PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

1285 Avenue of the Americas

New York, New York 10019
Telephone: (212) 373-3000
Facsimile: (212) 757-3990
Martin Flumenbaum
Stephen J. Shimshak
Andrew J. Ehrlich
Hannah S. Sholl

Attorneys for Defendants Mark Madoff and Andrew Madoff

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK
Hearing Date: June 23, 2010
SECURITIES INVESTOR PROTECTION
CORPORATION,
Plaintiff, Adv. Pro. No. 08-01789 (BRL)
v.
SIPA LIQUIDATION
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC, (Substantively Consolidated)
Defendant.

In re:
BERNARD L. MADOFF,
Debtor.

IRVING H. PICARD, Trustee for the Liquidation

of Bernard L. Madoff Investment Securities LLC,
Plaintiff, Adv. Pro. No. 09-1503 (BRL)
v.

PETER B. MADOFF, MARK D. MADOFF,

ANDREW H. MADOFF, and SHANA D.
MADOFF,
Defendants.

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS

MARK AND ANDREW MADOFF’S MOTION TO DISMISS
 TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES.......................................................................................... iv

PRELIMINARY STATEMENT........................................................................................ 1

BACKGROUND............................................................................................................. 3

A. The Alleged Transfers ............................................................................... 5

B. Mark And Andrew Madoff’s Purported Compliance Responsibilities ........... 7

C. The Complaint .......................................................................................... 9

ARGUMENT................................................................................................................ 10

I. THE TRUSTEE’S COMMON LAW CLAIMS FAIL AS A MATTER OF

LAW.................................................................................................................. 12

A. The Martin Act Preempts The Trustee’s Claims for Breach Of

Fiduciary Duty, Conversion, Unjust Enrichment, Negligence, And
Constructive Trust ................................................................................... 12

B. The Complaint Fails To State Claims For Breach Of Fiduciary Duty

And Negligence ...................................................................................... 14

1. The Trustee Fails To Plead That Mark Or Andrew Breached Any

Duty To BLMIS .......................................................................... 15

2. Bernard Madoff’s Massive Fraud Was The Cause Of BLMIS’s

Damages..................................................................................... 16

C. The Trustee’s Claim for Conversion Fails As A Matter Of Law

Because The Funds Over Which Mark And Andrew Madoff
Allegedly Assumed Unauthorized Control Were Not “Specifically
Identifiable”............................................................................................ 17

D. The Trustee’s Unjust Enrichment Claim Fails As A Matter of Law

Because Mark And Andrew Madoff Did Not Have Any Direct
Relationship With Investors ..................................................................... 18

E. The Trustee’s Claims For Constructive Trust And Accounting Fail As

A Matter of Law...................................................................................... 20

i
II. THE TRUSTEE’S BANKRUPTCY LAW CLAIMS SHOULD BE
DISMISSED ...................................................................................................... 22

A. The Trustee’s Turnover And Accounting Claim Is Precluded As A

Matter Of Law Because The Transfers Are Not “Property of the
Estate”.................................................................................................... 22

B. The Trustee Fails To State A Claim For Recovery Of The Preference

Period Transfers ...................................................................................... 23

C. The Trustee Fails To State A Claim For Actual Fraudulent Transfers

Under The Bankruptcy Code ................................................................... 24

1. The Trustee’s Actual Fraudulent Transfer Claim Must Be Dismissed

Because The Alleged Transfers Were “For Value And In Good Faith”
................................................................................................... 25

(a) The Alleged Transfers Were Made For Value ..................... 25

(b) Mark And Andrew Received The Alleged Transfers

In Good Faith .................................................................. 28

2. The Trustee Fails To Identify The Two-Year Transfers With

Particularity................................................................................. 29

3. The Trustee Fails To Plead Actual Intent On Behalf Of The Transferor

With Particularity ........................................................................ 30

D. The Trustee Fails To State A Claim For Constructive Fraudulent

Transfers Under The Bankruptcy Code..................................................... 31

1. The Trustee Fails To Allege Facts Supporting A Constructive

Fraudulent Transfer Claim............................................................ 31

2. The Trustee Has Failed To Allege That BLMIS Did Not Receive
“Reasonably Equivalent Value” For The Alleged Transfers ............ 33

