prosecute the Management Ci~îlS at his sole expense.. The Trustee shall seek, in good faith, as part of any full or paral settementQt the Management .claims, a release of all claims by any ~ètiiing party agains1 the .Fafrfield Funds and the Liquidators.
6. Service Provider Claim Recoveries. So long as the Non-Forbearance Amount of me Sentry Judgment, the Sigma Judgment and the Laibda Judgment have not bee.n satisfied in full, (i) the Liquidators shall retain one-hundred percent (100%) of the Net Recoveries Itom all claims and causes of action against the Fairfield Funds' custodians, .administrators, accountants and aiiditors, including but not limited to PricewaterhouseCoopers LLP (Canada), PricewaterhouseCoopers Accountats N.V., Citco Fund Services (Europe) BV, Citeo Bank Nederland N.V., Citeo Global Custody N.V., Citco Global Custody (NA) N.V., Citco (Canada) Inc. and all affiiates ofthe JbregoiiJg entities (the "Service Provider Claims"), .until the Liquidators collect Three Hundred Milion Dollars ($300.000.000) in the aggregate from such claims. and (ii) the Liquidators shall pay to the Tnistee tìfteen percent (15%) of the Net Recoveries from Service Provider Claims in excess of. Three Hundred Millon Dollars
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($300,000,000) in the aggregate, and the Liquidators shall retain the remaining eighty-tïvc perc.ent (85%) of siich Net Recovenes. The Liqûidator$ Sháll retain one..hundred percent (100%) of the Net Recoveries they receive from the 8.ervice Provider Glaims once the. Non-Forbeàrance Amount of the Sentry Judgment, the Sigma Judgment and the Lambda Judgment are satistìed in full. The :Liquidators shall .prosecute the Service ProVider Claims at their sale expense, and the Trustee shaH not, and shall have no right to, interene in oroilerwse interfere with the Liquidatprs' prosecuti on ofsiich actions.
7. Designated Subsequent Tranferee. Clàlil Recovenes. The Trustee in his sole discretion has commenced certain âCtions and may choose. to commence additional actions against individuals and entitleS "identified on Exhibit H hereto (the "Designated Subsequent Transferees" and "Designated Subsequent Traiisferee Clais;') to reCover transfers from BLMIS to Fairleld Sentry, and sUQsequently tratsferred to otherindì'viduals and/or entities (the .~Subseguent Transferee Claims"). Said Exhibit H, attached and incorporated by reference hereto, is not, and is not intended to be, anexhallsti'Ve or I'hciusive list of all Subsequent 'fTanfei'ee Claims commenced, or to be cmnienced .by the Ttustee~ provided, however, and except as otherwise provided in the last sentence of ths Paragraph 71 that only the Subsequent TratlSferee Claims against the Oesigiiated Subsequent Transferees.. identifed on Exhibit H shall bè treated as provided in this Paragraph 7. The Trustee in his. discretiOn has conunenced and/or niayëoD1l1ence Subsequent Trahsferee Claims against indivii;uals and/or entities that are. not Designated Subsequent Tl'çlJsferees to recover tra:sfel's from. BLMIS to Fairfield Sentr, Fairfield Sígna, or Fairfield Lambda ~d subsequently transfetred to. sucbindividuals and/or entities ("Non-Designated Subsequent Tranferees"arn ~'Non-DesiQIated Subsequent Trah.sfereeClaiins"), upon the Tnistee1s determa,tioni intbêexerCis.eofhis sole discretion, that l'isstatutory duties require him to commence such NQn.Des,rgpated Subsequent Transferee Clåirbs~pj:ovided, however, tha.t, with-respect to Non..Des.Îgnt~dSubsequent Transferee Claims not yet CQrnmenced, the Trustee shall provide reasonable notice to; and reasonably confer in good fàith with, ilie Liquidators prior to cOIjençinga.Nolì-Desígnated Subsequent Transferee Glaim~ and provided, nirher, that the Tnistee shall not .cnmmence' a NOil-De.signated Subsequent Transrètee Claim against FairtÌeld Sigma or fairfield Lambda. Onte the Ti"U5te~ commences a
Non-Designated Subsequent Transferee Claim, the case sha,Ub~come i; Subs.equent Transferee Claim for purposes of this Agreement which shall, except .as otherwi$e provided in the. last sentence of this Paragraph 7, be treated as provided in either Paragraphs .8 or 90f tlús Agreement, as applicable. The Trustee shall pay to the Liquidators fort percent (40%) of Subsequent Transferee Recoverieii (as defined below) in coniìeciion with Designated Subsequent Transferee Claims, and the Trustee shall retain all other Subsequent Trarsferee Recoveries from such Designated Subsequent Transferee Claims. The Truee shall prosecute all Subsequent Tranferee Claims 'solely at his expense,
Pursuant to the cooperation and joint interest provisions set forth and contemplated by Paragraph 14 below, the Trustee and Liquidators shall be in regular communication about the commencement of any Subsequent Tr~sferee Claims. As soon as is reasonably practicable following the Effective Date (defined below), the Liquidatörs shaU take reasonable steps to enable the Trustee to prosecute Subsequent Transferee Claims against the Designated Subsequent Transferees that are subject to an existing action commenced by the Liquidators to the extent the parties mutually agree that any action by the Llquidators is required.
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For puroses of this Agreement generally and Paragraphs 7.8 and 9 herein specifically, the tenn
"Subsequent Transferee Recoveries" shaH mean the gross consideration that is paid to the Trustee pursuant to a settlement. judgmentorother resolution of a Subsequent TransIèree Claim; provided that if, in a particular action, the Trustee asserts a Sub~equent Transteree Cluim against an individual or entity. and in the Sah'leaçtîoh seeks to i-ecover trarsfers made to or fot the benefit of the defendant from one or more entities ottier thii any of the Faidield Finds, and the entire adtiòn is resolved without à judicially detenrined allocàtion of the total recoveiies therein, the Subsequent Transferee Recoveries shall be deemed to be the gross amount of the Trùstee's recoveries from such action, n'niltplied by a fraction, Uie numerator of wluch shall be the anioimts claimed by the Ti1teeon account of transfers made to or tor the benefit of the defendant from the Faidìeld Funds; and thedenöìninator of wluch shall be the total amount claïmed by the Trustee in such ~ctioI1; provIded, furter, thataty allocation of recoveries 'set forth in a 'sertl.ement agreement resQlving.a. Subsequent Transferee Claim shall have no effect on die amount ôf Subsequent Transferee Recoveries.under this Agreement unless. the Liquidators consent tö such allocatioI1. in wrting,. whlch cònsent shall not be Uneasôn~bly withheld. To the
extent that the TrtLstee commences à Subsequent Transferee Claim against a Non~Desigmited
Subsequent Transferee and tha,t actión is .neither a Common Defendilt Claim as provided in and by Paragraph 8 below nora SepàratelyTreatêd Curtfuon DefendantClaim as provided in and by Paragraph 9 below, this Paragr-aph7 Ghall apply to any 'Suth action. 8. Common Defendant Ciaim Recoveres. The Paries expressly acknowledge th.at the Liquidators have.commence.d or wil coirmence certain Redeemer Actions, and the Trustee has comr~nced Or wil commence certain Subsequent Tnin.sferi:,è Claims, against the same indivìdi.s Qr entìties C"COmioIl Defendarts"), and the Trustee and the Liquidators. expressly agree that a. Redcemer Action and a Subsequent Transferee Claim may be prosecuted against a Common Defendant unl~ss the l'arlies mutt.aIly determine in writing, in good làitb.: that only the Liquidators' Redeemer Action or only the Tiustee's Subsequent Transferee Claim should proceetl. Notwithstandig Para,graphs 4 ahd 7 above, and except as othenVise provided in this Paragraph 8 Rhd in Pargraph 9 below, ir the event that the
Liquidators have commenced and ate actively prosecuting a Redeemer Action and the Trustee has commenced and is actively prosecuttng a Subsequent Trai~feIee Claim against one or more Common Defendants ("Common Defendant Clais"), M.yand all Net Recoveries paid to the Liquidators and Subsequent Transferee Recovenes paid to the Trustee by or on behalf of Common Defendants in connectiòn with anyCornmon Defendant Claims (collectively, "Common Defendant Recoveries") shall be deemed to be pooh~d tUd aggregated by the Parties with respec;t to each such Common Defendant and allocated among the Parties as. follows:
(1) The Liquidators shall be paid ùr retain (as applicable) Eighty-Five Percent (85%) of the Fictitious Profit Component (as defined below). if any, and the Trustee shaH be paid or retain (a,s applicable) Fifteen Percent (15%) of the Fictitious Profit Component, if any;. .
Oi) The Liquidators shall be paid or retain (as applicàble) Sixty-Five Percent
(65%) of the BVI Vulnerability Period Component (as defiiied below), if any, and
the Trustee shaU be paid or retain (as applicable) Thirt-Five Perc.ent (35%) of the BVi Vulnerabilty Period Component, ifany~ and
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(iii) The Liquidators shall be paid or retain (as applicable) Forty Percent (40%) of the Other Princip~i Component (as defined below), if iliy, and the Trustee shan be paid or retain (as ~pplicable) Sixty Percent (60%) of the Other Principal Component, ifany:.
Notwithstanding the foregoing, the allocation set forth in this Paragraph 8 shall not apply to (i) Subsequent Transferee Recovc:ries from the Designated Subsequent Transferces identitied on Exhibit H hereto, and suchSubsequeiit Transferee Recoveries shall, in an such Designated
Subsequent Tranferee Clañns.. be allocated among the Parties pursuant to Pargraph 7 above, or (ii) Non-Designated Subsequent Transferees identitìed on Exhibit I hereto, and such Subsequent Transfer~e Recoveries shall, in all s\ich Non-Designated Subsequent Transferee Claims, be allocated among the Parties pursuant to Pa.agraph 9 below.
Fot purposes of this Agreement, (x) the te-rm "Fictitious Profit Component" shall mean and include the. first Commóii De.fend~t Recovèries up to and including. the total amounts claimed by the Liquidators in the applicable. Redeeme .Attion on .account ofpayments made to or tor the, bene.fit of the applicable Common Defendant from each Fairtield Fund in exeess of the amounts such Common Defendant invested in each such Fmrfield Fiid (directly or indirectly) as detennined. accordig to the Fair.ieldFunds' books and records (ifand to the extent there is such excess); (y) the tetn "BVI Vulnerability Period Redemptions" shaH mean the muounts claimed . by the Liquidators in the ai:Plics,l;leRedeemet Actionon.account ofpayinents made to or for the benet it of eachComron Defc)ldaït,în.cöi1ection with the redemption of shares in the Fairfield Funds (i) tì'om and including April2.í. 2007 :and thereafter, in the case ofredemption of shares in Fairfield Sentry, (ii) from and inch.idiiig April 23, 2007 .and thereaf~r.. in the case of redemption of shares. in Fairfield Sigma and (li) froni and including February 27; 2007 and thereafter, in the vase of fcdemption of shares in Filitlield Lambda, in all cG~¡eS, less the Fíctitious Profit Component for such CtmlIl0n Defendant, if any; and (z) the term "Other Piincipal Redemptions" sh~ii mean thè total .alIoUJts ëHiimed by the Trustee in the applicable Subsequent Trans.feree Claim on account of payments made to or for the benefi of e.ach Common Defendant in connection with the rcdeniption of shares irtthe Fairfield Funds; less. the BVl Vulnerability Period Redemptions, if any; and (xx) the term ¡'BVI Vulnerability Period Pro Rata Share?' shall mean a fraction, the numerator of which is the BVI Vulnerability Period Redemptions, and the denominatør Qf which is the: BYI Vulnerabilty Period Redemptions plus the Other Principal Redemptions; (yy) the term "BVI Vtilnerabîlity Period Component" shal mean the amount of the Common Defendant Recoveries less the Fictitious Profit Component, if any, multiplied by the BVl Vulnerabilty Period Pt.a Rata Share; and (zz) the term "Other Principal Component" shall mean the amount of the Common Defendant Recoveries less (i) the Fictitious Profit Component, if any, and (ii) the BVI Vulnerabilty Period Component, if any.
Notwitbstaiiding the foregoing: (a) in the event that all of the Liquidators' claims against a Common Defendant asserted pursuant to the British Virgin Islands Insolvency Act 2003 are dismissed with pr~judice prior to the payment of the applicable Common Defendant Recoveries to the Trustee and/or the Liquiçlators (as- applicable), then (ì) the BVl Vulnerability Period Component as to such Common Defendant Recoveries shaH be zero and (ij) the Other Principal Component as to such Common Defendant Recoveries shall be the amount of Common Defendant Recoveries less the Fictitious Profit Component, if any: (b) in the event that a Subsequent Transferee Claim against a Common Defendant is dismissed with prejudice prior to
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the resolution of a Redeemer Action against such Common Deiendant, theii the Liquidators' Net Recoveries from such Redeeiner Action shall not constitute Common Defendant Recoveríes, and such Net Recoveries shall be aIlöcated among. the Parties in accordance with Paragraph 4; and (c) in the eveJit that the FictitiD"uS Profit Component, BVI VLt1nerability Period Component, and/ot Other Principal Component of any Common .Defendant RecoVeries are deteiUlined pursuant 1q a settlement agreeüient mutually agreed to in writing by the Parties hereto, judgment, jur verdict form, jury iIlterrogatoríes or other judicial adjudication with respect to the applicable Common Defendant Claim, such determination shall control and be used for purposes of determining the allocation of such Common Defendant Recoveries pursuant to this Paragraph 8. 9. Separately Treated Common Defendant Claim Recoveries; Notwithstanding Paragraph 8 above, unallocated Common Defendant Recoveries from Coninon Detèndant Cl~ims against the: Non-D.e:;ignated Subsequent Transferees identified on Exhibit I hereto ("Separatelv TreatedCômmol1 Defendants" and "Separately Treated Common Defendant
Claims:';) sha:ll be deemed to be. pooled and aggregated by the Pares with respect to each such Separately treated Conion Defendant ähd allocated among the Parties as follows,
(1) The Liqùidatorsshall be paid or retain (asilpplicable) Eighty-Five Percent
(85%) otthe Pro R:ata fictitious Profit Componellt (asdcfined below), if any, and the Trustee shall be paid or retain (as applìcable) Fifteen Percent (15%) of the Pro Rata Fictitious Profit CompOnent, if any; and
(iì) The Liquiclator~shril be paid or retaìn (as applicable) Forty Percent (40%) oftlie Pro Rata.Priiicípal Component (as defined below), if any, and the Tnistee shall b~ paid or tctaíii (as applicable) Sixty Percent (60%) of the Pro Rata Principal C01l1pOnent, ¡fany.
