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© Copyright 2014 by K&L Gates LLP. All rights reserved. In re Bernard L. Madoff Investment Securities LLC, Adv. Pro. No. 08-01789 (Bankr. S.D.N.Y.) The Ongoing Madoff Bankruptcy Litigation Under the Securities Investor Protection Act
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© Copyright 2014 by K&L Gates LLP. All rights reserved.

In re Bernard L. Madoff Investment Securities LLC, Adv. Pro. No. 08-01789 (Bankr. S.D.N.Y.)

The Ongoing Madoff Bankruptcy Litigation Under the Securities Investor Protection Act

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Richard A. Kirby is a securities litigation and government enforcement partner in K&L Gates’ Washington D.C. office. He has more than two decades of experience in private practice representing persons involved in Securities and Exchange Commission (“SEC”), Justice Department, state and self-regulatory organization enforcement investigations. Prior to joining K&L Gates, Richard served in the Office of the General Counsel of the SEC, where he briefed and argued more than 50 major securities cases throughout the country and before almost every federal Circuit Court. Richard has particular knowledge of workouts arising from Ponzi schemes, having worked on some of the highest profile cases in the nation. Richard leads the securities litigation team on Madoff Securities matters handled at K&L Gates, which represents dozens of victims of the Madoff Ponzi scheme.

PRESENTERS

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Laura K. [email protected]: 206.370.7808

D. Matthew [email protected]: 206.370.7660

Richard A. [email protected]: 202.661.3730

Laura K. Clinton is a partner in K&L Gates’ Seattle office. Her practice focuses on securities issues and complex commercial litigation, and she defends both corporate and individual clients in securities actions before the federal courts and FINRA. Laura oversees much of the Madoff litigation handled by K&L Gates.

D. Matthew Doden is an associate in K&L Gates’ Seattle office. His practice focuses on securities litigation and complex commercial disputes. He has had primary responsibility for coordinating the efforts of those clients filing claims against the government remission fund, the Madoff Victim Fund.

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Monthly StatementApple…………….IBM………………Enron…………..Amazon……….Coca-Cola…..REITs…………..Microsoft…..

WHAT IS A PONZI SCHEME?

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WITHDRAWALS DEPOSITS

A Ponzi scheme “is a fraudulent investment scheme in which money contributed by later investors is used to pay artificially highdividends to the original investors, creating an illusion of profitability, thus attracting new investors.” Ades–Berg Investors v. Breeden (In re The Bennett Funding Group, Inc.), 439 F.3d 155, 157 n. 2 (2d Cir.2006) (citing Black's Law Dictionary 1198 (8th ed. 2004)).

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SIGNIFICANT PONZI SCHEMES IN THE NATION AND REGION

Bayou Hedge Fund Ponzi Scheme (1996-2004) $450 million Bayou hedge funds were founded by Samuel Israel III, with assets held at an affiliated broker-dealer. Funds started legitimately but quickly turned to fraud when managers couldn’t generate return.

Tom Petters Ponzi Scheme (1998-2008) $3.65 billion Petters created three investment funds to finance his big box stores and other acquisitions. He then fabricated

retail orders from those acquisitions and used them as collateral to borrow more money through the funds.Stanford Ponzi Scheme (1990s-2009)

$7 billion Claimed his CDs were safer than US government-issued accounts while falsifying bank statements to show

higher-than-market returns.Nevin Shapiro Ponzi Scheme (2005-2009)

$930 million University of Miami booster, Nevin Shapiro, started Capital Investments USA, which he claimed bought wholesale

groceries and shipped them to more expensive markets. Funds from Capital Investments USA were actually diverted for Shapiro’s personal use.

Meridian Real Estate Funds Ponzi Scheme (2002-2012) $130 million (largest Ponzi scheme in the Pacific Northwest) Frederick Darren Berg founded the funds. Berg offered purported investments in seller-financed real estate that were immune from the declining real estate

market, but funds were actually diverted to other ventures such as a high-end motor coach company.Bernard L. Madoff Investment Securities Ponzi Scheme (1980s?-2008)

$18 billion Details to follow . . .

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INEVITABLY, PONZI SCHEMES WILL FAIL

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WITHDRAWALS DEPOSITS

Monthly Statement

Apple…………….IBM………………Enron…………..Amazon……….Coca-Cola…..REITs…………..Microsoft…..

See e.g. 2008-2009

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Typically, the fraudster is judgment proof. The business: Is not a going concern—the business typically was losing money, so there is

no real “company” to sell. Has no other assets—scheme failed to generate sufficient revenue, money

was stolen, extensive trading/business losses, etc. Has little to no insurance—most insurance policies voided by fraud.

A trustee can file clawback claims (fraudulent conveyance actions) to recover transfers made to investors up to six years before the insolvency.

Clawback claims are based on both federal bankruptcy law and state law (see Uniform Fraudulent Transfer Act)

An innocent investor is vulnerable to a clawback action because the focus is the fraudulent intent or insolvency of the transferor. Generally, once a “Ponzi scheme” or “insolvency” at the time of transfer is established,

the burden shifts to the investor.

WHY ARE PONZI SCHEMES DIFFERENT FROM ORDINARY SECURITIES LITIGATION

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HOW TO PICK UP THE PIECES Receiverships (Stanford / Bayou) Federal District Court / Bankruptcy Trustees (Bayou) SIPA Liquidations (Madoff) Government Restitution/Remission Funds (Bayou /

Madoff)

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The Madoff Ponzi Scheme

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MADOFF PONZI SCHEME TIMELINE 1959: Founded as a sole proprietorship of Madoff, Bernard L. Madoff Investment Securities LLC (“BLMIS”) begins operations. March 1960: BLMIS registers as broker-dealer. Early 1962: According to interviews with Madoff after his arrest, he and his father-in-law covered up huge BLMIS losses in 1962 caused by Madoff’s improper investment

of client savings in high-risk newly issued stocks. 1980s: Madoff has since acknowledged that he was using arcane strategies to help larger clients evade income taxes and foreign currency controls in the 1980s. 1986: Madoff establishes BLMIS’ principal place of business until its collapse at 885 Third Avenue, New York, New York. 1987: According to Madoff, he began covering numerous withdrawals after the 1987 market crash with deposits from new fund clients. Early 1990s: By this time, available evidence suggests that BLMIS was falsifying whole portfolios of securities. Madoff admits in his allocution that “[t]o the best of my

recollection, my fraud began in the early 1990s.” 1998: In a prison interview after his arrest, Madoff states, “[b]y 1998, I realized I was never going to get out of this. . . . That’s when I acknowledged the fact to myself that

the ax was going to fall on me eventually.” January 2001: BLMIS forms as a New York limited liability company wholly owned by Madoff. August 2005: CEO Samuel Israel III reveals the Bayou Group Ponzi scheme. Skepticism of consistently high-yield funds increases. September 2006: BLMIS registers as an investment advisor. January 2008: BLMIS files a Uniform Application for Investment Adviser Registration with the SEC, representing that BLMIS had 23 customer accounts and $17.1 billion

in assets under management. According to the Trustee, BLMIS actually had approximately 4,900 active client accounts with a purported value of approximately $65 billion under management.

December 11, 2008: Madoff arrested by federal agents for violation of the criminal securities laws, including inter alia, securities fraud, investment adviser fraud, and mail and wire fraud.

March 12, 2009: Madoff admits to his fraudulent scheme and pleads guilty to 11 felony counts. United States v. Madoff, No. 09-CR-213 (S.D.N.Y. March 12, 2009) (Docket No. 50). Madoff admits that he “operated a Ponzi scheme through the investment advisory side of [BLMIS].” Madoff asserts: “[a]s I engaged in my fraud, I knew what I was doing [was] wrong, indeed criminal.” Madoff admits: “that I never made the investments I promised my clients, who believed they were invested with me in the split strike conversion strategy.”

August 11, 2009: Former BLMIS employee, Frank DiPascali, pleads guilty to participating in and conspiring to perpetuate the Ponzi scheme. Among other things, DiPascali claimed that a fictitious scheme existed at BLMIS since at least the 1980s.

June 29, 2009: Madoff is sentenced to 150 years in prison. Madoff is incarcerated at Butner Federal Correctional Institution in North Carolina; Federal Bureau of Prisons Register #61727-054

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THE MADOFF NETWORK Madoff Ponzi Scheme was Unprecedented in

Scope Estimated $18 billion in customer losses. Over 60,000 persons or entities have claimed to have been harmed by

the fraud. Spanning three decades (possibly more?). International in scope.

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THE MADOFF NETWORK cont. Litigation is International as Well

Austria Italy Bermuda BVI Cayman Islands England Gibraltar Ireland Switzerland Luxemborg

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ILLUSTRATING THE MADOFF NETWORK

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MADOFF

Philanthropic Org

Feeder Fund LP Feeder FundFeeder FundDirect Investor

Feeder Fund

International

Fund Fund LP Family Investment Vehicle

Fund LLC Fund LPLLCFund

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HOW IS MADOFF DIFFERENT FROM EARLIER PONZI SCHEMES? Governing Law. The Securities Investor Protection Act (“SIPA”) governs because

BLMIS was a registered “broker-dealer” under 15 U.S.C. § 78o(b). SIPA represents the intersection of Bankruptcy and Securities Law.

