Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, Adv. Pro. No. 08-01789 (SMB)

• Decision Date: 27 July 2018
• Docket Number: Case No. 09-11893,Adv. Pro. No. 08-01789 (SMB)
• Citation: 592 B.R. 513
• Parties: In re: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: Bernard L. Madoff, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

592 B.R. 513

In re: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant,
v.
BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.

In re: Bernard L. Madoff, Debtor.

Adv. Pro. No. 08-01789 (SMB)
Case No. 09-11893

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

Signed July 27, 2018

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BAKER & HOSTETLER LLP, 45 Rockefeller Plaza, New York, New York 10111, David J. Sheehan, Esq., Seanna R. Brown, Esq., Amy E. Vanderwal, Esq., Of Counsel, Attorneys for Irving H. Picard, Trustee for SIPA Liquidation of Bernard L. Madoff Investment Securities LLC

CHAITMAN LLP, 465 Park Avenue, New York, New York 10022, Helen Davis Chaitman, Esq., Of Counsel, Attorneys for Participating Claimants

SIPA Liquidation Substantively Consolidated

MEMORANDUM DECISION AND ORDER REGARDING TREATMENT OF PROFIT WITHDRAWAL TRANSACTIONS

STUART M. BERNSTEIN, United States Bankruptcy Judge:

This omnibus proceeding is related to the liquidation of Bernard L. Madoff Investment

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Securities LLC ("BLMIS") under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa et seq . ("SIPA"). BLMIS was the corporate vehicle that Bernard L. Madoff used to perpetrate a Ponzi scheme through its investment advisory business. BLMIS' books and records, including many of the monthly statements sent to customers, included the notation "PW" generally followed by the name of a publicly-traded corporation and an amount deducted from the customer's monthly balance (a "PW Transaction"). The Trustee contends that the PW notation refers to distributions sent by check to the customer, and in computing customers' net equity claims, the Trustee treated PW checks the same as cash withdrawals. The Participating Claimants (defined below) contend that in the absence of corroborating evidence as to any particular customer, the PW notation should be disregarded, and the customer's net equity claim should be credited (increased) accordingly.

The Court conducted an evidentiary hearing on January 19, 2018, at which it heard the testimony of three witnesses and received into evidence numerous documents and portions of the deposition transcripts of several former employees of BLMIS, including Madoff, and Aaron Blecker, one of the Participating Claimants. For the reasons set forth in Part I of this opinion, the Court concludes that a PW notation appearing in a monthly statement supports the finding, in the absence of credible contrary evidence offered by a claimant in that claimant's case, that the customer received a cash distribution in the amount indicated.

In addition, the Court tried the objection to the Trustee's determination of the net equity claims submitted by Aaron Blecker ("Blecker Claims"). Mr. Blecker, individually and as joint tenant with his late wife, had four different BLMIS accounts (collectively, the "Blecker Accounts") over a span of approximately thirty years. Mr. Blecker contends that the Blecker Claims should be valued in the aggregate amount of $577,350.33, but the Trustee valued the claims at zero based on his treatment of the PW Transactions in the Blecker Accounts as cash withdrawals. For the reasons set forth in Part II of this opinion, the Court concludes that Mr. Blecker has waived any objection to the treatment of PW Transactions in the Blecker Accounts as cash withdrawals, and additionally, has failed to sustain his burden of proving the amount of his Blecker Claims. Accordingly, the Court sustains the Trustee's determination of the Blecker Claims at zero.

BACKGROUND

Part I

A. The BLMIS SIPA Liquidation and the Trustee's Duties¹

On December 11, 2008, Madoff was arrested by federal agents for violating numerous criminal securities statutes. On the same day, the United States Securities and Exchange Commission (the "SEC") filed a complaint in the United States District Court for the Southern District of New York against BLMIS and Madoff. On December 15, 2008, the SEC consented to a combination of its own action with an application of the Securities Investor Protection Corporation ("SIPC"). The District

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Court granted the SIPC application and entered an order which, in relevant part: (i) appointed the Trustee for the liquidation of the business of BLMIS pursuant to SIPA § 78eee(b)(3); (ii) appointed Baker & Hostetler LLP as counsel to the Trustee pursuant to SIPA § 78eee(b)(3); and (iii) removed the combined action to this Court pursuant to SIPA § 78eee(b)(4). Order , dated Dec. 15, 2008, at ¶¶ II, IX (ECF Doc. # 1).

