UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
SECURITIES INVESTOR PROTECTION SIPA LIQUIDATION CORPORATION, Case No. 08-01789 (BRL) Plaintiff, (Substantively Consolidated)
v. Appeal No.: ______BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Defendant.
In re:
BERNARD L. MADOFF,
Debtor.
DECLARATION OF SEANNA R. BROWN, ESQ., IN SUPPORT OF THE MEMORANDUM OF LAW OF IRVING H. PICARD, TRUSTEE, IN OPPOSITION TO MOTION FOR LEAVE TO APPEAL
I, Seanna R. Brown, Esq., of full age, hereby declare as follows:
1. I am associated with the law firm of Baker & Hostetler LLP, counsel to Irving H.
Picard, as trustee (“Trustee”) for the substantively consolidated liquidation proceeding of
Bernard L. Madoff Investment Securities LLC (“BLMIS”) under the Securities Investor
Protection Act (“SIPA”), 15 U.S.C. §§ 78aaa et seq., and the estate of Bernard L. Madoff
(“Madoff”). As an attorney of record, I am fully familiar with this case and the facts set forth
herein. I submit this Declaration to place before this Court true and correct copies of documents
relevant to the brief of the Trustee submitted in opposition to the motion of Marsha Peshkin, and
over 800 other customers of Bernard L. Madoff Investment Securities LLC for leave to appeal
the Order Approving Applications for Allowance of Interim Compensation for Services Rendered
and Reimbursement of Expenses, dated June 1, 2011 (“Sixth Interim Fee Order”) of the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”), to the extent the Sixth Interim Fee Order granted the sixth application for interim compensation of the
Trustee and B&H (“Sixth Fee Application”).
2. Attached hereto as Exhibit A is a true and correct copy of the transcript from the
Hearing of August 6, 2009 on the First Applications for Interim Compensation for Services
Rendered and Reimbursement of Actual and Necessary Expenses Incurred by Applicants from
December 15, 2008 to April 30, 2009.
3. Attached hereto as Exhibit B is a true and correct copy of the Memorandum
Decision and Order issued by the Honorable Judge Daniels, Misc. Matter M-47 (GBD), reported at Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities LLC,
2010 U.S. Dist. LEXIS 3037 (S.D.N.Y. Jan. 11, 2010), denying the Movants’ motion for leave to appeal the First Interim Fee Order (as defined in the Trustee’s Memorandum).
4. Attached hereto as Exhibit C is a true and correct copy of the transcript from the
Hearing of December 17, 2009 on the Second Applications for Interim Compensation for
Services Rendered and Reimbursement of Actual and Necessary Expenses Incurred by
Applicants from May 1, 2009 to September 30, 2009.
5. Attached hereto as Exhibit D is a true and correct copy of the transcript from the
Hearing of May 5, 2010 on the Third Applications for Interim Compensation for Services
Rendered and Reimbursement of Actual and Necessary Expenses Incurred by Applicants from
October 1, 2009 to January 31, 2010.
6. Attached hereto as Exhibit E is a true and correct copy of the Opinion and Order issued by the Honorable Shira A. Sheindlin, Misc. Matter M-47 (SAS), reported at Securities
Investor Protection Corporation v. Bernard L. Madoff Investment Securities LLC, 2010 U.S. Dist. LEXIS 81492 (S.D.N.Y. Aug. 6, 2010), denying Movants’ motion for leave to appeal the
Third Interim Fee Order (as defined in the Trustee’s Memorandum).
7. Attached hereto as Exhibit F is a true and correct copy of the transcript from the
Hearing of September 14, 2010 on the Fourth Applications for Interim Compensation for
Services Rendered and Reimbursement of Actual and Necessary Expenses Incurred by
Applicants from February 1, 2010 to May 31, 2010.
8. Attached hereto as Exhibit G is a true and correct copy of the transcript from the
Hearing of December 14, 2010 on the Fifth Application for Interim Compensation for Services
Rendered and Reimbursement of Actual and Necessary Expenses Incurred by Applicants from
June 1, 2010 to September 31, 2010.
9. Attached hereto as Exhibit H is a true and correct copy of the Trustee’s Reply to
Objection to Sixth Application for Interim Compensation for Services Rendered and
Reimbursement of Actual and Necessary Expenses Incurred From October 1, 2010 Through
January 31, 2011.
10. Attached hereto as Exhibit I is a true and correct copy of the Trustee’s Motion for an Order Approving an Initial Allocation of Property to the Fund of Customer Property and
Authorizing an Interim Distribution to Customers.
Pursuant to 28 U.S.C. § 1746, I hereby declare that the foregoing statements made by me
are true and correct. I am aware that if any of the foregoing statements made by me are willfully
false, I am subject to punishment.
Dated: June 29, 2011 Respectfully submitted,
/s/ Seanna R. Brown
Seanna R. Brown (SB-5203) BAKER & HOSTETLER LLP 45 Rockefeller Plaza New York, New York 10111 Tel: 212.589.4200 Fax: 212.589.4201
Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff EXHIBIT A 1 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------x In the Matter of Case No. 1-08-01789
SIPC V. MADOFF, Debtor. ------x August 6, 2009 United States Custom House One Bowling Green New York, New York 10004
In Re First Application for Interim Professional Compensation for Services Rendered and Reimbursement of Actual and Necessary Expenses Incurred for Baker & Hostetler LLP, et al.
B E F O R E: HON. BURTON R. LIFLAND, U.S. Bankruptcy Judge
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 2 1 A P P E A R A N C E S: 2 3 4 BAKER HOSTETLER, LLP 5 Attorneys for Irving H. Picard, SIPA Trustee 6 45 Rockefeller Plaza 7 New York, New York 10017 8 BY: MARC E. HIRSCHFIELD, ESQ. 9 -and- 10 DAVID J. SHEEHAN, ESQ. 11 -and- 12 ALISSA M. NANN, ESQ. 13 -and- 14 IRVING H. PICARD, BLMIS Trustee 15 16 17 18 MILBERG LLP 19 Attorneys for Unofficial 20 Committee of Customers 21 One Pennsylvania Plaza 22 New York, New York 10119 23 BY: MATTHEW GLUCK, ESQ. 24 -and- 25 JONATHAN M. LANDERS, ESQ.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 3 1 2 A P P E A R A N C E S: (Continued) 3 4 PHILLIPS NIZER, LLP 5 Attorneys for The Peskins and Maureen Ebel 6 666 Fifth Avenue 7 New York, New York 10103 8 BY: HELEN DAVIS CHAITMAN, ESQ. 9 10 WINDELS MARK LANE & MITTENDORF, LLP 11 Attorneys for Alan Nisselson Chapter 7 Trustee 12 156 West 56th Street 13 New York, New York 10019 14 BY: ALAN NISSELSON, ESQ. 15 -and- 16 REGINA GRIFFIN, ESQ. 17 18 SECURITIES INVESTOR PROTECTION CORPORATION 19 805 15th Street, Suite 800 20 Washington, D.C. 20005 21 BY: KEVIN H. BELL, ESQ. 22 23 24 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 4 1 PROCEEDINGS 2 THE COURT: SIPC v Madoff. 3 With respect to the timing of the hearing, 4 I understand there was a fairly long line outside and that 5 is why we were delayed. It seems to be no deed becomes 6 unpunished because I could have expected the courtroom to 7 be filled up, which it did not. 8 MR. SHEEHAN: Good morning, Your Honor. 9 THE COURT: Good morning, Mr. Sheehan. 10 MR. SHEEHAN: David Sheehan from Baker 11 Hostetler, on behalf of the Irving Picard as Trustee. 12 We have before Your Honor this morning a 13 number of applications. As is the normal course we would 14 deal with those that are unopposed and uncontested first. 15 THE COURT: Certainly. 16 MR. SHEEHAN: At this point we would like 17 to introduce Alissa Nann from our office. 18 MS. NANN: Good morning, Your Honor. 19 Alissa Nann, on behalf of the trustee. 20 Your Honor, we have this morning the 21 Trustee's fourth motion for an extension of time by which 22 the Trustee may assume or reject certain contracts or 23 leases. 24 Your Honor, we were last before you on this 25 issue on July 7, at which time you entered an order
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 5 1 extending the deadline to assume or reject to July 31. We 2 filed the instant motion on July 24th, and a bridge order 3 was entered by Your Honor on the 27th which extended the 4 deadline for the assumption or rejection of certain 5 contracts through today's hearing date. 6 At we explained to the Court the last time 7 we were before Your Honor, this extension motion is made 8 based upon a request by a Serge Trading (phonetic), who is 9 the purchaser of the Debtor's market-making business. 10 They were still in negotiation with Verizon 11 for certain contracts providing phone and internet 12 services, and those are the only contracts to which the 13 extension will apply. They were told they are very close 14 to coming to a deal with Verizon, and as we also reported 15 to the Court the last time, Serge will be paying the cost 16 of the service through the date of the extension, which we 17 will extend through the 31st and will be covering any 18 confidential and legal expenses relating to the motion. 19 We have not received any objection to the 20 motion, and we would ask that it be granted. 21 THE COURT: Are they making payments in 22 accordance with the basic contract price? 23 MS. NANN: I believe so, yes. 24 MR. SHEEHAN: Yes. 25 THE COURT: Very well.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 6 1 Does anyone want to be heard? 2 There is no response. 3 The application is granted. 4 MS. NANN: May I approach, Your Honor? 5 THE COURT: Yes, I will entertain it. I 6 have approved the order. 7 MS. NANN: Thank you, Your Honor. 8 MR. SHEEHAN: Thank you, Your Honor. 9 Your Honor, there are two other 10 applications for which no objections have been received. 11 First, I would like to offer my objection 12 to the application in the Windels motion. The 13 representatives for the Windels firm, Mr. Nisselson and 14 Regina Griffin are here on behalf of that application. 15 As Your Honor will recall and the record 16 will reflect, Mr. Nisselson was appointed as Chapter 7 17 Trustee for Bernard Madoff and his firm was appointed as 18 his counsel. 19 Subsequently there was an application by 20 Mr. Picard for substantial consolidation and a good deal of 21 the work was engaged in by Mr. Nisselson and his firm in 22 evaluating the proposals, in the responsibility they have 23 before them and how they should fulfill them in connection 24 with our application. 25 It was found by SIPC and the Trustee that
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 7 1 these were a very valuable resource to the overall estate 2 as well as to the advancement of what we are trying to 3 achieve in this case. As a result they submitted their 4 application to our firm and to SIPC. 5 As Your Honor knows from the record that 6 application has been approved. Obviously, it has been 7 agreed to by the U.S. Trustee. And more importantly it 8 was approved by SIPC who will advance the funds from its 9 SIPA fund to pay the fees and expenses of Mr. Nisselson and 10 his firm. 11 We would move that application here this 12 morning, Your Honor. 13 THE COURT: Does anyone want to be heard? 14 MR. BELL: Kevin Bell, for the Securities 15 Investment Protection Corporation. We have submitted 16 SIPC's recommendation in support of the application by 17 Windels Marx. We would ask the Court to grant an order 18 approving it. 19 THE COURT: It is clear from the prior 20 order of the Court that the compensation would not be 21 coming out of any of the estates, that it is coming purely 22 from SIPC. So there is no charge in any of the funds that 23 will be made available for distribution either under the 24 Chapter 7 or SIPC. The application has been granted. 25 MR. BELL: Thank you.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 8 1 MR. SHEEHAN: We have an order in 2 accordance with the rules of the court. It is an omnibus 3 form of the order addressing all the fee applications. 4 THE COURT: We will take that up at the 5 conclusion of the hearing. 6 MR. SHEEHAN: Thank you, Your Honor. 7 The other unopposed application is that on 8 behalf of the international law firms who have been 9 retained by the Trustee in connection with his 10 investigation, and his efforts to obtain assets and return 11 them to the customer property fund. 12 I wouldn't go through all the applications, 13 Your Honor, since it is unopposed. As Your Honor is aware 14 through the many applications that were made here over the 15 course of the last several months we have been retaining 16 counsel in Gibraltar, the British Virgin Islands, Bermuda 17 and the United Kingdom and they have been active in 18 assisting us not only in connection with the joint 19 provisional liquidation proceeding in the Court of Great 20 Britain, but also assisting us in these other proceedings. 21 They found those services to be extremely valuable. 22 We have submitted those applications to 23 SIPC who have reviewed them and also approved them and 24 submitted an application in support. We believe that 25 application should be granted, and I would move that
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 9 1 application as well, Your Honor. 2 MR. BELL: Kevin Bell, on behalf of SIPC. 3 SIPC has submitted it's recommendation and 4 is in full support of the Court entering an order approving 5 the application. 6 THE COURT: Does anyone else want to be 7 heard? 8 The application is granted. 9 Essentially, with respect to some of the 10 foreign activities that have been conducted with the aid of 11 these foreign counsel, there has been some international 12 recognition including recognition within the UN of 13 protocols that emanated from this effort. And the UN 14 guidelines making reference to this activity has recently 15 been approved by the commission, and I think that has been 16 a very interesting aspect of some of these efforts. The 17 application is granted. 18 MR. SHEEHAN: Thank you, Your Honor. 19 The last application is the application by 20 Mr. Picard, as Trustee, and Baker Hostetler by its counsel 21 to which there has been opposition filed. Initially, I 22 would ask that Mr. Picard be allowed to speak with regard 23 to his application as Trustee. 24 THE COURT: Sure. 25 MR. PICARD: Good morning, Your Honor. I
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 10 1 was appointed by Judge Stanton on December 15, when just a 2 few days earlier Mr. Madoff had been arrested. The SEC 3 filed a complaint against Mr. Madoff and Madoff Securities 4 International. 5 Judge Stanton appointed Lee Richards as the 6 receiver. When that occurred on December 11, Your Honor, 7 when I was appointed for the Bernard L. Madoff Investment 8 Securities, which I will refer to as BLMIS, Mr. Richards 9 was replaced with respect to the Debtor. He continued 10 with respect to BLMIS until the joint liquidator was 11 appointed. 12 After a hearing on February 4th of this 13 year, Your Honor found that both I and Baker Hostetler met 14 the disinterested standard of the SIPA statute. Today's 15 hearing, as Mr. Sheehan has stated concerns, interim fees 16 for four and-a-half months through April 30, Your Honor. 17 My activities are set forth in my 18 application and I am prepared to provide a summary of some 19 of the important aspects of it and answer any questions 20 Your Honor may have. 21 I seek $759,228.75 for the four and-a-half 22 month period beginning on December 16. 23 I expended 1,088.5 hours, Your Honor. 20 24 percent of the amount that I seek will be deferred until 25 later in the case, that is $151,845.75, Your Honor.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 11 1 So I am seeking payment of $607,383, Your 2 Honor. I also seek disbursements for local travel. 3 During the period I was operating a portion 4 of the business. As Your Honor will recall, we tried to 5 maintain initially the propriety trading and market-making 6 operations for sale. We ultimately did sell them. We 7 had retained Lazard Freres to help in the marketing of 8 that. 9 We reduced the head count initially from 10 approximately 160 people down to approximately 40 and those 11 people were really necessary for the market-making 12 operations. When it became obvious to us in March that the 13 market-making operations would be sold to any one of the 14 bidders that we had been talking to without the employees, 15 we let them go. 16 But in each case, Your Honor, that we dealt 17 with the employees and the terminations we had Warren Act 18 problems, ERISA problems both for healthcare, for the 401-K 19 plan that had been maintained and the 401-K plan, Your 20 Honor, was made at Fidelity, and the only investments that 21 the employees could make were funds of Fidelity. 22 So from that vantage point those assets are 23 being managed now by an independent agent, and they are all 24 well protected. 25 But we are still dealing with the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 12 1 Department of Labor, Your Honor, which is very concerned 2 about it, and they are doing a review. We will have a tax 3 return for the 401-K plan that will be filed before the end 4 of the year, Your Honor. 5 In addition to the business and the sale of 6 the market-making operations, I have been involved with the 7 claims and the investment account information, preparation 8 of determination letters and regular communications with my 9 consultants and the claim processing agent, application 10 partners, where the beginning of the claims process is, the 11 review, research, contacting people when we need more 12 information. 13 Together with my counsel I have been 14 involved in a statuary investigation of BLMIS's affairs and 15 had significant contact with both the FBI, the U.S. 16 Attorney's office, SEC, FENRA and, of course, the JPLs in 17 the U.K. We had numerous contacts, I personally as well as 18 my counsel with various state regulators, as I mentioned 19 the Department of Labor and other regulatory and law 20 enforcement agencies. 21 As I indicated, we retained Lazard with 22 SIPA's approval to help market and sell the market-making 23 operations. It was a lengthy term. It took probably 24 longer than we had hoped. But we ultimately were able to 25 sell it and we have every reason to believe that we will be
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 13 1 getting additional monies over the next couple of years 2 that the purchaser will be successful and the customers in 3 the long run will benefit from that sale. 4 Your Honor, we also had extensive dealings 5 with the Depository Trust Clearing Corporation, which held 6 Madoff securities that were there. There were about 1,600 7 positions in the account on December 11, and both the DTCC 8 and the National Securities Stock Corporation were not 9 ready to release a lot of the securities because there were 10 close-outs and all sorts of other issues that had to be 11 resolved. So that was another piece of the operation that 12 took a lot of time. 13 In addition, a lot of the financial 14 institutions that were holding money were not ready to 15 release those funds. It took substantial negotiations. 16 As you may recall, in the early stages of 17 the case, a number of stipulations were provided to you 18 which you did approve, whereby when the banks released the 19 funds they also received certain indemnification rights 20 from us. 21 So that, again, was a process that took a 22 bit of time and was not as easy as it might have been in 23 the typical case where you contact the bank and they say 24 here it is. 25 I have also had some involvement in
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 14 1 Bankruptcy Court litigation, especially in connection with 2 the foreign countries, and we have made a number of 3 appearances in the District Court at Judge Stanton's 4 request in connection with the SEC action. 5 With respect to my fees, Your Honor, I 6 would like the record to note that I have voluntary reduced 7 my fees by 10 percent. That is a reduction of about 8 $84,000, Your Honor. As I indicated there is a deferral 9 of about $150,000 in the laboring case. 10 Also, I did not bill for, I wrote off 11 approximately 176 hours, which is about another $123,000. 12 So in seeking the $759,228.75, and the approval of payment 13 of $607,383, I submit, Your Honor, those are reasonable 14 requests under the circumstances of this proceeding. 15 As noted at paragraph 33 of my application 16 and contrary to the implication of certain objections that 17 have been filed with the Court and before the press, the 18 amounts that will be rewarded either today or at another 19 time are going to be turned over to Baker Hostetler, the 20 firm of which I am a partner. I want to emphasize I will 21 not retain any portion of the award. 22 I previously reported and can tell you 23 again that the general estate has been and will continue to 24 be insufficient to meet the costs of administration 25 including legal fees. Thus, under all appropriate
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 15 1 sections of the statute, SIPC will be required to advance 2 those funds necessary to pay awards of compensation as it 3 has other administration costs as this case has moved 4 along. 5 In its recommendation in support of the 6 application, SIPC has acknowledged that it will advance the 7 necessary funds. 8 Accordingly, I request that the Court award 9 the amounts requested and approved by SIPC. 10 Your Honor, I would like to address a 11 certain number of objections that have been filed. I will 12 limit my remarks to factual matters. I do not propose to 13 respond to personal attacks as its contained in the papers 14 and filed by certain of the objectors. 15 But my silence, should not be construed, 16 Your Honor, as an agreement with any of those comments. 17 First, I disagree with the comments that 18 have been made that SIPC is insurance, rather, when raised 19 by statute, SIPC provided an advance to the Trustee to make 20 payments up to the statuary maximum. So that they don't 21 have to wait until the end of the case, or later on in the 22 case to get a distribution of. 23 Those advances, Your Honor, are deemed a 24 supplement to customer property. 25 Number 2. Contrary to allegations in a
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 16 1 number of the objections, Your Honor, I will not be 2 receiving 3 percent of any recovery. Your Honor has 3 already addressed that, so I won't belabor that point. 4 With respect to a number of other 5 objections, questions have been raised about the claims 6 processing, and why it is necessary to review claims and 7 research them. That has to do with a disagreement over 8 the methodology of how claims are being handled. 9 But I like to give you a couple of 10 examples, Your Honor, as to why it is necessary to review 11 and research claims. 12 We have many accounts in a single name and 13 in other names but we get more than one claim for that 14 account. We just can't pay each account whatever it 15 claims it should be paid. That has to be reviewed so we 16 could determine who the right claimant is, et cetera. 17 We have also received claims from customers 18 that don't comport with the documents that they submitted 19 or in some cases they just submit a signed piece of paper 20 with no information. Those all need to be reviewed, Your 21 Honor, so that we know what the right amount is, who the 22 right claimant is, et cetera. 23 We have also discovered that several 24 hundred claimants who should be treated as customers 25 submitted claims as general creditors. So we now in
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 17 1 reviewing all the general creditor claims to right that if 2 someone was a customer filed the wrong form we don't want 3 to penalize them, so the claims processing people are now 4 reviewing that. 5 We have also found that numerous claims 6 were filed both by customers and by attorneys here with the 7 Bankruptcy Court, not with the claims agent. As long as 8 those claims were filed before July 2, which was the bar 9 date, we are going to honor them. But, again, we had to 10 collect them from the Court and they have to now be melded 11 into our system. 12 So I just wanted to give you a little bit 13 of a flavor of some of the issues that we are dealing with 14 here. Mr. Sheehan, I am sure we will deal with some of 15 the other objections. 16 If you have any questions, I would be 17 pleased to answer them. 18 THE COURT: Thank you. 19 MR. SHEEHAN: Your Honor, on behalf of the 20 Baker Hostetler we have an application here this morning 21 for fees in the amount of $14,662,319, less the 20 percent 22 retention that Mr. Picard alluded to that the firm has 23 agreed to. The firm has also agreed to a 10 percent 24 voluntary reduction of the fees in this case. 25 I will not repeat, obviously, what Mr.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 18 1 Picard has just said or enter into any great detail this 2 morning what has already been laid out in quite some detail 3 in the interim report, we submitted the report and it is 4 available for everyone to see. 5 I think it is important, given the scope 6 and size this which justifies the reasonable nature of our 7 application here today to at least highlight to your Honor 8 some of the things we have encountered here that make this 9 a very, very unusual case. 10 First of all, this is a case that has been 11 talked about in the press incessantly and is one that 12 concerns one of the largest frauds that ever took place in 13 the United States. 14 That is by any measure absolutely true. 15 We do know that to be a fact by virtue of the investigation 16 that has been undertaken here. That investigation doesn't 17 just require us to look at the November 30, 2008 statements 18 and end the inquiry with regard to the nature and extent of 19 the fraud perpetrated by Madoff and his colleagues. 20 Needless to say we have to go behind that. 21 We have to investigate that clearly and thoroughly, first 22 and foremost because he is a crook. What are we supposed 23 to do, Your Honor, rely upon the crook's last statement and 24 that becomes somehow the be all and end all of how we 25 investigate this case, would anyone in their right mind
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 19 1 make that suggestion? 2 Obviously, we have to look behind that 3 fiction and find out what the truth is, Your Honor, and the 4 truth requires us to look back, look back into time, 5 recreate exactly what happened. 6 We know that Mr. Madoff is a liar. We 7 know that he has lied incessantly throughout his career. 8 Are we supposed to rely upon his allocations? I don't, Mr. 9 Picard doesn't. We know it is not true. 10 We are going beyond that. We are looking 11 to see everything that we can with regard to each of the 12 customers. We owe that to all of those customers who left 13 their money in there relying upon his lies, and they 14 deserve to have a complete and adequate investigation, so 15 that at the end of the day, Your Honor, they at least get 16 back a fair share of what they entrusted to Mr. Madoff. 17 That requires us to look at hundreds of 18 thousands of records. These records, as I say, can't be 19 just the customers' statements. As the SIPA statute says 20 we need to look at the books and records of the Debtor when 21 we make this decision and that requires us to look at bank 22 statements, to be able to trace cash in and cash out. 23 There were no securities, and that is the bedrock of this 24 case, cash in and cash out. So at the end of the day we 25 can't rely on what Mr. Madoff says is in and out, we have
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 20 1 to look at bank records, third-party records, counterparts 2 and everyone else with regard to each claimant. 3 Each claimant here, and there was not very 4 many of them, are not very new to the scene. Many had 5 been there for years, if not decades. Many of them had 6 accounts they received from others, accounts that they 7 received from their father, their brother, their sister or 8 some other relative. Well, that account was a fiction. 9 The father didn't have any cash. What he had was false 10 profits. His money in was gone years ago. What are we 11 supposed to do? Just ignore all of that? Accept that? Or 12 are we supposed to go and investigate that? 13 And that is exactly what we have been 14 doing, and a tremendous amount of time spent by Baker 15 Hostetler as well as the foreign counsel and the other 16 consultants we have hired has been spent on that effort. 17 And so we could find out what the truth is and make the 18 payments to those people under the statute, and in 19 accordance with the law and that is what we are doing. 20 Those customer claims that we received, the 21 almost 16,000 of those deserve, each and every one of them 22 to be examined carefully to arrive at exactly what the 23 facts are, not just to accept facially what one might 24 suggest should be the be all and end all. Each customer 25 deserves to have in this horrible situation the ability to
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 21 1 know that this Trustee and his counsel have looked 2 carefully at those records, that we looked at the entire 3 history of them. 4 We are trying to assist them in accordance 5 with the statutes, the moneys under SIPA and from the 6 customers' funds be accumulated by the Trustee in excess of 7 $1 billion, soon-to-be 1 billion 5 and growing throughout 8 the course of the litigation that we commenced in this 9 case. 10 Our goal is to create the largest customer 11 fund possible so we could return not just to the people 12 entitled to the SIPA advantages of $500,000, but in 13 significant dollars through the customer fund administered 14 by Mr. Picard. 15 That requires us to look at the customer 16 claims carefully, Your Honor. It is suggested that we are 17 not moving promptly. Promptly is a subjective term. If 18 someone went in and looked at all the work required to look 19 at all of this and find out what the background is, I would 20 suggest we are moving with all due diligence of deliberate 21 speed, and everything we could do to make this move as fast 22 as we have. We have already paid out over $300 million. 23 We have allowed claims over $3 billion. 24 Those claims have already been adjudicated. 25 We have looked at them carefully, finished their claim.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 22 1 Each of those people have received $500,000 or less 2 depending on the amount of their allowed claim. 3 That is just one aspect of this case, Your 4 Honor, requiring the assistance not only of Mr. Picard 5 reviewing these and looking at them, but also his counsel 6 and the people we have hired as our claims agent in it case 7 as well as other investigative means that we have. 8 That is just customer claims, Your Honor. 9 And we have an array of litigation. Some of which has 10 reached this courthouse in terms of individuals that we 11 have sued for substantial sums of money that's been 12 wrongfully received, as we allege, and we allege based upon 13 a thorough analysis of the books and records. This is 14 just not a spurious claim. This is one that has been 15 thoroughly researched by the Trustee and brought to this 16 Court because we believe that money should be returned, 17 returned so that they could be distributed equally on a pro 18 rata basis to all of the legitimate customers and allowed 19 claims in this proceeding. 20 We are continuing that investigation, Your 21 Honor. Your Honor will see over the succeeding months 22 numerous litigations. This is a case that unlike almost 23 any other will have more litigation in it than probably any 24 other case that Your Honor has before you in terms of the 25 avoidance actions we have been bringing against literally
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 23 1 hundreds of people. An argument has been made that we 2 have somehow done is somehow adverse to some of the 3 customers. 4 What I have said publicly, and I will say 5 here, look at what the Trustee does. The Trustee is not 6 suing little people. He is not trying to hurt the little 7 guy. We are suing people who have taken substantial funds 8 out. 9 We had settlements, as Your Honor has 10 approved, at this point, tantamount to 130 million dollars 11 from a foreign feeder fund, a very significant result in 12 this case. 13 In terms of the message it says to other 14 feeder funds that Mr. Picard will not just look back but he 15 will do everything he can to bringing the funds into the 16 estate. That requires the full service of a lot of 17 attorneys at our firm. 18 Those records have been detailed and we 19 have given you this report because we believe we acted very 20 responsibly and reasonably in pursuing each of these 21 actions. And not the least is the fact we have this vast 22 array of international litigation which I suspect, Your 23 Honor, as time progresses it will become even larger than 24 the domestic litigation that we have seen. 25 What we're seeing underlying these
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 24 1 international machinations that one could not comprehend 2 unless you have had access to all the records and see how 3 this money is moving between the banks, principals an 4 feeder funds and organizations that have no purpose other 5 than as to this. 6 This is not suggesting that you could 7 simply look at a bank statement and make a decision as to 8 what is occurring, Your Honor. You need to have active 9 participation by lawyers, investigators and Trustees to get 10 behind the scenes and find out exactly what is happening, 11 which has cost us, as Your Honor knows, and which we have 12 already dealt with today, is the retention of counsel 13 around the world at this point and it is going to grow 14 simply because this is a fraud that went on for decades. 15 And the architect of it had an amazing 16 amount of time to create this fraud. We are 17 deconstructing it and I think, quite frankly, I submit to 18 your Honor that the Trustee and his counsel and those he 19 has retained as consultants have in a very short period of 20 time unraveled a good deal of what is going on. But that 21 onion has been has yet to be pierced to its core. 22 At the end of day all work that's detailed 23 in our time records and all the work we have spelled out in 24 the interim report will be submitted to you as well as to 25 the applications we have submitted here today. The detail
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 25 1 exactly what I think the Trustee has been doing and why we 2 have been doing it, the purpose it is accomplishing by 3 virtue of what we are doing in this case. 4 I do want to talk a bit about the 5 objections, not because I believe they have any merit. I 6 think, quite frankly, there's a collateral attack here. 7 One of the objections actually reargued and 8 we have made this statement to your Honor, essentially a 9 cause of action that is completed here, the motion to 10 dismiss is pending. We do not believe this is the forum 11 for that discussion. It will be briefed and it will be 12 argued and Your Honor will render a decision as to what the 13 net equity calculation should be in this case as decided by 14 the Trustee, but ultimately by Your Honor. 15 But an objection to our fees here is not 16 the forum in which to discuss those issues, we respectfully 17 submit. 18 Mr. Picard has indicated there are other 19 objections, and most of those emanate from a 20 misapprehension of the law. Unfortunately, there is a lot 21 of press that is erroneous with regard to the 3 percent 22 that has actually no application in the SIPA statute and, 23 Your Honor, has already alluded to that, to the fact that 24 somehow we are going to get a piece of the action. There 25 is no basis in the law for that, factually or otherwise.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 26 1 None of these objections are accurate. 2 Rather than deal with them any further, I 3 believe at this point Your Honor should just not ignore 4 them, everyone has an opportunity to come to this Court and 5 make their position known to your Honor, but respectfully 6 they should not stand in the way to your Honor granting 7 your application here today. 8 Your Honor, that summarily is where I 9 believe we have come in this case to date. We have a lot 10 more work to do, but I would respectfully request that Your 11 Honor approve our application as stated in our paper. 12 MR. BELL: Kevin Bell for SIPC, Your 13 Honor. 14 Let me put in perspective what this case is 15 about. In the 38 and three-quarter years that SIPC has 16 been in existence, SIPC has advanced two Trustees 520 17 million to satisfy the claims of hundreds of thousands of 18 customers who have filed claims in over 320 liquidation 19 proceedings. 20 In this case, Your Honor, through last 21 night, SIPC has committed to advance $311 million to 22 satisfy the customers to whom the Trustee has made the 23 terminations. 24 That is more than 60 percent, Your Honor, 25 of what SIPC has advanced throughout its history in this
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 27 1 case. 2 I would expect, Your Honor, that in the 3 coming weeks that that number, $520 million will be 4 exceeded in this liquidation proceeding. That is just the 5 perspective of the dollars that SIPC is putting out for 6 customers and the dollar amount that Mr. Sheehan has talked 7 about of the allowed claims is about $3.4 billion. That 8 means there is $3.1 billion of claims above the SIPC 9 amount. 10 And the statute clearly requires, Your 11 Honor, the Trustee and his counsel to be aggressive in 12 trying to recover each and every penny that Mr. Madoff and 13 his colleagues took from customers and disbursed worldwide. 14 That effort is required by the Securities Investor 15 Protection Act, Your Honor, and by Congress who intended 16 the Trustee to move forward. 17 Let's go back to the Chandler Act of 1936 18 and look at how 60(E) is constructed, and we can go back 19 and look at the legislative history, the paper crisis in 20 the '60s and we can look at that to see how SIPA was 21 created. 22 The whole program that Congress set up 23 where SIPC would advance funds to supplement whatever the 24 Trustee had in the customer properties. We have submitted 25 a response to the objections in noting some of the points.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 28 1 But this misimpression about the word "insurance" is 2 nowhere in the statute. It is misleading. It leads a 3 lot of the innocent victims to, and I have talked to a 4 number of them, to have a miscomprehension of what is 5 happening. SIPC has used its personnel and its resource 6 to have this happen. 7 With regard to the Trustee's applications, 8 let me be very clear. This Court's Order, monthly 9 compensation procedure order of February 25, set forth the 10 procedures. The Trustee and counsel have submitted to 11 SIPC on a monthly basis their invoices. Each page of each 12 invoice has been read by the SIPC attorney on the case, by 13 me, as well by SIPC's general counsel, and we have entered 14 into dialogue with regard to some of the entries, with 15 regard to services. There have been adjustments made with 16 regard to some of those entries. 17 SIPC has filed its recommendation. We 18 said we look at applications. We look at everything in 19 this case. The oversight that SIPC has is a public 20 responsibility. 21 We had as you see in the response, we set 22 forth, a complete discussion at Congress when the statute 23 was amended in 1978. I happen to have been with SIPC for 24 over 36 years. So I have worked on hundreds of SIPC 25 liquidation proceedings and on a number of fee
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 29 1 applications. I guess the three us, the general counsel 2 and I have been have an aggregate of 100 years of work on 3 SIPA matters and on fee applications. So we bring a level 4 of expertise in reviewing this. 5 So some of the objections, Your Honor, were 6 by our own people and by bankruptcy practitioners seem to 7 miss the mark about really what the oversight is here 8 because this is a public trust that we have that we 9 represent to the Court in each and every recommendation we 10 make, particularly in cases where it is a no asset case 11 because the legislative history shows the complete 12 discussion of that fact with regard to how Section 5 of the 13 statute, the compensation provision, was created. 14 SIPC hopefully supports a recommendation of 15 the Trustee and of the Trustee's counsel with regard to the 16 applications that are before the Court and I would be 17 willing to answer any questions that the Court may have 18 with regard to SIPC's position. 19 THE COURT: Thank you. 20 MR. BELL: Thank you, Your Honor. 21 THE COURT: Does anyone want to be heard? 22 MS. CHAITMAN: I would like to speak now, 23 Your Honor. My name is Helen Chaitman. I am with the law 24 firm of Phillips Nizer. 25 I would like to outline in detail the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 30 1 objection that I have filed on behalf of Diane and Roger 2 Peskin and Maureen Ebel, the basis for which we asked the 3 Court to set a hearing at which we can prove the facts set 4 forth in the objection. 5 The objection is, in fact, an offer of 6 proof of what we would establish at the hearing and we 7 believe that Baker Hostetler and the Trustee have a 8 conflict of interest which under the established standard 9 in this Court disables them from serving in this case and 10 from receiving any compensation. 11 As a bankruptcy Trustee, it is fundamental 12 that the Trustee has a fiduciary duty to the customers of 13 this estate. 14 However that duty, Your Honor, is even more 15 important here because this is a proceeding under the 16 Securities Investor Protection Act which as SIPC has 17 acknowledged was passed in order to protect customers. 18 The protection to the customers under SIPA 19 is that the Trustee will promptly pay customers up to 20 $500,000 in SIPC insurance based upon their last account 21 statements. That what the statute says, Your Honor, and I 22 understand that the term SIPC insurance is no longer 23 embraced by SIPC, but for the Trustee, but, in fact, it was 24 on the website until this case came down that SIPC started 25 to ignore the statute under which it was enacted. It was
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 31 1 always referred to as SIPC insurance and it is not simply 2 an advance to customers, it is an advance to customers 3 where there are no assets in the case. It is a guaranteed 4 payment to customers up to $500,000 based upon their last 5 statements. 6 I have laid out in the objection, Your 7 Honor, that under the statute there was no contemplation 8 that people would have to file claims. The Trustee was 9 obligated to look at the last statements and honor the 10 claims. Congress understood that there would be SIPA 11 liquidations involving crooks where the brokers had never 12 purchased the securities. 13 THE COURT: Let me see if I understand the 14 thrust of your objection at this point. It is A, there is 15 some kind of conflict of interest that then disables Baker 16 Hostetler and the Trustee from remaining on the case. B, 17 that the distribution scheme as it was espoused is opposed 18 by you. 19 Frankly, I have read through your long 20 objection, and I do find it in the main it really 21 constitutes to the support of the Court for the adversary 22 proceeding that you brought which will be subject to 23 further review by this Court now. So you are in an 24 adversarial position and I don't believe it is the 25 appropriate for you to use that as the a fulcrum to object
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 32 1 to fees here. 2 We will deal with the motion to dismiss, 3 which is set before the Court when, in September or some 4 time later on in the month. But the only thing that 5 really remains with respect to your objection is the 6 disinterestedness of the Trustee and counsel. 7 MS. CHAITMAN: Well -- 8 THE COURT: If you want to speak 9 specifically to that I will be glad to entertain that. 10 MS. CHAITMAN: I would like to, Your 11 Honor, because if the Trustee and Baker Hostetler were 12 acting solely in the interests of SIPC, they would have 13 handled their retention totally differently. 14 They have defied -- SIPA is not a Chinese 15 menu where you could take one from column A and one from 16 column B. 17 The statute mandates prompt payment of 18 customer claims based upon their last statements. The 19 statute even prohibits SIPC from changing the definition of 20 net equity which is defined, in essence, as the last 21 statement. All of this is laid out in the objection. 22 If SIPC chose not to follow the statute for 23 the first time in its 38 and-a-half years -- 24 THE COURT: That is the issue that is drawn 25 before me in the adversary proceeding, Ms. Chaitman.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 33 1 MS. CHAITMAN: There is more than that. 2 THE COURT: That is what is before me and I 3 am not trying that issue today. 4 MS. CHAITMAN: I understand that but the 5 point is -- SIPC is running expenses at the rate of $2 6 million a week. The Trustee and Baker Hostetler are 7 running expenses at the rate of $1 million a week. 8 A great portion of those expenses are 9 solely because they are defying the mandate in the statute. 10 So by your approving fees, Your Honor, based upon a blatant 11 defiance of their statuary obligations, you are sanctioning 12 a conflict of interest. 13 What is important in this case which is 14 unprecedented certainly in SIPC's history is SIPC is 15 insolvent. It is incapable of paying its debt as they 16 become as Marie Shapiro of the SEC commission, testified on 17 July 14 in Congress -- 18 THE COURT: That is hearsay and media 19 speculation. I am here only with respect to the 20 appropriateness of granting fees. I am not trying the 21 other issues, Ms. Chaitman, nor am I interested in what 22 goes on before Congress because it has no effect except the 23 laws that Congress passes and Congress did pass a very 24 peculiar law, if you want to call it that, with respect to 25 SIPA.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 34 1 If you look at the wording in the statutes 2 they are very clear and they give this Court, as a matter 3 of fact very little discretion. 4 MS. CHAITMAN: Your Honor -- 5 THE COURT: Do you have anything else, Ms. 6 Chaitman, that is not in your papers? 7 MS. CHAITMAN: I have nothing that is not 8 in my papers, Your Honor. 9 THE COURT: Thank you. 10 Is there any response? 11 MR. SHEEHAN: No, Your Honor. 12 MR. BELL: No, Your Honor. 13 THE COURT: Does anyone else want to be 14 heard? 15 There is no response. 16 I have considered all of the responses, all 17 of the applications here before me today. I find no merit 18 to the objections. 19 The last objector, essentially has a 20 disagreement with respect to the distribution scheme, and 21 that is an issue which is a matter that will be brought 22 before me and I would resolve it one way or the other. 23 But the Court has already held a disinterestedness hearing. 24 There was no objection at that time and there are no new 25 facts that have come forward that would change the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 35 1 disinterestedness concept with respect to the fee 2 application here today. 3 With respect to the responses that were 4 stated in the objections, they clearly lay out the fact 5 that there has been nothing shown that this Trustee is not 6 acting in good faith. That is clear. 7 There is nothing that has been shown that 8 this Trustee is guilty of any kind of fraud or dereliction 9 of duty, another very key important factor that the Court 10 would consider as to whether or not a Trustee should be 11 removed or his disinterestedness. 12 We come back down to the disagreement in 13 the approach to handling the case, which is a matter that 14 is to be determined by this Court in connection with the 15 adversary proceeding that is pending before me. 16 On the other hand, it has not been shown at 17 all that the Trustee services have been anything but 18 necessary, have been reasonable. That have been a product 19 of decades of massive fraud, and I don't think there is any 20 real argument that this is the largest fraud committed in 21 the United States and I don't go back down to anything AD 22 or that appear in the rest of the world, but I am sure this 23 comes close to the top. 24 And many of the objections that have been 25 alleged are based upon the assumption that by granting fees
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 36 1 here that in some way it affects the amount of funds to be 2 distributed. That is absolutely not the case. 3 The statute even reads, and I will quote 4 from the statutes, in any case which allowance are to be 5 paid by SIPC without reasonable expectation of recoupment, 6 therefore, as provided in this chapter and there is no 7 reasonable expectation of recoupment here, and there is no 8 difference between the amounts requested and the amounts 9 recommended by SIPC, the Court awards the amounts 10 recommended by SIPC. 11 The main word "shall" is included. I am 12 taken by that because I know the difference between may and 13 shall. That removes a fair amount of discretion on the 14 part of the Court when SIPC agrees with and makes the 15 recommendation with respect to the applications. So there 16 isn't any real review that court ought to be conducting. 17 But even if the Court were to it is clear that SIPC is the 18 payor. 19 SIPC is the one whose ox is gored because 20 no funds of the claimant or of the victims will be impacted 21 by the granting of fees here, and it is clear from the 22 record before me that SIPC has not been supine as an 23 overseer. And in each case of the applications that have 24 been run through SIPC, SIPC has reviewed them and has 25 caused an adjustment, and I assume an adjustment downward
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 37 1 in the request. 2 Therefore, there has been the form of 3 monitoring that Congress envisioned. Now you may fault 4 Congress for the way it set this statute up. I can fault 5 Congress in many respects. But I do not have the power or 6 the inclination to do anything other than to implement the 7 law that is promulgated and handed down by Congress. The 8 1978 amendments, for example, strengthened by a factor of 9 10, the hand of SIPC with respect to the conduct of these 10 cases. 11 I do not find that any basis for changing 12 this Court's view of disinterestedness exists, and I am 13 very familiar with a lot of the activities that have taking 14 place in connection with this matter. 15 As I alluded to before, this case now 16 becomes a poster child for across the board litigation in 17 that the protocols that have been developed and entered 18 into somewhat at the Court's urging and with respect to the 19 cooperation of foreign entities who have an involvement 20 here, those protocols have now found their way into the 21 international community. 22 And now from the official guidelines 23 emanating from the United Nation, the Trustee's services 24 have proven valuable in that regard and, certainly, we all 25 recognize that the fraud that has taken place over the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 38 1 decades by a convicted felon has mandated a really 2 extensive forensic activity in order to justify the 3 administration of this case and the handling of the claims 4 process. 5 I note that the Trustee has modified his 6 stance of changing the view of the expectancy in the 7 granting of claims. And while I don't care much about the 8 media attention to this case, I can't help but read the New 9 York Law Journal every morning and reading about there has 10 been a further relaxation on the distribution scheme in 11 advancing it. 12 So that the sum of the complaints with 13 respect to the acceleration and approval has been adhered 14 to, and that there is a less restrictive approach having 15 been taken with respect to the dissemination of monies. 16 The long and short of it is that despite 17 the disagreement of methodology being applied here in this 18 unique and unusual case, I do find that the services 19 rendered have been reasonable, that they have been done 20 responsibly and to this point have been with a salutary 21 effect. 22 I will approve the application. 23 MR. SHEEHAN: Thank you, Your Honor. 24 THE COURT: Not withstanding the fact that 25 according to the Congressional scheme I don't have even
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 39 1 have a choice, as other courts have held. I don't 2 necessarily agree with that because all I would have to do 3 if I disagree with the fees is perhaps put them over, but 4 if I have to put them over and I have no basis to do that, 5 but if anyone looks at the architect of the SIPA statute 6 they will see all that does is give SIPC another 7 opportunity to come back and justify the positions that it 8 has taken. Another waste of time. 9 But, again, that is the way Congress wrote 10 it, and that is the way I will act to administer it. 11 I will entertain an order. 12 MR. SHEEHAN: Thank you Your Honor. 13 May I approach. 14 THE COURT: Yes. 15 That is notwithstanding, Mr. Sheehan, one 16 condition that you are too old to do this. That was 17 contained in one of the objections. 18 MR. SHEEHAN: I am just a spring chicken 19 compared to Mr. Picard, Your Honor. 20 THE COURT: I have approved the order. 21 MR. SHEEHAN: Thank you very much, Your 22 Honor. 23 MS. NANN: Thank you, Your Honor. 24 * * * 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 40 1 C E R T I F I C A T E 2 3 STATE OF NEW YORK } } ss.: 4 COUNTY OF NEW YORK } 5 I, MINDY CORCORAN, a Shorthand Reporter 6 and Notary Public within and for the State of New York, do 7 hereby certify: 8 That I reported the proceedings in the 9 within entitled matter, and that the within transcript is a 10 true record of such proceedings. 11 I further certify that I am not related, by 12 blood or marriage, to any of the parties in this matter and 13 that I am in no way interested in the outcome of this 14 matter. 15 IN WITNESS WHEREOF, I have hereunto set my 16 hand this 7th day of August, 2009.