Duration. The precise start date of the Madoff Ponzi scheme is subject to dispute, but some believe that it began as early as the 1980s.

Scope. The Madoff Ponzi scheme injured a broad spectrum of “customers” including direct institutional investors, individual investors accessing BLMIS through an expansive feeder fund network, and a significant number of international investors.

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IMPACT

1) SIPA2) Customer Claims against the Estate3) Trustee Claims against Customers4) Defenses to the Trustee’s Claims5) Limitations on Related Claims

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The Securities Investor Protection Act (“SIPA”)

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SIPA* -- THE INTERSECTION OF BANKRUPTCY AND SECURITIES LAW Congress Enacts SIPA in 1970. SIPA was enacted in 1970 in response to a “rash of

failures among securities broker-dealers” that caused significant losses to customers whose assets “were unrecoverable or became tied up on the broker-dealers’ bankruptcy proceedings.” In re New Times Sec. Servs., Inc., 371 F.3d 68, 84 (2d Cir. 2004).

SIPA Facilitates Liquidation of Failed Broker-Dealers. “The Act creates procedures for liquidating failed broker-dealers and provides their customers special protections.” In re: Bernard L. Madoff Inv. Sec. LLC, Case No. 14-27, Dkt. 109-1 at 7 (2d Cir. 2014).

SIPA is the Intersection of Bankruptcy and Securities Law. “Except as otherwise provided in this Act, the provisions of the Securities Exchange Act of 1934 . . . Apply as if this Act constituted an amendment to, and was included as a section of, such Act.” SIPA § 2.

Customer Property / Net Equity Claims. “SIPA prioritizes the distribution of customer property in a broker-dealer liquidation. The Act creates a fund of customer property for priority distribution exclusively among a failed broker-dealer’s customers, and customers share in the fund proportionally, according to each customer’s ‘net equity.’” In re: Bernard L. Madoff Inv. Sec. LLC, Case No. 14-27, Dkt. 109-1 at 5.

* SIPA is codified at 15 U.S.C. § 78aaa et seq. Throughout this presentation, we cite to the Act itself, as amended through P.L. 112-90, and approved January 3, 2012. The Act is available at: https://www.sec.gov/about/laws/sipa70.pdf.

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When Does SIPA Apply?Applies: BLMIS

Registered Broker-Dealer. BLMIS had been a registered broker-dealer since 1960.

BLMIS Collapses. BLMIS collapsed on December 11, 2008.

Madoff Investors = Customers. Madoff’s direct investors qualified as “customers” because they had claims against BLMIS for cash or securities that BLMIS purportedly held for their benefit.

SIPC Application. December 15, 2008, the District Court of the Southern District of New York grants SIPC’s application to liquidate BLMIS under SIPA. SEC v. Madoff, No. 08-10791, Dkt. No. 3 (S.D.N.Y. Dec. 15, 2008).

Does Not Apply: Through a private right of action.

Sec. Investor Prot. Corp. v. Barbour, 421 U.S. 412 (1975) (There is no private cause of action under SIPA. Customers cannot compel SIPC to initiate a liquidation under SIPA)

If the entity does not have customers in need of protection. S.E.C. v. Sec. Investor Prot. Corp., 758 F.3d

357, 358 (D.C. Cir. 2014) (“[B]ecause the Antiguan bank, unlike SGC, was not a SIPC member, SIPC had no ability to initiate measures directly against the [Antiguan] bank to protect the property of investors who purchased the bank's CDs.” Further, “the investors obtained the Antiguan bank's CDs by depositing funds with the bank itself, not with SGC (a broker-dealer), and they thus cannot be considered customers of the SGC”).

In re Bayou Group, LLC, No. 06-22306(liquidation of Bayou Funds was not subject to oversight by SIPC because the Bayou Funds were not registered broker-dealers, and the investors in the Bayou Funds were not “customers” of a broker)

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THE SECURITIES INVESTOR PROTECTION CORPORATION ("SIPC") Congress created SIPC as a nonprofit corporation (not a federal agency) that is charged with administering a fund capitalized by the

brokerage community that is meant to protect customers if their brokerage firm fails. See SIPA §§ 3, 4. SIPC is supervised by the SEC. SIPA § 3(a)(2)(B); Sec. Investor Prot. Corp. v. Barbour, 421 U.S. 412, 417 (1975) (“The role of

the SEC in this scheme, insofar as relevant to the present case, is one of ‘plenary authority’ to supervise the SIPC.”). SIPC membership includes all brokers or dealers who are members of a national securities exchange or are otherwise registered as

brokers or dealers under 15 U.S.C. § 78o(b). SIPA § 3(a)(2)(A). Membership currently includes approximately 4,000 securities brokerage firms.

SIPC is funded by its members. 2015 assessment rate = 0.25% of the member’s Net Operating Revenues. Depending on the financial condition of SIPC, assessments can be as high as ½ of 1% of a member’s net operating revenues. SIPA § 4(d)(1).

SIPA initiates liquidation proceedings when broker is insolvent and unable to meet its obligations. SIPC may ask a court for a protective decree if SIPC determines that the member “has failed or is in danger of failing to meets its obligations to customers,” the members customers have claims that cannot be satisfied by SIPC advances, and one of the following conditions is met: The debtor consents or fails to contest the protective decree; or The court finds that such debtor is (A) insolvent, or unable to meets its obligations as they mature; (B) the subject of a state or

federal proceeding in which a receiver, trustee, or liquidator for the debtor has been appointed; (C) not in compliance with applicable requirements of the 1934 Act, rules of the SEC or any self-regulatory organization with respect to financial responsibility or hypothecation of customers’ securities; or (D) is unable to make the computations that are necessary to establish compliance with financial responsibility or hypothecation rules. SIPC § 5(a)(3), (b)(1).

Consolidation of related liquidations. The filing of a meritorious SIPC application gives the court exclusive jurisdiction over the member and its property, and requires the court to stay any pending bankruptcy, mortgage foreclosure, equity receivership, or other proceeding to reorganize, conserve, or liquidate the member. SIPA § 5(b). If the SEC has any action pending against the member, it may, with SIPC’s consent, be combined with the SIPC proceeding. If no such action is pending, the SEC may intervene as a party to the SIPC proceeding. Sec. Investor Prot. Corp. v. Barbour, 421 U.S. 412, 416 (1975).

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SIPA TRUSTEE (SIPA § 7)Bankruptcy Code Governs Most Proceedings: “To the extent consistent with the provisions of this Act, a liquidation proceeding shall be conducted in accordance with, and as though it were being conducted under chapters 1, 3, and 5 and subchapters I and IIof chapter 7 of title 11 of the [Bankruptcy Code].” SIPA § 6(b).

Trustee for the Estate of BLMIS: Irving H. Picard Lead Counsel: David J. Sheehan

Under SIPA, the trustee has the power to . . . Calculate “net equity” claims of customers Claw back fraudulent transfers from customers Distribute customer property to eligible customers

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Trustee Fees are Paid by SIPC. The Trustee’s fees and costs are paid not by the debtor’s estate, but are advanced by SIPC. 15 U.S.C. § 78fff-3(b)(2). Compensation Requested to Date = $667 million

Customer Property Estate. SIPA superimposes on the Bankruptcy Code a separate customer property estate that takes priority over the debtor’s general estate. SIPC Advances. SIPA guarantees customers a minimum amount of recovery. When a

customer’s ratable share of the recovered customer property is insufficient to satisfy his or her net equity claim, the customer’s claim is supplemented by SIPC. $500,000 or $250,000. SIPC advances to the SIPA trustee up to $500,000 per customer on

a claim for securities, see SIPA § 9(a), and up to $250,000 on a claim for cash, see SIPA §9(a)(1), (d).

Madoff Customer Claims = Claims for Securities ($500,000). “SIPA's implementing regulations bolster the shared view of the Trustee, SIPC, and the SEC that a claimant who has “written confirmation” that securities have been purchased or sold on his or her behalf should be treated as a customer with a claim for securities. 17 C.F.R. §§ 300.501(b)(1), 300.502(a)(1).” In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 236 (2d Cir. 2011).

Before and After the Madoff Ponzi Scheme. Prior to 2008, SIPC had cumulatively advanced $671 million to investors of failed brokerage firms. See SIPC’s Annual Report, App. I (2007). As of February 6, 2015, SIPC has already committed $824 million to allowed claims against Madoff Securities.

Remainder to the General Estate. If the available “customer property and SIPC advances” are insufficient to satisfy a customer’s full

net equity claim, the customer is “entitled . . . to participate in the general estate” as an unsecured creditor. SIPA § 8(c)(1).

Conversely, if any customer property remains “after allocation in accordance with” SIPA's statutory priorities, those assets “become part of the general estate of the debtor.” SIPA § 8(c)(1).