Fot purposes of this Agreerneh.t, (x.)the term "Pro Rata Fictìtiöus ProIÌt Component" shall m~an the applicable Common Defendant RecoverieS multiplied by a fraction, the numerator of which shall be the tota amounts claimed :by the..pquida.tors in the applicable Rede.enier Action on account of payments made to or for the berifitof the applicable Common Defendant from each Fairfeld :Fund in excess of the amounts such Common Defenqçint invested in each such Fairfeld Fund (directly or indirectly) as detemiinedaccording to tlw Fairfield Ftinds' books and records (if and to the extent there is such excess). and the denominator of which shall be the total al10llnts claimed by the Trustee hi the applicable Subsequent Transferee Claím on account of payments made to or for the benefit of such Coinmon Defendant in connection with the redemption of shares in the Fairfield Funds; and (y) the tcnn "Pro Rata Principal Component" shall mean the applicable Common Defendant Recoveries less the Pro Rata Fictitious Profit Component. Notwithstanding the foregoing, in the event that the Pro Rata Fictitious Profit
Component and/or Pro Rata Principal Component of .any Common Defendant Recoveries are determined pursuai'it to a settlement agreement miitually agreed to in writing by the Paries hereto, judgnient. jur verdict fOrn, jury interrogatories or other judicial adjudication with respect to the applicable Separately Treated Common Defendant Claim, such deiermination shall control and be used for purposes of determining the allocation of such Common Detendant Recoveries with respect to Separately Treated Common Defendant Claims pursuant to thÌ"s Paragraph 9.
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10. JPMC Claim Recoveries. The Trustee shall pay to the Liquidators Thrty-
Three and Two-Tenths percent (33.2%) of the first gross consideration the Trustee receives from any of the Trustee's and/or BLMIS Estate's èlaims or causes of action against JPMorgan Chase,
N.A.and/or any of its afliates in an adversar proceeding entitled, Picard v. .lP Morgan Chase & COc, w1úch claims were întially filed ín the Bankruptcy Court and, following decision un a motíoi1 to withdraw the reterence,are currently pending in the United States District Court for the Southern Distnct of New York, C£!e No. ll-cv~00913 (tIie "JpMC Claims"), until the Liquidators af\~ pàid EightY Eight Milion Dollars ($88.000,000) ftom such consideration. The Trustee shall prosecutethe JPMC Claims solely at his expense, and the Liquidators shall not, and
shall have no right to, intervene in or otherse interfere with the Trustee's prosecution of the .TPMC ClaÙTS¡ except if, and oi:ly to eKtent that, the Trustee ex.pressly abJtees in Wrting otherwise. The Liquidatots shaIl have no right to any consideration received by the Trusiee in conneclion.With the. lPMC Claiinsonce the Liquidators .are paid Eighty Eight Milion Dollars ($8.8,000,000) in accordance with the te.ns hereof; provided, however, tha,t. each döllar the Trustee reço.Véts from the JPMG .claims in excess of $88,000,000 shaH be credited to the Judgments pursuant to Paragraph 11 below, until the Trustee recovers Two-Hundred Sh~ty'-Fìye MillQn Dollars ($265;000,000) in the aggregate fTom such claims. Within five (5) Business Days after the .Effective Date: (defir~d below), the Liquidators shall dismiss with pJejudice all daiins and causes ofaction.th~yhaveasserted against JPMorgan Ban, N.A., jPMorgan (Suisse) S.A., JPMorgan Securities Ltniittd and JPMorgan Trust Company (Caymai1).
i 1. Applicationöf Recoveries to the Judgments. Any and all recoveries of monies from the Redeemer Actions; Management Claims, Service Provider Claims. Designated Subsequent Transferee Ciahns; Nön~Designated Subsequent Transferee Claims, Commòn Defendant Claìnis, S.eparately Treated Common Defendant Claims atid the JPMC CIaíms (with respeCt fo the JPMC Claims. as provided in Paragraph i 0 above) (collectively, the .'Sharing Claims") that are paid, turned over or credited to, or otherv..Ìse retaüied or reçeived by; the Trtistee heret1nder ("Judgment ReduCÍl1g Recoveries") shall rediice, on a dollar-for-dollar basis, each of (i) the outstanding aipuut to be paid by Fairfield Sentry towards satisfying the Non- . Forbearance Amotmt of the Sentr Judgment, and (ii) the outstanding amount to be paid by either (x) Fairfield Sigma toward$satisfying the Sigma Judgment or (y) Fairfield Lambda towards satisfying the Lambda Judgment;. to be determined by the Liqiudators in their sole dísçretion. For the sake otcIarty, each dollar of Judgment Reducing Recoveries shall reduce the outstading amounts oWÎng on the Non-Forbearance Amount of the Sentry J udginertt by one
dollar and, at the såme timè ånd át the Liquidators' discretion.. either the Sigma Judgment or the Lambda Judgment, .by one dollar,
12. AUocatiún of Shared Recoveries. On the date that is three (3) months
from the Effective Date of this Agreement, and every three (3) months thereafter (each such date, a "ReCOIlcilation Date"), the Trustee and the Liquidators shall jointly and in good faith detemiine and reconcile the consideration (cash or otherwise) that is payahle to each from the
Shanng Claims. If the Triistee is entitled to payment trom the Liquidators in connection with the Sharing Claims, the LiquIdators shall make a cash payment to the. Trustee, to an account identified by the Trustee, of the amount owed to the Trustee, plus any interest that has been earned on and is specifically allocable to such amount, within 1ìve (5) Business Days after the applicable Reconcilation Date. If the Liquidators are entitled to payment from the Trustee in connection with the Sharg Claims, the Tnistee shall make a cash payment to the Liquidators, to
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one or more of the Fairfield BVI Accounts as identified by the Liquidators. of the amount owed to Ùie Liquidators, plus any interest that has been earned on and is specifically allocable to such amount, with five (5) Business Days after the applicable Reconciliation Date. Any amounts recovered by a Pary thal artsubject to payment, turnover or allocation to another Paity hereunder shàIl be held in trust for the benefit of such Party. Ifa dispüte arises betw"een the
Pares as to the amounts payable to any Party from recoveries on the Sharing Claims, and such dispute is. not resolved within thir (30) days following a Reconcilation Date. the Pares cOliseiit to the jurisdiction of the Hanptcy Court to resolve such dispute. For the avoidanee of doubt, the T11steeshall not be entitled to share in any recoveries from claims or causes of action prosecuted by the Liquidators, and the Liquidators shall not be entitled to share in any recoveries fi'om claims. or causes of action prosecuted by the Trustee, except for recoveriesfrom the Sharing Claims.
13. Allowance of a Fairfield Sentry Customer Claim,. Upon the occurrence of the maIg of the Twenty Four Milion Dollar ($24,000,000) partal payment of the Settlement Payment as set forth in Paragraph 2 ábove, and notwithstanding Section S02(d) of the Bankruptcy Code, the Trust.ec shall allow a Fairfield Sentry customer claim Piirsiiant to 15 U.S,C§ 78m (11) equal in priorit)' Lo other allowed customer claims against the BLMIS Estate (the "Allowed ciaim"), in the initial amount of Seventy Eight Milion Dollars ($78,000,000). Upon the payment of the balance of the Settlement Payment as set forth in Paragraph 2 above, the Trustee shall increase the amount of the Alowed Claim by theaiourt of One Hundred Fifty Two Iviliöti Dollars. ($152,OOO~OOO) resulting in an Allowed Claim ina final amount of Two Hundted Thirt Milion Dollars ('$230;000,000) (the "Final Amount"). The amount of the Allowed Clam represents Nineteen and Two~Tenths percent (19.2%) (the "Settlement
Percentage") of the Sentry SIPA Net Equity Claim. The Liquidators shall receive the full benefit of any SJilC customer advances under Sccüon 9 of SIP A. The payment of any sums to the TruStee by the Liquidators and/or the Fairfield FlUids or via recöveries of monies from the Sherrtg,Claiins: shaH not .serve t() increase the AlLowed Claim. Notwithstanding any oth~r language in this Agreement. III the event that, as a result of a final, non-appealable judidal detemiination and order of the Net Equity Method issue, allowed customer claims agailist BLMlS are ultimately calculated based on the amounts reflected on a customer's BLMIS acèöunt statement fot the period ending November 30, 2008 (the "Last Statement Method"). or to include other amounts beyond the Net Equity Method (including, fot example, if customers are entitled .to receive interest on their deposits will BLMtS) (together with the Last Statement Method, the "Modified. Net Equity Method"), the amount of the Allowed Claim &hall be calç.ulated ín the sçiè mannei' as other allowed customer claiTils are c.alculated pursuant to the Modified Net Equjty Method, provided that; in such event, the allowed amount of the Allowed
Claim shall equal the product of multiplying the Settlement Percentage of nineteen anci twö- tenths percent (.192) times the amount of the Sentr SIP A Clair as calculated pursuant to the Modified Net Equity Method (the "Adjusted Allowed Claim"). The Trustee shall not seek to subordinate, under principles of eq:uitable subordination or any other basis (including1 but not limited to, pursuant to Section 510(c) of the Bankruptcy Code), the Allowed Claim or the Adjusted Allowed Claim (as applicable) below allowed customer claims in the SlPA Proceeding. For the avoidance of doubt, in the event that valid customer claims against BLMIS are ultimately calculated using the Last Statement Method without any other adjustments, the Adjusted Allowed Claim would total One Bilion Two Hundred Six Millon Five Hundred Eighty Nine Thousand Seven Hundred Forty Three Dollars ($1,206,589,743), which amount is calculated by
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multiplying the Last" Statement Amount of Six Billon Two Hundred Eighty four Milion Three Hundred Twenty One Thousand Five Hundred Eighty One Dollars ($6,284,321,581) times Nineteen and Two Tenths Percent (.192). The Bankruptc.y Cour's order approving this Agreement shall provide for the allowance of the initial amount .of the Allowed Claim and the increase of the Allowed Claim as provided in this Paragraph 13.
14. Cooperation in Pursuing and Resolving: the Sharing Claims. Through a. si;pa,ate joint interest agreement; to be entered into by the Paries as soon as reasonably practicable followinguie Effective Date, the Trustee and the Liquidators each agree to provide reasonable access to the other's documents, data, and Ouier informtion relating to,. or beneficial to the pursuit ot: the Sharing Clais. The Tnistee and the Liquidâtors each agree to provide reàsonabIe cooperatioii and assistance to the other Party in connection with the prosecution of the Sharmg CJ¡iirs, provid.~ the othti' with a reasonable opport.unty to consider the terms for resolvingany Sharing Claims and confer iii good faith regarding such terms; provided~ however, that the Party. authorized under this Agteeient with the right and/or responsibilty of prosecuting aShang Claim (such Pary, the "Prosecuting Pattv") shall not be required to obtain the consent of the other Party to resolve orsettt-i the Prosecution Part's clai. Within five (5) Business Days .following the settlement or other resolution of a Sharing Claim, the Pi'osecüting Pary shall (i) tiíify the other Party of theamounts,tf any, paid or to be paid to the Prosecutirtg Par in èonnectiòri therewith and (ii) provide the other Par with a copy of ihe applicable 'settlément agreement, if any, subject to êompliance with any applicable contidentiality obligations. If the Liquidators request that the Truste.e, .On behair of himself, BLMIS and/or its eståte, release claims agaist a person oretitity in connection with the settlementCif any of the Sharing Claims prosecuted by the Liquidators againstsiichpers'on or entity, the Trustee agrees that he s1ia11 not utl'eliöl1ably refuse. to provide such release. If the Trustee reQ1.ests that the Liquidators" on behålf of themselves, any of the Fairfield Funds and/or their estates; releáse claims against a person or éntity in connection with the settlement of any of the Sharìng Claims prosecuted by the Tiusteeagainst such person or entitY, the Liquidators agree that they shaU not unreasonàbly refuse to provide such release. The Trustee and the Liquidators agree and stipulate that a joint iiitelest exists between them with respect to the Sharing Claims. The Trustee and the Liquidators fui'ther agree and stipulate that neither this Agreement nor any actton taken thereunder constitutes the waiver of any privilege or immunity of the Trustee 01' the Liquidators or their respective counsel.
15. Release bv the .Trustee. In consideration for the coVenants andagrecl1ents in this Agreement and for other good and valuable çonsideration, the receipt and sufficiencyof which is hereby acknowiedged~ the Trustee. on behalf of lùmselt~ BLMIS and its estate. hereby releases, acquits and forever discharges each of the Fairfield Funds, the Liquidators, individually ahd in theil' capacities as Liquidators, and all of the Liquidators' agents, representatives, attorneyi:, employees and professionals from any and all Trustee Released Claims (as defined below). The Trustee and the Liquidators expressly agree this release shall not affect or encompass. any claims by the Trustee against any third pary, including but not limited to, the Fail''ield Funds' respective former officers, directors, custodians, admiiiistrators, accountants, auditors, investment advisors and management companies, and the Fairfeld Funds' fanner and pr~sent investors or shareholders, For purposes of this Agreement, the term "Trustee Released Claims" shall mean any and all actions, causes of actíon, suits, debts, dues, SiunS of money, accotits, reckonings, bonds, bils, specialties, covenants, contracts. controversies, damages,
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judgments, and claims whatsoever, asserted or iiiasserted, known or unknown. now existing or arising in the. future (including, without limitation, the claims asserted against tlie Fairfeld F¡.mds in the Adversar Proceeding), except for any and all claims- and rights (and the enforcement thereof) of the Trustee and obligations ofthe Liquidators arising under ths Agreement.
16. Release by the Liquidators and the Fairfield Furtds; In consideration for the covenants and agreements in this Agreement and ror other good and valuable consideration, the reeeipt and suftciency of which is hereby acknowledged, the Liquidators, on behalf of themselves, each of the Fairfield Funds and their respective estates, hereby release, acquit and forever discharge the Tl'ustee and all of the Trustee's agents, representatives, attorneys, employees and professionals from any and all Liquidator Released Claims (as defined below).
The Trustee and the Liquidators expressly agree this release shall not affect or encompass (i) any claitns by the Liquidators or any of the Fairfeld Funds against any thîi p~rty, inclüding, but not limited to, the Fairfield Funds' investors and shareholders ;and. fQn.er directors, auditors, m;:n:agers, investtent advisors, administrator-s,. custodians and other se1'ice providers. (ii) any claii:~ by any creditors or shareholders of, or investors in. any the Fairfield Funds against
BLMIS 01' the BLMIS Estate, or (iii) the status or res 01 uti 011 of the. Sigma SIPA CJaim or the Lambda SIPA Claim, which shall be determined in a maner consistent With the customer claims asserted by other-indirect investors in .ILMIS. For purposes of this: Agreement, (i) the term "Liquidator Released Claims" shall mean any and all actions, causes of action, suits, debts, dues, st.uns of money, accounts, reckoning;:, bonds, bils, specialties, covenants, contracts, controversies, damages, judgments, and claims whatsoever, asserted or iinasserted. known or lltknowr, now existing or arising in the future, except for the fairfield SIPA Claims. the Allowed Claim, the Adjusted Allowed Claim (if applicable), and/or any and àl1 claims and rights
(nnd the enforcement thereof) of the raìreld Fnnds ¡:d obligations of the Trustee arising under ths Agreement; and (ii) the term "Released Claims" shall me,an, collectively, the Trustee Released Claims and the Liquidator Released Claims.
