Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff)
| Decision Date | 23 January 2020 |
| Docket Number | Adv. Pro. No. 08-01789 (SMB),Adv. Pro. No. 10-05355 (SMB) |
| Parties | SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: BERNARD L. MADOFF, Debtor. IRVING PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. ABN AMRO BANK (IRELAND) LTD. (f/k/a FORTIS PRIME FUND SOLUTIONS BANK (IRELAND) LIMITED) and ABN AMRO CUSTODIAL SERVICES (IRELAND), LTD. (f/k/a FORTIS PRIME FUND SOLUTIONS CUSTODIAL SERVICES (IRELAND) LTD.), Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
SIPA Liquidation
(Substantively Consolidated)
APPEARANCES:
BAKER & HOSTETLER LLP
45 Rockefeller Plaza
New York, New York 10111
David J. Sheehan, Esq.
Regina Griffin, Esq.
Tracy L. Cole, Esq.
Elizabeth McCurrach, Esq.
A. Mackenna White, Esq.
Of Counsel
LATHAM & WATKINS LLP
885 Third Avenue
New York, New York 10022
Christopher R. Harris, Esq.
Thomas J. Giblin, Esq.
Kevin Mallen, Esq.
STUART M. BERNSTEIN United States Bankruptcy Court:
Plaintiff Irving H. Picard, as trustee (the "Trustee") for the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. ("SIPA"), has moved ("Motion")1 for leave to file his Proposed Second Amended Complaint ("PSAC")2 seeking to recover two subsequent transfers totaling $265.5 million from ABN AMRO Bank (Ireland) Ltd. (f/k/a Fortis Prime Fund Solutions Bank (Ireland) Limited) ("Fortis Bank") and ABN AMRO Custodial Services (Ireland) Ltd. (f/k/a Fortis Prime Fund Solutions CustodialServices (Ireland) Ltd.) ("Fortis Custodial Services," and together with Fortis Bank, the "Defendants"). The Defendants oppose the Motion on the basis that the amendment is futile.3 For the reasons set forth herein, the Motion is denied.
Unless otherwise indicated, the background information is taken from the well-pleaded factual allegations of the PSAC and other information the Court may consider in determining whether the pleading is legally sufficient.
At all relevant times, Bernard L. Madoff operated the investment advisory arm of BLMIS as a Ponzi scheme. (¶ 53.) He purported to employ a "split-strike conversion" strategy ("SSC Strategy") under which BLMIS would purchase a basket of stocks intended to track the S&P 100 Index and hedge the investment by purchasing put options and selling call options on the S&P 100 Index. (¶¶ 59, 61-64.) In reality, BLMIS never purchased any securities on behalf of its investors and sent monthly statements to investors containing falsified trades typically showing fictitious gains. (¶¶ 59, 60.) All investor deposits were commingled in a JPMorgan Chase Bank account held by BLMIS, and the funds were used to satisfy withdrawals by other investors, benefit Madoff and his family personally, and prop-up BLMIS's proprietary trading division. (¶ 59.)
The BLMIS Ponzi scheme collapsed and Madoff was arrested by federal agents for criminal violations of federal securities laws on December 11, 2008 (the "FilingDate"). (¶ 35.) The Securities and Exchange Commission ("SEC") contemporaneously commenced an action in the United States District Court for the Southern District of New York, and that action was consolidated with an application by the Securities Investor Protection Corporation ("SIPC") asserting that BLMIS's customers needed the protections afforded by SIPA. (¶¶ 35, 36.) On December 15, 2008, the District Court granted SIPC's application, appointed the Trustee and his counsel, and removed the SIPA liquidation to this Court. (¶ 37.)
At a plea hearing on March 12, 2009, Madoff pleaded guilty to an eleven-count criminal information and admitted that he "operated a Ponzi scheme through the investment advisory side of [BLMIS]." (¶ 40; accord ¶ 76.)
Fortis Bank and Fortis Custodial Services are Irish companies incorporated in 2003 and 1995, respectively. (¶¶ 78-79.) The Defendants along with their affiliates, employees and business groups worked together as one unified entity (collectively, "Fortis") to provide banking services to clients worldwide including financing, hedge fund services, and asset management services. (¶¶ 3, 80, 85, 91, 224.)
The two transfers at issue arose out of a May 2, 2007 swap transaction ("Swap Transaction") between Fortis Bank and Rye Select Broad Market XL Fund (the "Rye XL Fund").4 (¶¶ 2, 166, 193.) Rye XL Fund was an affiliate of Rye Select Broad MarketFund L.P. (the "Broad Market Fund"), a fund managed by Tremont Partners, Inc. ("Tremont"), that invested all of its assets with BLMIS. (¶ 244.) Under the Swap Transaction, Rye XL Fund deposited funds with Fortis Bank as collateral and Fortis Bank agreed to pay Rye XL Fund three times the returns that would have been generated had the collateral amount been invested directly in Broad Market Fund. In return for providing Rye XL Fund with leveraged returns on its hypothetical investment in Broad Market Fund, Fortis Bank earned millions in fees and interest including the spread on the floating interest rate charged to Rye XL Fund based on the collateral deposited with Fortis Bank. (¶ 194.)