SIGNIFICANT DIFFERENCES FROM ORDINARY BANKRUPTCY

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LIQUIDATION TIMELINE December 11, 2008: Madoff is arrested by the FBI and criminally charged with a multi-billion-dollar securities fraud scheme. December 11, 2008: SEC files District Court complaint against Madoff and BLMIS alleging fraud through investment advisor activities. December 12, 2008: SDNY appoints Lee S. Richards, Esq. as the receiver for the assets of BLMIS. December 15, 2008: SDNY grants SIPC’s application for the liquidation of BLMIS under SIPA. SDNY appoints Irving H. Picard as SIPA trustee for liquidation of BLMIS,

names Baker & Hostetler LLP as Picard’s counsel, removes case to Bankr. SDNY pursuant to SIPA, and removes Lee S. Richards as receiver for BLMIS. January 2, 2008: Picard sends more than 8,000 claim forms to victims of Madoff Ponzi scheme. June 9, 2009: Substantive consolidation of estate of Bernard L. Madoff into the SIPA proceeding for BLMIS. August 5, 2009: SIPC agrees to pay undisputed portion of customer claims up to $500,000. October 28, 2009: SIPC advances exceed half-billion-dollar mark—more than all prior SIPC advances since SIPA was passed in 1970. March 1, 2010: Bankr. SDNY upholds Trustee’s “net equity” method for determining eligibility for distributions from the customer fund. (“Net Equity Decision”). November 1, 2010: Hardship program reinstated and extended. December 17, 2010: Trustee reaches $7.2 billion settlement agreement with Jeffry Picower ($5 billion to Customer Fund; $2.2 to government as forfeiture). May 9, 2011: $1 billion settlement with Fairfield Sentry. July 28, 2011: Tremont settlement increases customer fund by $1.025 billion August 16, 2011: Second Circuit upholds Trustee’s “net equity” method (“Net Equity Decision”). October 5, 2011: First pro-rata interim distribution to BLMIS customers with allowed claims. December 21, 2011: IRS settlement increases customer fund by $326 million. September 19, 2012: Second pro rata interim distribution to customers with allowed claims. December 2012: DOJ appoints Richard C. Breeden as Special Master of the Madoff Victim Fund. March 9, 2013: Third pro rata interim distribution to customers with allowed claims. October 9, 2013: SIPA Trustee files petition for writ of certiorari with the United States Supreme Court seeking review of lower court decisions regarding banks and their

liability in the Madoff Ponzi scheme. April 30, 2014: Deadline for claims to the Madoff Victim Fund. May 5, 2014: Fourth pro rata interim distribution to customers with allowed claims. August 12, 2014: Bankr. SDNY rules on Motion to Dismiss claims against Ezra Merkin and his Madoff feeder funds (“Merkin Decision”). Merkin Decision defines

“knowledge” and “willful blindness” for the purpose of determining clawback liability. November 17, 2014: Herald Fund SPC settlement increases customer fund by $497 million. December 8, 2014: Second Circuit holds that Section 546(e) of the Bankruptcy Code bars Trustee’s clawback claims, except those for actual fraudulent transfer under

§ 548(a)(1)(A). December 8, 2014: Bankr. SDNY upholds Trustee’s treatment of inter-account transfers for the purpose of calculating “net equity.” February 6, 2015: Fifth pro rata interim distribution to customers with allowed claims. February 20, 2015: Second Circuit rejects inflation adjustment to “net equity” calculation. (“Inflation Adjustment Decision”).

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Customer Claims

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CUSTOMER CLAIMS

“Customers” Entitled to Claims against Madoff Estate

How to Calculate Customer Claims Adjustments for Inflation?

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IS THE CLAIMANT A “CUSTOMER”? Only “customers” of a broker-dealer can file claims with the debtor. Sec. Investor Prot. Corp. v. Morgan, Kennedy & Co., 533 F.2d

1314, 1316 (2d Cir. 1976). “Customer.” The term “customer” of a debtor means “any person . . . who has a claim on account of securities received, acquired, or

held by the debtor in the ordinary course of its business as a broker or dealer from or for the securities accounts of such person for safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral, security, or for purposes of effecting transfer.” SIPA § 16(2). It includes a person who

has deposited cash with the debtor for the purpose of purchasing securities; has a claim against the debtor for cash, securities, futures contracts, or options on futures contracts received, acquired, or held in a portfolio margining

account carried as a securities account pursuant to a portfolio margining program approved by the Commission; and has a claim against the debtor arising out of sales or conversions of such securities.

It excludes a person whose claim arises out of transactions with a foreign subsidiary of a member of SIPC; or whose claim for cash or securities which by contract, agreement, or understanding, or by operation of law, is part of the capital of the debtor, or is

subordinated to the claims of any or all creditors of the debtor, notwithstanding that some ground exists for declaring such contract, agreement, or understanding void or voidable in a suit between the claimant and the debtor.

For Example: Sec. Investor Prot. Corp. v. Morgan, Kennedy & Co., 533 F.2d 1314, 1316 (2d Cir. 1976) (Trust is customer of the debtor;

trustees and beneficiaries are not). S.E.C. v. Sec. Investor Prot. Corp., 758 F.3d 357, 368-69 (D.C. Cir. 2014) (Investors were not “customers” because they acted

as lenders by purchasing CDs through an investment fund—i.e., depositing funds into the “capital of the debtor” in exchange for a promise of repayment.).

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MADOFF’S CUSTOMERS In re Bernard L. Madoff Inv. Sec. LLC, 708 F.3d 422, 427 (2d Cir. 2013).

Investors in Madoff feeder funds “do not qualify as BLMIS ‘customers’ under SIPA.” Only direct investors in BLMIS qualify as “customers” and can receive customer property from the SIPA

trustee.

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MADOFF

Philanthropic Org

Feeder Fund LP Feeder FundFeeder FundDirect Investor

Feeder Fund

International

Fund Fund LP Family Investment Vehicle

Fund LLC Fund LPLLCFund

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THE “NET EQUITY” OF MADOFF'S CUSTOMERS “Net Equity” (SIPA § 16(11)): SIPA provides that a customer's “net equity” is determined by:

“(A) calculating the sum which would have been owed by the debtor to such customer if the debtor had liquidated, by sale or purchase on the filing date [of the protective order]—

(i) all securities positions of such customer ... minus (B) any indebtedness of such customer to the debtor on the filing date ...”

Books and Records: SIPA also provides that the trustee should make payments to customers based on “net equity” insofar as the amount owed to the customer is “ascertainable from the books and records of the debtor or [is] otherwise established to the satisfaction of the trustee.” SIPA § 8(b) (emphasis added).

But Statute Leaves Open the Precise Methodology: Second Circuit concluded “that the statutory language does not prescribe a single means of calculating ‘net equity’ that applies in the myriad circumstances that may arise in a SIPA liquidation.. . . Differing fact patterns will inevitably call for differing approaches to ascertaining the fairest method for approximating ‘net equity,’ as defined by SIPA.” In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 235 (2d Cir. 2011).

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“NET EQUITY” cont.Competing Methods: Net Investment Method (Trustee)

“Net Equity”: Customer Claim = Deposits – Withdrawals. (i.e., no recovery of amounts above principal) Rationale. Any dollar paid to reimburse amounts above principal is a dollar no longer available to pay claims for money

actually invested. No legal effect should be given to Madoff machinations. Net Losers > Claims Allowed: A customer who withdrew less than she deposited over the course of her investment with Madoff

Securities has a net-equity claim and may be entitled to disbursements from the customer property estate for the amount of that net equity.

Net Winners > Claims Denied: If the Trustee, having engaged in in the same “netting” process, determines that account withdrawals exceeded deposits, then that customer’s net equity claim is denied and the Trustee brings an avoidance action to recover amounts above principal.

Last Statement Method (Customers) “Net Equity”: Customer claim equals the amount shown on their last BLMIS statement before its collapse (November

2008 Statement). Rationale: Customers have a legitimate expectation that their customer statements were accurate; the regulations affirm

this expectation in the context of a “claim for securities.” 17 C.F.R. § 300.502 (“Where the Debtor held cash in an account for a customer, the customer has a ‘claim for securities’ with respect to any authorized securities purchase: (1) If the Debtor has sent written confirmation to the customer that the securities in question have been purchased for or sold to the customer's account[.]”).

Net Losers > Claims Allowed: Anyone with a balance remaining on their last account statement (minus any indebtedness). Net Winners: No one.

Both Methods Were Applied by Prior Courts. See e.g., In re New Times Sec. Servs., Inc., 371 F.3d 68 (2d Cir. 2004) Court upheld SIPA Trustee dividing Ponzi scheme victims-claimants into two groups and applying different methods to each group:

(1) Claimants misled to believe they were investing in real mutual funds; and Last Statement Method

(2) Claimants who were “fraudulently induced” to buy “shares in bogus mutual funds” that did not exist. Net Investment Method

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THE “NET EQUITY” METHOD IN MADOFF Second Circuit Decision: Net Investment Method applies.

In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011). Books and Records Demonstrate that Last Statement is a Fiction. Net equity is calculated by reference to the

debtor’s book and records, and Madoff’s books and records “reveal that the last statements are fiction,” except for the “unmanipulated withdrawals and deposits.” Id. at 237-38.

Net Investment Method is Consistent with SIPA’s Purpose. “Because the main purpose of determining “net equity” is to achieve a fair allocation of the available resources among the customers, the Trustee properly rejected the Last Statement Method as it would have undermined this objective.” Id. at 240.

Last Statement Method Inequitable. Result of last statement method “would be that those who had already withdrawn cash deriving from imaginary profits in excess of their initial investment would derive additional benefit at the expense of those customers who had not withdrawn funds before the fraud was exposed.” Id. at 238.