17. Unknown Claìins. Unknown Claims shaJi mean any Released Claim, as defuied herein, that the Tmstee and/or the Liquidators do not know or suspect to exist in their tàvor at the time of giving the release in this Agreement that if known by them, might have affected their settlement and release in this Agreement. With respect to any and alt Released Claims in Paragraphs 15 and 16 of t1us Agreement, the Tnistee ¡:nd the Liquidators shall expressly waive or be deemed to have waived, the provisions, rights and benefits of California Civil Code section 1542 (to the extent it applies herein), which provides: A GENERA RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT TH TIME OF EXECUTIG THE RELEASE, WHICH IF KNOWN BY HlM MUST HAVE MATER1ALLY AFFECTED HIS SETTLEMENT WITH .HIE DEBTOR.
The Tnistee and the Liquidators expressly waive, and shall be deemed to have waived, any and all provisions, rights and benefits conferred by any law of any state or territory of the United
States. or principle of common law or foreign law, that is similar, companible or equivalent in effect to California Civil Code section 1542. The Tmstee and/or the Liquidators may hereafer
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discover facts in addition to or diftèrent from those that they now know or believe to be true with respect to the subject matter of the Released Chiims, but the Trustee and the Liquidators shall expressly have and shall be deemed to bave fully, Tlually and forever settled and released any and all Released Claims, known or unknown, suspected or unsuspectedi contingent or noncon:lingem, whether or not concealed or hidde.n, that now exist or heretotore have existed, upon any theory of law or equity now existing. or coming into existence in the future, including conduct that is negligent, reckless, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existei1ce or such different or additìonal facts. Each of the Tnistee :and theLiquidators eie,knowledge and shall be deemed to have acknowledged that the foregoing waiver was separately bargained for and a k.ey clement of the settlement of which this release is a part.
18. Bankptcy Cour and BVI Court ApprQval; Efiec.tive. Date: Termination. This Agreement is subject to, and shan. become eftè¿tive and binding on the Paries upon, and only upon, the later of both, (i) fourteen days following thè BankptcyCourt's entry of an order approving this Agreement in the -SIPA Proceeding that js not subject to a timely stay by. any cow"t of competent jurisdiction wid (ii) tòurteen days following the BVl Cour's entry of an order approving this Agreement that is not subject 10 a. timely stay by any court of competent jurisdiction (the date when this Agreement becömes efíectíveand binding on the Parties, the "Effective Date"), TIie fonn of the approval order iii the SIPA Pi'öceeding shall be subject to the
Li(iuidators' reasonable approvaL. The Trutee .shall use his reasona"Qle eftòrts to obtain approval of the Agreement in the SlPA Pröcieèding âS promptly as practicable after the date of this Agreeine11t. The form of the approval order in the BVI Proceedings .shall be stibject to the Trustee's reasonable approval. The Líquidators shall use their rea'50nable efforts to obtain approval of the Agreement in the BVI PtöceedIiigs as promptly as practìcable after the date of this Agreement. If tlus Agreenie.nt h~s not become effectiveas provïded in this Paragl'aph i 8 within TIiree Hunåred Sixty (360) days a.'èr the dilte of this Agreemeiit (or within such additional time as mutually agreed upon by the Paries), then (a) this Agreement (other than this
Paragràph 18) shall tenninate and be void.. (b) aU öf the statements, concessions, consents and agreeIIehts contained in ihe Agreement (other than this Paragraph 18) shall be void; and (c) none of the Trustee, the Liquidators; or any of the Fairield Funds may use or rely on any such statements, concessions, consents 0.1' agreeliients. in any public statement or litigation involving the SIPA Proceeding, the BVI Proceedings or the Chapter 15 Proèøedìngs~, any case Or proceeding relating to the SrPA Proceeding, the BVIPröceedings or the Chapter 15 Proceedings oraIiy case or proceeding relating to. any of the Fairfeld Funds, BLMIS or Madoff. 19. Use of Complaint. The Pariies agree and acknowledge that the Liquidators, on behalf of themselves and each of the Fa.irlield Funds, deny any liabilty to the BLMJS Estate, do not admit to any of the allegations in the complaint (Jr the amended complaint fied in the Adversary Proceeding,. and none of the allegations in sucli complaints shall be binding on or admissible against the Liquidators or any of the Fairfield FW1ÙS in any proceeding.
20. Closing. There shall be a closing ("'Closing") on the Effective Date of this Agreement. On the date when the Settlement Payment is paid in fuJI pursuant to Paragraph 2 hereof: whether on the date of the Closing or some later date, (a) the Tmstee shall pay Fairfield Sentry $500,000 from sire advances under Section 9 of SIPA to one or more of the Fairfield BVI Accounts as identified by the Liquidators, which amount may, prior to the payment in full
16 CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-2 Filed Filed 08/23/11 02/28/14 Page Page 18 31 of of 21 66
of the Settlement Payment, and with the mutual written consent of the Parties, such consent not to be reasonably withheld, be paid by .setoff against the Settlement Payment; (b) the amount of the Allowed Claim shall be increased to the Pirial Amoüùt without any fuer action by any of the Paries (subject to the adjustment of SUc;h amount as provided for in Paragraph 13); (c) the releases contained in Paragraphs t 5 and 17 in favor of the Liquidators and the Fairfield Funds
shall become effective witliout an further action by any of the Paries; and (d) the Escrow Agreements referenced in Paragraph 3 of this Agreement shall terminate without any hirthcr _ . action by any ofthé. Patties.
21. Liquidators' and Trustee.'s Authority. The Liquidators represent and
warrant to the Trustee that, as of the date hereof, and subject to the approval of the BVI Couii as. set forth in Paragraph i 8 above, each of thetn has the full power, authority and legal right to execute and deliver, and to perfomihis or her respective obligations under, this Agreement and
has taken all necessar action to authorize the execution, delivery, and performartçe of his or her respective obligations under thîs Agreeilient. The Trustee represents and warrants to the
Liquidators that, as of the date hereof, .and subject to the approval ofthe Bankruptcy Couit a, set fort in Paragraph 18 above, heha.s the fuI power, authority and legal right to execute and deliver, and to perform his obligations under; this Agreement and has taken all necessary action
10 authorize the execution, delivery,. .and perfonnaiice of his respective obligations under this Agreement.
22. Further AssuranceS. The Trustee and the Liquidators shall execute and deliver any document or instrument reasonably requested by either of them afte1' the date of this
Agreement to effectuaLe the. intent of this Agreement. 23. Entire Agreement. Ths Agreenient constiuites the entire agreement and understanding between anQ-àmOrig the Paríes and supersedes all pl'or agreements. representations and understandings concerningthe subject matter hereof.. 24. No admission, This Agreement and all negptiations, statements, alid .....:~,. ptoceedings in connection therewith are not, will not be argued to be, .and wil not be deemed to be a presumption, concession or admÌssion by any Party of any fau.lt~ liabilty or wrongdoing whatsoever. This Agreement and any matter rdating thereto may not be offered or reteivedin evidence or otherwise referred to ín any civil, criminaI, or admilÚstative action or proceeding as evidence of any vvrol1gdoing or liabilty. NotWithstanding the foregoing, the Judgments may be used. by the Tnistee to prosecute a Subsequent. Transferee Claim, and then for the purpose of
establishing the avoidance of the Withdraw¡:is.
25. Amendments, Waiver. This Agreement may not be teiininated, waived,
amended or modified in any way except in a writing signed by all the Parties. No waiver of any provision of this Agreement shall be.deemed to consttute a waiver of any other provision hereof, whether or not similar, nor shall s"Uch waiver constitute a continuing waiver. 26. AssígnabiUty. No Par hereto may assign his 01' her rights lllder this
Agreement to a third paity without the prior written consent of each ofthc other Paries hereto.
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27, Successors Bound. This Agreement shaH be binding upon and inure to the benefit of.each of the Paries and their successors and perrnilted assigns. 28. No Third Párty Beneficiary. The Paries do not intend to confer any benefit by or :under this Agreement. ~pon any person or entity other than the Parties hereto and their respective successors and permitted assigns. 29. Applicable Law. This Agreement shall be construed and enforced in accordance with the laws of the State of New York (without regard to its conflct of laws provisions); provided, however, that the BVI Court's approval of ths Agreement pursuant to
Paragraph 18 hereof shall be. in accordance with the law of the BY!.
30. Exclusive Jurisdiction. The Paries agree that the- Bankruptcy CourtshaU have exclusive jurisdiction over any action to enforce this Agreement, or any provision thereof. alid the Parties hereby consent to and submit to the jurisdiction of the Bankruptcy Court for ruiy such action. The Paries agree that ild Par shall bring, institutè, prosecute or majnt~jn any action to enJorcc this Agreement, or any provision thcæof, inaiiy court other than the Bankuptcy Court except for the limited piiose öf enforcing a final award or judgment entered by the B VI Cour or Bankptcy Co,ur in eonrection with this Agreement.
31. Captions and Rules ofConstl1.ction. The captions in this Agreement are inserted only as a matter of convenience and for reference mid do not define, limit ordeSCi"ibe the scope of this Agreement or the scope 9r .çontent of any of its provisions. Any reference in this Agreement to a Paragraph is to.aParagraph of this Agreement. "Includes" and "including'; are not límitinl;_
32. Recítals. Any facts set forth in any sentence in the Background section hereto preceded by the phrase "according to the Tnistee" are those provided by the Trustee, and none of such facts shall be bitding on or admissible against 11ie Liquidators or any of the Fairfield Funds in any proceeding. .
33. Counterparts: Electronic Copy of Signatures. Tbis Agreement may be execiited and delivered in any number of counterparts, each of which so executed and delivered shall be deemed tu bean original an4 .aU of which shall cQnstitute one and tIie same document. The Parties may evidence theír exeëutióii of this Agreement by delive.ry to the other Parties of scaned or faxed copies of their signatures, .with the same eftèct as the delivery of an original signature.
34. Notices. Any notices under this Agreement shall be in writing, shall be effective when received and may be delivered only by hand. by overnight delivery service, by fa,'X or by electronic transmission to:
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If to the Trustee. c/o: If to the Liquidators. c/o:
Mark Kornfeld, Esq. Wiliam Hare Baker & Hostetler LLP Forbes Hare 45 Rockefeller Center, Suite 1 100 Palm Grove. House New York, NY 10111 P.O. Box 4649 F: (212) 589-4201 TòrtölaVG 1110 mkomfeld(âbakerlaw. com British Virgin Islands F: (284) 494-1316 whare§forbesharc.com With copies to:
Kenneth M. Krys and Joanna Lau c/o KRyS Global Commerce House, 2nd Flöor P.O, Box 930 Tortola VG 1 I 10 British Virgin Islands F: (284) 494-7169 kenneUi.krys(Ðkrys~glob41.com
joanna. 1 au.§krys-globaJ.com -and- David J. Molton, Esq. Brown Rudnick LLP Seven Times Square New York, NY 10036 F: (212) 938-2822 dmol toriíw,btownuclnick. com
(Signature pagefollowsl
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IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as of the date tìrst above .written.
Irving H. Picard, Tnistee
Kennetli Krys, as Joint LitjuídatOl for and on behalf of Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited
Joanna Lau, as JoÍht Liquidator foránd óIi behalf of Fairfield Sentr Limited, FaIrfiCId Sigmfl Limited and Fairfield Lambda Limited CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-3 Filed 02/28/1408/23/11 Page 351 of of 7 66
EXHIBIT 2 CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-3 Filed 02/28/1408/23/11 Page 362 of of 7 66
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------)( SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant, No. 08-01789 (BRL) v. SIP A Liquidation BERNARD L. MADOFF INESTMENT (Substantively Consolidated) SECURITIES, LLC, Defendant. ------)( IRVING H. PICARD, Trustee for the Liquidation of Bernard L. MadoffInvestment Securities LLC, Plaintiff, v. Adv. Pro. No. 09-01239
FAIRFIELD SENTRY LTD., et aI.,
Defendants. ------)( ARGUING ON THE MOTION:
BAKR & HOSTETLER LLP 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 ll: David Sheehan Mark A. Kornfeld Thomas L. Long Marc E. Hirschfield Keith R. Murphy Jessie M. Gabriel Melissa L. Kosack A ttorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff
BROWN RUDNICK LLP Seven Times Square New York, New York 10036 Telephone: (212) 209-4800 ft: David J. Molton May Orenstein CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-3 Filed 02/28/1408/23/11 Page 373 of of 7 66
Daniel J. Saval Kerr L. Quinn
Attorneysfor the Foreign Representatives
MILBERGLLP One Pennsylvania Plaza New York, New York 10119 Telephone: (212) 594-5300 ll: Robert A. Wallner Kent A. Bronson Kristi Stahnke McGregor -and- SEEGER WEISS LLP One Wiliam Street New York, New York 10004 Telephone: (212) 584-0700 ll: Stephen A. Weiss Chrstopher M. Van de Kieft Parvin Aminolroaya Attorneys for Morning Mist Holdings Limited and Miguel Lomeli
Before: Hon. Burton R. Lifland United States Bankptcy Judge
BENCH MEMORANDUM AND ORDER GRATING TRUSTEE'S MOTION FOR ENTRY OF ORDER APPROVING AGREEMENT
Before the Cour is the Motion of the Trustee of the SIP A liquidation of BLMIS seeking
approval of a Settlement of the Trustee's instant adversar proceeding (the "Action") as against
Fairfield Sentry, Sigma and Lambda (the "Fairfield Funds") pursuant to, inter alia, Bankptcy
Rule 9019. i While the Fairfield Funds are currently the subject of separate proceedings before this Cour under chapter 15 of the Code, the court administering the Fairfield Funds' foreign main insolvency proceedings in the British Virgin Islands (the "BVI Court"), and not this Cour,
i A proposed settlement of the Trustee's adversary proceeding as against a second group of defendants is scheduled to be heard before this Court, in the context of this adversary proceeding as well as the separate chapter 11 case of Greenwich Sentry, L.P., on June 21, 2011. See In re Greenwich Sentr, L.P., Case No. 10-16229 (BRL), Dkt. No. 118.
