May 25, 2016 45 Rockefeller Plaza Time: 10:00A.M

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Baker & Hostetler LLP Hearing Date: May 25, 2016 45 Rockefeller Plaza Time: 10:00a.m. New York, NY 10111 Telephone: (212) 589-4200 Objection Deadline: May 18, 2016 Facsimile: (212) 589-4201 Time: 5:00p.m. David J. Sheehan Lauren J. Resnick

Attorneys for Irving H. Picard, Trustee for the substantively consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and the Estate of Bernard L. Madoff UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

SECURITIES INVESTOR PROTECTION CORPORATION, Adv. Pro. No. 08-01789 (SMB)

Plaintiff, SIPA LIQUIDATION v. (Substantively Consolidated) BERNARD L. MADOFF INVESTMENT SECURITIES LLC,

Defendant.

In re:

BERNARD L. MADOFF,

Debtor.

IRVING H. PICARD, Trustee for the Liquidation of Adv. Pro. No. 09-01503 (SMB) Bernard L. Madoff Investment Securities LLC,

Plaintiff, v. REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF THE ESTATE OF MARK D. MADOFF and TRUSTEE’S MOTION FOR ANDREW H. MADOFF, individually and as Executor LEAVE TO FILE A THIRD of the Estate of Mark D. Madoff. AMENDED COMPLAINT

Defendants. 09-01503-smb Doc 235 Filed 04/06/16 Entered 04/06/16 13:08:47 Main Document Pg 2 of 29 TABLE OF CONTENTS

Page

I. INTRODUCTION...... 1

II. RELEVANT FACTS...... 4

A. The U.S. Family Litigation And The Proposed Third Amended Complaint ...... 4

B. U.K. Liquidators Brought Claims Relating to a Separate Company (MSIL) Incorporated Under U.K. Law...... 5

III. ARGUMENT ...... 9

A. There Has Been No Undue Delay ...... 9

B. Request to Strike Is Improper and Should Be Denied...... 11

C. This Court Is Not Obliged to Give Comity to Foreign Judgments...... 13

D. Preclusion Does Not Attach to the U.K. Judgment ...... 15

1. Res Judicata (Claim Preclusion) Does Not Apply Here Where Different Claims Were Litigated In The Prior Proceeding By A Different Party.....16

2. Collateral Estoppel (Issue Preclusion) Does Not Apply Here Where There Is No Identity Of Issues Between The Prior And Current Litigation And There Was No Full And Fair Opportunity To Litigate...... 17

3. Preclusion Is Not Fair And Sensible In These Circumstances ...... 21

IV. CONCLUSION ...... 23

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Page(s)

Cases

Accurate Grading Quality Assurance, Inc. v. Khothari, No. 12 Civ. 9130 (LTS), 2014 WL 5073576 (S.D.N.Y. Sept. 30, 2014)...... 12

Alfadda v. Fenn, 966 F. Supp. 1317 (S.D.N.Y. 1997), aff’d, 159 F.3d 41 (2d Cir. 1998)...... 13

Arnold v. 1199 SEIU, 420 Fed. App’x 48 (2d Cir. 2011) ...... 21

Ball v. A.O. Smith Corp., 451 F.3d 66 (2d Cir. 2006) ...... 16

Bank of N.Y. v. Alison J. Treco (In re Treco), 240 F.3d 148 (2d Cir. 2001) ...... 14

Bank of New York v. First Millennium, Inc., 607 F.3d 905 (2d Cir. 2010) ...... 17

Bear Stearns & Co. v. 1109580 Ontario, Inc., 409 F.3d 87 (2d Cir. 2005) ...... 21

Beechwood Restorative Care Ctr. v. Leeds, 436 F.3d 147 (2d. Cir 2006) ...... 21

In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. 117 (Bankr. S.D.N.Y. 2014) ...... 5, 10

Bobby v. Bies, 556 U.S. 825 (2009) ...... 21

Chauffeur’s Training Sch., Inc. v. Spellings, 478 F.3d 117 (2d Cir. 2007) ...... 18

Cobb v. Pozzi, 363 F.3d 89 (2d Cir. 2003) ...... 19, 20

Computer Assocs. Int’l, Inc. v. Altai, Inc., 126 F.3d 365 (2d Cir. 1997) ...... 20

Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 600 F.3d 190 (2d Cir. 2010) ...... 17

EDP Med. Computer Sys., Inc. v. United States, 480 F.3d 621 (2d Cir. 2007) ...... 15

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Esquire Trade & Fin., Inc. v. CBQ, Inc., 562 F.3d 516 (2d Cir. 2009) ...... 15

Finch v. City of New York, 591 F. Supp. 2d 349 (S.D.N.Y. 2008) ...... 19

Gen. Foods Corp. v. Massachusetts Dept. of Pub. Health, 648 F.2d 784 (1st Cir. 1981)...... 17

Gonzales v. Banco Central Corp., 27 F.3d 751 (1st Cir. 1994)...... 17

Herendeen v. Champion Int’l Corp., 525 F.2d 130 (2d Cir. 1975) ...... 15

IMG Fragrance Brands, LLC v. Houbigants, Inc., No. 09 Civ. 3655 (LAP), 2009 WL 5088750 (S.D.N.Y. December 18, 2009) ...... 12

Jean-Gilles v. County of Rockland, 463 F. Supp. 2d 437 (S.D.N.Y. 2006) ...... 21

Johnson v. Watkins, 101 F.3d 792 (2d Cir. 1996) ...... 19

JP Morgan Chase Bank v. Altos Hornos de Mexico, 412 F.3d 418 (2d Cir. 2005) ...... 13

In re Lehman Bros. Holdings Inc., 422 B.R. 407 (Bankr. S.D.N.Y. 2010) ...... 14

Lynch v. Southampton Animal Shelter Found., Inc., 278 F.R.D. 55 (E.D.N.Y. 2011)...... 12, 13

Monahan v. N.Y.C. Dep’t of Corr., 214 F.3d 275 (2d Cir. 2000) ...... 15

New Hampshire v. Maine, 532 U.S. 742 (2001) ...... 15, 16

Pravin Banker Assoc., Ltd. v. Banco Popular Del Peru, 109 F.3d 850 (2d Cir. 1997) ...... 13

Rumford Chem. Works v. Hygienic Chem. Co. of New Jersey, 215 U.S. 156 (1909) ...... 17

S.E.C. v. Treadway, No. 11 Civ. 1534(RJH), 2011 WL 2623469 (S.D.N.Y. June 29, 2011)...... 12

