Picard v. Magnify Inc. (In re Bernard L. Madoff Inv. Sec. LLC)

• Decision Date: 13 April 2018
• Docket Number: Adv. Proc. No. 10–05279 (SMB),Adv. Proc. No. 08–01789 (SMB) SIPA LIQUIDATION
• Citation: 583 B.R. 829
• Parties: IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor. Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. Magnify Inc.; Premero Investments Ltd.; Strand International Investments Ltd.; The Yeshaya Horowitz Association; Yair Green; and Express Enterprises Inc., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

583 B.R. 829

IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor.

Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,

v.Magnify Inc.; Premero Investments Ltd.; Strand International Investments Ltd.; The Yeshaya Horowitz Association; Yair Green; and Express Enterprises Inc., Defendants.

Adv. Proc. No. 08–01789 (SMB) SIPA LIQUIDATION

Adv. Proc. No. 10–05279 (SMB)

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

Signed April 13, 2018

BAKER & HOSTETLER LLP, Attorneys for Plaintiff, Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, 45 Rockefeller Plaza, New York, NY 10111, David J. Sheehan, Esq., Tracy L. Cole, Esq., Fernando A. Bohorquez, Esq., David M. McMillan, Esq., Michelle N. Tanney, Esq., Joshua B. Rog, Esq., Of Counsel

DAVIDOFF HUTCHER & CITRON LLP, Attorneys for Defendants, 605 Third Avenue, 34th Floor, New York, NY 10158, Michael Wexelbaum, Esq., Larry Hutcher, Esq., Michael Katz, Esq., Of Counsel

MEMORANDUM DECISION DENYING MOTION TO DISMISS

STUART M. BERNSTEIN, United States Bankruptcy Judge:

As great oaks from little acorns grow so too did the Defendants' accounts with Bernard L. Madoff Investment Securities LLC ("BLMIS")—or so it seemed. During a twenty-five year period, the Defendants deposited roughly $5.4 million in their BLMIS accounts, withdrew nearly $154 million (the "Transfers"), and in 2009, filed net equity customer claims of approximately $839 million for the balance supposedly undrawn. Plaintiff Irving H. Picard, as trustee (the "Trustee") for the liquidation of BLMIS under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa et seq . ("SIPA") sued the Defendants to avoid and recover the value of the Transfers and disallow and equitably subordinate their net equity customer claims. (See Second Amended Complaint , dated Sept. 29, 2017 ("SAC") (ECF Doc. # 143).)¹

The Defendants have moved to dismiss the SAC pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Rule 7012(b) of the Federal Rules of Bankruptcy Procedure, for failure to state a claim upon which relief can be granted. For the reasons that follow, the motion is denied.

BACKGROUND

Bernard Madoff, operating BLMIS first as a sole proprietorship and then as a limited liability company, ran a Ponzi scheme by which he induced investors to entrust their money with BLMIS for investment in the financial markets with the promise or expectation of significant returns regardless of the direction the markets took. (¶ 25.)² In fact, while the Ponzi scheme operated, Madoff did not invest any funds entrusted with him, and instead, used customer deposits to pay redemption requests made by other BLMIS investors. (¶¶ 29, 32.) He was arrested in December 2008, (¶ 15), pled guilty in March 2009 and was sentenced to 150 years in prison. (¶ 25.) Other employees of BLMIS were also arrested and either pled guilty or were convicted after trial relating to their criminal activities perpetrated through BLMIS. (¶¶ 26, 27, 28.)

A. Magnify and Yair Green

The origin of the Trustee's claims in this case begins with the Defendant Magnify Inc. ("Magnify"). Magnify, a Panamanian corporation, opened Account No. 1FN024 (the "Magnify I Account")³ with BLMIS in 1983, depositing $3,136,150. (¶ 2; SAC, Ex. B, at 1 of 51.)⁴ Magnify was formed by Kurt Brunner, a Swiss attorney, who until April 2016, was listed as Magnify's Chairman and Managing Director, but Brunner did not exercise any actual control or decision-making authority over Magnify. (¶¶ 39, 49–51.) Instead, Magnify's creator, Albert Igoin, a French banker who was one of Madoff's oldest and largest customers as well as a social acquaintance, controlled Magnify, at least until December 1989. (¶¶ 2, 48.)

Between the time of its creation and March 1989, the withdrawals from the Magnify I Account were not particularly significant compared to what came later. During these first six years, approximately $320,000 was withdrawn, leaving $2,816,661 of the original deposit still in the account. (SAC, Ex. B, at 5 of 51.) In the late 1980s, Igoin asked the Defendant Yair Green, an Israeli lawyer, to create and register an Israeli association to handle Igoin's planned charitable contributions in Israel. (¶ 53.) Green filed registration papers with the Israeli Registrar of Associations for the Defendant Yeshaya Horowitz Association ("YHA") on or around May 4, 1988. (¶ 53.) On March 17, 1989, Green opened Account No. 1FN037 (the "YHA Account") for YHA at BLMIS which was funded by an inter-account transfer⁵ of $3 million from the Magnify I Account. (¶ 53.) As noted, the account contained only $2,816,661, and the balance of the transfer consisted of fictitious profits. (See SAC, Ex. B, at 5 of 51.) As a result of the transfer, no actual cash remained in the Magnify I Account, and despite the significant withdrawals described below, no additional funds were ever deposited.