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has been called upon to evaluate the Settlement from the perspective of the Fairfeld Funds'
foreign estates (the "Fairfield Estate"), and is scheduled to do so tomorrow, June 8, 2011. See
Notice of Hearing, Case No. 10-13164 (BRL), Dkt No. 411.
Thus, the issue presented by this Motion is solely whether the proposed Settlement is fair
and equitable, above "the lowest point in the range of reasonableness," and in the best interests
of the BLMIS estate. Liu v. Silverman (in re Liu), 166 F.3d 1200, at *1 (2d Cir. 1998) (citing
Protective Comm. For Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S.
414, 424 (1968)). In determining reasonableness, courts consider a number of factors, including
(i) the probability of success in the litigation; (ii) the difficulties associated with collection; (iii)
the complexity of the litigation and attendant expense, inconvenience, and delay; and (iv) the
paramount interests of creditors. In re Refco, Inc., No. 06-CIV-5596, 2006 WL 3409088, at *7
(S.D.N.Y. Nov. 16,2006), aff'd, 505 F.3d 109 (2d Cir. 2007); Air Line Pilots Assoc., Intl v. Am.
Nat'l Bank & Trust Co. (In re Ionosphere Clubs, Inc.), 156 B.R. 414,428 (S.D.N.Y. 1993), affd,
17 F.3d 600 (2d Cir. 1994); see also In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285,
292 (2d Cir. 1992).
The Court finds that the Settlement represents a complete, good faith compromise of the
Trustee's claims, is well above the lowest rung in a range of reasonableness, and in fact offers
significant value to the BLMIS estate for distribution to victims of the Madoff Ponzi scheme.
The Trustee has submitted, in his good faith business judgment, that continued multi-
jurisdictional litigation would be costly and complex, collection of any potential award from the
domestic and foreign entities involved would be difficult, and the outcome of the litigation is uncertain. See Affdavit ofIrving H. Picard, Dkt. No. 69, -¡ 4. The proposed Settlement, on the
other hand, ensures judgments against the largest Madoff feeder fuds in favor of the BLMIS
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estate totaling over $4 bilion,2 and a cash infusion of $70 milion into the customer propert fund. The customer claims asserted by the Fairfield Funds have been reduced by south of $1 bilion. Moreover, the Trustee's and Foreign Representatives' proposed joint litigation strategies provide for the assignment of claims, and allocation of recoveries, to the BLMIS estate, enhancing the Trustee's ability to achieve substantially greater sums from third parties for
ultimate distrbution to creditors and customers of the BLMIS estate.
The only objection before the Cour was raised not by creditors ofthe BLMIS estate, but by certain plaintiffs (the "Objectors") in a self-styled derivative action on behalf of Fairfield
Sentry, which has been stayed before this Court since recognition of the Fairfield foreign proceedings on July 22, 2010. See Morning Mist Holdings Ltd. v. Fairfield Greenwich Group, et al., 10-03765 (BRL). In a transparent, backdoor attempt to usur causes of action belonging to the Fairfield Estate, the Objectors present hypothetical, self-serving arguments that the Foreign
Representatives and/or Trustee would be less effective than themselves in prosecuting such claims. They therefore argue that the Settlement is prejudicial to the Fairfield Estate. They additionally request that enforcement of the Settlement be stayed pending resolution of their
appeal of this Court's order recognizing the Fairfield proceedings and triggering the stay of their action.
As the Objectors' arguments and speculative pecuniary interests relate only to the
Fairfield Estate, they lack standing to be heard with respect to the Motion before this Cour. As the Second Circuit found, "(bJankptcy courts are primarily courts of equity, but they are not empowered to address any equitable claim tangentially related to the bankrptcy proceeding." In
2 According to the proposed Settlement, with respect to the Trustee's judgment against Sentry, the Trustee agrees to forbear exercising any right to collect $1.3 bilion, leaving a judgment against Sentry not subject to forbearance in the amount of$1.924 billion. The Trustee has an admitted claim in Fairfield Sentry's estate provable in the Fairfeld proceedings for the full amount of the judgment. Mot., Dkt. No. 69, Ex. A (Form of Agreement), ~ 1.
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re Refco Inc., 505 F.3d at 118. The Objectors do not purport to be customers or creditors of the
BLMIS estate, but rather hold a de minimis stake in Fairfield Sentry. They have not raised their
objection before the BVI Court, which wil evaluate the Settlement as it relates to the Objectors' interests. While the Objectors contend that the Settlement damages their derivative action on behalf of Fairfield Sentr, they are "not directly and adversely affected pecuniarily. . . because they do not hold a direct interest in the Debtor, (BLMISJ," and therefore lack standing to object to the Trustee's Motion. In re Refco Inc., 2006 WL 3409088, at *2, *6 (holding that "interest holders in and, perhaps, creditors of the non-debtor parties to the settlement" lacked standing to object to the settlement under Bankptcy Rule 9019).
Assuming, arguendo, that the Objectors have standing, they have not established any basis for denying the Settlement or staying its enforcement. The objection on its merits does not challenge the Settlement's value to the BLMIS estate or, for that matter, any ground relevant to its approval. A hypothetical harm to the Objectors' right, which itself is legally uncertain, to pursue derivative actions on behalf of Fairfield Sentry, is insuffcient to find the Settlement uneasonable as to the BLMIS estate. The Objectors' request to stay the enforcement of the
Settlement pending resolution of their independent appeal is also unwarranted and inappropriate.
While Bankptcy Rule 8005 allows a part to seek a stay of the enforcement of a judgment
pending appeal of that judgment, the Objectors have made a novel request, without legal support, that "the proposed stay... remain in effect pending determination of the appeal of the
Recognition Order - not the appeal (if any) from any order approving the Settlement." Obj.,
Dkt. No. 76, p. 5. The Objectors have not established a basis under Bankrptcy Rule 8005 for a stay of the Settlement pending an appeal of an independent decision, entered over 10 months ago, in a separate case, involving separate parties. Indeed, the Trustee and the BLMIS estate
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would be unfairly prejudiced, and the goals of the Settlement thwarted, if this Cour were to
indefinitely stay the enforcement of an agreement promising substantial value to the BLMIS
estate and customers and victims of the MadoffPonzi scheme. The merits of the Settlement as to
the Fairfield Estate are left to the expertise of the BVI Court.
Accordingly, as approval of the Settlement is in the best interests of the BLMIS estate
and the Objectors have not established otherwise, the Trustee's Motion is hereby GRANTED,
and the objection is overrled.
The Trustee is directed to submit an order consistent with this record.
IT is SO ORDERED.
Dated: New York, New York June 7, 2011 lsi Buron R. Lifland United States Bankptcy Judge
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EXHIBIT 3 CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-4 FiledFiled 08/23/1102/28/14 PagePage 243 of of 20 66
Baker & Hostetler LLP Hearing Date: June 7, 2011 at 10:00 a.m. 45 Rockefeller Plaza Objection Deadline: May 26, 2011 New York, New York 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 David 1. Sheehan Mark A. Kornfeld Thomas L. Long Marc E. Hirschfield Keith R. Murphy Jessie M. Gabriel Melissa 1. Kosack
Attorneys jòr Irving fI Picard, Trustee for the Substantively Consolidated SIP A
Liquidation of Bernard L. Madojr Investment Securities LLC and Bernard L. Madoff
UNITED STATES BANKUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
In re: Adv. Pro. No. 08-01789 (BRL) BERNAR 1. MADOFF INVESTMENT SECURITIES LLC, SIPA LIQUIDATION
Debtor. (Substantively Consolidated) ------.------
IRVING H. PICARD, Trustee for the Liquidation of Bernard L. MadoffInvestment Securities LLC, Adv. Pro. No. 09-1239 (BRL)
Plaintiff
v.
FAIRFIELD SENTRY LIMITED, et aI.,
Defendants.
301)156021.7 CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-4 FiledFiled 08/23/1102/28/14 PagePage 344 of of 20 66
MOTION FOR ENTRY OF ORDER PURSUANT TO SECTION l05(a) OF THE BANKRUPTCY CODE AND RULES 2002(a)(3) AND 9019(a) OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE APPROVING AN AGREEMENT BY AN BETWEEN THE TRUSTEE AND KENNETH KRYS AN JOANNA LAU, SOLELY IN THEIR RESPECTIVE CAPACITIES AS THE FOREIGN REPRESENTATIVS FOR AND JOINT LIQUIDATORS OF FAIIELD SENTRY LIMTED,
FAIRFELD SIGMA LIMIED, AND FAIRIELD LAMBDA LIMITED
TO: THE HONORABLE BURTON R. LIFLAND UNITED STATES BANKRUPTCY JUDGE,
Irving H. Picard (the "Trustee"), as trustee for the substantively consolidated
liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") and Bernard 1.
Madoff ("Madoff," and together with BLMIS, the "Debtors"), by and through his
undersigned counsel, submits this motion (the "Motion") seeking entry of an order, pursuat
to section l05(a) of the United States Bankruptcy Code, 11 U.S.C. §§ 101 ~ ~. (the
"Bankrptcy Code"), and Rules 2002(a)(3) and 9019(a) of the Federal Rules of Banptcy
Procedure (the "Bankrptcy Rules"), approving an agreement (the "Agreement")1 by and
among the Trustee and Kenneth Krys and Joana Lau (together with their predecessors, the
"Liquidators" or the "Joint Liquidators"), solely in their respective capacities as the Foreign
Representatives tòr, and Joint Liquidators of, Fairfield Sentr Limited, a British Virgin
a British Virgin Islands Islands company ("Faifield Sentr"), Fairfield Sigma Limited,
company ("Fairfield Sigma"), and Fairfield Lambda Limited, a British Virgin Islands
company ("Fairfield Lambda" and, together with Fairfield Sentry and Fairfeld Sigma, the
"Fairfield Funds"), and, in support of the Motion, the Trustee respectfully represents as
follows:
The foim of Agreement is annexed hereto as Exhibit "A."
300 156021. CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-4 FiledFiled 08/23/1102/28/14 PagePage 445 of of 20 66
PRELIMINARY STATEMENT
Fairfield Sentry was the largest BLMIS Feeder Fund2 and one of the largest BLMIS customers. Fairfeld Sigma and Fairfeld Lambda were separate funds whose sole purose was to invest all of their funds in Fairfeld Sentry. The Fairfeld Funds are curently in liquidation in the British Virgin Islands. All three fuds were named as defendats, along with other entities and persons, in the present adversary proceeding. The Trustee and the
Fairfield Funds Joint Liquidators have agreed to settle the Trustee's claims against the
Fairfeld Funds on terms set forth in the Agreement. Under the Agreement judgments wil
be entered against Fairfield Sentry in the amount of Thee Bilion Fifty Four Milion Dollars
($3,054,000,000); against Fairfield Sigma in the amount of Seven Hundred Fift Two
Milion Three Hundred Thousand Dollars ($752,300,000); and against Fairfield Lambda in the amount of Fift Two Milion Nine Hundred Thousand Dollars ($52;900,000). These judgments are the largest entered to date against any BLMIS Feeder Fund. In addition,
Fairfeld Sentry wil pay Seventy Milion Dollars ($70,000,000) to the BLMIS Fund of
Customer Propert. The Agreement also incorporates a cooperative approach to pursue legal claims against entities or persons which redeemed Fairfield Fund shares. Finally, Fairfield Sentry's customer clai is reduced by nearly One Bilion Dollars
($1,000,000,000). The Agreement represents a good faith, complete, and total compromise between the
Trustee and the Liquidators as to any and all claims the Trustee asserted against the Fairfield
Funds for avoidable initial and recoverable initial and subsequent transtèrs by BLMIS
2 BLMIS Feeder Funds were investment vehicles, which invested assets with BLMIS via direct customer accounts with BLMIS's investment advisory business (the "IA Business").
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within the ninety days before the Filng Date and during the period greater than ninety days, but within six years before the Filing Date, and other clais the Trustee had asserted against the Fairfeld Funds. The Agreement wil greatly benefit victims of the Madoff Ponzi scheme and the total and percentage allocation of the Fund of Customer Propert. The
Trustee respectflly requests the Cour approve the Agreement.
BACKGROUND AND RELEVANT PROCEDURAL mSTORY IN TilS AND IN RELATED PROCEEDINGS
1. On December 11, 2008 (the "Filng Date"),3 the Securties and Exchange
Commission ("SEC") fieq a complaint in the United States District Court for the Southern
District of New York (the "District Cour") against the Debtors (Case No. 08 CV 10791).
The complaint alleged that the Debtors engaged in fraui;.. through the investment advisor activities of BLMIS.
SIP A, the SEC 2. On December 15,2008, pursuant to section 78eee(a)(4)(A) of consented to a combination of its own action With an application of the Securities Investor
Protection Corporation ("SIPC"). Thereafter, pursuant to section 78eee(a)(3) of SIPA, SIPC filed an application in the District Court alleging, inter alia, that BLMIS was not able to meet its obligations to securities customers as they came due and, accordingly, its customers needed the protection afforded by SIP A.
3. On tht date, the Distrct Cour entered the Protective Decree, to which
BLMIS consented, which, in pertinent par:
(i) appointed the Trustee for the liquidation of the business of BLMIS pursuant to section 78eee(b )(3) of SIPA;
In this case, the Filing Date is the date on which the Securities and Exchange Commission commenced its suit ageiinst BLMIS, December 11, 2008, which resulted in the appointment of a receiver for the firm. See Section 7811(7)(B) ofSIPA.
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(ii) appointed Baker & Hostetler LLP as counsel to the Trustee pursuant to section 78eee(b)(3) of SIP A; and
(iii) removed the case to this Cour pursuant to section 78eee(b)(4) of SIPA.
4. At a plea hearing (the "Plea Hearng") on March 12, 2009 in the criminal action tiled against him by the United States Attorney's Offce for the Southern District of
New York, Madoff pled guilty to an ll-count criminal information, which counts included securties fraud, money laundering, theft and embezzlement. At the Plea Hearing, Madoff admitted that he "operated a Ponzi schème through the investment advisory side of
(BLMISJ." (plea Hr'g Tr. at 23:14-17.) On June 29,2009, Madoff was sentenced to a term
of imprisonment of 150 years. 5. On April 13, 2009, an involuntary bankrptcy petition was tìed against
Madoff. On June 9, 2009, this Cour èntered an order substantively consolidating the
Chapter 7 estate of Madoff into the BLMIS SIP A proceeding.
THE TRUSTEE'S CLAIMS AGAINST THE FAIIELD FuNDS
6. Fairfeld Sentr was a customer of BLMIS and maintained four direct
FN045 , IFN069, Ir"'070 with customer accounts with BLMIS, Accounts 1FNOI2, 1
BLMIS commencing in or about 1990 (the "Faireld Sentry Accounts"). The Fairfeld
Sentry Accounts are listed on Attachment A to the Agreement.
