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

• Decision Date: 21 November 2019
• Docket Number: Adv. Pro. No. 10-04658 (SMB), Adv. Pro. No. 10-04377 (SMB),Adv. Pro. No. 08-01789 (SMB) (Substantively Consolidated)
• Citation: 610 B.R. 197
• Parties: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: Bernard L. Madoff, Debtor. Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and for the Estate of Bernard L. Madoff, Plaintiff, v. Carol Nelson, Defendant. Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and for the Estate of Bernard L. Madoff, Plaintiff, v. Carol Nelson, Individually and as Joint Tenant; and Stanley Nelson, Individually and as Joint Tenant, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

610 B.R. 197

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant,

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

In re: Bernard L. Madoff, Debtor.

Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and for the Estate of Bernard L. Madoff, Plaintiff,

v.Carol Nelson, Defendant.

Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and for the Estate of Bernard L. Madoff, Plaintiff,

v.Carol Nelson, Individually and as Joint Tenant; and Stanley Nelson, Individually and as Joint Tenant, Defendants.

Adv. Pro. No. 08-01789 (SMB) (Substantively Consolidated)

Adv. Pro. No. 10-04658 (SMB)

Adv. Pro. No. 10-04377 (SMB)

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

Signed November 21, 2019

BAKER & HOSTETLER LLP, 45 Rockefeller Plaza, New York, New York 10111, David J. Sheehan, Esq., Dean D. Hunt, Esq., Nicholas J. Cremona, Esq., Lan Hoang, Esq., Seanna R. Brown, 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., Gregory M. Dexter, Esq., Of Counsel, Attorneys for Defendants Carol Nelson and Stanley Nelson

SIPA LIQUIDATION

POST-TRIAL FINDINGS OF FACT AND CONCLUSIONS OF LAW

STUART M. BERNSTEIN, United States Bankruptcy Judge:

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") brought these adversary proceedings to recover intentional fraudulent transfers (the "Two-Year Transfers," defined below) made by BLMIS to Carol Nelson and Stanley Nelson (collectively, the "Defendants") in the aggregate amount of $3,065,077.00. The Court consolidated the cases for trial and conducted a two-day trial on May 8 and 9, 2019. The Trustee called three witnesses and the Defendants called no witnesses.¹

Pursuant to the Order Setting Trial , dated Jan. 17, 2019 (ECF Doc. # 126),² the parties were required to exchange witness lists and pre-marked exhibits on or before May 1, 2019. In order to expedite the trial, the Court and the parties adopted a procedure that left the question of the admissibility of all designated exhibits for post-trial briefing. (See Stipulation and Order Setting Post Trial Briefing Schedule , dated May 15, 2019 (ECF Doc. 157).) The parties thereafter submitted post-trial proposed findings of fact and conclusions of law³ and the Defendants' submission included objections to the admission of many of the exhibits designated by the Trustee.⁴ These objections are dealt with below.

The principal factual issue the Court must decide is whether the Two-Year Transfers were made by BLMIS or Madoff personally. The Court finds that BLMIS made the Two-Year Transfers. For the reasons that follow, the Court avoids the Two-Year Transfers and awards a final judgment in favor of the Trustee and against Carol Nelson in the sum of $455,077.00 and against Carol Nelson and Stanley Nelson in the sum of $2,610,000.00.

FINDINGS OF FACT

A. BLMIS's Business

Beginning in 1960 and until January 1, 2001, Bernard L. Madoff ran his broker-dealer business as a sole proprietorship (hereinafter referred to as "Madoff Securities"). Madoff Securities frequently used the trade name "Bernard L. Madoff Investment Securities" in the course of its business. Effective January 1, 2001, Madoff registered BLMIS as a New York single member limited liability company. (TX-008.) On January 12, 2001, BLMIS amended its SEC Form BD to reflect its change from a sole proprietorship to a single member limited liability company with Madoff as the sole member.⁵ BLMIS affirmed that it was transferring all of Madoff Securities' assets and liabilities relating to the business of Madoff Securities to BLMIS. (TX-007, at 11.) In 2006, BLMIS registered as an investment advisor. (TX-001 (Madoff Plea Allocution) at 28:10-19; TX-002 (DiPascali Plea Allocution) at 49:16-21.)

BLMIS was a single enterprise that operated three business units: (i) a proprietary trading business; (ii) a market-making business; and (iii) an investment advisory business. (Tr. (5/8) at 63:2-21.) The proprietary trading business traded for its own account to make money for BLMIS. (Tr. (5/8) at 62:24–63:21, 64:10-12, 68:7-16, 122:15-19, 151:2-8.) The market-making business made markets in certain stocks, bonds, warrants and rights. (Tr. (5/8) at 62:24–63:21, 122:15-19, 151:9-10.) The proprietary trading and market-making businesses were referred to within BLMIS as "House 5" and were collectively referred to in the trial testimony as the "Proprietary Trading Business." (Tr. (5/8) at 62:24–63:21, 150:18-21.) By all accounts, the Proprietary Trading Business was legitimate.