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SEC v. Amerindo Inv. Advisors, Inc., 2013 WL 1385013 (S.D.N.Y. Mar. 11, 2013)...... 18

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec., 516 B.R. 18 (S.D.N.Y. 2014) ...... 4, 10

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec., No. 12-MC-0115 (JSR), 2013 WL 1609154 (S.D.N.Y. Apr. 15, 2013) ...... 5, 10, 20

SIPC v. BLMIS, 490 B.R. 46 (S.D.N.Y. 2013) ...... 14

In re Sokol, 113 F.3d 303 (2d Cir. 1997) ...... 18

Studio Art Theater of Evansville, Inc. v. City of Evansville, 76 F.3d 128 (7th Cir. 1996)...... 18

Sullivan v. Gagnier, 225 F.3d 161 (2d Cir. 2000) ...... 19

Taylor v. Sturgell, 553 U.S. 880 (2008) ...... 15, 16, 17, 18

TechnoMarine SA v. Giftports, Inc., 758 F.3d 493 (2d Cir. 2014) ...... 15

In re Teltronics Servs., Inc., 762 F.2d 185 (2d Cir. 1985) ...... 15

In re Tyson, 433 B.R. 68 (S.D.N.Y. 2010) ...... 17

United States v. Bonventre, et al., No. 10-CR-00228 (LTS) (S.D.N.Y. Mar. 24, 2014), ECF No. 800 ...... 12

United States v. DiPascali, No. 09-CR-764 (RJS) (S.D.N.Y. Aug. 11, 2009), ECF No. 11 ...... 6

United States v. Hussein, 178 F.3d 125 (2d Cir. 1999) ...... 21

United States v. Madoff, No. 09-CR-213 (DC) (S.D.N.Y. Mar. 12, 2009), ECF No. 50...... 6

Victrix S.S. Co. v. Salen Dry Cargo A.B., 825 F.2d 709 (2d Cir. 1987) ...... 13

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Statutes

11 U.S.C. § 546(e)...... 9, 20

11 U.S.C. § 548(c)...... 10

Rules

Fed. R. Bankr. P. 7015 ...... 1

Fed. R. Civ. P. 12(f) ...... 11

Fed. R. Civ. P. 15 ...... 1

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I. INTRODUCTION

Almost 8 years since Madoff’s arrest, the Madoff Brothers have not returned a dime from

the millions of ill-gotten gains that funded their extravagant lifestyles, desperately clinging to

illicit proceeds taken from the victims of the fraud. The Trustee’s proposed Third Amended

Complaint (“TAC”) is not a “wholesale revision” but part of the continuing effort to recover

moneys stolen from BLMIS and its customers. The TAC is exactly what it was represented to

be—a streamlined pleading removing all allegations and claims relating to dismissed defendants,

focusing entirely on the remaining defendants, reducing the transfers alleged against the Madoff

Brothers, and adding additional factual specificity to previous-pled causes of action.1

In light of this court’s view on equitable disallowance, the Trustee hereby removes this

proposed additional count from his proposed TAC. Defendants concede that the causes of action

in the TAC are “as a technical matter[] the same as those asserted in previous iterations of the

complaint.” (Opp. Br. at 2.)2 This Court should grant the Trustee’s motion pursuant to the

liberal standard for amendment set forth in Rule 15 of the Federal Rules of Civil Procedure,

applicable to this adversary proceeding under Federal Rule of Bankruptcy Procedure 7015.

1 The Trustee most respectfully submits a revised proposed TAC for this court’s consideration in light of the following developments: (1) Removal of the proposed equitable disallowance count in light of this court’s view on this additional cause of action as well as claims to properties that are now beyond the reach of the Trustee following Andrew Madoff’s death. (2) On April 6, 2015, the Trustee dismissed Ms. Mack from this proceeding. Ms. Mack did not oppose the Trustee’s motion seeking leave to amend the complaint. (ECF No. 211.) Defendant Andrew Madoff died on September 3, 2014. The parties have agreed to submit a stipulation to be so ordered by this Court to substitute: (1) Martin Flumenbaum, solely in his capacity as Executor of Andrew Madoff’s Estate, and the Estate of Andrew Madoff for deceased Defendant Andrew Madoff and (2) David Blumenfeld, solely in his capacity as Successor Executor of the Estate of Mark Madoff, for deceased Defendant Andrew Madoff, in his capacity as former Executor of the Estate of Mark Madoff. 2 The blackline submitted by Defendants distorts the differences between the two complaints as entire sections were shifted to different locations with the underlying allegations otherwise kept intact.

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The Trustee’s claims and theory against the Madoff Brothers and their roles in the fraud

have not “radically shifted;” it is merely not as palatable to the Madoff Brothers now that the

proposed TAC is focused exclusively on their wrongdoing in light of the recent dismissal of all

other defendants from the action. Indeed, the Trustee’s theory has been clear all along and

consistent from the Second Amended Complaint (“SAC”) (excerpted below) to the TAC:

 “Unlike many of the ordinary IA Business customers who were duped by their account statements, however, the Family Defendants were—or should have been—aware at all times that the profits described in their IA account statements were a fiction.” (SAC ¶ 69.)

 The Madoff Brothers “knew or should have known that the profits and executions described in customers’ account statements, including their own, did not correspond to actual market conditions.” (SAC ¶ 113.)

 “Perhaps most obviously, as Co-Directors of Trading, Andrew and Mark were— or should have been—aware that no one was effecting trades within the IA Business, either in New York or in London…” (SAC ¶ 69.)

 The Madoff Brothers “were, or should have been, aware of the radically different performance of the IA Business as compared to the performance of the proprietary trading and market-making businesses, which traded in the same markets at the same time.” (SAC ¶ 113.)

 “[E]ach of the Family and Spouse Defendants knew or should have known that they were not entitled to these distributions of ‘free’ company money.” (SAC ¶ 113.)

Second, the Madoff Brothers’ procedurally improper argument that references to criminal

pleas and convictions in the proposed TAC should be stricken is similarly without merit. Indeed,

multiple references to criminal pleas were included in the SAC without objection. The TAC

simply adds three paragraphs to include the two most recent pleas from 2012 and 2014, as well

as the convictions of former BLMIS employees from the criminal trial in 2014. These three

additional paragraphs are not redundant, immaterial or scandalous. While the Madoff Brothers

may wish to distance themselves from these events, they contain information that is public, part

of the narrative of the fraud, and relevant to their own misconduct.

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Third, there has been no undue delay by the Trustee. The proposed amendment is timely

and necessary in light of the dismissal of numerous defendants from the case and the heightened

pleading standard of “actual knowledge” (only applicable to certain causes of action) that has

been set in various rulings since the filing of the Second Amended Complaint on May 4, 2012.