Digitally signed by Mindy Rothman- Mindy Rothman- Corcoran 17 DN: cn=Mindy Rothman-Corcoran, c=US Corcoran Reason: I am the author of this document 18 ______Date: 2009.08.11 16:37:02 -04'00' MINDY CORCORAN 19 20 21 22 23 24 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 EXHIBIT B
EXHIBIT C 1 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------x In the Matter of Index No. 01-08-01789 BERNARD L. MADOFF, IRVING PICARD and THE BANKRUPTCY LINK, et al.
Debtors.
------x
December 17, 2009
United States Custom House One Bowling Green New York, New York 10004
In Re Fee Application for all Professionals, et al.
B E F O R E:
HON. BURTON R. LIFLAND,
U.S. Bankruptcy Judge
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 2 1 A P P E A R A N C E S: 2 3 BAKER HOSTETLER, LLP Attorneys for Irving H. Picard, Esq., SIPA Trustee 4 45 Rockefeller Plaza New York, New York 10017 5 BY: DAVID SHEEHAN, ESQ. 6 -and- 7 MARC E. HIRSCHFIELD, ESQ. 8 9 10 11 SECURITIES INVESTOR PROTECTION CORPORATION 805 15th Street, Suite 800 12 Washington, D.C. 20005 13 BY: KEVIN H. BELL, ESQ. 14 15 BAKER HOSTETLER, LLP 3200 National City Center 16 1900 East Ninth Street Cleveland, Ohio 44114 17 BY: LOUIS A. COLOMBO, ESQ. 18 -and- DAVID E. KITCHEN, SQ. 19 20 21 22 23 24 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 3 1 A P P E A R A N C E S: (Continued) 2 3 4 PHILLIPS NIZER, LLP Attorneys for Objectants, 5 The Peskins, Maureen Ebel and others 666 Fifth Avenue 6 New York, New York 10103 7 BY: CHRYSSA V. VALLETTA, ESQ. 8 9 10 REEDSMITH, LLP 11 Attorneys for Bart Schwartz, the New York State appointed Receiver for the Ariel fund 12 and THE Gabriel Fund 599 Lexington Avenue, 29th Floor 13 New York, New York 10022 14 BY: JAMES C. McCARROLL, ESQ. -and- 15 LANCE GOTTHOFFER, ESQ. -and- 16 JOHN SCOTT, ESQ.. 17 18 19 DECHERT, LLP 20 Attorneys for J. Ezra Merkin and Gabriel Capital Corporation 21 1095 Avenue of the Americas New York, New York 10036-6797 22 BY: ANDREW J. LEVANDER, ESQ. 23 -and- GARY J. MENNITT, ESQ. 24 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 4 1 A P P E A R A N C E S: (Continued) 2 3 WINDELS MARX LANE & MITTENDORF, LLP Attorneys for Chapter 7 Trustee 4 156 West 56th Street New York, New York 10019 5 BY: ALAN NISSELSON, ESQ. 6 -and- REGINA GRIFFIN, ESQ. 7 8 9 RICHARDS KIBBE ORBE, LLP Attorneys for Reciever, Lee Richards 10 1 World Financial Center New York, New York 10281 11 BY: DANIEL ZINMAN, ESQ. 12 13 14 ALSO PRESENT: 15 Lee Richards 16 Stefanie Grossman 17 18 19 20 21 22 23 24 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 5 1 Proceedings 2 THE COURT: Bernard Madoff, Irving Picard 3 and the Bankruptcy Link. 4 MR. SHEEHAN: Good morning, Your Honor. 5 THE COURT: Good morning. 6 MR. SHEEHAN: David Sheehan with the law 7 firm of Baker Hostetler on behalf of the trustee for the 8 liquidation Bernard Madoff, Securities Investor Protection 9 Corp., LLC. 10 As you are fully aware, we have a number of 11 matters on for a hearing this morning. 12 What we propose, Your Honor, and I think we 13 informed your chambers of this, we would like to see what I 14 am calling the Merkin matters, the motions to dismiss and 15 the cases of Ariel and the Gabriel Funds that are on for 16 hearing this morning, that they be heard first. 17 And with regard to those motions I will not 18 be arguing them, Your Honor. My partner, Louis Colombo 19 will be. 20 His pro hac viche admission is in process. 21 It has not been fully processed, but I would like the 22 Court's permission and counsel on the other side since Mr. 23 Colombo has been handling matters since the outset that he 24 be permitted to argue the motion here this morning? 25 THE COURT: There are some head nods at the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 6 1 table. 2 There is no objection. 3 The application is granted. We will 4 proceed to the many fee applications that we have. 5 MR. LEVANDER: Your Honor, Andrew Levander 6 from the Dechert, LLP law firm. My partner today is Gary 7 Mennitt. We represent Mr. J. Ezra Merkin and Gabriel 8 Capital Corporation and Gabriel Capital Corporation. It is 9 our motion to dismiss, and with the Court's leave I will 10 proceed to argument. 11 THE COURT: Well, no, it seems to me that 12 we have a preemptive motion and that is the motion to amend 13 the complaint. 14 MR. LEVANDER: That is fine. 15 THE COURT: Which essentially is what your 16 motion is targeting at. So let's hear the motion to amend 17 first. 18 MR. LEVANDER: Fine. My partner, Gary 19 Mennitt will handle it. 20 THE COURT: It is not his motion. 21 MR. LEVANDER: No, it is his opposition. 22 MR. COLOMBO: The motion for leave to file 23 the second amended complaint as filed with the Court, and 24 as the Court is well aware we are in the very early stage 25 in those proceedings. There has been no discovery, we are
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 7 1 still in the pleading stage. 2 The test for allowing the amendment, of 3 course, is whether there is undue delay, which there hasn't 4 been; whether there is prejudice, there hasn't been. They 5 don't even challenge those issues in their briefs in 6 opposition to the motion for relief. They challenge the 7 motion on the grounds that the amendment would be futile, 8 but they never come to grips with what the thrust of the 9 amendment is, the thrust of the amendment is to assert 10 claims against Ezra Merkin, individually, as the general 11 partner of these various funds, such as Ascot and Gabriel; 12 Ascot in particular and as the general partner, the second 13 amended claim asserts he is liable under New York law or 14 Delaware law, whatever controls for the obligations of the 15 fund, to the extent the fund can't satisfy those 16 obligations of what we have alleged in the second amended 17 claim. 18 We gather in our reply brief that fully 19 establishes that Merkin is, in fact, obligated either under 20 New York or Delaware law to satisfy the obligations of the 21 partnership, to the extent the partnership cannot, I 22 understand Ascot has essentially millions of dollars in 23 fraudulent transfers, preferential transfers and in seeking 24 to recover the second amended claim asks to proceed against 25 Merkin. The law supports us, there has been undue delay
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 8 1 and we ask that it should be allowed. 2 THE COURT: Thank you. 3 MR. MENNITT: Gary Mennitt of the law firm 4 Dechert, LLP, and Mr. Levander's partner. 5 Today we are before Your Honor with a 6 motion to amend the complaint. We represent Ezra Merkin, 7 Gabriel Capital Corporation and it is not an issue on that 8 motion to amend. 9 Mr. Colombo's presentation just completely 10 ignores the structure of the fraudulent conveyance 11 provisions in the Bankruptcy Code, and the limited ability 12 that a debtor-in-possession or trustee has to enforce those 13 rules in Bankruptcy Court. 14 We did not dispute in our obligations to 15 this motion the proposition that a general partner is 16 generally liable for the obligations of a limited 17 partnership, and that is the thrust of what Mr. Colombo 18 just stood up and said, that is the thrust of what is in 19 their motion papers but that is not even close to adequate 20 because, and as a result their motion to amend is futile 21 and the complaint as against Ezra Merkin for general 22 partner liability would notwithstanding a motion to 23 dismiss. 24 And the reason is because of the 25 application of Section 550 of the Bankruptcy Code, Your
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 9 1 Honor. Section 550 of the Bankruptcy Code sets up an 2 exclusive remedy, it sets up an exclusive remedy that a 3 Debtor-in-Possession or trustee has to enforce either the 4 Section 548 federal fraudulent conveyance provisions of the 5 Bankruptcy Code, but also the Section 544, the fraudulent 6 conveyance provision, that are incorporated in the 7 Bankruptcy Code state law provision. 8 They are only incorporated in the 9 Bankruptcy Court through Section 544, and as the Court is 10 well aware those rights do not inure to the Debtor outside 11 of bankruptcy. 12 The fact that Section 550 is the exclusive 13 source of power for the Debtor in possession or the trustee 14 to recover under any fraudulent conveyance action under the 15 Bankruptcy Code is black letter law, and cases are cited on 16 page 2 and on page 3 of our brief. Those are the 17 Telligent case, Stratton Oakmont, Pereira and Hooker. 18 In the reply brief that the trustee filed 19 in this case they don't cite any of those cases because 20 they know it is black letter law. They cannot challenge 21 the proposition that all fraudulent conveyance claims must 22 channel through Section 550 in this Court. 23 There is no other power. There is no 24 power under Delaware law to sue a general partner except 25 through Section 550. They know that. They don't address
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 10 1 any of those cases. 2 The structure of the bankruptcy, Your 3 Honor, the provisions, and I won't spend too long on this 4 because I know the Court has written many times on these 5 issues, is basically as follows: Under Section 544(b), 6 the trustee can step in the shoes of the creditor and may 7 avoid any transfer avoidable under the applicable law by a 8 creditor. 9 Of course, that right, Your Honor, does not 10 exist outside the Bankruptcy Code by a Debtor, outside the 11 Bankruptcy Code, outside bankruptcy a Debtor can never sue 12 the recipient of a transfer of its property to recover that 13 property on the ground that it was a fraudulent conveyance. 14 THE COURT: It sounds to me, counsel, like 15 you are arguing the notion to dismiss targeted for the 16 second amended complaint. 17 And that the thrust of your argument is 18 that if I grant the application it would be futile. 19 MR. MENNITT: That is correct. It would 20 not survive the motion to dismiss. That is correct, it is a 21 futile argument. 22 THE COURT: Do you have anymore witness? 23 MR. MENNITT: That is a ground for you to 24 deny the motion to amend. 25 THE COURT: I understand that.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 11 1 MR. MENNITT: If I could just finish, and I 2 won't take too much more of your time. 3 THE COURT: Okay. 4 MR. MENNITT: Section 544 says they could 5 step into the shoes of the Debtor, and Section 548 sets up 6 the fraudulent conveyance claims and Section 550 provides 7 the exclusive remedy in Bankruptcy Court. They don't even 8 attempt. In our papers we went through all of the people 9 that the Bankruptcy Code says you could collect the 550 10 claim against. They don't even attempt to say Ezra Merkin 11 falls into any of those categories. He is not an initial 12 transferee. He didn't have legal authority to take that 13 money for himself. To the extent he is a subsequent 14 transferee, they have that claim in the initial complaint 15 but it is not a subsequent transferee because he is the 16 general partner liable for all of these transfers and he is 17 not a person for whose benefit the transfer is made as the 18 general partner. 19 We laid that all out in our brief. They 20 don't address those issues in their response. 21 And, Your Honor, the fundamental 22 misapprehension of the trustee with respect to this motion 23 is on Page 7 of their brief. They said in reality the 24 proposed second amended complaint alleged that Merkin is 25 liable for Ascot transfers under the new Debtor and
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 12 1 Creditor law as well as the Bankruptcy Code. See, their 2 whole theory here, Your Honor, is that somehow because they 3 are alleging state law claims under Delaware law for GP 4 liability and under the state law -- 5 THE COURT: They are arguing the motion to 6 dismiss the second amended complaint. 7 MR. MENNITT: But that is exactly what a 8 futility motion is. 9 THE COURT: I understand that. As I said, 10 I have read all of the papers and I understand that the 11 whole argument that you make is a futility argument. 12 MR. MENNITT: That is absolutely correct. 13 THE COURT: That is absolutely correct. 14 MR. COLOMBO: Maybe we are talking at cross 15 purposes, but we are saying as a matter of law Mr. Merkin 16 is liable for paying for those transfers that Ascot cannot 17 pay. That is as simple as I could say it. And we don't 18 think it is a futile argument. We think it is supported 19 by laws in our briefs that we should be allowed to pursue 20 the claim. 21 THE COURT: Thank you. As you well know, 22 we are at the early stages here, and the trustee is dealing 23 with a very complex set of facts, the facts are constantly 24 emerging. All you have to do is follow the media and find 25 out that more facts are unfolding every day. So it is not
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 13 1 beyond comprehension that you would get several requests 2 for an amended complaint as more factors are discovered. 3 The argument of futility I cannot buy into 4 at this point. 5 It is one that is supplanted by the fact 6 that the second amended complaint as proposed does, subject 7 to joinder pleadings present sufficient to withstand the 8 motion, the objection to a motion to amend. 9 It is clear that a party may amend its 10 pleading on leave of the Court, as justice so requires and 11 in light of the highly complex investigation and continuing 12 discovery of new facts the Trustee apparently in good faith 13 is asserting new liability claims against Mr. Merkin 14 sufficient to open the door for the joinder of issues. That 15 is where I am coming from, the joinder of issues, and then 16 I will entertain the motions to dismiss if the Trustee has 17 not plead sufficiently under those circumstances. 18 Therefore, I am going to grant the 19 Trustee's motion for leave to file the second amended 20 complaint. 21 Now, that carries with it a reaction to the 22 other pending motion, and that is a motion to dismiss. 23 Some parties, some parties including the Trustee seem to 24 feel that this motion to amend only targets one or two of 25 all of the defendants. I disagree.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 14 1 I think the rules and common sense indicate 2 all of the motions to dismiss should provide the 3 opportunity for all of the parties to effect a joinder. 4 Some of the other defendants may very well feel that the 5 second amended complaint is filed and served that they want 6 to react to it and amend their pleadings likewise. 7 So I am going to adjourn all of the motions 8 to dismiss pending the service of the second amended 9 complaint. 10 How much time do you want for filing, and 11 how much time do you want for a response? 12 MR. COLOMBO: Today is Thursday. I guess 13 by Monday. 14 THE COURT: Are you sure you want Monday? 15 There should be follow-up facts coming 16 MR. LEVANDER: It takes 30 days to make a 17 motion after that. 18 THE COURT: Yes. Are you sure you want a 19 month because there seems to be more factors and facts 20 coming out in connection with that grand fraud almost every 21 day? If you want a month, I will give you a month. 22 MR. COLOMBO: I am not going for a month, 23 Your Honor. 24 THE COURT: I don't want to be faced with 25 any continuous motions to amend based upon the latest new
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 15 1 fact that comes out. 2 MR. COLOMBO: I understand that and we are 3 sensitive to that. 4 Let's say a week. 5 THE COURT: Very well. 6 MR. LEVANDER: And then 30 days from that. 7 Thank you very much. 8 MR. GOTHOFFER: My name is Lance 9 Gotthoffer. And with me today, Your Honor, is John Scott 10 and James McCarroll from the law firm of ReedSmith 11 representing Bart Schwartz, the New York State appointed 12 receiver for the Ariel fund and the Gabriel fund. 13 Your Honor, I understand your point. I do 14 want to say we would be happy to proceed today on argument, 15 if Your Honor will permit that, but if Your Honor has made 16 up his mind that you wouldn't permit that -- 17 THE COURT: When you see where they are 18 coming from, you may be closer to the road. 19 MR. GOTTHOFFER: I am ready to go now or 30 20 days, as the Court may prefer. 21 THE COURT: Okay. 22 MR. SHEEHAN: Your Honor, we now have on 23 the agenda a number of fee applications for this morning. 24 Just to quickly review them. There are eight separate 25 applications with regard to international counsel that have
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 16 1 been essentially retained by the trustee and are in various 2 jurisdictions throughout the world. 3 We had the application by Lee Richard, 4 former receiver for BLMIS and his counsel as well as for 5 Alix Partners, his consultant. 6 We also have an application by Windels 7 Marx, the special counsel retained by the Trustee. 8 We also, of course, have an application by 9 Mr. Picard as trustee and by Baker Hostetler as his 10 counsel. 11 What I would propose to do, Your Honor, is 12 to move as quickly as I can to the ones to which there is 13 no opposition. 14 I will start first with the eight 15 applications that were filed in connection with the 16 international counsel that was retained by the Trustee. 17 Very briefly, Your Honor. As you well 18 know, as you say, not only from the newspapers report but 19 the reports filed by Court there are many actions that are 20 pending throughout the Caribbean and Europe with regard to 21 assets that we claim are part of the estate. 22 THE COURT: I said media, I didn't 23 necessarily say newspapers. 24 MR. SHEEHAN: I am just an old-timer so 25 that is where I get most of my news. What could I say?
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 17 1 In any event, Your Honor, those 2 applications are all predicated upon the fact that in each 3 of those jurisdictions and Gibraltar is one I know you are 4 familiar with because we came before Your Honor to seek 5 your assistance with regard to the enforcement of our 6 action here in New York, that we have retained local 7 counsel to assist us with regard to 75 million dollars, 8 Your Honor, that is sitting in the accounts of the bank, of 9 which there are two banks. 10 But in any event, Bank Safra, and they are 11 holding their firms pursuant to the direction of the 12 Gibraltar court, and we have a fairly sophisticated fight 13 going on with regard to the Chapter 15 issue with respect 14 to the fact that we think we will come back before Your 15 Honor where there is local, criminal as well as civil and 16 the bankruptcy considerations that are in play. That Your 17 Honor just highlights the need for that special counsel to 18 assist us in that jurisdiction. 19 You would go through each of the others, 20 Your Honor, and I wouldn't take up the Court's time this 21 morning because we have submitted it in our Trustee's 22 report, that each of those jurisdiction in which we became 23 counsel, similar actions are pending. They are all in 24 different unique forums, in the liquidating action in 25 Bermuda, and in BVI and in the individual actions in the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 18 1 Cayman Islands. 2 All of that has required us to institute 3 proceedings on behalf of Mr. Picard to appear given the 4 fact there are assets there. 5 As Your Honor knows, in a case such as 6 this, one of the things we have difficulty in doing is 7 tracing all those assets, that they go through different 8 transferees, and we have been successful in identifying a 9 number of those assets, and hopefully we will be successful 10 in retrieving them and bringing them back into the customer 11 funds and property. But without the assistance of these 12 counsel, I don't think we could accomplish that task. 13 So, Your Honor, I would move and they are 14 not opposed, all eight applications and I could read into 15 the record the various firms. 16 There is an application for interim 17 professional compensation for Attias & Levy; for Eugene F. 18 Collins; for Lovells LLP; SCA Creque, for Higgs Johnson 19 Truman Bodden & Company; for Williams Barristers & 20 Attorneys, for Schifferli Vafadar Sivilotti, for Schiltz & 21 Schiltz. And those are the firms, Your Honor, I would 22 respectfully move for their application for interim 23 compensation. 24 THE COURT: Does anyone else want to be 25 heard?
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 19 1 MR. BELL: Kevin Bell, on behalf of the 2 Securities Investor Protection Corp. 3 SIPC has reviewed each and every 4 application, and all the time records associated therewith, 5 and has filed its recommendation in support of each of 6 those applications of the international special counsel, 7 and we would ask the Court to approve the applications as 8 filed. 9 THE COURT: I note that after doing a 10 little look-see into all of them, most of them have 11 voluntarily given a public interest discount. 12 MR. SHEEHAN: That is correct. In each 13 instance it is that we demand, quite frankly that each 14 counsel be retained, make a 10 percent discount because it 15 is a case in the public interest. 16 THE COURT: What is it about it that makes 17 you think they don't take that into account? 18 MR. SHEEHAN: Your Honor, my cynicism and 19 yours are of equal stature. I don't think I could do much 20 more than that, but I agree it is a possibility. 21 In any event, at the end of the day they 22 also have a 20 percent holdback as is normal in the case of 23 people who work as special counsel and counsel to the 24 Trustee. So I believe, and probably most importantly 25 something I should emphasize this morning, in addition to
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 20 1 the discount, having been subjected to the scrutiny of 2 SIPC, and Your Honor has before you unredacted all of our 3 time records, we maintain and also we maintain through 4 international counsel very, very detailed reports of all 5 the time that is being spent. 6 So I know that good scrutiny is being 7 brought to all of those applications and Your Honor. So I 8 know that we in our office review them and sometimes feel 9 like corporate counsel reviewing records of retained 10 counsel around the country, but we do review all those 11 records as well. 12 We have modified those and reject the time 13 entries by them, et cetera, et cetera. 14 So all of these things are subject to I 15 good real scrutiny not only by our firm but by SIPC before 16 they ever reach Your Honor's desk. 17 THE COURT: Well, then upon those 18 representations it would appear that the amounts requested 19 are reasonable and based upon the services rendered, and I 20 will approve the application. 21 MR. SHEEHAN: Thank you, Your Honor. 22 The next application, Your Honor is that of 23 Windels Marx. This is a law firm represented to you by 24 Alan Nisselson and Regina Griffin. 25 Mr. Nisselson, as Your Honor will recall
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 21 1 from the early history of this case was appointed as the 2 Chapter 7 Trustee for Bernard L. Madoff. 3 We moved for a substantial consolidation on 4 behalf of Mr. Picard. A consent order was arrived at 5 after much diligence it was engaged by Mr. Nisselson with 6 regard to the preparedness of that application. 7 At the end of the day, Your Honor, Mr. 8 Nisselson's firm was then retained as special counsel to 9 the Trustee. And if I may, Your Honor, just to tell you, 10 since that time we have worked, very, very cooperatively 11 with Mr. Nisselson, Ms. Griffin, and other partners and 12 associates in that firm. 13 As Your Honor well knows, that has yielded 14 the fruit of the BLMIS Air, Chapter 11, what is before Your 15 Honor, which is a very complex attempt to rename the asset 16 known as the aircraft, a 30 million dollar jet that Mr. 17 Blumfeld and Mr. Bernard Madoff purchased through a variety 18 of different LLCs and, hopefully, at the end of the day 19 that asset will be fully realized and returned to the 20 estate, and the Windels Marx firm is handling that as well 21 as a number other difficult situations in which Mr. Madoff 22 embedded himself as the principal owner, utilizing the firm 23 of BLMIS to carry the ball and get his interest, and 24 obviously it should come back to the estate. 25 What isn't so obvious is the fact that he
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 22 1 has created these corporate structures that must be 2 penetrated, dissected and then revealed as to what those 3 interests are, how the money should be returned. 4 We have asked Windels Marx to, because of 5 Mr. Nisselson's continuing role as for a limited purpose as 6 Your Honor will recall, utilizing his stature as a Chapter 7 7 Trustee for Mr. Madoff, continuing in that role, he in 8 these particular instances has, we believe, added strength 9 and value in terms of appearing together as counsel to Mr. 10 Picard in retrieving those assets for the estate. 11 And there is no objection to this, Your 12 Honor. 13 THE COURT: Does anyone else want to be 14 heard? 15 MR. BELL: Your Honor, SIPC is in support, 16 has reviewed the applications and time records, and would 17 note that is in the international counsel, there is a 10 18 percent public interest discount and SIPC has submitted its 19 recommendations in support of the application as filed. 20 THE COURT: Well, I was originally 21 concerned with respect to the consolidation that there 22 would be a redundancy, and apparently it has worked out 23 well. There is more efficiency in the way the structure 24 of the two estates, the combined estates have operated, and 25 I am satisfied with the application.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 23 1 MR. SHEEHAN: Thank you very much, Your 2 Honor. 3 The next application, Your Honor, is also 4 unopposed. It is an application by Mr. Richards and his 5 firm representing Alix Partners. 6 Mr. Richards, I believe, will present that 7 application. 8 MR. RICHARDS: Good morning, Your Honor. 9 THE COURT: Good morning, Mr. Richards. 10 MR. RICHARDS: I was appointed a little 11 over a year ago to serve as the SEC's receiver. I served 12 in that capacity for a month or so until the SIPC trustee 13 was put in place and then in London, the provisional 14 liquidators was put in place. 15 We made our application for deeply 16 discounted fees. I believe they have been reviewed by 17 SIPC, and I believe there is a consent by SIPC and we would 18 otherwise rest on our papers, unless Your Honor has any 19 questions. 20 THE COURT: Does anyone want to be heard? 21 MR. BELL: Your Honor, Kevin Bell for SIPC. 22 I believe SIPC has reviewed these 23 applications, Your Honor, and the time records and has 24 engaged in intensive discussions with the receiver as 25 counsel, and has submitted its recommendation in support of
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 24 1 the applications as filed and we would recommend, Your 2 Honor, that the court approve them as filed. 3 THE COURT: I will grant the applications, 4 but I have one question. Alix Partners is no longer 5 connected with the case or are they still being retained 6 under the aegis of the SIPC trustee? 7 MR. PICARD: They continued working for 8 the trustee. They are a claimant. 9 THE COURT: This application relates to 10 these services to the receiver. 11 MR. PICARD: That is correct. With 12 respect to their work for me, they are pursuant to the SIPC 13 statute. 14 THE COURT: I was only curious because I 15 saw this denominator as a final application. 16 MR. PICARD: It's only final as the 17 receiver. 18 THE COURT: The application is granted. 19 MR. BELL: Thank you, Your Honor. 20 MR. SHEEHAN: Thank you, Your Honor. 21 MR. PICARD: Good morning, Your Honor. At 22 the outset I would like to suggest that you don't believe 23 everything you read or hear in the media because of -- 24 THE COURT: I don't necessarily believe 25 everything I read in the papers that are submitted to me
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 25 1 either. 2 MR. PICARD: I wasn't going there. 3 MR. SHEEHAN: Touche. 4 MR. PICARD: I will speak to my own 5 application, and Mr. Sheehan will speak to the Baker 6 Hostetler application. 7 My application as well as the firm's covers 8 a five-month period through September 30. After giving 9 effect to the 10 percent discount which he referred to and 10 a write-off of approximately 225 hours, I am seeking 11 $835,605, of which $710,264.25, would be paid currently. 12 And, Your Honor, $125,340.75 will be 13 deferred to a later point in the case. 14 I am also requesting a reduction of the 20 15 percent holdback to 15 percent. That was originally set 16 in the Court's order of February 25. 17 These requests have been approved by SIPC. 18 They filed a recommendation in the last couple of days. 19 As Your Honor is aware, SIPC has been 20 paying all of the administrative costs, one of which would 21 include these fees and prior fees and the other fees that 22 you have granted today. 23 MR. PICARD: Under the statute when SIPC 24 has a goal in the statute it pays whenever it seems to be 25 the rule.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 26 1 There are a couple of things I would like 2 to state for the record, and this goes to some 3 misinformation, Your Honor, that has been out in the public 4 domain, some of which I had said at prior hearings. 5 Number 1, no costs of administration are 6 paid from the recoveries we make for the benefit of the 7 customers. The costs of administration in this case, Your 8 Honor, are paid by SIPC. 9 Number 2, the percentage fee schedule, 10 which applies in a Chapter 7 or a Chapter 11 bankruptcy 11 case does not apply in a SIPC liquidation. So, therefore, 12 I am not getting 3 percent as has been reported continually 13 both in the press and other places, Your Honor. 14 The 3, Your Honor, are whatever amounts you 15 award to me are paid over to the firm. I do not keep 16 them. There are -- 17 THE COURT: I have to assume the firm pays 18 taxes on it. 19 MR. PICARD: I would assume that is 20 correct, Your Honor. 21 THE COURT: And you, too. 22 MR. PICARD: I do when the firm pays me. 23 As far as I know, there has been one docketed objection, 24 and there have been a couple of letters that have been 25 sent. One of the objections is primarily focused on the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 27 1 net equity issues making complaints that I believe are more 2 appropriate to be heard on February 2 and not in connection 3 with this fee application, Your Honor. 4 We did file a response yesterday to the 5 various objections and I will rest on that response. But 6 as noted there, Your Honor, some of the issues that are 7 raised you previously have ruled on. They are raised 8 again. I submit that the prior rulings in some cases 9 don't even apply to this case, Your Honor. 10 One of the objections specifically contends 11 that collecting assets in this case was easy. I beg to 12 differ. I did not see the banks or the Depository Trust 13 Clearing Corporation come to our door and offer to 14 surrender the money and securities that they were holding 15 in the name of BLMIS. In fact, it took a lot of time and 16 effort to get those assets back and certainly under the 17 circumstances it's not surprising that they weren't lining 18 up at the door. 19 But, Your Honor, it took time, effort and 20 we came to Court with a number of motions and applications 21 and stipulations that Your Honor may recall back to the 22 early part of the year. 23 Another apparent misconception or one that 24 I have heard and that, quite frankly, I was surprised of 25 was the price was raised in a congressional hearing last
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 28 1 week is that I have sued individuals for at least $700 2 million. 3 That is totally wrong, Your Honor. The 4 only individuals other than the 14 major cases that we have 5 brought, the only individuals who have been sued by me have 6 been sued in counterclaims in response to a complaint that 7 was filed against me. 8 The issue there, Your Honor, is we could 9 not lose the opportunity by not counterclaiming when we 10 answer to be able to bring a lawsuit or to be able to 11 pursue matters down the road. 12 That meant in the matters now pending, an 13 agreement by the parties, in not moving forward. So I 14 would just like the record to reflect we have not sued the 15 smaller individuals as has been reported. 16 Moving to claims, Your Honor. We have 17 received more than 16,200 claims. Of that number we have 18 determined 11,568 as of Tuesday. That is approximately 71 19 percent, Your Honor. 20 We have committed over 563 million dollars 21 of the SIPC funds based on the cash in and cash out 22 methodology. 23 While I am not going to address that issue 24 today, Your Honor, the record should reflect that I have 25 informed customers publicly and in determination letters
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 29 1 that if the Court finally determines that the way we are 2 dealing with claims is erroneous, we will go back and we 3 will revisit all the claims' determinations whether or not 4 a party has filed an objection. 5 Your Honor, during the compensation period 6 we implemented a hardship program in an effort to move 7 forward people who were in tremendous need, whether they 8 had medical problems, were losing their house to 9 foreclosure, and various and sundry other means that were a 10 problem that we could recognize, and we only got 317 11 applications. Those have been moved through the system as 12 best as we could. 13 Many of them have been determined. Many 14 have been allowed. 15 As I indicated through counsel, I have 16 started 14 pieces of litigation for approximately 15 17 billion dollars. They are primarily fraudulent 18 transactions. Without litigation we have already 19 recovered 240 million dollars in preferences. 20 These are people who have come forward. 21 One was a stipulation that Your Honor heard a number of 22 months ago. That has now been fully paid up and most of 23 the others are being handled through the claims process in 24 accordance with procedures that Your Honor fixed in the 25 claims procedure order signed last December.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 30 1 We are hopeful, Your Honor, in the near 2 future we will have some substantial recoveries of some 3 other matters. We will bring them to the Court to the 4 extent we have to do that and otherwise we will certainly 5 let the public, the people who are interested in the case, 6 know about them. 7 Getting back specifically to my 8 application, Your Honor. The four major areas in which I 9 expended time during the period account for about 68 10 percent. There are claims reviews, and case 11 administrations, the Bankruptcy Court litigation and the 12 Trustee's investigation. 13 Your Honor, another approximately 12 14 percent of the time has been spent in avoidance actions, 15 asset searches and dealing with the United States 16 Attorneys' Office. 17 I would like to let the Court know that 18 with respect to the U.S. Attorney's office we have a 19 cooperative program, if you will, and that is not to say 20 from time to time there aren't some little humps that we 21 each have to get over, but we have had good communications 22 and we are both progressing and doing what we each have to 23 do. 24 As I have noted earlier, there are 25 insufficient funds in the estate. So SIPC will be paying
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 31 1 these fees and paying the costs of administration as it has 2 all along. 3 I would be happy to answer any questions, 4 if you have any. 5 THE COURT: Does anyone want to be heard? 6 MS. VALLETTA: Yes, Your Honor. My name is 7 Chryssa Valletta, from the Phillips Nizer law firm. We 8 represent the objectants, Diane and Roger Peskin, Maureen 9 Ebel and various other customers. 10 I would just like to say our papers 11 constitute an offer of proof and we respectfully request an 12 opportunity to have an evidentiary hearing in which we 13 could prove the facts set forth in our objection and proofs 14 that fees should be disallowed and the trustee should be 15 disqualified and that of his counsel. 16 Other than that I rest on my papers unless 17 Your Honor has any questions. 18 THE COURT: Thank you, I have no questions. 19 MR. BELL: Your Honor, SIPC is here in 20 support of the Trustee application. As you have noted 21 before, the Trustee has taken a 10 percent service 22 discount, that is the Trustee and all counsel in this case. 23 SIPC supports the reduction of the holdback 24 of 20 percent to 15 percent going forward and backward, 25 adjusting the Court's order of monthly compensation
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 32 1 procedure order of February. 2 Your Honor, I would like to emphasize at 3 this point in time in the liquidation proceeding, SIPC 4 agrees with the Trustee that there is no reasonable 5 expectation that the general estate will be sufficient. 6 SIPC all along has hoped that we will move 7 from the word "shall" to "may" in the preparatory language 8 on the compensation. But at this point in time, SIPC 9 agrees with the trustee that there is no reasonable 10 expectation that there will be any money put for general 11 creditors or that SIPC will be repaid any of the money in 12 advance to pay all of the administrative expenses, both the 13 fees and costs of this case. 14 I would further state that some of the 15 objectors's points were made to Congress last week that 16 there be suggested changes in the SIPA statute. 17 I think within hours of those suggestions, 18 Congress passed minor amendments and at least the House of 19 Representative left the statute standing including all 20 provisions with regard to fees that the Court would be 21 acting under. 22 THE COURT: Well, there has been a 23 response to the objections that have been filed and, 24 frankly, I would be a little bit surprised if there was the 25 support for the response given to the respondents long
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 33 1 term. 2 Frankly, the Trustee's response and their 3 presentation today makes it clear that there is nothing in 4 the objection to the Trustee's fees or the fees of Baker 5 Hostetler that creates issues even that I haven't addressed 6 previously, nor do they raise any sufficient concerns that 7 this Court should order some kind of an evidentiary 8 hearing. There is backup in connection with that. 9 And some of the objections while 10 cosmetically look somewhat appealing are bordering on the 11 frivolous. The Trustee is charged with the mission of 12 going out to hunt out for assets and under in a case like 13 this that hunt is not easily achieved. 14 For example, objections to the use of 2004 15 subpoenas on a broad base is something that is almost basic 16 that it is a requirement of a case like this and the 17 objection on that ground that the Trustee is too aggressive 18 doesn't resonate with appropriate sincerity. 19 I am aware that the objectants have a 20 position which they articulated in the past and in the 21 media and before me, and the issues that are there are the 22 ones that will be dealt with appropriately when that is a 23 complete joinder and when I have all of the issues before 24 me I can make the appropriate determinations. 25 So, I am going to overrule the objection on
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 34 1 basically the same ground that I have done previously, and 2 I find nothing new in the current objection that overlaps 3 the original rulings. 4 I do overrule the objections at this point. 5 MR. SHEEHAN: Your Honor, what remains is 6 only the application of Baker Hostetler. Your Honor is 7 fully familiar with the record. I don't intend to cover 8 that again. 9 I think the Trustee this morning has 10 addressed most of the objections that were raised by the 11 other side. 12 THE COURT: And the other side has rested 13 on those papers and I already responded. 14 So, does anyone else want to be heard? 15 There were two letter objections. 16 MR. SHEEHAN: There were, Your Honor. 17 MR. PICARD: Your Honor, with respect to 18 one of them, the person who wrote the letter was not a 19 customer. But the customer to whom that person is related 20 has had his claim determined and allowed and that includes 21 the $500,000 SIPC advance. 22 MR. SHEEHAN: Unless you want to hear 23 something further from me, and I am more than happy to do 24 that, we are concluded. 25 THE COURT: Does anyone else want to be
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 35 1 heard? 2 The applications are granted. 3 MR. SHEEHAN: I have multiple sets of 4 orders and a disk with all of the applications for Your 5 Honor's consideration. 6 THE COURT: I will entertain it. I have 7 approved the order. 8 MR. SHEEHAN: Thank you very much, Your 9 Honor. The SIPC trustee thanks you, Your Honor. 10 * * * 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 36 1 C E R T I F I C A T E 2 3 STATE OF NEW YORK } } ss.: 4 COUNTY OF NEW YORK } 5 I, MINDY CORCORAN, a Shorthand Reporter 6 and Notary Public within and for the State of New York, do 7 hereby certify: 8 That I reported the proceedings in the 9 within entitled matter, and that the within transcript is a 10 true record of such proceedings. 11 I further certify that I am not related, by 12 blood or marriage, to any of the parties in this matter and 13 that I am in no way interested in the outcome of this 14 matter. 15 IN WITNESS WHEREOF, I have hereunto set my 16 hand this 19th day of December, 2009. 17 18 ______MINDY CORCORAN 19 20 21 22 23 24 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 EXHIBIT D 1 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------x In re:
BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Index No. 08-01789(BRL) Debtor. ------x IRVING H. PICARD, as Trustee for the Liquidation of BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Plaintiff, Adv. Pro No. 09-1172(BRL) V.
STANLEY CHAIS, et al,
Defendants.
