In re Bernard L. Madoff Inv. Securities LLC

• Decision Date: 01 March 2010
• Docket Number: No. 08-01789 (BRL).,08-01789 (BRL).
• Citation: 424 B.R. 122
• Parties: In re BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor. Securities Investor Protection Corporation, Plaintiff, v. Bernard L. Madoff Investment Securities LLC, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

Page 122

424 B.R. 122

In re BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor Securities Investor Protection Corporation, Plaintiff, v. Bernard L. Madoff Investment Securities LLC, Defendant.

No. 08-01789 (BRL).

United States Bankruptcy Court, S.D. New York.

March 1, 2010.

Baker & Hostetler LLP, by David Sheehan, Marc E. Hirschfield, Oren J. Warshavsky, Seanna R. Brown, New York, NY, Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff.

Securities Investor Protection Corporation, by Josephine Wang, Kevin H. Bell, Washington, DC, Attorneys for the Securities Investor Protection Corporation.

Securities and Exchange Commission, by Katharine B. Gresham, Alistaire Bambach, Washington, DC, Attorneys for the Securities and Exchange Commission.

Davis Polk & Wardwell LLP, by Karen Wagner, Jonathan D. Martin, New York, NY, Attorneys for Sterling Equities Associates.

Goodwin Procter LLP, by Daniel M. Glosband, David J. Apfel, Brenda R. Sharton, Larkin M. Morton, Boston, MA, Attorneys for Jeffrey A. Berman, Russell DeLucia, Ellenjoy Fields, Michael C. Lesser, Norman E. Lesser 11/97 Rev. Trust, Paula E. Lesser 11/97 Rev. Trust, and Jane L. O'Connor, as Trustee of the Jane O'Connor Living Trust.

Lax & Neville, LLP, by Brian J. Neville, Barry R. Lax, New York, NY, Attorneys for Mary Albanese, the Brow Family Partnership, Allen Goldstein, Laurence Kaye, Suzanne Kaye, Rose Less, and Gordon Bennett.

Milberg LLP, by Jonathan M. Landers, Matthew Gluck, Lois F. Dix, Joshua E. Keller, New York, NY, Attorneys for Albert J. Goldstein U/W FBO, Ruth E. Goldstein TTEE, Ann Denver, Norton Eisenberg, Export Technicians, Inc., Stephen R. Goldenberg, Judith Rock Goldman, Jerry Guberman, Anita Karimian, Orthopaedic Specialty Group PC, Martin Rappaport, Paul J. Robinson, Bernard Seldon, Harold A. Thau, and The Aspen Company.

Phillips Nizer LLP, by Helen Davis Chaitman, New York, NY, Attorneys for Diane and Roger Peskin, Maureen Ebel, and a group of other customers.

Shearman & Sterling LLP, by Stephen Fishbein, New York, NY, Attorneys for Carl Shapiro and related entities.

Sonnenschein Nath & Rosenthal LLP, by Carole Neville, New York, NY, Attorneys for certain investors.

MEMORANDUM DECISION GRANTING TRUSTEE'S MOTION FOR AN ORDER (1) UPHOLDING TRUSTEE'S DETERMINATION DENYING CUSTOMER CLAIMS FOR AMOUNTS LISTED ON LAST CUSTOMER STATEMENT; (2) AFFIRMING TRUSTEE'S DETERMINATION OF NET EQUITY; AND (3) EXPUNGING OBJECTIONS TO DETERMINATIONS RELATING TO NET EQUITY

BURTON R. LIFLAND, Bankruptcy Judge.

Before the Court is the motion (the "Motion") of Irving H. Picard, Esq. (the "Trustee" or "Picard"), trustee for the substantively consolidated Securities Investor Protection Act¹ ("SIPA") liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") and Bernard L. Madoff ("Madoff"), seeking an order (1) upholding the Trustee's determination denying customer claims for amounts listed on last BLMIS customer statements, dated November 30, 2008 (the "November 30th Statements"); (2) affirming the Trustee's determination of net equity; and (3) expunging objections to the Trustee's determinations of net equity claims filed by a certain group of claimants (the "Objecting Claimants")² in the above-captioned adversary proceeding. The Motion is filed pursuant to the Court's "Order Approving Form and Manner of Publication and Mailing of Notices, Specifying Procedures For Filing, Determination, and Adjudication of Claims; and Providing Other Relief" (the "Claims Procedure Order") entered on December 23, 2008, and the Court's "Order Scheduling Adjudication of `Net Equity' Issue" (the "Scheduling Order") entered on September 16, 2009. See Peskin v. Picard (In re Bernard L. Madoff Inv. Secs. LLC), 413 B.R. 137 (Bankr.S.D.N.Y.2009) (expounding generally on the Claims Procedure Order and the Scheduling Order).

The Madoff proceeding and its accompanying SIPA liquidation involve staggering numbers, with more than 15,000 claims filed and billions of dollars at stake. As of December 11, 2008 (the "Filing Date"),³ customers' November 30th Statements reflected $73.1 billion in fictional net investments and related gains. Net of "negative" accounts approximating $8.3 billion, customers are purportedly owed a total of $64.8 billion. The critical issue before the Court is how to define a claimant's "net equity" under SIPA for purposes of distributing against these astounding sums.