The investment advisory business ("IA Business") supposedly bought equity securities and options on behalf of its customers' accounts. (Tr. (5/8) at 62:24–63:21, 63:25–64:14.) Madoff represented to IA Business customers that he would invest their funds in shares of common stock and options, and "promised [investors that he] would opportunistically time those purchases [to] be out of the market intermittently, investing client funds during th[o]se periods in United States Government-issued securities, such as United States Treasury bills" as part of the purported "split-strike conversion" strategy. (TX-001 (Madoff Plea Allocution) at 26:7-11.) In addition, Madoff promised to "hedge the investments [he] made in the basket of common stocks by using client funds to buy and sell option contracts related to those stocks, thereby limiting potential client losses caused by unpredictable changes in stock prices." (Id. at 26:12-16.)

During at least the ten-year period before its collapse on December 11, 2008, BLMIS primarily used three bank accounts for the IA Business: JP Morgan Chase Bank, N.A. ("Chase") account #xxxxx1703 (the "703 Account"); Chase account #xxxxxxxxx1509 (the "509 Account," and together with the 703 Account, the "Chase Accounts"); and Bankers Trust account #xx-xx0-599 (the "599 Account"). (Tr. (5/8) at 89:13-21, 92:3-5, 186:11-17; TX-028; TX-029; TX-030; TX-031; TX-032.) The Chase Accounts were linked accounts. The 509 Account was a controlled disbursement account that was entirely funded by the 703 Account. (Tr. (5/8) at 188:11–189:2.) IA Business customers' cash deposits were deposited and commingled in the 703 Account. (Tr. (5/8) at 83:3-11; 188:11–189:2; see TX-037; TX-038.) IA Business customer withdrawals were made through the 509 Account which was entirely funded by the 703 Account during the period for which bank records were available. (Tr. (5/8) at 188:11–189:10; TX-149; TX-150; see TX-037.)

Ninety-seven percent of all cash deposited into the 703 Account came directly from IA Business customers; "either new customers putting money in or existing customers putting additional money in." (Tr. (5/8) at 83:3–85:23, 189:21–190:11; see TX-037; TX-038.) The other three percent of inflows into the 703 Account came from overnight sweeps and short-term investments. Because the overnight sweeps and short-term investments were made directly from the 703 Account, the source of the money for those investments was also customer funds. (Tr. (5/8) at 82:2–84:14, 85:8-23, 190:1-11; see TX-038.) "[T]he overnight sweeps [were used] to kind of create more money for the Ponzi [scheme] to enable it to go a little bit longer, in other words." (Tr. (5/8) at 92:6-21.)

Importantly, there were no inflows into the 703 Account from sales of securities for customer accounts, (Tr. (5/8) at 84:1-14, 190:1-11; see TX-038), or outflows from the 703 Account to purchase securities for customer accounts. (Tr. (5/8) at 83:3–84:14, 190:1-11.) Apart from two short-term loans BLMIS received from Chase totaling $145 million in November 2005 and January 2006—both of which were repaid by June 2006—the IA Business did not obtain loans from third parties or from the Proprietary Trading Business sufficient to pay the IA Business customer withdrawals. (Tr. (5/8) at 80:20–93:3; see TX-037; TX-038.)

Furthermore, the IA Business did not receive payments of any cash dividends despite what the customer statements reported. Between 1998 and 2008, BLMIS reported on the customer statements that it had paid or credited its customers $4.3 billion in cash dividends. (Tr. (5/8) at 86:21-24, 88:16-18; TX-039.) Of the more than 8,300 IA Business dividend transactions identified on the customer account statements from 1998 to 2008, not one purported dividend payment matched to a cash addition to the 703 Account. (Tr. (5/8) at 85:24–90:19; TX-039.) Hence, the only source of cash available for the IA Business to pay purported investment profits as well as redemption requests from its customers was from cash IA Business customers deposited in the 703 Account. (Tr. (5/8) at 80:20–93:3; see TX-037.)

Not surprisingly, these transactions rendered BLMIS insolvent. By no later than December 2002, its assets totaled approximately $1.82 billion and its liabilities totaled $11.9 billion. (Tr. 5/8 at 138:17–141:14; TX-035; TX-036.) By 2007, BLMIS's insolvency had deepened to $21.5 billion. (Tr. (5/8) at 142:6-17.) Defendants did not present testimony or evidence to rebut Dubinsky's conclusion that the funds in the 703 Account consisted of customer money, that the IA Business had no other source of funds, or that customer redemptions were paid with funds from the 703 Account through the 509 Account.

B. The Ponzi Scheme

On December 11, 2008 (the "Filing Date"),⁶ Bernard L. Madoff was arrested for violating numerous federal statutes and the SEC commenced proceedings against him and BLMIS in the United States District Court for the Southern District of New York. On December 15, 2008, the SEC consented to a combination of its own action with an...