According to the SAC, Green assumed control of Magnify and YHA following a December 14, 1989 meeting with Igoin and Brunner. At the meeting, Igoin introduced Green to Brunner as "the person that then would deal with the fate of Magnify." (¶ 56.)⁶ At Igoin's direction, Brunner prepared board minutes and an "Assignment of Transfer," transferring ownership of Magnify to YHA by delivering Magnify's bearer shares to Green. (¶ 56.) After that meeting, Brunner had no further contact with Igoin on any matter, and dealt only with Green concerning Magnify. (¶¶ 56, 115, 121.) Green authored all corporate resolutions for Magnify, and Magnify's other nominal officers and directors prior to BLMIS's collapse had no function other than to sign corporate documentation when necessary, and they had no involvement with the Magnify Accounts (defined below). (¶ 121.)

In addition to incorporating YHA, Green served as its "legal representative" or legal counsel from its inception. (¶ 55.) Green also held himself out as a co-founder of YHA, who "guided the organization's activities and ... contributed significant sums for scientific and medical research throughout Israel."⁷ (¶ 55.) Organizations would request funding from Green, and after YHA's board (Green was not a member) approved a request, Green negotiated and drafted the funding agreements over which he exercised total control. (¶ 142.) Green also signed many of the grant agreements, not in his capacity as YHA's attorney, but as the "trustee" for an anonymous donor, who had discretion over the terms and amount of the grant on the donor's behalf. (¶ 143.)

Between the time of YHA's formation and the collapse of BLMIS, Magnify transferred over $120 million in fictitious profits to YHA⁸ which YHA used to fund the beneficiaries of YHA's generosity including prominent hospitals, universities, and research institutions in Israel. (¶¶ 5, 8.) For example, YHA gave Bar Ilan University and Ben Gurion University grants totaling more than $28 million. (¶ 8.) Green personally benefitted from YHA's largesse. In return, he received honorary doctorates from both institutions, and was appointed to Ben Gurion University's investment and management committees. (¶ 8.) In addition, Hebrew University, which employed two YHA board members, received $36 million from YHA. (¶ 8.)

Green created several other entities that either held BLMIS accounts or benefitted from them. Over the years, he formed Defendants Premero Investments Ltd. ("Premero") and Strand International Investments Ltd. ("Strand"), and ultimately opened two BLMIS accounts for Premero (the "Premero I Account" and the "Premero II Account," and together, the "Premero Accounts") and one for Strand (the "Strand Account"). (¶ 63.) Although Brunner was at all relevant times Strand's "Sole Director," Green managed the Strand Account and dealt directly with BLMIS on all account activity. (¶ 117.) Green also opened bank accounts for Strand in Switzerland and Israel through which he diverted fictitious profits from BLMIS for his personal use. (¶ 117.) And in 1992, Green directed Brunner to create Defendant Express Enterprises Inc. ("Express"), and Express received $1 million directly from BLMIS in the form of redemptions from the Strand and Magnify Accounts. (¶ 64.)

One additional account was created. In September 1990, a second Magnify account (the "Magnify II Account," and together with the Magnify I Account, the "Magnify Accounts") was created without any initial deposit or account opening documents such as a Customer Agreement, Options Agreement and a Trading Authorization Limited to Purchases and Sales of Securities and Options that other BLMIS customers typically executed. (¶ 80 & n. 5.) Instead, BLMIS "funded" the Magnify II Account with a backdated trade of approximately $120 million, evidenced by fake trade confirmations. (¶¶ 82–87.) The September 1990 monthly statement, which started with a zero balance, was funded with a sale of roughly $120 million of MCI stock in May. The monthly statement listed a host of other May purchases and two purchases of MCI stock in October . The trade confirmations indicate that Magnify purchased the stock (which it supposedly sold to fund the account) in October 1986 , or four years before the Magnify II Account was opened, and listed an address for BLMIS that it did not move to until 1987. (¶ 85.)

B. Green Obtains Personal Benefits

As noted, Green garnered accolades and honoraria as a result of YHA's philanthropy. But he also benefitted in more concrete ways. After Igoin's death in January 1995, Green drafted an agreement (the "Fee Agreement") between himself and Magnify appointing himself the manager and supervisor of Magnify's investment portfolio, which consisted solely of the Magnify Accounts, in exchange for a percentage of Magnify's purported profits. At Green's request, Brunner signed the Fee Agreement on Magnify's behalf. (¶ 69.) Although the Fee Agreement was dated July 26, 1996, Green represented in...