------x
May 5, 2010 United States Custom House One Bowling Green New York, New York 10004
In Re: Hearing
B E F O R E: HON. BURTON R. LIFLAND, U.S. Bankruptcy Judge
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 2 1 A P P E A R A N C E S: 2 3 4 BAKER HOSTETLER, LLP 5 Attorneys for Irving H. Picard, SIPA Trustee 6 and Counsel for the Trustee 7 45 Rockefeller Plaza 8 New York, New York 10017 9 BY: MARC E. HIRSCHFIELD, ESQ. 10 -and- 11 DAVID J. SHEEHAN, ESQ. 12 -and- 13 PAUL EYRE, ESQ. 14 -and- 15 IRVING PICARD, ESQ. 16 17 LOEB & LOEB LLP 18 Attorneys for Picard v. Chais 19 Counsel for Stanley and Paula Chais 20 345 Park Avenue 21 New York, New York 10154 22 BY: EUGENE R. LICKER 23 -and- 24 WALTER H. CURCHACK, ESQ. 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 3 1 2 APPEARANCES: (Continued) 3 4 5 WINDELS MARK LANE & MITTENDORF, LLP 6 Attorneys for Alan Nisselson Chapter 7 Trustee 7 156 West 56th Street 8 New York, New York 10019 9 BY: ALAN NISSELSON, ESQ. 10 -and- 11 REGINA GRIFFIN, ESQ. 12 13 14 15 SILLS CUMMIS & GROSS P.C. 16 Attorneys for Chais Related Parties 17 One Riverfront Plaza 18 Newark, New Jersey 07102 19 BY: PHILLIP WHITE, ESQ. 20 -and- 21 ANDREW H. SHERMAN, ESQ. 22 23 24 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 4 1 2 APPEARANCES: (Continued) 3 4 5 BECKER & POLIAKOFF, LLP 6 Attorneys for Peskin, et al 7 45 Broadway 8 New York, New York 10006 9 BY: PETER W. SMITH, ESQ. 10 11 12 SECURITIES INVESTOR PROTECTION CORPORATION 13 805 15th Street, Suite 800 14 Washington, D.C. 20005 15 BY: KEVIN H. BELL, ESQ. 16 17 18 KLESTADT & WINTERS, LLP 19 Attorneys for Michael Chasalow 20 International, Inc. 21 292 Madison Avenue 22 New York, New York 10017 23 BY: TRACY L. KLESTADT, ESQ. 24 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 5 1 PROCEEDINGS 2 THE COURT: Bernard L. Madoff Investment 3 Securities, Debtor; Irving H. Picard, as Trustee versus 4 Stanley Chais, et al. 5 MR. SMITH: Good morning Your Honor. 6 MR. SHEEHAN: Good morning. For the 7 record, David Sheehan with Baker Hostetler for Irving H. 8 Picard, as Trustee. With me our my two colleagues, Marc 9 Hirschfield and Paul Eyre. Each of us will respectfully 10 handle a certain portion of the Chais applications as I 11 refer to them. Today we will be dealing with all the 12 defendants. I guess the best way to put it, is that I we 13 will dealing with the Chais applications that are due March 14 8. There are two other applications out there that will be 15 dealt with in today's hearing by my colleagues. 16 MR. WHITE: Good morning, Your Honor. 17 THE COURT: Good morning. 18 MR. WHITE: My name is Phillip White, and 19 with me is my colleague Andrew Sherman. I think we 20 represent most of the defendants that Mr. Sheehan is 21 talking about. We represent about 46 individuals and 22 entities that are listed, and there are some stipulations 23 that we will file with the Court. It be would be hard for 24 me to list them all here. I would call them the Chais 25 related parties as to distinguish it from the fact that we
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 6 1 do not represent Mr. Stanley Chais, individually, himself. 2 MS. KLESTADT: Tracy Klestadt, from the 3 law firm of Klestadt & Winters. I represent Michael 4 Chasalow. 5 MR. WHITE: I guess the first order of 6 business is our motion to dismiss under 12(b)(6) for 7 failure to state a claim. 8 I gather that we have agreed what we will 9 do is handle the motion seriatim so that would be first on 10 the agenda. And the motion we filed on behalf of Mirie 11 Chase to dismiss for lack of personal jurisdiction would be 12 handled fairly quickly. 13 THE COURT: Sure. 14 MR. WHITE: I guess I am better off at the 15 podium. Is that what you would prefer, Your Honor? 16 THE COURT: Whatever make you comfortable. 17 MR. WHITE: I am new to the Bankruptcy 18 Court, Your Honor. I would like to thank you for hearing 19 me and forgive my lack of experience in your courtroom. 20 THE COURT: It is the same as every other 21 courtroom in the circuit that I know of except for the 22 Court of Appeals. 23 MR. WHITE: Well, that is good to know, 24 Your Honor. 25 THE COURT: We don't have lights that cut
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 7 1 you off. Sometimes I cut you off. 2 MR. WHITE: My intention is to be 3 relatively quick, frankly, Your Honor, because I don't 4 think counsel's role in the motion to dismiss is to go over 5 everything that is in the briefs. 6 The Court is well aware of the intricacies 7 of the laws of fraudulent conveyances, and other issues 8 that Your Honor may have that you would like to question me 9 about. I don't intend to spend much time doing that kind 10 of thing. 11 I would like to try to focus the Court on a 12 couple of key things that made this motion to dismiss 13 different than the run of the mill. We all as litigators 14 are very accustomed to people getting sued and it feels 15 almost like an ordinary event. Fraudulent conveyance I am 16 told by my colleagues in the bankruptcy bar is not an 17 extremely serious type of allegation. 18 To me I want to ask the Court as I have to 19 suspend that feeling of routineness for a moment and put 20 yourself in the place of the children of Stanley Chais who 21 I do represent with the exception of Mr. Chasalow, who are 22 just ordinary people. Obviously, very wealthy before 23 December of 2008, but who are human beings. 24 In December of 2008 they woke up one 25 morning and find out their lives are changed because Bernie
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 8 1 Madoff turned out to be a pretty bad guy taking along other 2 people's money. 3 You know what? They went to work that day 4 like other people and I suspect they got some sympathy and 5 whatnot from their colleagues in their community a few 6 months later though the complaint that has been filed here 7 trickles out and the result is probably very different. 8 Here they are accused of being active 9 participants in what is the largest, ugliest Ponzi scheme 10 in the history of the United States. 11 And while we may think of a fraudulent 12 conveyance as a kind of routine thing this complaint 13 alleges that they, in fact, stole $300 million of innocent 14 victims. 15 We should look at the 9(b) element, which 16 is the first one of the elements I would like to look at. 17 From the perspective of people who are 18 individuals, there are, of course, lots of entities I 19 represent as well, who are faced with that problem, these 20 people eventually see the complaint and they say, oh, my 21 goodness, what have I done. 22 What does this complaint tell me about what 23 evil things I have done to be lumped in with Bernie Madoff, 24 and perhaps my father who turns out to be allegedly not a 25 particularly good guy either.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 9 1 When you look at the complaint, and I have 2 read it a few times, it doesn't say much. It looks like 3 at the end of the day that these people are accused of 4 really the same things that any other investor in the 5 Madoff transactions have been. They had accounts. We 6 don't deny that. 7 They had distributions, quite substantial 8 distributions as it turns out. 9 The only other allegation is that in there 10 they had a famous father who turns out to be alleged to 11 have been very close with Bernie Madoff and had done some 12 bad things. 13 The rest of what is in the complaint has 14 nothing to do with them. I would suggest to the Court 15 that the purpose of Rule 9(b) is to protect people like my 16 clients from this kind of overreaching. 17 They are supposed to be given particular 18 notice of what it is they did, not of what other people 19 did. 20 So when you think about, it is the 21 complaint alleges all kinds of things about what Stanley 22 Chais did, outsized returns, manufactured losses, 23 fabricated transactions, and the like. 24 There is no allegation that my people knew 25 about them, did them, ever spoke to Mr. Madoff or either,
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 10 1 never mind about their accounts or about these 2 transactions, or directed anything or what have you. 3 They are like anyone else, Your Honor, any 4 other investor who received distributions from Madoff. 5 Yet, they are treated completely 6 differently, Your Honor. So to me it is really incumbent 7 on the Court here to do the gatekeeper function that 9(b) 8 contemplates. 9 I represent some 46 individuals and 10 entities. There is not one allegation other than the 11 amounts that were withdrawn from the various accounts that 12 pertains to their specific situation. The ones about what 13 Mr. Chais did or did not do, but there is no allegation 14 that they knew him. The ones about the so-called red 15 flags that related to what general creditors, ordinary 16 folks might have known, is not specific to them. 17 Even the allegations that relate to some of 18 the specific transactions in what are called the Chais 19 family accounts, they might relate to one of the 40 people 20 or so that are the entities I represent but not to all of 21 them as a whole. 22 They are treated as some kind of monolithic 23 evil empire in this complaint and the reality is they are 24 not and there is no basis in the complaint for doing that. 25 I would urge the Court that given the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 11 1 structure of the complaint to say to the Trustee, look, you 2 have overreached here with regard to these defendants. 3 You could have treated them differently, not alleged they 4 were active participants. Not made claims for actual 5 fraudulent based fraudulent conveyances. You chose not 6 to. You have the obligation to come forward with the 7 goods on what each individual and each entity is alleged to 8 have done or to have knowledge of in those circumstances, 9 you can't treat them all as if they are extensions of the 10 family of Chais. 11 Now, the complaint deals with that a little 12 bit by saying that Stanley Chais and all of my clients are 13 alter egos of one another. 14 Well, the New York Law Department does not 15 that I am aware of and there has been no case cited by the 16 Trustee in his opening papers that suggests a human being 17 can be the alter ego of another human being. Nor does the 18 complaint make any of the allegations that are normal to an 19 alter ego or piercing of the corporate veils type of 20 transaction, all of which would be subject to 9(b) and 21 which have a very heightened pleading standard. 22 So rather when we point this out in the 23 moving papers, rather than going back an amending the 24 complaint or explaining what further explanation there 25 would be or what have you, they respond by changing the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 12 1 issue. No longer are they saying that they solved the 2 problem of lack of specificity by alter ego kind of 3 allegations. They switched it. They say we are changing 4 to agency now. Stanley Chais was the agent of all the 5 individuals and entities that Mr. White represents. 6 That is not even in the complaint. So the 7 appropriate means for that, if they would have a basis for 8 that would be first totally inconsistent with the idea of 9 alter ego because in an alter ego claim, of course, the 10 person in charge of this case alleges that Stanley Chais 11 controls all the entities. In an agency arrangement the 12 entities control the agent. 13 It is the complete opposite of one another. 14 There is no way this complaint could have given anyone 15 notice of that set of allegations and switching in 16 midstream without pleading it is not a fair game. It 17 certainly can't satisfy the exigency requirement of 9(b), 18 Your Honor. 19 So, Your Honor, that is the main problem, 20 that all these people are lumped together as an entity. 21 This is no explanation of who did what. And there is no 22 allegation that anyone did anything that is actually wrong. 23 On that basis all of the claims that are 24 predicated on actual fraud should be ripe for being 25 dismissed.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 13 1 Frankly in this case at this point, the 2 normal repleading should not be done here. It is over a 3 year later, if there are any new factual allegations that 4 is coming in, I think the Court should be assuming what the 5 in complaint is the best they should do otherwise they 6 couldn't amend it. 7 Let me move on to the next point. For 8 every one of these fraudulent conveyance complaints, there 9 needs to be an allegation in each of the claims that each 10 of the entities was a net winner. That is a requirement 11 in the context of a fraudulent conveyance claim. It is a 12 Ponzi scheme. We don't dispute that. 13 The opposition papers make a great deal of 14 how we are complaining or trying to argue the net equity in 15 a different format. We didn't even submit papers with 16 regard to the net equity argument and my point is, the 17 Court has, of course, decided the method of calculation 18 that is going to be used, but it doesn't matter what method 19 the Court decides one way or the other for net equity. 20 The point is you can't figure out if you 21 are a net winner or loser other than on an account by 22 account basis, and by subtracting the amount that is 23 alleged to have deposited against the amounts that are 24 alleged to have been withdrawn. 25 In the circumstances where many of these
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 14 1 accounts predate according to the allegations of the 2 complaint the creation of Madoff's Ponzi scheme in the 3 early '90s. The complaint itself proves that there has to 4 be some actual deposits made in these accounts that would 5 be offset against the withdrawals. There is no 6 allegations about any of that. 7 What there is a very lengthy list of 8 withdrawals that were made by my client and an allegation 9 well, they total up to some $300 million. It must be more 10 than they put in and so, therefore, they must be net 11 winners. 12 That is not enough, Your Honor. It gives 13 no individual defendant notice of what it is being accused 14 of. They are not part of one giant scheme. They are 15 individual trusts and human beings that had various 16 different accounts that are entitled to be given notice for 17 the amounts that they are alleged to have put in versus the 18 amounts they are alleged to have taken out. 19 So, therefore, there could be some 20 calculation by whatever means of net equity. It is a 21 pleading fall-out, just like the failure to do 9(b) and 22 satisfy the specificities, to fail to allege property net 23 equity and even if there is net equity, other than in a 24 conclusory aggregate sort of way. 25 The last point I want to point out to the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 15 1 Court is the issue about the statute of limitations and how 2 it works in this circumstance. 3 Your Honor, first of all, the main point I 4 am trying to get to is there cannot be claims that survive 5 this motion that go back more than six years since the 6 filing of the petition at a minimum. 7 The Court will know we made an argument it 8 ought to be go up to the date of the filing of the 9 petition. I will leave that to the papers, but for the 10 moment let's assume that's the petition date of which six 11 years earlier is the cutoff. 12 The reason is actually relatively simple. 13 As to the New York DCL we all know it is 14 settled law in the Second Circuit, and in New York there is 15 no tolling available for constructive fraud claims under 16 the DCL for fraudulent conveyance. 17 So those claims, Your Honor, are limited to 18 the period immediately preceding the petition at a minimum. 19 I am not going to argue about the five months here. 20 As to the actual fraud claims to the extent 21 there is a claim of tolling that claim of tolling is based 22 upon the fact no one could have discovered it yet, the 23 complaint alleges that anyone could have discovered it. 24 So you can't have it both ways, Your Honor. 25 There is a dichotomy in the allegations of the complaint,
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 16 1 and while people are entitled to plead in the alternative 2 and are entitled to legal theories but not to alternative 3 facts. The facts are the facts. Either these facts were 4 sufficient for a mythical or a hypothetical creditor to 5 have discovered that Madoff was a fraudster or they were 6 not. 7 That has opposite consequences for the 8 Trustee's complaints, on the one hand. If you assume they 9 are on a valid basis on which a reasonable creditor or 10 ordinary creditor could have discovered the fraud, then you 11 do get tolling but you get no constructive fraud claims 12 because then you would have good faith. 13 The other way around, Your Honor, to the 14 extent these things could not have been discovered, you get 15 tolling and no good faith. 16 My point is what that means and what is 17 important from the standpoint from the people I represent, 18 is that the liabilities that they are faced with here are 19 contained to a six-year period that is measurable rather 20 than reaching back to the beginning of Madoff's 21 relationship with Stanley Chais or the beginning of the 22 accounts and entities that are involved here and I think 23 that even at this early stage of the proceeding given the 24 status of the law they are entitled to that comfort because 25 the law provides for it, and the pleadings that the Trustee
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 17 1 has set before the Court does not sufficiently plead any 2 basis for going back more than the six years. 3 Your Honor, if you have any questions,or 4 we could talk about inconsistencies, but I suspect you know 5 more about it than I do from your years on the bench, but I 6 am happy to entertain any questions you have. I wanted to 7 focus the Court on those issue. 8 THE COURT: Thank you. Now, I will hear 9 from the other side. Unless Mr. Klestadt thinks that it 10 is appropriate to speak now. 11 MR. KLESTADT: Your Honor, I have a 12 separate motion for my client somewhat more -- perhaps a 13 couple of minutes of argument if I may. 14 THE COURT: Why don't we just focus on the 15 arguments that have just come up. 16 MR. KLESTADT: Very well, Your Honor. 17 Thank you. 18 MR. SHEEHAN: Thank you, Your Honor. I 19 think actually the beginning and end of Mr. White's 20 argument sort of answers several questions. He spoke at 21 the beginning of ordinary people and that is who he 22 represents, but indeed that is exactly who the Trustee 23 represents in this proceeding. 24 All of the ordinary people who did not get 25 their money back, all of those people at the wrong end of
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 18 1 the Ponzi scheme, not like the ordinary people that got 2 hundreds of millions of dollars of fictitious profits. He 3 represents the ordinary people who lost money in this case, 4 in this Ponzi scheme. 5 In the Ponzi scheme, Your Honor, he should 6 be able to get that money back from the other ordinary 7 people. There is another thing that is important about 8 ordinary people. You and I both know for the year 9 and-a-half in this case there are out there many people who 10 did not know what was going on. They did not have Stanley 11 Chais involved for decades with Mr. Madoff on a virtual 12 daily basis as their dad, as the director of their family 13 trust, as the person who was involved in wide investments 14 throughout Madoff and his entire career practically. They 15 did not have that. 16 They were out there duped totally. I don't 17 have any question in mind that there is out there not one, 18 but many, if not dozens of hypothetical creditors that fit 19 right in that category. They are not hypothetical but 20 very real and they didn't know. 21 Your Honor, those two points I think are 22 very salient in terms of where we should go with the 23 motion. The other thing that really strikes me as I 24 listen to Mr. White, there used to be, and I think it is 25 still true that what we should be doing in a complaint is
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 19 1 giving our adversaries and the defendants a road map, to 2 let them know what is going on, what are we really talking 3 about here. Listening to Mr. White I think we gave them 4 quite a road map. I think he knows exactly what is going 5 on. He knows that Stanley Chais together with his 6 children and all the various enterprises outlined in the 7 complaint were actively involved in investing with Madoff 8 for decades and taking out what they now know to be 9 fictitious profits. We believe, and we have alleged that, 10 in fact, Mr. Chais knew and participated. 11 Just by way of example in the complaint we 12 give several really good examples, we could give dozens and 13 dozens, and I don't know if anyone asks us to prove that in 14 our complaint, but there is more than enough if we only 15 look at the manipulation of the accounts. They are 16 backdated. 17 I don't know much about any investor, 18 sophisticated or otherwise, but certainly Mr. Chais and 19 presumably his family had some degree of sophistication and 20 would realize you really can't call up and change 21 statements six months after the transaction took place. 22 That doesn't happen to ordinary people. 23 That happens to extraordinary people like Mr. Chais and his 24 family. That is why they have been sued. That is why we 25 have outlined to them all of those transactions, dozens and
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 20 1 dozens and dozens of transactions going all the way back, 2 yes, and if you look it goes back into the 1980s. 3 We believe, Your Honor, and we don't have 4 to prove it here today because we are not at a trial but we 5 will at trial prove that the Ponzi scheme went back into 6 the 1980s. 7 In fact, Mr. DePasquale has stated that, 8 and the facts will come in to prove it that Mr. Chais was 9 well aware of it. 10 It is not guilt by association. We can't 11 ignore what is the reality. He wants to bring reality into 12 the courtroom. What is the reality? The reality is this 13 is a family, and they talk to one another, and that money 14 transfers by Mr. Chais from one family account to another 15 family court. He takes fictitious profits and puts them 16 into another family account. He is not doing that 17 willy-nilly on his own. It's done by people who know each 18 other. 19 I don't mean to be facetious when I say 20 this but if this was such an allegation we would allege 21 that there is mishpocha. You know what this means. 22 These people are all family. They all talk to one 23 another. That is obvious from everything that transpires 24 in terms of the transactions in these accounts. 25 Going back to the beginning as it were,
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 21 1 what we have here is we have an allegation -- 2 THE COURT: The argument is it may be 3 obvious and inferred, but it is not in the pleading. 4 MR. SHEEHAN: But, I believe, it is, Your 5 Honor, in this sense it outlines what Mr. Chais did. That 6 is true in some detail, but it also outlines there are 7 things happening in these other accounts, not just in his. 8 It is enough to give you notice. We didn't 9 prove it, I agree with that, but it's enough to give every 10 defendant in this case notice that there were extraordinary 11 profits that should have given you notice, where there were 12 transactions that were backdated, that should have given 13 you notice and not least that there were hundreds of 14 millions of dollars of fictitious profits. 15 They are on the wrong end of the Ponzi 16 scheme, and the mere fact they were in it this long tells 17 the story. There is more than enough in this complaint 18 that incorporates not Mr. Chais, but all of the other 19 participants here. 20 Look at it this way, Your Honor, just the 21 mere fact that they got fictitious profits alone, under the 22 bankruptcy statute as we have alleged, gives us the right 23 to get this money back. Good faith or not, that is 24 fictitious profit. That is what we alleged. 25 We have not, and I agree with Mr. White on
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 22 1 this, given him a final number. That is because that 2 number will be going through some more accounting. We do 3 need their books and records to get their checks. This 4 fraudster, we have really torn apart his records and, we 5 are not sure of every nickel that went in and out. We 6 know hundreds of millions of dollars from 1995 forward was 7 indeed taken, but we need to go back further. We believe 8 it will establish that there is even more than money due 9 and owing, but that is subject to discovery. 10 We have not hidden the fact that it is out 11 there. We are not sort of hiding everything here. 12 Everything is right in front of the entire group. They 13 know exactly what is going on. 14 What will happen after this, after we get 15 past this motion will be the fact this will be ordinary 16 discovery. If has been a year. In the last year we 17 could have had a lot of discovery and been further along in 18 this case. They would have real insight beyond what is in 19 the pleading. But they have more than enough notice in 20 this pleading enough to put together their defense and know 21 what is going. 22 For example, Your Honor, each of these 23 involves a transaction. We have given them all the 24 transactions, we have listed every one of them. 25 That is what is the heart and soul of the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 23 1 case, Your Honor, are those transactions. What more do 2 they want us to do? If Your Honor wishes, and I don't mean 3 this in the way to be pejorative, but it would require 4 hundreds and hundreds and hundreds of pages of a complaint 5 to give you every one of those transactions and outline in 6 a way that we will do in discovery, and they will fully 7 realize everything that is going on. 8 If a pleading requires us to do that, fine, 9 we will go back to the drawing board and do that. We 10 think we gave our adversary a summary of every transaction 11 that is involved, everyone who we are relying upon to prove 12 hundreds of millions of dollars of fictitious profits. 13 That is more than adequate for them to not only have notice 14 but to defend the case. Those are the transactions that 15 are in play. 16 Two other things, Your Honor, before I sit 17 down. Well, there is one point I would like to make, Your 18 Honor, and it is not hitting me. I think I actually hit 19 it already now that I look at any notes, the statute of 20 limitations. 21 I, think first of all, my adversary has 22 conceded that we are right in the six-year period and that 23 six months should not be in play. 24 I think we do believe we have a 25 hypothetical creditor. I do believe we could go back as
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 24 1 far as we can as long as we could establish, and it is our 2 burden and we accept it readily that the Ponzi scheme went 3 back to the date which all these transactions are in play. 4 I believe the law is in the favor of the 5 Trustee here to liberally allow him to go back and gather 6 in all of those fictitious profits, and all of the 7 misbegotten funds from this Ponzi scheme and to bring them 8 back in to be distributed, and given the facts of this case 9 as we have alleged them, I think we are entitled to do 10 that. 11 Thank you, Your Honor. 12 THE COURT: I have one issue that was 13 covered by Mr. White, and I didn't hear your responding to 14 it. The agency theory which you have raised in your 15 brief, that is really not in the complaint itself. 16 Are you relying on this agency theory to 17 demonstrate fraudulent intent or are you really saying that 18 the mere fact of fraud is sufficient in itself. 19 I don't know where are you going in the 20 agency theory. I could concede that both agents and 21 principal are involved in some parts of the transaction, 22 but I have difficulty in trying to separate them, and I 23 don't know where you are coming from in the complaint which 24 is not based on an agency theory but perhaps infers it. 25 MR. SHEEHAN: I think it does, and that is
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 25 1 what we are trying to do in the brief. Putting aside the 2 agency and the fact we develop it, I think you are right 3 about principal and agency here because it can go both ways 4 in this particular setting as facts develop. But it was 5 inferred. We are saying these folks were operating with 6 knowledge of each other because of the fact there is 7 knowledge of those accounts and they are talking to each 8 other about them. 9 THE COURT: The principal and agency 10 theory raises and falls on the degree of control. That 11 would be both ways. I don't know that the complaint 12 spells out the control on the part of the principal being 13 the individual defendants in one issue and Chais being the 14 principal in another context and having control over all of 15 these accounts. 16 It may very well be that discovery points 17 outs that there are agreements, that are oral or written, 18 that give the individual defendants the right to make 19 demands to receive funds. But I don't know that the 20 complaint specifically does that or may be inferred doing 21 that. 22 I haven't heard from you, but you aren't 23 condemned for writing on the theory of agency in your 24 brief, but not in the complaint. 25 MR. SHEEHAN: Well, let me respond very
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 26 1 briefly to that, Your Honor. I agree with you it is not 2 detailed in the complaint. Mr. White points that out as 3 well. As best I think it is, as Your Honor suggests, it 4 is inferred. Clearly, I think we would have the right 5 through discovery to determine through the documents that 6 Your Honor has alluded to whether that exists or not. 7 What we were arguing in the complaint, which I think is a 8 fair argument is the fact that the knowledge that Mr. Chais 9 had, which clearly he had, I don't think anyone is 10 disputing that here, quite frankly, given the fact he was 11 working as he was with his family and doing what he was 12 doing, that knowledge could be imputed. I think we have 13 the right to prove that. 14 That allegation is predicated upon an array 15 of facts, and that is that all these accounts over all 16 these years, the manipulation of those accounts by Mr. 17 Chais, and we do allege that he was in fact manipulating 18 those accounts and directing them. There is no question 19 if in so doing that, he did it with the knowledge of the 20 accounts, and in doing that, that knowledge gets imputed. 21 That is where we are, Your Honor. 22 THE COURT: Okay. 23 Mr. White, do you want to respond? 24 MR. WHITE: Just a couple of quick points. 25 First, it is not our role to dispute what is known or not
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 27 1 known what Stanley Chais did in the proceeding. I feel I 2 would be remiss -- 3 THE COURT: I know Stanley Chais is not a 4 movant for dismissal. 5 MR. WHITE: He is also not my client. He 6 has a lawyer in the room. I presume he will deny the 7 allegations in the claim when the time comes, I don't want 8 the record to stand uncorrected he didn't dispute it. It 9 is not time to dispute it. When the time comes we will 10 have to decide what to do and what is appropriate under the 11 circumstances. We should not take it as a given as it 12 seems as counsel to the Trustee is suggesting that Stanley 13 Chais did all of these things. I don't know whether he did 14 or did not. 15 My facts are as they are alleged in the 16 complaint. Okay, that's fine for now. The question is 17 the sufficiency of the allegation, not the truth of the 18 matter of the facts as they are asserted thus far. 19 It seems to be at the heart of Mr. 20 Sheehan's argument is that this is a family and they talk 21 to each other. I am not sure what else might be implicit 22 in the mishpocha, not having expertise in Yiddish. 23 THE COURT: I don't know how it figures out 24 in the record. I don't know, it wasn't spelled out and I 25 am not sure the reporter knows it.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 28 1 MR. SHEEHAN: I will submit it separately. 2 MR. WHITE: To the extent it is what he 3 says, and there is not something laden in that other than 4 these people are family, the allegation that these people 5 talk to each other. You have to be kidding me, that is the 6 basis of suing someone for $300 million for publicly 7 humiliating them and saying they are were active 8 participants in an ugly scheme like this? They talk to 9 each other because they are family members. By the way, 10 the allegation that they talk to each other is not in the 11 complaint. It didn't get in there. 12 I would like to know what basis for the 13 imputation that Mr. Sheehan talks about that they plead 14 because if all it is, people in families talk to each other 15 it seems to me that Mr. Sheehan needs to or the Trustee 16 needs to know some more about the Chais family before they 17 could make that allegation. 18 THE COURT: Well, his argument is that the 19 complaint is sufficient enough to embark on appropriate 20 discovery. 21 If he fails in the discovery, then he is 22 exposed to a plea for summary judgment. So what we are 23 really dealing with today is whether there is enough here 24 to embark on appropriate discovery. Family relationships 25 as an inference is pretty strong in that regard.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 29 1 To look into those family relationships may 2 be that sufficient pleading here that suggests discovery is 3 appropriate under those circumstances. He may never 4 succeed in showing that these people were nothing more than 5 distantly related people on the street that got the largess 6 of Stanley Chais just because he felt like doing something 7 good for someone. 8 On the other hand, a family relationship 9 and bond might be strong enough to create the inference 10 that there is this relationship. 11 MR. WHITE: Well, Your Honor, I think we 12 have come to a sad day, frankly, by the fact that you are 13 related to someone would allow a quasi-government official, 14 if you will, to force you to the burden of explaining in a 15 public place your family relationships. There needs to be 16 a basis for saying these people knew, and the fact your 17 father is whoever he is, is not a basis standing alone for 18 that or even the proper basis for an inference or pleading. 19 THE COURT: It may very well be that you are 20 correct, but we shouldn't be doing that until there is some 21 discovery. 22 MR. WHITE: I think you have to plead 23 something and have a good faith basis for pleading it. 24 These are things that are missing in the claim. The fact 25 that you are saying they are in the family, it is not that
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 30 1 sort of basis. I would be very disappointed to find out 2 that I could be held responsible for what my father did on 3 the way to work this morning, when he had a car accident. 4 THE COURT: The fact is you are not going 5 to establish it. 6 MR. WHITE: There is a huge expense 7 involved in this kind of discovery that the Court is 8 contemplating. My clients lost all of their money just 9 like all the other victims that Mr. Picard represents, and 10 for them to have to defend what seems to be a lawsuit not 11 based on much more than or other than association, which is 12 like we would like to say, is not a basis in the American 13 system for proceeding, thereby a basis for putting people 14 to the burden of defending this kind of a lawsuit. The 15 Trustee needs to come up with something more, whether the 16 source of the money, meaning whether it came from Stanley 17 Chais or some other person is irrelevant to the purpose of 18 a fraudulent conveyance. The question is what happened in 19 the accounts between Madoff securities on the one side and 20 my clients on the other. 21 The fact that the source of that funding of 22 those accounts came from Stanley Chais is not related to 23 that inquiry. The idea Stanley Chais felt akin to them 24 and gave them money is not part of the fraudulent 25 conveyance analysis. That is a question of showing if that
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 31 1 was intentional and people knew what was going on. If it 2 is constructive that reasonable people would have noticed 3 it. It is a relationship between them and Madoff 4 Securities, not between them, their father and Madoff 5 Securities. 6 I would urge the Court to look past that. 7 Beyond that, Your Honor, I don't think I 8 have anything further to add. At this point I guess we 9 will rest and move on to the next motion. 10 MR. SHEEHAN: I have one brief thing to say 11 just in response to this. It will take only 30 seconds. 12 Sometimes in the course of the argument we 13 seem to lose our way, the basic principles. This is a 14 motion to dismiss. 15 We allege Stanley Chais stole hundreds of 16 millions of dollars. We alleged that is all fictitious 17 profits. We have alleged that all those accounts, dozens 18 and dozens of those accounts in the name of his clients, 19 it's not their money, it is other people's money, they 20 didn't lose their money. They lost money that belonged to 21 other people. That is all alleged and that is all true 22 for the purpose of this motion. That alone sustains us 23 today. All of the others, it is just power techniques 24 asserted with this at this point, but the basic principle 25 in this case is the allegation of hundreds of millions of
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 32 1 dollars being taken away from other people and the Trustee 2 seeks to get it back. 3 Thank you, Your Honor. 4 MR. WHITE: I have one more thing. If we 5 could finish up with my people, first Tracy. 6 On the agenda is the motion we made by 7 Mirie Chase to dismiss for lack of personal jurisdiction. 8 This will take about 20 seconds. 9 The bottom line is this woman had an 10 account in Madoff. She is an Israeli citizen who has no 11 contacts otherwise in the United States. 12 Apparently on the issue of what personal 13 jurisdiction is, while Stanley Chais was her agent, we are 14 led back to the question about agency, of course not found 15 in the pleading. It is the burden of the plaintiff to lay 16 a basis for proper jurisdiction. None has been alleged 17 here, Your Honor. 18 The theory argued in the motion, in the 19 papers in opposition is inconsistent with the basis alleged 20 in the complaint. 21 So, Your Honor, on that basis we would say 22 Ms. Chais ought to be dismissed in the case for lack of 23 personal jurisdiction. 24 MR. HIRSCHFIELD: Good morning, Your Honor. 25 Marc Hirschfield, from the law firm of Baker Hostetler, on
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 33 1 behalf of the Trustee. 2 This is not the first time in this case 3 that Your Honor has had the chance to consider personal 4 jurisdictional issues. 5 In fact, Your Honor, just a few months ago 6 the Court issued a ruling in that context of another of the 7 Trustee adversary proceedings that ruled upon a motion to 8 dismiss for personal jurisdiction. 9 That was in Picard v Cohmad, and reported 10 at 418BR75. 11 In that decision the Court overruled the 12 motion to dismiss of two Swiss entities and found that the 13 Court had jurisdiction over them. 14 The standard is set forth in Your Honor's 15 ruling, so I won't repeat it here today, but the Trustee 16 easily meets that burden. 17 As a matter of fact, the facts are just as 18 compelling if not more so than the case in Cohmad. Just 19 briefly the facts are these. 20 Mirie Chase -- and I would note that in 21 Madoff's records Mirie is spelled M-I-R-I-E versus M-I-R-I. 22 But these two accounts in BLMIS the first was opened in her 23 name and what we think was her Social Security number and 24 her address in Israel. There is a checkmark in the box of 25 agency and it has Stanley Chais' name as being her agent.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 34 1 Based on that, we could infer that we have alleged that 2 Stanley Chais is her agent. 3 Over the five-year period that Mr. Chais 4 maintained this account there are at least 11 transactions 5 in the account. Money came in and money went out and 6 there was a transfer to another account, which I will get 7 to in a second. 8 One of the transactions I mentioned was a 9 check was made payable to Ms. Chais personally, a $20,000 10 check in April 2003, and in all this account was a net 11 winner of more than $288,000. 12 Let me mention a transfer out. 13 Well, in November of 2004, Ms. Chais 14 transferred $340,000 out of her account and closed it. It 15 was transferred to another account, with her husband, Mark 16 Chais, who I should mention is her husband, and Mark Chais 17 and Stanley Chais' son. So she is Stanley Chais' 18 daughter-in-law. That joint account was held in her name 19 and her husband is as joint tenants. 20 That account had a spectre of transactions, 21 more than 50 transactions in totalbetween the time she 22 became a joint tenant in the account when Madoff collapsed 23 in 2008. 24 As a matter of fact, that account was a net 25 winner of 13 and-a-half million dollars.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 35 1 So based upon these facts which the Court 2 on a motion to dismiss on jurisdictional grands treats that 3 as true, the Court has clear jurisdiction over Mr. Chais. 4 As I said, the Court in Cohmad cited a 5 standard. I won't repeat it here. But clearly, the 6 allegations are that Ms. Chais' conduct was such that it 7 relates to BLMSI and her actions do and, therefore, the 8 Court has specific jurisdiction. It is clear she is 9 acting individually or acting through her or through her 10 husband directed transactions in these accounts. This is 11 not a bad investment. 12 Certainly Madoff would from time to time 13 give money out to people who would ask for it, but you 14 would have to ask for it, he didn't give money out 15 indiscriminately. 16 Clearly, the fact there were redemptions 17 and transfers, someone had to ask for them. Ms. Chais 18 said she did not personally ask for them, and I don't know 19 whether that is true or not. We did not have discovery 20 yet, either she or someone acting on her behalf did because 21 we know the money came out. 22 Once we get a prima facie case of showing 23 that we had the jurisdiction they had the burden of going 24 forward showing they don't and they have not met that 25 burden.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 36 1 What the court also has to do is to look to 2 see whether jurisdiction is reasonable under the due 3 process grounds for the same reason that the Court found in 4 Cohmad we found it is reasonable to exercise jurisdiction, 5 that is equally applicable here. 6 One thing I want to note is that is not in 7 our papers. In the Cohmad decision Your Honor is citing 8 your prior decision that was reported at 63-BR422, it was 9 noted that it is possible for a person to waive 10 jurisdictional issues and, in fact, filing a notice of 11 appearance could do that. 12 Well, in fact, the notice of appearance was 13 filed on behalf Ms. Chais, is Mirie Chase as a party. In 14 docket 13 in the case a notice was filed on her behalf as 15 well as other defendants represented by counsel. 16 On that basis alone we believe the Court 17 properly could exercise jurisdiction here. 18 For all these reasons we think the Court 19 clearly had jurisdiction and the Court should exercise good 20 judgment and allow this lawsuit to go forward. 21 Thank you, Your Honor. 22 MR. WHITE: I have a two points to make, 23 Your Honor. One, with regard to the stipulation and the 24 waiver, I have never heard of this before. 25 I recall this was an issue for us at the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 37 1 time we were entering appearances. I need time to go and 2 check the records because it certainly was not the 3 intention on our part because we were aware of this issue 4 at the time we were doing that. So I am caught unaware at 5 this time by that argument. 6 The other point that I would like to make 7 to the Court is Mr. Hirschfield spoke about how it is not a 8 passive role. Mrs. Chais has said it is a passive role, 9 that she does not ask for or direct any activity with 10 regard to these accounts. 11 There is nothing in the pleading to the 12 contrary, Your Honor. Again, you are asking for things 13 that are not in there to fill in the gaps that could have 14 easily been plead properly. 15 So from there we say, Your Honor, that the 16 Trustee has not met the burden. 17 MR. KLESTADT: Good morning, Your Honor. 18 Tracy Klestadt, from the law firm of Klestadt & Winters. 19 We represent Michael Chasalow, and have filed a separate 20 motion to dismiss. 21 Your Honor, on the 51-page complaint, only 22 paragraph 38 mentions Michael Chasalow. And if I may quote 23 for the record it is the fourth line: 24 Defendant Michael Chasalow is a person 25 residing in Los Angeles, California. On information and
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 38 1 belief Michael Chasalow was the husband of Emily Chasalow. 2 On information and belief Michael Chasalow is the 3 registered agent for the Brighton Company (phonetic) and 4 for his family foundation and an officer and/or director of 5 Onedaga, Inc. (phonetic). 6 Your Honor, that is the only mention 7 Michael Chasalow in the entire complaint. Michael 8 Chasalow's name does not appear in the schedule of 9 transfers because we received no transfers. 10 Your Honor, this is a perfect example, as 11 Mr. Sheehan is referring to earlier, of a complaint that 12 does not provide a road map for allegations against Mr. 13 Chasalow because there are no allegations of fact against 14 Mr. Chasalow. 15 Mr. Chasalow happens to be a respected 16 professor of law at the UCLA law school. His finances are 17 separate from those of his wife. 18 He is not alleged, Your Honor, to be a 19 Trustee of any of the family trusts. There are no factual 20 allegations that he received any funds or that he directed 21 the transfer of any funds. 22 He is not alleged to be an immediate 23 transferee or subsequent transferee. 24 In the response that was filed by the 25 movant there is a statement alleging that Mr. Chasalow may
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 39 1 have had joint control or access to joint accounts but it 2 is not pled in the complaint. This is a situation where 3 the assertion is guilt by association or guilt by family 4 relation. 5 There is no factual allegation in the 6 complaint whatsoever, Your Honor. This is no road map 7 and, I believe, Your Honor, it does not meet the requisite 8 detail of pleading anything to survive our motion to 9 dismiss. 10 I would request Your Honor to entertain our 11 motion. 12 Thank you. 13 MR. HIRSCHFIELD: Good morning, Your Honor. 14 I am still Marc Hirschfield from Baker Hostetler, so far as 15 I know. 16 In a nutshell, Mr. Klestadt argues that 17 because Mr. Chasalow does not have his own account at BLMIS 18 he could not be held liable in our complaint. This is a 19 very narrow and impermissible view of the law. 20 In fact, the complaint alleges that Mr. 21 Klestadt mentioned that Mr. Chasalow is related to Emily 22 Chasalow Chais, Stanley's daughter and he is a registered 23 agent for the Brighton Company, and is either an officer of 24 director of Onedaga and the Chais family foundation. These 25 entities withdrew millions and millions of dollars from
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 40 1 BLMIS and Emily had at least 11 accounts at BLMIS that is 2 either an account holder or beneficiary for, and they 3 withdrew more than $51 million since January of 1997. 4 The complaint does allege that all but one 5 of those accounts after 1998 went into a bank account for 6 Emily Chais. 7 Now, I will get back to that in a second. 8 The Trustee has alleged facts that show Mr. Chasalow's 9 relationship to various entities that are named in the 10 complaint. 11 We have the right to seek the return, the 12 avoidance of return of transfers to initial transferees and 13 subsequent transferees. 14 We have had no discovery here at all, as 15 Your Honor knows, and we are entitled to discovery to find 16 out exactly which transfers may have been gone to Mr. 17 Chasalow. 18 We know that some did -- and I will get to 19 that in a second -- but we know for a fact that some did. 20 The complaint does put him on notice we are 21 seeking in paragraph 166, the return of payments of 22 commissions or fees of transferring from one account or 23 another or by some other means. 24 Clearly, Mr. Klestadt knows he is being 25 sued for fraudulent transfer and that is either as an
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 41 1 initial transferee or subsequent transferee. 2 I mention that discovery here is 3 appropriate. At the time we filed the complaint we have 4 information as to where Mr. Chasalow may have gotten 5 transfers. We have since learned, on at least one 6 occasion, that $6.4 million from Emily Chais, she withdrew 7 from BLMIS went to a joint bank account with Mr. Chasalow. 8 So clearly it went to a joint bank account, where he had 9 control over those funds and would be an initial 10 transferee. 11 Had we not found this out independently we 12 could not have known it or alleged it. At the time we 13 filed the complaint we didn't yet know that. By discovery 14 we will found out exactly which transfers Mr. Chasalow had 15 gotten as an initial transferee and which ones he got as a 16 subsequent transferee. 17 Clearly, the complaint lists a slew of 18 transactions, and he has exclusively knowledge of, which 19 monies he may have received. 20 It is not appropriate to hold a Trustee to 21 a burden where he can't make allegations because he is not 22 taking discovery and does not have the information. The 23 information is in their hands and they know it. We will 24 learn it through discovery. We would submit that the 25 reading of the law presented by the defendant here is
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 42 1 impermissibly narrow and we should be allowed to go forward 2 with discovery and to establish which transfers Mr. 3 Chasalow got through discovery as the initial transferee 4 and which funds he received as a subsequent transferee, and 5 then seek to avoid those transactions. 6 Thank you, Your Honor. 7 MR. KLESTADT: Just very briefly, Your 8 Honor, the complaint does not say that. 9 THE COURT: -- well, that is true, the 10 complaint doesn't say it. The brief does. I have looked 11 at the brief. 12 All these new facts are in there. I could 13 just say I grant your motion with the right to replead 14 because I think the new facts do justify sustaining the 15 complaint. This could be a waste of time, but if that is 16 the way it ought to be, I could do that. 17 MR. KLESTADT: I think given the fact they 18 have lumped my client in with this -- 19 THE COURT: Now, you have separate facts 20 that bring your client into the focus of the Trustee's 21 complaint. 22 MR. KLESTADT: We may warrant a separate 23 motiion, so the Court may focus on what specifically would 24 be applicable or not applicable to my client. 25 THE COURT: As I say, I could grant your
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 43 1 motion but that just brings us back to unless you could 2 stipulate and direct the Trustee to replead with respect to 3 your client, based upon the old facts and the new facts 4 that have been admitted in discovery. 5 MR. KLESTADT: I could take that up with 6 my clients. We raise that issue and, in fact, we raised 7 the issue of the Trustee repleading the case, but that was 8 rejected. 9 THE COURT: That would save everyone in the 10 case a lot of time and effort if you would let the Court 11 know. 12 MR. WHITE: I think we need a change of 13 personnel, now, Your Honor. 14 MR. KLESTADT: May I be excused, Your 15 Honor; I have an 11:30 before Judge Gonzales? 16 THE COURT: Go ahead. 17 (Brief recess.) 18 MR. HIRSCHFIELD: Judge, one thing before 19 Mr. Eyre argues the motion to dismiss the counterclaims. 20 Counsel has asked me to withdraw our 21 reliance on the pleadings on the appearance as a basis for 22 jurisdiction. We did not give him a copy of that last 23 night and we apologize for that. We will withdraw that 24 argument. It is what it is. 25 MR. EYRE: Your Honor, may it please the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 44 1 Court, Paul Eyre, from Baker Hostetler, representing the 2 Trustee. 3 We have a motion to dismiss the 4 counterclaims filed by Stanley Chais, the father, his wife, 5 Pamela Chais, and various Appleby entities that are 6 controlled by Pamela Chais and the 1991 Chais family trust. 7 Those entities, Your Honor, answered the 8 complaints and filed a four-count counterclaim. 9 The four counts of the counterclaim are 10 tortious interference with business relations, conversion 11 and the Fifth Amendment count that is some form of due 12 process for the denial of counsel. 13 All four counts are predicated on one 14 single act. 15 That is, Your Honor, the act of the Trustee 16 in sending a letter to Goldman Sachs on March 6, 2009. 17 A March 6 letter was sent to Goldman Sachs, 18 among other entities and basically that letter was sent to 19 put Goldman Sachs and others on notice of the Trustee's 20 position regarding assets that they may have obtained 21 directly or indirectly from BLMIS. 22 Your Honor, it was also in the letter, the 23 letter was also sent to put Goldman Sachs and others on 24 notice of the automatic stay. 25 The letter was sent pursuant to the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 45 1 Trustee's exercise of his fiduciary duties. In fact, some 2 would argue his obligation to send the letter to assist him 3 in marshalling the assets that would come into the estate 4 and be distributed among those individuals who lost 5 millions of dollars. 6 This is not the time for me to give the 7 opening statement on Stanley Chais. I will resist that 8 urge, Your Honor. The Court has heard enough about Mr. 9 Chais' relationship going back 30 years with Mr. Madoff, 10 it's been a close association. 11 I will however briefly explain to the Court 12 that the money is what is in the counterclaims, they are 13 complaining of the access of money. The way the money 14 worked at the end was really quite simple. 15 The money would come out of Madoff, and it 16 would go to City National Bank in California. 17 City National Bank in California would then 18 have two buckets, or at least it was essentially two 19 buckets. 20 One bucket was for Chais family, all the 21 entities that are Stanley Chais, his wife, his children. 22 All those entities. 23 The second bucket was called the arbitrage. 24 That was what it was called by Madoff. But that is three 25 entities, Pompom (phonetic), Landover and Brighton. They
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 46 1 are entities in California where investors, people come 2 into these entities and for 30 years, or more than that, 3 perhaps, Stanley Chais was the one that these investors 4 gave their money to. He, in Your Honor, would give the 5 money to Madoff. 6 There was only a brief time when Stanley 7 Chais did not have that role. That is when he was sick. 8 I believe he went to Israel for a period of time and 9 installed his son Mark as the individual in charge of 10 Pompom, Landover and Brighton. 11 In any event, the money would come out and 12 be disbursed and money would actually go back to Stanley 13 Chais as his percentage of the Pompom, Landover and 14 Brighton. If they did well, above 10 percent, which they 15 always did, he got a particular account. 16 Money would also go from City to an account 17 that Mr. Chais had at Goldman Sachs and that is in two 18 parts. One I will call the liquid account, it has the 19 liquid assets. The other is partnerships, real estate 20 partnerships. So what happened here is, and it is very 21 important for these counterclaims that there is no 22 allegation, none, that the Trustee took money, that the 23 Trustee took property, that the Trustee exercised control 24 over any account. 25 There is no allegation, in fact, that the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 47 1 Trustee had the power, had the authority or in any way 2 stopped money from going out of Goldman Sachs to Mr. Chais. 3 What happened is as follows. The Trustee 4 sends a letter and the Court I am sure is aware of these 5 types of letters. 6 In that letter, the Trustee details his 7 legal position, relies on statutes. He spells out the 8 statutes. 9 He cites case law, Your Honor, and he says 10 this is our belief as to the current situation. 11 Goldman Sachs then makes an independent 12 decision, or it's apparently an independent decision, to 13 not allow money to go out to Mr. Chais. 14 That was a decision, Your Honor, that 15 Goldman Sachs made. These counterclaims also claim that 16 because the letter was sent, Goldman Sachs was caused to do 17 something. 18 I submit, Your Honor, that is facially 19 implausible for a number of reasons. Number 1, as Mr. 20 Chais is fully aware, there were millions of dollars 21 potentially owed on those real estate investments. And 22 what has been happening over time, as Madoff gave the money 23 to Chais, Chais was able to use that money to make his 24 capital calls to Goldman. 25 When Madoff dried up, I am positive that
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 48 1 Goldman Sachs considered its own position and decided, gee, 2 we better worry a little bit about the pocket of money 3 sitting here, in case Mr. Chais is unable to make a capital 4 call. 5 So Goldman Sachs itself decides they won't 6 allow the money out. Now, in fact, just so we are clear, 7 in fact, and this is important, money has gone out. 8 Plenty of money has gone out. 9 The Trustee even after the receipt of the 10 letter sent a letter to Goldman Sachs saying: The Trustee 11 agrees for money to come out for living expenses, medical 12 expenses. In fact, as Your Honor knows, in September of 13 2009, Mr. Chais filed a motion to the Court, an order to 14 show cause. We countered with a TRO. 15 There was an agreement reached, a consent 16 decree reached at this point, a consent order that 17 basically establishes a system for money going out for 18 counsel fees, for medical expenses, for living expenses. So 19 all of that is ongoing at the moment. 20 Getting back to the letter itself, I think 21 everyone now, and by everyone I mean certainly the Chais 22 entities and the Trustee, by which the Chais entities 23 conceded that the sending of the letter itself would not be 24 a tortious act. And I think they would agree that the 25 sending of the letter would not be a tortious act. That
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 49 1 is consistent with a number of cases cited in our brief. 2 The Kush (phonetic) case indicates, Kush must also 3 establish that the Trustee intentionally interfered with 4 the performance of her contract without an economic or 5 legal excuse or justification. 6 The recovery for a tort is not allowed 7 absent a showing that the defendant intended to harm the 8 plaintiff without an economic or legal excuse or 9 justification. 10 I believe that in their papers that Chais 11 has conceded that is indeed the sending of the letter is 12 indeed what the Trustees are required to do. That is part 13 of their job to marshal assets. So the actual sending of 14 the letter we believe, and I think it is conceded, cannot 15 be a tortious act. The Chaises go on to say that perhaps 16 we conceded that, but the letter itself contained a 17 misrepresentation. As best I am able to tell, they claim 18 that the letter misrepresents the definition of customer 19 property under 78fff2C3. 20 I will not argue that issue here today. 21 The Court is well aware of the Trustee's position, that 22 indeed assets sitting at Goldman Sachs on behalf of Mr. 23 Chais is customer property. 24 But regardless of that argument, Your 25 Honor, there could be no question that the Trustee acted in
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 50 1 good faith, good faith belief and that it was legally 2 justified in sending the letter. 3 The argument on Goldman Sachs is also that 4 it is facially implausible that Goldman Sachs upon 5 receiving the letter of the Trustee would not do its own 6 work, would not consider itself its own legal position, 7 would not examine its contract, would not do the things 8 that a Goldman Sachs would normally do. 9 In fact, when you read the counterclaim it 10 becomes obvious that one of the reasons the counterclaim 11 fails in addition to what I just stated. Is that there was 12 no breach. 13 You can't have a tortious interference with 14 a contract, if the contract itself was not breached. 15 There are many references in the 16 counterclaim and in the document filed by the Chaises that 17 reference the agreement with Goldman. 18 We believe Your Honor can indeed look at 19 that. It was not attached to the counterclaim, but it was 20 attached to our papers. 21 This document it is very clear, Your Honor, 22 that Goldman Sachs reserved the right on its own to 23 withhold funds. There was no breach. There has been no 24 breach of this contract. 25 From March, the receipt of the letter by
