Picard v. Sage Realty

• Decision Date: 15 April 2022
• Docket Number: 20 Civ. 10109 (JFK),20 Civ. 10057 (JFK)
• Parties: IRIVING H. PICARD, Plaintiff, v. SAGE REALTY, et al., Defendants. IRVING H. PICARD, Plaintiff, v. SAGE ASSOCIATES, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

IRIVING H. PICARD, Plaintiff, v. SAGE REALTY, et al., Defendants.

IRVING H. PICARD, Plaintiff, v. SAGE ASSOCIATES, et al., Defendants.

Nos. 20 Civ. 10109 (JFK), 20 Civ. 10057 (JFK)

United States District Court, S.D. New York

April 15, 2022

FOR THE TRUSTEE, IRIVING H. PICARD

David J. Sheehan, Nicolas J. Cremona, Stacey Ann Bell, Amy Elizabeth Vanderwal, James Hefferan Rollinson, Lan Hoang Patrick Thomas Campbell, Seanna R. Brown, Stephanie Ann Ackerman, BAKER & HOSTETLER LLP

FOR THE DEFENDANTS

Andrew Bennett Kratenstein, Carole Neville, Darren Todd Azman Michael Robert Huttenlocher, McDERMOTT WILL & EMERY LLP

FINDINGS OP FACT AND CONCLUSIONS OF LAW

JOHN F. KEENAN, United States District Judge:

Table of Contents

I. Procedural Background ..................................... 4

II. Findings of Fact .......................................... 7

A. Operation of BLMIS ...................................... 9

1. IA Business Computer Systems .......................... 10

2. Trading Strategies of the IA Business ................. 11

3. BLMIS's Change in Organization ........................ 19

B. The Sage Accounts ...................................... 20

1. Convertible Arbitrage Trading in the Sage Accounts .... 21

2. Portfolio Strategy in the Sage Accounts ............... 22

3. Split Strike Conversion Strategy in Sages Account ..... 33

C. Evidence Related to Directed and Authorized Trading .... 34

1. Malcolm's Testimony ................................... 34

2. Madoff's Discretion Over Trading in the Sage Accounts . 39

3. Trustee's Evidence in Response to Sages' Directed Trading Claim ..................................................... 41

4. Findings of Fact Regarding Directed and Authorized Trading ................................................... 43

D. The Sage Accounts on the Filing Date ................... 45

E. Evidence of Partnership Liability ...................... 46

III. Conclusions of Law ..................................... 48

A. Applicable Law ......................................... 50

1. The Securities Investor Protection Act ................ 50

2. The Second Circuit's Net Equity Decision .............. 53

B. Discussion ............................................. 56

1. The Use of the Net Investment Method is Sound as a Matter of Law .................................................... 56

2. The Trustee Properly Denied the Sages' Customer Claims 73

3. The Trustee Has Established a Prima Facie Case Under 11 U.S.C. § 548 .............................................. 75

4. The Sages are General Partners of Sages Associates and Sage Realty ............................................... 86

5. Prejudgment Interest Is Not Warranted ................. 91

IV. Conclusion ............................................... 94

This litigation is the result of the theft of billions of dollars by Bernard L. Madoff (“Madoff”) from customers of his investment firm, Bernard L. Madoff Investment Securities LLC (“BLMIS”), in the largest “Ponzi scheme” in American history. Four days after Madoff was arrested on December 11, 2008, BLMIS was placed into liquidation proceedings and a Trustee, Irving H. Picard, Esq. (“the Trustee”), was appointed under the Securities Investment Protection Act (“SIPA”), 15 U.S.C. §§ 78aaa-78lll, for the purpose of recovering and distributing customer property that had been misappropriated by Madoff during the fraud. As a part of this effort, the Trustee initiated thousands of adversary proceedings to avoid and recover transfers made by Madoff to BLMIS customers who had withdrawn more money from their BLMIS account than they had deposited over the account's lifetime. The money recovered from these “net winners” is used by the Trustee to support a fund of “customer property” under SIPA. Pursuant to the statute, each BLMIS customer is entitled to a pro rata portion of the fund to the extent of their “net equity, ” as defined by 15 U.S.C. § 78lll(11). See 15 U.S.C. § 78fff-2(c)(1)(b). For purposes of this liquidation, the Trustee has limited net equity claims to BLMIS customers who have yet to recover their principal investment.