7. On or about May 18, 2009, the Trustee commenced an adversar proceeding
against Fairfield Sentr, Fairfeld Sigma, Fairíïe1d Lambda, and other defendants in the
Bankruptcy Court under the caption Picard v. Faiifield Sentry Ltd et al., Adv. Pro. No. 09-
01239 (BRL), as later amended on July 20, 2010 (the "Adversary Proceeding"). In the
Adversar Proceeding, the Trustee asserts that the Fairfield Funds are liable to the BLMIS
Estate under sections 544, 547, 548, 550 of the Banptcy Code, SIPA § 78fff-2(c)(3) and
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the New York Fraudulent Conveyance Act (New York Debtor and Creditor Law §§ 270-
281) for the withdrawals made by Fairfeld Sentry from BLMIS, of One Billon One
Hundred Thirty Thousand Dollars ($1,130,000,000) from the Fairfield Sentry Accounts within ninety days before the Filing Date ("90 Day Withdrawals") and an additional One
Billion, Nine Hundred Twenty Four Milion Dollars ($1,924,000,000) from the Fairfield
Sentry Accounts, during the period more than 90 days, but within six years, before the Filing
Date (the "Pre 90-Day Withdrawals" and, together with the 90 Day Withdrawals, the
"Withdrawals"), and Fairfield Sentr's subsequent transfer of approximately Seven Hundred
Fifty Two Milion Three Hundred Thoiisand Dollars ($752,300,000) of the Withdrawals to
Fairfield Sigma and Fifty Two Millon Nine Hundred Thousand Dollars ($52,900,000) of the Withdrawals to Fairfeld Lambda, (collectively, the "Transfers"). Specifically, the
Tnistee seeks, inter alia, recovery from the Fairfeld Funds of an amount totaling Three
Bilion Fift Four Milion Dollars ($3,054,000,000). The Trustee also has asserted claims for turnover and accounting of the Withdrwals, and for disallowance of the claims fied by the Fairfeld FlUids.
8. All claims of the Trustee against the Fairfield Funds under sections 544, 547,
548 or 550 of the Bankruptcy Code, applicable provisions of SIPA, including 78fff-2(c)(3), and the New York Debtor and Creditor Law §§ 270-281 shall be referred to herein as the
"Avoiding Power Claims."
9. The Trustee believes that all of the initial Transfers described in the
Adversary Proceeding are avoidable and the subsequent transfers are recoverable. The
Liquidators, on behalf of each of the Fairfeld Funds, have disputed any liability to the
BLMIS Estate in connection with the Adversary Proceeding and the A voiding Power Claims
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alleged therein.
FAIFIELD FUNS' CLAIMS AGAINST THE BLMIS ESTATE
LO. Prior to July 2, 2009, the bar date for filing claims in the BLMIS bankrptcy case, and prior to the appointment of the Liquidators, Fairfield Sentry filed three customer claims in the SIPA Proceeding (assigned claim numbers 008037, 007898 and 11251, later amended by claim numbers 011234 and 011429 (such claims, collectively, the "Sentr SIPA
Claim") alleging aggregate losses from the Fairfeld Sentry Accounts of Six Bilion Two
Hundred Eighty Fôur Milion Three Hundred Twenty One Thousand Five Hundred Eighty
One Dollars ($6,284,321,581) (the "Last Statement Amount"). The Sentry SIPA Claim,
including the relevant BLMIS Accotmt Numbers IFN012, IFN045, IFN069, lFN070, is included as Attachment B to the Agreement.
II. The Tnistee has disputed that Fairfeld Sentry is entitled to allowance of a customer claim in the amount reflected on its November 30, 2008 BLMIS account statement. On March 1, 2010 ths Cour issued an opiiùon applying the Trustee's "net equity" calculation of customer claims as the difference between amounts deposited into
BLMIS and amounts withdrawn (the "Net Equity Method"). Appeal of the March 1, 2010 order is curently pending before the Untied States Court of Appeals for the Second Circuit.
According to the Trustee, the amount of the Sentry SIPA Claim based on the Net Equity
Method is One Billion One Hundred Ninety Two Millon Five Hundred Thirty Six
Thousand Three Hundred Forty Two Dollars ($ 1, i 92,536,342) (the "Sentry SIPA Net
Equity Claim").
12. Prior to July 2, 2009, the bar date for filing claims in the BLMIS bankrptcy case, and prior to the appointment of the Liquidators, Fairfield Sigma filed four customer
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claims in the SIPA Proceeding (assigned claim numbers 011250, 011744, 011240 and
011249) claiming aggregate losses of Seven Hundred Seventy Three Milion Six Hundred
Thirt Five Thousand One Hundred Eighty Eight Dollars ($773,635,188) (such claims, collectively, the "Sigma SIPA Claim"). On or about December 8, 2009, the Trustee issued a notice of denial of the Sigma SIP A Claim on the asserted basis that Sigma is not a customer of BLMIS within the meaning of 11 U.S.C. § 7811(2) (the "Sigma Denial Notice"). On or about Januar 7, 2010, the Liquidators fied a timely objection to the Sigma Denial Notice in
the SIP A Proceeding, and that objection remains pending. The Sigma SIPA Claim, the
Sigma Denial Notice and the Liquidators' objection to the Sigma Denial Notice are included as Attachment C to this Agreement.
13. Prior to July 2, 2009, the bar date tor filing claims in the BLMIS bankptcy
case, and prior to the appointment of the Liquidators, Fairtield Lambda filed four customer claims in the SIPA Proceeding (assigned claim numbers 014661, 014761, 014762 and
014795) claiming aggregate losses of Thirt Six Milion Six Hundred Seventy Six Thousand
Two Hundred and Five Dollars ($36,676,205) (such claims, collectively, the "Lambda SIPA A Claim, the "Fairfield Claim" and, together with the Sentry SIPA Claim and the Sigma SIP the SIPA Claims"). On or about December 8, 2009, the Trustee issued a notice of denial of
Lambda SIPA Clai on the asserted basis that Lambda is not a customer of BLMIS within the meaning of 11 U.S.C. § 7811(2) (the "Lambda Denial Notice"). On or about Janua 7,
2010, the Liquidators tiled a timely objection to the Lambda Denial Notice in the SIPA A Claim, the Lambda Proceeding, and that objection remains pending. The Lambda SIP
Denial Notice and the Liquidators' objection to the Lambda Denial Notice are included as
Attachment D to this Agreement.
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14. Pursuant to an Order entered on April 23, 2009, the Ea'item Carbbean
Supreme Cour in the High Cour of Justice of the Virgin Islands (the "BVI Court") appointed Christopher Stride to be the Liquidator tòr Fairfield Lambda, which appointment commenced the winding up of Fairfield Lambda pursuant to the British Virgin Islands
Insolvency Act 2003 (the "Lambda Proceeding").
15. Pursuant to an Order entered on July 21, 2009, the BVI Court (i) pennitted the commencement of the winding up of Fairfeld Sentry in accordance with the British
Virgin Islands Insolvency Act 2003 (the "Sentry Proceeding"), and (ii) appointed Kenneth
Fairfield Sentry. Krs and Chrstopher Strde as the Joint Liquidators for
16. Pursuant to an Order entered on July 21, 2009, the BVI Couit (i) pennitted the commencement of the winding up of Fairfeld Sigma in accordance with the British
Virgin Islands Insolvency Act 2003 (the "Sigma Proceeding" and, together "vith the Lambda
Proceeding and the Sentr Proceeding, the "BVI Proceedings"), and (ii) appointed Kenneth
Krys and Christopher Stride to be the Joint Liquidators for Fairfield Sigma.
17. On July 22,2009, in proceedings commenced by the Liquidators pursuant to
Chapter 15 of the Banuptcy Code (the "Chapter 15 Proceedings"), the Bankruptcy Court entered an order recognizing the BVI Proceedings as foreign main proceedings and granting related relieftöthe Liquidators.
18. On or about September 6, 2010, the BVI Cour issued notices acknowledging
Christopher Stride's resignation and Joanna Lau's appointment as Joint Liquidator with
Kenneth Krys of each of the Fairfield FlUids.
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SETTLEMENT DISCUSSIONS AND TRUSTEE'S INVESTIGATION
19. During 2010 and 2011, the Liquidators, on behalf of each of the Fairfeld
Funds, engaged in good tàith discussions with the Tnistee aimed at resolving the Trustee's claims. While the LiqtUdators, on behalf of each of the Fairfeld Funds, informed the
Trustee they disputed they had any liability to the Trustee, the Liquidàtors, on behalf of each
of the Fairfield Funds, nevertheless engaged in good faith negotiations with the Trustee that
yielded the settlement set forth in the Agreement.
20. The Trustee has conducted a comprehensive investigation of the Fairfield
Funds' direct and indirect investments through BLMIS, the Fairfeld Sentr BLMIS
Accounts, and the dealings between the Fairfeld Funds and other BLMIS Feeder Funds, and
BLMIS customers. The Liquidators and the Fairfeld Funds have cooperated with the
Trustee and faciltated the investigation by providing information the Trustee has requested.
This investigation includes, but is not limited to: the review and analysis of both the
Fairfield Funds' BLMIS-related transactional histories as reflected in the BLMIS account
statements, correspondence and other records and documents available to the Trustee;
interviews with third-party witnesses; meetings with the Liquidators and their counsel, on
behalf of each of the Fairfield Funds; and a substantial review of third-par records and
documents.
21. After a review of the relevant records and a thorough and deliberate
consideration of the uncertinty and risks inherent in all litigation, the Trustee, in the
exercise of his business judgment, has determined that it is appropriate to reach a business
resolution in this matter rather than continue the litigation.
10
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OVERVIEW OF THE AGREEMENT
22. The principal terms and conditions of the Agreement are generally as follows
(as stated above, the form of Agreement is attached as Exhibit "A" and should be reviewed for a complete account of its terms):4
. The Trustee and the Liquidators agree they shall jointly request the Bankptcy Court to: (i) enter a judgment against Fairfeld Sentr in the amount of Three Billon Fifty Four Milion Dollars ($3,054,000,000), representing the settled amount of the Trustee's A voiding Power Claims against Fairfeld Sentry (the "Sentr Judgment"), (ii) enter a judgment against Fairfield Sigma in the amount of Seven Hundred Fift Two Milion Three Hundred Thousand Dollars ($752,300,000), representing the settled amount of the Trustee's Avoiding Power Claims against Fairfield Sigma (the "Sigma Judgment") and (iii) enter a judgment against Fairfeld Lambda in the amount of Fift Two Millon Nine Hundred Thousand the Trustee's Dollars ($52,900,000), representing the settled amount of Avoiding Power Claims against Fairfield Lambda (the "Lambda Judgment" and, together with the Sentr Judgment and the Sigma Judgment, the "Judgments").
. The Liquidators shall pay to the Tiustee for the benefit of the Fund of Customer Propert a total of Seventy Milion Dollars ($70,000,000) (the "Settement Payment"). On the Closing, the Liquidators shall pay to the Trustee the sum of Twenty Four Millon Dollars ($24,000,000) by \-\fire transfer. The Liquidators shall pay to the Tiustee the balance of the Settlement Payment totaling Forty Six Milion Dollars ($46,000,000) three (3) Business Days following the first to occur of: (a) the first date when Fairfield Sentry's account at Citco Ban Nederland N.V.-Dublin branch (the "Citco Account") is nQ longer subject to an order of attachment; (b) the sale by the Liquidators of any Allowed Claim as defined in the Agreement; or (c) the aggregate receipt by the Liquidators of funds belonging to Fairfield Sentr equal to Forty Six Milion Dollars ($46,000,000) from any source, other than from recoveries shared between the Parties under the Agreement, after the Closing.
Tenns not otherwise defined iii this section shall have the meaning ascribed in the Agreement. In the event of any inconsistency between the summary of terms provided in this section and the terms of the Agreement, the Agreement shall prevaiL.
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. The Fairfield Sentr Customer Claim will upon the receipt of the Settlement Payment be allowed in the final amount of Two Hundred Thirt Millon Dollars ($230,000,000), which represents a mutually agreed reduction of the claim in the amount of Nine Hundred Sixty Two Milion Five Hundred Thirt Six Thousand Four Hundred Thirty Two Dollars ($962~536,432).
. The Trustee shall prosecute all claims and causes of action he has asserted in the Adversar Proceeding against the Fairfeld Funds' former investment managers, investment advisors, managing entities, directors, partners, and offcers, including but not limited to Fairfeld Greenwich Group, Fairfield Greenwich (Bermuda) Limited, Fairfeld Greenwich Advisors, LLC, Faield Risk Services Limited, Fairfield Greenwich Limited, Fairfield International Managers, Inc., Walter M. Noel, Jr., Jeffrey Tucker, and all other individual persons named as defendants in the Adversar Proceeding (the "Adversary Proceeding Claims"). The Liquidators shall unconditionally and irtevocably assign to the Trustee any and all claims asserted by, or on behalf of, the Fairfield Funds against Fairfeld Greenwich Group, Fairfeld Greenwich (Bennuda) Limited, Fairfield Greenwich Advisors, LLC, Fairfield Greenwich Limited, Fairfield Investment Mangers, Inc., Walter M. Noel, Jr., Jeffey Tucker, Andres Piedrahita, Amit Vijayvergiya, Brain Francouer, Lourdes Barrenche, Cornelius Boele, Philp Toub, Richard Landsberger, Charles Murphy, Andrew Smith, Danel Lipton, Mark McKeefry, Harold Greisman, Santiago Reyes, Jacqueline Harary, Robert Blum, Corina Noel-Piedrahita and Mara Teresa Pulido Mendoza in the action entitled Fairfield Sentry Limited v. Fairfield Greenwich Group, et al., currently pending in the Banptcy Court, Adv. Pro. No. 10-03800 (BRL) (the "Liquidators' New York Action"), including but not limited to the Fairfield Funds' claims for Breach of Fiduciary Duty, Breach of Contract, Unjust Emichment, Constructive Trust, Rescission of Investment Manager Contract based on Mutual Mistake, and Accountig (the "Assigned Claims" and, together with the Adversary Proceeding Claims, the "Management Claims").
. The Trustee wil release, acquit, and forever discharge each of the Fairfeld Funds, the Liquidators, individually and in their capacities as Liquidators, and all of the Liquidators' agents, representatives, attorneys, employees and professionals on the specific terms set forth therein. The release becomes effective upon Trustee's actual receipt of the Settlement Payment at the Closing as defined in the Agreement
without any fuer action by any of the Paries.
. The Trutee and the Liquidators agree to provide reasonable access to the other's documents, data and other infoffiation relating to, or beneficial to the pursuit of, the Sharing Claims. The Trustee and the
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Liquidators each agree to provide reasonable cooperation and assistance to the other Part in connection with the prosecution of the Sharng Claims, provide the other with a reasonable opportunity to consider the terms for resolving any Sharing Claims and confer in good faith regarding such terms.