The Trustee is also not precluded from filing the TAC under the doctrines of res judicata

and/or collateral estoppel. Like the criminal pleas and convictions, the allegations relating to the

transfers of funds between MSIL and BLMIS were included in the SAC. (See SAC, ¶¶8, 11, 60-

66.) Beyond that, the Defendants misstate the facts and misapply the law regarding the U.K.

litigation. The Trustee was not a party to the U.K. proceeding.3 The litigated claims in the U.K.

proceeding were brought solely by the MSIL Liquidators and did not put at issue the BLMIS

Ponzi scheme or any party’s knowledge of it.4 The MSIL Liquidators asserted conventional

company claims against the Madoff Brothers as directors of MSIL, a U.K. company, for breach

of their fiduciary duties to MSIL, in a U.K. court, and under U.K. law. There were no claims

whatsoever relating to BLMIS litigated in that proceeding nor were there any issues of U.S.

Bankruptcy Code or U.S. law claims presented. No overlap exists between the legal issues in the

MSIL proceeding and this one. Each involves a distinct set of facts and claims and seeks

recovery for different harms on behalf of different estates. In fact, unlike the MSIL case, the IA

transfers to MSIL are relevant here for the separate purpose of proving the unprofitability of the

3 As detailed below, the Trustee was dismissed from that U.K. action on jurisdictional grounds years prior. In fact, even when the Trustee was a claimant in that proceeding, he pursued only claims against Sonja Kohn. 4 In their opposition brief, the Madoff Brothers claim that the Trustee raised the issue of “actual knowledge and participation by Mark and Andrew in Bernie Madoff’s Ponzi scheme” and lost on the merits. (See Opp. Br. at 6.) Nothing could be further from the truth—as admitted by the Madoff Brothers themselves in the U.K. proceeding. (See Andrew Madoff Opening Submission ¶ 9 (“MSIL does not seek to suggest that [Andrew Madoff] and [Mark Madoff] knew or suspected that [Bernard Madoff] was engaged in a Ponzi scheme”); see also Ehrlich Decl. Ex. 1 ¶ 1 (noting that there was no suggestion that the defendants knew of the BLMIS Ponzi scheme).)

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market-making and proprietary trading business units—managed and run by the Madoff

Brothers—that underlies the Trustee’s claim to recover the Madoff Brothers’ excessive

compensation. The Trustee’s interest in pursuing claims under the Bankruptcy Code and U.S.

law must not be denied, nor should this Court be deprived of adjudicating those claims.

The Trustee should be granted leave to amend the SAC.

II. RELEVANT FACTS

A. The U.S. Family Litigation And The Proposed Third Amended Complaint

The Trustee commenced this action against the Madoff Brothers in October 2009, almost

a year prior to the filing of the claims in the U.K. proceeding, for causes of action arising under

the Bankruptcy Code and New York Debtor & Creditor Law for fraudulent transfers made from

the BLMIS estate. The Trustee also asserted common law claims for breach of fiduciary duty to

BLMIS, negligence, conversion, unjust enrichment, constructive trust and an accounting. The

Trustee amended his complaint in 2011 and 2012 to include additional family member

defendants and additional avoidable and recoverable initial and subsequent transfers. The

Trustee subsequently settled and/or discontinued his action against Peter Madoff (Bernard

Madoff’s brother and BLMIS’s Senior Managing Director and Chief Compliance Officer), Shana

Madoff (Bernard Madoff’s niece, Peter Madoff’s daughter, and BLMIS’s Compliance Director),

Susan Elkin (Mark Madoff’s ex-wife), Deborah Madoff (Andrew Madoff’s widow) and

Stephanie Mack (Mark Madoff’s widow).

Also following the filing of the Trustee’s SAC were various rulings by the District Court

and this Court which heightened the Trustee’s pleading standard to one of “actual knowledge”

for certain of the Trustee’s bankruptcy claims. See, e.g., Sec. Investor Prot. Corp. v. Bernard L.

Madoff Inv. Sec., 516 B.R. 18 (S.D.N.Y. 2014); Sec. Investor Prot. Corp. v. Bernard L. Madoff

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Inv. Sec., No. 12-MC-0115 (JSR), 2013 WL 1609154 (S.D.N.Y. Apr. 15, 2013); In re Bernard L.

Madoff Inv. Sec. LLC, 515 B.R. 117 (Bankr. S.D.N.Y. 2014).

B. U.K. Liquidators Brought Claims Relating to a Separate Company (MSIL) Incorporated Under U.K. Law

Bernard Madoff founded two separate companies, BLMIS and MSIL. He founded

BLMIS in or about 1960 as a sole proprietorship, and on January 1, 2001, he transitioned it to a

limited liability company under the laws of the State of New York. For most of its existence,

BLMIS operated from its principal place of business at 885 Third Avenue, New York, New

York. Madoff, as founder, sole owner, chairman, and chief executive officer, operated BLMIS

with several family members, including the Madoff Brothers, and other employees, some of

whom have been convicted or pleaded guilty to helping Madoff carry out the fraud. BLMIS had

three business units: investment advisory (the “IA Business”), market-making, and proprietary

trading. BLMIS registered as an investment advisor with the SEC in or about August 2006. The

IA Business was a Ponzi scheme. The money sent to BLMIS by customers for investment was

used to fuel the fraudulent scheme and to enrich Madoff, the Madoff Brothers, and others, until

December 2008, when requests for redemptions overwhelmed the flow of new investments and

caused the inevitable collapse of the scheme.

MSIL was separately incorporated under the laws of England and Wales in March 1983.

(See Exhibit 1 to the Declaration of Andrew J. Ehrlich (“Ehrlich Decl.”) ¶ 30 (ECF No. 192).)

MSIL operated out of London, had its registered office in London, and was regulated by U.K.

authorities. (Id.) MSIL maintained trading and bank accounts in its name and had employees

separate and apart from BLMIS. (Id.) Bernard Madoff was its chief executive officer, principal

shareholder, and a director. (Id. ¶¶ 31, 33.) Peter Madoff, the Madoff Brothers, and several

others also served on MSIL’s board. (Id. ¶ 33.) MSIL’s records reveal that beginning in or

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around 1988 the company began to deal in securities and to provide market-making information

as an agent for BLMIS. (Id. ¶ 34.) In or about 2001, MSIL also began proprietary trading. (Id.)

