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

• Decision Date: 19 March 2019
• Docket Number: Adv. Pro. No. 15-1293 (SMB),Appeal No. 17-CV-2230 (VSB),Adv. Pro. No. 08-1789 (SMB) (Substantively Consolidated)
• Citation: 598 B.R. 102
• 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 Peshkin, and Russell Oasis, Plaintiffs/Appellants, v. Capital Growth Company ; Decisions, Incorporated; Favorite Funds; JA Primary Limited Partnership; JA Special Limited Partnership; JAB Partnership ; JEMW Partnership; JF Partnership; JFM Investment Companies; JLN Partnership ; JMP Limited Partnership; Jeffry M. Picower Special Company; Jeffry M. Picower, PC.; The Picower Foundation ; the Picower Institute of Medical Research; the Trust f/b/o Gabrielle H. Picower; Barbara Picower, individually, and as Executor of the Estate of Jeffry M. Picower, and as Trustee for the Picower Foundation and for the Trust f/b/o Gabrielle H. Picower; and Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Defendants/Appellees.
• Court: U.S. District Court — Southern District of New York

598 B.R. 102

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 Peshkin, and Russell Oasis, Plaintiffs/Appellants,

v.Capital Growth Company ; Decisions, Incorporated; Favorite Funds; JA Primary Limited Partnership; JA Special Limited Partnership; JAB Partnership ; JEMW Partnership; JF Partnership; JFM Investment Companies; JLN Partnership ; JMP Limited Partnership; Jeffry M. Picower Special Company; Jeffry M. Picower, PC.; The Picower Foundation ; the Picower Institute of Medical Research; the Trust f/b/o Gabrielle H. Picower; Barbara Picower, individually, and as Executor of the Estate of Jeffry M. Picower, and as Trustee for the Picower Foundation and for the Trust f/b/o Gabrielle H. Picower; and Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Defendants/Appellees.

Adv. Pro. No. 08-1789 (SMB) (Substantively Consolidated)

Adv. Pro. No. 15-1293 (SMB)

Appeal No. 17-CV-2230 (VSB)

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

Signed March 19, 2019

Helen Davis Chaitman, Lance Gotthoffer, Chaitman LLP, New York, NY, Counsel for Plaintiffs/Appellants

Gary Stein, Jennifer Marie Opheim, Marcy Ressler Harris, Michael Yongha Kwon, Schulte Roth & Zabel LLP, New York, NY, Mark David Richardson, Labaton Sucharow LLP, Wilmington, DE, Counsel for Defendants/Appellees Capital Growth Company, Decisions Incorporated, Favorite Funds, JA Primary Limited Partnership, JA Special Limited Partnership, JAB Partnership, JEMW Partnership, JF Partnership, JFM Investment Companies, JLN Partnership, JMP Limited Partnership, Jeffry M. Picower Special Company, Jeffry M. Picower, P.C., The Picower Foundation, The Picower Institute of Medical Research, The Trust f/b/o Gabrielle H. Picower, and Barbara Picower

David J. Sheehan, Ferve Emine Ozturk Khan, Baker & Hostetler LLP, New York, NY, Counsel for Defendant/Appellee Irving H. Picard

OPINION & ORDER

SIPA LIQUIDATION

VERNON S. BRODERICK, United States District Judge:

This bankruptcy appeal arises out of the third attempt by a group of former customers of Bernard L. Madoff Investment Securities LLC ("BLMIS") to circumvent a permanent injunction entered by the United States Bankruptcy Court for the Southern District of New York, in connection with its approval of a $7.2 billion settlement between the Trustee of BLMIS and a number of parties affiliated with Jeffry M. Picower (the "Picower Parties" and, together with the Trustee, "Appellees").

Appellants—former BLMIS customers and now creditors of the BLMIS estate—seek review in this Court after the Bankruptcy Court denied their application for a declaration that their proposed Third Amended Complaint (the "Fox III Complaint") against the Picower Parties asserted claims that were not barred by the permanent injunction. Because I agree with the Bankruptcy Court's determination that the Fox III Complaint asserts claims that are duplicative and derivative of claims previously brought by the Trustee, I conclude that the Fox III Complaint violates the permanent injunction and I AFFIRM the decision of the Bankruptcy Court.

I. Factual Background and Procedural History ¹

A. Madoff's Ponzi Scheme and BLMIS's Bankruptcy

This appeal arises from the Ponzi scheme devised by Bernard L. Madoff ("Madoff"), the ensuing bankruptcy of Bernard L. Madoff Investment Securities LLC, and the resulting bankruptcy proceedings. A detailed discussion of Madoff's Ponzi scheme and the events giving rise to the bankruptcy can be found in several prior decisions issued by the Bankruptcy Court, but in brief, the scheme operated as follows:

Madoff claimed he was investing BLMIS's customers' funds in stocks and then hedging with option trades. In reality, Madoff never invested any of the funds. Instead, BLMIS generated fictitious account statements reflecting trades that were never actually completed and profits that were never actually generated. Because BLMIS was not actually generating profit, it paid customers who withdrew funds with the proceeds of other customers' investments. Eventually, BLMIS was unable to meet its customers' demands for withdrawals, and the scheme collapsed.