Rye XL Fund initially provided $10 million in collateral to Fortis Bank, (¶ 197), but between May 2, 2007 and May 1, 2008, increased the collateral deposited under the Swap Transaction to $235.5 million (the "Collateral Transfer"). (¶ 265.) Fortis hedged its risk by investing three times the collateral amount directly in Broad Market Fund (the "Hedge"). (¶¶ 195, 198.) Therefore, when the Swap Transaction grew to $235.5 million, Fortis's investment in Broad Market Fund under the Hedge correspondingly grew to $706.5 million. (¶ 198.) The Collateral Transfer is the first transfer that the Trustee is seeking to recover.
The second transfer appears to relate to a $30 million July 1, 2008 redemption (the "Partial Hedge Redemption," and together with the Collateral Transfer, the "Subsequent Transfers") by either Fortis Bank or Fortis Custodial Services5 from BroadMarket Fund. (¶¶ 257-60; ¶¶ 344-50 (Count Two); PSAC, Ex. G (listing the date and amount of the Partial Hedge Redemption).) Rye XL Fund had the right to decrease the amount of the collateral held by Fortis Bank. (Swap Confirmation at § 10(c).) Given the structure of the Swap Transaction, if Rye XL Fund reduced the amount of its collateral, Fortis Bank would reduce the Hedge by three times the reduction. While the PSAC is silent, I assume that the Partial Hedge Redemption was triggered by a reduction of $10 million in the Rye XL Fund collateral. Fortis Bank had no reason to render its perfect hedge, see Picard v. ABN AMRO Bank (Ireland) Ltd. (In re BLMIS), 505 B.R. 135, 138 (S.D.N.Y. 2013); Picard v. Citibank, NA. (In re BLMIS), 608 B.R. 181, 185 (Bankr. S.D.N.Y. 2019) ("Citibank"), imperfect by withdrawing its investment in the Broad Market Fund absent a corresponding reduction in the collateral amount. My assumption is merely for narrative purposes and does not affect the disposition of the Motion.
The Trustee contends that the Subsequent Transfers are traceable to initial transfers from BLMIS, the initial transfers are avoidable and he can recover the Subsequent Transfers from the Defendants under section 550(a)(2) of the Bankruptcy Code. The initial transfers from BLMIS were made to Prime Fund and Broad Market Fund, , and in the case of the Collateral Transfer, the intermediate transferee was Rye XL Fund. (¶¶ 251-56; PSAC, Exs. E and F (listing transfers to Rye XL Fund from Broad Market Fund and Prime Fund, respectively).)
By the Motion, the Trustee seeks leave under Rule 15(a)(2) of the Federal Rules of Civil Procedure to file the PSAC. According to the Trustee, (Trustee Memo at 1, 10-11), the amendments are necessary to meet the more rigorous pleading requirements relating to allegations of bad faith imposed by the District Court in SIPC v. BLMIS (In re BLMIS), 516 B.R. 18, 21-24 (S.D.N.Y. 2014) ("Good Faith Decision"); see also SIPC v. BLMIS (In re BLMIS), 590 B.R. 200, 204-05 (Bankr. S.D.N.Y. 2018) (), and the PSAC's allegations against the Defendants meet the heightened requirements. (Trustee Memo at 12-33.)
The Defendants assert that the amendments proposed in the PSAC are futile. In the main, they argue that the Trustee has failed to sufficiently plead a lack of good faith on the part of the Defendants and the PSAC alleges that they received the Subsequent Transfers for value. Consequently, the Trustee's claims are barred by the defense set forth in section 550(b)(1) of the Bankruptcy Code. (Fortis Memo at 14-32.) In addition, the initial transfers to Prime Fund and Broad Market Fund are protected by the safe harbors set forth in sections 546(e) and 546(g) of the Bankruptcy Code, (id. at 32-37), the Trustee is barred by 11 U.S.C. § 550(d) from recovering from the Defendants because he already recovered the initial transfers through a settlement with Tremont and its affiliates, (id. at 37-39), and the Subsequent Transfers did not deplete the estate because the Defendants deposited greater amounts back into BLMIS (through Broad Market Fund) than it received by way of the Subsequent Transfers. (Id. at 39-41.)
The Trustee replied to the Defendants' opposition, (see Trustee Reply), and the Court heard oral argument on September 25, 2019.
Rule 15(a) of the Federal Rules of Civil Procedure, made applicable pursuant to Rule 7015 of the Federal Rules of Bankruptcy Procedure, governs motions for leave to amend pleadings. Generally, leave should be...
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