As of 2002, MSIL ceased trading as an agent of BLMIS and traded solely on its own account as

a proprietary trader of Pan-European and American securities. (Id.) It was alleged in the

Trustee’s SAC that MSIL was used to facilitate and conceal the Ponzi scheme. (See SAC, ¶¶ 8,

60-66.)

Shortly after the massive fraud was revealed, MSIL went into liquidation under U.K. law.

No applications were made to substantively consolidate the two estates. Steven John Akers and

Mark Richard Byer, of Grant Thornton LLP, were appointed Joint Liquidators of MSIL (the

“Liquidators”). The Liquidators and the Trustee worked cooperatively to maximize recoveries to

their respective estates and achieve efficiencies, where possible, solely by virtue of the fact that

the two companies shared a common principal, Bernard Madoff. Their respective investigations

revealed that hundreds of millions of dollars of transfers were made between the two companies.

See also Plea Allocution of Bernard L. Madoff at 4-5, United States v. Madoff, No. 09-CR-213

(DC) (S.D.N.Y. Mar. 12, 2009), ECF No. 50; Plea Allocution of Frank DiPascali at 48-49,

United States v. DiPascali, No. 09-CR-764 (RJS) (S.D.N.Y. Aug. 11, 2009), ECF No. 11.

After evaluating their fiduciary duties, the Trustee and the Liquidators decided that they

would bring claims on behalf of their respective estates in a proceeding in the U.K. The

Liquidators determined that fraudulent conveyances were made by MSIL and that the MSIL

directors breached their fiduciary duties to MSIL. The Trustee determined that certain payments

made to Ms. Sonja Kohn (“Kohn”) were comprised of funds initially transferred from the

BLMIS estate. The Trustee’s only claims in the U.K. proceeding were to recover those transfers

to Kohn. (See Flaux Order ¶ 61, Nov. 25, 2011 (“BLMIS has no claim against the other

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defendants, specifically the directors of MSIL”)) The Trustee did not assert claims in the U.K.

proceeding against the Madoff Brothers or any other defendant. Id. The U.K. proceeding was

commenced in December 2010 and the Trustee agreed to fund the proceeding. (See Ehrlich

Decl. Ex. 1 ¶106.)

The Trustee and the Liquidators sought a worldwide freezing order against Kohn’s assets.

During the pendency of that application, in February 2011, Kohn challenged the U.K. court’s

jurisdiction to hear the claims made against her by the Trustee. On November 25, 2011, Justice

Julian Flaux found that the Trustee had no standing under English law to pursue his independent

U.S. claims against Kohn, rendering the U.K. court without jurisdiction to hear and determine

the Trustee’s claim against Kohn. (See Flaux Order ¶¶ 184, 61 (“[w]hilst it might be sensible

case management for the MSIL and BLMIS claims to be tried together, the court would in fact

have no jurisdiction over the BLMIS claims”).) The Trustee was thereafter dismissed from the

case.5 Despite his dismissal, the funding arrangement that was reached when the Trustee was a

party to the case remained in effect. Justice Flaux, however, restricted the ability of the Trustee

and the Liquidators to share information. The Liquidators were permitted in certain limited

circumstances to share information with the Trustee but such information could not be used by

the Trustee in any of his U.S. litigations unless it was derived from proceedings stemming from a

separate freezing order relating to Kohn.

The Liquidators’ allegations against the MSIL directors, which included the Madoff

Brothers, related solely to breaches of duty to MSIL under the U.K. Companies Act. The

5 Approximately one year later, during the Fall of 2012, the Trustee and the Liquidators agreed that the Trustee would be permitted to file a proof of claim in the MSIL liquidation proceeding. After an arms’ length negotiation, the Trustee and the Liquidators reached an agreement as to the amount of the Trustee’s claim against the MSIL estate.

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Liquidators alleged the Madoff Brothers failed to: (a) not make ultra vires dispositions;

(b) exercise powers for the purposes, and in the interests of, MSIL; (c) exercise independent

judgment; (d) exercise reasonable care, skill and diligence; (e) keep company accounts; and

(f) meet the standard of honesty required of fiduciaries under U.K. law.6

Because MSIL’s claims were conventional company claims against its directors for

breach of fiduciary duty, it was not relevant to MSIL’s case that any of the Defendants knew of

the Ponzi scheme. Andrew Madoff admitted that the Liquidators did not allege that the Madoff

Brothers “ought to have uncovered the fraud, or that if they had complied with their duties as

directors the fraud would have been exposed and brought to a halt.” (Andrew Madoff Opening

Submission ¶ 9.)

MSIL’s case proceeded to trial against its former directors and Kohn on June 12, 2013.

The Liquidators retained Taylor Wessing LLP as their solicitors and Blackstone Chambers as

their barristers to represent them at trial. All trial and post-trial decisions, including whether to

take an appeal, were made by the Liquidators and the attorneys acting at their direction.

At the time of the U.K. trial in June 2013, Mark Madoff was deceased. Andrew Madoff

submitted direct testimony in the form of a written witness statement but did not appear for

cross-examination by the Liquidators, consistent with U.K. judicial procedures.

On October 18, 2013, Justice Popplewell issued a decision dismissing MSIL’s claims.

Justice Popplewell determined that the Madoff Brothers breached their duties to MSIL “to

exercise reasonable skill and care by failing to address their minds to the question whether the

6 Specifically, the Liquidators alleged that the MSIL directors should not have made certain payments, including payments to Kohn, interest payments on subordinated loans, and payments for yachts and luxury vehicles. By doing so, the Liquidators alleged that the MSIL directors “dishonestly” breached their duties to MSIL.

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payments were in the interests of MSIL.” (See Ehrlich Decl. Ex. 1 ¶ 294.) Despite this breach,

Justice Popplewell found that the Madoff Brothers had no reason to question whether such

payments were truly in the interests of MSIL and therefore held that the Madoff Brothers could

not be liable for their breaches of duty. Justice Popplewell further concluded that the central

aspect of their defense—that the Madoff Brothers did not know of the payments—was not

accurate. (See Ehrlich Decl. Ex. 1 ¶¶ 249, 250.) Justice Popplewell determined that Andrew

Madoff did, in fact, know of the payments but that his testimony was an effort “to distance

himself and his brother from the payments as a defensive tactic, not only for the purposes of

these proceedings but in light of the civil claims brought against them in the US.” (See Ehrlich

Decl. Ex. 1 ¶ 251.)

The Liquidators did not appeal Justice Popplewell’s decision.

III. ARGUMENT

A. There Has Been No Undue Delay

There has been no undue delay by the Trustee. Defendants’ claim to the contrary is

entirely disingenuous, as they omit many of the pertinent facts that place the Trustee’s motion for

leave to amend in its proper context.