. The Trustee and the Liquidators shall share recoveries under the AgreemenL for certa groups of additional claims already filed or to be filed, as set fort and defined by the Agreement as "Sharng Claims."
. The Releasees will release, acquit, and forever discharge the Trustee and all his agents on the specific terms set forth in the Agreement. The release becomes effe.ctive upon the Trustee's actual receipt of the Settlement Payment at the Closing a,; defined in the Agreement
without any fuher action by any of the Paries.
. All agreements between Faield Sentr and BLMIS (other than the Settlement Agreement) wil be teiminated as of the date of the Settlement Payment.
. If the Bankptcy Court and/or the BVI Court have not entered the order approving the Agreement by Thee Hundred Sixty (360) days after the date of the Agreement, then, at the option of either the Trustee or the Liquidators and the Fairfeld Funds and upon \\'ritten notice to the other parties to the Agreement, the Agreement v"il terminate and be null and void.
The Agreement is subject to the approval of both this Cour (on behalf of the BLMIS estate) and the BVI Court (on behalf of the Fair.feld Funds' estates administered in the BVI
Proceedings). A hearing before the BVI Court to consider approval of the Agreement wil be scheduled soon. Any stakeholder of the Faireld Funds seeking information regarding those proceedings should contact Charlotte Caulfield of the British Virgin Islands offce of
KRyS Global (phone: 1-284-494-9644; e-mail: charlotte.cauifield~krs-global.com) or
Forbes Hare (phone: 1-284-494-1890; e- William Hare of the British Virgin Islands offce of mail: wiliain.hare(atòrbeshare.com). the Liquidators' general counsel.
23. The agreed upon settlement, described below and set forth in the Agreement, resolves any and all claims the Trustee asserted in the Adversary Proceeding against the
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Fairíìeld Funds, including, but not limited to, claims the Trustee had against the Fairfield
Funds for direct and indirect transfers by BLMIS within the ninety days before the Filing
Date and during the period more than niety days, but within six years, before the Filng
Date, and other claims the Trustee had against the Fairfield Funds. The Agreement provides for judgments for one hundred percent (100%) of the Trustee's Avoiding Power Claims against the Fairfield Funds. The Agreement wil retur Seventy Millon Dollars
($70,000,000) from Fairfield Sentry's cash to the Fund of Customer Propert for ultiate distribution to defruded customers in accordance with SIP A, reduces Fairfeld Sentr's claim before the Tiustee by nearly $1 BilIon,and provides a cooperative mechanism for the
future rec.overies to the Fund of Customer Property from proceedings, including but not
limited to claims against Fairfield Sentr management entities and individuals, to be jointly
pursued by the Trustee and the Liquidators. RELIEF REQUESTED
24. By this Motion, the Trustee respectfully requests that the Court enter an order
substantially in the form of the proposed Order annexed hereto as Exhibit "B" approving the
Agreement.
LEGAL BASIS
25. Bankruptcy Rule 9019(a) provides, in pertinent part, that "(o)n motion by the
tnistee and after notice and a hearing, the cour may approve a compromise or settlement."
Courts have held that in order to approve a settlement or compromise under Bankrptcy
Rule 9019(a), a banruptcy court should find that the compromise proposed is fair and
equitable, reasonable, and in the best interests of a debtor's estate. In re Ionosphere Clubs,
Inc., 156 DR 414, 426 (S.D.N.Y. 1993), aif'd, 17 F.3d 600 (2d Cir. 1994) (citingProtectžve
Comm. for Index. Stockholders ofTlvlT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414,424
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(1968)). 26. The Second Circuit has stated that a banuptcy court, In determning
whether to approve a compromise, should not decide the numerous questions of law and fact
raised by the compromise, but rather should "canvass the issues and see whether the
settlement 'fall(s) below the lowest point in the range of reasonableness.''' Liu v. Silverman
In re WT (In re Liú), 1998 U.S. App. LEXIS 31698, at *3 (2d Cir. Dec. 18, 1998) (quoting
Grant Co., 699 F.2d 599, 608 (2d Cir. 1983)); see also Masonic Hall & Asylum Fund v.
is 85691, Offcial Comm. Of Unsecured Creditors (In re Refco, Inc.), 2006 C.S. Dist. LEX
at *21-22 (S.D.N.Y. Nov. 16,2006); In re Ionosphere Clubs, 156 B.R. at 426; In re Purifed
Down Prods. Corp.., 150 B.R. 519, 522 (S.D.N.Y. 1993) ("(TJhe court need not conduct a
'mini-trial' to determine the merits of the underlying litigation"); In re Drexel Burnham
Lambert Group, Inc., 134 B.R. 499, 505 (Bankr. S.D.N.Y. 1991).
27. In deciding whether a paricular compromise falls within the "range of
reasonableness," courts consider the following faètors:
(i) the probabilty of success in the litigation; (ii) the diffculties associated with collection; the complexity of the litigation, and the attendant expense, .; (iii) inconvenience, and delay; and
(iv) the paramount interests of the creditors (or in this case, customers).
In re Refco, Inc., 2006 U.S. Dist. LEXIS 85691 at *22; Nells v. Shugrue, 165 B.R. 115, 122
(S.D.N.Y. 1994) (citing In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285,292 (2d
Cir. 1992), cert. denied, 506 U.S. 1088 (1993)).
28. The banuptcy court may credit and consider the opinions of the trustee or
debtor and their counsel in determining whether a settlement is fair and equitable. See In re
Purifed Down Prods., 150 B.R. at 522; Tn re Drexel Burnham Lambert Group, Inc., 134
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B.R. at 505. The competency and experience of counsel supporting the settlement may also be considered. Nells v. Shugnie, 165 B.R. at 122. Finally, the court should be mindful of the principle that "the law favors compromise." in re Drexel Burnham Lambert Group, Inc.,
134 B.R. at 505 (quoting In rl! Blair, 538 F.2d 849, 851 (9th Cir. 1976)).
29. The Trustee believes that the settlement is fair and equitable and the terms. of
the Agreement fall well above the lowest point in the range of reasonableness. Accordingly~
the Agreement should be approved by this Court. The Agreement memorializes a settlement that resolves all issues regarding the Trustee's claims asserted in the Adversary Proceeding
against the Fairfeld Funds without the need for protracted and costly litigation, the outcome
of which is uncertain in light of the circumstances in this matter. As par of the Agreement,
the Trustee on the one hand, and the Liquidators and the Fairfield Funds, on the other hand,
have reached a good faith, complete, and total compromise as to any and all claims the
Trustee asserted in a lawsuit for Three Bilion Fift Four Milion Dollars ($3,054,000,000)
against the Fairfeld Funds for avoidable initial and recoverable initial and subsequent
transfers by BLMIS during the ninety day, two year, and six year periods prior to the Filing the Trustee Date, and other claims the Trustee had against the Fairfield Funds. (Affdavit of
in Support of the Motion (the "Picard Affidavit") iiii 4-5. A true and accurate copy of the
Picard Affidavit is attached hereto as Exhibit "C.") 30. While the Trustee believes that he would ultimately prevail in an action
against the Fairfield Funds, he has determined, in an exercise of his business judgment, that
litigation of the issues in a litigation against the Fairfeld Funds would undoubtedly be
extremely complex, create significant delay, and would involve both litigation risk and
difficulties associated with collection. Id. ~ 4.
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31. The Liquidators, on behalf of each of the Fairfield Funds, have described a number of defenses and have contested the allegations that the Trustee asserted in a lawsuit against the Fairfield Funds, including, but not limited to, the Fairfeld Sentr, Fairfield
Sigma, and Fairfield Lambda. While the Tnistee is confident of his factul and legal position, there is risk involved in complex litigation. The certn nature of the settlement also allo",'s the Tnistee to avoid the complications and defenses necessarily associated with attempting to collect a judgment from a variety of domestic and foreign entities. 32. As outlined above, the Agreement greatly fuers the interests of the customers of BLMIS by, among other things: (i) obtaining judgments in the amount of
Three Bilion Fifty Four Milion Dollars ($3,054,000,000) against Fairfield Sentr, Seven
Hundred Fift Two Milion Thee Hundred Thousand Dollars ($752,300,000) against
Fairfield Sigma, and Fifty Two Milion Nine Hundred Thousand Dollars ($52,900,000) against Fairfield Lambda; (ii) adding Seventy Milion Dollars to the Fund of Customer
Property in the very near tenn, (iii) reducing the Fairfield Sentr Net Equity Claim from
One Bilion One Hundred Ninety Two Million Five Hundred Thirty Six Thousand Three
Hundred Forty Two Dollars ($1,192,536,432) to an allowed SIPA Claim of Two Hundred
Thirt Million Dollars ($230,000,000); and (iv) increasing the Trustee's abilty to recover substantially greater sums for the Fund of Customer Propert through cooperative efforts
and marshalling of resources of the Trustee and the Liquidators. ld. ~ 6.
33. Given the complexities involved in proceeding with litigation, including, but not limited to, multiple bankruptcy proceedings, collectabilty issues associated therewith, and the time value of money, the Trustee has determined that the proposed settlement with the Avoiding Power the Liquidators and the Fairfeld Funds represents a fair compromise of
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Claims. The Agreement allows the Trustee to avoid protracted litigation and resolves all of the defenses the Liquidators, on behalf of each of the Fairfield Funds, raised durig good- faith negotiations with the Trustee. The ability to avoid the time and expense associated with continuing to litigate this matter, combined with the fact that the Agreement will result
in a very substatial recovery, makes the settlement embodied by the Agreement extemely
beneficial to BLMIS customers.
CONCLUSION
34. In sum, the Trustee submits that the Agreement should be approved because.
it: (a) 'wil avoid lengthy, burdensome, and expensive litigation; (b) represents a fair and
reasonable compromise of the A voiding Power Claims that greatly benefits the estate and
the customers of BLMIS; and (c) is well within the "range ofreasQnableness" and confers a
substantial benefit on the estate. For these reasons, the Tnistee respectfully requests that the
Court enter an Order approving the Agreement. NOTICE
35. In accordance with Banuptcy Rules 2002 and 9019, notice of this Motion
has been given to (i) SIPC; (ii) the SEC; (iii) the Internal Revenue Service; (iv) the United
States Attorney for the Southern District of New York; (v) Forbes Hare, Pal Grove House,
P.O. Box 4649, Tortola VO 1110, British Virgin Islands, Attn: Wiliam Hare; (v) KRyS
Global, Clarence Thomas Building, Pasea Estate, Road Town, Tortola VG 1110, British
Virgin Islands, Attn: Kenneth M. Krs and Joan Lau; and (vi) Brown Rudnick LLP,
Seven Times Square, New York, New York 10036, Att: David J. Molton. The Trustee has
regular U.S. maiL. also provide notice to all interested paries by email or
18 300156021.7 CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-4 Filed Filed 08/23/11 02/28/14 Page Page 20 61 of of 20 66
WHEREFORE, the Trustee respectfuly requests entry of an Order substantially in
the fonTI of Exhibit "B" to the Motion granting the relief requested in the Motion.
Dated: New York, New York Respectfully submitted, May 9, 2011
lsi David 1. Sheehan Baker & Hostetler LLP 45 Rockefeller Plaz New York, New York l0111 Telephone: (212) 589.4200 Facsimile: (212) 589-4201 David J. Sheehan Email: dslieehan(âbakerlaw.com Mak A. Korneld Email: inkorneld§bakerlaw.coin lòomas L. Long Email: tlong(gbakerlaw.com Marc E. Hirschfeld Email: mhrschfield(ibakerlaw.com Keith R. Murhy Email: kmumhy§bakerlaw.com Jessie M. Gabriel Email: jgabriellßbakerlaw.com Melissa 1. Kosack Email: mkosackræbakerlaw.com
Attorneys/or Irving I-I Picard, Esq. Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securites LLC and Bernard L. Madof/
2
)OOIS602L.7 CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-5 Filed 02/28/1408/23/11 Page 621 of of 5 66
EXHIBIT 4 CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-5 Filed 02/28/1408/23/11 Page 632 of of 5 66 Case 1: 1 0-cv-07311-GBD Document 32 Filed 06/28/11 Page 1 of 29
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
) In re: ) Civil No. 10-7311 (GBD) ) Fairfield Sentry Limited, et al., ) On Appeal From: ) Debtors in Foreign Proceedings. ) Case No. 10-13164 (BRL) ) )
FOREIGN REPRESENTATIVES' MEMORAUM OF LAW IN OPPOSITION TO APPELLANTS' MOTION TO STAY BANUPTCY COURT'S ORDERS APPROVING SETTLEMENT AGREEMENT BETWEEN APPELLEES AN RELATED DEBTORS AN IRVING H. PICAR, TRUSTEE
BROWN RUDNICK LLP Seven Times Square New York, New York 10036 (212) 209-4800 David J. Molton May Orenstein Daniel 1. Saval Kerry L. Quinn
Attorneys for the Foreign Representatives CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-5 Filed 02/28/1408/23/11 Page 643 of of 5 66 Case 1: 1 0-cv-07311-GBD Document 32 Filed 06/28/11 Page 5 of 29
Kenneth Krys and Joanna Lau (together with their predecessors, the "Foreign
Representatives"), in their capacities as the duly appointed foreign representatives for, and joint liquidators of, Fairfield Sentry Limited (in liquidation) ("Sentry"), Fairfield Sigma Limited (in liquidation) ("Sigma"), and Fairfield Lambda Limited (in liquidation) ("Lamba" and, collectively with Sentry and Sigma, the "Debtors"), Appellees in connection with the Bankruptcy Court's order of Chapter 15 foreign main recognition regarding Sentry (which is the sole subject of and in the above-captioned appeal),! through their United States attorneys Brown Rudnick LLP, hereby submit this opposition to the Appellants' Motion to Stay Bankruptcy Court's Orders
Approving Settlement Agreement Between Appellees and Irving H Picard, Trustee (the
"Motion"), (Civil NO.1 0-7311 (GBD), Dkt. 29), and hereby state as follows:
PRELIMINARY STATEMENT
1. Morning Mist Holdings Limited and Miguel Lomeli (the "Appellants") have
launched yet another improper collateral attack on the Recognition Order under the guise of their
Motion to this Court to stay the Bankruptcy Court's order (the "BLMIS Approval Order"i
1 Capitalized terms not defined herein shall have the meaning given them in the BLMIS Trustee's Motion for Entry of Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002(a)(3) and 9019(a) of the Federal Rules of Bankruptcy Procedure Approving An Agreement by and Between the Trustee and Kenneth Krys and Joanna Lau, Solely in Their Respective Capacites as the Foreign Representatives for and Joint Liquidators of Fairfield Sentry Limited, Fairfield Sigma Limited, and Fairfield Lambda Limited (Adv. Pro. No. 09-01239 (BRL); Dkt. 69) (the "Motion To Approve"), attached as Exhibit A to the Compendium of Exhibits to the Foreign Representatives Opposition to Appellants' Motion for a Stay (the "Foreign Representatives' Compendium"), fied contemporaneously herewith. 2 The Bankruptcy Court approved the Settlement Agreement first in its June 7, 2011 Bench
Memorandum and Order Granting Trustee's Motion For Entry of Order Approving Agreement (Adv. Pro. No. 09-01239 (BRL), Dkt. 92) (the "BLMIS Settlement Decision"), attached to the Foreign Representatives' Compendium as Exhibit B. The BLMIS Settlement Decision was followed by a June
10,2011 Order Pursuant to Section 105(a of the Bankruptcy Code and Rules 2002 and 9019(a) of the Federal Rules of Bankruptcy Procedure Approving An Agreement By and Among the Trustee And Kenneth Krys and Joanna Lau, Solely In Their Respective Capacites As The Foreign Representatives For and Joint Liquidators of Fairfield Sentry Limited, Fairfield Sigma Limited, and Fairfield Lambda Limited (Adv. Pro. No. 09-01239 (BRL), Dkt. 95) (the "BLMIS Approval Order"), attached as Exhibit C to the CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-5 Filed 02/28/1408/23/11 Page 654 of of 5 66 Case 1:1 0-cv-07311-GBD Document 32 Filed 06/28/11 Page 25 of 29
and Citco are far more valuable in the hands of the Foreign Representatives than the Appellants; indeed, it was Appellants' prosecution of those claims, before they were stayed by the
Recognition Order, that threatened to cause real, irreparable harm to Sentry and its stakeholders.
