Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff)

• Decision Date: 11 October 2012
• Docket Number: Adversary Nos. 08–01789 (BRL), 11–02732 (BRL).
• Citation: 480 B.R. 501
• Parties: In re 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 Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. Bureau of Labor Insurance, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

480 B.R. 501

In re 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 Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,

v.Bureau of Labor Insurance, Defendant.

Adversary Nos. 08–01789 (BRL), 11–02732 (BRL).

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

Oct. 11, 2012.

Baker & Hostetler LLP, By: David J. Sheehan, Thomas L. Long, Mark A. Kornfeld, Regina Griffin, Torello Calvani, Michelle Kaplan, Catherine Woltering, Constantine P. Economides, New York, NY, for Irving H. Picard, Esq., Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff, Investment Securities LLC and Bernard L. Madoff.

Lowenstein Sandler PC, By: Michael B. Himmel, Amiad M. Kushner, Jamie R. Gottlieb, New York, NY, for Bureau of Labor Insurance.

MEMORANDUM DECISION AND ORDER DENYING BLI'S MOTION TO DISMISS THE TRUSTEE'S COMPLAINT

BURTON R. LIFLAND, Bankruptcy Judge.

Before the Court is the motion (the “Motion to Dismiss”) of the Taiwanese Bureau of Labor Insurance (“BLI”) seeking to dismiss the complaint (the “Complaint”) of Irving H. Picard, Esq. (the “Trustee”), trustee for the substantively consolidated Securities Investor Protection Act ¹ (“SIPA”) liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and Bernard L. Madoff (“Madoff”), filed pursuant to SIPA sections 78fff(b), 78fff–1(a) and 78fff–2(c)(3), sections 105(a), 544, 550(a) and 551 of the Bankruptcy Code (the “Code”) and various sections of New York Debtor and Creditor Law (the “NYDCL”) ² to recover certain transfers allegedly received by BLI as a subsequent transferee of funds originating from BLMIS.

BLI moves to dismiss the Complaint on four grounds: ³ (i) this Court lacks subject matter jurisdiction because BLI is immune from liability under the Foreign Sovereign Immunities Act (the “FSIA”); (ii) this Court lacks personal jurisdiction over BLI; (iii) the Trustee cannot recover from BLI, as subsequent transferee, under section 550 of the Code (“ Section 550”) because he has not avoided the initial transfers from BLMIS to Fairfield Sentry Limited (“Fairfield Sentry” or the “Fund”) and cannot now do so because the relevant statute of limitations has expired; and (iv) the Trustee's claims are barred by the presumption against extraterritoriality, which prohibits the extraterritorial application of Section 550 against BLI. The Trustee argues to the contrary, contending that the Court has both subject matter and personal jurisdiction, and may use Section 550 to recover subsequent transfers from BLI.

At bottom, the Trustee's instant suit is based upon BLI's investment of tens of millions of dollars in Fairfield Sentry with the specific goal of having funds invested in BLMIS in New York, with intent to profit therefrom. Such investment was not haphazard. Rather, BLI intentionally tossed a seed from abroad to take root and grow as a new tree in the Madoff money orchard in the United States and reap the benefits therefrom.

For the reasons set forth below and at oral argument, the Motion to Dismiss is DENIED.

BACKGROUND⁴

The Trustee's instant action arises from the commercial relationship between Fairfield Sentry, the largest BLMIS feeder fund, and defendant BLI, an agency or instrumentality of the Republic of China (the “ROC”) (commonly known as Taiwan). BLI is a political branch of the ROC responsible for labor safety policies and handling investments of the Labor Insurance Fund. See Declaration by Tsai, Chung–Chun in Support of Defendant's Motion to Dismiss Plaintiff's First Amended Complaint (“Tsai Decl.”) (Dkt. No. 9), ¶ 4. BLI is statutorily authorized to invest “in any [ ] government-authorized projects, which may inure to the benefit of their Fund,” id., ¶ 6(e), including “[h]edge funds issued by the foreign fund management institutions,” id., ¶ 8(c).

Prior to investing in Fairfield Sentry, BLI hired an investment advisor agent, Union Securities Investment Trust Co. Ltd. (“Union Securities”), to conduct diligence on Fairfield Sentry. As part of this diligence, Fairfield Greenwich Group, the entity controlling Fairfield Sentry furnished BLI with a private placement memorandum and other general information about the Fund. BLI also received specific information about the Fund's investment strategy, along with past results and details of specific trades in the Standard & Poor's 100 Index (“S & P 100”). See, e.g., Declaration of Thomas L. Long in Support of the Trustee's Memorandum of Law in Opposition to the Motion to Dismiss of the Bureau of Labor Insurance (“Long Decl.”) (Dkt. No. 17), Ex. 1, pp. 1–6, 10. Union Securities learned that the Fund's “strategy is executed by Bernard L. Madoff Securities,” id. at Ex. 1, p. 2, and that a minimum of 95% of the Fund's assets would be held in BLMIS's custody in New York and invested in U.S. Securities and Treasuries, id. at Ex. 4 (Private Placement Memorandum of Fairfield Sentry Limited, as of October 1, 2004) [hereinafter “2004 PPM”], p. 15; Supplemental Declaration of Thomas L. Long in Support of the Trustee's Sur–Reply in Opposition to the Motion to Dismiss of the Bureau of Labor Insurance (“Long Supp. Decl.”) (Dkt. No. 46), Ex. 1 (Private Placement Memorandum of Fairfield Sentry Limited, as of August 14, 2006) [hereinafter “2006 PPM”], pp. 9–10.

