In re Bernard L. Madoff Inv. Sec. Llc
| Decision Date | 22 September 2011 |
| Docket Number | Bankruptcy No. 08–01789 (BRL).,Adversary No. 09–1503 (BRL). |
| Citation | 458 B.R. 87,55 Bankr.Ct.Dec. 139 |
| Parties | In re BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor.Irving H. Picard, as Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,v.Peter B. Madoff, Mark D. Madoff, Andrew H. Madoff, and Shana D. Madoff, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
OPINION TEXT STARTS HERE
Baker & Hostetler LLP, By: David J. Sheehan, John Siegal, Marc D. Powers, New York, NY, for Plaintiff, Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff.Paul, Weiss, Rifkind, Wharton & Garrison LLP, By: Martin Flumenbaum, Stephen J. Shimshak, Andrew J. Ehrlich, Hannah S. Sholl, New York, NY, for Defendant, Andrew H. Madoff, individually and as Executor of the Estate of Mark D. Madoff.Lankler Siffert & Wohl LLP, By: Charles T. Spada, New York, NY, for Defendant, Peter B. Madoff.Smith Valliere PLLC, By: Timothy A. Valliere, New York, NY, for Defendant, Shana D. Madoff.
Before this Court are the motions (the “Motions to Dismiss”) of Mark D. Madoff 1 and Andrew H. Madoff, Peter M. Madoff, and Shana D. Madoff (the “Defendants”) seeking to dismiss the complaint (the “Complaint”) filed in the above-captioned adversary proceeding by Irving H. Picard, Esq. (the “Trustee,” or “Plaintiff”), trustee for the substantively consolidated Securities Investor Protection Act (“SIPA”) 2 liquidation () of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and Bernard L. Madoff (“Madoff”), pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6), made applicable herein by Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 7012.3
The instant Complaint differs from all others connected to the Madoff Ponzi scheme in one significant respect: its named Defendants are Madoff's brother, two sons, and niece. As set forth in the Complaint, the Defendants held senior management positions at BLMIS, which, the Trustee asserts, was “operated as if it was the family piggy bank,” with the Defendants living in multi-million dollar homes and relying on BLMIS funds to pay for vacations, travel, and other personal expenses—all while failing to fulfill their responsibilities as high ranking employees of the business. This failure was unsurprising given their close familial relationship with Madoff and proximity to BLMIS, both of which undergird the claim at the heart of the Trustee's Complaint: that if anyone was in a position to prevent Madoff's scheme, it was the Defendants, who, instead, stood by profiting mightily while allowing it to persist. The Defendants nevertheless steadfastly contend their involvement with BLMIS was entirely legitimate, and they, above all others, were betrayed by their family's patriarch. But even if they were victims of the cruelest betrayal, the Complaint alleges that the Defendants' failures to fulfill their responsibilities at BLMIS facilitated egregious harms.
The Trustee accordingly seeks to avoid and recover transfers made to the Defendants in the collective amount of over $198 million under various sections of the Bankruptcy Code (the “Code”) and New York Debtor and Creditor Law 4 (the “NYDCL”); as well as to utilize sections of the Code to disallow and equitably subordinate those claims filed by the Defendants in the SIPA proceeding (collectively, the “Bankruptcy Claims”).5 In addition, the Trustee seeks tort damages for BLMIS by bringing claims under New York common law for breach of fiduciary duty, negligence, conversion, unjust enrichment, constructive trust, and accounting (the “Common Law Claims”). The Complaint, however, contains some correctable pleading deficiencies, and will need to be amended in part in order to stand as a matter of law.6 Thus, as set forth below, the Defendants' Motions to Dismiss are DENIED in part and GRANTED in part.
A comprehensive discussion of the facts underlying the SIPA Liquidation and Madoff's Ponzi scheme is set forth in this Court's prior decisions. See In re Bernard L. Madoff Inv. Sec. LLC, 424 B.R. 122, 125–32 (Bankr.S.D.N.Y.2010) ( In re BLMIS I ), aff'd, Nos. 10–2378, et al., 2011 WL 3568936 (2d Cir. Aug. 16, 2011) ( In re BLMIS II ); see also Picard v. Merkin (In re Bernard L. Madoff Inv. Sec. LLC), 440 B.R. 243, 249–51 (Bankr.S.D.N.Y.2010) ( Merkin I ), leave to appeal denied, 2011 WL 3897970, at *13 (S.D.N.Y. Aug. 31, 2011) ( Merkin II ).