39. Similarly, the Appellants' rank speculation that the value of Sentry's claims against its former investment manager, FGG, wil be destroyed if assigned to the Trustee is meritless. See Appellants' MOL at 10-11. Appellants do not even argue that the assignment of those claims would be invalid; rather, they merely claim that certain cases raise "serious questions" regarding the assignabilty of those claims.23 In any event, this argument is a red herring, as the Picard v. HSBC Bank and Picard v. JPMorgan cases cited by Appellants, see
Appellants' MOL at 9- 1 l, have only decided thus far that the reference of those actions to the
Bankruptcy Court should be withdrawn. Moreover, at the hearing on the Settlement Agreement, the Bankruptcy Court noted the inapplicability of the assignment issue raised in those cases
(which concern the assignability of claims pursuant to specific provisions of the SIPA statute) to the assignability of Sentry's claims to the BLMIS trustee under the Settlement Agreement:
"You're conflating several different areas here and the issue there involves standing perhaps under SIP A but what we have here is the normal kind of assignment of a claim, almost in a
23 The Foreign Representatives wil be moving before the Bankptcy Court for approval of the assignment of the management claims to the BLMIS Trustee under the terms of the Settlement Agreement. Section 1520(a)(2) of the Bankruptcy Code provides, in pertinent par, that "sections 363, 549, and 552 apply to a transfer of an interest of the debtor in propert that is within the territorial jurisdiction of the United States to the same extent that the sections would apply to propert of the estate." 11 U.S.C. § 1520(a)(2). In tum, Section 363(b) of the Bankruptcy Code provides, in pertinent part, that "(t)he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinar course of business, propert of the estate." 11 U.S.C. § 363(b)(1). If Appellants have an issue with the limited issue of the assignment of the management claims from the perspective of Sentry's estate under applicable Section 363 standards, they wil have the opportnity to be heard by the Bankuptcy Court on that motion.
21 CaseCase 1:11-cv-05905-AT 1:11-cv-05905-UA Document Document 29-20 2-5 Filed 02/28/1408/23/11 Page 665 of of 5 66 Case 1:1 0-cv-07311-GBD Document 32 Filed 06/28/11 Page 29 of 29
CONCLUSION
For the reasons set forth herein, the Foreign Representatives respectfully request that this
Court deny the Motion.
Dated: June 28, 2011 New York, New York
BROWN RUDNICK LLP
By: lsi David Molton David 1. Molton May Orenstein Daniel 1. Saval Kerry L. Quinn Seven Times Square New York, New York 10036 (212) 209-4800
Attorneys for the Foreign Representatives
25 Case 1:11-cv-05905-AT Document 29-21 Filed 02/28/14 Page 1 of 2
EXHIBIT 21
CaseCase 1:11-cv-05905-AT 1:11-cv-05905-BSJ Document Document 29-21 19 Filed Filed 10/03/12 02/28/14 Page Page 1 2 of of 1 2
NEW YORK LOS ANGELES DETROIT
USDCSDNY DOCUMENT ELECfRONICALLY FILED Robert A. Wallner Direct Dial: 212-946-9335 DOC#: ｾ [email protected] DATE FILED: Ｏ ｡ ｬ ｢ ｾ Ｗ Ｇ Ｒ Ｍ ｯ ｬ ｊ ｾ
October 1, 2012
VIA FIRST CLASS MAIL The Honorable Barbara S. Jones United States District Judge Daniel Patrick Moynihan United States Courthouse 500 Pearl Street New York, New York 10007-1312
Re: In re Fairfield Sentry Limited, 11 Civ. 5905 (BSJ)
Dear Judge Jones:
I represent movants in the above referenced matter, and write on behalf of the parties to advise the Court that counsel are engaged in discussions that may obviate the need for a ruling on the pending motion to withdraw the bankruptcy court reference. If that status should change, we will advise the Court promptly. In the meantime, the parties are available to address any questions that the Court may have. ｒ ･ ｦ ｊ ｉ ｴ ｾ
Robert A. Wallner
cc: David J. Molton, Esq. (by email) Stephen A. Weiss, Esq. (by email)
Tne parties ave diree-ted to adv (se +he Couxt os +0 -t-h e status 201 of +he\l settle mevit d.lscussions 6h or- ｾ ･ Ｎ ｦ ｏ ｲ ｾ NoverY1be v- 2 1 2.
DOCS\642531vl
One Pennsylvania Plaza' New York, NY 10119 . T 212.594.5300· F 212.868.1229 . milberg.com Case 1:11-cv-05905-AT Document 29-22 Filed 02/28/14 Page 1 of 2
EXHIBIT 22
CaseCase 1:11-cv-05905-AT 1:11-cv-05905-BSJ Document Document 29-22 20 Filed Filed 11/05/12 02/28/14 Page Page 1 2 of of 1 2
NEW YORK LOS ANGELES DETROIT
usoc DOCl,; ELECT. Robert A. WaHner DOC# Direct Dial: 212-946-9335 DATEFIL rw allner®milberg .com
November 1,2012
VIA U.S. MAIL The Honorable Barbara S. Jones United States District Judge Daniel Patrick Moynihan United States Courthouse 500 Pearl Street New York, New York 10007-1312
Re: In re Fairfield Sentry Limited, 11 Civ. 5905 (BSJ)
Dear Judge Jones:
I represent movants in the above matter and write, on behalf of the parties, in response to the Court's Order dated October 3,2012.
The parties continue to be engaged in discussions that may obviate the need for a ruling on the pending motion to withdraw the bankruptcy court reference. If that status should change, we will advise the Court promptly. The parties do anticipate that they should be able to provide an update as to the status of these discussions no later than November 16, and the parties therefore respectfully request that November 16 be set as the next date for the parties to report to the Court. In the meantime, the parties are available to address any questions that the Court may have.
\\pp It Cl:\..t r 01\ gVl-LVl t cd . SD ovd e.,v u:{ .
ｎ ｾ Ｊ ｽ ｐ Robert A. Wallner
cc: David J. Molton, Esq. (by email) Stephen A. Weiss, Esq. (by email)
DOCS\644970v I
One Pennsylvania Plaza' New York, NY 10119 T 212.594.5300 . F 212.868.1229· milberg.com Case 1:11-cv-05905-AT Document 29-23 Filed 02/28/14 Page 1 of 2
EXHIBIT 23
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EXHIBIT 24
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EXHIBIT 25
Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 2 of 17
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
SECURITIES INVESTOR PROTECTION CORPORATION, Adv. Pro. No. 08-01789 (BRL) Plaintiff,
V. SIP A LIQUIDATION
BERNARD L. MADOFF INVESTMENT SECURITIES LLC, (Substantively Consolidated)
Defendant.
12 MC 0115 In re: ORDER MADOFF SECURITIES (Relates to consolidated proceedings on Standing and SLUSA issues)
PERTAINS TO CASES LISTED IN EXHIBIT A
JED S. RAKOFF, U.S.D.J.:
WHEREAS:
A. Pending before the Court are various adversary proceedings commenced by Irving
H. Picard, as trustee ("Trustee") in connection with the substantively consolidated liquidation proceedings of Bernard L. Madoff Investment Securities LLC ("BLMIS") and the estate of
Bernard L. Madoff under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa et seq., in which certain defendants (the "Standing and SLUSA Withdrawal Defendants") have sought withdrawal of the reference from the Bankruptcy Court to this Court arguing, among other grounds, that (i) the Trustee lacks standing to assert common law claims and/or (ii) the Trustee's claims are barred by the Securities Litigation Uniform Standards Act ("SLUSA").
1 Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 3 of 17
B. Exhibit A hereto, prepared by the Trustee's counsel, identifies single cases or, in certain instances, the lead case of related adversary proceedings where defendants are represented by common counsel, in which Standing and SLUSA Withdrawal Defendants have filed motions to withdraw the reference (or joinders in such motions, as the case may be, which are deemed included in the scope of this Order unless expressly stated otherwise on Exhibit A) based on, among other grounds, the Trustee's standing to bring common law claims and/or the application ofSLUSA to the Trustee's claims (the "Adversary Proceedings").
C. The Court, over the objections of the Trustee and the Securities Investor
Protection Corporation ("SIPC"), previously withdrew the reference from the Bankruptcy Court to consider issues concerning the Trustee's standing and the application of SLUSA raised by certain defendants. See Picard v. HSBC Bank PLC, 450 B.R. 406 (S.D.N.Y. 2011) (the "Prior
Standing and SLUSA Withdrawal Ruling").
D. On April 17, 2012, a telephonic conference (the "Telephone Conference") was held among counsel for the Trustee, SIPC and counsel for movants in certain adversary proceedings, which was prompted by counsel's submission of proposed briefing schedules in connection with three pending motions to withdraw the reference. The actions and relevant counsel that participated in the Telephone Conference are listed in Exhibit B hereto. During the
Telephone Conference, the Court directed the Trustee to propose a form of order consistent with the Order dated April 13, 2012, No. 12 MC 0115 (S.D.N.Y. Apr. 13, 2012) (ECF No. 4), to provide that all currently pending motions to withdraw the reference in the Adversary
Proceedings based on the Trustee's standing to assert common law claims and/or the application of SLUSA will be granted in part solely to address the Withdrawn Standing and SLUSA Issues
2 Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 4 of 17
(as defined below), for the same reasons for withdrawal of the reference stated in the Prior
Standing and SLUSA Withdrawal Ruling, but otherwise remain sub judice.
E. During the Telephone Conference, the Court directed the Trustee to advise all
Standing and SLUSA Withdrawal Defendants, regardless of when the Court granted a motion to withdraw the reference, that the Court preferred to address the Withdrawn Standing and SLUSA
Issues (as defined below) on the merits at this time in a common proceeding.
F. During the Telephone Conference, the Court directed the Trustee to advise all
Standing and SLUSA Withdrawal Defendants, regardless of when the Court granted a motion to withdraw the reference, that the Court preferred that all Standing and SLUSA Withdrawal
Defendants choose one attorney to act as lead counsel at the oral argument at which the Court shall address the Withdrawn Standing and SLUSA Issues (as defined below), and the Trustee's counsel has represented that it so notified the Standing and SLUSA Withdrawal Defendants via email to the parties at the email addresses listed on Exhibit A hereto.
G. On April 18, 2012, a second telephonic conference (the "Second Telephone
Conference") was convened at the request of certain counsel that were party to the original
Telephone Conference to seek clarification of the Court's directives during the Telephone
Conference. The actions and relevant counsel that participated in the Second Telephone
Conference are listed in Exhibit C hereto. During the Second Telephone Conference, the Court clarified its prior directives and made the following ruling providing, inter alia, that the Court was withdrawing the reference, in part, solely as set forth herein, in order to address, among other issues, the merits of the Withdrawn Standing and SLUSA Issues (as defined below).On
April 19, 2012, the Court issued an order directing common briefing on the following issues raised in pending motions to withdraw the reference: (1) whether 11 U.S.C. § 546(e) limits the
3 Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 5 of 17
Trustee's ability to avoid transfers made by Madoff Securities; (2) whether provisions of the
Internal Revenue Code that tax undistributed portions of IRAs prevent the Trustee from avoiding
IRA distributions that would otherwise be taxed; (3) whether the Trustee may, consistent with
non-bankruptcy law, avoid transfers that Madoff Securities purportedly made in order to satisfy
antecedent debts; (4) whether the Trustee has standing to pursue common law claims and, if so,
whether the Securities Litigation Uniform Standards Act preempts the Trustee's common law
claims. (See Order, In re: Madof!Securities, No. 12-MC-00115 (JSR) (S.D.N.Y. April19, 2012)
(ECF No. 22).
H. The Withdrawn Standing and SLUSA Issues (as defined below) may be affected
by decisions in the following appeals currently pending before the Second Circuit Court of
Appeals: Picard v. JPMorgan Chase & Co., et al. (2d Cir. 11-5044), Picard v. UBS Fund
Services (Luxembourg) et al. (2d Cir. 11-5051), Picard v. UniCredit S.p.A., et al. (2d Cir. 11-
517 5), Picard v. HSBC Bank plc, et al. (2d Cir. 11-5207), Trezziova v. Kahn, et al. (In re Herald)
(2d Cir. 12-156), and Criterium Capital Funds B. V. v. Tremont (Bermuda) Limited, et al. (In re
Kingate) (2d Cir. 11-1397). The Standing and SLUSA Withdrawal Defendants believe that judicial economy favors awaiting possible appellate guidance in those cases with regard to the
Withdrawn Standing and SLUSA Issues (as defined below).
BASED ON THE FOREGOING, IT IS HEREBY ORDERED AS FOLLOWS:
1. The reference of the Adversary Proceedings is withdrawn from the Bankruptcy
Court, in part and solely with respect to the Standing and SLUSA Withdrawal Defendants, to
this Court for the limited purpose of deciding the following issues (the "Withdrawn Standing
and SLUSA Issues"):
(a) whether the Trustee has standing to bring common law claims; and
4 Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 6 of 17
(b) whether SLUSA preempts the Trustee's common law claims.
