Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC
| Decision Date | 15 July 2022 |
| Docket Number | 08-01789 (CGM),Adv. Pro. No. 10-05421 (CGM) |
| Citation | 642 B.R. 353 |
| 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 Bernard L. Madoff, Plaintiff, v. Frank J. Avellino, et al., Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
BAKER HOSTETLER, LLP, Attorneys for the Irving H. Picard, Trustee, 45 Rockefeller Plaza, New York, NY 10111, BY: Regina Griffin (via Zoom)
NASON YEAGER GERSON HARRIS & FUMERO, P.A., Attorneys for the Defendants, 3001 PGA Boulevard, Suite 305, Palm Beach Gardens, FL 33410, BY: Gary A. Woodfield (via Zoom)
(Substantively Consolidated)
Irving H. Picard ("Trustee"), Trustee for the Substantively Consolidated SIPA1 Liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS2 ") and Bernard L. Madoff ("Madoff"), brings this adversary proceeding against Frank Avellino and numerous other defendants to recover fictitious profits received by the defendants for its investment in the infamous Ponzi scheme of BLMIS. The Trustee seeks summary judgment under count one and thirteen of his complaint. Under count one,3 the Trustee has moved for summary judgment against Mayfair Ventures, Grosvenor Partners, Aster Associates, and St. James Associates (collectively, the "Entity Defendants"). Under count thirteen, the Trustee seeks summary judgment against the general partners ("General Partner Defendants") of the Entity Defendants. The Trustee seeks to hold the General Partner Defendants liable for the debts of the partnership.
The Court heard oral argument on June 15, 2022. For the reasons set forth in this memorandum decision, the Court finds the transfers were, in fact, transfers of BLMIS’ customer property, and that the Entity Defendants and General Partner Defendants (collectively "Defendants") are liable for these monies.
This Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1334(b) and 157(a), the District Court's Standing Order of Reference dated July 10, 1984, and the Amended Standing Order of Reference dated January 31, 2012. In addition, the District Court removed the SIPA liquidation to this Court pursuant to SIPA § 78eee(b)(4), (see Order, Civ. 08– 01789 (Bankr. S.D.N.Y. Dec. 15, 2008) ("Main Case"), at ¶ IX (ECF No. 1)), and this Court has jurisdiction under the latter provision.
The Defendants argue that this Court lacks the authority to enter a final order in these cases. Opp'n at 40, ECF No. 247.
This Court disagrees. The Court does have the authority to enter a final order because the Defendants filed customer claims in this case. See Compl., Ex. P, ECF No. 1. Thus, Defendants have impliedly consented to a final adjudication. Picard v. Bam L.P. , (In re BLMIS ), 612 B.R. 257, 260 (S.D.N.Y. 2020) (citing Langenkamp v. Culp , 498 U.S. 42, 44, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) ); In re BLMIS LLC ("Epstein II "), No. 1:21-cv-02334, 2022 WL 493734, at * 11 (S.D.N.Y. Feb. 17, 2022) (). To the extent that it does not, the Court asks the District Court to construe this decision as proposed findings of fact and conclusions of law, pursuant to the Amended Standing Order of Reference dated January 31, 2012.
For a background of these SIPA cases and the BLMIS Ponzi scheme, please refer to the background section of Picard v. Avellino (In re BLMIS ), 557 B.R. 89, 94–95 (Bankr. S.D.N.Y. 2016).
In 1958, Frank Avellino ("Avellino") began working as an accountant for Madoff's father-in-law, Saul Alpern ("Alpern"). Trustee's Stmt. ¶ 43. In 1960, Madoff began operating his business from Alpern's accounting firm, Alpern & Heller. Id. ¶ 44. In 1968, David Bienes ("Bienes")5 joined Alpern's firm as an accountant. Id. ¶ 45. In the early 1960's, Alpern formed his own group of investors to provide money to Madoff. Id. ¶ 47. In an interview on PBS's Frontline, Bienes stated that Madoff's early customers were "[Alpern's] clients, family, friends. Id. ¶ 48.6 In the 1960s, Alpern told Bienes that investing with Madoff will yield him 20% returns. Id. ¶ 49.7 Avellino & Bienes ("A&B") was formed in 1975. Id. ¶ 46. In 1975, Alpern retired and transferred the management of his business accounts to A&B. Id. ¶ 53. A&B continued to collect moneys from investors to send to Madoff. Id. ¶ 54. Bienes acknowledged that in the 1970's, A&B was Madoff's sole feeder fund. Id. ¶ 57.8 A&B's compensation for feeding other investors’ funds to BLMIS's investment advisory business ("IA Business") was to retain the difference between the rate of returns Madoff guaranteed them in advance and the lower rates of return they promised their investors. Id. ¶ 64.