Armed with this knowledge, BLI chose to invest in Fairfield Sentry for the following reasons:

(I) [T]he history and asset size of [Fairfield Sentry] were in accordance with the relevant rules of the BLI; (2) [Fairfield Sentry] had a stable and steady annualized return rate of 11.02% and a Sharpe ratio of 2.81 since its foundation in 1990; (3) Investing in [Fairfield Sentry] met other requirements of BLI's policy.

Tsai Decl., ¶ 9. In order to invest with the Fund, BLI either individually or with the aid of Union Securities appears to have opened one or more accounts with JPMorgan Chase Bank in New York. See Long Decl., Ex. 3 (Subscription Agreement between BLI and Fairfield Sentry Limited, as Executed on January 4, 2007) [hereinafter “Subscription Agreement” or “Agreement”], pp. 1–2, 4, 11.

The Controlling Documents

On January 4, 2007, BLI signed the Subscription Agreement with Fairfield Sentry. See id. at p. 11. In accordance with this Agreement, BLI appointed Union Securities as its advisor. See id. at pp. 3–4. BLI acknowledged in the Agreement that it was a “Professional Investor,” and “warrant[ed] that [it] has such knowledge and expertise in financial matters sufficient to evaluate the risks involved in an investment in [Fairfield Sentry].” Id. at p. 3, ¶ 5(c). BLI also indicated that it had “obtained sufficient information from [Fairfield Sentry] or its authorized representatives to evaluate such risks and ha[d] consulted with [its] own advisors and is fully informed as to the legal and tax requirements within the Subscriber's own country (countries) regarding a purchase of the Shares [of Fairfield Sentry].” Id. at p. 4, ¶ 8.

The Subscription Agreement expressly incorporated the 2004 PPM and, by amendment, the 2006 PPM (taken together, the “PPMs”). See id. at p. 1, ¶ 1. The PPMs clearly highlighted the prominent role of New York-based BLMIS's split strike conversion strategy (the “SSC Strategy”) ⁵ in Fairfield Sentry's investments. The 2006 PPM clearly stated:

As a result of the Investment Manager's selection of Bernard L. Madoff Investment Securities, LLC (“BLM[IS]”) as execution agent of the split strike conversion strategy, substantially all of the Fund's assets will be held in segregated accounts at BLM[IS], a U.S. registered broker-dealer and qualified custodian.

2006 PPM, p. 16 (emphasis added). During those times when BLMIS's SSC strategy was not in the U.S. equity markets, investor funds were used to purchase U.S. Treasury Bills. See Compl., ¶ 25. In addition, the PPMs set forth that BLMIS would retain custody of at least 95% of the Fund's assets in the United States and would determine which shares of companies on the S & P 100 would be purchased, as well as the timing of such purchases. See 2006 PPM, pp. 9–10 (“Investment Policies”); p. 21, ¶ 17 (“When the Fund invests utilizing the ‘split strike conversion’ strategy ... it will not have custody of the assets so invested.”); see also 2004 PPM, p. 15 (“BLM[IS] has approximately 95% of the Fund's assets under custody.”). The 2006 PPM further clarified that “[t]he services of BLM[IS] and its personnel are essential to the continued operation of the Fund, and its profitability, if any.” 2006 PPM, p. 10. Fairfield Sentry's investment manager, Fairfield Greenwich (Bermuda) Ltd., had the discretion to invest less than 5% of the fund's net asset value outside of BLMIS's SSC strategy, with the rest going to BLMIS. Id. (“The Investment Manager, in its sole and exclusive discretion, may allocate a portion of the Fund's assets [ ] never to exceed, in the aggregate, 5% of the Fund's Net Asset Value”).

The Agreement further memorializes the connections between BLI and New York in several additional ways. First, BLI “agree[d] that any suit, action or proceeding ... with respect to this Agreement and [Fairfield Sentry] may be brought in New York” and “irrevocably submit[ted] to the jurisdiction of the New York courts with respect to any [p]roceeding.” Subscription Agreement, p. 6, ¶ 19. Second, the Agreement specified that it “shall be governed and enforced in accordance with the laws of New York, without giving effect to its conflict of laws provisions.” Id. at p. 5, ¶ 16. Third, the Agreement required that all subscription payments from BLI to Fairfield Sentry pass through Fairfield Sentry's New York HSBC bank account. Id. at pp. 1–2. Finally, BLI specified that all redemption payments from Fairfield Sentry Investments “should be wired only to” to JPMorgan Chase Bank, New York at 270 Park Avenue, New York, N.Y. 10017, USA. Id. at p. 11...