These consolidated cases involve two separate actions arising from the Trustee's administration of the customer property fund in this liquidation. The first action consists of two consolidated adversary proceedings filed by the Trustee in the Bankruptcy Court to avoid and recover approximately $16, 880, 000 that was transferred by BLMIS to the entity defendants, Sage Associates and Sage Realty (“Sage Accounts”), in the two years prior to BLMIS's filing for bankruptcy (“the Filing Date”^[1]). (Factual Stipulation of the Parties (“Stipulation”) ¶¶ 65-67, ECF No. 38-1.^[2]) The Trustee seeks to hold the individual defendants, Malcolm Sage, Martin Sage, and Ann Sage Prasser (“the Sages”) jointly and severally liable for the transfers in their alleged capacities as general partners of both entities. The second action involves two customer claims filed by the Sages against the BLMIS estate seeking a share in the fund for customer property under SIPA. The Trustee denied the Sages customer claims and the Sages objected.

On December 1, 2020, the Sages filed a motion to withdraw both proceedings from the bankruptcy court, arguing that the legal and factual issues presented in these consolidated cases turn on “substantial and material consideration” of SIPA. Picard v. Sage Realty, No. 20 Civ. 10057 (AJN), 2021 WL 1987994, at *2 (S.D.N.Y. May 18, 2021). Judge Alison Nathan, to whom these cases were originally assigned, agreed with the Sages, and removed the reference in a May 18, 2021, Opinion and Order. See id. Following that Order, the parties consented to a bench trial, which this Court held from January 9, 2022, to February 2, 2022.

Central to the resolution of both cases is the Sages' objection to the Trustee's use of the “Net Investment Method” to calculate the value of their BLMIS accounts on the Filing Date. Under the Net Investment Method, the “net equity” of a given BLMIS account is determined by calculating the total amount of money that was invested in the account minus the total amount of money that was withdrawn over the account's lifetime. Because the Sages withdrew more from the Sage Associates and Sage Realty accounts than they deposited, the Trustee determined that the accounts had a negative net equity or zero balance. Based on that determination, the Trustee denied the Sages' customer claims and initiated the instant avoidance actions to recover the fictitious profits that were transferred to the Sage Accounts in the two years before the Filing Date.

The Sages contend that the Trustee's use of the Net Investment Method was incorrect as a matter of law because they, unlike all other claimants in this liquidation, directed or authorized Madoff to purchase the securities reported on their customer account statements. The Sages argue that because their account statements “tracked the authorizations or directions that Malcolm gave Madoff and mirrored how [the relevant] securities performed in the market, ” the Trustee is required to credit the securities reflected on the last customer account statements when calculating their “net equity” under SIPA § 78lll(11). (Joint Pre-Trial Report at 10, ECF No. 38.)

This Opinion constitutes this Court's Findings of Fact and Conclusions of Law in these consolidated cases pursuant to Federal Rule of Civil Procedure 52(a)(1). For the reasons that follow, the Court concludes that the Trustee appropriately used the Net Investment Method to calculate the net equity of the Sage Accounts and awards a final judgment in favor of the Trustee and against the Defendants in the sum of $16, 880, 000.

I. Procedural Background

On December 11, 2008, Madoff was arrested for securities fraud. Later that day, the United States Securities and Exchange Commission (“SEC”) simultaneously commenced proceedings against Madoff and BLMIS in the United States District Court for the Southern District of New York. (Stipulation ¶ 1.) On December 15, 2008, the Securities Investor Protection Corporation (“SIPC”) petitioned for a protective decree placing BLMIS into liquidation in the Southern District and appointing the Trustee. (Id.) That day, the District Court granted the SIPC's application and entered an Order (“the Protective Order”) placing BLMIS's customers under the protection of SIPA. (Id. ¶¶ 2-4.) The Protective Order further appointed Irving H. Picard as trustee for the liquidation of BLMIS and removed the SIPA liquidation to the bankruptcy court. (Id.)

On December 23, 2008, the bankruptcy court entered a Claims Procedure Order, which established the process for the filing, determination, and adjudication of customer claims in the BLMIS liquidation proceeding. (Id. ¶ 27.) Under the Order, all customer claims must be submitted to the Trustee, who is required to resolve each claim by way of a written determination. (Id.) If a customer objects to the Trustee's determination, they must file their objection with the bankruptcy court.

On June 18, 2009, the Sages filed customer claims against the BLMIS estate, seeking compensation for the securities listed on the November 30, 2008, customer statements of the Sage Associates Account (Account 1-S0547) and Sage Realty Account (Account 1-S0316). (Id. ¶¶ 27-29.) As noted previously, the Trustee applied the net investment method to determine the value of the net equity in each account on the Filing Date. (Id.) Because the Sages had withdrawn more than they had deposited into their accounts, the Trustee denied both customer claims. (Id. ¶¶ 28, 29.)

On November 12, 2010, the Trustee initiated two adversary proceedings against the Sages to avoid and recover...