The Trustee filed the SAC on May 4, 2012. (ECF No. 113.) The Trustee subsequently

discontinued his action against Peter Madoff in February 2013, dismissed Shana Madoff in

March 2013, and settled with Susan Elkin and Deborah West in March 2014 and May 2014,

respectively (and later settled with Stephanie Mack on April 6, 2015). Also during the 2013-

2014 time period—as this Court and the Defendants are well aware—the legal landscape

changed as decisions affecting the Trustee’s pleading burden were issued by both this Court as

well as the District Court. On April 15, 2013, the District Court held that “actual knowledge”

must be pled by the Trustee to be exempted from the safe harbor of Section 546(e). Sec. Investor

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Prot. Corp. v. Bernard L. Madoff Inv. Sec., No. 12-MC-0115 (JSR), 2013 WL 1609154, at *4

(S.D.N.Y. Apr. 15, 2013). In a subsequent decision on April 27, 2014, the District Court held

that the Trustee must “particularize[] allegations that the defendants here either knew of

[BLMIS’s] fraud or willfully blinded themselves to it” in order to “make out a plausible claim

that he is entitled to recover the monies defendants received from their securities accounts.” Sec.

Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec., 516 B.R. 18 (S.D.N.Y. 2014). On August

12, 2014, this Court also applied the “actual knowledge” standard announced by the District

Court and explained that the Trustee must show that an initial (or subsequent) transferee had

actual knowledge of Madoff’s Ponzi scheme in order to avoid and recover preferences and actual

and constructive fraudulent transfers to the full extent permitted by state and federal bankruptcy

law. In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. at 138 (Bankr. S.D.N.Y. 2014). This

Court further explained that the transferee’s knowledge is also relevant under section 548(c), as

the Trustee must plead and prove the transferee’s lack of subjective good faith. Id. The

proposed TAC addresses this newly-imposed burden.

The Madoff Brothers have essentially conceded that the Trustee’s TAC does not

prejudice them. Indeed, this case is still in the early stages of litigation despite the passage of

time and the Trustee’s persistent efforts to move the case forward.7

7 The deadlines in the Case Management Plan in this case began to lapse in August 2012. Since then, the Trustee has circulated revised Plans, which extended dates to advance discovery. Defendants delayed their responses to these proposals, never agreeing, and requiring further revisions as each draft became obsolete. This continued until the Madoff Brothers finally stated on September 4, 2013 that they would not participate in any further discovery. “[W]e do not think it is appropriate for the case to move forward against our clients, while it remains stayed as against other defendants—and, as we understand it, those other defendants are insisting that the case should not proceed against them until resolution, by Judge Rakoff, of certain legal issues that will affect the scope of the Trustee’s claims against them.” (Ehrlich Letter at 3.) The case has remained at a standstill even after the in pari delicto motion referenced in counsel’s letter was decided on December 5, 2013, and recent efforts to obtain a resolution have been unfruitful.

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The TAC addresses the dismissal of almost all defendants—with the exception of the

Madoff Brothers—as well as the “actual knowledge” pleading burden applicable to certain of the

Trustee’s claims involving the fraudulent transfer of moneys from the Madoff Brother’s IA

accounts. All of these events followed the Trustee’s filing of the SAC. The Trustee did not

unduly delay requesting leave to amend the SAC.

B. Request to Strike Is Improper and Should Be Denied

Defendants’ request to strike references in the TAC to the criminal proceedings and pleas

is a red herring. Such references were, in fact, included in the SAC. (See SAC ¶¶ 22 (Bernard L.

Madoff), 23 (Frank DiPascali), 24 (David Kugel), 25 (Enrica Cotellessa-Pitz).) The only

additional references contained in the TAC are limited to three paragraphs referencing two

additional pleas and one criminal trial against former BLMIS employees which occurred after

the filing of the SAC. (See TAC ¶¶ 21 (Peter Madoff plea in 2012), 22 (criminal trial in 2014),

and 23 (Paul Konigsberg plea in 2014).)

Rule 12(f) of the Federal Rules of Civil Procedure provides that a court “may strike from

a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous

matter.” Fed. R. Civ. P. 12(f). The court may do so “on its own” or “on motion made by a party

either before responding to the pleading or, if a response is not allowed, within 21 days after

being served with the pleading.” Id. Defendants’ request to strike is procedurally improper for

two reasons: first, it is not made as a motion under Rule 12(f); and second, whether as a motion

or a request, it is untimely because the TAC is not yet the operative pleading.

Putting aside the procedural deficiencies, however, Defendants’ request should also be

denied on the merits. Rule 12(f) motions to strike are strongly disfavored, “and in order to have

redundant, immaterial or impertinent matters stricken from a pleading, the movant must

demonstrate that no evidence in support of the allegation would be admissible, that the

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allegations have no bearing on the issues in the case, and that to permit the allegations to stand

would result in prejudice to the movant.” IMG Fragrance Brands, LLC v. Houbigants, Inc., No.

09 Civ. 3655 (LAP), 2009 WL 5088750, at *1(S.D.N.Y. December 18, 2009); see also Accurate

Grading Quality Assurance, Inc. v. Khothari, No. 12 Civ. 9130 (LTS), 2014 WL 5073576

(S.D.N.Y. Sept. 30, 2014); S.E.C. v. Treadway, No. 11 Civ. 1534(RJH), 2011 WL 2623469, at

*1 (S.D.N.Y. June 29, 2011). The Second Circuit has stated that “courts should not tamper with

the pleadings unless there is a strong reason for so doing.” Lynch v. Southampton Animal Shelter

Found., Inc., 278 F.R.D. 55, 69 (E.D.N.Y. 2011).

Indeed, these allegations are already part of the public record and generally available.

See Lynch, 278 F.R.D. at 66-67 (concluding that allegations already part of the public record and

generally available detracts from any potential prejudice to defendants). References in the TAC

to additional criminal proceedings and pleas that have occurred since the filing of the SAC,

specifically the criminal convictions in United States v. Bonventre, et al., No. 10-CR-00228

(LTS) (S.D.N.Y. Mar. 24, 2014), ECF No. 800, and the guilty pleas by former Defendant Peter

Madoff and Madoff’s accountant, Paul J. Konigsberg, are germane to this litigation because they

demonstrate the involvement of other individuals in the Ponzi scheme and operations of BLMIS,

disproving the fictions perpetrated by the Madoff Brothers that: (1) the business units that they

ran and managed were “insulated” from the fraud; and (2) that the fraud was perpetrated by

Madoff alone and kept hidden from his sons—highly educated investment professionals and key

senior managers at the company with much greater access to information than the average non-

insider BLMIS investor. In fact, “it is not enough that the matter offends…the objecting party if

the challenged allegations describe acts or events that are relevant to the action.” Lynch, 278

F.R.D. at 65.