I. THE DEFENDANTSA. Peter B. Madoff
Peter B. Madoff (“Peter”) is Madoff's brother and was BLMIS's Senior Managing Director and Chief Compliance Officer (“CCO”). He is a law school graduate and held a number of securities licenses with the Financial Industry Regulatory Authority (“FINRA”), including Series 1, 4, and 5. Peter was the Director of the Securities Industry Financial Markets Associations (“SIFMA”), a member of the Board of Governors and the Executive Committee of the National Stock Exchange, the Vice Chairman of the FINRA Board of Governors, as well as a Director of the National Securities Clearing Corporation. He also served on NASDAQ's Executive Committee Board of Governors. Compl. ¶ 6.
As the CCO of BLMIS, Peter was allegedly responsible for adopting and administering compliance procedures to prevent and detect fraud and to identify and address significant compliance issues in accordance with SEC and FINRA regulations. Compl. ¶¶ 28–36. His duties included, inter alia, preparing the annual review of BLMIS's investment advisory business's (“IA Business”) compliance program, performing qualitative tests of BLMIS's internal compliance procedures, and assessing whether such procedures were effectively implemented. Compl. ¶¶ 28–36.
Peter is alleged to have received at least $60,631,292 from BLMIS, including, but not limited to, withdrawals of fictitious profits from investment advisory accounts at BLMIS (“IA Accounts”); salaries and bonuses from 2001 to 2008 in the total amount of $20,067,920; loans totaling $13,244,649.30; and various other payments funding purchases of real estate, business investments, a life insurance policy, personal credit card bills, and the purchase and restoration of an Aston Martin automobile.7 Compl. ¶¶ 65–73.
B. Mark D. Madoff and Andrew H. Madoff
Mark D. Madoff (“Mark”) and Andrew H. Madoff (“Andrew”), Madoff's sons, were Co–Directors of Trading at BLMIS and served as Controllers and Directors of Madoff Securities International Ltd. (“MSIL”), a U.K. affiliate of BLMIS. 8 Both held securities licenses with FINRA, including Series 4, 7, 24, and 55, and were members of various securities organizations. Mark was Chairman of the FINRA Inter–Market Committee, Governor of the Securities Traders Association (“STA”), Co–Chair of the STA Trading Committee, a member of the FINRA Membership Committee and Mutual Fund Task Force, President of the Securities Trader Association of New York (“STANY”), Chairman of the FINRA Regulation District Ten Business Conduct Committee, and Chairman of the Securities Industry and Financial Markets Association (“SIFMA”) NASDAQ committee. Similarly, Andrew was Chairman of the Trading, Trading Issues and Technology, and Decimalization and Market Data Committees and Subcommittees at SIFMA. He was also a member of the FINRA District Ten and NASDAQ Technology Advisory Committees. Compl. ¶¶ 7, 8.
Andrew and Mark were purportedly responsible for ensuring compliance with BLMIS's policies and procedures, as well as applicable securities laws. Compl. ¶¶ 28–36, 47–49.
Mark allegedly received at least $66,859,311 from BLMIS, including, but not limited to, withdrawals of fictitious profits from IA Accounts; salaries and bonuses from 2001 to 2008 in the total amount of $29,320,830; real estate loans in the amount of $15,126,589; and payments funding real estate purchases, business investments, and personal credit card bills. Compl. ¶¶ 74–84. Likewise, Andrew allegedly received at least $60,644,821 from BLMIS, including, but not limited to, withdrawals of fictitious profits from IA Accounts; $31,105,505 in salary and bonuses between 2001 and 2008; loans totaling $11,285,000; and various other payments funding business investments, the purchase and maintenance of a boat, and personal credit card expenses. Compl. ¶¶ 85–94.
C. Shana Madoff
Shana Madoff (“Shana”), Madoff's niece, served as the in-house Counsel and Compliance Director for BLMIS. She is a law school graduate and a member of the FINRA Consultative Committee; STANY; NASD's Market Regulation Committee, the SIFMA Self–Regulatory and SRO Committee, and the SIFMA Continuing Education Committee. Compl. ¶ 9.
Like Peter, Shana was purportedly responsible for monitoring BLMIS's operations and ensuring compliance with federal securities laws and regulations and corresponding FINRA rules and regulations. Compl. ¶¶ 28–36, 43–46.
Shana allegedly received at least $10,607,876 from BLMIS, including, but not limited to, withdrawals of fictitious profits from IA Accounts; salaries from 2001 to 2008 in the amount of $3,832,878; as well as various payments funding the purchase of a home, business investments, interior decoration, rent, and personal credit card expenses. Compl. ¶¶ 95–98.
Rule 12(b)(6) allows a party to move to dismiss a cause of action for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6); Fed. R. Bankr.P. 7012(b). When considering a motion to dismiss under Rule 12(b)(6), a court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555–56, 127 S.Ct....
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