Distinguishing New Times: “[T]he objecting BLMIS claimants are unlike the appellants in New Times I because their customer statements reflected investments in real stocks listed on the Standard & Poor's 100 Index. However, the objecting BLMIS claimants are similarly situated to the New Times appellants in a crucial respect: assessing “net equity” based on their customer statements would require the Trustee to establish each claimant's “net equity” based on a fiction created by the perpetrator of the fraud. Id. at 241.

But the Issue is Still Open for Future Cases: “In holding that it was proper for Mr. Picard to reject the Last Statement Method, we expressly do not hold that such a method of calculating “net equity” is inherently impermissible. To the contrary, a customer’s last account statement will likely be the most appropriate means of calculating “net equity” in more conventional cases.” Id. at 238.

Clearly Inferior. “It therefore appears to us that in many circumstances a SIPA trustee may, and should, exercise some discretion in determining what method, or combination of methods, will best measure “net equity.” . . . “[A] reviewing court could and should accord a degree of deference to such an exercise of discretion so long as the method chosen by the trustee allocates “net equity” among the competing claimants in a manner that is not clearly inferior to other methods under consideration.” Id. at 238 n. 5.

Cert. Petition Denied.

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INFLATION ADJUSTMENT Controlling for the Effects of Inflation. A dollar invested in 1980 is worth more than a dollar invested in 2008.

. . right? SEC Supports an Inflation Adjustment. SEC agreed that the statute permitted an inflation adjustment and

urged the court to avoid favoring later customers over earlier customers. In re Bernard L. Madoff Investment Securities LLC, Case No. 14-97, at 11 (2d Cir. Feb. 20, 2015).

Trustee’s Expert’s Calculations. Inflation adjustment would increase allowed claims of early investors by $2.9 billion, and reallocate approximately $575 million to early investors (assuming $10 billion customer property pool).

Second Circuit Holding. “We conclude that SIPA’s scheme disallows an inflation adjustment as a matter of law.” In re Bernard L. Madoff Investment Securities LLC, Case No. 14-97, at 16 (2d Cir. Feb. 20, 2015). Although “SIPA does not address the possibility of an inflation adjustment, . . . [a]n inflation adjustment

goes beyond the scope of SIPA’s intended protections and is inconsistent with SIPA’s statutory framework.” Id. at 13.

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SIPA’s Intended Protections SIPA’s Statutory Framework

SIPA’s purpose is to “remedy broker-dealer insolvencies—not necessarily broker-dealer fraud. . . .”

“Net Equity” definition makes no mention of an inflation adjustment.

“Although SIPA defends investors from a broker-dealer’s failure to perform its custodial role over customer property, it does not otherwise shield investors from loss. Instead the Act merely restores investors to what their position would have been in the absence of liquidation.”

Other portions of SIPA do address inflation adjustments. See SIPA § 9(e) (providing procedures for SIPA to periodically “determine whether an inflation adjustment to the standard maximum cash advancement amount is appropriate.”)

“‘SIPA was not designed to provide full protection to all victims of a brokerage collapse,’ and ‘arguments based solely on the equities are not, standing alone, persuasive.’” . . . . “The purpose of determining net equity under SIPA is to facilitate the proportional distribution of customer property actually held by the broker, not to restore to customers the value of the property that they originally invested.”

SIPA is likely silent on a “net equity” inflation adjustment because in a typicalbroker-dealer failure, “an inflation adjustment would be nonsensical” because “the securities have values [as of the date of the filing] that already incorporate economic circumstances such as inflation.”

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Claims against Customers

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TRUSTEE'S CLAWBACK POWER SIPA borrows heavily from the Bankruptcy Code, specifically incorporating the Code’s

avoidance powers: SIPA § 8(c)(3) (“[T]he [SIPA] trustee may recover any [customer property] transferred by the debtor . . . if

and to the extent that such transfer is voidable or void under the provisions of title 11 of the [Bankruptcy Code].”);

SIPA § 7(a) (trustee is vested “with the same powers and title with respect to the debtor and the property of the debtor, including the same rights to avoid preferences, as a trustee in a case under [the Bankruptcy Code]”);

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 476 B.R. 715, 722 (S.D.N.Y. 2012), supplemented (May 15, 2012) (“SIPA expressly incorporates the limitations Title 11 places on trustee’s powers, including §546(e).”).

SIPA also imposes a significant standing limitation: “Whenever customer property is not sufficient to pay in full the [customers’ allowed net equity claims and reimbursement of certain, but not all, types of SIPC advances], the trustee may recover any property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the provisions of Title 11.” SIPA § 8(c)(3) (emphasis added).

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THE MADOFF TRUSTEE’S CLAWBACKCLAIMS The Trustee sued the customers to recover billions of dollars in account withdrawals from Madoff Securities. Good Faith Defendants (and their Subsequent Transferees):

11 U.S.C. §§ 547(b), 550, and 551. Seeking avoidance and recovery of full amount of preference payments made during the 90 days preceding the liquidation;

11 U.S.C. §§ 548(a)(1)(A), 550, and 551. Seeking avoidance and recovery of “fictitious profits” portion of fraudulent transfers made during the two years preceding the liquidation with actual intent to default existing or future creditors;

11 U.S.C. §§ 548(a)(1)(B), 550, and 551. Seeking avoidance and recovery of “fictitious profits” portion of fraudulent transfers made during the two years preceding the liquidation where BMLIS was insolvent and received less than reasonably equivalent value; and

11 U.S.C. §§ 544(b), 550, 551, and NY Debtor and Creditor Law. Seeking avoidance and recovery under state law—made applicable through Section 544(b) of the Bankruptcy Code—of “fictitious profits” portion of fraudulent conveyances made during the six years preceding the liquidation.

Bad Faith Defendants (and their Subsequent Transferees): 11 U.S.C. §§ 547(b), 550, and 551. Seeking avoidance and recovery of full amount of preference payments made during the 90

days preceding the liquidation. 11 U.S.C. §§ 548(a)(1)(A), 550, and 551. Seeking avoidance and recovery of the full amount of fraudulent transfers made

during the two years preceding the liquidation with actual intent to defraud existing or future creditors; 11 U.S.C. §§ 548(a)(1)(B), 550, and 551. Seeking avoidance and recovery of the full amount of fraudulent transfers made

during the two years preceding the liquidation where BMLIS was insolvent and received less than reasonably equivalent value; 11 U.S.C. §§ 544(b), 550, 551, and NY Debtor and Creditor Law. Seeking avoidance and recovery under state law—made

applicable through Section 544(b) of the Bankruptcy Code—of full amount of fraudulent conveyances made during the six years preceding the liquidation.

11 U.S.C. §§ 502(b)(1); SIPA §§ 78fff(b), 78fff-1(a), and Fed. R. Bankr. Procedure 3007(b). Statutory or Equitable Disallowance of Defendant’s net equity claims.

11 U.S.C. §§ 105(a), and 510(c). Equitable Subordination of defendant’s net equity claims.

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Defenses to the Trustee’s Claims

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11 U.S.C. § 546(e) The Value Defense Extraterritoriality Trustee Standing

DEFENSES TO THE TRUSTEE'S CLAIMS

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11 U.S.C. § 546(e) AND THE REACH OF CLAWBACK ACTIONS 546(e) Prohibition. Bankruptcy Code Section 546(e) prohibits a trustee from

recovering stockbroker transfers that are made in connection with securities contracts or are settlement payments: “The trustee may not avoid a transfer that is a . . . settlement payment, as defined in section 101 or 741 of

this title, made by . . . a . . . stockbroker . . . or that is a transfer made by . . . a . . . stockbroker . . . in connection with a securities contract, as defined in section 741(7) . . . that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.”

Statutory Safe Harbor. 546(e) limits clawback claims except those claims permitted by Section 548(a)(1)(A) (intentional fraudulent transfer claims under federal law.). Effectively 546(e) limits these claims to clawback claims for transfers that occurred up to two years before the date of filing.

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CLAIMS THAT SURVIVE § 546(e) Good Faith Defendants (and their Subsequent Transferees):

11 U.S.C. §§ 547(b), 550, and 551. Seeking avoidance and recovery of full amount of preference payments made during the 90 days preceding the liquidation;

11 U.S.C. §§ 548(a)(1)(A), 550, and 551. Seeking avoidance and recovery of “fictitious profits” portion of fraudulent transfers made during the two years preceding the liquidation with actual intent to default existing or future creditors;

11 U.S.C. §§ 548(a)(1)(B), 550, and 551. Seeking avoidance and recovery of “fictitious profits” portion of fraudulent transfers made during the two years preceding the liquidation where BMLIS was insolvent and received less than reasonably equivalent value; and

11 U.S.C. §§ 544(b), 550, 551, and NY Debtor and Creditor Law. Seeking avoidance and recovery under state law—made applicable through Section 544(b) of the Bankruptcy Code—of “fictitious profits” portion of fraudulent conveyances made during the six years preceding the liquidation.