The statutory framework for the satisfaction of customer claims in a SIPA liquidation proceeding provides that customers share pro rata in customer property⁴ to the extent of their net equities, as defined in SIPA section 78lll(11) ("Net Equity").⁵ See SIPA § 78fff-2(c)(1)(b). If the fund of customer property is insufficient to make customers whole, the trustee is entitled to an advance⁶ from the Securities Investor Protection Corporation ("SIPC") to pay each customer the amount by which his Net Equity exceeds his ratable share of customer property, subject to a cap of $500,000 for securities claims. See SIPA § 78fff-3(a).

The Trustee defines Net Equity as the amount of cash deposited by the customer into his BLMIS customer account less any amounts already withdrawn by him (the "Net Investment Method"). In contrast, the Objecting Claimants define Net Equity as the amounts reflected on customers' November 30th Statements (the "Last Statement Method"). The Trustee and the Objecting Claimants maintain that their respective definitions of Net Equity are thoroughly consistent with SIPA, statutory and case law, and notions of equity.

Congruent to the import and complexity of this issue, the briefs filed in support and opposition to the Motion are voluminous and impressive. For the purposes of this decision, the Court has considered all papers filed in response to the Scheduling Order, including over thirty briefs and more than twenty pro se submissions.⁷ SIPC and the SEC submitted briefs in support of the Motion.⁸ The Court recognizes that the application of the Net Equity definition to the complex and unique facts of Madoff's massive Ponzi scheme is not plainly ascertainable in law. Indeed, the parties have advanced compelling arguments in support of both positions. Ultimately, however, upon a thorough and comprehensive analysis of the plain meaning and legislative history of the statute, controlling Second Circuit precedent, and considerations of equity and practicality, the Court endorses the Trustee's Net Investment Method.

Accordingly, for the reasons set forth below, the Trustee's determination of Net Equity is hereby APPROVED.

BACKGROUND

I. PROCEDURAL HISTORY

The Motion arises in connection with the infamous Ponzi scheme perpetrated by Madoff through his investment company, BLMIS. On December 11, 2008, Madoff was arrested by federal agents and charged with securities fraud in violation of 15 U.S.C. sections 78j(b), 78ff and 17 C.F.R. section 240.10b-5, in the United States District Court for the Southern District of New York (the "District Court"). United States v. Madoff, No. 08-MJ-02735.⁹ That same day, the Securities and Exchange Commission (the "SEC") filed a civil complaint in the District Court, alleging, inter alia, that Madoff and BLMIS were operating a Ponzi scheme through BLMIS's investment advisor activities. S.E.C. v. Madoff, et al., No. 08-CV-10791, 2008 WL 5197070 (the "Civil Action").

On December 15, 2008, SIPC filed an application in the Civil Action seeking a decree that the customers of BLMIS are in need of the protections afforded by SIPA. The District Court granted SIPC's application and entered an order on December 15, 2008, placing BLMIS's customers under the protections of SIPA (the "Protective Order"). The Protective Order appointed Picard as trustee for the liquidation of the business of BLMIS, appointed Baker and Hostetler, LLP as counsel to the Trustee, and removed the SIPA liquidation proceeding to this Court pursuant to SIPA sections 78eee(b)(3) and (b)(4).

On March 12, 2009, Madoff pled guilty to an 11-count criminal indictment filed against him and admitted that he "operated a Ponzi scheme through the investment advisory side of [BLMIS]." See United States v. Madoff, No. 09 CR 213(DC), Docket No. 57, Plea Hr'g Tr. at 23:14-17. On June 29, 2009, Madoff was sentenced to 150 years in prison.

II. CLAIMS ADJUDICATION PROCEDURE

On December 23, 2008, the Court approved the Claims Procedure Order, which sets forth a systematic framework for the filing, determination and adjudication of claims in the BLMIS liquidation proceeding. Pursuant to this order, all claims by customers must be filed with the Trustee, who must determine the claims in writing. If the claimant does not object to the determination, it is deemed approved by the Court and binding on the claimant. If the claimant objects and files an opposition, the Trustee must obtain a hearing date and notify the claimant thereof. Certain, but not all, Madoff claimants objected to the Trustee's determination of Net Equity due to his use of the Net Investment Method.

After a number of these objections were filed, the Court entered the Scheduling Order establishing a hearing date of February 2, 2010 to address whether Net Equity, as defined by SIPA, is calculated using the Net Investment Method or the Last Statement Method. In the interim, the Trustee continues to process and pay customer claims in the ordinary course. As of February 26, 2010, 12,047 claims have been determined, 1,936 claims have been allowed, and thus far $649,643,586.95 has been committed by SIPC.¹⁰

FACTUAL HISTORY¹¹

I. THE STRUCTURE AND ORGANIZATION OF BLMIS

BLMIS is a New York limited liability company, founded by Madoff as a sole proprietorship in 1960. BLMIS was wholly-owned by Madoff, who was also its chairman and chief executive officer. Together with family members and a number of additional employees,...