Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC
| Decision Date | 03 October 2018 |
| Docket Number | Adv. Proc. No. 12-01576 (SMB),Adv. Proc. No. 08-01789 (SMB) (Substantively Consolidated) |
| Citation | 594 B.R. 167 |
| Parties | SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: Bernard L. Madoff, Debtor. Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. BNP Paribas S.A., et al., Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
BAKER & HOSTETLER LLP, Attorneys for Irving H. Picard, Trustee, 45 Rockefeller Plaza, New York, NY 10111, David J. Sheehan, Esq., Mark A. Kornfeld, Esq., Torello H. Calvani, Esq., Joanna F. Wasick, Esq., Marco Molina, Esq., Jonathan A. Forman, Esq., Of Counsel
CLEARY GOTTLIEB STEEN & HAMILTON LLP, Attorneys for the Defendants, One Liberty Plaza, New York, NY 10006, Breon S. Peace, Esq., Ari D. MacKinnon, Esq., Of Counsel
SIPA LIQUIDATION
Plaintiff Irving H. Picard (the "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"), filed his proposed Amended Complaint on August 30, 2017 ("PAC")1 (ECF Doc. # 100)2 seeking to recover avoidable transfers totaling approximately $156 million from subsequent transferees BNP Paribas S.A. ("BNP Bank"), BNP Paribas Arbitrage SNC ("BNP Arbitrage"), BNP Paribas Securities Services S.A. ("BNP Securities Services"), and BNP Paribas Bank & Trust (Cayman) Limited ("BNP Cayman," and collectively, the "Defendants"). The Defendants have moved to dismiss the PAC arguing that (i) it was improperly filed without leave of Court, (ii) the Court lacks personal jurisdiction over the Defendants, (iii) the PAC fails to state claims upon which relief can be granted, and (iv) certain claims are time-barred. For reasons outlined below, the motion to dismiss for lack of personal jurisdiction is denied, the filing of the PAC will be treated as a motion by the Trustee for leave to amend his existing complaint, and that motion is granted in part and denied in part.
Unless otherwise indicated, the background information is taken from the well-pleaded factual allegations of the PAC and other information the Court may consider in determining whether the pleading is legally sufficient.
At all relevant times, Bernard Madoff operated the investment advisory arm of BLMIS as a Ponzi scheme. (¶ 36.) Beginning in 1992, Madoff told investors that he employed the "split-strike conversion" strategy ("SSC Strategy"), under which BLMIS purported to purchase a basket of stocks intended to track the S & P 100 Index, and hedged the investment by purchasing put options and selling call options on the S & P 100 Index. (¶¶ 42-45.) 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. (¶¶ 40, 41.) 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' proprietary trading department. (¶ 40.)
The BLMIS Ponzi scheme collapsed when redemption requests overwhelmed the flow of new investments, (¶ 49), and Madoff was arrested by federal agents for criminal violations of federal securities laws on December 11, 2008 (the "Filing Date"). (¶ 18.) 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' customers needed the protections afforded by SIPA. (¶¶ 18, 19.) 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. (¶ 20.)
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]." (¶¶ 23, 50.)
BNP Bank is a corporation organized under the laws of France. (¶ 52.) It provides banking services in seventy-five countries and has maintained a presence in the United States since the late 1800s. (¶ 58.) Currently, BNP Bank has over 10,000 employees and more than 700 retail branches in the United States. (¶ 58.)
BNP Arbitrage and BNP Securities Services, both French entities, are wholly-owned subsidiaries of BNP Bank, (¶¶ 53, 55), and maintain offices in Paris, France and New York, New York. (¶¶ 53, 55, 59.) BNP Cayman is also a wholly owned subsidiary of BNP Bank that is located in and organized under the laws of the Cayman Islands. (¶ 54.)
BNP Bank's relationship with Madoff began around November 1988 when it provided a $15 million personal line of credit to Madoff, which increased to $40 million by May 1995, and to $75 million by October 1996. As collateral for the loan, Madoff pledged securities it held on behalf of BLMIS customers. (¶ 84.) BNP Bank conducted due diligence in connection with the extension of credit, which included reviewing BLMIS' Financial Operating and Combined Uniform Single ("FOCUS") Reports and audited financials and meeting with Madoff at BLMIS' office. (¶ 85.) Madoff used the loan proceeds to finance and grow the BLMIS Ponzi scheme. (¶ 88.)
In 1997, BNP Bank partnered with Access International Advisors ("Access") to create Oreades SICAV ("Oreades"), a Luxembourg-incorporated "feeder fund" that invested exclusively with BLMIS. (¶ 89.) BNP Bank, through its subsidiaries purported to provide services to Oreades while Access recruited investors. (¶ 90.)
