Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC

• Decision Date: 07 March 2017
• Docket Number: Adv. P. No. 08–01789 (SMB), Adv. P. No. 15–01293 (SMB)
• Citation: 568 B.R. 203
• Parties: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: Bernard L. Madoff, Debtor. Susanne Stone Marshall, Adele Fox, Marsha Peskin, and Russell Oasis, Plaintiffs, v. Capital Growth Company, et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

568 B.R. 203

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,

v.BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.

In re: Bernard L. Madoff, Debtor.

Susanne Stone Marshall, Adele Fox, Marsha Peskin, and Russell Oasis, Plaintiffs,

v.Capital Growth Company, et al., Defendants.

Adv. P. No. 08–01789 (SMB)

Adv. P. No. 15–01293 (SMB)

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

Signed March 7, 2017

BAKER & HOSTETLER LLP, 45 Rockefeller Plaza, New York, NY 10111, David J. Sheehan, Esq., Deborah H. Renner, Esq., Tracy L. Cole, Esq., Keith R. Murphy, Esq., Amy Vanderwal, Esq., Ferve Ozturk, Esq., Samuel M. Light, Esq., Of Counsel, Attorneys for Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC

CHAITMAN LLP, 465 Park Avenue, New York, NY 10022, Lance Gotthoffer, Esq., Helen Davis Chaitman, Esq., Of Counsel Attorneys for the Fox Parties

SCHULTE ROTH & ZABEL LLP, 919 Third Avenue, New York, NY 10022, William D. Zabel, Esq., Marcy Ressler Harris, Esq., Michael Kwon, Esq., Jennifer M. Opheim, Esq., Mark D. Richardson, Esq., Of Counsel Attorneys for the Picower Parties

SIPA LIQUIDATION

(Substantively Consolidated)

MEMORANDUM DECISION DENYING MOTION FOR DECLARATORY JUDGMENT AND DISMISSING COMPLAINT

STUART M. BERNSTEIN, United States Bankruptcy Judge

Certain former customers of Bernard L. Madoff Investment Securities LLC ("BLMIS") have filed a Complaint , dated Aug. 29, 2015 ( "DJ Complaint ") (ECF Doc. # 1)¹ and related motion, (see Memorandum of Law in Support of Motion for Declaratory Judgment , dated November 9, 2015 ("Fox Brief ") (ECF Doc. # 18)), seeking a declaration that their proposed Third Amended Complaint ("PTAC ")² , which they hope to file in Florida District Court, asserts claims against the "Picower Parties"³ that are not barred by the automatic stay or the permanent injunction described below. The Picower Parties and Irving H. Picard ("Trustee"), the trustee for the liquidation of BLMIS under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. ("SIPA"), oppose the application and seek a declaration that the proposed claims, like their earlier iterations, are barred. For the reasons stated, the application is denied, and the DJ Complaint is dismissed.

BACKGROUND

The background to Bernard L. Madoff's infamous Ponzi scheme has been recounted in numerous decisions of this Court, the District Court and the Second Circuit. E.g. , Picard v. Ida Fishman Revocable Trust (In re BLMIS ), 773 F.3d 411, 414–15 (2d Cir. 2014), cert. denied , ––– U.S. ––––, 135 S.Ct. 2859, 192 L.Ed.2d 910 (2015) ; SIPC v. BLMIS (In re BLMIS ), 516 B.R. 18, 20–21 (S.D.N.Y. 2014) ; SIPC v. BLMIS (In re BLMIS ), 424 B.R. 122, 125–32 (Bankr. S.D.N.Y. 2010), aff'd , 654 F.3d 229 (2d Cir. 2011), cert. denied , 567 U.S. 934, 133 S.Ct. 25, 183 L.Ed.2d 675 (2012). The Court assumes familiarity with these decisions, and recounts only the facts necessary to address the instant application.

A. The Settlement and the Permanent Injunction

Following Madoff's arrest in December 2008 and the revelation that the investment advisory side of BLMIS operated as a Ponzi scheme, BLMIS entered into liquidation proceedings pursuant to the SIPA. The Trustee thereafter commenced numerous adversary proceedings to avoid and recover transfers BLMIS made to certain customers, including the Picower Parties. The Trustee's suit against the Picower Parties sought recovery of $7.2 billion transferred from BLMIS to the Picower Parties from December 1995 to the collapse of BLMIS as, inter alia , fraudulent transfers under the Bankruptcy Code and New York law. The Trustee alleged that the Picower Parties knew that BLMIS was a Ponzi scheme and actively participated by giving directions to BLMIS employees to create fictitious trading records in their accounts. In addition, the Government separately pursued a civil forfeiture action pursuant to 18 U.S.C. § 981(a)(1)(C) against the Picower Parties.

The Trustee, Picower Parties and Government eventually entered into a global settlement (the "Settlement")⁴ under which the Picower Parties agreed to pay $5 billion to the Trustee and forfeit $2.2 billion to the Government. The Court's January 13, 2011 order approving the Settlement included the following permanent injunction (the "Permanent Injunction") in favor of the Picower Parties:

ORDERED, that any BLMIS customer or creditor of the BLMIS estate who filed or could have filed a claim in the liquidation, anyone acting on their behalf or in concert or participation with them, or anyone whose claim in any way arises from or is related to BLMIS or the Madoff Ponzi scheme, is hereby permanently enjoined from asserting any claim against the Picower BLMIS Accounts or the Picower Releasees that is duplicative or derivative of the claims brought by the Trustee, or which could have been brought by the Trustee against the Picower BLMIS Accounts or the Picower Releasees.