E. The Trustee Fails To State A Claim For Actual Fraudulent Transfers

Under The New York Debtor And Creditor Law ....................................... 34

1. The Trustee Does Not Identify The Six-Year Transfers With

Particularity................................................................................. 34

2. The Trustee Fails To Plead Actual Intent On Behalf Of The Transferor

And The Transferees.................................................................... 34

ii
 3. The Trustee’s Claim Must Be Dismissed Because The Alleged
Transfers Were Received For “Fair Consideration And Without
Knowledge” ................................................................................ 36

F. The Trustee Fails to State a Claim for Constructive Fraudulent

Transfers Under The New York Debtor and Creditor Law.......................... 36

1. The Trustee Has Failed To Allege That BLMIS Did Not Receive
“Fair Consideration” For The Alleged Transfers ............................ 37

G. Bankruptcy Code 546(e) Precludes Avoidance of Transfers from

Mark and Andrew’s BLMIS Customer Accounts ...................................... 38

H. The Trustee Cannot Rely On The Discovery Rule To Avoid Transfers

That Occurred More Than Six Years From The Commencement Of
The Adversary Proceeding Or To Obtain Attorneys Fees ........................... 39

1. The Trustee’s “Discovery Rule” Claim Fails Because It Does Not

Identify Appropriate Creditors...................................................... 40

2. The Trustee’s Own Allegations Preclude Any Inference That A

Category Of Investors Exists Who Could Not Have Discovered The
Fraud .......................................................................................... 41

3. The Trustee’s Claim To Recover Attorneys’ Fees Under DCL Section

276-a Fails As A Matter of Law Because The Trustee Has Not
Alleged That Mark And Andrew Took The Transfers With Actual
Intent To Defraud ........................................................................ 42

I. The Trustee’s Claim To Avoid Subsequent Transfers Should Be

Dismissed Because The Trustee Has Not Alleged Any Subsequent
Transfers ................................................................................................ 42

J. The Disallowance Claim Must Be Dismissed Because There Has

Been No Adjudication On The Underlying Avoidance Action And
The Trustee Has Not Demonstrated That A Viable Avoidance Claim
Exists ..................................................................................................... 43

K. The Equitable Subordination Claim Must Be Dismissed Because The

Trustee Fails To Adequately Plead Any Underlying Inequitable
Conduct.................................................................................................. 44

III. THE TRUSTEE’S REQUEST FOR PUNITIVE DAMAGES IS

INAPPROPRIATE ............................................................................................. 44

CONCLUSION ............................................................................................................. 45

iii
 TABLE OF AUTHORITIES

Page(s)
CASES

Abbey v. 3F Therapeutics, Inc.,

2009 WL 4333819 (S.D.N.Y. Dec. 2, 2009) ........................................................ 12

Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc.,

651 F. Supp. 2d 155 (S.D.N.Y. 2009) .................................................................. 13

Am. Fin. Int’l v. Bennett,

2007 WL 1732427 (S.D.N.Y. June 14, 2007)............................................ 14, 15, 19

Andrew Velez Constr. Inc. v. Consol. Edison Co. of New York, Inc.
(In re Andrew Velez Constr., Inc.),
373 B.R. 262 (Bankr. S.D.N.Y. 2007) ............................................................22, 35

Ashcroft v. Iqbal,
129 S.Ct. 1937 (2009) ..................................................................................passim

Assured Guaranty (UK) Ltd. v. J.P. Morgan Inv. Mgmt., Inc.,

No. 603755/08 (Sup. Ct. New York County Jan. 28, 2010)................................ 12

Atlanta Shipping Corp. v. Chemical Bank,

818 F.2d 240 (2d Cir. 1987) ................................................................................ 29

ATSI Commc’ns Inc. v. Shaar Fund, Ltd.,

493 F.3d 87 (2d Cir. 2007).................................................................................. 10

Balaber-Strauss v. Sixty-Five Brokers (In re Churchill Mortgage Inv. Corp.),

256 B.R. 664 (Bankr. S.D.N.Y. 2000) ...........................................................passim

Barron v. Igolnikov,
No. 09 Civ. 4471 (S.D.N.Y. Mar. 10, 2010)......................................................... 13