The Trustee argues that A&B knew of Madoff's Ponzi scheme and helped create it. Avellino and Bienes9 argue that they never knew Madoff was running a Ponzi scheme. Def's Stmt. ¶ 56. Avellino and Bienes admitted that over 35 years, A&B never had a down year. Id. ¶ 65–66. In 1992, the SEC began investigating A&B as unlawfully operating an "unregistered investment company" and "engaged in the unlawful sale of unregistered securities." Id. ¶ 72. As part of the SEC investigation, Avellino and Bienes testified that they believed Madoff employed a viable hedged investment strategy for the A&B Accounts. Id. ¶ 77. Avellino and Bienes testified that they believed that their A&B accounts contained $440 million. Id. ¶ 76. The Trustee's expert, Bruce Dubinsky ("Dubinsky"),10 analyzed the original transactions appearing on the A&B customer statements and concluded that such statements did not reflect any purported investment strategy. Id. ¶ 80. In his own criminal proceeding, Frank DiPascali ("DiPascali"),11 testified that he redid the A&B customer statements prior to sending them to the SEC investigators. Id. ¶ 82. One of the changes DiPascali made to A&B customer statements involved retroactively inserting $86 million in fake US Treasuries to A&B Business account 1-00125-3. Id. ¶ 88.
The Defendants dispute most of the Trustee's characterization of the SEC investigation into A&B. For purposes of this motion, the Court need not concern itself with A&B's potential involvement in assisting Madoff's Ponzi scheme. At issue in this case are only counts one and thirteen of the Trustee's complaint. The Court will now turn to count one against the Entity Defendants.
Mayfair Ventures was a general partnership formed under the laws of the state of Florida. Id. ¶ 372. Defendants Avellino, Nancy Avellino, Bienes, and Dianne Bienes were general partners of Mayfair Ventures. Id. ¶ 373. The Trustee's expert, Matthew Greenblatt ("Greenblatt"),12 determined that on February 11, 1993, Account No. 1ZB032 (the "Mayfair Ventures Account") was opened with a cash deposit of $26,000,000, which represented principal. Id. ¶ 404. On March 28, 1995, there was an additional cash deposit of $2,000,000, leading to a principal of $28,000,000. Id. ¶ 405. There were twenty-nine cash withdrawals from the Mayfair Ventures Account totaling $27,850,000. Id. ¶ 406. Greenblatt's evidence demonstrates that between February 11, 1993 and December 11, 2008, $32,350,000 was withdrawn from the account.13 Between December 11, 2006 and the SIPA filing date of December 11, 2008 ("Two-Year Period"), $2,500,000 in fictitious profits was withdrawn from the Mayfair Ventures Account. Id. ¶ 410.
Greenblatt determined that Account No. 1ZB046 ("Grosvenor Partners Account") was opened on February 26, 1993, with a deposit of $1,740,000, representing principal. Id. ¶ 412. Defendants Avellino and Mayfair Ventures were general partners of Grosvenor Partners. Id. ¶ 377–378. Over time, the Grosvenor Partners Account made deposits of $43,351,600 of principal. Id. ¶ 417. The Grosvenor Partners Account eventually withdrew $101,603,000—$58,251,400 in fictitious profits. Id. ¶ 420. Within the Two-Year Period, $2,500,000 of fictitious profits was withdrawn from the Grosvenor Partners Account. Id. ¶ 421.
Aster Associates was a general partnership that opened Account No. 1ZB509 ("Aster Associates Account") on June 30, 2004. Id. ¶ 423. Defendants Avellino, Nancy Avellino, Rachel A. Rosenthal Trust U/A dated June 29, 1990 and Rachel Anne Rosenthal Trust Number 2 U/A dated June 24, 1992 were general partners of Aster Associates. Id. ¶ 382–387. Within the Two-Year Period, $3,500,000 in fictitious profits was withdrawn from Aster Associates Account. Id. ¶ 428.
St. James Associates was a general partnership formed under the laws of the state of Florida. Id. ¶ 390. Defendants Bienes and Dianne Bienes were general partners of St. James Associates. Id. ¶ 391. St. James Associates opened Account No. 1ZB510 ("St. James Account") on June 30, 2004. Id. ¶ 430. Between June 30, 2004 and December 11, 2008, $18,450,000 was withdrawn from BLMIS, which consisted of $1,000,000 in principal and an additional $17,450,000 in fictitious profits. Id. ¶ 435. Within the Two-Year Period, $8,700,000 in fictitious profits was withdrawn from the St. James Account. Id. ¶ 436.
Under Rule 56(a) of the Federal Rules of Civil Procedure, as applied by Rule 7056(c) of the Federal Rules of Bankruptcy Procedure: "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." The materiality of facts must be determined with reference to the governing substantive law. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "A...
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