A & G Goldman P'ship v. Picard ("Goldman III App. Ct. "), 739 F. App'x 679, 681 (2d Cir. 2018) (summary order) (internal citations omitted); see also In re Bernard L. Madoff Inv. Sec. LLC, 424 B.R. 122, 135 (Bankr. S.D.N.Y. 2010), aff'd, 654 F.3d 229 (2d Cir. 2011).

After Madoff's scheme came to light in December 2008, BLMIS entered into liquidation proceedings pursuant to the Securities Investor Protection Act ("SIPA"). See Marshall v. Capital Growth Co. ("Bankr. Op."), 568 B.R. 203, 205 (Bankr. S.D.N.Y. 2017). Irving H. Picard (the "Trustee"), as Trustee for the liquidation of BLMIS, determined that each BLMIS customer's claims against the bankruptcy estate would be calculated based on the "Net Investment Method," crediting the amount of cash the customer deposited into his BLMIS account, less any amounts withdrawn from it. See In re Bernard L. Madoff Inv. Sec. LLC , 654 F.3d 229, 233 (2d Cir. 2011). Under the Net Investment Method, a customer's recovery was limited to the amount of his investment—that is, he could not recover the false profits that BLMIS had reported on his customer statements. Some customers, including Appellants in the current action, argued that the Trustee should also return their fictitious profits to them; however, the Bankruptcy Court upheld the Trustee's use of the Net Investment Method. See In re Bernard L. Madoff Inv. Sec. LLC , 424 B.R. at 135. The Second Circuit, in turn, affirmed the Bankruptcy Court's decision, concluding that permitting customers to collect their false profits would "have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff's machinations." In re Bernard L. Madoff Inv. Sec. LLC , 654 F.3d at 235.²

B. Trustee's Suit Against Picower and the Permanent Injunction

In May 2009, the Trustee initiated an adversary proceeding against Jeffry Picower (now deceased) and the Picower Parties to recover $7.2 billion that BLMIS had fraudulently transferred to the Picower Parties between 1995 and 2008, as part of the Ponzi scheme. Bankr. Op., 568 B.R. at 205. The Trustee's complaint alleged that the Picower Parties were aware of the Ponzi scheme, were "complicit[ ] in [Madoff's] fraud," and actively participated in the scheme by directing BLMIS employees to create fictitious trading records in their accounts. (App'x 869; Bankr. Op., 568 B.R. at 205.) To support the contention that Picower had knowledge of Madoff's fraud, the complaint cited Picower and Madoff's close relationship, Picower's understanding of BLMIS's operations, and the "implausibly high rates of return" that Picower received on his purported investments. Goldman III App. Ct. , 739 F. App'x at 681. The Trustee and the Picower Parties (along with the Government) ultimately entered into a global settlement agreement, pursuant to which the Picower Parties agreed to forfeit $7.235 billion, to be distributed to BLMIS victims. (App'x 1125.) On January 13, 2011, the Bankruptcy Court approved the settlement and issued a permanent injunction, which defines the parties against whom it applies. The injunction provides:

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.

Bankr. Op., 568 B.R. at 205–06.

C. Prior Attempts to Sue the Picower Parties

Both prior to and since the issuance of the permanent injunction, two sets of putative class action plaintiffs—the Fox Parties (Appellants here) and the Goldman Parties³ —have repeatedly attempted to assert non-derivative claims against the Picower Parties to recover their lost investments, including their falsely reported profits. Bankr. Op., 568 B.R. at 206. The Fox Parties and the Goldman Parties have now each submitted three versions of their respective complaints, which allege that Picower constituted a "control person" of BLMIS under § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t, thereby rendering Picower jointly and severally liable for BLMIS's fraud.⁴ Courts, however, have uniformly concluded that each successive version of the Fox and Goldman complaints merely assert claims that are duplicative or derivative of those claims brought by the Trustee on behalf of BLMIS. These complaints have resulted in a total of eleven decisions from the Bankruptcy Court, other courts within this district, and the Second Circuit, concluding that the permanent injunction bars the Goldman and Fox complaints.⁵

These decisions have identified two primary deficiencies in the Fox and Goldman complaints. First, the complaints rest on allegations of Picower's misconduct with respect to his own accounts. Picower's actions—specifically, the withdrawal of billions of dollars in customer funds from his BLMIS accounts—"harmed every BLMIS investor (and BLMIS itself) in the same way": "the very essence of the allegations against the Picower defendants is that they paid themselves out of assets that comprised other customers' accounts, thereby diminishing the value of BLMIS." Fox I Dist. Ct. , 848 F.Supp.2d at 480. Second, claims that Picower controlled Madoff's or BLMIS's activities in any way were purely "conclusory" and insufficient to support a § 20(a) control person claim. See Goldman I Dist. Ct. , 2013 WL 5511027, at *6 ("Apart...