(See Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure Approving an Agreement by and among the Trustee and the Picower BLMIS Account Holders and Issuing a Permanent Injunction , dated Jan. 13, 2011, at 7 (ECF Adv. P. No. 09–01197 Doc. # 43).) The Trustee agreed to "use his reasonable best efforts to oppose challenges, if any, to the scope, applicability or enforceability of the Permanent Injunction" as part of the Settlement. (Settlement, ¶ 7.)

B. Prior Attempts to Sue the Picower Parties

Prior to and since the issuance of the Permanent Injunction, two groups of putative class action plaintiffs—the "Fox Parties"⁵ and the "Goldman Parties"⁶ —have tried to circumvent the Permanent Injunction and the automatic stay by asserting claims against the Picower Parties made to sound like they are personal and direct. They involved allegations that Picower was a "control person" of BLMIS under section 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and other claims arising from the same conduct. These attempts proved unsuccessful and resulted in nine decisions from this Court, the District Court and the Second Circuit concluding that the Permanent Injunction barred the claims. See Picard v. Fox (In re BLMIS ), 429 B.R. 423 (Bankr. S.D.N.Y. 2010), aff'd , 848 F.Supp.2d 469 (S.D.N.Y. 2012) (" Fox I "), aff'd , 740 F.3d 81 (2d Cir. 2014) (" Fox II "); and SIPC v. BLMIS (In re BLMIS ), 477 B.R. 351 (Bankr. S.D.N.Y. 2012), aff'd , No. 12 Civ. 6109 (RJS), 2013 WL 5511027 (S.D.N.Y. Sept. 30, 2013) (" Goldman I "); and Capital Growth Co. v. Marshall (In re BLMIS ), 511 B.R. 375 (Bankr. S.D.N.Y. 2014) (" Fox III "), aff'd sub nom. Fox v. Picard (In re BLMIS ), 531 B.R. 345 (S.D.N.Y. 2015) (" Fox IV" ); and Picard v. A & G Goldman P'ship (In re BLMIS ), 546 B.R. 284 (Bankr. S.D.N.Y. 2016) (" Goldman II "), aff'd , 565 B.R. 510 (S.D.N.Y. 2017) (" Goldman III ").

As these decisions reflect, the pervasive problem with all the prior pleadings was generally the same. They alleged, in substance, that the Picower Parties withdrew vast amounts of money from their accounts with BLMIS and caused the BLMIS employees to doctor the records of their accounts. The Picower withdrawals skewed the rest of BLMIS' financial information and caused Madoff to send misleading financial information to its customers who relied on the misinformation to invest with BLMIS. The prior pleadings failed, however, to plead facts showing that Picower ever spoke with or sent misleading financial information to any member of the putative class, or directed BLMIS or Madoff to create or send misleading information. Furthermore, the Picower Parties' withdrawals harmed all customers in the same, indirect way by stealing assets that would have been available to them, and ultimately, driving BLMIS into bankruptcy.

C. The Proposed Third Amended Complaint

This brings us to the PTAC . The Fox Parties assert six claims against the Picower Parties including "control person" liability under section 20(a) of the Exchange Act, violations of federal and Florida RICO statutes, and breaches of Florida common law. (¶¶ 111–97.) According to the PTAC , Picower had a close business and social relationship with Madoff, and began investing with Madoff in the late 1980s. Around 1987, Madoff structured an investment at the insistence of Picower and a few other BLMIS customers that benefitted them (including Madoff) if the stock market fell, but would expose them to losses if the market rose. The stock market eventually went up, and Madoff owed "a couple billion dollars" on account of the investment. Madoff then turned his business "illegitimate" in order to cover the losses. (¶¶ 53, 54.) Picower was the primary beneficiary of Madoff's Ponzi scheme, and pressured Madoff to expand his customer base so that he could withdraw ever more funds. (¶¶ 55, 57, 58.)

The thrust of the PTAC is that Picower exercised control over BLMIS by:

1. directing Madoff to make a margin loan of $6 billion, which was actually a theft of BLMIS funds, to one of the Picower Party's BLMIS accounts, (¶¶ 62–64);

2. agreeing to be listed as a counterparty on BLMIS' fake option trades to create the appearance of legitimate trading, (¶¶ 65–70);

3. loaning BLMIS $76 million in 1992 when a BLMIS feeder fund—Avellino & Bienes—was under SEC investigation and needed funds from BLMIS to repay Avellino & Bienes investors, (¶¶ 71–75);

4. loaning BLMIS $125 million in 2006 to fund BLMIS customer redemptions, (¶¶ 76–78); and

5. causing Madoff and other BLMIS employees to book phony transactions in the Picower Parties' BLMIS accounts to manufacture fictitious gains (or fictitious losses to reduce tax liabilities). (¶¶ 82–89.)

The fraudulent transactions which Picower allegedly directed caused BLMIS to misstate its financial condition in regulatory disclosures and overstate the value of its assets in BLMIS customers' account statements, including the statements sent to the Fox Parties. (¶¶ 90–94.)

Thus far, the PTAC parrots the...