Except as otherwise provided herein or in orders of this Court, the reference to the Bankruptcy
Court is otherwise maintained for all other purposes.
2. The Trustee and SIPC are deemed to have raised, in response to all pending
motions for withdrawal of the reference based on the Withdrawn Standing and SLUSA Issues,
all arguments previously raised by either or both of them in opposition to all such motions
granted by the Prior Standing and SLUSA Withdrawal Ruling, and such objections or
arguments are deemed to be overruled, solely with respect to the Withdrawn Standing and
SLUSA Issues, for the reasons stated in the Prior Standing and SLUSA Withdrawal Ruling.
3. All objections that could be raised by the Trustee and/or SIPC to the pending
motions to withdraw the reference in the Adversary Proceedings, and the defenses and
responses thereto that may be raised by the affected defendants, are deemed preserved on all
matters.
4. The Standing and SLUSA Withdrawal Defendants shall file one consolidated opening brief, not to exceed forty (40) pages, addressing the Withdrawn Standing and SLUSA
Issues on or before August 3, 2012. Separately, on or before August 3, 2012, certain Standing and SLUSA Withdrawal Defendants as to whom the Trustee asserts the applicability of the
"insider exception" to the in pari delicto I Wagoner doctrine may submit a brief, not to exceed seven (7) pages, on that part of the standing issue.
5. The Trustee and SIPC shall each file an opposition brief, not to exceed forty (40) pages each, addressing the Withdrawn Standing and SLUSA Issues on or before September 14,
2012. Separately, on or before September 14, 2012, the Trustee may submit a separate brief, not
5 Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 7 of 17
to exceed seven (7) pages, regarding the effect of the "insider exception" on the in pari delicto I
Wagoner doctrine.
6. The Standing and SLUSA Withdrawal Defendants shall file one consolidated reply brief, not to exceed twenty (20) pages, on or before October 5, 2012. Separately, on or before October 5, 2012, certain Standing and SLUSA Withdrawal Defendants as to whom the
Trustee asserts the applicability of the "insider exception" to the in pari delicto I Wagoner doctrine may submit a separate reply brief, not to exceed five (5) pages, on that part of the standing issue.
7. The Court will hold oral argument concerning the Withdrawn Standing and
SLUSA Issues on October 15, 2012, at 4:00 p.m. (the "Hearing Date").
8. On or before October 5, 2012, the Standing and SLUSA Withdrawal Defendants shall designate one lead counsel to advocate their position at oral argument on the Hearing Date.
Separately, on or before October 5, 2012, the certain Standing and SLUSA Withdrawal
Defendants as to whom the Trustee asserts the applicability of the "insider exception" to the in pari delicto I Wagoner doctrine shall designate one counsel to advocate their position on that part of the standing issue at oral argument on the Hearing Date.
9. The caption displayed on this Order shall be used as the caption for all pleadings, notices and briefs to be filed pursuant to this Order.
10. All communications and documents (including drafts) exchanged between and among any of the defendants in the Adversary Proceedings listed on Exhibit A, and/or their respective attorneys, shall be deemed to be privileged communications and/or work product, as the case may be, subject to a joint interest privilege.
6 Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 8 of 17
11. This Order is without prejudice to any and all grounds for withdrawal of the reference (other than the Withdrawn Standing and SLUSA Issues) raised in the Adversary
Proceedings by the Standing and SLUSA Withdrawal Defendants, all of which are preserved.
12. Nothing in this Order shall: (a) waive or resolve any issue raised by any party other than the withdrawal of the reference solely with respect to the Standing and SLUSA Issues;
(b) limit, restrict or impair any defense or argument that has been raised or could be raised by any Standing and SLUSA Withdrawal Defendant in a motion to dismiss under Fed. R. Civ. P. 12 or Fed. R. Bankr. P. 7012, or any other defense or right of any nature available to any Standing and SLUSA Withdrawal Defendant (including, without limitation, all defenses based on lack of personal jurisdiction or insufficient service of process), or any argument or defense that could be raised by the Trustee or SIPC in response thereto; and (c) be deemed or construed as the submission of a motion to dismiss under Fed. R. Civ. P. 12 or Fed. R. Bankr. P. 7012.
13. Nothing in this Order shall constitute an agreement or consent by any Standing and SLUSA Withdrawal Defendant to pay the fees and expenses of any attorney other than such defendant's own retained attorney. This paragraph shall not affect or compromise any rights of the Trustee or SIPC.
14. This Order is without prejudice to and preserves all objections of the Trustee and
SIPC to timely-filed motions for withdrawal of the reference currently pending before this Court
(other than the withdrawal of the reference solely with respect to the Withdrawn Standing and
SLUSA Issues) with respect to the Adversary Proceedings, and the defenses and responses thereto that may be raised by the affected defendants, are deemed preserved on all matters.
15. The procedures established by this Order shall constitute the sole and exclusive procedures for determination of the Withdrawn Standing and SLUSA Issues in the Adversary
7 Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 9 of 17
Proceedings, and this Court shall be the forum for such determination. To the extent that briefing or argument schedules were previously established with respect to the Withdrawn
Standing and SLUSA Issues in any of the Adversary Proceedings, this Order supersedes all such schedules solely with respect to the Withdrawn Standing and SLUSA Issues. To the extent that briefing or argument schedules are prospectively established with respect to motions to withdraw the reference or motions to dismiss in any of the Adversary Proceedings, the Withdrawn
Standing and SLUSA Issues shall be excluded from such briefing or argument. Except as stated in this paragraph, this Order shall not be deemed or construed to modify, withdraw or reverse any prior Order of the Court that granted withdrawal of the reference in any Adversary
Proceeding for any reason.
SO ORDERED.
Dated: New York, New York May 15_, 2012 ｾ ｄ Ｎ ｊ Ｎ
8 Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 10 of 17
EXHIBIT A
1. Picard v. Trotanoy Inv. Company 11-cv-07112-JSR Katten Muchin Rosenman LLP (for Access Ltd., et al. International Advisors Ltd.) I Robert W. Gottlieb I ([email protected]) Brian L. Muldrew (brian.muldrew@kattenlaw .com) 2. Picard v. Federico Ceretti, et al. 11-cv-07134-JSR Paul Hastings LLP (as filed by Federico Ceretti, Carlo Jodi Kleinick Grosso, FIM Limited and FIM [email protected]) Advisers LLP) Barry Sher ([email protected]) Mor Wetzler ([email protected]) 3. Picard v. Federico Ceretti, et al. 11-cv-07256-JSR Cleary Gottlieb Steen & Hamilton LLP (as filed by Citi Hedge Fund Carmine D. Boccuzzi, Jr. Services, Ltd.) ( [email protected]) David Y. Livshiz ( [email protected]) 4. Picard v. Oreades Sicav, et al. (as 11-cv-07763-JSR Cleary Gottlieb Steen & Hamilton LLP filed by BNP Paribas Investment Lawrence B. Friedman Partners Luxembourg S.A., BGL ([email protected]) BNP Paribas S.A. and BNP Paribas Breon S. Peace Securities Services S.A.) ([email protected]) 5. Picard v. Equity Trading Portfolio 11-cv-0781 0-JSR Cleary Gottlieb Steen & Hamilton LLP Ltd., et aL (as filed by BNP Paribas Lawrence B. Friedman Arbitrage SNC) ([email protected]) Breon S. Peace I I ([email protected]) I 6. Picard v. Square One Fund Ltd., et 12-cv-02490-JSR Tannenbaum Helpern Syracuse & Hirschtritt LLP; • al. Brune & Richard LLP. Tannenbaum Helpern Syracuse & Hirschtritt LLP Tammy P. Bieber ([email protected]) Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 11 of 17
Brune & Richard LLP David Elbaum ( [email protected])
Bernfeld, DeMatteo & Bernfeld, LLP David Bernfeld ( [email protected]) 7. Picard v. Fairfield Sentry Limited, 12-cv-02619 Simpson Thacher & Bartlett LLP eta/. (as filed by Chester Global Mark G. Cunha Strategy Fund Limited, Chester ([email protected]) Global Strategy Fund, LP, Irongate Peter E. Kazanoff Global Strategy Fund Limited, ([email protected]) Fairfield Greenwich Fund (Luxembourg), Wollmuth Maher & Deutsch LLP Fairfield Investment Fund Limited, Frederick R. Kessler Fairfield Investors (Euro) Ltd., and ([email protected]) Stable Fund LP) Paul R. DeFilippo ([email protected]) Michael P. Burke ([email protected])
Debevoise & Plimpton LLP Mark P. Goodman
([email protected]) ' '
O'Shea Partners LLP Sean F. O'Shea ([email protected]) Michael E. Petrella ([email protected])
White & Case LLP Glenn M. Kurtz ([email protected]) Andrew W. Hammond ( ahammon
Covington & Burling LLP Bruce A. Baird ([email protected])
Kasowitz, Benson, Torres & Friedman LLP Daniel J. Fetterman ( [email protected])
Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C. Edward M. Spiro ( espiro@maglaw .com)
Dechert LLP Andrew J. Levander ( [email protected]) David S. Hoffner ( [email protected]) 8. Picard v. Fairfield Sentry Limited, 12-cv-02638 Simpson Thacher & Bartlett LLP et at. (Joint Memorandum filed by Mark G. Cunha various defendants) ([email protected]) Peter E. Kazanoff ([email protected])
W ollmuth Maher & Deutsch LLP Frederick R. Kessler ( fkessler@wmd-law .com) Paul R. DeFilippo ([email protected]) Michael P. Burke ([email protected])
Debevoise & Plimpton LLP Mark P. Goodman ([email protected]) Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 13 of 17
O'Shea Partners LLP Sean F. O'Shea ( [email protected]) Michael E. Petrella ([email protected])
White & Case LLP Glenn M. Kurtz ([email protected]) Andrew W. Hammond ( [email protected])
Covington & Burling LLP Bruce A. Baird ([email protected])
Kasowitz, Benson, Torres & Friedman LLP Daniel J. Fetterman ( [email protected])
Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C. Edward M. Spiro ( [email protected])
Dechert LLP Andrew J. Levander (andrew [email protected]) David S. Hoffner ( [email protected]) 9. Picard v. Kohn (as filed by Redcrest 12-cv-02661 Kirkland & Ellis LLP Investments, Inc., Line Group Ltd., Jay P. Lefkowitz, P.C. Line Management Services Ltd., and [email protected]) Line Holdings Ltd.) Joseph Serino, Jr. [email protected]) Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 14 of 17
David S. Flugman ( [email protected])
10. Picard v. Peter B. Madoff, et al. 12-cv-02752 Cohen & Gresser LLP (as filed by Deborah Madoft) Mark S. Cohen ([email protected]) Daniel H. Tabak ( dtabak@cohengresser .com)
11. Picard v. Peter B. Madoff, et al. 12-cv-02883 Cooley LLP (as filed by Stephanie Mack) Alan Levine ( [email protected]) Lawrence C. Gottlieb ([email protected]) Laura Grossfield Birger ([email protected]) Michael A. Klein ([email protected])
12. Picard v. Defender Limited, et a/ 12-cv-02800 Klestadt & Winters LLP (Defender Limited, Reliance Tracy L. Klestadt Management (BVI) Limited, ( [email protected]) Reliance Management (Gibraltar) Brendan M. Scott Limited and Tim Brockmann- ([email protected]) Moving Parties) 13. Picard v. UBS A G, et al. (Reliance 12-cv-02802 Klestadt & Winters LLP Management (BVI) Limited and Tracy L. Klestadt Reliance Management (Gibraltar) ([email protected]) Limited- Moving Parties) Brendan M. Scott (bscott@_klestadt.com) 14. Picard v. Defender Limited, et al 12-cv-02871- Seward & Kissel LLP (Reliance International Research Mark J. Hyland LLC and Justin Lowe -Moving ([email protected]) Parties) Mandy DeRoche ( [email protected]) 15. Picard v. Leon Flax, et al. 12-cv-02928 Katten Muchin Rosenman LLP Anthony L. Paccione Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 15 of 17
anthony. [email protected] Brian L. Muldrew brian.muldrew(a}kattenlaw .com 16. Picard v. UBS AG, et al. (M&B 12-cv-02483 Cravath, Swaine & Moore LLP Capital Advisers Sociedad de David Greenwald Valores, S.A., M&B Capital ( [email protected]) Advisers Gestion SGIIC, S.A. - Richard Levin Moving Parties) [Amended Motion ([email protected]) to Withdraw] Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 16 of 17
EXHIBITB
Participants To April17, 2012 Telephonic Conference
Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madofflnvestment Securities LLC and Bernard L. Madoff
BAKER HOSTETLER, LLP Oren J. W arshavsky ( [email protected]) Nicholas Cremona ([email protected])
SECURITIES INVESTOR PROTECTION CORPORATION Kevin Bell ([email protected]) Lauren Attard ([email protected])
Picard v. Lake Drive LLC, et al, 11-cv-093 71-JSR; Picard v. Bear Lake Partners, et al, 11-cv-093 72-JSR
KATTEN MUCHIN ROSENMAN LLP Anthony L. Paccione (anthony. [email protected])
Picard v. Mosaic Fund L.P. , et al, 11-cv-09444-JSR
MACHT, SHAPIRO, AARATO & ISSERLES LLP Eric S. Olney ( [email protected]) Case 1:11-cv-05905-AT Document 29-25 Filed 02/28/14 Page 17 of 17
EXHIBIT C
Participants To April18, 2012 Telephonic Conference
Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation o(Bernard L. Madofjlnvestment Securities LLC and Bernard L. Madoff
BAKER HOSTETLER, LLP Oren J. Warshavsky ( [email protected]) Nicholas Cremona ( ncremona@bakerlaw .com)
SECURITIES INVESTOR PROTECTION CORPORATION Kevin Bell ([email protected]) Lauren Attard (lattard@si pc. or g)
Picard v. Lake Drive LLC, et al, 11-cv-093 71-JSR; Picard v. Bear Lake Partners, et al, 11-cv-093 72-JSR
KATTEN MUCHIN ROSENMAN LLP Anthony L. Paccione (anthony. paccione@kattenlaw .com)
Picard v. Mosaic Fund L.P. , et al, 11-cv-09444-JSR
MACHT, SHAPIRO, AARA TO & ISSERLES LLP Eric S. Olney ( [email protected])
Picard v. Goldstein, et al, 11-cv-08491-JSR
KRAMER LEVIN NAFTALIS & FRANKEL LLP Elise Scherr Frejka ( [email protected])
Picard v. Elins Family Trust, et al., 11-cv-04 772-JSR
KLEINBERG, KAPLAN, WOLFF & COHEN P.C. Matthew J. Gold ([email protected]) David Parker ( [email protected])
300242822 Case 1:11-cv-05905-AT Document 29-26 Filed 02/28/14 Page 1 of 2
EXHIBIT 26
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