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 51 1 Goldman, until September of '09, Goldman could have been 2 sued by Chais. Chais could have come to this Court. 3 Goldman could have come to this Court. A lot of things 4 could have happened, and none happened until September of 5 '09 when Chais brought a motion before the Court and we 6 reached an agreement. 7 Even if, for argument's sake, you could 8 make the argument that the Trustee misrepresented the law 9 in a letter that was his business judgment to send, and 10 even if you could argue that the letter caused Goldman 11 Sachs to breach a contract, which, of course, they didn't 12 breach, but even if you could make those arguments, we 13 believe further that the Trustee is immune from a lawsuit 14 for the sending of the letter. 15 While we concede that the immunity is not 16 total, there is a qualified asset in the community, but I 17 can't think of a more relevant thing that a Trustee can do 18 such as sending this letter that should be protected by 19 immunity. 20 I mean one could -- the argument has been 21 made, well, if he intentionally misstated something, if it 22 was a mistake he abrogates immunity. 23 If everything the Trustee said in the 24 letter is true, which we believe it is, you don't need 25 immunity. The reason trustees get immunity is for a
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 52 1 mistake, and you don't need that if everything the Trustee 2 is doing is absolutely correct. 3 In hindsight to go back and you said you 4 abrogated immunity because we conclude your definition of 5 customer property is not the definition we believe to be 6 the case, I think it misses the point entirely. 7 I think that the Chaises go on to say, and, 8 I believe, this is true, they then make the argument, well, 9 maybe by a mistake, maybe if the Trustee made an honest 10 justifiable mistake, he doesn't lose immunity but he will 11 lose immunity if he intentionally did something, if he 12 intentionally did something in the letter to misstate the 13 law. 14 I have a number of responses to that, Your 15 Honor. The first is that there is absolutely nothing in 16 the complaint, nothing, that alleges facts that this 17 Trustee intentionally misstated something in a letter to 18 try to get Goldman Sachs to do something. 19 Your Honor, there is nothing in the 20 counterclaim other than the bald assertion that the Trustee 21 intentionally did something. That is a legal conclusion 22 and, I believe, the Astroff (phonetic) case in 2009, and 23 the other case makes it very clear that is not acceptable. 24 Furthermore, it appears to me anyway, if a 25 Trustee, if the argument is, well, the Trustee tried to
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 53 1 fool Goldman Sachs by mistakenly putting a wrong law in 2 that you have actually put the cases in, you have put the 3 statute in, the causal connection between that letter and 4 Goldman's actions must indeed fall. 5 This is Goldman Sachs. If anyone truly 6 believes that the Trustee is deliberately and intentionally 7 trying to fool Goldman Sachs into doing something they 8 otherwise would not do, the Trustee doesn't put in their 9 cites to the cases, all the things the Trustee did not. 10 I think that is facially implausible. I 11 think as the Court is well aware, facial implausibility 12 does matter, it does matter in a complaint. 13 There are two other counts. The count for 14 conversion, Your Honor, basically, it seems to me that we 15 took something, that the Trustee took something. 16 There is nothing in the complaint at all, 17 nothing, factually that would show the Trustee took 18 anything, had control over anything because he did not. 19 The only act he is accused of doing is 20 sending the letter. That is the act. The act of sending 21 a letter cannot control an account that is held at Goldman 22 Sachs by Mr. Chais. That can't follow. 23 I think the conversion fails also. 24 One thing I failed to mention is even if 25 the Chaises were able to overcome the immunity, even if
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 54 1 they were able to overcome the causal connection, all those 2 things that I believe are reasons for the counterclaim to 3 fail, the actual statements in the letter itself are 4 privileged. 5 There is plenty of good law that says when 6 a Bankruptcy Court appointee sends out various things, 7 various letters, the content of those letters are 8 privileged. 9 The Chais defendants tried to distinguish 10 those cases. What they say is, well, that is true if the 11 statements in the letter constitutes defamation and/or the 12 letter is going to someone who is part of the judicial 13 proceeding. They said those are the only two times that 14 you get the privilege. 15 I found nothing in the case law, nothing 16 that supports the notion that it has to be defamatory, or 17 could only be letters that go to the proceeding that would 18 allow you to have the privilege. 19 I believe the privilege would extend to the 20 content of the letter. That is a further reason that the 21 motion to dismiss should be granted. 22 The last count, Your Honor, is the Fifth 23 Amendment claim. As I best understand it, it is as 24 follows: It appears that the argument is that Mr. Chais 25 was denied access to counsel, counsel that Mr. Chais has
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 55 1 had, the law firm of Loeb & Loeb, for a good 30 years. 2 They are counsel that has been paid out of 3 the assets. As I understand it, it has been paid 4 regularly. The Trustee has agreed pursuant to the consent 5 decree to agree that money will go to pay legal fees. 6 Furthermore, and I think the fact of the 7 matter is he has always had counsel, he has always had it 8 all along. I think it is also important, and I don't want 9 to get hung up on it, but it is true in a civil context 10 that the defendant is not necessarily denied access to 11 counsel if he has the right at all for access to counsel, 12 but it is also not a situation where he simply gets the 13 counsel of his choice. That is not what the law requires. 14 The other argument, and I wouldn't belabor 15 the point, the Trustee is not an estate actor doing 16 something unconstitutionally to Mr. Chais. He cannot do 17 that. He is not an estate actor. 18 I could argue further, but to sum it up, I 19 basically say, I think this has to be conceded, the only 20 thing in the complaint that this Trustee is accused of 21 doing is that which every Trustee must do, which is attempt 22 as he knows best to be able to do to marshal the assets of 23 those people like the Chaises, who have taken out hundreds 24 of millions of dollars. 25 The Trustee has an obligation to try to get
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 56 1 that money back. He is doing what a Trustee has to do. 2 If doing what a Trustee has to do subjects 3 a Trustee to counterclaims of the sort here, the 4 counterclaims for conversion, counterclaims for tortious 5 interference, counterclaims for a violation of someone's 6 due process right, I would submit to the Court that we 7 would have a very hard time, having not done its job. 8 Thank you very much, Your Honor, I 9 appreciate it. 10 MR. LICKER: Good morning, Your Honor. 11 THE COURT: Good morning. 12 MR. LICKER: Eugene Licker with my 13 colleague, Walter Curchak, from the law firm of Loeb & 14 Loeb, on behalf of the defendants, Stanley Chais, Pamela 15 Chais, Appleby Productions Ltd, and some of its related 16 entities. 17 Going last has a lot of drawbacks, Your 18 Honor, and it only has one benefit. It allows me to make 19 some commentary on what went on before, including the 20 argument I was not a part of. 21 As Mr. White says there is a point where 22 Mr. Chais' lawyer comes out, and we have denied the 23 allegation in the complaint that has been submitted in the 24 answer that is before you today. The answer, the 25 allegations which are taken as true for the purpose of this
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 57 1 motion. 2 The second thing I would say, Your Honor, 3 with all indulgence and apologies to the court reporter, 4 the noun that best describes this matter, I don't believe 5 is mishpocha, but I would choose mishigas. On that note, 6 and I have given her the spellings, my best guess of 7 spellings on those. 8 I want to address what Mr. Eyre just had to 9 say. With all due respect, I would ask you to dismiss 10 virtually all of it. I have been doing this for 30 years, 11 and I have to say that this is the first defense of a 12 motion to dismiss that I heard that went so far into the 13 facts, and really at this point what I found to be the 14 Trustee's approach to this entire case. 15 So when Mr. Eyre gets up here and says I 16 wouldn't rehash the allegations against Mr. Chais, if you 17 recall in his opening brief, he did just that. 18 He, essentially, asked Your Honor to take 19 as true not the pleading that is before Your Honor on this 20 motion, but his pleading. And even if we were assume that 21 Mr. Chais has done all of these terrible things and 22 frankly, there is not all that much in the complaint that 23 is plead specifically anyway, it is all paragraph 1 of 3 in 24 there. It's all in one paragraph. 25 He has asked Your Honor to accept his
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 58 1 allegations as true rather than those in the counterclaim. 2 Now, as Your Honor well knows, this is a motion to dismiss. 3 The issue before the Court is not whether we prove our 4 claims, but whether we stated our claims, and it is our 5 pleading that is accepted as true. 6 So when Mr. Eyre goes through and tells you 7 how the Goldman Sachs account works, how monies were 8 transferred to City National Bank, leaving aside the fact 9 that Mr. Eyre is testifying on the basis of pure hearsay, 10 leaving aside he is not under oath, leaving a stipulated 11 fact that some of things he has presented as the facts are 12 wrong, it is all irrelevant. It is all not competent 13 commentary on this motion. This is a motion to dismiss 14 the counterclaims. 15 I would ask that Your Honor ignore what Mr. 16 Eyre tells you about the millions and millions of dollars. 17 THE COURT: That is not the real issue 18 here. You, I, and Mr. Eyre, know that this matter and 19 these allegations in the counterclaim come before me and 20 it's not for the first time, but there is also a history. 21 This Court has presided over the litigation involving the 22 Goldman Sachs account, and the consent order with respect 23 to it. 24 The real issue here is whether the sending 25 of that letter was a tortious act and the impact of that
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 59 1 and the freeing of the account, is the freeing of the 2 account an act of volition on the account of Goldman Sachs 3 that was triggered by the letter or not. 4 The account frankly was frozen, not by the 5 Trustee, but by Goldman Sachs. 6 I think the law will acknowledge that 7 Goldman Sachs is a pretty sophisticated target when it 8 comes to someone claiming an improper or tortious act, and 9 makes its own judgment as to whether or not it is 10 appropriate to freeze the account. 11 I think we can conclude that Goldman Sachs 12 made a judgment on the account. 13 MR. LICKER: Right, Your Honor. 14 THE COURT: Whatever its thinking was, I 15 don't think it is relevant here. 16 MR. LICKER: Whatever its thinking was? 17 THE COURT: Yes. 18 MR. LICKER: Whatever Goldman's thinking 19 was? 20 THE COURT: Yes. You will have to assume it 21 has done due diligence. 22 MR. LICKER: Yes. 23 THE COURT: And you cannot assume that 24 Goldman froze the account out of ignorance. 25 MR. LICKER: I don't assume anything.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 60 1 THE COURT: These are real issue before me 2 and I agree with you, I don't care about all of the other 3 issues. But it does come before me with somewhat of a 4 history involving the utilization of the money and a lot of 5 things that are contained in this counterclaim. 6 MR. LICKER: But very much to the point, 7 Your Honor, I don't know what went through Goldman's mind. 8 I know what would go through my mind if I were counsel to 9 Goldman and got this letter, and we will talk about the 10 contents of the letter in a minute. 11 But that is what trials are for. We will 12 find out what went through Goldman's mind. We will find 13 out whether Goldman read these cases and said, you know, 14 that Baker Hostetler, those people were pretty smart and 15 got it right or they may have read those cases as we did 16 and said, you know what, the guys at Baker Hostetler got it 17 wrong. 18 THE COURT: This is not a lawsuit against 19 Goldman Sachs, but the Trustee. 20 MR. LICKER: It is not -- 21 THE COURT: Perhaps under the old theory it 22 should be. 23 MR. LICKER: Every tortious interference 24 case, Your Honor, has two culpable parties. When A induces 25 B to breach a contract with C, B has breached that contract
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 61 1 and is susceptible to, but it does not mean A is not. 2 The question is did the letter that was 3 sent start a chain of events, of which the inevitable 4 result was Mr. Chais would lose control of his property and 5 the answer is yes, that is what we allege and we will show 6 at trial. 7 Let me read to you, if I might, Your Honor, 8 just a small portion of this letter. We will ask 9 ourselves is Goldman Sachs just deciding for itself without 10 any liability, any culpability on behalf of Mr. Picard or 11 is there something else going on. 12 It is the last substantive paragraph, but 13 not the last paragraph, and it is important because -- I 14 will read the last paragraph: 15 This letter places you on notice, (if you 16 were not already on notice), that because the funds 17 constitute, "customer property," not because we think that, 18 but because they do and, therefore, property of BLMIS 19 pursuant to SIPA, the Trustee will presume that any further 20 payment or disposition of the funds by you, whether or not 21 at the direction of your customer or depository, will, not 22 might, will be deemed a willful violation of the automatic 23 stay by the Bankruptcy Court. 24 You are hereby instructed to refrain from 25 engaging in or permitting any transfers or dispositions of
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 62 1 the funds or other monies received from BLMIS without an 2 order of the Bankruptcy Court. 3 Your failure to abide by this instruction 4 may subject you and/or the transferee to liability under 11 5 U.S.C. sections 549 and 550. 6 In addition, any such transfer or 7 disposition may be deemed by the Bankruptcy Court to have 8 been made in bad faith and your liability may include 9 sanctions. 10 Final paragraph, Your Honor. Please 11 contact me as soon as possible for discuss compliance with 12 this letter. 13 Signed Lauren J. Resnick, on behalf of 14 Baker Hostetler. 15 Your Honor, yes, Goldman is smart people 16 and they have smart lawyers and they read this law, and 17 they could have decided not to be intimidated by these 18 bullying tactics but they did not, they did not. 19 The letter, and we will talk about the 20 substance of the letter in a minute, is wrong. The letter 21 does what Mr. Picard has done, vis-a-vis Mr. Chais from the 22 start, which is to presume guilt. 23 The letter leverages off of loose language 24 in cases that utilize a legal fiction to align the SIPA 25 statute and Bankruptcy Code so as to avoid technical
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 63 1 defenses. 2 It says to the Goldman Sachses of the 3 world, the money that you hold, irrespective of what we 4 prove, we have not proved a thing, without a stroke of a 5 judicial pen, the money that you hold belongs to me, Irving 6 Picard. It does not belong to Stanley Chais. 7 That is not true, Your Honor. What is 8 true is the Trustee believes he can prove that is his 9 money, that he is going to -- and this is in March -- he is 10 going to interpose a complaint, he did in May, and he says 11 he will win and maybe he will, I don't believe so but maybe 12 he wins. And when he wins, then it is his money. But 13 what he was doing in March of '09 is taking that money, 14 taking dominion and control of that money. And contrary to 15 Mr. Eyre's comments, the conversion claim says he took 16 dominion and control over that money, and that is the 17 element of conversion. He just took control of the 18 account: 19 Please call to discuss compliance, please 20 call me so I will tell you, Goldman Sachs, what to do with 21 the account. 22 There are lot of lawyers in the room. If 23 Goldman came to them and said what should I do, it is 24 no-brainer, don't give Stanley Chais the money. 25 Why? What if the letter is wrong? So
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 64 1 what? You want to put up with a lawsuit and pay a lawyer 2 to defend. No. As night follows day, Goldman did not 3 only what Mr. Picard knew what they were going to do, it is 4 what he intended them to do. That is why he sent the 5 letter. 6 On this motion to dismiss, Your Honor, we 7 are not here to resolve the facts but to talk about the 8 arguments. Let's talk about the argument that Mr. Eyre 9 raises here. 10 First, it is Mr. Picard's duty to marshal 11 assets. He said we have conceded that. I don't know it 12 is his duty to send letters but it is his duty to marshal 13 assets. I have no problem with him sending letters, 14 telegrams or e-mails. All he has to do is get it right 15 and not wrong. He has to not take my client's property. 16 But whether he was acting in good faith, 17 whether Goldman took the time to read those cases and 18 decided for itself what to do, those are all questions of 19 fact. That is what trials are for, not things that are 20 cognizable on a motion to dismiss. 21 Is the letter true or false? We will have 22 a trial about that. We will find out whether the letter 23 is true or false. But I would argue that the letter very 24 clearly is false. 25 What the Trustee has done is taken solace
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 65 1 in language in Park South, Hill 1 and Hill 2, that creates 2 a legal fiction. 3 And we could talk about it but it is very 4 clear the legal fiction is for purposes of standing because 5 of the language difference between SIPA and the Bankruptcy 6 Code. That is it. 7 As the Second Circuit said in Colonial, and 8 that was not a SIPA case, but it does not matter at all to 9 this point. The Court says if it were the case that the 10 property in the hands of the third party were property of 11 the estate, then you would not need to bring an action for 12 the Trustee to get it back. You would just take it back. 13 It is his property. 14 The cause of action, says the Colonial 15 Court, is the property of the estate, not the property 16 itself. 17 It still has to go through the process of 18 convincing you, Your Honor, that it is their property. 19 That is the step they skipped. 20 By skipping that step, Your Honor, they 21 have harmed our client. If was certainly Goldman Sachs 22 that pulled the trigger, but it cannot be said that 23 language in that letter is merely the Trustee stating his 24 opinion and saying to Goldman, you do what you want. It 25 is clear what the intended and the probable result of
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 66 1 sending that letter would be. 2 But, Your Honor, that is what we are going 3 to prove at trial. Is the Trustee immune from suit? No 4 it is not. The truth is that he is immune for the 5 exercise of business judgment and this is not a business 6 judgment. It is not a decision of when to sell or what 7 price to sell. This is writing a letter, taking a 8 position that is legally bankrupt and because of that, 9 causing harm to a third party. 10 Whether it is exercising business judgment, 11 though, it is a question of fact. That is why we have 12 trials. 13 Is the letter privileged? I would have to 14 say this is one of the most creative arguments I have heard 15 in a long time. But it is also one of the most vacuous. 16 The notion of privilege and I have litigated a number of 17 defamation cases, and I believe Your Honor has seen many 18 more than I have litigated, the notion of privilege is 19 unique to two causes of action, a cause of action for 20 defamation and for malicious prosecution. Why? Because 21 of the nature of those actions in a lawsuit, you are always 22 putting someone's reputation on the line. You are saying 23 that someone did something wrong. 24 If you don't privilege those matters, then 25 no one could ever sue for defamation. That is why it
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 67 1 adheres. 2 The Trustee cited no case outside of the 3 defamation context, with two, well, one exception and one 4 case that they say it is an exception. The latter is the 5 Weisman case, which grows out of the OPM leasing, where 6 Weisman's older brother, Mordecai, sued the trustee. There 7 were three sentences. It's in the absolutely wonderful 8 report that's reported by, and I am sure Your Honor is very 9 well familiar with it. 10 THE COURT: They are still making money in 11 selling the examiner's and Trustee's book. 12 MR. LICKER: You can get it for free. 13 THE COURT: Can you? The bound copy is 14 about hundred and some-odd dollars. 15 MR. LICKER: Is that right? 16 THE COURT: I don't get any -- 17 MR. LICKER: It is absolutely wonderful, I 18 keep it on my shelf at all times. I think it is the best 19 written book on fraud that there ever was. 20 In the report -- 21 THE COURT: Just, as an aside, when you talk 22 about fraud and Madoff, it's kind of sophisticated or 23 unsophisticated. The OPM fraud was essentially taking a 24 glass cocktail table, putting a contract on the table, a 25 flashlight underneath it and then forging the signatures.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 68 1 MR. LICKER: The image of Mordecai 2 Weissman with a flashlight on the table and then where it 3 is filled in is etched in my mind. It is a wonderful 4 case. 5 THE COURT: It is also interesting one of 6 them ending up marrying the photographer? 7 MR. LICKER: I don't know. 8 THE COURT: We don't know for sure about 9 the sex of the photographer. It would be interesting to 10 find out. 11 MR. LICKER: I want to interview the -- I 12 think Mordecai Weisman is out there, it is very, very 13 interesting. His brother was mentioned as having a 14 no-show job, and having complicity in the fraud. There 15 were three sentences in a several hundred page report. He 16 sued for defamation and tortious interference and the whole 17 argument is you defamed me, therefore I can't do business 18 anymore. It was a defamation case. That is all it was. 19 The only other case that the Trustee has 20 found where the notion of privilege applies someplace else 21 is a case out of California applicable to Section 47 of the 22 California Civil Code that specifically privileges 23 materials that are presented in Court. That is sui 24 generis. It has got nothing to do with the case. 25 My favorite argument, which is the next
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 69 1 argument the Trustee makes, to the extent the privilege 2 only applies to defamation cases. Well, this is a 3 defamation case. The argument is it was about a letter 4 which has a false statement, that is defamation, that 5 causes an injury to the counterclaimant. Therefore, this 6 must be a defamation case. 7 Your Honor, they left out the notion that 8 the falsehood has to be about the plaintiff. This 9 falsehood is about money and they have left out the part 10 about reputation of damage. We are not claiming that. 11 We are claiming other kind of damages, inability to access 12 funds. This is not a defamation case. 13 Next, there is no breach. Why do we know 14 there is not? Mr. Eyre tells us that. He is a very good 15 lawyer. The fact he has read these contracts and he now 16 tells Your Honor there is no breach, that is interesting 17 but irrelevant. That is why we have trials. 18 Indeed there is a breach. There is 19 nothing in any of those contracts that says any third party 20 can decide when and if money could be released to Mr. 21 Chais. But that is for trial. That is not on a motion 22 to dismiss. 23 Finally, it is Goldman's fault, it is not 24 our fault. Well, Your Honor, causation. If this letter 25 had not made its way to Goldman Sachs, I guarantee you I
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 70 1 would not be standing here making this argument. We would 2 not have been before you. 3 In terms of the elements of the various 4 causes of action there are a couple of technical arguments 5 that the Trustee makes in their reply brief. I want to 6 address that because we did have a chance to do it on the 7 paper. 8 We argue tortious interference with 9 contracts and business relationships to the extent any of 10 the relationships between Mr. Chais and Goldman is extra 11 contract, that it is not dealt with by the contract, the 12 Trustee comes back and says and this really epitomizes the 13 Trustee's argument in this case, he comes back and says 14 there is no allegation of malice. You have to allege 15 allege malice, and they quote the statute, which means 16 unlawful means or purpose. They say they have an alleged 17 malice. 18 We have an alleged unlawful means, 19 referring to the conduct of the Trustee for sending a 20 letter that was untrue. That is what unlawful means. 21 We don't say that the Trustee hates Mr. 22 Chais, that he has hatred or ill will towards him. But 23 what we said was it was unlawful full means. 24 Mr. Eyre has misconstrued the 25 constitutional argument of what is happening here. He is
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 71 1 remembering when the letter came in and we had some 2 problems getting money out of Goldman Sachs. As you could 3 imagine, Your Honor, I might have made it my business to 4 mention all of this to Mr. Eyre and to ask him to 5 reconsider. That would all go to good faith. That is 6 factual, and not before you on this motion. Mr. Eyre is 7 confusing what went on back then with what we are arguing 8 now. 9 What we argued back then is, hey, you may 10 be willing to dole out and make Mr. Chais come out to you 11 and say, I need to see the doctor this week, can I have 12 $100 to pay this bill, and you will say yes. You are not 13 bad people or trying to kill the man. But they were not 14 allowing us access to any funds to pay for the legal 15 defense and it affected the legal defense. Yes, we stayed 16 on. We wouldn't abandon the client. But it affected the 17 legal defense. 18 But that is not what the fourth cause of 19 action is about. It is very simple, Your Honor, under 20 Intercontinental, you could have private actors that act as 21 public actors who are subject to the state action 22 restrictions. This is one of those situations and the 23 government is not allowed to take your property, which in 24 this case is control over this account without due process 25 and that is what they have done.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 72 1 This is not a Sixth Amendment argument, but 2 a Fifth Amendment argument, and I want to make that clear. 3 Let me close with this. I was here for 4 the first argument. I heard Mr. Sheehan very passionately 5 argue to Your Honor about the thousands and thousands of 6 victims of the Madoff fraud. 7 I can't say anything different. Obviously 8 a lot of people were hurt here. I have nothing but 9 respect and Mr. Chais has nothing but respect for the 10 Trustee and his efforts to try to get money back to those 11 people. That is a noble effort, and I am glad they are 12 people who willing to serve. 13 I would suggest that nothing about this 14 counterclaim will chill anyone's argument about serving in 15 that capacity, in the capacity as Trustee. I think you 16 have their fee application on the calendar for this 17 afternoon that goes to that point. 18 But it does not give this Trustee or any 19 Trustee carte blanche to skip the judicial process. 20 If Mr. Picard can prove that Mr. and Mrs. 21 Chais and the Appleby entities, that all of our clients got 22 money they did not deserve he will get a judgment out of 23 Your Honor and it will be executable and they will recover. 24 They have to do those things first, though, Your Honor. 25 What they have done here and what they
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 73 1 tried to do without the stroke of a judicial pen is skip 2 Your Honor and go straight to judgment. It is pure Alice 3 and Wonderland, punishment first and trial later. That 4 they cannot do, and that is what the Trustee is liable for. 5 We will try to do that at trial. We plead adequately the 6 four causes of actions. It is fully before Your Honor, and 7 that is why the motion must be denied. 8 MR. EYRE: I will make three brief points, 9 Your Honor. 10 On footnote 8 of our papers we cite the 11 fact that the Chaises reference the account, and the 12 contract with Goldman Sachs in numerous paragraphs of the 13 counterclaim. 179 to 182, 184 to 180, et cetera. It is 14 also clear law, I believe, that a party should not be 15 allowed to escape the consequences of its own failure to 16 attach a document. 17 I believe the Court can consider that 18 Goldman Chais agreement in a motion to dismiss and it does 19 not convert that motion a summary judgment. 20 Secondly, the Chaises referenced the 21 Weissman case, this case has to do with privilege. It says 22 briefly: Under the law of New York statements that arise 23 in the Court of judicial proceedings and are relevant and 24 pertinent thereto are absolutely privilege. 25 The privilege protects statements
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 74 1 regardless of the speaker's state of mind, knowledge of 2 falsity or the jury that the statements caused. The 3 privilege embraces anything that may possibly be pertinent 4 or which has enough awareness or connection with the 5 proceeding so that a reasonable man may think it is 6 relevant. All doubts should be resolved in favor of its 7 relevancy or pertinency. 8 The third point I will make, in the letter 9 that the Trustee sent to Goldman and others, there are two 10 points about the letter that I would just like to just 11 raise. 12 Number 1, the letter does not mention Chais 13 in any respect. 14 The second point I would make is the 15 letter, encourages Goldman Sachs to do its own work and its 16 own due diligence, which they would do anyway, but the 17 letter does say, your failure to abide by these 18 instructions may subject you, et cetera. 19 It also says, in addition, any such 20 transfer or disposition may be deemed by the Bankruptcy 21 Court. The idea when you put "may" into this, I would 22 submit Goldman Sachs would do it anyway, but the Trustee 23 was encouraged in making its own independent assessment of 24 the legality here and what they should do about it. 25 Thank you very much for your time, and I
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 75 1 appreciate it. 2 MR. LICKER: I am tempted not to say 3 anything but I am a lawyer and I have to talk. 4 On the Weissman case, I am not sure what 5 Mr. Eyre's point was, but it applies to something other 6 than defamation cases, it went a little far. When Judge 7 Cotell (phonetic) said immunity applies irrespective of the 8 knowledge of falsity. There is a reason he use that 9 phrase, because he was addressing defamation and this not a 10 defamation case. 11 The letter speaks for itself. I will tell 12 you what I would tell Goldman Sachs. If does not matter 13 what we think Goldman Sachs was thinking. We will find 14 that out at trial and at discovery. 15 This is a motion to dismiss. Thank you 16 Your Honor. 17 THE COURT: There has been very little 18 discussion about one very important document, which has 19 been referred to, perhaps obliquely right now, but 20 paragraph 29 of the customer agreement gives Goldman Sachs 21 the complete authority to freeze funds at their own 22 discretion, totally. 23 If you read the rest of that particular 24 paragraph, they are a very independent actor, and what they 25 do is to be construed as an act of their own volition.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 76 1 And that may be a very important factor in 2 my consideration of whether or not these counterclaims 3 stand, 4 MR. SHEEHAN: Thank you, Your Honor. 5 MR. WHITE: Thank you, Your Honor. 6 MR. SHEEHAN: Your Honor, there is one 7 last item here. Well, there are quite few of them, it's 8 the fee applications and we have the Trustee and his 9 counsel as well as a number of other applications. 10 (Brief recess.) 11 MR. SHEEHAN: Good morning, Your Honor. 12 THE COURT: Good morning. 13 MR. SHEEHAN: This is a return date of a 14 number of applications for interim allowance of fees on 15 behalf of a number of parties. 16 There is only one objection that has been 17 filed that I am aware of. That is in connection with the 18 application of Mr. Picard and by his counsel, Baker 19 Hostetler. 20 THE COURT: Well, there is a little 21 reaction which doesn't really appear to be an objection to 22 the fees but more to the substance to your rejection of a 23 claim on the part of one Dr. Rudolfo Dawlt (phonetic) in 24 Zurich, Switzerland, which if you would look at the way it 25 is titled, it refers to today's hearing but it seems to
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 77 1 really regard this particular claim and Trustee's rejection 2 of it. 3 So unless there is somebody who could 4 clarify it, I don't regard this specifically as an 5 objection to fees. 6 MR. SHEEHAN: Your Honor, I have that 7 letter as well, I have it on my desk and I read it as you 8 did. Even though it was captioned a claim, the letter was 9 characteristically an objection to the claim. I turned it 10 over to our rejection people and they are handling it. 11 With regard to those applications, Your 12 Honor, not objected to. I won't go into them. I will go 13 into a brief detail and I would identify the firms 14 involved. A number of them are firms retained by the 15 Trustee in connection with actions instituted in foreign 16 jurisdictions. 17 The first is Schiltz & Schiltz. The next 18 is Higgs Johnson Truman Bodden & Company, Eugene F. 19 Collins, Willaim Barristers and Attorneys as Special 20 Counsel, Attias & Levy, Lovells LLP and Kugler Kandestin. 21 I will leave these sheets with the reporter 22 so she could have the spelling of these names, Your Honor. 23 All of these, these are all foreign counsel and there being 24 no objection, we would move those applications be approved. 25 I should note for the record that Mr. Bell
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 78 1 is here, ready to speak. 2 MR. BELL: Kevin Bell, for the Securities 3 Investment Protection Corporation. 4 With respect to that cluster of special 5 counsel, SIPC has filed one recommendation and supports the 6 amounts requested by those various counsel and would 7 support the entry of an order approving those requests, 8 Your Honor. 9 THE COURT: Does anyone want to be heard? 10 Well, definitially, for the purpose of this 11 proceeding, I am prepared and I do treat them as attorneys 12 for the Trustee -- 13 MR. SHEEHAN: Yes. 14 THE COURT: -- and they have the same 15 standing as the attorney for the Trustee for the purpose of 16 my granting allowance and in considering the position of 17 SIPC. 18 MR. SHEEHAN: Thank you, Your Honor. 19 The other unopposed application has been 20 filed by Windels Marx, who is here in Court this morning. 21 Alan Nisselson and Regina Griffin are here today, Your 22 Honor. 23 As you well know, Your Honor, they have 24 appeared already before you in a number of capacities on 25 behalf of the Trustee.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 79 1 We have been working cooperatively with 2 that firm in connection with a number of matters, some of 3 which have involved corporations of which the Madoff family 4 and other third parties had an interest. 5 Shortly you will be seeing complaints filed 6 with regard to at least two of them. 7 In addition to them, there are a number of 8 insiders where we have had conflicts because of their 9 relationship to the corporate clients that we had. We 10 felt it was remote but nevertheless appropriate not to be 11 involved with those particular situation. 12 We have asked Windels Marx to handle those 13 as well. They are not insignificant preference and 14 fraudulent conveyance actions. 15 I know that myself and the Trustee had very 16 much enjoyed working with Windels Marx, but beyond that we 17 feel there has been work that has been superb and we 18 strongly move that it be approved. 19 MR. BELL: On behalf of SIPC we filed 20 another recommendation in support of the fees requested by 21 Windels Marx and would support an order by this Court. 22 THE COURT: Does anyone want to be heard? 23 I will grant the request by Windels Marx. 24 It may very well be they come under the same statute, 25 78fff5c, based upon the consolidation order, and the
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 80 1 approval of this Court as well as the real fact that they 2 have been working as attorneys in sort of a hybrid fashion 3 and now in a more direct fashion for the Trustee. 4 MR. SHEEHAN: Your Honor, I would just 5 point out that I will be turning to our application and 6 that Mr. Picard, the Trustee, would like to address the 7 Court. 8 MR. PICARD: Good afternoon, Your Honor. 9 THE COURT: Good afternoon. 10 MR. PICARD: Irving Picard, SIPA Trustee. 11 This is my third application for interim compensation. It 12 covers the four-month period ending January 31, 2010. 13 For the period I seek a total $671,591.25, 14 of which $570,852.56 would be paid, and $100,738.69 will be 15 deferred until the further order of the Court. 16 I also seek reimbursement of actual and 17 necessary expenses totalling $77.66. 18 In connection with my fees, I would note 19 that my fees start with a 10 percent discount for my hourly 20 rates. 21 In addition, as noted in the applications 22 that I will address in a little while, there are other 23 hours that have not been billed for. 24 SIPC has filed a recommendation in support 25 of the interim fee application. As I noted in my
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 81 1 application, the general estate will not be sufficient to 2 pay administrative expenses, which included paying for the 3 professional fees which are such as those you have already 4 approved, mine and Baker Hostetler's. 5 Under the circumstances, SIPC is required 6 to advance the funds to the Trustee to pay the amounts 7 awarded. There is no difference between their 8 recommendation and the amounts applied for. As you noted, 9 this status provide that the Court should award the amounts 10 recommended. 11 There is one objection that was filed by 12 Diane and Roger Peskin, Maureen Ebel and a large group of 13 investors. As set forth in the response papers that we 14 have filed, the objection includes a number of arguments 15 that have previously been rejected by Your Honor. 16 The motion for leave to appeal, the first 17 fee application order was denied by the district court and 18 the second one on the second application is still pending. 19 The crux of the objections are as I see it 20 they are talking about, I have a conflict of interest. 21 They both stood there and they attempted to bolster their 22 argument by seeming to say since we have a disagreement on 23 various legal issues, that both I and Baker Hostetler 24 should be disqualified. 25 I personally and I am sure Baker does not
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 82 1 believe that provides a basis for disqualification and that 2 is what was set forth in the response. 3 I won't belabor that point, Your Honor. 4 During the period of my application, a substantial amount 5 of time was spent in connection with moving customer claims 6 and dealing with objections to determinations Your Honor. 7 Your Honor had the briefing in that equity issue which you 8 decided in March. 9 We started working on the next major group, 10 by which you have entered a scheduling order in April, that 11 will be heard during the fall. 12 Before that time, Your Honor, you will be 13 seeing other objections coming before the Court on matters 14 that do not raise some of the nitty-gritty issues and some 15 of the more difficult issues and don't all fit together in 16 one package. 17 The task of recovering assets is ongoing 18 and, as you know, it is international in scope. As you 19 have heard, we have six or so foreign counsel, many of whom 20 have been instrumental in helping us locate people to 21 depose and also helping us follow the trail. 22 My activities are generally set forth in my 23 application. I also would refer Your Honor to the amended 24 third interim report that was filed in April. 25 Next, turning to the claims, we received
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 83 1 16,312 customer claims from persons claiming to have lost 2 money in the Ponzi scheme. That, of course, includes a 3 substantial number of people who are relying on their 4 November 30th statements. 5 As I previously reported, Your Honor, in 6 December of 2008, there were approximately 4,900 accounts 7 that were opened. Thus, if you look at the bare numbers, 8 we have received more than 11,400 claims from persons who 9 did not have accounts in their respective names. 10 Many of these latter people were entities 11 invested through various types of funds, including pension 12 or profit-sharing trusts, family partnerships, limited 13 liability companies and the like. 14 Each claim has a story and each one is 15 reviewed before a determination letter is sent out. 16 As of January 31, we had determined 11,861 17 customer claims, allowing claims for more than 4.55 million 18 and SIPIC, at that point, it committed approximately 629 19 million dollars for advances. 20 I am pleased to report that as of April 30, 21 those numbers have increased. 22 On January 31, we had determined 23 approximately 72.7 percent and as of April 30, the number 24 is above 76 percent. 25 SIPC's commitment now is up to over 682.8
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 84 1 million dollars. 2 In addition, during that period we resolved 3 a number of avoidance matters without requiring litigation 4 for an amount totalling approximately 262.4 million 5 dollars. 6 Since then, there have been other 7 recoveries, including 220 million dollars from the Levy 8 family, and other recoveries that have been made during the 9 claims processing period. 10 We are very hopeful, Your Honor, in the 11 very near future we will be announcing some significant 12 settlements that will put us in a position to do an 13 allocation and an interim distribution to customers. We 14 are hopeful that the application will be filed and we could 15 have a hearing as of, perhaps, as early as late summer or 16 early fall. 17 As set forth in my application during the 18 four-month period, the major areas in which I devoted time 19 out of the 947.7 hours, approximately 30 percent was spent 20 in connection with claims review. 21 Approximately 154 hours in attending to 22 various Bankruptcy Court matters. 23 133 hours were in case administration. 24 About 10 percent of the time was concerned with the 25 Trustee's investigation.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 85 1 Based on my normal hourly rates during the 2 period I would be seeking expenses of 746,000 plus dollars. 3 But as I have indicated previously, I agreed with SIPC to 4 reduce my hourly rate by 10 percent. That is a reduction 5 of about $75,000. So as a result, I'm requesting 6 $671,591.25 of which $100,738.69 would be deferred. 7 Additionally, in consideration of good 8 billing practice I have written off or not billed 9 approximately $117,000. I seek the discounted amount at 10 this time. 11 I would also seek $77.66, which are related 12 to some long distance telephone calls and travel. As in 13 lawful travel. In the past, as I have indicated, in both 14 the application and to the Court, I will pay over to Baker 15 Hostetler the full amounts of any interim compensation 16 expense reimbursement that is awarded or paid. 17 As I noted at the outset, SIPC has filed 18 its recommendation in support of the Trustee's application. 19 I would be happy to answer any questions 20 that Your Honor may have. 21 THE COURT: Does anyone want to be heard? 22 Thank you. Thank you, Mr. Smith. 23 MR. SMITH: We have an objection to both 24 Mr. Picard and Baker Hostetler. So maybe it make sense 25 for Mr. Sheehan to go on now and speak on behalf of Baker
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 86 1 Hostetler. 2 THE COURT: Very well. 3 MR. SHEEHAN: The arguments are well stated 4 in the pleadings. Fees of $23.884,085.25 is being sought 5 and expenses of $390,204.85 satisfied. The same arithmetic 6 applies for counsel to the Trustee, as far as the discount 7 and 15 percent holdback, Your Honor. 8 It is almost impossible for me here to 9 summarize exactly what we have done. We have submitted to 10 your Honor unredacted time sheets which are voluminous as I 11 know Your Honor knows. 12 Suffice it to say there are multiple facets 13 to this case requiring the attention of many attorneys. 14 The difficulty in summarizing that is the size of it. 15 We have the customer claim process, for 16 example, and right now there are over 2,700 objections, and 17 that does not include the 1,900 that were filed with regard 18 to the customer status issue that is part of the scheduling 19 order. 20 In addition to that, Your Honor, there are 21 4,000 outstanding claims all of which have been to be 22 determined at this time. Many of which involve, Your 23 Honor, individual issues, as Mr. Picard has indicated, of 24 ownership. 25 All of those require both a legal and
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 87 1 factual analysis in order to determine the status of who 2 the customers are as well as, obviously, the forensic 3 accounting in terms of establishing the amount that may be 4 due to the customer in the event of an allowed claim. 5 Needless to say, countless hours were spent 6 just on that and it is a top priority of the Trustee, and 7 we will move as aggressively as we can move those customer 8 claims going forward. 9 In addition to those, there are, of course, 10 other litigations that are filed before Your Honor and you 11 are familiar with that, including Chais, which was argued 12 before you this morning and many others, Picower, which is 13 in settlement discussions as has been well reported and a 14 number of others that are ongoing before Your Honor. 15 In addition to those, there are literally 16 dozens, if not hundreds of litigations that are being 17 reviewed and contemplated in connection with the over 20 18 billion dollars that was paid out in the short period of 19 time of about 24 months prior to the demise of the BLMIS. 20 Those constitute significant potential 21 recoveries by the Trustee of customer property. We are 22 doing our very best to deal with those in an applicable 23 way. It may very well be before the end of the year there 24 will be a significant number of claims that will be filed. 25 The approach of the Trustee throughout with
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 88 1 regard to both large and small, people who are net winners 2 and losers, who have received what we believe to be 3 preference and fraudulent conveyances consisting of false 4 profits, we have reached out to those folks. 5 And the feeder funds as well as the 6 individual funds, they require a great deal of time but we 7 believe it is the best approach. This is a case in which 8 no one feels as though they win. Everyone feels as though 9 they lost, the winner and the losers. We recognize that. 10 We do our very, very best to work with them as best as we 11 can to work out an accommodation if we can. 12 Those that are significant, obviously, Your 13 Honor is going to see. Those that are small, and there 14 are many that are very small, you don't as we are not 15 required under the rules. 16 But in each and every case we are in 17 contact with counsel especially with the feeder funds, but 18 in connection also with many of other individuals in 19 conducting our investigation and working out what we can in 20 negotiations and settlement. If we can't do that, as I 21 have said, we will see a lot of complaints. Those involve 22 the feeder fundss throughout Europe, Caribbean, British 23 Virgin Islands, the Caymans, and Bermuda. That is why we 24 have all the counsel we retained, as each of those are 25 very, very complicated.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 89 1 As is reflected in our time records, what 2 we have found is that Mr. Madoff became a securitized debt. 3 We found there are very sophisticated transactions 4 involving major financial institutions as well as the 5 feeder fundss, where multiple layers of debt were incurred 6 funded by the Madoff returns. They were, as we all know, 7 available for years and years and there were steady 8 returns. They were just the kind of returns that people 9 in the financial industry looked to securitize, to create 10 those instruments, swaps, and credit the swaps. 11 All of that is involved in the Madoff 12 enterprise involving not just Mr. Madoff but also involving 13 all the people with whom he dealt. These are enormously 14 complicated an require a good deal of deconstruction and 15 each one of those represents hundreds and hundreds of 16 millions of dollars in potential recovery. 17 The efforts you can see from our records 18 reflect that as do things that don't appear necessarily in 19 the Court's record but are reflected in Your Honor's review 20 in the time records, but I can talk about them openly here, 21 they are reflected in our investigations and it's well 22 known to people on the other side. We are not doing 23 things that counsel is not fully aware of because we are in 24 negotiation with most of them before proceeding with 25 litigation against them.
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 90 1 We are well aware of the statute and we are 2 well prepared to follow through with those if we have to. 3 In addition to all that work, there is an 4 ongoing array, a good deal of it before Your Honor, of what 5 I would call individual litigation that occurs just in the 6 administration of the estate. Whether it be seeking 7 injunctive relief before Your Honor, whether it be dealing 8 with various motion practices that we have that is not 9 related to a specific litigation, and as Your Honor is 10 aware, there is a good deal of that occurs as well. 11 So we have multiple teams involved in each 12 of those endeavors, as again it's reflected in our time 13 records. 14 I believe that all of the work and I know 15 the SIPC Trustee agrees and supports it. We are reviewed 16 very, very carefully. I prepare that bill along with some 17 assistants working diligently every month. I could tell 18 you for a fact there are many, many conversations with SIPC 19 where they review specifically who is at a meeting, how 20 many people are attending, how much time is spent, was it 21 productive, what were you specifically seeking to do. 22 This is by far not a rubber stamp. This 23 is a very intensive review that takes place every month by 24 SIPC, with regard to this at two levels. Both at the 25 assistant general counsel, Mr. Bell, who is here, as well
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 91 1 as by general counsel herself. 2 So, Your Honor, when this arises before you 3 it arises before you after having thoroughly been reviewed 4 and approved by SIPC. I would respectfully ask Your Honor 5 to approve our application. 6 MR. BELL: Your Honor, I thank Mr. Sheehan 7 for his talk about the exhaustive review that SIPC does 8 with regard to the Trustee and counsels monthly 9 applications pursuant to this Court's monthly compensation 10 order. 11 There are many discussions about the fees. 12 There are many pages in the applications. I could advise 13 the Court that each and every page is reviewed. Discussions 14 are had and decisions are made, and SIPC after that review, 15 with the concurrence of the Trustee and counsel, will 16 follow the monthly procedures order and pay. 17 SIPC does that at two levels. At my level, 18 I am the staff attorney on the case even though I have a 19 title. 20 Then it is done by general counsel and the 21 general counsel and I have engage in extensive discussions 22 after I have had my extensive discussions with the Trustee 23 and its counsel. 24 So the thoroughness of this review I could 25 assure the Court where we say, carefully evaluated, I think
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 92 1 you could use the words that we exhaustively evaluate the 2 applications. We take this responsibility extremely 3 seriously. 4 So we have done the review and we have 5 followed our recommendation by SIPC's general counsel, and 6 we support the entry of an order for the approval of the 7 applications as filed. 8 MR. SMITH: Good afternoon, Your Honor 9 Peter Smith of Becker & Poliakoff, on behalf of the 10 objection filed by the Peskins and other customers. 11 Your Honor, I will just address the issue 12 of the most recent grounds contained in this objection, not 13 the ones that reiterate or reiterate from the first two 14 objections that were filed, but I would mention are subject 15 to appeals. Specifically that the Trustee an his 16 counsel's involvement in the Canavan adversary proceeding 17 filed last month, around April 5 or so, in which the 18 Trustee and counsel seek to enjoin an action filed in the 19 district court in New Jersey. On April 13, Your Honor 20 denied the application for a TRO. 21 The hearing on the preliminary injunction 22 motion is rescheduled, pending some discovery disputes. 23 The Trustee and his counsel we believe had 24 disqualified themselves, we believe, based on the positions 25 they have taken in the adversary proceeding because they
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 93 1 have essentially argued the position of the defendants in 2 that New Jersey action. Therefore, they are directly 3 adverse to every customer who would benefit from a positive 4 judgment in that proceeding. 5 The Trustee and his counsel have made 6 substantive and procedural defenses, asserted them on 7 behalf of the defendants who are in the New Jersey action 8 that even the defendants themselves in the action have not 9 made. 10 All the defendants in that action have done 11 is to seek to have the action transferred here. When it 12 gets here Your Honor will have a preview I suppose of all 13 the defenses that they will raise. 14 There is no basis, Your Honor, for them to 15 have done that in their papers. 16 I just want to give you a few examples of 17 what was contained in the motion for preliminary 18 injunction. 19 THE COURT: This is a request for fees. 20 MR. SMITH: What we argue, Your Honor, 21 that is -- 22 THE COURT: I am hearing more of a defense 23 with respect to the litigation that is pending before me. 24 MR. SMITH: No, Your Honor, we will hear 25 more of that I suppose in the weeks to come, but the issue
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 94 1 right here -- 2 THE COURT: You say that they should not be 3 asking for fees for their involvement in the New Jersey 4 litigation. 5 MR. SMITH: I don't think I said that. 6 THE COURT: Isn't that what you are saying? 7 MR. SMITH: Their fees for whatever they do 8 or have done in the New Jersey application are probably not 9 part of the application because I think this one cut off in 10 January. 11 THE COURT: But, nevertheless, it is their 12 activities supports their argument that they have that it 13 has disabled them for asking for fees because they are 14 breaching some duties that they have. 15 MR. SMITH: I believe that the breach of 16 duty is their loyalty to the customers. And I think it is 17 very clear that any customer who would see those papers, 18 and customers are aware of what is going on in those 19 proceedings, they are aware of this fee application -- 20 THE COURT: One wonders when one peels it 21 away whether everyone under your theory could be disabled 22 under those same theories. 23 MR. SMITH: Who else could be? 24 THE COURT: All counsel. 25 MR. SMITH: No, only the counsel who took
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 95 1 the position contrary -- 2 THE COURT: That is an opinion that you 3 have. 4 MR. SMITH: They are arguing the position 5 of the defendants. 6 THE COURT: Let me hear you out. 7 MR. SMITH: Okay. So, Your Honor, the 8 customers to whom the Trustee is supposed to be loyal can 9 only view the complaint for the preliminary injunction in 10 one way, which is that the Trustee and his counsel have put 11 that aside in this regard with respect to the persons who 12 the customers are suing to recover damages. For that 13 reason it is impossible for there not to be an appearance 14 of a conflict of interest between the Trustee and Baker 15 Hostetler to whom they are supposed to be loyal in this 16 proceeding. 17 For that reason, they should not receive 18 their fee and there should at least be an evidentiary 19 hearing as to whether they should be disqualified. 20 THE COURT: Thank you. 21 MR. SMITH: Your Honor. 22 MR. SHEEHAN: Your Honor, I don't intend 23 to argue the motion here. I will say one thing. I would 24 suggest there are a great many customers that would think 25 what we are doing in terms of trying to preserve this
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 96 1 Court's jurisdiction in connection with the net equity 2 ruling which is a whole thrust of why we are seeking to 3 have that case enjoined and why the people in New Jersey 4 are seeking to have it transferred here, there are a whole 5 host of customers who have bought that argument. I will 6 leave it out there. 7 MR. SMITH: Your Honor, I will say this 8 quickly, if the only goal was to protect the net equity 9 decision they would not have to raise defenses for the 10 defendants. They could have stopped on the ground for the 11 preliminary injunction without saying all of the things 12 they said in their motion how the claims are without merit; 13 however there are procedural problems with that complaint. 14 They did not have to say anything further. They have yet 15 to answer for why they did these things. 16 If it is not they are advocating on behalf 17 of those defendants, why on earth did they do it? There is 18 no basis for it. Thank you. 19 THE COURT: Thank you. I will overrule 20 your objection. It is quite obvious that the objectors 21 here are on the other side of many litigations with the 22 Trustee. 23 It is always interesting that it would be 24 part of the practice, and it shouldn't be to try to disable 25 your adversaries or take a legal position based on the fact
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 97 1 you seek to disable counsel. 2 But as I have pointed out in my statements 3 previously, I think if one peels away all the interests 4 that the various parties represent, one might find very 5 easily an appearance of conflict of interest of counsel, 6 and I could think of several areas which were involved in 7 all of the litigations before me. 8 What is clear to me, and one of the reasons 9 I am rejecting the argument here, is that these objectors 10 and their counsel have been very active in creating new 11 litigation made of sandboxes in multiple jurisdictions, 12 which in some form indicates a disagreement with the 13 Court's net equity decision. 14 It is understandable that the objectors 15 would seek to have the Trustee disabled, but that is not a 16 ground here for arguing against the consideration by this 17 Court of the request for fees under 78 -- and I won't go 18 through all of the Es -- when SIPC finds the fees 19 appropriate and the disinterestedness of the Trustee has 20 already been measured in the early part of the proceeding, 21 that the statute has the words, "award the amounts 22 recommended." 23 I find no basis for finding that the 24 Trustee should be found to have an appearance of a conflict 25 of interest. As a matter of fact, I think there is an
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 98 1 obligation wherever the administration of the Madoff estate 2 is a implicated for the Trustee to appear and deal with 3 that. 4 That essentially is the main argument that 5 is being made today, the additional argument that is being 6 expressed. 7 If you bring on litigation, it is obvious 8 that the Trustee has to go and react to it if that 9 litigation implicates the administration of the estate, and 10 that is apparently is the case here. 11 Objection is overruled. The decision is 12 reserved with respect to all motions thus heard. 13 MR. SHEEHAN: Your Honor, I have an order 14 that I would like to submit, if I may approach. 15 THE COURT: Yes. 16 MR. SHEEHAN: Thank you, Your Honor. 17 THE COURT: It is unfortunate but more 18 litigation, more fees. 19 I have approved the order. 20 MR. SHEEHAN: Thank you very much, Your 21 Honor. Thank you for all your time. 22 THE COURT: Thank you. 23 24 * * * 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 99 1 C E R T I F I C A T E 2 3 STATE OF NEW YORK } } ss.: 4 COUNTY OF NEW YORK } 5 I, MINDY CORCORAN, a Shorthand Reporter 6 and Notary Public within and for the State of New York, do 7 hereby certify: 8 That I reported the proceedings in the 9 within entitled matter, and that the within transcript is a 10 true record of such proceedings. 11 I further certify that I am not related, by 12 blood or marriage, to any of the parties in this matter and 13 that I am in no way interested in the outcome of this 14 matter. 15 IN WITNESS WHEREOF, I have hereunto set my 16 hand this 5th day of May, 2010.