In January and March 1998, a BNP Bank subsidiary opened two investment accounts at BLMIS for Oreades. (¶ 91.) Two BNP Bank subsidiaries served as administrators of Oreades: BNP Paribas Fund Administration S.A. from 1997 to 2002 and BNP Securities Services from 2002 to 2004. (¶ 92.) The administrators were responsible for processing subscriptions into and redemptions from Oreades and frequently corresponded with BLMIS employees to direct transfers in and out of Oreades' BLMIS accounts. (¶ 94.) The administrators received all of the BLMIS account statements and trade confirmations for Oreades, and were responsible for calculating the fund's monthly net asset value based on those numbers. (¶ 95.)
By 2003, BNP Bank's standard practice was to receive account statements and trade confirmations electronically. In May 2003, BNP Securities Services asked BLMIS to adhere to this policy, but BLMIS refused, and continued to send paper statements and confirmations through the mail. BNP Bank exempted BLMIS from this requirement to maintain the business relationship. (¶ 96.)
From the time of Oreades' formation, BNP Bank and Access hid the fact that BLMIS was serving as Oreades' custodian and investment advisor. (¶ 97.) Oreades represented that a BNP Bank subsidiary served as its official custodian (BGL BNP Paribas from 1997 to 2002 and BNP Securities Services from 2002 to 2004), but in reality, the BNP Bank subsidiary delegated all custodial authority to BLMIS through an undisclosed sub-custodian agreement. (¶¶ 98, 99.) Madoff demanded this arrangement as a precondition to investment, (¶ 99), but did not charge a fee for the custodial services performed by BLMIS. (¶ 100.) This allowed the BNP Bank subsidiaries to charge custodial fees to Oreades investors without performing corresponding services. (¶ 100.)
Similarly, Oreades represented to investors and to Luxembourg's financial regulator, the Commission de Surveillance du Secteur Financier ("CSSF"), that a BNP Bank affiliate, Inter Conseil, served as its investment advisor. (¶ 101.) However, Inter Conseil delegated its investment advisory duties to BLMIS in an undisclosed Sub-Advisory and Management Agreement. (¶ 102.) Madoff required the delegation and performed the services free of charge, (¶¶ 102, 105), and Inter Conseil received fees from Oreades investors despite the delegation of duties. (¶ 105.) In addition, BNP Bank's own compliance rules required a "strict separation" between a fund's investment adviser and custodian. (¶ 106; see also ¶¶ 99, 102.) The delegation of custodial and investment advisory duties to BLMIS violated this rule. (¶ 107.)
BNP Bank knew that the delegation to BLMIS of custodial and investment advisory duties violated Luxembourg law. First, only a Luxembourg-regulated entity could act as Oreades' custodian, but BLMIS was not regulated by the CSSF. (¶ 108.) Second, Luxembourg law required that Oreades' investment advisor and custodian be disclosed, but BNP Bank and its affiliates deliberately omitted mention of BLMIS in offering materials. (¶ 109; see also ¶¶ 261-62.) Third, Luxembourg law required the BNP Bank subsidiary purportedly acting as custodian to verify the actions of BLMIS as investment advisor, but the subsidiary lacked the ability to verify BLMIS trades. (¶ 110.) Because BLMIS' relationship with Oreades violated Luxembourg law, BNP Bank required that Inter Conseil's management arrangement with BLMIS "must remain ‘private’ that is, the CSSF ... must remain unaware of it." (¶ 111; see also ¶¶ 261-62.)4
On July 10, 2003, a senior executive at BNP Securities Services, Lionel Trouvain, reviewed a BNP Bank internal audit and compliance report on Oreades and became concerned "that the risk [to] BNP Paribas is very extensive." (¶ 113.) Trouvain noted that BLMIS' practice of sending account...
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Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC
...Cir. 2013) (quoting Marine Midland Bank, N.A. v. Miller , 664 F.2d 899, 904 (2d Cir. 1981) ); see also Picard v. BNP Paribas S.A. (In re BLMIS ), 594 B.R. 167, 187 (Bankr. S.D.N.Y. 2018) (same). At this preliminary stage, "the plaintiff's prima facie showing may be established solely by all......
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Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec. (In re Madoff)
...2013) (quoting Marine Midland Bank, N.A. v. Miller, 664 F.2d 899, 904 (2d Cir. 1981)); see also Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R. 167, 187 (Bankr. S.D.N.Y. 2018) (same). "Prior to discovery, a plaintiff challenged by a jurisdiction testing motion may defeat the motion by pl......
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Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec. (In re Madoff)
...vital statistics - the who, when, and how much - of the purported transfers to establish an entity as a subsequent transferee of the funds." Id. However, the plaintiff's burden at the pleading does not require dollar-for-dollar accounting of the exact funds at issue." Picard v. BNP Paribas ......
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Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec. (In re Madoff)
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