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The facts contained in these three additional paragraphs have been well-publicized and

are part of the narrative of the fraud at BLMIS; therefore, they cannot be said to prejudice the

Madoff Brothers in any meaningful way and should not be stricken from the TAC. See, e.g.,

Lynch, 278 F.R.D. at 67-68 (“[E]ven assuming that a portion of the background material is

irrelevant or immaterial, allegations that supply background or historical material or other matter

of an evidentiary nature normally will not be stricken from the pleadings unless they are unduly

prejudicial to the defendant.”) (internal citation and quotations omitted).

C. This Court Is Not Obliged to Give Comity to Foreign Judgments

Before determining whether a foreign judgment has preclusive effect, a court must first

consider whether to extend comity to the foreign judgment. Comity may only be exercised

where the court determines that the foreign court had “proper jurisdiction and enforcement does

not prejudice the rights of United States citizens or violate domestic public policy.” Victrix S.S.

Co. v. Salen Dry Cargo A.B., 825 F.2d 709, 713 (2d Cir. 1987); see Alfadda v. Fenn, 966 F.

Supp. 1317, 1326 (S.D.N.Y. 1997), aff’d, 159 F.3d 41 (2d Cir. 1998). The MSIL judgment does

not meet this standard. Even then, comity “does not achieve the force of an imperative or

obligation.” Pravin Banker Assoc., Ltd. v. Banco Popular Del Peru, 109 F.3d 850, 854 (2d Cir.

1997); see also JP Morgan Chase Bank v. Altos Hornos de Mexico, 412 F.3d 418, 423 (2d Cir.

2005) (comity “is not an imperative obligation of courts but rather is a discretionary rule of

practice, convenience, and expediency”) (internal quotations omitted).

The Madoff Brothers argue that this Court should, on the basis of comity, defer to a

decision rendered in the U.K., on different claims brought under U.K. law, and involving

different parties, when deciding issues arising under the Bankruptcy Code and U.S. common law

in an adversary proceeding commenced in this Court. Granting comity to the U.K. judgment

would contravene the interests of the U.S. in having our courts determine issues of federal

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bankruptcy law in relation to U.S. debtors. This is all the more true where, as here, the Madoff

Brothers filed proofs of claim against the debtor seeking to recover from the BLMIS estate—

resolution of those claims along with the avoidance claims asserted by the Trustee are integral to

the restructuring of the debtor-creditor relationship. See SIPC v. BLMIS, 490 B.R. 46, 54-55

(S.D.N.Y. 2013).

Indeed, courts routinely decline to recognize foreign judgments on the basis of comity.

For example, in the chapter 11 case of Lehman Brothers, this Court refused to recognize

judgments rendered by English trial and appellate courts even where the Lehman entity had

intervened and participated as a party in the U.K. proceeding. This Court reasoned that the

“English Courts did not consider any provisions of the Bankruptcy Code in connection with their

decisions,” and found relevant that “neither of the English Courts purported to bind this Court in

any respect.” In re Lehman Bros. Holdings Inc., 422 B.R. 407, 417-18 (Bankr. S.D.N.Y. 2010);

see also Bank of N.Y. v. Alison J. Treco (In re Treco), 240 F.3d 148, 159-60 (2d Cir. 2001)

(declining to extend comity to foreign proceeding where U.S. bankruptcy law applicable in U.S.

court was substantially different than foreign law applied in prior proceeding).

Here, in an adversary proceeding brought by a trustee of a U.S. debtor against the

debtor’s principals, appointed pursuant to the requirements of SIPA, the U.S. has a strong

interest in having a federal bankruptcy court resolve the issues of federal bankruptcy law and

U.S. common law presented in the Trustee’s TAC. See In re Treco, 240 F.3d 148, 157 (2d Cir.

2001) (“The principle of comity has never meant categorical deference to foreign proceedings . .

. [T]hat deference should be withheld where appropriate to avoid the violation of the laws, public

policies, or rights of the citizens of the United States.”). Enforcement of the U.K. judgment to

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preclude a separate litigation of different U.S. claims here would violate these principles and this

Court should not extend comity to the judgment of the U.K. court.

D. Preclusion Does Not Attach to the U.K. Judgment

Preclusive effect of a judgment takes two forms: claim preclusion, also referred to as res

judicata; and issue preclusion, frequently referred to as collateral estoppel. The doctrine of res

judicata holds that a final judgment forecloses “successive litigation of the very same claim,”

whether or not the issues before the courts are identical. New Hampshire v. Maine, 532 U.S.

742, 748 (2001). Res judicata “bars later litigation if an earlier decision was (1) a final judgment

on the merits, (2) by a court of competent jurisdiction, (3) in a case involving the same parties or

their privies, and (4) involving the same cause of action.” Esquire Trade & Fin., Inc. v. CBQ,

Inc., 562 F.3d 516, 520 (2d Cir. 2009) (internal quotations omitted); EDP Med. Computer Sys.,

Inc. v. United States, 480 F.3d 621, 624 (2d Cir. 2007) (citing In re Teltronics Servs., Inc., 762

F.2d 185, 190 (2d Cir. 1985)).8 In order for a judgment to be a bar, the same causes of action

and the same parties must have been involved in both suits. Herendeen v. Champion Int’l Corp.,

525 F.2d 130, 133 (2d Cir. 1975).

Collateral estoppel bars “successive litigation of an issue of fact or law actually litigated

and resolved in a valid court determination essential to the prior judgment,” even if the issue is

presented in the context of a different claim in a subsequent suit. New Hampshire v. Maine, 532

U.S. at 748-49; see Taylor v. Sturgell, 553 U.S. 880, 892 (2008). Collateral estoppel requires

8 Another formulation of the test within this Circuit holds that res judicata applies where: (1) the previous action involved an adjudication on the merits; (2) the previous action involved the plaintiffs or those in privity with them; and (3) the claims asserted in the subsequent action were, or could have been, raised in the prior action. See TechnoMarine SA v. Giftports, Inc., 758 F.3d 493, 499 (2d Cir. 2014) (citing Monahan v. N.Y.C. Dep’t of Corr., 214 F.3d 275, 285 (2d Cir. 2000). The Trustee submits that res judicata is barred under either formulation of the test for the reasons stated herein.