Digitally signed by Mindy Rothman- 17 Mindy Rothman- Corcoran DN: cn=Mindy Rothman-Corcoran, c=US Corcoran Reason: I am the author of this document 18 ______Date: 2010.05.10 15:05:41 -04'00' MINDY CORCORAN 19 20 21 22 23 24 25
VERITEXT REPORTING COMPANY 212-267-6868 516-608-2400 EXHIBIT E
EXHIBIT F Page 1
1 UNITED STATES BANKRUPTCY COURT
2 SOUTHERN DISTRICT OF NEW YORK
3 Case Nos. 08-01789-BRL, 09-01154-BRL, 10-03114-BRL
4 ------x
5 In the Matter of:
6 BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
7 Debtor.
8 ------x
9 SECURITIES INVESTMENT PROTECTION CORPORATION
10 Plaintiff,
11 -against-
12 BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
13 Defendant.
14 ------x
15 IRVING PICARD, TRUSTEE,
16 Plaintiff,
17 -against-
18 VIZCAYA PARTNERS LIMITED, et al.,
19 Defendants.
20 ------x
21 IRVING PICARD, TRUSTEE,
22 Plaintiff,
23 -against-
24 ADELE FOX,
25 Defendant.
VERITEXT REPORTING COMPANY 212-267-6868 www.veritext.com 516-608-2400 Page 2
1
2 U.S. Bankruptcy Court
3 One Bowling Green
4 New York, New York
5
6 September 14, 2010
7 10:04 AM
8
9 B E F O R E:
10 HON. BURTON R. LIFLAND
11 U.S. BANKRUPTCY JUDGE
12
13
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VERITEXT REPORTING COMPANY 212-267-6868 www.veritext.com 516-608-2400 Page 3
1 Adversary proceeding: 08-01789-brl Securities Investor
2 Protection Corporation v. Bernard L. Madoff Investment
3 Securities, LLC.
4 1) (cc-2895) Notice of Hearing on Fourth Applications For
5 Interim Compensation For Services Rendered And Reimbursement of
6 Actual and Necessary Expenses Incurred by Applicants
7
8 Adversary proceeding: 08-01789-brl Securities Investor
9 Protection Corporation v. Bernard L. Madoff Investment
10 Securities, LLC.
11 1) (cc-2883) Trustee and Baker & Hostetler LLP Application For
12 Allowance Of Interim Compensation For Services Rendered And
13 Reimbursement of Actual and Necessary Expenses Incurred
14
15 2) cc-(2884) Windels Marx Lane & Mittendorf, LLP Application
16 for Allowance of Interim Compensation for Services Rendered and
17 Reimbursement of Actual and Necessary Expenses Incurred from
18 February 1,2010 through May 31, 2010 and Request for Partial
19 Release of Holdback for Windels Marx Lane & Mittendorf, LLP,
20 Special Counsel
21
22 3) (cc-2886) Eugene F. Collins As Special Counsel For The
23 Trustee Application For Allowance Of Interim Compensation For
24 Services Rendered And Reimbursement of Actual and Necessary
25 Expenses Incurred
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2 4) (cc-2887) Williams, Barristers & Attorneys As Special
3 Counsel To The Trustee Application For Allowance Of Interim
4 Compensation For Services Rendered And Reimbursement Of Actual
5 And Necessary Expenses
6
7 5) (cc-2888) Attias & Levy As Special Counsel For The Trustee
8 Application For Allowance Of Interim Compensation For Services
9 Rendered And Reimbursement of Actual and
10 Necessary Expenses Incurred
11
12 6) (cc-2889) SCA Creque as Special Counsel To The Trustee
13 Application For Allowance Of Interim Compensation For Services
14 Rendered
15
16 7) (cc-2890) Schiltz & Schiltz as Special Counsel To The
17 Trustee Application For Allowance of Interim Compensation For
18 Services Rendered And Reimbursement Of Actual and
19 Necessary Expenses Incurred
20
21 8) (cc-2891) Hogan Lovells International LLP (Formerly Lovells
22 LLP) As Special Counsel To The Trustee Application For
23 Allowance Of Interim Compensation For Services Rendered And
24 Reimbursement Of Actual And Necessary Expenses Incurred
25
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1 9) (cc-2892) Mishcon de Reya As Special Counsel To The Trustee
2 For Allowance Application Of Interim Compensation For Services
3 Rendered
4
5 10) (cc-2893) Kugler Kandestin, LLP As Special Counsel To The
6 Trustee Application For Allowance Of Interim Compensation For
7 Services Rendered And Reimbursement of Actual and Necessary
8 Expenses
9
10 11) (cc-2894) Higgs Johnson Truman Bodden & Co. As Special
11 Counsel To The Trustee Application For Allowance of Interim
12 Compensation For Services Rendered And
13 Reimbursement Of Actual And Necessary Expenses Incurred
14
15
16
17
18
19
20
21
22
23
24
25 Transcribed by: Zipporah Geralnik
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2 A P P E A R A N C E S :
3 BAKER AND HOSTETLER LLP
4 Attorneys for Irving H. Picard, Trustee for the
5 Substantively Consolidated SIPA Liquidation of
6 Bernard L. Madoff Investment Securities LLC and Bernard
7 L. Madoff
8 45 Rockefeller Plaza
9 11th Floor
10 New York, NY 10111
11
12 BY: DAVID J. SHEEHAN, ESQ.
13 IRVING H. PICARD, ESQ.
14
15
16 SECURITIES INVESTOR PROTECTION CORPORATION (SIPC)
17 805 15th Street, N.W.,
18 Suite 800
19 Washington, DC 20005
20
21 BY: KEVIN H. BELL, ESQ.
22
23
24
25
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2 A P P E A R A N C E S (continued):
3 WINDELS MARX LANE & MITTENDORF, LLP
4 Attorneys for SIPA Trustee and Chapter 7 Trustee
5 156 West 56th Street
6 New York, New York 10019
7
8 BY: ALAN NISSELSON, ESQ.
9 REGINA GRIFFIN, ESQ.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
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1 P R O C E E D I N G S
2 THE COURT: Good morning.
3 IN UNISON: Good morning, Your Honor.
4 THE COURT: Please be seated.
5 THE CLERK: SIPC v. Bernard L. Madoff Investment
6 Securities, LLC.
7 MR. SHEEHAN: Good morning, Your Honor.
8 THE COURT: Good morning.
9 MR. SHEEHAN: David Sheehan of Baker Hostetler counsel
10 to the trustee, Irving Picard. This morning here with me is
11 Kevin Bell from the Securities Investor Protection Corporation,
12 Mr. Nisselson and his counsel, Regina Griffin, for Windels Marx
13 and, of course, the trustee.
14 THE COURT: Are there any other appearances?
15 MR. SHEEHAN: No, I don't think so, Your Honor.
16 Your Honor, there are a number of matters on before
17 you this morning all involving interim fee applications. The
18 only one of which is opposed is that of Baker Hostetler and the
19 trustee, Mr. Picard. What I would propose is that we deal with
20 the unopposed applications first. That is with Your Honor's
21 permission.
22 THE COURT: That's acceptable.
23 MR. SHEEHAN: Your Honor, before you this morning are
24 applications for third interim fee application of Windels Marx
25 Lane & Mittendorf, counsel to Mr. Nisselson who is still
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1 continuing as a Chapter 7 trustee in connection with the
2 Bernard L. Madoff matter. As I said, there are no -- there is
3 no opposition to this application. Since the inception of Mr.
4 Nisselson's work as trustee and that of his counsel, they have
5 rendered invaluable service to the trustee in numerous
6 litigations that they've already commenced or are underway
7 involving significant corporate transactions engaged in by Mr.
8 Madoff and his family, principally BOM Air (ph.) family, the
9 Madoff Energy, Primax and a number of others all of which are
10 very convoluted transactions engaged in by Mr. Madoff, as I
11 said, his family and, in some instances, third parties
12 utilizing the customer property of BLMIS for their own ill
13 gotten gains.
14 As I say, the work has been first rate. It's been a
15 pleasure to work with the Windels Marx firm and the trustee and
16 his counsel would strongly recommend that this application be
17 approved.
18 THE COURT: Does anyone want to be heard?
19 MR. BELL: Your Honor, Kevin Bell on behalf of the
20 Securities Investor Protection Corporation. SIPC has reviewed
21 the application very thoroughly, Your Honor, has discussed the
22 application with Windels Marx. There have been certain
23 adjustments made after SIPC's suggestions. The SIPC supports
24 the interim compensation and expenses as well as the release of
25 190,000 dollars that was previously withheld prior to awards
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1 this Court has made.
2 THE COURT: Does anyone else want to be heard? I'm
3 inclined to grant the application.
4 IN UNISON: Thank you, Your Honor.
5 MR. SHEEHAN: Your Honor, the balance of the
6 applications which I'm going to do within a group are all
7 interim fee applications in connection with counsel retained by
8 the trustee and various jurisdictions in Europe and in the
9 Caribbean.
10 The first is the application of Eugene F. Collins. He
11 is located in Ireland. There are several funds in Ireland. We
12 are in the process of negotiating with them at this point
13 therefore it would be inappropriate to get into details but
14 suffice it to say, as everything associated with the Bernie
15 Madoff matter, is -- involves significant dollars. They
16 certainly are -- it is true here.
17 Thema International is one of the feeder funds that
18 we're negotiating with and there are, as I said, significant
19 dollars involved. If, in fact, we cannot resolve those with
20 the impending date of December 11th, Your Honor, we will surely
21 be seeing a complaint in connection with that and Mr. Collins
22 will be of great assistance to us there.
23 Mr. Williams -- the Williams firm works with us in
24 Bermuda. In Bermuda, there are a number of feeder funds that
25 are involved, one of -- and we have, in fact, secured and
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1 restrained 110 million dollars. Needless to say, there's a few
2 people fighting over that including Mr. Picard as trustee. We
3 are fully engaged with Alpha Prime which is the principal
4 feeder fund there. Mr. Williams has been assisting us in those
5 efforts. Again, efforts are trying to be made to resolve that.
6 We're not sure where that is going to end up but more than
7 likely in the form of a complaint giving the impending date.
8 Gibraltar, Your Honor has a lot of familiarity with
9 since you've already entered a default judgment in the about of
10 180 million dollars in favor of Mr. Picard as trustee. We are
11 in the process of seeking the enforcement of that, with Your
12 Honor's assistance, with the court in Gibraltar. We've had, as
13 Your Honor knows, a good deal of success on several fronts
14 there including the production of documents and an appeal.
15 That appeal resulted in 30,000 pounds being awarded to Mr.
16 Picard as trustee under the English system of the winner goes
17 the spoils. So we actually got paid for our discovery efforts
18 there. And the Attias & Levy firm has been of extraordinary
19 help in that regard. It's a very complex situation and we've
20 has, as I've said, much success.
21 BVI is one of the more difficult situations. There
22 are --
23 THE COURT: Get me back to the Gibraltar.
24 MR. SHEEHAN: Yes, Your Honor.
25 THE COURT: Has there been a reaction to the Court's
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1 correspondence with he Gibraltar court?
2 MR. SHEEHAN: Yes. There has, Your Honor. So, the
3 reaction has been positive on several fronts. The court
4 certainly is inclined to view our position favorably there, so
5 much so that several of the parties have -- if Your Honor will
6 recall, because it was a default, we invited them, if they
7 wished, to come here to litigate. We weren't concerned about
8 litigating the issue, just that they weren't appearing.
9 With Your Honor's arrival on the scene through your
10 letter to the court, they've now suggested to us that perhaps
11 they'd be better off coming here and seeking our assistance in
12 relief from the default and having a trial take place which, of
13 course, we'd be happy to do. So I think we've -- I don't know
14 if that's how it's going to work out, Your Honor. They're
15 considering your options --
16 THE COURT: What about the funds on deposit and the
17 court in Gibraltar?
18 MR. SHEEHAN: They're still sitting there on deposit.
19 They have not been moved over to Mr. Picard at this point. But
20 I think it's -- it's always difficult to predict in the area of
21 litigation, Your Honor, but the momentum seems to be in favor
22 of the trustee.
23 The -- in the British Virgin Islands, there are twenty
24 feeder funds. The SCA Creque firm is the firm that we've
25 retained there, has been of assistance to us in a number of
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1 fronts. We have not instituted other than in the Harley
2 situation a litigation there. We are negotiating with all of
3 the representatives of the feeder funds but, needless to say,
4 given the significant amount of money involved, about 1.5
5 billion dollars in the aggregate, we are preparing complaints
6 in the event that we cannot resolve those matters.
7 Luxemburg involves the Luxalpha and related funds that
8 are there. That represents about 330 million dollars at this
9 point, Your Honor. Schiltz & Schiltz has again been working
10 with us. Our difficulty there has been obtaining documents, as
11 Your Honor is probably well aware of, the privacy laws in
12 France, Switzerland and Luxemburg are pretty stringent. We're
13 working very hard to get around those and to negotiate relief
14 because I think, ultimately, if we have to litigate those
15 issues, I'm persuaded that we have a better position than they
16 believe we have because they're all subject to jurisdiction of
17 this court and I think the law favors us -- you may comment,
18 but that's where we are. We've managed to persuade them of
19 that and I think we're going to get most of the documents but
20 again, given where we are and the amount of money involved,
21 close to half a billion dollars, I believe that we will be
22 probably again instituting litigation here. So, in the next
23 several months, I think Your Honor is going to see a
24 significant number of filings of complaints against feeder
25 funds. Because not withstanding the diffi -- the efforts,
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1 extensive efforts by the trustee's counsel and his counsel in
2 these jurisdictions, the complexity, nature and scope of these
3 matter and the initial reaction, of course, always being that I
4 didn't know and us then having to persuade them that perhaps
5 they did, it takes a good deal of time and we're still in that
6 process. So I'm persuaded that more than likely we're going to
7 end up with more complaints than settlements in this regard.
8 London, there's two counsel here and the reason for
9 that is Hogan and Lovells. We had Lovells but when they got
10 together with Hogan, they were conflicted out. We couldn't
11 work out that conflict so we brought in a very prominent firm
12 in London, Mishcon de Reya as the special counsel to succeed
13 them. That has been a very smooth transition. We've had very
14 good success there in terms of, again, discovery of the feeder
15 funds. A good many of the feeder funds are managed by firms in
16 the -- London and so therefore they maintain most of their
17 documents and we had an application there recently and obtained
18 documents again. Again, one, an 80,000 pound award to the
19 trustee for the costs associated with that endeavor.
20 So we've had a good deal of success again in that
21 forum in terms of getting documents which, again, underscores
22 why I think we're going to have success elsewhere. The -- on
23 top of that we've also interviewed all fifteen of the employees
24 of MSIL. We are preparing and we'll have a full report for
25 this Court as to the nature and background of the involvement
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1 of the London operation and what it was doing in connection
2 with the OMIS here in the United States. It's, on the surface,
3 a money laundering operation but there's much more deep
4 involvement by a number of individuals all of whom will be
5 pursued either here in the United States or through Mr. Picard
6 because he is, as Your Honor knows, recognized in the
7 proceedings in the liquidation of MSIL through that working
8 with Mr. Acre (ph.) who is the joint liquidator.
9 THE COURT: To that end, and as I indicated to the
10 Supreme Court of Gibraltar, Mr. Picard has very strong standing
11 authority pursuant to Section 1505 of our Bankruptcy Code.
12 MR. SHEEHAN: Yes, I agree, Your Honor. And I think
13 this case -- I think Your Honor has noted this in the past and
14 I thin it's absolutely true that when we're all done here, in
15 the next whatever number of years it takes to get this done,
16 there's going to be some very interesting law made in the area
17 of Chapter 15 and evolved of Mr. Picard and foreign
18 jurisdictions.
19 We intend to vigorously pursue the strength afforded
20 us by the Bankruptcy Code and to incorporate that into, I
21 think, things that we'll be able to do in Europe. Working with
22 Mr. Acres who as you know is the joint liquidator for missile
23 (sic) or we call MSIL. And I think working in tandem, I think
24 we can accomplish many things there and that's what we're
25 looking forward to doing. And Mishcon de Reya is now
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1 succeeding Lovells in spearheading that effort and they've done
2 a fine job.
3 THE COURT: You also have some very strong opinions
4 from the UK high court --
5 MR. SHEEHAN: Yes.
6 THE COURT: -- from recently.
7 MR. SHEEHAN: Yes, the Rubin decision is a terrific
8 decision for us, Your Honor, in forcing a default judgment, of
9 all things, in the courts there which I thought was a terrific
10 outcome for us. It's on appeal but I think -- one hopes that
11 the law will continue to swing in our favor.
12 THE COURT: Well, it's based upon the Cambridge
13 decision --
14 MR. SHEEHAN: Yes.
15 THE COURT: -- of Lord Hoffmann which is essentially
16 the main comment the -- recommendation of the highest courts in
17 the UK.
18 MR. SHEEHAN: Yes. That's right.
19 Then the last two, Your Honor, Canada, there's really
20 only one event occurring up there. There is some feeder fund
21 activity there. It's more in the way of third-party
22 investment. Kugler Kandestin firm has done fine work for us
23 there. And last but not least of, there's the Caymans. There
24 are four funds in the Cayman Islands. The Higgs Johnson firm
25 has been with us almost from the outset of this litigation, has
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1 provided, again, invaluable assistance to us in terms of local
2 courts there, representing the trustee and assisting us in both
3 negotiations of -- with the feeder funds as well as in
4 discovery efforts.
5 So, Your Honor, on balance, all of the counsel that
6 we've retained we find to be fine colleagues who have done
7 great work for us who will continue to do so going forward and
8 the trustee and his counsel would recommend that all of those
9 applications be approved. And I note, finally, for the record,
10 that they are indeed all unopposed.
11 THE COURT: Does anyone want to be heard?
12 MR. BELL: SIPC has support its recommendation in
13 support of these applications by the trustee's special counsel
14 and stands on its recommendation.
15 THE COURT: The applications are granted.
16 MR. SHEEHAN: Thank you, Your Honor. Mr. Picard will
17 address the objections that were filed with regard to his
18 application and that of the firm.
19 THE COURT: Sure.
20 MR. PICARD: Good morning, Your Honor. In the fourth
21 interim application for compensation, it cover a four month
22 period from February 1st through May 31st, I'm seeking approval
23 for $601,202.25 in fees and disbursements of $39.63. At this
24 time I'm seeking payment of eighty-five percent in accordance
25 with the amended order establishing compensation procedures and
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1 the full $39.63 of disbursements. SIPC has filed its
2 recommendations in favor of my portion of the application.
3 As Your Honor knows, in this case all the costs of
4 administration are being paid by SIPC including the fees of the
5 trustee as well as counsel including all the special counsel
6 that Mr. Sheehan has addressed. And so it will -- it has
7 already agreed to advance the amounts that are necessary to pay
8 these applications. In connection with my request, I expended
9 809.7 hours at an average hourly rate of $742.50 which includes
10 a ten percent discount of my normal rates and I've also written
11 off about 102,000 dollars in the interest of judicious billing
12 procedures.
13 The primary areas of my work are set forth in the
14 application both in the body and Exhibit B. Major areas involve
15 the claims review and related matters, Bankruptcy Court
16 litigation, case administration, avoidance actions, trustee
17 investigation and there's some significant time in connection
18 with the discussions with the U.S. Attorney's office.
19 As Your Honor will recall, we've recovered about 1.5
20 billion dollars since the beginning f the proceeding. Contrary
21 to statements in one -- at least one of the objections, getting
22 that money was not easy. You may recall early on we came to
23 court with a number of stipulations that were hotly negotiated
24 with a number of banks in order to recover money and securities
25 that Mr. Madoff had in his participant account at the
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1 Depository Trust also were not easy to get because, under the
2 circumstances, each of these financial institutions wanted to
3 make sure that we really were entitled to recover these things.
4 So that activity took a period of time.
5 In addition, we've settled two major pieces without
6 litigation. One is the Optimal settlement for 235 million
7 dollars and the other was the Levy family settlement for 220
8 million dollars. On top of that, we've also been able to
9 settle in the context of claims processing a lot of potential
10 preference actions to the tune of about fifty million dollars
11 at this point. And in virtually all of the cases, the parties
12 did not have to pay money to us rather a portion, or in some
13 cases all, of the SIPC advance was used to cover the
14 settlement. And all of those funds, the billion-five, is, in
15 my view, customer property and will be subject to allocation
16 and distribution in the near future.
17 One of the other objections seems to raise the
18 question about we haven't' shown much by way of results. This
19 was a Ponzi scheme of longstanding, as you heard a moment ago,
20 broad geographical breadth. And it's not unusual in cases of
21 this kind that results don't show up the minute you do
22 something. But I think, as Mr. Sheehan indicated, over the
23 course of the next couple of months, the -- you will see and
24 everyone will see evidence of the work that has been done
25 during the current period and earlier periods.
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1 A number of the other objections, which I don't
2 propose to respond to, really relate to the difference of
3 opinion as to the SIPA statute and how it should be
4 interpreted. Your Honor has ruled on a number of those issues
5 in the past. Some have been taken on appeal and, in fact, one
6 of the objectors has sought leave to appeal three of the prior
7 fee applications. Two have been denied by the District Court;
8 the third one was recently assigned to a judge and we would
9 expect that a similar result will occur.
10 Just to put a few facts on the record. We've received
11 16,374 customer claims. That includes duplicates, amendments,
12 modifications, supplements and even a few untimely claims. As
13 of last Friday, we had determined 13,350 claims. That's 81.5
14 percent. Of that group, we had allowed 2,213 for 5,629,000,000
15 dollars and SIPC has committed about 723.4 million dollars for
16 payment on those claims.
17 Of the approximately 3,000 claims left to be
18 determined, there are about 2100 form claimants who, on the
19 record, don't appear to have accounts. A number of these
20 claimants may be banks of broker-dealers and there is a
21 provision in the SIPC statute that if they are custodial
22 accounts, the beneficiaries of those accounts may be entitled
23 to SIPA coverage. So it's taking some extra time to work
24 through those kinds of claims. A lot of the other claims
25 involve insiders, Madoff family members, former employees and
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1 feeder funds against we have significant preference claims so
2 we have not determined them as yet.
3 We have currently pending nineteen avoidance actions
4 seeking about fifteen billion dollars. We have -- and I know
5 we have talked in the past about one or another -- we have some
6 significant settlements that we've been working on. We hope
7 that some of the related issues will get resolved in the very
8 near future and that we will be able to present them to the
9 Court and that before the end of the year we'll be able to make
10 a distribution of a significant amount of money, larger than
11 the 1.5 billion we have.
12 One of the objections raised a question of how much
13 we've calculated, based on our money in/money out approach, the
14 total allowed claims will be. We publicly stated on a number
15 of occasions as well as in court, that that number will be no
16 more than twenty billion. I believe it will be a shade less
17 but we have a number of claimants that didn't file claims. We
18 also have a number of issues, of course, with the preference
19 actions and depending on how some of those play out the number
20 would be less than twenty billion.
21 Based on the record of this proceeding, Your Honor, I
22 request that you deny the objections and also the record in the
23 proceeding in general and award me the amount that I've
24 requested that SIPC has supported. If you have any other
25 questions, I'd be happy to try to respond.
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1 THE COURT: Does anyone want to be heard? There is no
2 response. Is there anything else before me?
3 MR. SHEEHAN: Just the fees of Baker. I can talk for
4 a few minutes, Your Honor.
5 THE COURT: Sure.
6 MR. SHEEHAN: Your Honor, I feel somewhat inhibited
7 here because, as Your Honor knows, we don't file the narrative
8 associated with these applications and yet it is an extremely
9 telling narrative in terms of the work that's performed by the
10 firm. So to one extent, we're disarmed. We can't really talk
11 greatly about this because they are very sophisticated issues
12 involving multiple attorneys across a wide spectrum of law
13 suits. In fact, in one of our recent applications, several of
14 our colleagues objected to things that we actually did disclose
15 suggesting that we perhaps breached even 408 by doing so.
16 Notwithstanding that inhibition, however, I feel
17 compelled t, because of some of the statements that have been
18 made, to explain that what is involved here is an enormous
19 task. And let me break it down into three basic categories an
20 not burden the Court too much with a statement in support of
21 this but I think it is important, for purposes of the record,
22 to make it plain what's involved here. We, first of all, have
23 the customer claims, as Mr. Picard said, over 16,000. Now, a
24 good many of those involve feeder funds but -- and that may --
25 you may look at that and say well, on its face, in several
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1 weeks we're going to be arguing this motion with regard to
2 feeder fund investors and what should happen with them.
3 Well, that's not something you just casually arrive at
4 and it's not something you do by just looking badly at the
5 claim or without any research or looking at the feeder fund
6 itself. A great deal of research had to be done both legally
7 and, more importantly, factually and forensically with regard
8 to each and every customer claim over 8,000 as well as all of
9 the feeder funders involved. That's just one aspect of this
10 case. That is an aspect to the case that I spend a lot of my
11 time on. It's a very important thing, there are a number of
12 attorneys, very qualified attorneys working on that, that's
13 absolutely true.
14 But when you compare that to the work that went into
15 putting together -- and anyone who's read it knows what the
16 work was to do the Fairfield Greenwich amended complaint, the
17 research that went into that , the digging in, finding out all
18 of those things that went on for years and years against what?
19 A uniform front of silence. No one's cooperating here.
20 Starting with Mr. Madoff and all the way down. Either they are
21 being silent or they're represented. Everything the trustee
22 does here, he does on his own but virtue of going through the
23 books and records, using the strong arm of 2004, taking
24 depositions and issuing subpoena for records.
25 This is a vast and enormous task. It requires a wide
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1 spectrum of talent throughout the firm in order to do so.
2 There aren't just corporate issues here, there aren't just
3 bankruptcy issues. Just think for the moment, if you were
4 involved as a financial institution in the 19 -- late 1990's in
5 to 2000 and you watched Mr. Madoff year in and year out with
6 those kind of returns, would you think about leveraging that?
7 Well, I'll tell you, they did.
8 Banks, financial institutions, many of them involved
9 in very sophisticated notes and swaps transactions, trades on
10 those. Unbelievably sophisticated work being done by a wide
11 variety of people prominent throughout the financial services
12 industry. The names will ring through this courtroom as to who
13 was involved and who was using Bernie Madoff and what they
14 knew. All of that is out there. That is all forthcoming. And
15 that is only happened because of all the hard work that Mr.
16 Picard and his trustee and all the people that he's retained
17 the consultants, also paid for by SIPC; forensic accountants at
18 FTI, and Alix and other experts, all of whom have assisted us
19 in this endeavor.
20 That's just het feeder funds. On top of that, there
21 are going to be, literally, and unfortunately, hundreds of
22 lawsuits. Because this is, as I've often said to Your Honor, a
23 Ponzi scheme. There's nothing else but other people's money
24 involved. So there are those, those net losers, that's who
25 truly we represent; those net losers who did not get their
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1 money back. We are going to seek from those net winners who
2 got their money, some of that back.
3 The trustee is exercising great discretion in that
4 regard and you'll see that. In the next coming weeks there
5 will be submitted to Your Honor a broad plan associated with
6 this that has been well thought out and researched by the
7 trustee for Your Honor's consideration and, quite frankly, all
8 of our adversaries. We would not embark on this kind of an
9 endeavor without including everyone within the process; our
10 adversaries as well as our colleagues and of course the Court.
11 And at the end of the day, we're hoping that most of
12 those can be resolved amicably at least cost and least pain to
13 those folks who are out there. But they must realize that as
14 victimized as they may feel, the larger victim is, indeed,
15 those who did not get their money back. And the trustee,
16 empowered by SIPA and by the Bankruptcy Code, is doing what
17 equity always does. Equity is a quality and that is exactly
18 what we are trying to achieve here.
19 So there are literally dozens and dozens of attorneys
20 and those who've objected and said yes, it looks like a lot of
21 lawyers are involved, that's absolutely true. Demanded by the
22 scope and magnitude of what we're confronted by. And we work
23 vey hard every day to do that. And at some point, I won't have
24 to speak in vagaries as I am here today; I understand that.
25 But I wanted Your Honor to know that we do take this very, very
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1 seriously, that we work very, very hard and that, as Mr. Picard
2 has said, in the next several weeks, months, all of that will
3 be forthcoming, all of that will be spread upon the record
4 including not only settlements that I think will be forthcoming
5 but in addition to that litigation that will demonstrate the
6 scope and magnitude of this case.
7 So I would recommend, Your Honor, respectfully, that
8 you approve our application here today.
9 MR. BELL: Your Honor, Kevin Bell for SIPC. This is
10 the fourth application on which SIPC is stating its position.
11 We have filed a recommendation in support. This is week
12 ninety-three. On December 15th, 2008, I filed SIPC's
13 application in the District Court. Those ninety-three weeks
14 have been a long time in SIPC's life. We have observed
15 everything that has occurred that Mr., Sheehan has alluded to.
16 We have read every page and every entry is the thousand of
17 pages of time records that were submitted to SIPC and we have
18 made suggested changes -- we have suggested changed to both the
19 trustee and counsel which, for the most part, were accepted and
20 resulted in write-offs and reduction of the fees sought.
21 Mr. Sheehan has alluded to and it will be very helpful
22 when December 11th comes, when the next fee application occurs,
23 to be able to let the world see what SIPC knows. And that is
24 how involved this case is and with the in-depth work that
25 trustee and his lawyers, particularly Baker Hostetler, Windels
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1 and the numerous consultants the trustees have retained have in
2 pursuing these assets for the benefit of the fund of customer
3 property and a future distribution to those individuals that
4 qualify as customers to get the net losers back their fair
5 share of the money that was previously distributed but he
6 crook, Mr. Madoff.
7 SIPC has a very in-depth awareness of each nook and
8 cranny of the customer claims review and is extremely aware of
9 those claims that remain to be determined, as noted by the
10 trustee earlier. To advise the Court, earlier this month
11 Congress has requested and received a reply from SIPC about
12 when it expects all the claims to be resolved and I am pleased
13 to tell the Court that SIPC has advised the court that it, in
14 consultation with the trustee, expects all claims to be
15 determined by the end of the year. All 3,000 or so that remain
16 to be determined.
17 So with regard to the fees, you know, the objections
18 are repetitious of what has hap -- what has occurred and prior
19 to and I've made statements on the record and I make these
20 statements for the record because I would expect we will see an
21 appeal by the same individuals to the District Court from this
22 Court's award of the fees. But the tasks that have been
23 performed by the trustee, as outlined in the time records and
24 outlined to SIPC, I can report to the Court have been
25 thoroughly and professionally addressed by counsel. There is
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1 no discrepancy between what trustee and counsel have requested
2 and what SIPC recommends. And SIPC would recommend to the
3 Court, as it did in its written statement, that the Court
4 approve and award the fees as requested by trustee and counsel.
5 Thank you, Your Honor.
6 THE COURT: Does anyone else want to be heard?
7 Ell, as has been pointed out, there have been several
8 objections to the fee requests. Nobody's bothered to come to
9 court with respect to arguing in favor of their objections.
10 I'm somewhat concerned about that and the Court's taken the
11 time and trouble to contact the objectants to ascertain whether
12 they are coming here to stand by the papers that they filed.
13 The answer has been no and there has not been any response.
14 I'm surprised and a little bit disappointed because it
15 is important that when legitimate objections are filed with the
16 Court at least there's an opportunity for the recipients of
17 those objections to face the objectors and to discuss, on the
18 merits, the positions that they take. This is the fourth fee
19 request and, essentially, with respect to this fee request,
20 basically the same arguments are advanced in support of these
21 objections as were advanced previously.
22 The objections previously, as have been pointed out by
23 other courts and this Court, all revolve around the methodology
24 used by the trustee to compute net equity. That was observed,
25 for example, by Judge Daniels in his opinion of January 11th,
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1 2010. That issue is now fast tracked to the second circuit and
2 the disagreement with a litigator posture is not really the
3 appropriate basis to object to a request for fees.
4 Under these circumstances, it is a bit disconcerting
5 to the Court. Many of the arguments raised in the objections
6 deal with not only the disagreement with the litigation posture
7 taken by the trustee, SIPC and the law firm but with respect to
8 the actual process and administration of the case which has
9 been discussed at great length here this morning as a thorough
10 report to the Court, which I'm pleased in on this record. But
11 likewise, in connection with SIPC's letter to Congress which is
12 a public document available to all and which, essentially,
13 describes the exact status as has been described to the Court
14 this morning and is largely the response to much of the
15 objections that have been lodged here by parties who didn't
16 bother to show.
17 It is also true that this has been a very, very large
18 and complex and broad international and national set piece of
19 litigation. The sandbox is -- litigation sandbox is worldwide.
20 The issue and negotiation sandbox, likewise, is worldwide with
21 the trustee required to appear and respond to litigation, both
22 before this Court and other courts but in connection with he
23 international aspects of the proceedings.
24 And to quote statements that were made in response to
25 objections filed to the previous applications, much of the
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1 expenses and cost of litigation is incurred because there is an
2 obligation, wherever the administration of the Madoff estate is
3 implicated, for the trustee to appear and deal with that. If
4 litigation is brought on, it is obvious that the trustee has to
5 go and react to it. If that litigation implicates the
6 administration of the estate, and that apparently is the case
7 with much of the request for fees here, it is also noteworthy
8 that much of the litigation effort has been spent in reaction
9 to litigation brought either by the movants, the objective --
10 objectants here or those that are aligned with them.
11 And in sum, I do find that there are no new facts or
12 arguments that have been advanced today which would alter my
13 prior findings concerning conflicts and the appropriateness of
14 the fees that have been requested here today. It is also
15 interesting, and parties seems to have lost sight of the fact,
16 that once upon a time, before Congress changed the rules, the
17 Court had some discretion to modify a trustee's fees but in SEC
18 against Charisma Securities Corp., 506 F.2d (2d Cir. 1974), it
19 was noted that the trustee had this discretion.
20 However, SIPA was amended in 1978 and now the
21 recommendations of SIPC are binding on the Court in most cases.
22 That's in the statute. I need not paraphr -- go in and
23 regurgitate the entire statute but in part, "in any case in
24 which the allowances to be paid by SIPC without the reasonable
25 expectation of recoupment, as provided in this chapter, and
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1 there was no difference between the amounts requested and the
2 amounts recommended by SIPC, the Court shall award the amounts
3 recommended by SIPC."
4 So there's a mandatory shall there and one wonders why
5 Congress even bothered to involve this Court in the evaluation
6 of the fees because the statute, primarily, it leaves that to
7 SIPC to review and pay. It does not come out of the estate.
8 And under 78eee(b)(5)(C), I must approve the fees when the
9 allowance to be paid by -- is to be paid by SIPC, the fact
10 here; there is no reasonable expectation of recoupment, that
11 does not appear that there is a reasonable expectation that
12 SIPC is going to be repaid by the estate; and there's no
13 difference between the amount recommended by SIPC and the
14 amount requested by the trustee or his counsel.
15 There has been, for many of the applications here, a
16 voluntary reduction for different purposes by the trustee and
17 the various counsel here so there is no difference. So the
18 three essentials have been satisfied in connection with the
19 statute which means the Court shall. However, under the
20 circumstances presented before me, even if this was 1976 or
21 1977, I find that the discretion afforded by me equals the
22 approval that I must give based upon their current statute and
23 based upon my evaluation in a pre-1978 era, I find the request
24 reasonable and appropriate and I approve them.
25 IN UNISON: Thank you, Your Honor.
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1 MR. PICARD: May I approach Your Honor --
2 THE COURT: Yes.
3 MR. PICARD: -- with an order?
4 THE COURT: And in approval I also state that the
5 objections are overruled. I have approved the order.
6 IN UNISON: Thank you, Your Honor.
7 (Proceedings concluded at 10:49 AM)
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3 RULINGS
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5 Granting of Application 9 2
6 For Interim Compensation and
7 Partial Release of Holdback
8 for Windels Marx Lane &
9 Mittendorf, LLP, Special Counsel
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11 Granting of Application 16 16
12 For Interim Compensation For
13 Windels Marx Lane & Mittendorf,
14 Eugene F. Collins,
15 Williams, Barristers & Attorneys,
16 Attias & Levy, SCA Creque,
17 Schiltz & Schiltz,
18 Hogan Lovells International LLP,
19 Mishcon de Reya,
20 Kugler Kandestin, LLP and
21 Higgs Johnson Truman Bodden & Co.
22
23 Granting of Application 31 25
24 For Interim Compensation For
25 Baker & Hostetler LLP
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2 C E R T I F I C A T I O N
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4 I, Zipporah Geralnik, certify that the foregoing transcript is
5 a true and accurate record of the proceedings.
6 Digitally signed by Zipporah Geralnik Zipporah DN: cn=Zipporah Geralnik, c=US Reason: I am the author of this document Geralnik Date: 2010.09.16 17:26:41 -04'00' 7 ______
8 Zipporah Geralnik
9 AAERT Certified Electronic Transcriber (CET**D-489)
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11 Veritext
12 200 Old Country Road
13 Suite 580
14 Mineola, NY 11501
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16 Date: September 16, 2010
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2 UNITED STATES BANKRUPTCY COURT
3 SOUTHERN DISTRICT OF NEW YORK
4 Adv. Proc. No. 08-01789-brl
5 ------x
6 SECURITIES INVESTOR PROTECTION CORPORATION,
7 Plaintiff,
8 v.
9 BERNARD L. MADOFF INVESTMENT SECURITIES, LLC,
10 Defendant.
11 ------x
12
13 U.S. Bankruptcy Court
14 One Bowling Green
15 New York, New York
16
17 December 14, 2010
18 10:21 a.m.
19
20
21 B E F O R E:
22 HON. BURTON R. LIFLAND
23 U.S. BANKRUPTCY JUDGE
24
25
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2 (3207) Baker and Hostetler LLP Fifth Application for Allowance
3 of Interim Compensation for Services Rendered and Reimbursement
4 of Actual and Necessary Expenses Incurred.
5
6 (3208) Attias & Levy as Special Counsel to the Trustee
7 Application for Allowance of Interim Compensation for Services
8 Rendered and Reimbursement of Actual and Necessary Expenses
9 Incurred.
10
11 (3209) Eugene F. Collins as Special Counsel to the Trustee
12 Application for Allowance of Interim Compensation for Services
13 Rendered and Reimbursement of Actual and Necessary Expenses.
14
15 (3210) Hogan Lovells International LLP (Formerly Lovells LLP)
16 as Special Counsel to the Trustee Application for Allowance of
17 Interim Compensation for Services Rendered and Reimbursement of
18 Actual and Necessary Expenses Incurred.
19
20 (cc-3211) Windels Marx Lane & Mittendorf, LLP Application for
21 Allowance of Interim Compensation for Services Rendered and
22 Reimbursement of Actual and Necessary Expenses Incurred.
23
24
25
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2 (3212) Williams, Barristers & Attorneys as Special Counsel to
3 the Trustee Application for Allowance of Interim Compensation
4 for Services Rendered and Reimbursement of Actual and Necessary
5 Expenses Incurred.
6
7 (3213) Schiltz & Schiltz as Special Counsel Application for
8 Interim Professional Compensation to the Trustee for Allowance
9 of Interim Compensation for Services Rendered and Reimbursement
10 of Actual and Necessary Expenses Incurred.
11
12 (3214) Higgs & Johnson (Formerly Higgs Johnson Truman Bodden &
13 Co.) as Special Counsel to the Trustee Application for
14 Allowance of Interim Compensation for Services Rendered and
15 Reimbursement of Actual and Necessary Expenses Incurred.
16
17 (3215) Kugler Kandestin, LLP as Special Counsel to the Trustee
18 Application for Allowance of Interim Compensation for Services
19 Rendered and Reimbursement of Actual and Necessary Expenses
20 Incurred.
21
22 (3216) Werder Vigano as Special Counsel to the Trustee
23 Application for Allowance of Interim Compensation for Services
24 Rendered and Reimbursement of Actual and Necessary Expenses
25 Incurred.
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2 (3217) SCA Creque as Special Counsel Application for Allowance
3 of Interim Compensation for Services Rendered.
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24 Transcribed by: Esther Accardi
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2 A P P E A R A N C E S :
3 BAKER AND HOSTETLER LLP
4 Attorneys for Trustee
5 45 Rockefeller Plaza
6 New York, New York 10111
7
8 BY: DAVID J. SHEEHAN, ESQ.
9 IRVING H. PICARD, ESQ.
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12 WINDELS MARX LANE & MITTENDORF, LLP
13 Special Counsel to SIPA Trustee and Chapter 7 Trustee
14 156 West 56th Street
15 New York, New York 10019
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17 BY: ALAN NISSELSON, ESQ.
18 REGINA GRIFFIN, ESQ.
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21 SECURITIES INVESTOR PROTECTION CORPORATION
22 805 15th Street, N.W., Suite 800
23 Washington, D.C. 20005
24
25 BY: KEVIN H. BELL, ESQ.
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2 A P P E A R A N C E S : (continued)
3 BECKER & POLIAKOFF
4 45 Broadway, 11th Floor
5 New York, New York 10006
6
7 BY: HELEN DAVIS CHAITMAN, ESQ.
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1 P R O C E E D I N G S
2 THE CLERK: SIPC v. BLMIS.
3 MR. SHEEHAN: Good morning, Your Honor.
4 THE COURT: Good morning.
5 MR. SHEEHAN: David Sheehan from Baker and Hostetler
6 on behalf of Irving Picard; the trustee for Bernard L. Madoff
7 Securities Inc.
8 We have this morning, Your Honor, a number of
9 applications in connection with interim fee allowances. As I
10 have done in the past, what I would like to do is approach
11 those that were not objected to and save the last, that which
12 was objected to. Which is, of course, the application of Mr.
13 Picard, as trustee, and his counsel, Baker and Hostetler.
14 With the Court's permission, I'd like to proceed.
15 THE COURT: Go ahead.
16 MR. SHEEHAN: The -- As Your Honor well knows, and as
17 the press is dutifully reported of late, there is a great deal
18 going on in the world involving Mr. Madoff, and a good deal of
19 that is occurring not in the United States, but elsewhere.
20 Around the globe; in Europe as well as in the Caribbean.
21 And as a result, what the trustee has done through the
22 course of the last two years is retain counsel in each of those
23 jurisdictions to assist him in the endeavors that he engages in
24 to recover funds and return them to the victims.
25 Each of those attorneys has applied for compensation,
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1 and none of those are objected to. And what I'd like to
2 briefly do, Your Honor, is just name the counsel, the
3 jurisdiction which they're operating, and a brief summary of
4 what they've done for the record, if I may.
5 THE COURT: Go ahead.
6 MR. SHEEHAN: The first is Attias & Levy. This is a
7 matter that Your Honor has -- is very familiar with, and that's
8 in Gibraltar involving the Vizcaya matter.
9 The local counsel there has been of extremely
10 important to us in terms of locking up to seventy-five million
11 dollars that resides in the courts there. And is soon to be
12 turned over to the court here, subject to this Court's
13 jurisdiction, and ultimately subject to a trial before Your
14 Honor with regard to our claims there.
15 The outcome there to a very large extent was assisted
16 by our local counsel and clearly we support their application.
17 Next application is by special counsel; Eugene F.
18 Collins. And that's the law firm we retained in Ireland.
19 Ireland was a jurisdiction through which much of the
20 Madoff money passed. A good deal of it still resides there.
21 Thema is one of the major funds that we sued that is -- resides
22 there, as well as others that are located within that
23 jurisdiction in terms of race.
24 Eugene F. Collins has been supportive of us almost
25 from the inception of the case, and has done a good deal of
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1 work to assist us in pursuing those assets.
