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

• Citation: 505 B.R. 135
• Decision Date: 26 December 2013
• Docket Number: Nos. 12 MC 115 (JSR), 11 Civ. 6877 (JSR), 11 Civ. 6878 (JSR), 11 Civ. 7825 (JSR).,s. 12 MC 115 (JSR), 11 Civ. 6877 (JSR), 11 Civ. 6878 (JSR), 11 Civ. 7825 (JSR).
• Parties: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re Madoff Securities. Pertains to: Irving H. Picard, Plaintiff, v. ABN AMRO Bank (Ireland) Ltd. (f/k/a Fortis Prime Fund Solutions Bank (Ireland) Limited), ABN AMRO Custodial Services (Ireland) Ltd. (f/k/a Fortis Prime Fund Solutions Custodial Services (Ireland) Ltd.), Rye Select Broad Market XL Fund, LP, Defendants. Irving H. Picard, Plaintiff, v. ABN AMRO Bank N.V. (presently known as the Royal Bank of Scotland, N.V.), and Rye Select Broad Market XL Fund, LP, Defendants. Irving H. Picard, Plaintiff, v. Citibank, N.A., Citibank North America, Inc., and Citigroup Global Markets Limited, Defendants.
• Court: U.S. District Court — Southern District of New York

505 B.R. 135

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,

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

In re Madoff Securities.

Pertains to:

Irving H. Picard, Plaintiff,

v.ABN AMRO Bank (Ireland) Ltd. (f/k/a Fortis Prime Fund Solutions Bank (Ireland) Limited), ABN AMRO Custodial Services (Ireland) Ltd. (f/k/a Fortis Prime Fund Solutions Custodial Services (Ireland) Ltd.), Rye Select Broad Market XL Fund, LP, Defendants.

Irving H. Picard, Plaintiff,

v.ABN AMRO Bank N.V. (presently known as the Royal Bank of Scotland, N.V.), and Rye Select Broad Market XL Fund, LP, Defendants.

Irving H. Picard, Plaintiff,

v.Citibank, N.A., Citibank North America, Inc., and Citigroup Global Markets Limited, Defendants.

Nos. 12 MC 115 (JSR), 11 Civ. 6877 (JSR), 11 Civ. 6878 (JSR), 11 Civ. 7825 (JSR).

United States District Court,

S.D. New York.

Dec. 26, 2013.

OPINION AND ORDER

JED S. RAKOFF, District Judge.

Defendants in the three above-captioned actions move to dismiss various claims asserted against them in the adversary proceedings brought by Irving Picard (the “Trustee”), the trustee appointed under the Securities Investor Protection Act (“SIPA”), 15 U.S.C. § 78aaa et seq., to administer the estate of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”). Defendants argue that certain transfers that the Trustee seeks to recover are shielded by the “safe harbor” protecting swap agreements from avoidance because the relevant transfers occurred “in connection with” a swap agreement and were made “for the benefit of” a “financial participant.” See11 U.S.C. § 546(g).

On May 15, 2012, this Court withdrew the reference from the Bankruptcy Court with respect to the issue of whether section 546(g) prevents the Trustee from recovering the relevant transfers in both Picard v. ABN AMRO Bank (Ireland), No. 11 Civ. 6877, and Picard v. ABN AMRO Bank N.V., No. 11 Civ. 6878. See Order, 12 MC 115, ECF No. 97 (S.D.N.Y. May 15, 2012). On July 3, 2012, the Court withdrew the reference with respect to this issue in Picard v. Citibank, N.A., No. 11 Civ. 7825, citing its earlier decision. See Order, 12 MC 115, ECF No. 214 (S.D.N.Y. July 3, 2012). The Court received separate briefing on each motion to dismiss from the defendants, the Trustee, and the Securities Investor Protection Corporation (“SIPC”), and on November 29, 2012, the Court heard oral argument in a coordinated fashion in all three actions.

By a “bottom line” Order dated February 15, 2013, the Court granted the defendants' motions to dismiss with respect to the withdrawals of funds from Madoff Securities' customer accounts that were based on the defendants' requests for redemptions occasioned by reductions in the collateral underlying the swap transactions, but denied the motions to dismiss as they related to the initial withdrawals of funds from Madoff Securities' customer accounts that were subsequently used to provide collateral in these swap agreements.See Order, No. 12 MC 115, ECF No. 451 (S.D.N.Y. Mar. 14, 2013). This Opinion and Order sets forth the reasons for the Court's rulings in its February 15, 2013 Order and directs further proceedings before the Bankruptcy Court.

FACTUAL BACKGROUND

The Court assumes familiarity with the underlying facts of Madoff Securities' fraud and ensuing bankruptcy and recounts here only those facts that are relevant to the instant motions to dismiss. As alleged by the Trustee, the swap transactions at issue in these three adversary proceedings follow a common pattern: Certain investment funds that had invested substantially all of their assets with Madoff Securities withdrew money from their Madoff Securities customer accounts in order to invest in certain private investment vehicles known as “synthetic funds.” These synthetic funds offered investors returns that tracked those received by a fund invested with Madoff Securities (the “reference fund”), but promised a multiplied return of two or three times that obtained by the reference fund's direct investment with Madoff Securities. The synthetic funds achieved these multiplied returns by entering into swap agreements with the financial institutions that are the defendants in the instant proceedings.¹

Under the swap agreements, the synthetic funds provided an amount of collateral to defendants, and defendants in turn agreed to pay the synthetic funds the multiplied return of the performance of the reference fund for that amount of collateral. The defendants then invested in the underlying reference fund the same multiplied amount of collateral in order to create a “perfect hedge” against the defendants' obligations under the relevant swap agreement ( i.e., defendants paid out the earnings on their investments in the reference funds to the synthetic funds and in return received fees and interest on the collateral deposited by the synthetic funds).