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that “(1) the identical issue was raised in a previous proceeding; (2) the issue was actually

litigated and decided in the previous proceeding; (3) the party had a full and fair opportunity to

litigate the issue; and (4) the resolution of the issue was necessary to support a valid and final

judgment on the merits.” Ball v. A.O. Smith Corp., 451 F.3d 66, 69 (2d Cir. 2006) (citation

omitted).

The Madoff Brothers’ attempt to use a foreign judgment—which involved different

parties and different issues relating to alleged duty breaches to a U.K. company under U.K.

law—to preclude the Trustee’s claims relating to the U.S. Bankruptcy Code and U.S. common

law claims on behalf of BLMIS should be rejected.

1. Res Judicata (Claim Preclusion) Does Not Apply Here Where Different Claims Were Litigated In The Prior Proceeding By A Different Party

As an initial matter, res judicata only applies to bar claims for relief in subsequent

litigation. It does not bar factual allegations. See, e.g., Taylor v. Sturgell, 553 U.S. at 892; New

Hampshire v. Maine, 532 U.S. at 748. Here, the Madoff Brothers do not argue that any of the

Trustee’s claims for relief are barred by the U.K. judgment but rather that res judicata applies to

bar certain factual allegations in the proposed TAC. Because res judicata does not bar facts,

however, this argument fails.

Second, the Madoff Brothers argue in a conclusory fashion that the same claims were

brought against them in the U.K. But even a cursory analysis of the two actions shows that is not

so. The Madoff Brothers were sued in the U.K. by the MSIL Liquidators for alleged breaches of

fiduciary duties to MSIL. They are being sued here for receipt of fraudulent transfers from the

BLMIS estate, breaches of their duties to BLMIS, unjust enrichment, negligence, constructive

trust, and an accounting. Indeed, even when the Trustee was a party to the U.K. proceeding, he

did not assert any claims against the Madoff Brothers or any of the other directors of MSIL

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because the claims—breaches of duty to MSIL—were not his to assert. In these circumstances,

res judicata cannot attach to the U.K. judgment. See Bank of New York v. First Millennium, Inc.,

607 F.3d 905, 919 (2d Cir. 2010) (“Claim preclusion bars the relitigation only of claims that

were, or could have been, brought in an earlier litigation between the same parties or their

privies. It has no effect on claims that could not have been brought in the prior action.”)

(emphasis in original) (citing Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 600 F.3d

190, 195-96 (2d Cir. 2010)).

Despite the Madoff Brothers’ sweeping statements suggesting otherwise, the Trustee was

not a party to the U.K. proceeding, having been dismissed years prior. Nor was he a privy of the

Liquidators for purposes of res judicata. While the Trustee and the Liquidators shared an

interest in maximizing recoveries for their respective estates, the Liquidators could not have

adequately represented the Trustee’s interests as to claims that the Liquidators did not and could

not have asserted. See Taylor v. Sturgell, 553 U.S. at 894-95; In re Tyson, 433 B.R. 68, 99

(S.D.N.Y. 2010). And while the Trustee agreed to provide funding for the litigation under an

agreement struck when he was participating in the litigation against only the Kohn defendants,

courts have found that the mere fact that non-parties assist in financing the litigation is not

relevant for res judicata purposes. See, e.g., Gonzales v. Banco Central Corp., 27 F.3d 751, 758-

760 (1st Cir. 1994) (citing Rumford Chem. Works v. Hygienic Chem. Co. of New Jersey, 215

U.S. 156, 159-60 (1909)); Gen. Foods Corp. v. Massachusetts Dept. of Pub. Health, 648 F.2d

784, 787-88 (1st Cir. 1981). Res judicata will not preclude the Trustee’s filing of the TAC when

the U.K. proceeding involved entirely different parties, applicable law, and claims.

2. Collateral Estoppel (Issue Preclusion) Does Not Apply Here Where There Is No Identity Of Issues Between The Prior And Current Litigation And There Was No Full And Fair Opportunity To Litigate

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Collateral estoppel also does not bar the Trustee’s proposed amendments because the

Trustee did not have a “full and fair” opportunity to litigate the identical issues in the earlier

proceeding, particularly where (a) the Trustee never asserted claims against the Madoff Brothers

in the English proceedings and (b) the Trustee was dismissed for lack of jurisdiction in

connection with the claims he did pursue, namely those against Kohn. See In re Sokol, 113 F.3d

303, 306 (2d Cir. 1997) (party opposing collateral estoppel “has the responsive burden of

establishing the absence of a full and fair opportunity to litigate the issue in the prior action”). A

person who was not a party to a suit generally has not had a “full and fair opportunity to litigate”

the claims and issues settled in that suit. Taylor v. Sturgell, 553 U.S. at 892 (citation omitted).

Moreover, a full and fair opportunity to litigate in the earlier proceeding requires “ample

opportunity to present evidence and exhibits, and . . . appellate review.” Studio Art Theater of

Evansville, Inc. v. City of Evansville, 76 F.3d 128, 131 (7th Cir. 1996). The Liquidators, being

the sole claimant in the English proceedings from December 2011, acting through their barristers

and solicitors, made all trial determinations with respect to presentation of evidence, exhibits,

and a potential appeal, not the Trustee.

A full and fair opportunity to litigate also includes the right to conduct cross-examination

of witnesses. If a party is denied the opportunity to cross-examine a witness, this may “justify

denial of collateral estoppel effect” as to findings based on the testimony of that witness. See

Chauffeur’s Training Sch., Inc. v. Spellings, 478 F.3d 117, 132 (2d Cir. 2007); see also SEC v.

Amerindo Inv. Advisors, Inc., 2013 WL 1385013, at *6 (S.D.N.Y. Mar. 11, 2013). The fact that

the Liquidators (let alone the Trustee) did not have an opportunity to cross-examine Andrew

Madoff even though he submitted direct testimony should prohibit the application of collateral

estoppel here.

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Collateral estoppel fails for a more basic reason as well. In order to apply issue

preclusion, the Court must find that the issues essential to the adjudication of the foreign

judgment are identical to the issues that the Trustee must establish to support his U.S.-based

claims. Johnson v. Watkins, 101 F.3d 792, 795 (2d Cir. 1996) (“collateral estoppel has been

narrowly tailored to ensure that it applies only where circumstances indicate the issue estopped

from further consideration was thoroughly explored in the prior proceeding, and that the

resulting judgment thus has some indicia of correctness”). The burden of demonstrating an issue

raised in a subsequent proceeding is identical to one that was raised and necessarily decided by a

prior action “rests squarely on the party moving for preclusion.” Finch v. City of New York, 591

F. Supp. 2d 349, 362 (S.D.N.Y. 2008); Cobb v. Pozzi, 363 F.3d 89, 113 (2d Cir. 2003) (citing

Sullivan v. Gagnier, 225 F.3d 161, 166 (2d Cir. 2000)).