2 Next firm is Hogan & Lovells. Hogan Lovells, as Your
3 Honor will recall, was initially Lovells. Retained by the
4 trustee at the outset of the case to assist us in London in
5 connection with the company owned by Mr. Madoff; Madoff
6 Securities International, or MSIL.
7 Lovells unfortunately developed a conflict; this is
8 their final application for services that were rendered prior
9 to the conflict occurring. The conflict occurred as a result
10 of the merger of Hogan & Lovells. And, unfortunately, the
11 Hogan firm had matters that we did not feel comfortable in
12 waiving the conflict on behalf of the trustee, so we retained
13 new counsel in London to handle those matters.
14 The next firm is Williams, Barristers. Williams
15 Barristers is in Bermuda. As I noted earlier, there are funds
16 throughout the Caribbean, Bermuda being one of them. A
17 principal fund there is Kingate. Kingate has 100 million
18 dollars in the bank, which we have secured, and is waiting the
19 outcome of litigation, which will take place here before Your
20 Honor in connection with litigation that we've instituted.
21 We've also taken through Williams, Barristers those
22 steps that are necessary to preserve that asset pending the
23 outcome of our litigation here, and the potential enforcement
24 of that judgment in Bermuda.
25 Williams, Barristers has assisted us in all those
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1 endeavors.
2 Next firm is Schiltz & Schiltz. Schiltz & Schiltz is
3 located in Luxembourg. Luxembourg is the location of Luxalpha,
4 a major fund that has been sued by the trust for significant
5 dollars, and is one of the principal funds that we are
6 pursuing, both here in the United States and potentially in
7 Europe as well.
8 Schiltz & Schiltz is with us since the beginning of
9 the case. Has been invaluable in terms of the structure of
10 that litigation.
11 Next firm is Higgs & Johnson. Higgs & Johnson is
12 located in the Cayman Islands. As Your Honor will recall, we
13 have instituted suit in the Cayman Islands against Harley
14 International. This is a fund that owes the estate one billion
15 dollars. And our counsel, Higgs & Johnson, has been of great
16 assistance to us throughout the course of the many hearings
17 that have been held down there in connection with a great deal
18 of activity associated with Harley.
19 As with all these cases, there are liquidators being
20 appointed by local jurisdictions, as is the case with Harley.
21 And we deal in that jurisdiction on a fairly regular basis with
22 that liquidator. And Higgs & Johnson represents us in that
23 effort.
24 Then the next firm is Kugler & Kandestin. Kugler &
25 Kandestin is a firm located in Canada. There are no funds
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1 there, but a good deal of documentation passed through a
2 variety of sources there. We've had to engage in a good deal
3 of discovery using 2004 in connection with Kugler's assistance
4 there, and we have achieved a good deal of document production
5 in connection with numerous funds, and has been of great
6 assistance to us.
7 Then there is Werder Vigano. Werder Vigano is in
8 Switzerland. As Your Honor well knows, there are a number of
9 Swiss banking connections associated with this case. Most
10 prominently perhaps is Union Bancaire Privee. There's a
11 settlement pending before Your Honor with regard to that very
12 action. And there are other actions associated with Swiss
13 banks.
14 This firm, Werder, has been of great assistance to us
15 in looking into the extra territoriality issues, as well as the
16 international jurisdictional issues associated with pursing
17 claims against Swiss banks, which is no mean feat has everyone
18 knows.
19 Then last is SCA Creque. This is in BVI. British
20 Virgin Islands was the home of many of the funds created by Mr.
21 Madoff. And Defender being one of them that we sued along with
22 a number of others. That litigation is ongoing here before
23 Your Honor, and Creque has been of assistance with regard to
24 all of those efforts as well.
25 So I would submit, Your Honor, all of those firms I've
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1 just named, there is no opposition, and I submit that their
2 applications should be approved.
3 MR. BELL: Your Honor, Kevin Bell on behalf of the
4 Securities Investor Protection Corporation.
5 I note, as does Mr. Sheehan, that Hogan Lovells is an
6 application for final compensation and payment of the holdback
7 that had been held back on the prior orders of the Court. And
8 that all others for interim. SIPC supports the entry of the
9 court order that allows the compensation requests for all the
10 applications, including the payment of Hogan Lovells final
11 compensation, including the prior holdback.
12 THE COURT: Does anyone want to be heard?
13 (No response)
14 THE COURT: There's no response. The applications are
15 granted.
16 MR. BELL: Thank you, Your Honor.
17 THE COURT: The next application is for special
18 counsel to the trustee; Windels Marx. And in the courtroom
19 today is the Chapter 7 trustee, Mr. Nisselson and his counsel;
20 Regina Griffin.
21 And as I've said before, Your Honor, and I'm very
22 happy to report it again, The support and work from Windels
23 Marx has been nothing short of superb. The work that they have
24 done has been first rate. It has been relentless in the sense
25 that the hours that they've put in and vast amount of hard work
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1 that went into the work, not only associated -- I should report
2 this to Your Honor, not only associated with the cases that are
3 before you Talon Air involving the aircraft of Mr. Madoff, the
4 Madoff corporations, such as CRIMEX, Madoff Energy, the Madoff
5 family funds, all of which are being handled through Mr.
6 Nisselson with Ms. Griffin and the firm.
7 But, also, as Your Honor knows, over the last several
8 weeks, we've had tremendous work associated with putting
9 together a number of complaints. And that firm came in and
10 assisted us in that effort as well.
11 And I know the trustee and myself are very supportive
12 of their application here today and would ask that it be
13 approved.
14 THE COURT: Does anyone want to be heard?
15 MR. BELL: Your Honor, again, SIPC has submitted its
16 application and supports the entry of the court order allowing
17 the application for interim compensation by Windels Marx.
18 THE COURT: The application is granted.
19 MR. SHEEHAN: Your Honor, at this time --
20 THE COURT: Typically in the cases well known to the
21 Court I do appear and fill in some of the so-called gaps in the
22 context of litigation. And it does provide for a very smooth
23 transition between the various firms here.
24 MR. SHEEHAN: Your Honor, the last application is that
25 of the trustee and his counsel; Baker Hostetler. At this point
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1 I'll turn over the podium, as it were, to Mr. Picard; the
2 trustee.
3 MR. PICARD: Good morning, Your Honor.
4 THE COURT: Good morning.
5 MR. PICARD: In this portion of the fifth application
6 for interim compensation covers the four-month period ending
7 September 30th. I seek the Court's approval for a $684,659.25
8 in fees, of which 581,960 dollars represents eighty-five
9 percent.
10 In addition, I seek 100,000 dollars of the holdback
11 and disbursements of $954.41.
12 SIPC has filed its recommendation pursuant to Section
13 78eee(b)(5)(C) of SIPA in favor of my portion of the
14 application as well as in favor of Baker & Hostetler's portion.
15 As I've indicated in prior applications I agreed with
16 SIPC at the outset of the proceeding to discount my rates, as
17 did the firm, by ten percent.
18 None of the fee payments, either to me, Baker, or any
19 of the other counsel you heard about today are being paid out
20 of any of the recoveries that we get. All those recoveries are
21 for the benefit of the allowed claimants. I also stand by my
22 prior pronouncements, if you will, that SIPC does not have a
23 reasonable expectation of recoupment of its administrative
24 advances.
25 Without getting into the specifics of allocation of
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1 property, which we hope we will have an application to the
2 Court in the next couple of months, I do want to address an
3 objection as well as news stories which focus on the current
4 allowed claims of approximately six billion dollars. And I
5 emphasize the word "current."
6 From that number the objection, as well as the news
7 stories, jump to the conclusion that we will have sufficient
8 funds to pay allowed claimants in full, and then to pay money
9 back to SIPC to cover its administrative advances. I submit
10 that their premise is wrong. They haven't done their homework.
11 If they had they would know that pursuant to Bankruptcy Code
12 Section 502(d) in connection with a number of adversary
13 complaints that we have filed, we have objected to the
14 allowance of significant claims on the grounds that the
15 defendants have not repaid to us the amounts that they received
16 as preferences, as a major example.
17 In fact, to the extent that we are successful in
18 recovering from those parties, the allowed -- the defendant to
19 the extent that he, she or it pays back will be able to
20 increase its claim. So while we will be getting in more money,
21 at the same time the allowed claims will increase. That is
22 what happens in the typical bankruptcy case, and that's what
23 will happen here.
24 And, of course, we're in litigation. Many cases get
25 settled, and I don't assume, and I don't think anyone should
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1 assume, that we're going to recover every single dollar that we
2 seek. Although, we hope and expect that we will recover
3 significant dollars.
4 During the four-month period I expended 922.1 hours.
5 In addition to the ten percent discount on that time, I wrote
6 off approximately 133,000 dollars in the exercise of good
7 billing practice.
8 As set forth in the application, especially Exhibit
9 C -- Exhibit B, excuse me, the significant portion of my time
10 was spent in connection with claims review, avoidance action,
11 case administration, the trustee's investigation, some
12 bankruptcy court litigation, and communications and meetings
13 with the U.S. Attorney's office.
14 As I said at the last interim fee hearing, this Ponzi
15 scheme was of longstanding, vast in scope and geographical
16 reach. Our complaints showed that.
17 Work done during the four-month period on which we're
18 here before you today, as well as in earlier periods, are now
19 beginning to show. Recoveries and the sale of the market-
20 making business are now up over 1.5 billion dollars. We have
21 hearings scheduled for approval of two settlements, totaling in
22 excess of one billion dollars. And we have several other
23 settlements in the pipeline and hope to be able to announce
24 those in the very near future.
25 As of last Friday we have determined 96.1 percent of
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1 the 16,394 claims. That’s approximately fifteen percent more
2 than when we were here in September.
3 As I indicated, we have asserted 502(d) counts against
4 a number of claimants; approximately a little bit more than
5 100. And we had claims from 10,400 plus claimants who don't
6 have accounts, that we had denied.
7 Based on where we are we today have 643 claims
8 remaining to be determined. And we hope to have most of that
9 done by the end of the year. These are the claims, of course,
10 that require extra work, review and, in many cases, inquiry of
11 the customer.
12 In connection with the adversary proceeding complaints
13 that we have filed, I've continued the hardship program that
14 was first introduced in connection with the claims process.
15 Based on the earlier hardship applications with which we had
16 agreed, and information submitted during the past few months by
17 persons claiming hardship, including at least one of opposing
18 counsel's clients, we have refrained from bringing at least 200
19 actions. We are continuing to receive inquiries and
20 applications, which we review on a regular basis. The hardship
21 program has a special place on the trustee's website. I
22 encourage persons who believe that they have a financial
23 hardship, significant medical issues, family issues, and the
24 like, to complete and submit an application.
25 We can't possibly know the issue that people are
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1 facing, unless they bring them to our attention. If we concur
2 with the application, as I have stated publicly on numerous
3 occasions, we will dismiss the adversary proceeding.
4 Based on where I expect we will be in the next several
5 months, I anticipate, as I indicated at the outset, that we
6 will be scheduling a hearing before Your Honor in the near
7 future on a motion for allocation of property, all of which, in
8 my view, should go to the customer fund, and present a proposal
9 for an interim distribution.
10 Based on the record of the proceedings, I ask Your
11 Honor to deny the objection and award the requested amount of
12 my time, the 100,000 of deferred and the disbursements. I'd be
13 pleased to answer any questions if you have them.
14 THE COURT: I have none.
15 MR. PICARD: Thank you, Your Honor. Mr. Sheehan will
16 address some of the other matters.
17 MR. SHEEHAN: Your Honor, as is well known by you and
18 has been widely reported in the press, we've been at this
19 endeavor for approximately two years. As a famous English
20 statesman once said, we are now at the -- not at the beginning
21 of the end, but the end of the beginning.
22 What we had before us is a significant array of
23 litigation. And in support of the fee application what I'd
24 briefly like to do this morning is to reflect upon the past.
25 Because in a good way it definitely reveals the future.
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1 The future being many, many course -- many litigations
2 against a variety of different financial institutions and FEDER
3 funds. They're all matter of record now, they've all been
4 filed. Widely reported that they constitute in excess of fifty
5 billion dollars.
6 The goal here of the trustee; the goal is to return
7 100 percent of the money to those victims. That is the goal
8 and that is what we are going to strive mightily to achieve.
9 We made some significant strides just in the last couple of
10 weeks, as Mr. Picard just reported. In the next several weeks
11 there will be even more significant strides made and reported
12 to this Court, to the public at large, as to significant
13 settlements going towards that goal of 100 percent return.
14 Will we achieve that? I don't know.
15 Litigation and all of assisted to associated with it,
16 make it difficult to predict that. But it's a worthy goal, an
17 admirable one, and one that the trustee and his counsel worked
18 with arduously everyday since the day of their appointment.
19 I think it's revealed by looking at the nature of the
20 cases that we've put together. Yes, we have sued individuals,
21 that is true, but only those individuals who got other people's
22 money. A fact often forgot no matter how often I repeat it, is
23 that this is a Ponzi scheme. And those who got other people's
24 money really shouldn't keep it. Bankruptcy is equality, and
25 what we are going to do is try to achieve that.
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1 As the trustee points out, we will be as careful and
2 deliberate as we can not to pursue those who can ill afford to
3 return the money of others. We understand that. And as
4 demonstrated by the fact that we've already walked away from
5 several hundred lawsuits we will undoubtedly walk away from
6 hundreds of others.
7 But the end of the day, the goal here is, there are
8 victims out there. People who did not get their money back;
9 hundreds of them, millions and millions of dollars. Our goal
10 is to follow this litigation that we've put together to make
11 sure that happens, that they get their money back.
12 And I think if you reflect upon the work that we've
13 done, not just in the four-month period, but in the two years
14 leading up to today, what you will see is a steady course
15 that's been followed by the trustee and his counsel.
16 Conducting a worldwide investigation. This is not something
17 that takes a matter of hours, or days, or weeks, but months and
18 years in order to achieve the outcome that we've achieved here
19 today.
20 To measure that by one minor matter or two, and to
21 suggest that through that prism one can then evaluate the work
22 that was done by the trustee and his counsel, is to be absurd.
23 That makes no sense. One has to look at the vast panoply of
24 work achieved by the trustee in the last two years, and his
25 counsel to assess the value of that work.
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1 Anyone who has read any of the complaints that are
2 free to be read that have not been sealed, whether that be
3 large portions of HSBC, large portions of the RICO complaint,
4 demonstrate that this was a vast worldwide fraud that Mr.
5 Madoff wasn't just an aberration, that it just wasn't an
6 affinity crime. What he engaged in was being part of the
7 fabric of the financial institutions of this country. That he
8 represented a financial instrument that they will utilize and
9 try to take advantage of. And in so doing took away the
10 millions and millions of dollars of innocent people. And the
11 only way -- the only way that's ever going to come back to them
12 is through the auspices of this trustee and the counsel that he
13 has retained to follow that money and to get it back.
14 That's what this application represents. Your Honor
15 has before you detailed time records. Yes, they're not shown
16 to the public. My adversary seems to suggest that there's
17 something untoward with regard to that.
18 One would think that as an experienced lawyer she
19 would recognize that there are in those time records, because
20 in order to let you, and SIPC and those who review these
21 records, know exactly what the trustee is doing. There are
22 thought processes contained within those records. There are
23 strategies, there is work product. It cannot be shown to the
24 public. These litigations are significant, complex, difficult.
25 Are we supposed to play all of our cards in front of all of
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1 them? They're not doing that for us, Your Honor. Obviously,
2 we shouldn't. The answer is simple and plain.
3 So, therefore, when we make this application to Your
4 Honor, we make it to you with full disclosure. With all the
5 years of experience that you bring to it to look at it, and as
6 does SIPC in looking at it as well.
7 It's important to note that the industry supports this
8 effort. This is funded not by the customers, not by some
9 taxpayer, but by the industry. The industry funds SIPC. The
10 industry here is paying the trustee and his counsel to chase
11 this money and to bring it back. Why? Because SIPA was
12 instituted to bring the money back to those customers. And my
13 adversary suggests that we've limited it in a wrongful way.
14 That's not for today, that's for the Second Circuit at
15 this point, Your Honor already having ruled on that topic. And
16 the law being, quite frankly, clear, what do we do when we're
17 in the situation where there are victims, where it's very
18 difficult? Can we get subjective, or do we do what we do as
19 lawyers, we follow the law. That's what we did here, that's
20 what the trustee has done, and he has reached out to Your Honor
21 and to the circuit and to other courts, all of them asking them
22 to apply the law and this is what we are doing here in terms of
23 pursuing these dollars and returning them to the customers.
24 So I would submit, Your Honor, that I have not gotten
25 into any of the detail. I don’t think I have to. We have
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1 complaints against seven major banks. Citibank, Natixis; each
2 of these representing 500 million dollars, a billion dollars.
3 Against JPMorgan Chase; the bank of Mr. Madoff, over six
4 billion dollars is being claimed. If you go through that
5 complaint, which Your Honor can, but the public can't at this
6 point, you see all the detail that went into all the work to
7 pull all of that together. To tell that story in a way that is
8 coherent and powerful. And at the end of the day I believe the
9 trustee will be successful in his efforts there. And so on and
10 so forth with regard to HSBC and all of the other complaints
11 that we've brought, and also against all the FEDER funds.
12 This was a monumental effort culminating in the
13 filings that took place over the last six to eight weeks. We
14 believe that that time was well spent. Well spent in terms of
15 the effort that we're bringing on behalf of the customers. But
16 well spent on behalf of restoring to the financial community
17 belief in the fact that ultimately -- ultimately the truth will
18 be known as to exactly how this architect of fraud, this
19 mastermind of Mr. Madoff, how it all happened. And we will
20 spread that upon the record, which is also part of our
21 responsibility.
22 So based upon that, Your Honor, I respectfully submit
23 that our application for fees and allowances here on behalf of
24 Baker, be approved.
25 MR. BELL: Your Honor, Kevin Bell on behalf of SIPC.
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1 Tomorrow begins the 105th week since SIPC filed its
2 application to begin the liquidation of the debtor under the
3 auspices of the Securities Investor Protection Corporation to
4 bring relief to all the victims.
5 Today's New York Times had an article about an issue
6 that came before the Court last month, about people buying the
7 victims' claims. And it ended with the -- what I want to start
8 with, which is Mr. Ross's idea that there is hope that there
9 will be payment of his claim. Your Honor, that is what SIPC's
10 all about. SIPC strives to make sure that the trustee and
11 counsel use their efforts to pursue the wrongdoers and to bring
12 those funds back into the control of the trustee so that goal,
13 that hope that Mr. Ross has can be fulfilled.
14 At this point in time that cannot happen. And I would
15 like to address the provision of the statute that is in
16 question today, raised by the opposition. Namely, that in case
17 in which the allowances will be paid by SIPC without reasonable
18 expectation of recoupment thereof, and there is no difference
19 between the amounts requested and the amounts recommended by
20 SIPC, the Court shall award the amounts recommended by SIPC.
21 At this moment in time, there is no reasonable expectation of
22 such a recoupment.
23 I have been involved in cases where there has been
24 full payment -- repayment of SIPC. It is my fondest
25 expectation that that would occur. It is the expectation of
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1 the SIPC leadership that that would occur. But at this moment
2 in time there is no reasonable expectation, there is a hope.
3 The trustee has advised that there's no reasonable
4 expectation. And SIPC, on examination, agrees with the trustee
5 at this moment. Mr. Picard and Mr. Sheehan have talked about
6 the future, about litigation, and we all, having been involved
7 in litigation over many years as lawyers, know that our hopes
8 sometimes don't get fulfilled in litigation because something
9 may happen.
10 The -- I would call the Court's attention to one of
11 the exhibits attached to the opposition to this application.
12 It is a document this Court referred to in its decision on the
13 motion to dismiss by Merkin. And that is the letter to
14 Congressman Kanjorski dated September 7th.
15 And in that you will see the president of SIPC
16 reported to the committee that has oversight over SIPC that
17 there is a very strong possibility that the allowed claims
18 would be somewhere around 17.3 billion dollars. The trustee
19 has added a footnote to that this morning, and anybody who
20 peruses the complaints filed will see that they are replete
21 with counts that assert 502(d) of the Bankruptcy Code, because
22 those defendants who are also claimants for protection under
23 the SIPA statute received preferences. And it is clear in
24 SIPC's view that that is a number that is the operative number
25 in this liquidation proceeding.
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1 So at some point in time when the trustee is able to
2 recover over twenty billion dollars maybe we would be at a
3 point where there would be no reasonable expectation. But as
4 the trustee has reported, he has 1.5 billion in hand, another
5 approximately a billion dollars that is subject to motions for
6 this Court's approval on two settlements. And the SIPC is very
7 well aware that that doesn't equal the twenty billion dollars
8 or so that are reported to Congress it expects that under the
9 methodology this Court approved, would be the allowed amount of
10 customer claims.
11 So let me just sum up by saying that SIPC has filed
12 its recommendation in support of the interim application of
13 trustee and counsel. It supports the entry of a court order
14 that would allow all applications by -- allow the application
15 by the trustee and counsel, including the payment of a portion
16 of the large holdback that has -- that this Court has
17 recognized in its prior orders in the sum of 100,000 dollars
18 for the trustee, and 3.4 million for Baker and Hostetler.
19 And I would say, Your Honor, SIPC is very aware of
20 everything that the trustee is doing. It has reviewed
21 intensively each of the applications that's before the Court
22 and all the invoices that are part of it. And it would
23 strongly urge the Court to enter the order submitted by the
24 trustee and counsel on their application.
25 Thank you, Your Honor.
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1 (Pause)
2 MS. CHAITMAN: Good morning, Your Honor. As you know
3 I represent several hundred investors of Madoff.
4 And many of those investors who had allowed claims
5 have been forced to sell their claims, because they couldn't
6 wait any longer to get the money that they needed to live on,
7 having lost everything they own in Madoff.
8 This is a case in which there is a great deal which is
9 undisclosed. And I think that's very regrettable. And I think
10 what was appropriate in response to my objection was a full
11 disclosure of the economics of this case. And, unfortunately,
12 we haven't received it.
13 The facts set forth in the September 7th letter of Mr.
14 Harback to Mr. Kanjorski and Mr. Garrett, reveal facts that had
15 never been disclosed publicly to my knowledge. And they
16 include the fact that, according to that letter, there is
17 approximately seventeen billion in net investments in Mr.
18 Madoff's companies. Therefore, presumably, the total claims
19 would be seventeen billion dollars.
20 However, in a situation where Mr. Picard has a
21 statutory duty to promptly allow claims and deliver substitute
22 securities to investors, after two years he has only allowed
23 5.8 billion dollars of the seventeen billion in possible
24 claims. And he hasn't told you today why that is. He says
25 well, it takes a long time to go through the records. There's
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1 an explanation, but we haven't heard it. It may very well be
2 that Mr. Picard never intends to allow those seventeen billion
3 in claims, so that the total claims in this case, all together,
4 will be 5.8 billion dollars.
5 And if we assume that that's true for a second, then
6 it's virtually inconceivable that there won't be enough money
7 to pay all the allowed claims in full and to fully reimburse
8 SIPC, in which event SIPC and the trustee should not be relying
9 on the provision of SIPA to which Mr. Bell just referred Your
10 Honor.
11 Now, we've heard Mr. Bell say that he's got setoff
12 claims; that Mr. Picard has asserted setoff claims against the
13 presumably the seventeen billion dollars in claimants, whose
14 claims have not yet been allowed. But as Your Honor knows, Mr.
15 Picard has sued for the difference between what people took out
16 and what they put in. So let's assume that I had put in a
17 million dollars and taken out two million dollars, then Mr.
18 Picard would have sued me for a million dollars. If he wins,
19 and I pay back the million dollars, I don't have an allowed
20 claim, I'm not recognized as a claimant because I had a zero
21 net investment.
22 So I don't really see how the mystery can be solved
23 simply by Mr. Bell's explanation, that some of the complaints
24 that have been filed have 502(d) claims in them. And we
25 shouldn’t be in this case, Your Honor. We shouldn't be feeling
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1 around in the dark for the facts about this. Those of my
2 clients who are still holding on and haven't been forced to
3 sell their claims have a right to know what the reasonable
4 prospect of payment is, and whether they're going to get
5 significantly more than the thirty cents on the dollar, or
6 thirty-three cents on the dollar that Wall Street is now
7 offering people.
8 That's why I filed the objection, Your Honor. And I
9 believe that the Court should not allow any further fees until
10 there's a full disclosure of the real economics of this
11 proceeding.
12 Thank you.
13 THE COURT: Anyone else want to be heard?
14 MR. SHEEHAN: If could briefly, Your Honor.
15 THE COURT: Sure.
16 MR. SHEEHAN: I think there is been -- there has been
17 full disclosure. It does require a good deal of putting things
18 together. Maybe not even a good deal, it's relatively
19 straightforward.
20 We know that FEDER funds are net losers, said that
21 since day one. Net losers, however, receive preferences and
22 fraudulent conveyances. Net losers who, therefore, will be
23 sued for billions of dollars. And at the end of the day,
24 either by settlement or by the judgment of this case, they will
25 pay that money back. And when they do, as Mr. Picard pointed
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1 out, the amount of their claim will be enhanced.
2 Those seventeen billion dollars, twenty -- it's in
3 that range, seventeen to eighteen billion dollars of FEDER Fund
4 claims are there. They're net losers, they're not winners.
5 Not somebody who got all their money back. So when we sue all
6 those people what are we doing? We're seeking to do exactly
7 what the statute tells us to do, that equity is equality. That
8 FEDER Fund simply cannot come out ahead of other people simply
9 because it's a loser. It has to give it back and participate
10 in a pro rata distribution. It's as plain, quite frankly, as
11 the nose on your face, if you actually looked at it clearly.
12 And that is is that you've got approximately seventeen to
13 eighteen billion dollars of claims filed by FEDER Funds, that
14 eventually will be determined and presumably allowed, except to
15 the extent that if the conduct of that FEDER Fund was so
16 egregious, so outrageous this trustee seeks to subordinate that
17 claim. Then, in that event, the amount of the denominator may,
18 indeed, be reduced.
19 But in the more likely event that what we prove here
20 is basically a lack of good faith, inquiry notice, that which
21 we have alleged, it will not be subordination so much as a
22 payment to the trustee, an increase in the amount of the claim,
23 so, indeed, the numerator will be increased, but so will the
24 denominator.
25 I believe that's very plan, very available to anyone
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1 on the website, doesn't take a good deal of arithmetic to
2 figure it out. And I think somebody with bankruptcy experience
3 and knowledge would understand that.
4 So I don't think there's any mystery here, Your Honor,
5 none. Nothing being hidden, nothing being held back, it's all
6 out there for everyone to see.
7 Thank you, Your Honor.
8 THE COURT: Thank you. Does anyone else want to be
9 heard?
10 (No response)
11 THE COURT: Well, it's interesting in that the focus
12 of this hearing on fee applications has turned away from the
13 actual fee applications, and more toward a disagreement
14 necessarily on the part of the -- or maybe not necessarily on
15 the part of the objectors, as to the impact of the net equity
16 determination, because that drives an awful lot of why the
17 parties are for or against.
18 The statute that I have before me with respect to
19 allocation of fees is clear. One time Congress gave this Court
20 some discretion, but then the original SIPA legislation was
21 changed and modified, so that the recommendation of SIPA is a
22 commandment upon the Court. The statute says that the court
23 shall approve if SIPA recommends the fee structure.
24 The only out is that there should not be a reasonable
25 expectation of recoupment, and that, essentially, is the horse
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1 that the objectors ride on here today to support their
2 objection.
3 I agree with Mr. Bell, that at this juncture there is
4 no reasonable expectation of recoupment. That reasonable
5 expectation, even if this Court was to give it some credence,
6 is so highly speculative it's really rank speculation.
7 Especially where the litigation that's pending before this
8 Court involves very well financed adversaries able to push back
9 with the timing, conclusion and income results, all of which
10 are not susceptible to any clear estimation.
11 So I cannot make that leap that one would say on a
12 very rosy estimate, that there is a reasonable expectation that
13 SIPC will be recouped for the amount of fees that are being
14 laid out.
15 Again, the emphasis is that these fees,
16 notwithstanding the objection, are not coming from any of the
17 victims, and they're not coming from the estate. And under all
18 of the circumstances, and notwithstanding the statutory command
19 that this Court shall approve the fees, I am very well aware of
20 the Herculean effort being utilized in the litigation arena to
21 recoup funds for the benefit of the victims, and
22 notwithstanding how the Court of Appeals, or ultimately the
23 Supreme Court, rules. And in that regard I would hope that
24 there'd be some swift at disposition, so that monies that are
25 coming in in hand are able to be distributed rather quickly.
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1 I commend the trustee and counsel's suggestion that
2 there may be a sufficient funds for distribution early next
3 year. That will be most helpful.
4 Just to give you a bird's eye view of the impact of
5 all the litigation that's being described in front of me here,
6 last week as a delegate to the United Nations in Austria, the
7 whole Austrian financial public community was up in arms and
8 discussing the trustee's litigation against the banks and
9 parties in Austria. It is quite clear that the litigation is
10 having a very substantial impact. And that does not come
11 without a lot of investment in lawyer and trustee time and
12 effort.
13 Of course, none of that litigation, to the extent that
14 it was publicized in Austria, has had a current nexus to the
15 application before me today, although it may very well have.
16 But, in any event, I do not find that the objectors
17 have made any strong point with respect to objecting to the
18 fees that have been requested here today. The objections are
19 overruled. And I will entertain an order approving them --
20 approving the fees.
21 MR. SHEEHAN: May I approach, Your Honor?
22 THE COURT: Yes.
23 (Pause)
24 THE COURT: I have approved the order.
25 MR. SHEEHAN: Thank you very much, Your Honor. Good
VERITEXT REPORTING COMPANY 212-267-6868 www.veritext.com 516-608-2400 SIPC v. BERNARD L. MADOFF INVESTMENT SECURITIES
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1 morning, Your Honor.
2 MS. CHAITMAN: Thank you, Your Honor.
3 THE COURT: Thank you, Ms. Chaitman.
4 (Whereupon these proceedings were concluded at 11:08 a.m.)
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6 Application to approve fees for foreign 12 15
7 counsel granted
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VERITEXT REPORTING COMPANY 212-267-6868 www.veritext.com 516-608-2400 Page 36
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4 I, Esther Accardi, certify that the foregoing transcript is a
5 true and accurate record of the proceedings.
Digitally signed by Esther Accardi 6 Esther DN: cn=Esther Accardi, o, ou, [email protected], c=US 7 ______Accardi Date: 2010.12.16 14:16:16 -05'00'
8 ESTHER ACCARDI (CET**D-485)
9 AAERT Certified Electronic Transcriber
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13 200 Old Country Road
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VERITEXT REPORTING COMPANY 212-267-6868 www.veritext.com 516-608-2400 EXHIBIT H Baker & Hostetler LLP Hearing Date: June 1, 2011 45 Rockefeller Plaza Hearing Time: 10:00 am New York, NY 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 Irving H. Picard Email: [email protected] David J. Sheehan Email: [email protected] Seanna R. Brown Email: [email protected] Jacqlyn R. Rovine Email: [email protected]
Attorneys for Irving H. Picard, 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, SIPA Liquidation v. (Substantively Consolidated) BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Defendant. In re:
BERNARD L. MADOFF,
Debtor.
TRUSTEE’S REPLY TO OBJECTION TO SIXTH APPLICATION OF TRUSTEE AND BAKER & HOSTETLER LLP FOR ALLOWANCE OF INTERIM COMPENSATION FOR SERVICES RENDERED AND REIMBURSEMENT OF ACTUAL AND NECESSARY EXPENSES INCURRED FROM OCTOBER 1, 2010 THROUGH JANUARY 31, 2011
Baker & Hostetler LLP (“B&H”), counsel to Irving H. Picard as trustee (the “Trustee”) for the substantively consolidated liquidation proceeding of Bernard L. Madoff Investment
Securities LLC (“BLMIS”) under the Securities Investor Protection Act (“SIPA”), 15 U.S.C. §
78aaa et seq.,1 and Bernard L. Madoff (“Madoff”), individually (collectively, “Debtor”), respectfully submits this reply on behalf of the Trustee and itself to the objection filed in opposition to the sixth application (the “Sixth Application”) (ECF No. 4022) for an order allowing and awarding interim compensation for services performed by the Trustee and B&H for the period commencing October 1, 2010 through and including January 31, 2011 (the “Compensation
Period”), and reimbursement of actual and necessary expenses incurred during the Compensation
Period, and in support thereof, respectfully represents as follows:
PRELIMINARY STATEMENT
1. The Trustee has repeatedly emphasized over the course of his appointment that
not a single penny of the administrative costs of this entire liquidation, whether it be his fees,
fees of his counsel, special counsel, consultants, or any other administrative costs, will be paid
out of any recoveries obtained by the Trustee for the benefit of BLMIS customers with allowed
claims. Rather, all of those fees are paid by administrative advances from the Securities Investor
Protection Corporation (“SIPC”), as are all administrative costs incurred by the Trustee.
Payment of those costs has no impact on recoveries that the Trustee has obtained and will obtain
because the costs are chargeable to the general estate. Recoveries from litigation, settlements,
and other means will be available in their entirety for the satisfaction of customer claims.
2. The standards for allowing and awarding interim compensation to the Trustee and
his counsel are clear and unambiguous. Under Section 5(b)(5)(A) of SIPA, the Court shall grant
1 References hereinafter to provisions of SIPA shall omit “15 U.S.C.”
2
reasonable compensation for services rendered . . . by a trustee, and by the attorney for a trustee,
in connection with a liquidation proceeding.” SIPA § 5(b)(5)(A).
3. Where the fees are paid by SIPC without any reasonable expectation of
recoupment, and SIPC recommends that the amounts requested be approved, the Court is
required to award the amounts recommended by SIPC. SIPA § 78eee(b)(5)(C).
4. Consistent with other bankruptcy and SIPA cases, the amounts awarded as interim
compensation remain subject to final review by SIPC and the Court at the conclusion of the
liquidation proceeding. See, e.g., In re Stable Mews Assocs., 778 F.2d 121, 123 n.3 (2d Cir.
1985).
5. The standards guiding SIPC in its review of Trustee and counsel fees are the same
as those that would be considered by the Court, if it had such discretion here—whether those
services are reasonable and necessary. Services are necessary where there is a benefit to the estate. See, e.g., In re Keene Corp., 205 B.R. 690, 696 (Bankr. S.D.N.Y. 1997).
6. Of the hundreds of law firms that have filed notices of appearance, and the thousands of creditors, customers, and related parties involved in this liquidation proceeding, only a single objection has been filed to the Sixth Application: by Ms. Helen Davis Chaitman,
Esq.2 See Objection to Sixth Application of Trustee and Baker & Hostetler LLP For Allowance of Interim Compensation for Services Rendered and Reimbursement of Actual and Necessary
Expenses Incurred From October 1, 2010 Through January 31, 2011 (the “Objection”) (ECF No.
4088). Ms. Chaitman also filed objections to each of the prior interim fee applications of the
2 The Objection states that it is on behalf of “Marsha Peshkin and over 800 other Customers of Bernard L. Madoff” (the “Peshkin Objectors”). The particular group of clients or number of clients that Ms. Chaitman purports to represent in any given objection, filing, or pleading in matters relating to this liquidation proceeding is fluid, to say the least, and at times conflicts with notices of appearances filed by other counsel with respect to certain purported clients.
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Trustee and his counsel, all of which have been overruled. Not satisfied with this Court’s rulings, Ms. Chaitman has sought leave to appeal four of the five orders approving prior interim fee applications. The United States District Court for the Southern District of New York
(“District Court”) denied the motions for leave to appeal the first and third fee orders. See
District Court Memorandum and Decision dated January 11, 2010 (GBD), Misc. Matter M-47,
(ECF No. 1764); District Court Opinion and Order dated August 6, 2010 (SAS), Misc. Matter
M-47.3
7. Similar to prior objections filed to the interim fee applications of the Trustee and counsel, the Objection fails to articulate any reason grounded in fact or law that the interim compensation requests of the Trustee and B&H set forth in the Sixth Application should not be awarded. The SIPA statute is clear that the compensation shall be awarded to the Trustee and
B&H where SIPC’s recommendation is equal to the amounts requested. No argument set forth in the Objection provides any basis for the Court to deviate from the statutory language that is determinative of the Sixth Application.
8. Recognizing that there is no relief to be had by way of statute, the Objection instead sets forth a number of scurrilous allegations and repetitive arguments irrelevant to the legal framework governing compensation awards in a SIPA matter. Ms. Chaitman and her clients have made it plain that they disagree with the Trustee’s legal positions, as evidenced by the voluminous amount of objections, litigation, and appeals in which she is currently engaged
3 The motions for leave to appeal the second and fifth fee orders remain pending before the District Court.
4 on behalf of her various purported clients.4 Nothing in the Objection (or the public record, for that matter), suggests that the Trustee and B&H’s services are not benefitting the estate. Rather, those services for which the Trustee and B&H seek compensation are simply ones that Ms.
Chaitman and her clients disagree with, which is not the standard courts apply in evaluating fee requests. Ignoring that standard, Ms. Chaitman and her clients instead seek to re-argue pending
4 The following is a selection of matters in which Ms. Chaitman is or has been involved and in which she has filed the following documents related to this liquidation proceeding: (i) United States v. Madoff, No. 09-CR-213 (DC) (S.D.N.Y.) (motion for reconsideration of District Court’s determination that DOJ may seek Trustee’s assistance in Madoff forfeiture, which was denied) (ECF No. 110); (ii) SIPC v. BLMIS, Adv. Pro. No. 08-01789 (BRL) (Bankr. S.D.N.Y.) (objection to first applications of the Trustee and B&H for interim compensation, which was overruled) (ECF No. 351), (motion for leave to appeal of order approving first applications of Trustee and B&H for interim compensation, which was denied by district court, supra ¶ 6) (ECF No. 366), (opposition on net equity) (ECF No. 755), (reply to SEC’s brief on net equity) (ECF No. 1096), (motion for leave to appeal of order approving second applications of Trustee and B&H for interim compensation) (ECF No. 1114), (letter to Court on behalf of certain “net winners” requesting a SIPC advance of up to $500,000 in exchange for foregoing future distribution from fund of customer property) (ECF No. 1849), (appeal of Court’s net equity decision) (ECF No. 2048), (objection to third applications of Trustee and B&H for interim compensation, which was overruled) (ECF No. 2233), (motion for leave to appeal of order approving third applications of Trustee and B&H for interim compensation, which was denied by district court, supra ¶ 6) (ECF No. 2298), (opposition on customer motion) (ECF No. 2567), (objection to fourth applications of Trustee and B&H for interim compensation, which was overruled) (ECF No. 2943), (objection to avoidance action procedures motion, which was overruled) (ECF No. 3110), (objection to settlement approval procedures motion, which was overruled) (ECF No. 3111), (objection to fifth applications of Trustee and B&H for interim compensation, which was overruled) (ECF No. 3308), (motion for leave to appeal of order approving fifth applications of Trustee and B&H for interim compensation) (ECF No. 3593), (motion to vacate Levy settlement order, which was denied) (ECF No. 3860), (notice of appeal of order denying motion to vacate Levy settlement order) (ECF No. 4005), (motion to compel Trustee’s investigative reports and financial records) (ECF No. 4045), (objection to sixth applications of the Trustee and B&H for interim compensation) (ECF No. 4088); (iii) Peskin v. Picard, Adv. Pro. No. 09-01272 (BRL) (Bankr. S.D.N.Y.) (suit brought against Trustee regarding, inter alia, net equity), on appeal at Peskin v. Picard, No. 09-CV-08730 (JGK) (S.D.N.Y.) (affirming bankruptcy court’s ruling that, among other holdings, “the bulk of the Complaint was tantamount to an objection to the appellants’ claim determinations, and thus constituted an impermissible attempt to circumvent the Claims Procedure Order.”), on appeal at Peskin v. Picard, No. 10-04789 (2d Cir.); (iv) Canavan v. Harbeck, No. 10-CV-00954 (FSH) (PS) (D.N.J.) (suit against directors of SIPC); (v) Picard v. Picower, Adv. Pro. No. 09-1197 (BRL) (Bankr. S.D.N.Y.) (objection to Trustee’s motion for entry of order approving $5 billion settlement and issuance of permanent injunction, which was denied) (ECF No. 32), (appeal of Court’s order approving $5 billion settlement and issuing permanent injunction) (ECF No. 45); and (vi) In re Bernard L. Madoff Inv. Sec. LLC, No. 10-2378 (2d Cir.) (briefs and filings on net equity) (ECF Nos. 202, 215, 217 and 344).
Ms. Chaitman has also filed hundreds of objections to claim determinations on behalf of her clients and two objections on behalf of herself as a BLMIS investor as a member of a limited liability company. (ECF Nos. 283, 3645).
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legal disputes with the Trustee, which are sub judice before this Court, the District Court, and the
Second Circuit, in the guise of an objection to interim fee applications. Beyond frivolous, the
Objection should face the same fate as the prior objections and be denied by this Court.
9. Because many of the bases for the Objection are the matters of current pending litigations and appeals, the Trustee will respond to those allegations and arguments in the proper pleading, at the proper time, and in the proper forum. Because the Objection contains a number of material misstatements, the Trustee will correct the record where necessary. Silence as to any particular allegation made in the Objection, however, should not be viewed as agreement with or an admission to that allegation.
10. As set forth herein, the Court should grant the relief requested in the Sixth
Application.
TIME AND EFFORT BY THE TRUSTEE AND BAKER & HOSTETLER
11. The Peshkin Objectors allege that the fees paid to the Trustee and B&H are excessive and the amount of time and number of attorneys working on the Madoff liquidation is not justified. However, as this Court has previously noted, the scale of this liquidation involves
“staggering numbers, with more than 15,000 claims filed and billions of dollars at stake.” In re
Bernard L. Madoff Inv. Securities LLC, 424 B.R. 122, 124 (Bankr. S.D.N.Y. 2010).
Additionally, this Court recognized that “the Trustee is charged with the mission of going out to hunt for assets and under [sic] in a case like this that hunt is not easily achieved.” Second
Interim Fee Hr’g Tr., at 33. In order to determine claims and collect assets for the estate, an extensive amount of work must be done by the Trustee and B&H which requires the time, effort
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and expertise of many attorneys and other employees. This liquidation is a result of the largest and lengthiest Ponzi scheme to date and unwinding this massive fraud is a complex task.5
12. Furthermore, it should be noted that the statute of limitations for the Trustee to commence avoidance causes of action ran on December 11, 2010. During the Compensation
Period, over one thousand avoidance actions were filed by the Trustee in order to recover money for the estate and ultimately for the customers of BLMIS; this was the culmination of over two years of work by the Trustee and B&H since their appointment. This Court has previously noted the “Herculean effort being utilized in the litigation arena to recoup funds for the benefit of victims.” Fifth Interim Fee Hr’g Tr., at 28. The work of the Trustee and his counsel, as detailed in the Sixth Application and which is a matter of public record through the litigations filed, clearly supports the amounts requested in the Sixth Application. Moreover, those amounts are recommended by SIPC. (ECF No. 4098). As such, the Objection notwithstanding, the Court should award the amounts.
THE FUND OF CUSTOMER PROPERTY AND CUSTOMER CLAIMS
13. The Objection, like that of the objection filed to the Fifth Application by Ms.
Chaitman, makes fundamental misstatements regarding customer claims, the fund of customer property, and the expectation as to whether SIPC will recoup its administrative advances. Not only are the allegations incorrect and misconstrue the Trustee’s obligations under SIPA and the
5 One example of the tremendous effort that was and is required to unwind Madoff’s fraud, which the Trustee, his counsel, and consultants have expended since December 2008, during this Compensation Period, and that still continues, is illustrated by Exhibit A to the complaint in the matter of Picard v. Sonja Kohn, 10-5411 (BRL) (Bankr. S.D.N.Y.), also annexed hereto as Exhibit A. This chart is a product of almost two years of global investigation and depicts graphically the defendant members of the Medici empire, which include individuals, sham entities in New York, the Cayman Islands, Italy, Gibraltar, and Austria, complicit financial institutions throughout the world and their agents, and dozens of bad actors who, together, funneled billions into BLMIS. This is just but one of the litigations brought by the Trustee amongst dozens of similarly complicated cases.
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Bankruptcy Code, but they implicitly concede the propriety of the Trustee’s position with respect
to net equity.
14. The Objection sets forth a tortured reading of the statute to conclude that the
Trustee’s avoidance powers are limited to the value of the fund of customer property and the
amount of allowed claims as of an arbitrary date chosen by the Peshkin Objectors. The result of
this unsupportable logic is that the Trustee may only sue to recover up to the amount of current allowed claims, which is currently approximately $6.9 billion. By the Peshkin Objectors’
calculation—not one that is supported by the record or the Trustee—the fund of customer
property is purportedly $9.8 billion, leaving an excess of $2.9 billion, thereby rendering the
Trustee’s avoidance actions in contravention of SIPA.
15. As an initial matter, the Peshkin Objectors take issue with the Trustee’s
calculation of the customer fund because the “Trustee did not include the $2.2 billion forfeited to
the governed [sic] by the Picowers, even though he previously represented that every penny of
the $7.2 billion settlement will be distributed to customers.” The $2.2 billion, and other funds
forfeited by the Government, are in the possession of the United States Attorney’s Office for the
Southern District of New York (“USAO”) (the “Forfeiture Fund”). As explained by the USAO
in a recent memorandum of law with respect to the Picower forfeiture,6 victims are entitled to
petition for mitigation or remission of forfeiture in accordance with the criteria set forth in 28
C.F.R. Part 9. The Government may contract with a special master to notify petitioners, process
petitions, and make recommendations with regard to forfeited property. 28 C.F.R. § 9.9(c).
6 Memorandum of Law (1) In Opposition To The Motion Of Adele Fox To Intervene and To Amend, Modify, Or Rescind the Stipulation And Order Of Settlement, and (2) In Support of The Government’s Cross Motion (A) To Dismiss The Claim of Adele Fox and (B) For Entry of a Final Order of Forfeiture, United States v. $7,206,157,717 On Deposit at JP Morgan Chase Bank, N.A., No. 10-CV-9398 (TPG) (S.D.N.Y) (ECF No. 13) at 32.
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Pursuant to this authority, the Department of Justice has announced that it would retain Mr.