Bad Faith Defendants (and their Subsequent Transferees): 11 U.S.C. §§ 547(b), 550, and 551. Seeking avoidance and recovery of full amount of

preference payments made during the 90 days preceding the liquidation. 11 U.S.C. §§ 548(a)(1)(A), 550, and 551. Seeking avoidance and recovery of the full amount of

fraudulent transfers made during the two years preceding the liquidation with actual intent to defraud existing or future creditors;

11 U.S.C. §§ 548(a)(1)(B), 550, and 551. Seeking avoidance and recovery of the full amount of fraudulent transfers made during the two years preceding the liquidation where BMLIS was insolvent and received less than reasonably equivalent value;

11 U.S.C. §§ 544(b), 550, 551, and NY Debtor and Creditor Law. Seeking avoidance and recovery under state law—made applicable through Section 544(b) of the Bankruptcy Code—of full amount of fraudulent conveyances made during the six years preceding the liquidation.

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Claims that would survive

546(e)(assuming defendant

lacked actual knowledge of the fraud)

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546(e) Applies. Second Circuit affirmed application of 546(e) to limit trustee clawback claims. In re Bernard L. Madoff Inv. Sec. LLC, 773 F.3d 411 (2d Cir. 2014). “The clawback defendants, having every reason to believe that BLMIS was actually engaged in the business of

effecting securities transactions, have every right to avail themselves of all the protections afforded to the clients of stockbrokers, including the protection offered by § 546(e).” Id. at 420.

“[B]y enacting § 546(e), Congress provided that, for a very broad range of securities-related transfers, the interest in finality is sufficiently important that they cannot be avoided by a bankruptcy trustee at all, except as actual fraudulent transfers under § 548(a)(1)(A). We are obliged to respect the balance Congress struck among these complex competing considerations.” Id. at 423.

Actual Knowledge Exception to 546(e). Where a trustee alleges defendant had actual knowledge of the fraud, 546(e) does not apply. In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. 117, 138 (Bankr. S.D.N.Y. 2014) (“If, however, an initial (or subsequent) transferee had actual knowledge of Madoff's Ponzi scheme, he cannot avail himself of the § 546(e) safe harbor, and the Trustee can avoid and recover preferences and actual and constructive fraudulent transfers to the full extent permitted by state and federal bankruptcy law.”) Actual Knowledge = High Level of Certainty. The actual knowledge exception is narrowly construed. In re Bernard

L. Madoff Inv. Sec. LLC, 515 B.R. 117, 139 (Bankr. S.D.N.Y. 2014) (“Thus, ‘actual knowledge’ implies a high level of certainty and absence of any substantial doubt regarding the existence of a fact.”)

$4 Billion Impact. Trustee is claiming that 546(e) ruling has barred a total of $4 billion in clawback claims. Cert. Petition Filed. Trustee and SIPC each filed petitions for writ of certiorari. Responses are due in early May 2015.

546(e) DECISION

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THE VALUE DEFENSE The Value Defense. Section 548(c) provides a defense to a clawback claim brought under

Bankruptcy Code § 548(a) to the extent the transferee “takes for value and in good faith.” 11 U.S.C. § 548(c).

Burden of Proof. Ordinarily, the transferee bears the burden of proving the defense, and an objective,

reasonable investor standard applies. Christian Bros. High Sch. Endowment v. Bayou No Leverage Fund, LLC (In re Bayou Group, LLC), 439 B.R. 284, 308, 313 (S.D.N.Y.2010).

In the case of BLMIS, however, the District Court modified the good faith defense by requiring the Trustee to plead and prove the transferee's lack of good faith. SIPC v. BLMIS,2014 WL 1651952, at *5 (S.D.N.Y. Apr. 27, 2014) (“Good Faith Decision”).

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548(c) - VALUE “Value.” “‘Value’ means property, or satisfaction or securing of a present or antecedent debt of the debtor, but

does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor.” 11 U.S.C. § 548(d)(2)(A). “Debt.” Bankruptcy Code defines “debt” as “liability on a claim.” 11 U.S.C. § 101(12). “Claim.” “Claim” means “right to payment, whether or not such right is reduced to judgment, liquidated,

unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” 11 U.S.C. § 101(5)(A).

“Value” = Principal Not Profits. Picard v. Greiff, 476 B.R. 715, 725 (S.D.N.Y. 2012) (Any “transfers from Madoff Securities to

defendants that exceeded the return of defendants’ principal . . . Were not ‘for value’” for purposes of 548(c)).

In re Bayou Grp., LLC (“Bayou IV”), 439 B.R. 284, 337 (S.D.N.Y.2010) (“The pre-judgment interest remedy does not provide an independent cause of action that accrues to Appellants' benefit at the moment of redemption.”).

“Value” = Payment in Satisfaction of Claims? In cases involving Ponzi schemes, courts historically held payments in satisfaction of state law rescission claims are recognized as providing “value” to the estate . . . Bayou IV, 439 B.R. at 309 (Defendants “gave value in the form of their initial investments, and have tort

claims of rescission to recover all of their initial investment based on fraudulent inducement.”) Donell v. Kowell, 533 F.3d 762, 772 (9th Cir.2008) (“Payments up to the amount of the initial investment

are considered to be exchanged for ‘reasonably equivalent value,’ and thus not fraudulent, because they proportionally reduce the investors' rights to restitution.”).

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548(c) – VALUE cont. The Antecedent Debt Opinion. Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC,

499 B.R. 416 (S.D.N.Y. 2013) Holdings:

“Value” ≠ Amounts Above Principal. “Claims against the general Madoff Securities estate do not constitute “value” within the meaning of section 548(c) to the extent that they would be used to withhold fraudulent transfers owing to the customer property estate under SIPA.” Id. at 430.

“Value” ≠ Face Value of Inter-Account Transfers. “[P]re-reach-back-period inter-account transfers of amounts exceeding principal in the account of the sender continue to be fictitious profits, not principal, in the account of the recipient, and therefore do not constitute antecedent debt for the recipient of the funds.” Id.

Rationale was largely SIPA and it’s definition of “net equity.” “Although the Trustee has the same authority to avoid transfers as a bankruptcy trustee, those powers must be

interpreted through the lens of SIPA’s statutory scheme.” Id. at 423. “More fundamentally, the definition of net equity and the definition of claims that can provide ‘value’ to the customer

property estate are inherently intertwined . . . .” Id. at 424. “The structure of SIPA supports this reading.” Id. “[T]his outcome is a logical application of the policy motivating SIPA.” Id. at 425.

But did the court err in relying on SIPA to interpret “value” under the bankruptcy code? In re Bernard L. Madoff Inv. Sec. LLC, 773 F.3d 411, 423 (2d Cir. 2014) (“In our earlier decision, we interpreted “net

equity” in a manner that would harmonize it with the SIPA statutory framework as a whole. . . . Section 546(e), however, is part of the Bankruptcy Code, not SIPA, and was not in issue in [the Net Equity Decision]. This is important because, in enacting the Bankruptcy Code, Congress struck careful balances between the need for an equitable result for the debtor and its creditors, and the need for finality. . . . We are obliged to respect the balance Congress struck among these complex competing considerations.”)

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548(c) – GOOD FAITH “Good Faith”? “The Bankruptcy Code does not define ‘good faith’ and the legislative history related to section 548(c) never defines, and

scarcely addresses, good faith.” In re Bayou Grp., LLC, 439 B.R. 284, 309 (S.D.N.Y. 2010) (internal quotations omitted). Bankruptcy Good Faith - Objective. Bankruptcy Courts determining whether a transferee acted in good faith will ask: Whether the

alleged “red flag” information would have put a reasonably prudent transferee (objective) on inquiry notice that the debtor was insolvent or that it had a fraudulent purpose in making the payments to the transferee. Whether the transferee is on inquiry notice is informed by “the standards, norms, practices, sophistication, and experience generally possessed by participants in the transferee's industry or class.” In re Bayou Grp., LLC, 439 B.R. 284, 313 (S.D.N.Y. 2010).

SIPA Good Faith - Subjective. “[T]o establish a lack of ‘good faith’ on the part of securities customers under § 548(c) in the context of a SIPA bankruptcy, the trustee must show that the customer either actually knew of the broker's fraud or ‘willfully blinded’ himself to it.” Picard v. Avellino, 469 B.R. 408, 412 (S.D.N.Y. 2012); see also Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 516 B.R. 18, 21 (S.D.N.Y. 2014). This is because under SIPA, the “good faith” standard is subjective rather than objective “because the securities laws do not

ordinarily impose any duty on investors to investigate their brokers, [and] those laws foreclose any interpretation of ‘good faith’ that creates liability for a negligent failure to so inquire.” Picard v. Avellino, 469 B.R. 408, 412 (S.D.N.Y.2012); accord Picard v. Katz,462 B.R. 447, 455 (S.D.N.Y. 2011).

“Actual Knowledge” = “‘[A]ctual knowledge’ implies a high level of certainty and absence of any substantial doubt regarding the existence of a fact.” In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. 117, 139 (Bankr. S.D.N.Y. 2014).

“Willful Blindness” = “[S]trong suspicion but some level of doubt or uncertainty of the existence of a fact and the deliberate failure to acquire actual knowledge of its existence.” In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. 117, 140 (Bankr. S.D.N.Y. 2014).