The Madoff Brothers argue that the issue of their knowledge of the BLMIS fraud was

adjudicated by the U.K. court. But the Liquidators and Andrew Madoff agreed at the time of the

trial in the U.K. that the Madoff Brothers’ knowledge of the BLMIS Ponzi scheme was not at

issue in the U.K. proceeding. (See Ehrlich Decl. Ex. 1 ¶ 1 (noting that there was no suggestion

that the defendants knew of the BLMIS Ponzi scheme); Andrew Madoff Opening Submission

¶ 9 (“MSIL does not seek to suggest that [Andrew Madoff] and [Mark Madoff] knew or

suspected that [Bernard Madoff] was engaged in a Ponzi scheme”).) Where a fact-intensive

issue such as knowledge was not even a part of the plaintiff’s case that resulted in the foreign

judgment, it is impossible for that issue to have been “actually litigated and decided” in the

foreign proceeding or even “necessary” to the court’s judgment.

Moreover, because the standards for recovery on the respective claims of the Liquidators

and the Trustee are different, the issues are not similar for purposes of collateral estoppel. The

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Second Circuit has explained that issues in foreign and U.S. actions are “not identical when the

legal standards governing their resolution are significantly different.” Computer Assocs. Int’l,

Inc. v. Altai, Inc., 126 F.3d 365, 371 (2d Cir. 1997); see Cobb v. Pozzi, 363 F.3d at 113-14

(“Courts and commentators alike have recognized that a shift or change in the burden of proof

can render the issues in two different proceedings non-identical, and thereby make collateral

estoppel inappropriate.”).

At trial, the Liquidators asserted only breaches of fiduciary duty against the Madoff

Brothers, which generally require a showing that the Madoff Brothers did not act in MSIL’s best

interests or exercise reasonable diligence, skill, and care. Here, in addition to the claims for

breaches of fiduciary duty to BLMIS (an entirely different entity) and U.S. common law claims,

the Trustee is seeking to recover fraudulent transfers from the BLMIS estate under U.S.

bankruptcy law. Under various rulings by Judge Rakoff and this Court, the Trustee is required to

show “actual knowledge” in order to avoid application of the section 546(e) safe harbor to

certain of his fraudulent transfer claims. See, e.g., Sec. Investor Prot. Corp. v. Bernard L.

Madoff Inv. Sec., No. 12-MC-115, 2013 WL 1609154 (S.D.N.Y. Apr. 15, 2013). Actual

knowledge was not even an issue that the Liquidators faced on their simple breach of duty claims

to the MSIL estate and therefore, bars any preclusive effect to the Trustee’s allegations on both

the issues of the Madoff Brothers’ knowledge of the BLMIS fraud and the MSIL-related

transfers.

The Madoff Brothers sprinkle out-of-context dictum from the U.K. judgment into their

opposition. But given that the issues before the U.K. court were decidedly narrow—whether the

Madoff Brothers breached their fiduciary duties to MSIL by permitting certain payments to be

made—the statements highlighted by the Madoff Brothers were not necessary to support a valid

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and final judgment on the merits. The Second Circuit has held that collateral estoppel will not

apply where the earlier court’s finding was dictum. United States v. Hussein, 178 F.3d 125, 129

(2d Cir. 1999); see Beechwood Restorative Care Ctr. v. Leeds, 436 F.3d 147, 152–53 (2d. Cir

2006). Rather, the doctrine only applies to preclude a prior factual or legal determination when

the issue resolved in the prior proceeding was necessary to the court’s determination. Bobby v.

Bies, 556 U.S. 825, 834 (2009) (“If a judgment does not depend on a given determination,

relitigation of that determination is not precluded.”); see also United States v. Hussein, 178 F.3d

at 129. Because the issue of knowledge of the Ponzi scheme was not an element of the

Liquidators’ case and did not need to be established in order for the Liquidators to succeed on

their claims, the commentary made by the U.K. court as to the knowledge of the Madoff

Brothers was not necessary to the judgment and cannot be used to preclude the Trustee from

having a full and fair opportunity to litigate his claims here.

3. Preclusion Is Not Fair And Sensible In These Circumstances

Even if the Madoff Brothers had met their burden to establish res judicata or collateral

estoppel, which they have not, a court also “must satisfy itself that application of the doctrine is

fair.” Arnold v. 1199 SEIU, 420 Fed. App’x 48, 52 (2d Cir. 2011) (citing Bear Stearns & Co. v.

1109580 Ontario, Inc., 409 F.3d 87, 91 (2d Cir. 2005)). Courts recognize that “[a]pplication of

res judicata principles is not a rigid exercise . . . It must be given a flexible, common-sense

construction that recognizes the reality of the situation.” Jean-Gilles v. County of Rockland, 463

F. Supp. 2d 437, 454 (S.D.N.Y. 2006).

The Madoff Brothers owed separate duties to two separate companies located in two

different countries, which went into insolvency proceedings under U.S. and U.K. law,

respectively. Accordingly, they were sued for breaches of their fiduciary duty to MSIL in the

U.K. proceeding and breaches of their fiduciary duty to BLMIS, as well as violations of

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Bankruptcy, NY Debtor and Creditor Law, and common law, in the U.S. proceeding. No claims

regarding the Madoff Brothers’ knowledge of the fraud, breaches of duty to BLMIS, or any of

the Trustee’s Bankruptcy, U.S. or common law-based claims were raised—or could have been

raised—in the U.K. proceeding. When all of the circumstances of the U.S. and U.K. litigation

are considered, this Court cannot, and should not, give any preclusive effect or comity to the

U.K. judgment.

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IV. CONCLUSION

Accordingly, for the reasons set forth above, as well as in the Trustee’s moving brief, the

Trustee respectfully requests that the Court grant his motion for leave to amend the complaint.

Date: April 6, 2016 BAKER & HOSTETLER LLP New York, New York

BY: /s/David J. Sheehan 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 David J. Sheehan Email: [email protected] Lauren J. Resnick Email: [email protected]

Attorneys for Irving H. Picard, Trustee for the substantively consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and the Estate of Bernard L. Madoff

Of Counsel: Jimmy Fokas Email: [email protected] Melissa M. Carvalho Email: [email protected] Patrick T. Campbell Email: [email protected]