Picard to serve as special master to assist the USAO and the Department of Justice (“DOJ”) in the petition process to be conducted in connection with BLMIS-related forfeitures, in accordance with applicable regulations. Thus, if retained, Mr. Picard would wear “two hats,” one as SIPA
Trustee and one as DOJ special master. There is no basis, therefore, to allocate the $2.2 billion and other forfeited funds to the fund of customer property under SIPA, even though those funds may ultimately go to BLMIS victims through the forfeiture remission process.
16. With respect to the customer fund for which the Trustee is responsible under
SIPA, the Trustee’s pending motion for allocation and distribution has a very detailed explanation of the contents of the fund of customer property and the interplay of customer claims. See Motion for an Order Approving an Initial Allocation of Property to the Fund of
Customer Property and Authorizing an Interim Distribution to Customers (“Allocation Motion”).
(ECF No. 4048). As set forth therein, the Trustee has recovered, or entered into agreements to recover, approximately $7.6 billion. Because of certain appeals to the Picower settlement, see
Fox v. Picard, 11-CV-1298 (JGK) (S.D.N.Y.), and Marshall v. Picard, 11-CV-1328 (JGK)
(S.D.N.Y.), —one of which Ms. Chaitman has taken on behalf of a single client, Ms. Marshall, the other taken by Ms. Chaitman’s client, Ms. Fox—$5 billion of that settlement is not in the fund of customer property or available for distribution, but instead remains in an escrow account until those appeals are finally resolved or a final, nonappealable order of forfeiture is entered.
See Picard v. Picower, No. 09-1197 (BRL) (ECF No. 25).
17. Thus, the Trustee has only $2.6 billion in his possession. As set forth in the
Allocation Motion, due to other litigation-related matters, he has requested that the Court approve allocating $2.3 billion to the fund of customer property. See Allocation Motion ¶ 65.
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The difference between the $2.6 billion in the Trustee’s possession and the $2.3 billion that the
Trustee sought permission to allocate to the fund of customer property is largely due to an appeal filed by Ms. Chaitman to this Court’s Order denying her motion to vacate the Levy settlement, discussed infra ¶ 29. Contrary to the Objection, therefore, the most that could be available in the distribution from the fund of customer property at this time if the Court approves the Allocation
Motion is $2.3 billion.
18. A plain reading of the Allocation Motion shows that because of certain outstanding disputes and appeals, including the appeal on net equity, the Trustee must operate as though all those appeals could be resolved against him, and that all disputed claim amounts could be allowed. This requires the Trustee to keep proper reserves when making any distributions or calculating the amounts recovered on behalf of any one customer, to ensure a pro rata distribution in the event that it is determined that the amount of allowable claims is higher than the current amount of allowed claims.
19. The Peshkin Objectors argue that the Trustee is only permitted to sue where customer property is insufficient to pay customer claims. Objection ¶ 17. Because the Peshkin
Objectors assert that the Trustee currently has sufficient funds to pay all current allowed customer claims, they argue that he is prevented from using his avoidance powers. Id.
20. Yet such a claim could not be more directly contradictory to the position that Ms.
Chaitman and her clients have taken before this Court and the Second Circuit on net equity. If they were to prevail on net equity, the amount of allowable claims would not be approximately
$6.9 billion (the amount of current allowed claims), or $17.3 billion (the amount of principal lost
10 by customers who filed claims, which amount could be allowed),7 or the approximate $20 billion
(the total amount of principal lost by all BLMIS investors), but up to $64.8 billion. If the
Trustee were required to satisfy $64.8 billion of allowed net equity claims, as Ms. Chaitman has argued here and in the Second Circuit, then it appears she and her clients may in fact agree with the Trustee’s lawsuits since they would be guaranteed to participate in a distribution from the fund. But the legal authority to pursue avoidance actions cannot rest on unknown variables such as who will be able to participate in the customer fund, or in what amounts, as Ms. Chaitman seems to contend.
21. Aside from the net equity dispute, the Objection once again sets forth a misunderstanding of allowed and allowable customer claims. Contrary to the assertion in the
Objection, the fact that certain claims will become allowable in the future, in addition to the current $6.9 billion, is not some sort of “self-serving explanation” on the part of the Trustee.
Rather, these amounts have been set forth in various lawsuits and in seeking to recover those amounts from parties that owe funds to the estate, the Trustee is fulfilling his fiduciary obligations to the customers and creditors of BLMIS. See supra ¶ 20 and n.7.
22. In order to determine what each customer is fully and finally owed from the fund of customer property, the Trustee needs to know the total value of customer property and the total value of allowed claims. The only time the Trustee will be able to conclusively do so is at the conclusion of the liquidation proceeding (which does not preclude him from making interim distributions, with appropriate reserves, as he seeks to do in the Allocation Motion). The amount of customer property is dependent upon the recoveries made by the Trustee through litigation
7 This is not to suggest that this is the outside limit of allowable claims, even if this Court’s net equity decision is upheld. Final allowable claim amounts may be increased by, inter alia, operation of Sections 502(d) and 502(h) of the Bankruptcy Code.
11 and settlements throughout the case. The amount of allowable claims is dependent upon both of those factors as well, in that there is litigation pending against defendants with net equity claims and such claims will not be allowed until the avoidance actions involving those defendants are resolved by settlement or otherwise and any judgment rendered against the claimants in the avoidance actions are satisfied.
23. So what does this mean for the Trustee? Must he stop his pursuit of assets at the amount of current allowed claims as of today? Are his avoidance powers somehow circumscribed by a set of variables such as the amount of customer property recovered and the amount of allowed claims as of a certain date, even though those numbers continually change?
That is the view of the Peshkin Objectors.
24. The problem from a legal standpoint is that it fails to appreciate what the Trustee has before him—a fiduciary obligation to treat all customers and all creditors equally and to try to recover all estate assets for the benefit of customers and creditors, up to and until the conclusion of the liquidation proceeding. If the Trustee favors certain customers—say those with allowed claims as of May 2011—by distributing to those claimants all of the funds in his possession at that time, there may be nothing left for a customer whose claim is later allowed
(and has an equal right to payment as those customers who received an earlier payment). That would not effect a pro rata distribution. Likewise, if the Trustee “folds up shop” and stops his recovery efforts because he could satisfy all current allowed claims (which, as set forth in the
Allocation Motion, he could not) as of some arbitrary date, he will not recover all estate assets nor will he be able to satisfy customer claims in full since claims that are later allowed will decrease each customer’s proportionate share of that finite set of dollars.
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25. Both legally and logically, the Objection makes no sense. The Trustee is required to take a holistic view and make reasonable judgments as to what the picture will look like at the very end of the liquidation proceeding so as to ensure that every customer with an allowed claim receives a pro rata distribution. Moreover, the Trustee’s goal is to effect a 100% distribution to all customers and to create a general estate for general creditors.
26. Although the Trustee has made significant strides in reaching these goals, he is far from realizing them entirely. Until such time as he is closer to being able to fully satisfy the customer claim priority and the other priorities in the statute, there is not a reasonable expectation that SIPC will recoup its administrative advances. Accordingly, the Court shall award the fees requested and recommended by SIPC. SIPA § 78eee(b)(5)(C). The numerical machinations set forth in the Objection fail to alter the governing statutory scheme, which mandates the allowance of the compensation requested.
THE OBJECTION RAISES ISSUES THAT ARE THE SUBJECT OF PENDING LITIGATION OR APPEALS
27. The Peshkin Objectors raise various issues that are the subject of ongoing litigation or appeal. Litigating issues that are sub judice before this and other federal courts in the context of a fee application is improper. Cf. United States v. $7,206,157,717 On Deposit at
JP Morgan Chase Bank, N.A., No. 10-CV-9398 (TPG) (S.D.N.Y) (ECF No. 6) (rejecting attempt by BLMIS “net winner” claimant to litigate net equity dispute in action for forfeiture of funds related to BLMIS). The Trustee, Ms. Chaitman, her clients (and others) may have genuine legal disputes over the law and the various interpretations of that law. That there are real disputes between adversaries pending in various courts of law—which are being litigated on the merits— is not a basis for a court to deny a fee request. Moreover, many of the same arguments have
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been raised in prior objections to interim fee applications, each of which have been overruled by this Court, and they should be rejected again.
28. The Objection repackages allegations set forth in a separate pleading recently filed by, inter alia, Ms. Chaitman, entitled BLMIS Customers’ Motion to Compel the Trustee to
Provide a Report of His Investigative Activities and the Financial Affairs of BLMIS (the
“Motion To Compel”) (ECF No. 4045). The Trustee’s response to the Motion to Compel is due
on June 7, 2011 and, as noted in the Objection at ¶ 26, will be heard by the Court on June 21,
2011. As the matter is before the Court on the merits, the Trustee submits it is not a proper basis
to object to a request for compensation.
29. The Peshkin Objectors assert that the Trustee has improperly settled certain
matters that were approved by this Court on notice and a hearing, including the settlement with
the estate of Jeffry Picower (“Picower”) and the heirs of Norman Levy.8 The Trustee’s
settlement with Picower is the subject of pending appeals from an order of this Court overruling
the Objection filed by Ms. Chaitman and in which Ms. Chaitman is participating. See Marshall
v. Picard, No. 11-CV-1298 (JGK) (S.D.N.Y.). The settlement with the heirs of Norman Levy is
also the subject of an appeal from an order of this Court denying the relief sought by Ms.
Chaitman, on behalf of Ms. Peshkin and some subset of Ms. Chaitman’s other clients, and in
which Ms. Chaitman is participating. See Peshkin v. Levy-Church, No. 11-CV-3313 (DAB)
(S.D.N.Y.). As these matters are pending before the District Court, the Trustee submits it is not
a proper basis to object to a request for compensation.
8 On December 21, 2010, on notice and a hearing, this Court approved a pre-litigation settlement between the Trustee and Carl Shapiro, Robert Jaffe, and related entities (the “Shapiros”) in the amount of $550 million. (ECF No. 3551). No objections were made to that settlement. The attempt to re-litigate that settlement through the Objection should be rejected.
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30. The Peshkin Objectors assert that the Trustee delayed litigation of the net equity
issue and payment of SIPC advances. The net equity issue is pending before the Second Circuit,
and Ms. Chaitman is participating in that appeal on behalf of some subset of her clients. See In
re Bernard L. Madoff Investment Securities LLC, No. 10-2378 (bk) (2d Cir.). As such, it is not a
proper basis to object to a request for compensation.
31. The net equity issue has driven each of the prior objections to interim fees by Ms.
Chaitman and this Court has recognized that the issue is not pertinent to the applications
themselves. See Fifth Interim Fee Hr’g Tr., at 27 (“[I]t’s interesting that the focus of this hearing
on fee applications has turned away from the actual fee applications, and more toward a disagreement necessarily on the part of the – or maybe not necessarily on the part of the
objectors, as to the impact of the net equity determination”). That issue is no more relevant to
the Sixth Application than it was to any of the prior applications.
32. Indeed, other courts have rejected attempts by claimants to litigate the net equity
issue outside of the pending Second Circuit appeal. See United States v. $7,206,157,717 On
Deposit at JP Morgan Chase Bank, N.A., No. 10-9398 (TPG) (S.D.N.Y) (ECF No. 16) (“In any
case, the proper avenue for Fox to challenge Picard’s method of compensating Madoff’s victims
is not with this case, but with the appeal by other net winners of the Bankruptcy Court’s decision
approving of Picard’s method. That appeal is currently pending in the Second Circuit.”). The
Objection here should be similarly rejected as an attempt to litigate an issue in an improper
forum using an improper vehicle.
33. Moreover, this Court previously dismissed as premature Ms. Chaitman’s
argument that the Trustee failed to promptly pay allowed claims with SIPC advances, the District
Court affirmed the ruling, and that appeal is pending before the Second Circuit. Peskin v.
15
Picard, Adv. Pro. No. 09-01272 (BRL) (Bankr. S.D.N.Y.) (ECF No. 42); Peskin v. Picard, No.
09-CV-08730 (JGK) (S.D.N.Y.) (ECF No. 22); Peskin v. Picard, No. 10-4789 (2d Cir). Nothing has changed since the Court made this determination, thus this argument remains untimely.
Even if it were timely, it remains irrelevant to an award of interim compensation.
THE OBJECTION SETS FORTH SPURIOUS OR INACCURATE ALLEGATIONS
34. Contrary to the Peshkin Objectors’ assertion, neither district court judge to
consider the issue of assignee standing has held that the Trustee lacks standing to assert claims
for aiding and abetting. Objection ¶ 58. Instead, the Honorable Jed S. Rakoff, U.S.D.J.,
withdrew the reference to the Bankruptcy Court in Picard v. HSBC Bank plc on the ground that
the trustee’s standing to bring common law claims requires “substantial interpretation of SIPA
because it is [a question that is] far from clear,” thus better suited to the district court. No. 11-
CV-763 (JSR) (S.D.N.Y.) (ECF No. 23), No. 11-CV-836 (JSR) (S.D.N.Y.) (ECF No. 23).
35. Similarly, the Honorable Colleen McMahon, U.S.D.J., withdrew the reference to
the Bankruptcy Court in Picard v. JP Morgan Chase on a parallel basis, recognizing that the
issue of standing was unresolved: “[i]f the Trustee’s action remained in the bankruptcy court,
that court would have to determine if the Trustee has standing to assert the claims against
JPMorgan . . .” No. 11-CV-913 (CM) (ECF No. 30). Neither court held that the Trustee’s
common law claims were dismissed for lack of standing, merely that the District Court would
determine that question. Further, and more important, neither Court has questioned the majority
of the Trustee’s claims or allegations in these lawsuits.
36. Contrary to the assertion in the Objection, the Trustee has not “acknowledged that
only the second and third priorities of distribution are applicable in this case.” Objection ¶ 13.
Instead, the Trustee stated that only the second and third priorities were relevant to the
16
Allocation Motion that was based on the proposed allocation and distribution therein. Allocation
Motion ¶ 38.
37. As the Trustee has stated in prior fee applications and to the Court, the Trustee
pays over to B&H the full amount of any interim compensation and disbursements awarded to
him. See, e.g., Third App. Hr’g Tr. 85; Fourth Fee App. ¶ 17, n.3; Fifth Fee App. ¶ 20 n.4; Sixth
Fee App. ¶ 24 n.5. The unfounded allegation in the Objection regarding the Trustee’s
compensation is false.9
38. Similarly, B&H is not improperly charging markups on temporary attorneys. All
of the fees for which compensation is sought are for attorneys that are fully employed by B&H.
While the Trustee has engaged the services of contract and/or temporary attorneys on this matter,
those costs have been billed appropriately. The Trustee likewise submits that it is appropriate to
bill for law clerks, non-legal staff, such as paralegals and library staff, consistent with
bankruptcy and non-bankruptcy practices.
39. Similarly, there is no basis to suggest that there is any “lack of professionalism”
with respect to B&H’s billing. As with all of its obligations as counsel to the Trustee, B&H
diligently reviews its bills, makes write-offs and reductions where appropriate, and ensures that
all billings and fee applications are in conformity with SIPA, the Bankruptcy Code, this Court’s
Administrative Order, and the Amended Monthly Compensation Procedures Order entered by
this Court. Additionally, each bill is carefully reviewed by SIPC, as is each fee application, to
ensure compliance with those same authorities. For each period, the Trustee and B&H file their
9 In response to an inquiry from a reporter, Ms. Chaitman acknowledged she has no evidentiary basis for this allegation. See Evan Weinberger, Madoff Investors Want Trustee’s $44B Fee Bid Blocked, 360Law, (May 26, 2011), http://www.law360.com/newyork/articles/247596/madoff-investors-want-trustee-s-44m- fee-bid-blocked (“The motion gave no evidence that such a contract was in place, and Helen Davis Chaitman, counsel for the objecting investors, said in a telephone interview that she had no supporting documents for the claim”).
17
interim fee applications with this Court for approval, which are carefully scrutinized by the
Peshkin Objectors and others. In view of Section 78eee(b)(5)(C) of SIPA, there is no basis for
another layer of review to determine whether the fees requested—which are paid by SIPC and
not out of any recoveries for customers—are appropriate. Nor is there any basis in fact for such
a request. Accordingly, the request for a fee examiner should be denied.
40. It has become evident that Ms. Chaitman and her clients will object to the interim
fees and actions of the Trustee and his counsel no matter what he does. With regard to the
Picower settlement, Ms. Chaitman argues that the Trustee recovered too much.10 With regard to
the Levy settlement, too little. In the Objection at ¶ 36, Ms. Chaitman assails the Trustee and
B&H for proposing a “paltry first distribution to customers” in the amount of $2.3 billion, yet has appealed a settlement on behalf of a single client that would have resulted in $5 billion more
being available for distribution, and appealed a second settlement that would have added another
$220 million. She and her clients assert that the Trustee is violating the law when he seeks to recover funds to satisfy allowed claims beyond approximately $6.9 billion, but argue to the
Second Circuit that the amount of allowable claims in this proceeding should be $64.8 billion.
She argues that the Trustee doesn’t represent net winners, a position that will undoubtedly change if a large general estate is created or this Court’s net equity decision is reversed. In sum,
Ms. Chaitman’s positions have been nothing short of a study in contradiction.
41. Finally, the repeated objections to the Trustee and B&H’s interim fee applications are not only frivolous, but unnecessary. Interim compensation awards are just that—interim
10 See, e.g., Objection Of Susanne Stone Marshall And Other Victims Of The Crimes Of The Picower Parties Whose Claims Are Not Recognized By The Trustee To The Trustee’s Settlement With The Picower Parties, Picard v. Picower, 0-1197 (BRL) (Bankr. S.D.N.Y.) (ECF No. 32). In yet another contradiction, Ms. Chaitman argues in the current Objection that the Trustee reached a “sweetheart” deal with the Picowers and should have recovered more. Objection ¶ 28.
18
compensation. Moreover, there is a holdback of the fees awarded. Consistent with other
bankruptcy and SIPA cases, the amounts awarded as interim compensation remain subject to
final review by SIPC and the Court at the conclusion of the liquidation proceeding. See, e.g., In
re Stable Mews Assocs., 778 F.2d 121, 123 n.3 (2d Cir. 1985); see also Recommendation of the
Securities Investor Protection Corporation in Support of Sixth Application of Trustee and
Counsel for Interim Compensation and Reimbursement of Expenses, ¶ 11 (ECF No. 4098) (“An
interim allowance does not involve a determination as to the actual reasonable value of the
services in question. It is merely a payment on account of the final allowance and does not
imply that the Court or SIPC has approved the value which the Trustee and Counsel have placed
on their services. The amounts sought do not exceed the sums the Court might reasonably award
as final compensation for the services rendered. Accordingly, SIPC supports the Application.”).
Any objections to the interim fee applications of the Trustee and counsel can be resolved at that
time.
CONCLUSION
42. For the reasons stated above, the Trustee respectfully requests that this Court
enter an Order as follows: (i) denying the Objection; (ii) granting the Applications; and (iii)
granting such other and further relief as the Court may deem just and proper.
Dated: New York, New York Respectfully submitted, May 27, 2011 BAKER & HOSTETLER LLP
By: /s/ David J. Sheehan______Baker & Hostetler LLP 45 Rockefeller Plaza New York, NY 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201
19
Irving H. Picard Email: [email protected] David J. Sheehan Email: [email protected] Seanna R. Brown Email: [email protected] Jacqlyn R. Rovine Email: [email protected]
Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC And Bernard L. Madoff
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EXHIBIT A 1996-2007: As subadvisor, Eurovaleur received 20% of BAWW’s fees derived from Primeo, Alpha Prime, and Thema Int’l totaling $11,030,369
Pioneer 1998-2008: $32,484,360 in Global Kickbacks of Customer Property Manfred After 2005 Asset Mgmt 2008: $3,000,000 in 2008: $15,000 Kastner S.p.A. Kickbacks of Customer Property (Kohn’s close business UniCredit Bank 2007-08: Management and associate) Bank Austria Createdby UniCredit S.p.A. Cayman, in Milan, 2000: performance fees Infovaleur, Inc. M-Tech Owns 100% Austria Ltd. It owned the Services GmbH Milan advisor to Primeo, 2008: $97,000 Acquired by UniCredit, Created Created by Sonja Kohn in New York Austria: 2002-04, in 2000 Starting 2007. FundsWorld 2005: For its various Primeo Fund Ltd. in 1996: Kohn was 100% owner Kohn owned 50%, Peter roles in the alleged Created by BA in Cayman Islands in 1993. Financial Absolute and manager. Shared mailing 2004 Kohn owned Illegal Scheme, BA addresses with Eurovaleur, 100%, 2007 sold Scheithauer Services In 2007, at UniCredit’s direction and with 2007: $5,000 received at least Fed at least $371 million directly Portfolio 2007-08: $780,047 interest to (Kohn’s close business Operated by $31 million. assistance from Eurovaleur, Primeo’s Palladium, and the Mgmt Ltd. sent toAPM Kastner Cayman via Landau associate) Kohn in investments in BLMIS were sent through into BLMIS and hundreds of Hartsteins’ home in 2002-09: $302,229 Milan. $9,439,788 totaling Payments 2008: millions more through Herald, Bank (APM Cayman) Monsey, NY. 2006-09: $158,245 Alpha Prime,Herald, and Alpha Prime, and Thema Int’l Thema Int’l. Created by Kastner
2006-08: Payments totaling $59,306 Medici AG Medici s.r.l. Franco in 1999: Payments of €750,000 in 2000 and 1993-2007: Mordechai 2007: CommissionsMugnai, of $1,394,350 Paul BA Worldwide (Vienna) Co-owned with Created by BM in Bank Transferred at BM Milan in 1997: BM de Sury Fund Mgmt (BAWW) Invested in BLMIS indirectly Kohn owns 75%, 2009: $26,438 Landau €1.5 million in 2002 (former directors least $55 million 2009: Infovaleur paid R. Kohn $57,334 c/o Eurovaleur (Sonja Kohn’s son-in-law) owned 51% until Medici AG Medici of HAM & Herald Fund) Created by BA in BVI in 1993: BA through other funds BA owns 25% 2004, 100% Cayman, owned 95% BAWW had a 10% BA runs BM as after. (Vienna) Daniele Cosulich Ltd. (former BM revenue sharing plan with BA. BAWW Palladium Kohn owns 75%, Created 1999: was advisor to Primeo until 2007, a branch. employee & HAM Bernard L. 2006: $440,000 Capital BA owns 25% Kastner director) and Alpha Prime and Thema Int’l. Advisors BA runs BM as a branch. employed here From 2000 to 2007 BAWW was Mado Medici s.r.l. (Delaware, Moishe 2000-01 run by Radel-Leszczynski. Fed at least $1.5 billion Owned and Managed Investment Created by BM 2002-03: $100,015 2004) Hartstein BAWW received at least directly into BLMIS 2004: $2,704 Received at least $62 million 2006-08: Fees 0f $522,351 $68 million in Securities in Milan in 1997: (Sonja Kohn’s son-in-law) for its roles in the alleged Illegal Herald Fund SPC BM owned 51% 2007-08: Fees 0f $182,729 (BLMIS) alleged Illegal Scheme. Created by Kohn, Eurovaleur, BA, and until 2004, BM in Cayman Islands in NY 100% after. Scheme. 2006-08: Fees 0f $3,450,759 Medici 2004 Realty Ltd. Bank Tecno Eurovaleur Thema Int’l and Alpha Prime Medici AG Rina A joint venture Development Inc. transferred at least $13 million Gibraltar, 2005 Shared Milan O ce Hartstein So po in fees over life of funds between Hassans & Research Ltd. Created by Kohn Transferred at least $45 million Located in and employees (Sonja Kohn’s daughter) in NY in 1990: Austria and BM AG Hassans (Tecno Gibralter) Registered the GmbH over life of fund Fed at least $1 billion (Gibraltar) 2006: Owned directly into BLMIS o ce. Primeo Fund Transferred at least $2 million over life of fund Created by Sonja Kohn in Gibraltar trademark in by and shared Creator address with Principal in 2007: Its registered o ce was Eurovaleur 1993 in NY. BM Herald Asset (NY, 1990) Medici Bank Fees of2007-08: $4,760 Herald in Gibraltar location with plaque Realty Ltd. Medici AG Mgmt (HAM) saying, “Line Management Transferred more than $100 million over life of fund Asset Services, A liated with Sonja Kohn Owned A joint venture Gibraltar, 2005 Created by Kohn in Cayman Created by Radel-Lesczyski while she was president of BAWW Located in Islands in 2004: Ownership Hassans.” between Hassans Mgmt Counsel and BM AG Hassans structure obscured by complex o ce. Thema Int’l (HAM) (on information (Gibraltar) web of interrelated companies and belief) Sonja Kohn Owned through Redcrest Investments, Inc. orchestrated by Kohn and Hassans. Fund, plc Owned Sonja Kohn HAM operated from BA Cayman’s Bernard L. Mado HAM & APM Made more than 100 Received at least $62 million o ce in Cayman and Created by Benbassats in sharedCayman o ce direct transfers of in stolen Customer Property Medici S.r.l. o ces Ireland in 1996. Held in stolen Customer Property Held in was Tecno Gibraltar’s sole director from Mado in exchange Sonja Kohn trust in Milan. Shlomo Amselem, a Line Management employee, Owned Owned Owned to Kohn and her trust for sustaining the for Kohn family. for Kohn Owned Owned Owned 2009: $299,995 Ponzi scheme. & her 2006-08: Fees of & her husband Owned $12,940,394 for husband distributing Herald Fed at least $400 million directly into BLMIS Redcrest Redcrest Brera Investments, Line Line Line & Primeo in Line Servizi Management Holdings Ltd. Herald Germany Line Line Investments, Inc. Group Ltd. Herald Holdings Ltd. Management Redcrest is the ultimate parent of Tecno Gibraltar Aziendiale S.r.l. (BVI, 2003) Services Ltd. Consult Ltd. MediciFinanz Consult Ltd. Group Ltd. Inc. (Gibraltar, 2008) (Gibraltar, 1988) Principal (Gibraltar, 1988) Services Ltd. (BVI, 2003) (Milan, 2002) Served as (Gibraltar, 1995) Owned 100% of (Gibraltar, 2004) Consulting GmbH (Gibraltar, 2004) Owned 100% of (Gibraltar, 2008) Held its ownership parent to HAM Owned 100% of Herald Consult Ltd. (Created by (Gibraltar, 1995) Owned 100% of Served as Line Management Owned 100% of Owned 100% of Owned 100% of Herald Consult Ltd. parent to HAM Tecno Development in Tecno Italy in trust and the four Line Holdings Ltd. in trust for Kohn HAM Kastner in Germany, 1996) HAM in trust for Kohn Owned 100% of Line Management companies to Services Ltd. and her Line Holdings Ltd. Services Ltd. and the four for Sonja Kohn, on d/b/a Seki Holding GmbH Alpha Prime Fund and her husband companies to & Research S.r.l. the right. husband information Erwin the left. (Techno Italy) and belief. Absolute Portfolio Created by Kohn, Zapotocky, et al. Kohn Mgmt. Ltd. in Bermuda, 2003: Structural Created in Milan in 2002: Brera (Sonja Kohn’s husband) (APM Cayman) clone of Primeo. Servizi owned 95% of Tecno Line Holdings Ltd. Fed at least $247 million directly into BLMIS held Herald Consult Created by Kastner in Italy and held its interest Ltd. in trust for Cayman Islands 1999) in trust for an unknown Kohn and Both entities Mado bene ciary, who, on her husband co-owned information and belief, with BM. Securities was Kohn. Robert Alan Counsel 2008: Payments International Kohn of $964,440 (MISL) Hassans Int’l Manager & co-owner (Sonja Kohn’s son) Fed at least $255 million directly into BLMIS London Law Firm Line Holdings held 2008: Three Bank Medici Gibraltar Herald Consult in Counsel (on information and belief)payments totaling and Tecno Gibraltar located at trust for Kohn and Dec. 15, 2008: payments totaling $15,201,550 Hassans Int’l $5.33 million Senator Fund Ltd. Hassans o ce. her husband Law Firm Created by Radel-Leszczynski in Bermuda Certain Hassans partners and Counsel Netty Blau Bank Medici Gibraltar in 2006: Structural clone of Alpha Prime. associates also held non-lawyer (Sonja Kohn’s mother) In e ect, fund was run by the same people and Tecno Gibraltar located at Gerila 1996-2006: Investment Manager corporate positions at companies Sonja Kohn owned Hassans o ce. Beteilgungs- who managed Primeo and BAWW controlled by Kohn, Hassans, or until 2007. ReviTrust Verwalt other members of the Medici Certain Hassans partners and (Kastner owned) Enterprise, as part of a Erko, Inc. associates also held non-lawyer Services complex corporate structure corporate positions at companies Liechtenstein that concealed Kohns were (Kohn used bene cial owners Created by Sonja Kohn in controlled by Kohn, Hassans, or ReviTrust to other members of the Medici create new of HAM. New York in 1987: Enterprise, as part of a entitites in 2007-08: $1,400,000 in Erko’s address was complex corporate structure 2008) Kickbacks of Customer Property the same as Kohn’s that concealed Kohns were Thema NY lawyers’ address. bene cial owners Asset Mgmt of HAM. Eurovaleur owned (Created by Herald (Lux) SICAV 2002-07: $14,601,000 in 10% of Thema Asset Benbassat family Kickbacks of Customer Property Management in BVI, 1996) Created by Kohn, Eurvaleur, BA, et al. Eurovaleur in Luxembourg in 2008. owned 10% 1997-2002: $11,058,054 in Kickbacks of Customer Property
Management Company Money Flow
* Fund Kickbacks of Customer Property
Medici Enterprise’s Alleged Illegal Scheme: Money In and Out KEY Ownership Relationship * According to the RICO Complaint, Rico Case Statement and Exhibits, filed in the United States Bankruptcy Court, Southern District of New York, in re: Bernard L. Madoff Investment Securities LLC, by Irving H. Picard, Trutee for the Liquidation of Bernard L. Madoff Investment Securities LLC. EXHIBIT I Baker & Hostetler LLP Hearing Date: July 12, 2010 45 Rockefeller Plaza Hearing Time: 10:00 A.M. (EST) New York, New York 10111 Objection Deadline: May 31, 2010 Telephone: (212) 589-4200 Reply Deadline: June 21, 2010 Facsimile: (212) 589-4201 David J. Sheehan Email: [email protected] Seanna R. Brown Email: [email protected] Jacqlyn R. Rovine Email: [email protected]
Attorneys for Irving H. Picard, 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,
Debtor.
MOTION FOR AN ORDER APPROVING AN INITIAL ALLOCATION OF PROPERTY TO THE FUND OF CUSTOMER PROPERTY AND AUTHORIZING AN INTERIM DISTRIBUTION TO CUSTOMERS TABLE OF CONTENTS
Page
I. PRELIMINARY STATEMENT...... 1 II. PROCEDURAL HISTORY...... 6 III. THE LIQUIDATION PROCEEDING, CLAIMS PROCESSING & THE NET EQUITY DISPUTE ...... 8 IV. ALLOCATION OF PROPERTY & DISTRIBUTION SCHEME UNDER SIPA ...... 12 A. Allocation Of Property...... 12 B. Distribution Under SIPA...... 13 C. Allocation Of Assets To The Fund Of Customer Property And Related Reserves ...... 14 i. Assets In Trustee’s Possession As Of The Fourth Interim Report & Certain Related Reserves ...... 16 ii. Undisputed Recoveries To The BLMIS Estate Since The Fourth Interim Report...... 17 iii. Disputed Recovery—The Picower Settlement ...... 19 iv. Summary Of Requested Allocation ...... 23 D. Determination Of Allowable Net Equity Claims & Related Reserves...... 23 V. INTERIM CALCULATION OF PRO RATA SHARE DISTRIBUTION OF CUSTOMER FUND...... 26 A. No Interim Distribution Of General Estate...... 32 VI. DEPARTMENT OF JUSTICE FORFEITURE FUNDS...... 33 VII. MISCELLANEOUS ...... 33 A. Notice...... 33 B. Waiver Of Memorandum Of Law...... 34 VIII. CONCLUSION...... 34
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TO THE HONORABLE BURTON R. LIFLAND, UNITED STATES BANKRUPTCY JUDGE:
Irving H. Picard, as trustee (“Trustee”) for the liquidation of the business of Bernard L.
Madoff Investment Securities LLC (“BLMIS”) under the Securities Investor Protection Act, 15
U.S.C. § 78aaa et seq. (“SIPA”),1 and the substantively consolidated estate of Bernard L. Madoff
(“Madoff”) (collectively, “Debtor”), respectfully submits this motion (the “Motion”) pursuant to
SIPA §§ 78lll(4), 78fff(a)(1)(B), 78fff-2(b), and 78fff-2(c)(1), and Rule 9013 of the Federal
Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) seeking entry of an order (1) approving an initial allocation of property to the fund of customer property (“Customer Fund”); and (2) authorizing an interim distribution to customers whose claims for customer protection under SIPA have been allowed for amounts exceeding the statutory limits. This Court has jurisdiction over this Motion pursuant to SIPA §§ 78eee(b)(2), 78eee(b)(4), 28 U.S.C. §§ 157 and 1334, and Bankruptcy Rule 5005. This Motion is based upon the law set forth below as well as the facts set forth in the affidavit of Matthew Cohen (“Cohen Aff.”), filed herewith. In support of this Motion, the Trustee alleges and represents as follows:
I. PRELIMINARY STATEMENT
1. In order to protect customers of an insolvent broker-dealer such as BLMIS,
Congress established a statutory framework pursuant to which customers of a debtor in a SIPA liquidation are entitled to preferential treatment in the distribution of assets from the debtor’s
estate. The mechanism by which customers receive preferred treatment is through the creation
of a fund of “customer property” as defined in SIPA § 78lll(4), which is distinct from a debtor’s
general estate. Customers holding allowable claims are entitled to share in the Customer Fund
1 For convenience, subsequent references to sections of the Act shall follow the form: “SIPA § __.”
based on each customer’s “net equity” as of the filing date, to the exclusion of general creditors.
SIPA § 78fff-2(c).
2. To protect customers further, Congress authorized the Securities Investor
Protection Corporation (“SIPC”) to advance to the Trustee up to $500,000 for each customer
with an allowed net equity claim if customer property is insufficient to satisfy the customer’s
claim. SIPA § 78fff-3(a). Because determining the total amount of customer property and the ratable share owed to each customer takes time, SIPA authorizes SIPC to advance funds to the
Trustee, who in turn may promptly pay amounts up to the SIPA limits to customers with allowed claims. SIPA §§ 78fff-2(b)(1), 78fff-3(a)(1). Thus, even if ultimately there is enough customer property to make a customer whole without the use of SIPC funds, SIPA does not make the customer wait until the Trustee has collected customer property before partially or fully satisfying his or her claim. With the exception of those claims in litigation or involved in settlement discussions, the Trustee has advanced or committed to advance SIPC funds to each customer with an allowed net equity claim.
3. In order to make distributions from the Customer Fund, the Trustee must determine or be able to sufficiently estimate: (a) the total value of customer property available for distribution, or the “numerator” (including reserves for disputed recoveries), and (b) the total net equity of all allowed claims, or the “denominator” (including reserves for disputed claims).
Each element of this equation—the customer property numerator and the net equity claims denominator—is inherently complex in a liquidation of this magnitude. The Trustee has calculated reserve amounts on a “worst-case” basis, such that the ultimate resolution of disputed amounts will not adversely affect any customers’ allowed or disputed net equity claims.
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4. There are many unresolved issues in this liquidation proceeding that will require
the maintenance of substantial reserves with respect to both the customer property numerator and
the net equity claims denominator. Nonetheless, this liquidation proceeding has progressed to a
stage at which it is now possible for the Trustee, on an interim basis, to determine: (a) the
allocation of property to the Customer Fund, or the “numerator” (taking into account reserves);
(b) the amount of allowable net equity claims, or the “denominator” (also taking into account
reserves); and (c) the calculation of each customer’s minimum ratable share of the Customer
Fund. Each of those determinations is set forth herein.
5. In this Motion, the Trustee seeks permission to make an initial allocation to the
Customer Fund and an interim distribution to customers whose claims have not been fully satisfied because their net equity claims as of the Filing Date2 exceeded the statutory SIPA
protection limit of $500,000. The distribution will be made on claims allowed as of March 31,
2011, which relate to 1,224 BLMIS accounts.
6. Over the course of the twenty-nine months since his appointment, the Trustee has
recovered more than $7.6 billion. Of the “net loser” customers (those BLMIS customers who
did not receive their principal back prior to December 11, 2008) who filed claims with the
Trustee, the amounts recovered thus far represent approximately 44% of the principal lost in this
scheme, totaling approximately $17.3 billion.3 This means that the Trustee is almost halfway to the full recovery of principal lost by “net loser” claimants in this liquidation proceeding. If and
2 In this case, the Filing Date is the date on which the Securities and Exchange Commission commenced its suit against BLMIS, December 11, 2008, which resulted in the appointment of a receiver for the firm. See SIPA § 78lll(7)(B) and infra ¶ 6.
3 The total amount of principal lost by all investors is approximately $19.5 billion. Not every customer with a “net loser” account, however, filed a claim with the Trustee. Thus, the amount that the Trustee would have to recover in order to return 100% of the principal lost by those who are eligible to receive a distribution in this proceeding is approximately $17.3 billion.
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when the Trustee recovers all of the principal lost, it will represent the first time that the “net
loser” customers will be caught up to “net winner” customers—“net winners” being those
customers who received all of their principal back prior to December 11, 2008.4
7. Despite having recovered over $7.6 billion, only approximately $2.3 billion is
available to the Trustee for distribution at this time. The reduced amount is the result of various
appeals that have been filed, including, but not limited to, the appeal relating to the “net equity”
dispute (the “Net Equity Dispute”), discussed infra ¶¶ 69-79, the appeals relating to the $5
billion Picower settlement, discussed infra ¶¶ 53-64, and the appeal relating to the settlement with the Levy family, discussed infra ¶ 45. The result of these appeals is that instead of a 44% distribution, the Trustee is only able to make a 4% distribution at this time.
8. Pursuant to the decision and order of this Court on March 1, 2010 and March 8,
2010, respectively (collectively, the “Net Equity Decision”), only “net loser” customers have a positive net equity under SIPA such that they are eligible for a distribution from the Customer
Fund. Were the Net Equity Decision to be reversed, those claims of “net winner” customers that have been denied to date may become allowable and eligible for a distribution from the
Customer Fund. In order to ensure that there are funds sufficient to make a pro rata distribution in that eventuality, the Trustee is maintaining significant reserves,5 which decrease the amount
available for distribution from approximately 44% to approximately 13%.
9. While not nearly as significant as a 44% distribution, a 13% distribution at this
stage of the proceeding would be a welcome result for many BLMIS victims. Unfortunately, the
4 Net losers and net winners will not be equal, however, until net winners repay the fictitious profits they received.
5 For this reason alone, no objections to this Motion need be filed by “net winner” claimants to protect any rights to payment in the event the Net Equity Decision is reversed because the distribution model and related reserves build in such protection.
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appeal relating to the Net Equity Dispute is not the only appeal pending that reduces the amounts
the Trustee can distribute to victims. As noted above, certain claimants have appealed the $220
million settlement with the Levy family, requiring the Trustee to hold those funds in reserve
pending the outcome of that appeal. Moreover, two claimants (on behalf of themselves and
uncertified, putative classes, whose class actions have been enjoined) separately appealed the
most significant settlement obtained by the Trustee to date—that with the estate of Jeffry
Picower for $5 billion—singlehandedly reducing the amounts available from $7.3 billion to $2.3
billion. Because of these appeals, distributions on claims relating to 1,224 accounts must be
reduced from approximately 13% percent to just over 4%.
10. While a 4% recovery may appear to be so de minimus such that it is inadvisable to
make a distribution at this time, there are several factors that tip the balance in favor of a
distribution, even with the pending appeals relating to the Net Equity Dispute, the Levy
settlement, and the Picower settlement.
11. By way of this Motion, the Trustee seeks to distribute more than $272 million
(with an additional $424 million available for distribution to certain net loser accounts, if the
claims relating to their accounts become allowed prior to the time at which the distribution is made).6 These distributions will be paid on claims relating to 1,224 BLMIS accounts. The
average payment amount to those 1,224 BLMIS accounts is $222,551.12. Thirty-nine payments
will go to claimants who qualified for hardship status under the Trustee’s hardship program.
12. Moreover, a significant number of claimants did not have accounts at BLMIS but
instead invested in an entity that was a BLMIS customer. Investors in feeder funds are an
6 If all of the net loser accounts were allowed prior to the distribution, the total distribution would be approximately $696 million. SIPC’s subrogation claim is approximately $8 million, which as discussed herein, is being currently deferred pending further developments in this proceeding.
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example of the foregoing. A distribution to a feeder fund would likely benefit those persons who
had invested in the fund.
13. Given these numbers and factors, the Trustee submits that the liquidation
proceeding is at an appropriate juncture to make a distribution. Further, he does not believe it is
equitable to delay payments however small to thousands of injured customers on account of the
actions of two claimants or a potentially lengthy appellate process over which he has no control.
14. The proposed allocation and distribution are initial and interim in nature. The
Trustee anticipates recovering additional assets through litigation and settlements. Final
resolution of certain disputes will permit the Trustee to reduce the reserves he is required to
maintain, which would allow him to make additional distributions to customers in the future.
The Trustee will seek authorization for these further allocations and distributions upon the
recovery of additional funds and the resolution of significant disputes.
II. PROCEDURAL HISTORY
15. On December 11, 2008, Madoff was arrested and criminally charged with a multi-
billion dollar securities fraud scheme in violation of 15 U.S.C. §§ 78j(b) and 78ff and 17 C.F.R.
§ 240.10b-5 in the United States District Court for the Southern District of New York. See
United States v. Madoff, 08-MJ-2735. Also on December 11, 2008, the Securities and Exchange
Commission (“SEC”) filed a complaint in the District Court against Madoff and BLMIS, among others, titled SEC v. Madoff, No. 08-CV-10791 (LLS) (the “SEC Action”).
16. On December 15, 2008, under SIPA § 78eee(a)(4)(A), the SEC consented to
combine the SEC Action with an application of SIPC. Thereafter, under SIPA § 78eee(a)(3),
SIPC filed the application in the District Court alleging that BLMIS was not able to meet its
obligations to securities customers as the obligations came due and that its customers needed the
protection afforded by SIPA. The District Court entered a protective decree, to which BLMIS
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consented, which, in pertinent part, (a) appointed the Trustee for the liquidation of the business of the Debtor under SIPA § 78eee(b)(3), (b) appointed Baker & Hostetler LLP as counsel to the
Trustee pursuant to SIPA § 78eee(b)(3), and (c) removed the case to this Court under SIPA
§ 78eee(b)(4).
17. By orders dated December 23, 2008 and February 4, 2009, respectively, the
Bankruptcy Court approved the Trustee’s bond and found that the Trustee was a disinterested person. (ECF Nos. 11, 69).7 Accordingly, the Trustee is duly qualified to serve and act on
behalf of the estate of BLMIS.
18. At a plea hearing on March 12, 2009 in the criminal action filed against him by
the United States Attorney’s Office for the Southern District of New York, Madoff pled guilty to
an 11-count criminal information, which included charges of securities fraud, money laundering,
theft, and embezzlement. Madoff admitted that he “operated a Ponzi scheme through the
investment advisory side of [BLMIS].” (Plea Hr’g Tr. at 23:14-17). On June 29, 2009, Madoff
was sentenced to a term of imprisonment of 150 years.
19. On August 11, 2009, a former BLMIS employee, Frank DiPascali, pled guilty to
participating in and conspiring to perpetuate the Ponzi scheme. At a plea hearing on August 11,
2009, DiPascali pled guilty to a ten-count criminal information. DiPascali admitted, among other things, that Madoff had been operating a Ponzi scheme since at least the late-1980s or early
1990s. (Plea Allocution of Frank DiPascali at 46, United States v. DiPascali, No. 09-CR-764
(RJS) (S.D.N.Y. Aug. 11, 2009) (ECF No. 11)). Mr. DiPascali has yet to be sentenced.
7 All ECF references refer to pleadings filed in the main adversary proceeding pending before the Bankruptcy Court, Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities LLC, Adv. Pro. No. 08-1789 (Bankr. S.D.N.Y.) (BRL), unless otherwise noted.
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20. On April 13, 2009, an involuntary bankruptcy petition was filed against Madoff.
On June 9, 2009, this Court entered an order substantively consolidating the Chapter 7 estate of
Madoff into the BLMIS SIPA proceeding.
III. THE LIQUIDATION PROCEEDING, CLAIMS PROCESSING & THE NET EQUITY DISPUTE
21. Section 78fff(b) of SIPA provides that a SIPA liquidation proceeding “shall be conducted in accordance with, and as though it were being conducted under chapters 1, 3 and 5 and subchapters I and II of chapter 7 of title 11” to the extent that these provisions are consistent with SIPA.
22. SIPA affords special protection to “customers,” as defined in SIPA § 78lll(2), who receive preferential treatment by having their claims satisfied ahead of general creditors.
See In re Adler Coleman Clearing Corp., 198 B.R. 70, 71 (Bankr. S.D.N.Y. 1996) (recognizing that a “person whose claim against the debtor qualifies as a ‘customer claim’ is entitled to preferential treatment”); In re Hanover Square Sec., 55 B.R. 235, 237 (Bankr. S.D.N.Y. 1985)
(“[a]ffording customer status confers preferential treatment”). The amounts owed to each customer are determined by valuing his or her “net equity,” defined in SIPA § 78lll(11), as of the
Filing Date.
23. While customer protection is a paramount objective of SIPA, the Trustee has duties under SIPA to the entire bankruptcy estate. Accordingly, both customers and general creditors may file claims against the estate in a SIPA liquidation.