Principal vs. Profits. The “good faith” issue is not implicated when the Trustee seeks to recover only amounts above principal. Even if the transfer was received in “good faith,” the transferee did not give “value” for the transfer of net profits, and cannot, therefore, avail himself of the good faith defense. See Katz, 462 B.R. at 455–56. The “good faith” issue is, however, implicated where the Trustee seeks to recover the repayment of principal to the transferee

because the transferee gave value to the extent it deposited cash with BLMIS. In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. 117, 138-39 (Bankr. S.D.N.Y. 2014)

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EXTRATERRITORIALITY DEFENSE In re Bernard L. Madoff Investment Sec., LLC, No. 1:12-ms-00115-JSR, Dkt. No. 551

(S.D.N.Y. July 7, 2014) Facts:

Trustee attempts to claw back subsequent transfers between foreign entities under 11 U.S.C. § 550(a)(2) (i.e., Madoff > Foreign Feeder Fund > Foreign Investor.) A group of consolidated customers moved to dismiss the Trustee’s claims to claw back subsequent transfers between two foreign entities. The issue was withdrawn to the S.D.N.Y. and Judge Rakoff.

Alternative Holdings: 550(a)(2) does not apply extraterritorially to transfers between two foreign entities: “The Court concludes

that (1) the application of section 550(a)(2) [(empowering a trustee to claw back subsequent transfers)] here would constitute extraterritorial application of the statute, and (2) Congress did not clearly intend such an application.” Id. at 4.

Considerations of international comity would preclude extraterritorial application of 550(a)(2). “Moreover, given the factual circumstances at issue in these cases, even if section 550(a)(2) could be applied extraterritorially, such an application would be precluded here by considerations of international comity.” Id.

Result = A Pending Motion to Dismiss. Rakoff noted before concluding his opinion: “[U]nless the Trustee can put forth specific facts suggesting a domestic transfer, his recovery actions seeking foreign transfers should be dismissed.” Id. at 19 n. 4. That motion to dismiss is now pending before the Bankruptcy Court.

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TRUSTEE STANDING Trustee standing to bring a clawback action: “Whenever customer property is not sufficient to pay in full the [customers’ allowed net

equity claims and reimbursement of certain, but not all, types of SIPC advances], the trustee may recover any property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the provisions of Title 11.” SIPA § 8(c)(3) (emphasis added).

Does Picard have standing to bring his clawback actions? Customer Property (Feb. 6, 2015) = $10.551 billion Madoff Victim Fund = $4 billion Allowed Claims = ($13.338 billion)

Potential Allowed Claims as High as $17.5 billion? Trustee has indicated that total allowed claims could be as high as $17.5 billion

Assignment of Allowed Claims to the Trustee. But how many of the allowed claims have been assigned to the Trustee? See Blumenfeld Settlement.

Timing of Calculation. Bevill, Bresler. “The date to be used for valuation of the fund of customer property is the SIPA filing date.” Matter of Bevill,

Bresler & Schulman, Inc., 83 B.R. 880, 893 (D.N.J. 1988). But the court based its decision largely on SIPA’s purpose and not its plain language.

Picard. “But it has long been held that ‘the fund of customer property shall be valued for the purposes of [SIPA § 8(c)(3)] as of [the filing date],’” Picard v. Flinn Investments, LLC, 463 B.R. 280, 284 (S.D.N.Y. 2011) (quoting In re Bevill, Bresler & Schulman, Inc.,83 B.R. at 898). Only issue before the court was whether or not to withdraw the reference on the issue.

Current Legal Challenge. Several clawback defendants filed a motion to dismiss, arguing that the Trustee lacks standing at this time. Intervenors argued that a hearing on the issue of standing should be postponed until “the time of recovery.”

Madoff Prediction. Taking into account (1) investor withdrawals prior to BLMIS’ collapse, and (2) property distributed as part of BLMIS’ Bankruptcy, Madoff predicts in a post-arrest interview that “people who were with me will make better than if they’d been in the market” during the meltdown of 2008. Will his prediction prove correct?

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Limitations on Related Claims

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LIMITATIONS ON RELATED CLAIMS In Pari Delicto SLUSA

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LIMITATIONS ON TRUSTEE'S COMMON LAW SECURITIES CLAIMS – IN PARIDELICTO In re Bernard L. Madoff Inv. Sec. LLC., 721 F.3d 54 (2d Cir. 2013) - Picard sued several financial institutions in his capacity as

Trustee under SIPA. He brought New York state law claims including unjust enrichment, breach of fiduciary duty, aiding and abetting fraud, negligence, and contribution. Each claim was alternatively brought on behalf of BLMIS, the Madoff Customers, and SIPC as subrogree to customer claims. Id. at 57-58, 62. Claims filed on behalf of BLMIS:

Majority of Trustee’s claims barred by doctrine of in pari delicto: BLMIS’ misconduct was imputed to the Trustee because the Trustee “stands in the shoes of BLMIS and may not assert claims

against third parties for participating in a fraud that BLMIS orchestrated.” Id. at 63-64. Remaining contribution claim denied:

“SIPA provides no right to contribution, and it is settled in this Circuit that there is no claim for contribution unless the operative federal statute provides one.” Id. at 65.

Claims filed on behalf of Madoff Customers: Denied for lack of standing:

A bankruptcy trustee has no standing generally to sue third parties on behalf of the estate's creditors, but may only assert claims held by the bankrupt corporation itself.

SIPA “does not confer upon SIPA trustees a power, denied all other bankruptcy trustees, to sue third parties on claims that belong to persons other than the estate.” Id. at 67, 72.

Claims filed on behalf of SIPC: Subrogation denied for lack of statutory authority.

Neither SIPA nor its legislative history supported the Trustee’s claim that SIPC was subrogated to the customers’ claims against the financial institutions. Id. at 74.

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LIMITATIONS ON INVESTORS' COMMON LAW CLAIMS - SLUSA The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) preempts state law

securities class actions. SLUSA provides that no action seeking damages “based upon the statutory or common law of any State or subdivision thereof” on behalf of more than 50 persons or a class “may be maintained in any State or Federal court by any private party alleging ... a misrepresentation or omission of a material fact in connection with the purchase or sale of acovered security.” 15 U.S.C. § 78bb(f)(1). “Covered Security.” A “covered security” is defined as a security that meets the standards

of the Securities Act of 1933. 15 U.S.C. § 78bb(f)(5)(E). “Under § 18(b) of the Securities Act of 1933, a covered security is one that is ‘listed, or authorized for listing, on [the national exchanges]’ or that is ‘issued by an investment company that is registered, or that has filed a registration statement, under the Investment Company Act of 1940.’ ” Romano v. Kazacos, 609 F.3d 512, 520 n. 3 (2d Cir. 2010) (quoting 15 U.S.C. § 77r(b)).

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LIMITATIONS ON INVESTORS' COMMON LAW CLAIMS – SLUSA'S APPLICATION TO MADOFF In re Herald, 730 F.3d 112 (2d Cir. 2013) (J. Rakoff, writing for Second Circuit) - Investors in Madoff Securities

feeder funds brought class actions claims based on state law theories of fraud and breach of fiduciary duties against two banks that held the Madoff Securities accounts. Claims Preempted. Plaintiffs’ claims were preempted by SLUSA because the complaints alleged

“misrepresentation[s] or omission[s] of a material fact in connection with the purchase or sale of a covered security.’” Id. at 119.

The complaints allege that, as Madoff’s bankers, JPMorgan and BNY had not only ignored “red flags” of fraud, but also: “had actual knowledge that [Madoff Securities] was violating its fiduciary duties and committing fraud.” . . . furthered Madoff's fraud by “funnel[ing] hundreds of millions of dollars to Madoff” and Madoff Securities. . . . “kept their mouths shut to ensure their own profits at the expense of Plaintiffs and the other members of the

Class.” “ignored the evidence of fraud and failed to disclose the fraud” because the bank “was collecting such large

fees”

Investor > Feeder Fund > Madoff > Covered Securities. Interests in feeder funds are not covered securities, but because Madoff purported to invest in covered securities, SLUSA applied. Id. at 118.

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LIMITATIONS ON INVESTORS' COMMON LAW CLAIMS – SLUSA – SUPREME COURT WEIGHS IN Chadbourne & Parke LLP v. Troice (“Troice”), 134 S. Ct. 1058 (2014) - Investors in four consolidated civil class

actions brought claims against firms, individuals, insurance brokers, and law firms who helped sell certificates of deposit used to run the Stanford Ponzi scheme. Defendants argued that the investors’ claims were preempted by SLUSA. Investors alleged that that they purchased CDs (uncovered securities), with the understanding that

the Bank would use the proceeds to purchase safe and secure securities (covered securities) The investors were told that the CDs were safer than other CDs, could be redeemed at any time, and

that the proceeds would be invested “in safe, secure, and liquid assets.” The investors claimed that these falsehoods were material to their decision to purchase the CDs.

SLUSA did not apply because the investors did not allege that the defendants’ misrepresentations led the victims to buy or to sell (or to maintain positions in) covered securities. SLUSA phrase “‘material fact in connection with the purchase or sale’ suggests a connection that

matters. And for present purposes, a connection matters where the misrepresentation makes a significant difference to someone’s decision to purchase or to sell a covered security, not to purchase or to sell an uncovered security, something about which the Act expresses no concern.” Id. at 1066. (emphasis added)

At most, the complaints “alleged misrepresentations about the Bank’s ownership of covered securities—fraudulent assurances that the Bank owned, would own, or would use the victims’ money to buy for itself shares of covered securities . . . Consequently, there is not the necessary “connection” between the materiality of the misstatements and the statutorily required “purchase or sale of a covered security” by the victims. Id. at 1071.