As relevant to the instant motions to dismiss, the Trustee now seeks to obtain funds received by defendants via two different paths. First, the Trustee seeks to recover amounts withdrawn by the investment funds that became the payments of collateral underlying the swap agreements between the synthetic funds and the defendants (the “collateral payments”). Second, during the course of the swaps, the synthetic funds occasionally decreased the amount of collateral involved in the swaps, leading defendants to request redemption of a portion of their shares in the reference fund in the same amount. The Trustee also seeks to recover these “redemption payments” made by the reference funds to defendants.

With this basic description in mind, the Court reviews the specific allegations in each of the complaints in the instant proceeding and then turns to its analysis of the defendants' motion to dismiss.

1. Picard v. ABN AMRO Bank (Ireland)

In Picard v. ABN AMRO Bank (Ireland), the Trustee seeks to recover $265.5 million from ABN AMRO Bank (Ireland) Ltd. and ABN AMRO Custodial Services (Ireland) Ltd. (together, “AA Ireland”).²See Amended Complaint (“AC(6877)”) ¶ 6, Picard v. ABN AMRO Bank (Ireland), No. 11 Civ. 6877, ECF No. 33 (S.D.N.Y. filed July 3, 2012). As alleged by the Trustee, on May 2, 2007, AA Ireland entered into a swap agreement with Rye Select Broad Market XL Fund, LP (“Rye XL LP”), a synthetic fund owned and operated by Tremont Partners, Inc. Id. ¶¶ 4, 61–62. Under this agreement, AA Ireland agreed to pay Rye XL LP an amount equal to three times the return on a hypothetical investment in Rye Select Broad Market Fund LP (“Broad Market”), an investment fund also owned by Tremont Partners that had invested substantially all of its assets with Madoff Securities and that acted as the reference fund. Id. ¶¶ 3, 61–63. Over the course of the swap relationship, Rye XL LP paid AA Ireland $235.5 million as collateral for the swap. Id. ¶ 73. The Trustee alleges that the funds for this payment of collateral were Madoff Securities customer property transferred from Broad Market and Rye Select Broad Market Prime Fund LP (“Prime Fund”), another investment fund owned by Tremont Partners and direct customer of Madoff Securities. Id. ¶¶ 3, 49–56, 58–61, 72–73.

In order to pay Rye XL LP the promised returns under the swap agreement, AA Ireland invested in Broad Market (the reference fund for Rye XL LP's hypothetical investment) three times the collateral AA Ireland received from Rye XL LP. Id. ¶¶ 66–67. On July 1, 2008, after Rye XL LP decided to decrease the size of the swap, AA Ireland sought to withdraw $30 million from Broad Market in order to maintain its “perfect hedge” against its obligations under the swap agreement. See id. ¶ 75; see also Decl. of Christopher R. Harris dated July 24, 2012, Ex. B (“Swap Agreement”) at 17–18 ¶ 10(c) (discussing Rye XL LP's authority to reduce interests in swap). Based on this request, Broad Market withdrew $30 million from its Madoff Securities account for payment to AA Ireland. Id. ¶¶ 74–75. Although the Trustee claims that AA Ireland made an independent business decision to withdraw these funds from Broad Market, see AC(6877) ¶¶ 74–75, the swap agreement itself expressly contemplated that AA Ireland would hedge its exposure by investing in Broad Market, see Swap Agreement at 19–20 ¶ 12.

In short, the Trustee seeks to recover the following transfers from AA Ireland: (1) the withdrawal of $235.5 million in customer funds from Madoff Securities by Prime Fund and Broad Market, which transferred the funds to Rye XL LP, which then transferred those funds to AA Ireland as collateral for the swap agreement; and (2) the withdrawal of $30 million in customer funds from Madoff Securities by Broad Market, which transferred the funds to AA Ireland in redemption of its shares of Broad Market.

2. Picard v. ABN AMRO Bank N.V.

In Picard v. ABN AMRO Bank N.V., the Trustee seeks to recover approximately $237 million from ABN AMRO Bank N.V. (presently Royal Bank of Scotland) and ABN AMRO Bank Inc. (collectively, “ABN/RBS”).³See Amended Complaint (“AC(6878)”) ¶ 2, Picard v. ABN AMRO Bank N.V., No. 11 Civ. 6878, ECF No. 32 (S.D.N.Y. filed Aug. 8, 2012). On September 1, 2006, ABN/RBS entered into a swap agreement with Rye Select Broad Market XL Portfolio Ltd. (“Rye XL Portfolio”), another synthetic fund created by Tremont Partners to engage in such transactions. Id. ¶¶ 34–35, 84–85. Under this swap agreement, ABN/RBS agreed to provide Rye XL Portfolio with an amount equal to three times the return on a hypothetical investment in Rye Select Broad Market Portfolio Limited (“Portfolio Limited”), another Madoff Securities customer and Tremont Partners entity that acted as the reference fund for this swap. Id. ¶¶ 39, 85–87. By December 2008, Rye XL Portfolio had transferred collateral payments under the swap agreement to ABN/RBS in the amount of $141 million, of which the Trustee alleges that at least $74.6 million consisted of transfers of Madoff Securities customer funds by Portfolio Limited and Rye Select Broad...