Among his other duties, a SIPA Trustee must determine each customer's share in customer property up to the amount of their "net equity," which is the amount the debtor-broker would have owed to the customer if the broker had liquidated the customer's securities positions, plus any cash deposited by the customer to purchase securities, less any sums owed by the customer to the broker. SIPA § 78lll (11). The Trustee's statutory obligation is to discharge net equity claims of customers of the debtor "insofar as such obligations are ascertainable from the books and records of the debtor or are otherwise established to the satisfaction of the Trustee." SIPA § 78fff-2(b).

The BLMIS books and records presented the Trustee with a challenge. Although Madoff claimed to execute various investment strategies for his customers, in reality, he neither bought nor sold any securities on their behalf. Instead, he deposited customer money into BLMIS' bank accounts, and used customer deposits to pay customer withdrawals. In re BLMIS , 654 F.3d 229, 232–33, 240 (2d Cir. 2011) (" Net Equity Decision "), cert. denied , 567 U.S. 934, 133 S.Ct. 24, 25, 183 L.Ed.2d 675 (2012). The securities transactions and holdings reported on customer statements were fictitious, but the actual cash deposits and withdrawals were accurate. See id. at 232 ("[T]he only accurate entries reflected the customers' cash deposits and withdrawals."). Accordingly, the Trustee determined to calculate each customer's net equity based on a cash in/cash out methodology (the "Net Investment Method"). Under the Net Investment Method, each customer's net equity is equal to the amount of cash or principal deposited by the customer less the amount of cash or principal withdrawn.² Customers that deposited more in their BLMIS accounts than they withdrew were net losers with positive net equity claims, while those that withdrew more than they deposited were net winners with no net equity claims.

Over 16,000 claims were filed against the BLMIS estate, and the Trustee issued claim determination letters to each claimant.³ As noted, the issue raised by the Participating Claimants⁴ concerns the

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Trustee's treatment of the PW Transactions as debits, i.e., cash withdrawals from their BLMIS accounts. Each of the Participating Claimants, including Mr. Blecker, submitted a customer claim for a BLMIS account that contained one or more PW Transactions (i.e. , a "direct account"), or for a BLMIS account that received an inter-account transfer from a BLMIS account that contained one or more PW Transactions (i.e. , an "indirect account"). The Trustee determined their claims by treating each PW Transaction as a withdrawal, and the Participating Claimants, including Mr. Blecker, filed timely objections to the Trustee's determinations.

Given the number of Participating Claimants raising the identical issue, the Court established a separate omnibus proceeding to resolve the issues related to the Trustee's treatment of PW Transactions. Order Establishing Schedule for Limited Discovery and Briefing on Profit Withdrawal Issue , signed June 24, 2015 (ECF Doc. # 10266). Thereafter, the parties engaged in discovery, including the taking of the depositions of Madoff and BLMIS employees Annette Bongiorno, Winifier Jackson, Dorothy Khan, Alethea Leung, and Joann Sala. In addition, Mr. Blecker, who is elderly, was deposed to preserve his testimony. The parties agreed to try Mr. Blecker's objections to the Trustee's determination of the Blecker Claims together with the omnibus issue regarding the appropriate treatment of PW Transactions under the Net Investment Method.

B. The Trustee's Experts

1. Lisa Collura

In order to assist him in the SIPA liquidation of BLMIS, the Trustee retained the professional services of FTI Consulting, including Ms. Lisa Collura and Mr. Matthew Greenblatt. Ms. Collura is a forensic accountant with more than twenty years of experience in financial fraud investigations and cases. She is a CPA, a certified fraud examiner and certified in financial forensics. Tr. 60:22-61:1. Forensic accounting is a specialty area of accounting in which CPAs or accountants gather, collect, review, analyze and interpret financial records and other evidence in connection with a fraud. Tr. 62:6-15. Based on her training and experience, Ms. Collura was qualified as an expert in the area of forensic accounting. Tr. 67:16-19.

Ms. Collura sought to reconcile cash transactions reflected on the statements of the BLMIS customer accounts with available BLMIS bank...