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LIMITATIONS ON INVESTORS' COMMON LAW CLAIMS – SLUSA – SECOND CIRCUIT REACTS TO TROICE Second Circuit Denies rehearing based on Supreme Court’s Troice

Decision. Distinguishing Troice – Stanford victims were never induced to invest in covered

securities; Madoff victims were, albeit through intermediary funds. “[T]he closest that the plaintiffs in Troice could get to statutorily defined ‘covered

securities’ was the allegation that Stanford induced purchase of the uncovered securities by, among other misrepresentations, vague promises that the Stanford Investment Bank had significant holdings in various covered securities.” In re Herald, 753 F.3d 110, 113 (2d Cir. 2014).

“Madoff Securities, by contrast, fraudulently induced attempted investments in covered securities, albeit through feeder funds (not alleged in the instant complaints as anything other than intermediaries), and the defendant banks are alleged to have furthered that scheme. Madoff Securities’ victims thus ‘tried to take ... an ownership position in the statutorily relevant securities,’ i.e., covered securities. That Madoff Securities (a Ponzi scheme) fraudulently failed to follow through on its promise to place the investments in covered securities does not in any respect remove this case from the ambit of SLUSAas defined in Troice.”

Cert. Petition Denied (3/31/2015)

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The MVF: Recovery for “Victims”

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GOVERNMENT REMISSION FUNDS Restitution: Court Managed. Restitution to persons “directly and proximately harmed” by fraud is ordinarily mandatory. See

18 U.S.C. § 3663A(a)(1). In such a case, the Court is authorized to determine a restitution amount and a schedule of victims and payments at the time of sentencing. Although restitution and forfeiture are separate, and the Court may appropriately order a defendant to both disgorge his wrongful profits (forfeiture) and repay his victims (restitution), the Government is authorized to restore forfeited assets to victims by applying such funds to a restitution order entered as part of sentencing. “Impracticable” Exception (18 U.S.C. § 3663A(c)(3)). There are cases, however, where the Court may determine

that an order of restitution is not appropriate because the “number of identifiable victims is so large as to make restitution impracticable,” or because the determination of complex issues of fact related to the cause or amount of the victim’s losses would complicate or prolong the sentencing process to a degree that the need to provide restitution to any victim is outweighed by the burden on the sentencing process,” 18 U.S.C. § 3663A(c)(3). Where restitution is found to be impracticable, the Government is authorized to compensate victims through the process of remission authorized under the forfeiture statutes and related regulations.

Remission: Attorney General Managed (21 U.S.C. § 853(i); 28 C.F.R. § 9.1 et seq.). 21 U.S.C. § 853(i) authorizes the Attorney General to “grant petitions for mitigation or remission of forfeiture, restore forfeited property to victims, or take any other action to protect the rights of innocent victims which is in the interest of justice” and is not otherwise inconsistent with the forfeiture statutes. Victim’s Burden to Prove Loss. The victim must satisfactorily demonstrate that: (1) he or she incurred pecuniary

loss of a specific amount; (2) the pecuniary loss was a direct result of the illegal act; (3) the victim did not knowingly contribute in, participate in, or benefit from, or act in a wilfully blind manner toward the commission of the offense; (4) the victim has not been compensated for the loss; and (5) the victim does not have recourse to other assets to obtain compensation. 28 C.F.R. §§ 9.2(v), 9.8(a).

MVF > Remission Fund (18 U.S.C. § 853(i)). The DOJ requested that the Court forego its ordinary restitution process under 18 U.S.C. § 3663A, and permit the Government to proceed via the forfeiture and remission process outlined in 21 U.S.C. §853(i) and C.F.R. 9.1 et seq. See e.g. United States v. DiPascali, No. 09 Cr. 764, Dkt. Nos. 84, 89 (S.D.N.Y. 2012).

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THE MADOFF VICTIM FUNDDOJ. Attorney General is acting through his delegee, the Chief of the Asset Forfeiture and Money Laundering Section of the Department of Justice’s Criminal Division

Special Master, Richard C. Breeden (former Chairman of SEC from 1989-1993) Appointed in December 2012 Breeden’s Firm > RCB Fund Services, LLC

Fund = $4 Billion. Approximately $4 billion for distribution Funds collected from forfeitures to the DOJ obtained in the SDNY in cases related to the Madoff Ponzi scheme.

Claims 63,553 Claims

21,822 from US residents 41,731 from foreign nationals

Claimed Losses Exceed $76.654 Billion Breeden estimates that investors obtained exposure to BLMIS through more than 1,000 different

investment vehicles. 55% of claims reviewed to date are at least two tiers away from Madoff Securities—i.e., Investor >

Investment Fund > Feeder Fund > Madoff SecuritiesRelevant Dates

April 30, 2014: Claims deadline February 2, 2015: 21,000 of the claims have been reviewed (in total there are 3.3 million pages of documents to

review) Only 20% of claimed losses in this first set of reviewed claims have been determined ineligible

Eligibility Determination? Claimants will receive an Informal Notice of Determination to fix deficiencies

25% of claimants will receive an Informal Notice before the end of the calendar year (previously estimated to occur in Q1 2015)

Formal Notice of Determination (including opportunity to “cure” if necessary)

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OPEN ISSUES Review of MVF Determinations. Claimants are entitled to reconsideration of an MVF determination under 28 C.F.R. § 9.8(a)(3), and the

ultimate decision is subject to judicial review under the APA. Broad Discretion. Courts in the Second Circuit have recognized the broad discretion 18 U.S.C. § 853(i) grants the Attorney

General. See e.g. United States v. Gordon, No. 03 CR. 1494 (GEL), 2005 WL 2759845, at *3 (S.D.N.Y. Oct. 19, 2005) (21 U.S.C. 853(i) “grants the Attorney General extraordinarily broad discretion over the handling of forfeited funds.”) aff’d sub nom. DSI Associates LLC v. United States, 496 F.3d 175 (2d Cir. 2007).

But within Limits of Statutes and Regulations. If the rule was adopted by notice and comment then it is considered a “legislative rule” binding on the agency and can be changed only with notice and comment. If the agency acts contrary to the rule, then it has acted contrary to law under the APA. See e.g., Fort Stewart Schs. v. FLRA, 495 U.S. 641, 654 (1990) (“It is a familiar rule of administrative law that an agency must abide by its own regulations.”).

To be Determined – Reconciling Actual Victim Loss w/ the Justice Department’s Regulations Who is a Victim?

The MVF asserts that only the “underlying investors” (i.e., no feeder funds, family investment vehicles, limited partners, trusts, etc.) are “victims” entitled to remission. The “MVF will look through issues of formal title to determine whose funds were ultimately lost in the fraud at Madoff Securities.” http://www.madoffvictimfund.com/MVF_Form_IND_v2.pdf.

But “victim” is defined much broader as “a person who has incurred a pecuniary loss as a direct result of the commission of the offense underlying a forfeiture.” 28 C.F.R. § 9.2. Moreover, a “person” is defined as “an individual, partnership, corporation, joint business enterprise, estate, or other legal entity capable of owning property.” Id.

How to Calculate Loss? The “MVF will use a ‘cash-in, cash-out’ methodology to measure your loss. We start with all your cash investments in

Madoff Securities and then subtract all your withdrawals. The resulting ‘net investment’ will be your claim, less all recoveries you have already received, including payments from the SIPC or the bankruptcy trustee.” http://www.madoffvictimfund.com/Nov18_Letter.shtml.

But by regulation, the amount of pecuniary loss that can be granted to a victim through remission “is limited to the fair market value of the property of which the victim was deprived as of the date of the occurrence of the loss. No allowance shall be made for interest forgone or for collateral expenses incurred to recover lost property or to seek other recompense.”28 C.F.R. § 9.8(c).

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Our Team

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Bibliography

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BIBLIOGRAPHYKey Judicial Principals and Holdings in Ponzi Scheme Liquidation Proceedings Purposes of SIPA

In re New Times Sec. Servs., Inc., 371 F.3d 68, 84 (2d Cir. 2004) (SIPA was enacted in 1970 as a response to a “rash of failures among securities broker-dealers” that caused significant losses to customers whose assets “were unrecoverable or became tied up on the broker-dealers’ bankruptcy proceedings.”).

In re New Times Sec. Servs., Inc., 463 F.3d 125, 127 (2d Cir. 2006) (“The principal purpose of SIPA is to protect investors against financial losses arising from the insolvency of their brokers.” (internal quotation marks omitted)).

In re Bernard L. Madoff Inv. Sec. LLC (“Net Equity Decision”), 654 F.3d 229, 239 (2d Cir. 2011) (“It is not at all clear that SIPAprotects against all forms of fraud committed by brokers . . . But it is clear that the statute is not designed to insure investors against all losses.”).

In re Stratton Oakmont, No. 01–CV–2812, 2003 WL 22698876, at *5 (S.D.N.Y. Nov. 14, 2003) (“SIPA's main purpose [i]s ... not to prevent fraud or conversion, but to reverse los[s]es resulting from brokers’ insolvency.”)

Sec. Investor Prot. Corp. v. Morgan, Kennedy & Co., 533 F.2d 1314, 1317 (2d Cir. 1976) (SIPA is also intended to “protect capital markets by instilling confidence in securities traders.”).