24. In order to establish an orderly liquidation and determination of claims consistent with SIPA and the Bankruptcy Code, upon application of the Trustee dated December 21, 2008, this Court entered the Claims Procedures Order, which directed, among other things, that the
Trustee: (a) on or before January 9, 2009, provide notice of the liquidation proceeding and
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claims procedures to all former customers, broker-dealers, and other creditors of the Debtor; (b) on or before January 9, 2009, publish notice of the commencement of this SIPA proceeding in
The New York Times, The Wall Street Journal, The Financial Times, USA Today, Jerusalem
Post, and Ye’diot Achronot; and (c) give notice of the February 4, 2009 hearing on
disinterestedness of the Trustee and his counsel and the meeting of creditors to be held on
February 20, 2009. Ex Parte Application for Order Approving Form and Manner of Publication
and Mailing of Notices (ECF No. 8); Order Signed on Dec. 23, 2008 Approving Form and
Manner of Publication and Mailing of Notices (the “Claims Procedure Order”) (ECF No. 12).
25. As required by the Claims Procedures Order, notice was published on January 2,
2009 in all publications. Affidavit of Publication of John Franks at AlixPartners LLP (ECF No.
57); (Cohen Aff. ¶ 4). Also on January 2, 2009,8 more than 15,000 claim forms were mailed to
purported customers, purported customers’ alternate addresses, broker-dealers, and general
creditors of the Debtor advising potential claimants of the Court-approved and statutory time
limits for filing claims. (Cohen Aff. Aff. ¶ 4). In this case, all claims—whether customer,
general creditor, or other claims—must have been filed by July 2, 2009 or were barred as
untimely. See SIPA § 78fff-2(a)(3).
26. In the Claims Procedures Order, the Court set forth the following procedure for
determining claims for customer protection under SIPA. First, the Trustee must review each
customer claim filed and determine whether the asserted claim amount agrees with the “net
equity” for that account, as reflected on the books and records of BLMIS or otherwise
established to the satisfaction of the Trustee. Second, the Trustee must send the claimant a letter
setting forth this determination. Third, if the claimant agrees with the Trustee’s written
8 Certain additional notice mailings were completed by January 9, 2009. (ECF No. 76).
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determination, or if the claimant does not object to the Trustee’s determination as required within
30 days of its mailing, then the determined amount becomes the customer’s “net equity” claim.
Fourth, if the claimant disagrees with the Trustee’s determination, then the claimant is required to file a written statement with the Court setting forth the basis for the objection, together with copies of any documents in support of its objection, and serve it on the Trustee within 30 days of the mailing of the Trustee’s determination letter. Upon the claimant’s objection, the Trustee shall obtain a hearing date from the Court to hear the dispute.
27. As of March 31, 2011, the Trustee had received 16,518 customer claims. (Cohen
Aff. ¶ 6). As of March 31, 2011, the Trustee had determined 16,268 of those claims. (Id. ¶ 7).
The Trustee allowed 2,409 claims and committed to pay approximately $793 million in funds advanced to him by SIPC. (Id.). The allowed claims total over $6.8 billion. (Id.).
28. Of the remaining determined customer claims, 13,438 were denied, 12 were determined as asserting no claim, and 149 were withdrawn. (Id. ¶ 8). Two hundred and sixty claims relating to 205 accounts have been “deemed determined,” meaning that the Trustee has instituted litigation against those claimants. (Id.). The complaints filed by the Trustee in those litigations set forth the express grounds for disallowance of customer claims under section
502(d) of the Bankruptcy Code. Accordingly, such claims will not be allowed until the avoidance action is resolved by settlement or otherwise and any judgment rendered against the claimant in the avoidance action is satisfied. Two hundred and fifty customer claims remain to be determined, as they are still under review by the Trustee’s staff; the value of these claims has been reserved in the proposed distribution. (Id.).
29. As of March 31, 2011, the Trustee received 427 timely and 21 untimely filed secured priority and unsecured non-priority general creditor claims totaling approximately $1.7
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billion. The claimants include vendors, taxing authorities, employees, and customers filing
claims on non-customer proof of claim forms. Of these 448 claims, 101 are general creditor
claims and fifty are broker-dealer claims, which together total approximately $266 million of the
$1.7 billion.9 (Id. ¶ 9).
30. Two thousand, two hundred and ninety (2,290) unique docketed objections to the
Trustee’s claims determinations have been filed relating to approximately 3,800 claims, which will be noticed for hearing if necessary. (Id. ¶ 11). These 2,290 objections relate to
approximately 1,150 BLMIS accounts. (Id.). The objections raise various issues, including the
proper interpretation of “net equity,” the right to interest or time value of money, and whether the
Trustee’s calculation of allowed claims amounts are correct, which are among the matters for
which the Trustee is reserving.
31. The Trustee allowed or denied customer claims as described above depending on,
first, whether the claimant was a customer of BLMIS (i.e., had an account in his/her name) and second, whether the claimant had positive “net equity,” as that term is defined by SIPA. In calculating each customer’s “net equity,” the Trustee has credited the amount of cash deposited by the customer into his BLMIS account, less any amounts withdrawn by him from his BLMIS customer account (the “cash in, cash out method” or the “Trustee’s Net Investment Method”).
Some claimants have argued that the Trustee is required to allow customer claims in the amounts shown (“Fictitious Statement Amount”) on the November 30, 2008 BLMIS customer statements
(the “Net Equity Dispute”). Nonetheless, this Court upheld the Trustee’s Net Investment
9 The 151 secured, priority, and non-priority general claims are explicit “general creditor” claims, such as vendor and service claims. (Cohen Aff. ¶ 9). They do not include “customer” claims, even though each “customer” claim—both those allowed and denied—has a “general creditor” component. All BLMIS creditors, including customers whose claims were allowed, customers whose claims were denied, and general creditors, may have claims as general creditors against BLMIS for misrepresentation, fraud, and breach of contract (assuming they filed claims). Customers who filed customer claims need not have specifically filed claims as general creditors to protect such rights.
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Method as the only interpretation consistent with the plain meaning and legislative history of the
statute, controlling Second Circuit precedent, and considerations of equity and practicality (ECF
No. 2020), reported at SIPC v. BLMIS, 424 B.R. 122 (Bankr. S.D.N.Y. 2010) (the “Net Equity
Decision”). The Net Equity Decision is currently on appeal before the Second Circuit.
IV. ALLOCATION OF PROPERTY & DISTRIBUTION SCHEME UNDER SIPA
A. Allocation Of Property
32. In order to protect customers of an insolvent securities broker-dealer such as
BLMIS, Congress enacted a bipartite statutory framework that gives customers priority over
general creditors of the broker-dealer. Pursuant to SIPA § 78fff-2(c)(1)(B), all customers will
share ratably in the fund of customer property. Pursuant to SIPA § 78fff-2(c), general creditors
and customers, to the extent of their respective unsatisfied net equities, will share in any general
estate. Estate property not allocable to the fund of customer property is distributed in the order
of priority established in section 726 of the Bankruptcy Code. SIPA § 78fff(e). Any property
allocated to the fund of customer property that is not necessary to satisfy customer and other
priority claims will become part of the general estate. SIPA § 78fff-2(c).
33. According to SIPA § 78lll(4), “customer property” consists of “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.”
34. Among the assets that comprise “customer property” are “any other property of
the debtor which, upon compliance with applicable laws, rules and regulations, would have been set aside or held for the benefit of customers . . .” SIPA § 78lll(4)(D). Under SIPA §
78lll(4)(D), a trustee is permitted to look to the property of the debtor to rectify the actions taken by the debtor that resulted in a shortfall in customer property. See Ferris, Baker, Watts v.
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Stephenson (In re MJK Clearing, Inc.), 286 B.R. 109, 131-32 (Bankr. D. Minn. 2002)
(“Application of the plain meaning of 15 U.S.C. § 78lll(4)(D) provides a means to rectify any actions taken by, or with respect to, the debtor, that results in such a shortfall. . . . Thus, if the debtor failed to set aside or hold for the benefit of customers sufficient property, 15 U.S.C. §
78lll(4)(D) would require the trustee to correct the debtor’s error.”).
35. Thus, if the trustee determines that there is a shortfall in assets such that customer property is insufficient to satisfy net equity claims, then he may look to other assets of the debtor and allocate property to the fund of customer property.
36. SIPA liquidations generally take a broad and inclusive customer-related approach to the allocation of property. For example, in In re Park South Securities, LLC, 99% of the debtor’s estate was allocated to customer property. See Order, No. 03-08024A (Bankr. S.D.N.Y.
Oct. 30, 2008).10 Consistent with prior liquidations, the Trustee expects to allocate most of the
BLMIS estate to the Customer Fund, inasmuch as here, recovered property either belonged to customers or was derived from the misuse of customer property.
10 Accord SIPC v. Lehman Brothers, Inc., Adv. Pro. No. 08-01420, Motion for Order Approving Allocation of Property of the Estate at 27-28, n.33 (Bankr. S.D.N.Y. Oct. 5, 2009) (ECF No. 1866) (allocating “most” of debtor’s assets to customer property); In re Vision Inv. Grp., Inc., Adv. Pro. No. 97-1035B, Order Approving Third and Final Report and Final Accounting of the Securities Investor Protection Corporation (Bankr. W.D.N.Y. Dec. 13, 2005) (allocating 95% of debtor’s estate to customer property); In re Klein Maus & Shire, Inc., Adv. Pro. No. 00-8193A, Order Approving Trustee’s Final Report and Account, Approving Allocation of Property and Distribution of Fund of Customer Property, Finding of No Distribution to General Creditors (Bankr. S.D.N.Y. Dec. 15, 2004) (allocating 99% of debtor’s estate to customer property); In re MJK Clearing, 286 B.R. at 132 (allocating 100% the debtor’s assets as customer property); In re A.R. Baron & Co., Inc., Order Approving Final Report and Account and Related Relief, Adv. Pro. No. 96-8831A (Bankr. S.D.N.Y. Feb. 10, 2004) (allocating 99% of the debtor’s assets to customer property); In re Hanover, Sterling & Co., Adv. Pro. No. 96-8396A, Order Approving Trustee’s Final Report and Account, Approving Allocation of Property and Distribution of the Fund of Customer Property (Bankr. S.D.N.Y. Aug. 21, 2002) (allocating 75% of debtor’s estate to customer property).
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B. Distribution Under SIPA
37. The SIPA distribution scheme, while complex, can be distilled to a simple equation. Each customer is entitled to his or her pro rata share of customer property. To determine the percentage that each allowed customer will receive from the fund of customer property in an interim distribution, the aggregate amount collected to date by the trustee and allocated to customer property is divided by the aggregate amount of net equity claims allowed by the trustee. The percentage result is then to be applied to each net equity claim to determine a customer’s pro rata share. The equation is as follows:
Fund of Customer Property (“Numerator”)______= Customer Pro Rata Share Allowable Customer Net Equity Claims (“Denominator”)
38. SIPA § 78fff-2(c)(1) establishes the order of distribution of customer property.
The second and third priorities of distribution are relevant here. The second priority is to distribute customer property among customers based on their filing date net equities. SIPA
§ 78fff-2(c)(1)(B). The third priority is to distribute customer property to SIPC as subrogee.
SIPA § 78fff-2(c)(1)(C). Thereafter, any customer property remaining becomes part of the general estate.
39. The amount advanced by SIPC to the Trustee in full or partial satisfaction of a customer claim is based on the difference between the customer’s net equity and his share of customer property, subject to the $500,000 limit of SIPA’s statutory protection. The SIPC advance does not reduce the customer’s net equity or his claim against customer property. If the sum of the amount of a customer’s SIPC advance and any subsequent distribution of customer property exceeds the customer’s net equity, SIPC has the right to recoup the excess. In effect,
SIPC becomes subrogated to the claims of customers to the extent it has supplied advances but
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cannot seek recovery from customer property as to any individual customer until the customer
has been fully satisfied. SIPA §§ 78fff-3(a), 78fff-2(c)(1).
C. Allocation Of Assets To The Fund Of Customer Property And Related Reserves
40. As this Court previously found in its Net Equity Decision, Madoff did not engage
in securities trading on behalf of BLMIS customers. Madoff used customer funds to support
operations and fulfill requests for redemptions to perpetuate the Ponzi scheme. Thus, payment of
“profits” to any one customer in fact came from another customer’s deposit of funds. As BLMIS was a Ponzi scheme, all of the funds withdrawn by BLMIS customers were simply other people’s money.
41. BLMIS was organized as a single member limited liability company. BLMIS operated a fraudulent investment advisory business (the “IA Business”), a proprietary trading
desk, and a market making desk. Although it had three distinct units, customer funds that were
invested through the IA Business were used to fund not only the IA Business, but all of BLMIS’s
operations.
42. BLMIS had an obligation to set aside sufficient assets to cover its statutory
obligations to customers. To the extent it did not, even assets that were not directly “proceeds”
of Madoff’s fraud are to be treated as “customer property” up to the amount of the deficiency.11
However, even including such assets in the fund of customer property, all of the assets of BLMIS
11 SIPA’s definitional paragraphs were amended in 1978 to incorporate in the “customer property” definition any other property of the debtor’s estate which, upon compliance with applicable laws, rules, and regulations, would have been set aside or held for the benefit of customers. Thus, to the extent that prior to the Filing Date BLMIS failed to maintain cash and securities in compliance with the Net Capital Rule issued by the SEC (Rule 15c3-3), as affected by the Customer Protection Rule (Rule 15c3-3) (both issued pursuant to the Exchange Act, 15 U.S.C. § 78o(c)(3)(A)), the Trustee is required to allocate property as necessary to remedy such non-compliance. The Customer Protection Rule effectively requires that a broker-dealer maintain secure control of all property that would have to be delivered to customers in the event of a liquidation: either the securities themselves or their value in the form of cash (or equivalents), and cash sufficient to pay net cash obligations to customers.
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and Madoff would nonetheless be insufficient to cover the obligations of BLMIS to its
customers.
43. For these reasons, and because it is not uncommon for almost all property
available to a broker-dealer to be deemed “customer property,” the Trustee seeks the Court’s
approval to allocate to the Customer Fund virtually all cash currently in his possession—
$2,617,974,430.26—as well as those assets specifically identified herein as the Picower
Settlement Funds. (Cohen Aff. ¶ 18). See First Fed. Sav. & Loan Assoc. of Lincoln v. Bevill,
Bresler & Schulman, Inc. (In re Bevill, Bresler & Schulman, Inc.), 59 B.R. 353, 362-66 (D.N.J.
1986) (describing and approving SIPA allocation and distribution scheme similar to that proposed by Trustee).
i. Assets In Trustee’s Possession As Of The Fourth Interim Report & Certain Related Reserves
44. In the Trustee’s Interim Report for the period of April 2010 through September
2010 (“Fourth Interim Report”), the Trustee reported that he possessed approximately $1.5 billion.12 See Fourth Interim Report, at ¶ 1 (ECF. No. 3038). These funds were primarily
derived from the following sources: (a) the transfer of BLMIS bank accounts to the BLMIS
estate; (b) pre-litigation settlements; (c) customer preference recoveries; (d) the sale of assets;
and (e) refunds.
45. One of the more significant pre-litigation settlements approved by this Court was
entered into by the Trustee and the estate of Norman F. Levy. Order Pursuant to Section 105(a)
of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure
Approving an Agreement By and Among the Trustee and Jeanne Levy-Church and Francis N.
Levy (ECF No. 1964). This settlement resulted in the return of $220 million to the BLMIS
12 In addition, the Trustee has in his possession a de minimis amount of unliquidated assets.
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estate. (Cohen Aff. ¶ 13). Certain claimants, represented by the law firm of Becker & Poliakoff,
LLP, moved to vacate this settlement, which was heard by this Court on March 30, 2011.
Customers’ Motion to Set Aside the Order Approving the Trustee’s Settlement with the Levy
Heirs for Failure to Disclose Material Information (ECF Nos. 3860-3862). The Court denied the motion (ECF No. 3984), and the claimants filed an appeal on April 11, 2011 (ECF No. 4005)
(the “Levy Appeal”). Because the proceeds of the Levy settlement remain the source of dispute, the Trustee is prevented from distributing these funds to customers at this time. The Trustee seeks approval to allocate the full amount of this settlement to the Customer Fund, though the
Trustee will hold the $220 million in reserve pending the appeal.
46. Other claimants returned $11,500,158.34 in preference and other monies to the
BLMIS estate pursuant to agreements that contained clauses relating to the outcome of the Net
Equity Dispute. (Cohen Aff. ¶ 14). These agreements provide that if a final, nonappealable order overruling the Net Equity Decision is entered (such that each customer’s “net equity” in this proceeding shall be calculated as the Fictitious Statement Amount), the funds returned to the
BLMIS estate shall revert to the claimants. The Trustee seeks approval to allocate the full amount of these preference and other settlements to the Customer Fund, though the Trustee will hold the $11,500,158.34 in reserve pending the outcome of the Net Equity Dispute.
ii. Undisputed Recoveries To The BLMIS Estate Since The Fourth Interim Report
47. Since the Fourth Interim Report, this Court has approved four significant settlements between the Trustee and certain parties that greatly increased the amount of funds recovered to the BLMIS estate. Three of these settlements are undisputed and the proceeds of which are in the BLMIS estate and available for allocation and distribution.
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48. On December 21, 2010, this Court approved a settlement between the Trustee and
Carl Shapiro, Robert Jaffe, and related entities (the “Shapiros”) in the amount of $550 million.
Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of the
Federal Rules of Bankruptcy Procedure Approving an Agreement By and Among the Trustee and the Shapiro Family (ECF No. 3551). On or about December 23, 2010, the Shapiros transferred $550 million to the Trustee. (Cohen Aff. ¶ 15). The Trustee seeks approval to allocate the full amount of this settlement to the Customer Fund for distribution in accordance with this Motion.
49. On January 6, 2011, this Court approved a settlement between the Trustee and
Swiss bank Union Bancaire Privée (“UBP”) that resulted in the recovery of $470 million to the estate.13 Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of
the Federal Rules of Bankruptcy Procedure Approving an Agreement By and Among the Trustee
and Union Bancaire Privée (ECF No. 3632). On or about January 24, 2011, UBP transferred
$470 million to the Trustee. (Cohen Aff. ¶ 15). The Trustee seeks approval to allocate the full
amount of this settlement to the Customer Fund for distribution in accordance with this Motion.
50. On March 10, 2011, this Court approved a settlement between the Trustee and
Hadassah in the amount of $45 million. Order Pursuant to Section 105(a) of the Bankruptcy
Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure Approving an
Agreement By and Among the Trustee and Hadassah, the Women’s Zionist Organization of
America, Inc. and Hadassah Medical Relief Association, Inc. (ECF No. 3912). On or about
13 Per the settlement agreement executed on December 6, 2010, UBP agreed to pay the Trustee an additional amount (the “UBP Guarantee Payment”) upon the resolution of actions brought by the Trustee against the Chester and Irongate family of funds. The UBP Guarantee Payment shall be the difference between $30 million and the sum of all settlement and judgment amounts received by the Trustee from the Chester and Irongate family of funds. As a result, the maximum UBP Guarantee Payment will be $500 million.
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March 28, 2011, Hadassah transferred $45 million to the Trustee. (Cohen Aff. ¶ 15). The
Trustee seeks approval to allocate the full amount of this settlement to the Customer Fund for
distribution in accordance with this Motion.
51. In addition to the above settlements, the Trustee has recovered $89,071,011.28
since the Fourth Interim Report as a result of preference and other settlements, of which
$45,981,625.41 is subject to the Net Equity Dispute.14 (Cohen Aff. ¶ 16). The Trustee will hold
the $45,981,625.41 in reserve pending the outcome of the Net Equity Dispute. Therefore, the
Trustee seeks approval to allocate the full amount of these preference and other settlements to
the Customer Fund, but only $43,089,385.87 of these settlements will be available for
distribution at this time.
52. To the extent additional settlements are entered into and approved by this Court
prior to the entry of an order on this Motion, the Trustee will seek to allocate those recoveries by way of a supplemental filing.
iii. Disputed Recovery—The Picower Settlement
53. The fourth significant settlement entered into by the Trustee since the Fourth
Interim Report—that with the estate of Jeffry Picower (the “Picower Settlement” or the “Picower
Settlement Funds”)—stands to have the greatest effect on customer recoveries in this liquidation
proceeding. Because of actions taken by certain claimants, however, the Picower Settlement
Funds have not yet been transferred to the Trustee. Some background regarding the Picower
Settlement Funds will be provided for context and clarity.
14 These agreements provide that if the court enters a final, nonappealable order overruling the Net Equity Decision (such that each customer’s “net equity” in this proceeding shall be calculated as the Fictitious Statement Amount), the funds returned to the BLMIS estate shall revert to the claimants.
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54. On May 12, 2009, the Trustee commenced an adversary proceeding against Jeffry
Picower and related entities (the “Picower Defendants”), captioned Picard v. Picower, Adv. Pro.
No. 09-1197 (Bankr. S.D.N.Y.) (BRL) (ECF No. 1). Thereafter, the Trustee and Mrs. Barbara
Picower, the executor of the estate of Jeffry Picower (the “Picower Estate”), engaged in settlement negotiations that resulted in an agreement to settle the Trustee’s claims in the amount of $5 billion.
55. Mrs. Picower’s agreement with the Trustee, however, was contingent on her reaching an agreement with the United States Government (the “Government”) to resolve potential civil forfeiture liability of the Picower Estate pursuant to 18 U.S.C. § 981(a)(1)(C). As a result of subsequent negotiations with the Government, Mrs. Picower, on behalf of the Picower
Estate, agreed to forfeit to the Government the amount of $7,206,157,717 (the “Forfeited
Funds”), of which $5 billion was credited and to be paid over to the Trustee. The remainder represented Mrs. Picower’s settlement with the Government.
56. In February 2010, while the Picower settlement negotiations were ongoing, Adele
Fox (“Fox”) and Susanne Marshall (“Marshall”), each a BLMIS claimant (collectively, the
“Florida Plaintiffs”), commenced putative class actions against the Picower Defendants in the
United States District Court for the Southern District of Florida, West Palm Beach Division
(collectively, the “Florida Actions”) for damages relating to BLMIS. Upon motion of the
Trustee, this Court preliminarily enjoined the Florida Actions (the “Preliminary Injunction
Order”). Picard v. Fox, Adv. Pro. No. 10-3114 (Bankr. S.D.N.Y.) (BRL), Memorandum Order and Decision Granting Trustee’s Motion Pursuant to Bankruptcy Code Sections 362(a) and
105(a) and Bankruptcy Rule 7065 for Enforcement of the Automatic Stay and for a Preliminary
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Injunction (ECF No. 22). The Florida Plaintiffs appealed the Preliminary Injunction Order to the
District Court for the Southern District of New York. Id., Notice of Appeal (ECF No. 25).
57. In December 2010, the Trustee moved for an order approving the Picower
Settlement. At the same time, the Government commenced a forfeiture action in the District
Court. United States of America v. $7,206,157,717 On Deposit at JPMorgan Chase, NA in the
Account Numbers Set Forth on Schedule A, No. 10-CV-9398 (S.D.N.Y.) (TPG) (ECF No. 1).
The Government and Mrs. Picower entered into a Stipulation and Order of Settlement (the
“Forfeiture Stipulation”), which was so ordered by the District Court. Id., Stipulation and Order
of Settlement (ECF No. 2). Thereafter, the Trustee’s Picower Settlement was approved by this
Court on January 13, 2011 (the “Picower Settlement Order”). Picower, Order Pursuant to
Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of
Bankruptcy Procedure Approving an Agreement by and Among the Trustee and the Picower
BLMIS Account Holders and Issuing a Permanent Injunction (ECF No. 43).
58. Under the terms of an escrow agreement incorporated by reference into both the
Picower Settlement Order and the Forfeiture Stipulation (the “Escrow Agreement”), the Picower
Estate transferred the full $7.2 billion to the escrow account at JPMorgan Chase Bank, NA (the
“Picower Escrow Account”). Id. Shortly thereafter, approximately $2.2 billion was transferred to the Government pursuant to the Forfeiture Stipulation.
59. The Escrow Agreement provides that the $5 billion remaining in the Picower
Escrow Account is to be transferred to the Trustee upon the entry of the earlier of either: (a) a final, nonappealable order approving the Trustee’s settlement; or (b) a final, nonappealable order of forfeiture. Id.
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60. As referenced above, this Court entered the Picower Settlement Order on January
13, 2011. Had fourteen days expired with no appeals taken, the Picower Settlement Order entered by this Court would have become final and nonappealable on January 27, 2011.
Pursuant to the Escrow Agreement, the Trustee would have then sought the release of the $5 billion and received such funds within five business days. However, that is not what transpired.
Instead, the Florida Plaintiffs (certain of which are represented by the law firm of Becker &
Poliakoff, LLP) appealed the Picower Settlement Order to the District Court, meaning that a final, nonappealable order regarding the Trustee’s Picower settlement can be entered only upon the resolution of those appeals. Picower, Amended Notice of Appeal (ECF No. 45); Notice of
Appeal (ECF No. 49). As a result, instead of the Trustee receiving the $5 billion in early
February 2011 for distribution to customers, those funds remain in the Picower Escrow Account.
61. The Government forfeiture action relating to the Picower Estate is pending before the District Court. Fox filed both a motion to intervene in that action and a claim against the forfeited funds. $7,206,157,717 On Deposit at JPMorgan Chase, NA in the Account Numbers
Set Forth on Schedule A, Motion to Intervene (ECF Nos. 6-8), Notice of Claim (ECF No. 10).
The Government opposed the motion to intervene and simultaneously filed a cross-motion to dismiss Fox’s claim to the forfeited funds (the “Government Opposition”). Id., Opposition to
Adele Fox’s Motion to Intervene, and Cross-Motion to Dismiss Adele Fox’s Claim to the
Defendant in Rem, and for a Final Order of Forfeiture (ECF Nos. 12-14). In the Government
Opposition, the Government requested that the District Court enter a final order of forfeiture.
The District Court has scheduled a hearing on May 26, 2011.
62. The only way for the Trustee to receive the Picower Settlement Funds for allocation to the Customer Fund and distribution under SIPA is through either entry of a final,
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nonappealable order approving the Picower Settlement or a final, nonappealable order of forfeiture. Upon either event, the Trustee will seek the transfer of $5 billion to the BLMIS estate from the Escrow Account.
63. It is not known at this time whether or when a final order of settlement or forfeiture will be entered and, thus, whether or when the Trustee will receive the $5 billion paid in settlement of the Trustee’s claims against the Picower Estate. Should those funds come into the BLMIS estate, there is no question that the $5 billion should be allocated to the Customer
Fund.
64. The Trustee seeks approval to allocate the $5 billion Picower Settlement to the
Customer Fund upon receipt of such funds. As discussed more fully below, upon receipt of those funds and allocation to the Customer Fund, each customer’s distribution will increase markedly.
iv. Summary Of Requested Allocation
65. The Trustee, in this Motion, seeks to allocate $2,617,974,430.26 to the Customer
Fund, with $220 million and $57,481,783.75 (a total of $277,481,783.75) held in reserve pending
the outcome of the Levy Appeal and the Net Equity Dispute, respectively, leaving
$2,340,492,646.51 available for distribution at this time. (Cohen Aff. ¶ 18).
66. The Trustee also seeks to allocate the $5 billion Picower Settlement Funds to the
Customer Fund. Should the Picower Settlement Funds be transferred to the BLMIS estate before
entry of an order by this Court regarding allocation of the estate, the Trustee will seek permission
to distribute those funds.
67. The Trustee does not seek to allocate any funds to the General Estate at this time.
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D. Determination Of Allowable Net Equity Claims & Related Reserves
68. For distribution purposes, the Customer Fund numerator is only one half of the equation. In order to calculate each customer’s pro rata share of customer property, the Trustee also needs to establish the denominator, or the amount of allowable net equity claims.
69. If the Trustee had determined all customer claims and his determinations were final either through the passage of time or judicial determination, the denominator would simply equal the amount of allowed claims. Because the Trustee is seeking to make an interim distribution prior to a final determination of all customer claims and while certain disputes such as the Net Equity Dispute are pending, the Trustee cannot use as the denominator the amount of allowed claims as of this date. Doing so could result in an uneven distribution to customers, in violation of SIPA and the Bankruptcy Code, because there could be less funds to distribute to claimants whose claims are allowed in the future. Instead, the Trustee must project as to the amount of all allowable net equity claims and establish sufficient reserves to ensure that he can make a pro rata distribution to all possibly-eligible claimants, should their claims be allowed. In order to do so, he must maintain sufficient reserves.
70. In its current posture, the Net Equity Dispute can be resolved in one of two ways: this Court’s Net Equity Decision could be upheld by a final, nonappealable order holding that net equity under SIPA shall be calculated using the cash in, cash out method, or the Net Equity
Decision could be overturned by a final, nonappealable order holding that each customer’s claim must be valued in the Fictitious Statement Amount.
71. The Trustee, in this Motion, seeks to set the Fictitious Statement Amount of
$57,354,863,950.37 as the “denominator” for purposes of this distribution (the “Net Equity
Reserve Denominator”). (Cohen Aff. ¶ 25).
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72. The Fictitious Statement Amount is the amount shown on the November 30, 2008
BLMIS customer statements. The total amount of fictitious equity shown on the customer statements issued by BLMIS on November 30, 2008 was $64,884,303,872.14. (Id. ¶ 20).
However, this $64,884,303,872.14 includes $8,597,048,281.54 in negative equity (i.e., amounts
owed by customers to BLMIS) from twenty-two accounts. (Id.). When this negative equity is
added to the $64,884,303,872.14 fictitious equity of those customer accounts that had a positive
balance, the total fictitious equity for all BLMIS customer accounts as of November 30, 2008
increases to $73,481,352,153.68. (Id.).
73. The Trustee has subtracted $16,034,388,246.88 in customer claims, including
those related to the Levy, Picower, and Shapiro accounts that were irrevocably withdrawn from
this liquidation proceeding as part of the settlements with those parties, from the Fictitious
Statement Amount. (Id. ¶ 21).
74. During December 2008, seven new accounts opened with cash activity that
resulted in a net deposit of $84,555,432.72. (Id. ¶ 24). This activity is not reflected in the
Fictitious Statement Amount but is included in the Net Equity Reserve Denominator. Also
during December 2008, 250 accounts that are included in the Net Equity Reserve Denominator
had cash activity that resulted in a net withdrawal of $225,604,087.19. (Id. ¶ 22). This activity is not reflected in the Fictitious Statement Amount. One hundred sixteen accounts remitted
$48,948,698.04 to the Trustee based on preference settlements or settlement agreements not contingent on the Net Equity Dispute, which is also included in the Net Equity Reserve
Denominator. (Id. ¶ 22).
75. Of the Fictitious Statement Amount, approximately $7.2 billion correlates to
customer accounts against which no claims were filed or the claims were withdrawn due to
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settlement agreements. (Id. ¶ 26). Thus, even if the Second Circuit resolves the Net Equity
Dispute against the Trustee such that net equity is valued in the Fictitious Statement Amount, the
Trustee asserts that no distributions should be made on these accounts. However, the Trustee has
still included the $7.2 billion in the Net Equity Reserve Denominator because of certain actions
pending in this Court.
76. Those actions include a class action filed prior to the statutory bar date against the
Trustee seeking, inter alia: (a) declaratory relief that “net equity” must be valued in the Fictitious
Statement Amount, and (b) a determination that the class action be deemed a class proof of claim
on behalf of all customers who failed to file a customer claim prior to the bar date. See Less v.
Picard, Adv. Pro. No. 09-1265 (Bankr. S.D.N.Y.) (BRL).
77. Pursuant to a stipulation so ordered by this Court on September 18, 2009, the
class action was stayed pending the entry of a final, nonappealable order regarding the Net
Equity Dispute. Less, So Ordered Stipulation signed on Sept. 18, 2009 Between Plaintiffs and
Defendant (ECF No. 34). As such, no rulings were made as to the declaratory relief sought in
the class action, including the propriety of filing a class proof of claim in this liquidation proceeding. Thus, the Trustee has included in the Net Equity Reserve Denominator approximately $7.2 billion relating to the fictitious equity of accounts for which no claims were filed. (Cohen Aff. ¶ 25).
78. After making the discussed-above adjustments, the Net Equity Reserve
Denominator is $57,354,863,950.37. (Id. ¶ 25). This amount is the highest amount for which the Trustee will have to reserve because no customer’s net equity could be greater than the
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amount on their November 30, 2008 statement once the adjustments described above have been made.15 (Id. ¶ 27).
79. In contrast, if the Net Equity Dispute were not pending, and no other reserves were required, $17,265,885,837.54 would be the denominator under the Trustee’s Net
Investment Method. (Id. ¶ 19).
V. INTERIM CALCULATION OF PRO RATA SHARE DISTRIBUTION OF CUSTOMER FUND
80. SIPA § 78fff-2(c)(1) establishes, in pertinent part, that a customer is to receive his ratable share from the fund of customer property. To the extent that the customer has already been fully satisfied through an advance of funds by SIPC by the time that customer property is distributed, SIPC steps into the shoes of the customer as subrogee and receives that customer’s share of customer property. In that manner, a customer does not receive a double recovery on his claim that was already fully satisfied by the SIPC advance.
81. As set forth above and in the Cohen Affidavit, the Trustee proposes to allocate
$2,617,974,430.26 to the Customer Fund at this time. (Id. ¶ 29). Of that amount,
$2,340,492,646.51 is available for distribution (the “Net Customer Fund”). See supra ¶ 65. The
Net Equity Reserve Denominator is $57,354,863,950.37. (Cohen Aff. ¶ 29). To determine the percentage of each allowed customer net equity claim that can be satisfied from the Customer
Fund, the Net Customer Fund is divided by the Net Equity Reserve Denominator, resulting in the following percentage (“Scenario 1”):
$2,340,492,646.51 (Net Customer Fund) = 4.081% $57,354,863,950.37 (Net Equity Reserve Denominator)
15 There are no additional reserves required for any future avoidance recoveries by the Trustee because such recoveries will be added to both the numerator and the denominator by operation of Bankruptcy Code § 502(h). Any subsequent recovery coupled with a corresponding claim for the same amount cannot adversely affect the distribution because the addition of any amount to both the numerator and denominator can only result in an increase, not a decrease, of the pro rata distribution to any customer.
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Under Scenario 1, the allowed claims relating to 1,214 BLMIS accounts will be partially
satisfied and the allowed claims relating to 10 additional accounts will be fully satisfied. Eight
hundred and sixty-eight accounts have already been fully satisfied or committed to be fully satisfied by the funds advanced to the Trustee by SIPC. An additional 205 accounts that have
been “deemed determined” could receive a distribution if and when the status of their claims
moves from “deemed determined” to allowed. Seventy-nine of the 205 accounts would be fully
satisfied by the SIPC advance. The remaining 126 accounts would receive both a SIPC advance
and a distribution in accordance with the Trustee’s Motion.
82. If the $5 billion Picower Settlement Funds were to come into the BLMIS estate
and be allocated to the Customer Fund, each customer’s ratable share of the Customer Fund
would accordingly increase (“Scenario 2”). (Id. ¶ 33). Rather than 4.08%, each customer’s
share would be calculated as follows:
$7,340,492,646.51 (Net Customer Fund) = 12.798% $57,354,863,950.37 (Net Equity Reserve Denominator)
Under Scenario 2, when combined with amounts advanced to the Trustee by SIPC,
claims relating to 1,177 accounts would be partially satisfied and the allowed claims relating to
47 additional accounts would be fully satisfied. Eight hundred and sixty-eight accounts have
already been fully satisfied or committed to be satisfied by the funds advanced to the Trustee by
SIPC. An additional 205 accounts that have been “deemed determined” could receive a
distribution if and when the status of their claims moves from “deemed determined” to allowed.
Seventy-nine of the 205 accounts would be fully satisfied by the SIPC advance. Three additional
accounts would be fully satisfied with the SIPC advance plus their pro rata share of the
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Customer Fund. The remaining 123 accounts would receive both a SIPC advance and a distribution in accordance with the Trustee’s Motion.
83. If this Court’s Net Equity Decision were upheld by a final, nonappealable order holding that net equity under SIPA shall be calculated using the cash in, cash out method, and no reserves for the Levy Appeal were required, each customer’s ratable share of the Customer Fund would accordingly increase (“Scenario 3”). (Id. ¶ 34). Rather than 12.80%, each customer’s share would be calculated as follows:
$2,617,974,430.26 (Customer Fund) = 15.163% $17,265,885,837.54 (Net Equity Reserve Denominator)
Under Scenario 3, when combined with amounts advanced to the Trustee by SIPC, claims relating to 1,168 accounts would be partially satisfied and the allowed claims relating to
56 additional accounts would be fully satisfied. Eight hundred and sixty-eight accounts have already been fully satisfied or committed to be fully satisfied by the funds advanced to the
Trustee by SIPC. An additional 205 accounts that have been “deemed determined” could receive a distribution if and when the status of their claims moves from “deemed determined” to allowed. Seventy-nine of the 205 accounts would be fully satisfied by the SIPC advance. Three additional accounts would be fully satisfied with the SIPC advance plus their pro rata share of the Customer Fund. The remaining 123 accounts would receive both a SIPC advance and a distribution in accordance with the Trustee’s Motion.
84. If this Court’s Net Equity Decision were upheld by a final, nonappealable order, the Picower Settlement Funds of $5 billion were to come into the BLMIS estate to be allocated to the Customer Fund, the Levy funds were available, and no other reserves were required, each customer’s ratable share of the Customer Fund would accordingly increase (“Scenario 4”). (Id. ¶
35). Rather than 4.08% or 15.16%, each customer’s share would be calculated as follows:
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$7,617,974,430.26 (Customer Fund) = 44.122% $17,265,885,837.54 (Net Equity Reserve Denominator)
This means that each customer would receive approximately 44.1 cents on the dollar. Under
Scenario 4, when combined with amounts advanced to the Trustee by SIPC, claims relating to
994 accounts would be partially satisfied and the allowed claims relating to 230 additional
accounts would be fully satisfied. Eight hundred and sixty-eight accounts have already been
fully satisfied or committed to be fully satisfied by the funds advanced to the Trustee by SIPC.
An additional 205 accounts that have been “deemed determined” could receive a distribution if
and when the status of their claims moves from “deemed determined” to allowed. Seventy-nine
of the 205 accounts would be fully satisfied by the SIPC advance. Fifteen additional accounts
would be fully satisfied with the SIPC advance plus their pro rata share of the Customer Fund.
The remaining 111 accounts would receive both a SIPC advance and a distribution in accordance with the Trustee’s Motion.
85. The following chart provides an example of the four distribution scenarios for a customer with an allowed claim of $575,000:
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Total To Claimant (SIPC Amount of Advance + Customer Customer Interim Amount of Pro Rata Allowed SIPC Pro Rata SIPC Allocation to Allocation to Category Share Amount Advance Amount Subrogation Customer Customer) Scenario 1: Funds on Hand $575,00 (“FOH”) $0.0408 0 $500,000 $23,464 $0 $23,464 $523,464 Scenario 2: (FOH + $575,00 Picower) $0.1280 0 $500,000 $73,591 $0 $73,591 $573,591 Scenario 3: (FOH + net equity upheld + $575,00 Levy) $0.1516 0 $500,000 $87,186 $12,186 $75,000 $575,000 Scenario 4: (FOH + Picower + net equity upheld + $575,00 Levy) $0.4412 0 $500,000 $253,699 $178,699 $75,000 $575,000
86. While the Trustee would prefer to implement Scenario 4, pending the final
resolution of the Net Equity Dispute, the Levy Appeal, and the Picower Settlement, he cannot do so. Thus, the Trustee at this time seeks to implement Scenario 1.
87. Accordingly, the Trustee has determined that each customer’s ratable share of the
Net Customer Fund shall be no less than 4.08% of the customer’s net equity claim. (Id. ¶¶ 29-
30). By this Motion, the Trustee seeks the authority to make a distribution of the Net Customer
Fund equal to 4.08% of the customer net equity claims (the “Proposed Interim Distribution”).
Under the Proposed Interim Distribution, actual distributions from the Customer Fund will only be made to those customers whose claims have not already been fully satisfied.
88. SIPC, as subrogee, is entitled to receive partial repayment of its cash advances to the Trustee pursuant to SIPA § 78fff-3(a)(1), which, in this case, total $793,149,690.14. (Id. ¶
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7). Further, SIPC is entitled to receive repayment as to any given customer to the extent the
customer’s claim was fully repaid by a combination of the SIPC advance and the Trustee’s initial
distribution. See In re Bell & Beckwith, 104 B.R. 852 (Bankr. N. D. Ohio 1989), aff’d, 937 F.2d
1104 (6th Cir. 1991). However, in light of the Net Equity Dispute and other considerations,
SIPC has agreed to defer receipt of any subrogation amounts from this initial distribution.
Instead, any monies that would otherwise be paid to SIPC will, at present, be retained by the
Trustee pending further developments in the case.
89. If the Court approves this Motion with current numbers, the allowed claims relating to 1,214 accounts will be partially satisfied and the allowed claims relating to 10 additional accounts will be fully satisfied. Eight hundred and sixty-eight accounts have been fully satisfied by the funds advanced to the Trustee by SIPC. An additional 205 accounts that have been “deemed determined” could receive a distribution if and when the status of their claims moves from “deemed determined” to allowed. Seventy-nine of the 205 accounts would be fully satisfied by the SIPC advance. The remaining 126 accounts would receive both a SIPC advance and a distribution in accordance with the Trustee’s Motion. (Cohen Aff. ¶ 28).
90. As noted above, the Trustee is only making an interim distribution of the undisputed property allocated to the Customer Fund and he expects additional recoveries allocable to the Customer Fund.
91. The numbers contained herein are based on recoveries and claims allowed as of
March 31, 2011. To the extent that additional claims are allowed, or additional recoveries are made by the Trustee, those events will alter the allocation and/or the calculation of the distribution. To the extent that additional claims are allowed, or additional recoveries are made,
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the Trustee will supplement this filing accordingly with final calculations for the relief sought in
this Motion.
A. No Interim Distribution Of General Estate
92. Under SIPA § 78fff(e), funds from the general estate satisfy the administrative
costs and expenses of a Debtor’s estate and a liquidation proceeding. To the extent that the
general estate is insufficient, SIPC makes advances to the Trustee for the payment of such costs
and expenses. SIPA § 78fff-3(b)(2). All administrative advances made by SIPC are recoverable
from the general estate under section 507(a)(2) of the Bankruptcy Code. SIPA
§§ 78eee(b)(5)(E), 78fff(e). The general estate is distributed in accordance with section 726 of the Bankruptcy Code, with section 507(a)(2) expenses receiving second priority.16 SIPA
§ 78fff(e).
93. As noted previously, see supra ¶ 29, the Trustee has received 427 timely and 21 untimely filed secured priority and unsecured non-priority general creditor claims totaling approximately $1.7 billion. The claimants include vendors, taxing authorities, employees, and customers filing claims on non-customer proof of claim forms. One hundred and one of these
448 are general creditor claims and 50 are broker-dealer claims which together total approximately $266 million of the $1.7 billion. Inasmuch as the Trustee proposes to allocate no assets to the General Estate, see supra ¶ 67, there are no funds in the General Estate from which to make a distribution to general creditors at this time. Accordingly, “[no] purpose would be served” by the examination of or the institution of actions seeking to disallow such claims. See ii
U.S.C. § 704(5).
16 There are no § 507(a)(1) expenses in this liquidation proceeding.
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VI. DEPARTMENT OF JUSTICE FORFEITURE FUNDS
94. The United States Attorney’s Office for the Southern District of New York
(“USAO”) is in the process of forfeiting billions of dollars of assets relating to the fraud that
occurred at BLMIS (the “Forfeiture Fund”). Victims are entitled to petition for mitigation or
remission of forfeiture in accordance with the criteria set forth in 28 C.F.R. Part 9. The
Government may contract with a special master to notify petitioners, process petitions, and make
recommendations with regard to forfeited property. 28 C.F.R. § 9.9(c). Pursuant to this authority, the Department of Justice has announced that it would retain Mr. Picard to serve as special master to assist the USAO and the Department of Justice (“DOJ”) in the petition process to be conducted in connection with BLMIS-related forfeitures, in accordance with applicable regulations. Thus, Mr. Picard would wear “two hats,” one as SIPA Trustee and one as DOJ special master.
95. It is anticipated that many of the customers to which the Trustee proposes to distribute pursuant to this Motion may also be eligible for distributions from the Forfeiture Fund.
Any determination as to the amounts owed to a claimant—whether a “customer” under SIPA or a “victim” under the forfeiture regulations—will take into account monies received from either fund such that no claimant receives in this SIPA proceeding more than their net equity claim under SIPA.
VII. MISCELLANEOUS
A. Notice
96. Pursuant to Bankruptcy Rules 2002(a)(6), 2002(f)(8), and 2002(h), the Trustee
has given notice of the hearing on the Trustee’s Motion by first class mail, postage prepaid, to all
claimants that filed a claim in the liquidation proceeding, and all counsel that have appeared in
the main liquidation proceeding. Copies of the Application have been transmitted to SIPC, the
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SEC, and other parties in interest. The Trustee believes that no further notice need be given of
this or any further matter in the proceeding.
B. Waiver Of Memorandum Of Law
97. The Trustee respectfully requests that this Court waive the requirement under
Local Bankruptcy Rule 9013-1(b) for the submission of a separate memorandum of law or,
alternatively, deem this Application as satisfying that requirement.
VIII. CONCLUSION
98. This Motion and the relief requested by the Trustee are consistent with the policy
and purposes underlying SIPA and are in the best interests of the customers of BLMIS, the
Debtor estate, its creditors, and SIPC.
99. No prior application for the relief sought herein has been made to this or any other
Court.
100. WHEREFORE, the Trustee respectfully requests that this Court enter an order
(a) approving (i) the proposed initial allocation of property to the Customer Fund and to the
General Estate; (ii) the proposed interim distribution of the Customer Fund; and (b) granting such other and further relief as may be deemed just and proper.
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Dated: May 4, 2011 Respectfully submitted,
/s/ David J. Sheehan Of Counsel: David J. Sheehan Email: [email protected] Baker & Hostetler LLP Seanna R. Brown 3200 National City Center Email: [email protected] Cleveland, Ohio 44114 Jacqlyn R. Rovine Telephone: (216) 621-0200 Email: [email protected] Facsimile: (216) 696-0740 Baker & Hostetler LLP Brian A. Bash 45 Rockefeller Plaza Email: [email protected] New York, New York 10111 Thomas Wearsch Tel: (212) 589-4200 Email: [email protected] Fax: (212) 589-4201
Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff
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