Applicability of SIPA Sec. Investor Prot. Corp. v. Barbour, 421 U.S. 412 (1975) (No private right of action for the customers of a member broker to

compel SIPC to initiate liquidation). S.E.C. v. Sec. Investor Prot. Corp., 758 F.3d 357, 358 (D.C. Cir. 2014) (“[B]ecause the Antiguan bank, unlike SGC, was not a

SIPC member, SIPC had no ability to initiate measures directly against the [Antiguan] bank to protect the property of investors who purchased the bank's CDs.” Further, “the investors obtained the Antiguan bank’s CDs by depositing funds with the bank itself, not with SGC (a broker-dealer), and they thus cannot be considered customers of the SGC”).

Role of SIPC, Trustee, & SEC Sec. Investor Prot. Corp. v. Barbour, 421 U.S. 412, 417 (1975) (“The role of the SEC in this scheme, insofar as relevant to the

present case, is one of ‘plenary authority’ to supervise the SIPC.”). Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 499 B.R. 416, 420 (S.D.N.Y. 2013) (Describing in detail the

powers and duties of SIPC trustee)

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BIBLIOGRAPHY cont. “Customer”

Sec. Investor Prot. Corp. v. Morgan, Kennedy & Co., 533 F.2d 1314, 1316 (2d Cir. 1976) (Trust is customer of the debtor; trustees and beneficiaries are not).

S.E.C. v. Sec. Investor Prot. Corp., 758 F.3d 357, 368-69 (D.C. Cir. 2014) (Investors were not “customers” because they acted as lenders by purchasing CDs through an investment fund—i.e., depositing funds into the “capital of the debtor” in exchange for promise of repayment.).

In re Bernard L. Madoff Inv. Sec. LLC, 708 F.3d 422, 427 (2d Cir. 2013) (Investors in Madoff feeder funds “do not qualify as BLMIS ‘customers’ under SIPA.”)

“Net Equity” In re Bernard L. Madoff Inv. Sec. LLC (“Net Equity Decision”), 654 F.3d 229, 236 (2d Cir. 2011) (upholding Trustee’s Net

Investment Method). In re New Times Sec. Servs., Inc., 371 F.3d 68 (2d Cir. 2004) (calculating “net equity” using the Last Statement Method for

claimants misled into believing they were investing in real mutual funds, but using the Net Investment Method for those fraudulently induced to invest in “bogus mutual fund”).

Inflation Adjustment In re Bernard L. Madoff Inv. Sec. LLC, No. 14-509-BK CON, 2015 WL 727965, at *6 (2d Cir. Feb. 20, 2015) (“Under SIPA,

Claimants' net equity claims cannot be adjusted to reflect inflation.”) Commodity Futures Trading Comm'n v. Walsh, 712 F.3d 735, 754-55 (2d Cir. 2013) (“We see no abuse of discretion in the

district court's approval of the [Equity] Receiver’s Plan without requiring the requested inflation adjustment.”) Trustee Standing

Matter of Bevill, Bresler & Schulman, Inc., 83 B.R. 880, 893 (D.N.J. 1988) (“The date to be used for valuation of the fund of customer property is the SIPA filing date.”)

Picard v. Flinn Investments, LLC, 463 B.R. 280, 284 (S.D.N.Y. 2011) (“But it has long been held that ‘the fund of customer property shall be valued for the purposes of [SIPA § 8(c)(3)] as of [ the filing date],’”)

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BIBLIOGRAPHY cont. 548(c) – “Value”

Christian Bros. High Sch. Endowment v. Bayou No Leverage Fund, LLC (“In re Bayou Group, LLC”), 439 B.R. 284, 308, 313 (S.D.N.Y.2010) (Ordinarily, the transferee bears the burden of proving the defense, and an objective, reasonable investor standard applies.)

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (“Good Faith Decision”), No. 12 Misc. 115, 2014 WL 1651952, at *5 (S.D.N.Y. Apr. 27, 2014) (In a SIPA proceeding, the trustee bears burden to plead and prove the transferee’s lack of good faith).

In re Bayou Grp., LLC, 439 B.R. 284, 309 (S.D.N.Y.2010) (Defendants “gave value in the form of their initial investments, and have tort claims of rescission to recover all of their initial investment based on fraudulent inducement.”)

Donell v. Kowell, 533 F.3d 762, 772 (9th Cir.2008) (“Payments up to the amount of the initial investment are considered to be exchanged for ‘reasonably equivalent value,’ and thus not fraudulent, because they proportionally reduce the investors’ rights to restitution.”).

Picard v. Greiff, 476 B.R. 715, 725 (S.D.N.Y. 2012) (Any “transfers from Madoff Securities to defendants that exceeded the return of defendants’ principal . . . Were not ‘for value’” for purposes of 548(c)).

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (“Antecedent Debt Decision”), 499 B.R. 416, 430 (S.D.N.Y. 2013) (“Claims against the general Madoff Securities estate do not constitute “value” within the meaning of section 548(c) to the extent that they would be used to withhold fraudulent transfers owing to the customer property estate under SIPA.”)

548(c) – “Good Faith” In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. 117, 138-39 (Bankr. S.D.N.Y. 2014) (The “good faith” issue is implicated where

the Trustee seeks to recover the repayment of principal to the transferee because the transferee gave value to the extent it deposited cash with BLMIS.)

In re Bayou Grp., LLC, 439 B.R. 284, 313 (S.D.N.Y. 2010) (Bankruptcy Courts determining whether a transferee acted in good faith will ask: Whether the alleged “red flag” information would have put a reasonably prudent transferee (objective) on inquirynotice that the debtor was insolvent or that it had a fraudulent purpose in making the payments to the transferee.)

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BIBLIOGRAPHY cont. Picard v. Avellino, 469 B.R. 408, 412 (S.D.N.Y. 2012) (“[T]o establish a lack of “good faith” on the part of securities customers

under § 548(c) in the context of a SIPA bankruptcy, the trustee must show that the customer either actually knew of the broker's fraud or ‘willfully blinded’ himself to it.”)

In re Bernard L. Madoff Inv. Sec. LLC, 515 B.R. 117, 139-40 (Bankr. S.D.N.Y. 2014) (“Thus, ‘actual knowledge’ implies a high level of certainty and absence of any substantial doubt regarding the existence of a fact. . . . And willful blindness requires a “strong suspicion but some level of doubt or uncertainty of the existence of a fact and the deliberate failure to acquire actual knowledge of its existence.”)

Trustee’s Common Law Claims In re Bernard L. Madoff Inv. Sec. LLC., 721 F.3d 54 (2d Cir. 2013) (majority of Trustee’s common law claims are barred by the

doctrine of in pari delicto). In re Herald, 730 F.3d 112, 119 (2d Cir. 2013) (J. Rakoff, writing for Second Circuit) (allegations were “more than sufficient to

satisfy SLUSA’s requirement that the complaint allege a ‘misrepresentation or omission of a material fact in connection with thepurchase or sale of a covered security.’” Therefore, plaintiffs’ claims were preempted by SLUSA).

Chadbourne & Parke LLP v. Troice (“Troice”), 134 S. Ct. 1058 (2014) (Where plaintiffs do not allege that the defendants' misrepresentations led the victims to buy, sell, or to maintain positions in covered securities, SLUSA does not apply.)

In re Herald, 753 F.3d 110, 113 (2d Cir. 2014) (distinguishing fraud in Chadbourne from Madoff Securities Ponzi scheme, and re-affirming In re Herald, 730 F.3d 112).

Inter-account Transfers Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 499 B.R. 416, 430 (S.D.N.Y. 2013) (“[P]re-reach-back-period

inter-account transfers of amounts exceeding principal in the account of the sender continue to be fictitious profits, not principal, in the account of the recipient, and therefore do not constitute antecedent debt for the recipient of the funds.”)

546(e) In re Bernard L. Madoff Inv. Sec. LLC, 773 F.3d 411, 420 (2d Cir. 2014) (“The clawback defendants, having every reason to

believe that BLMIS was actually engaged in the business of effecting securities transactions, have every right to avail themselves of all the protections afforded to the clients of stockbrokers, including the protection offered by § 546(e).” ).

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BIBLIOGRAPHY cont. Parallel Government Remission Funds

United States v. Gordon, No. 03 CR. 1494 (GEL), 2005 WL 2759845, at *3 (S.D.N.Y. Oct. 19, 2005) (21 U.S.C. 853(i) “grants the Attorney General extraordinarily broad discretion over the handling of forfeited funds.”) aff’d sub nom. DSI Associates LLC v. United States, 496 F.3d 175 (2d Cir. 2007).

Fort Stewart Schs. v. FLRA, 495 U.S. 641, 654 (1990) (“It is a familiar rule of administrative law that an agency must abide by its own regulations.”).

Bankruptcy Court Jurisdiction Stern v. Marshall, 131 S. Ct. 2594, 2618, 180 L. Ed. 2d 475 (2011) (“Congress may not bypass Article III simply because a

proceeding may have some bearing on a bankruptcy case; the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.”).

Extraterritoriality In re Bernard L. Madoff Investment Sec., LLC, No. 1:12-ms-00115-JSR, Dkt. No. 551 (S.D.N.Y. July 7, 2014) (Congress did

not intend for 550(a)(2) to apply extraterritorially, and even if it did, application of that subsequent transfer clawback provision to transactions between two foreign entities would be precluded by considerations of international comity)

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