Bear, Stearns Sec. Corp. v. Gredd (In re Manhattan Inv. Fund, Ltd.),
397 B.R. 1 (S.D.N.Y. 2007)............................................................................... 30

Bell Atl. Corp. v. Twombly,

550 U.S. 544 (2007).....................................................................................passim

Berenson v. Nat’l Surety Co.,

260 N.Y. 299 (1932)........................................................................................... 16

Bernheim v. Litt,
79 F.3d 318 (2d Cir. 1996).................................................................................. 10

iv
Brandt v. Am. Nat’l Bank & Trust Co. (In re Foos),
188 B.R. 239 (Bankr. N.D. Ill. 1995) ................................................................. 30

Carey v. Crescenzi,
923 F.2d 18 (2d Cir. 1991).................................................................................. 42

Carmona v. Spanish Broad. Sys., Inc.,

2009 WL 890054 (S.D.N.Y. Mar. 30, 2009) ......................................................... 18

Castellano v. Young & Rubicam, Inc.,

257 F.3d 171 (2d Cir. 2001)............................................................................... 12

Chemtex, LLC v. St. Anthony Enters., Inc.,

490 F. Supp. 2d 536 (S.D.N.Y. 2007) .............................................................28, 36

Citadel Mgmt., Inc. v. Telesis Trust, Inc.,

123 F. Supp. 2d 133 (S.D.N.Y. 2000) ................................................................ 17

Cohen v. UN-Ltd. Holdings, Inc. (In re Nelco, Ltd.),

264 B.R. 790 (Bankr. E.D. Va. 1999) .................................................................. 26

Coty Inc. v. L'

Oreal S.A.,
2008 WL 331360 (S.D.N.Y. Feb. 4, 2008)......................................................... 18

CPC Int’l Inc. v. McKesson Corp.,

70 N.Y.2d 268 (1987)........................................................................................ 13

Cullen v. BMW of N. Am., Inc.,

691 F.2d 1097 (2d Cir. 1982) .............................................................................. 17

DeBlasio v. Merrill Lynch & Co., Inc.,

2009 WL 2242605 (S.D.N.Y. July 27, 2009) ....................................................... 14

Ehle v. Howard,
2006 WL 948120 (N.Y. Sup. Ct. Apr. 7, 2006) .................................................... 16

Enron Corp. v. Avenue Special Situations Fund II, L.P. (In re Enron Corp.),
340 B.R. 180 (Bankr. S.D.N.Y. 2006)................................................................ 43

F.C.C. v. NextWave Personal Commc’ns, Inc. (In re NextWave Personal Commc’ns,

Inc.),
200 F.3d 43 (2d Cir. 1999).................................................................................. 26

FDIC v. Hirsch (In re Colonial Realty Co.),

980 F.2d 125 (2d Cir. 1992) ................................................................................ 22

Fed. Nat’l Mortgage Assoc. v. Olympia Mortgage Corp.,

2006 WL 2802092 (E.D.N.Y. Sept. 28, 2006).................................................30, 34

v
Fundacion Museo de Arte v. CBI-TDB Union Bancaire Privee,
160 F.3d 146 (2d Cir. 1998) ................................................................................ 17

Global Crossing Estate Representative v. Winnick,

2006 WL 2212776 (S.D.N.Y. Aug. 3, 2006) ........................................................ 40

Gortat v. Capala Bros., Inc.,

585 F. Supp. 2d 372 (E.D.N.Y. 2008).................................................................. 16

Granite Partners, L.P. v. Bear Stearns & Co., Inc.,

17 F. Supp. 2d 275 (S.D.N.Y. 1998) .................................................................. 13

HBE Leasing Corp. v. Frank,

48 F.3d 623 (2d Cir. 1995)....................................................................... 28, 36, 38

Heller v. Kurz,
228 A.D.2d 263 (N.Y. App. Div. 1996)................................................................ 19

IMG Fragrance Brands, LLC v. Houbigant, Inc.,

2009 WL 5171741 (S.D.N.Y. Dec. 18, 2009) .................................................... 22

In re 1031 Tax Group, LLC,

2009 WL 4342635 (Bankr. S.D.N.Y. Dec. 3, 2009) ............................................. 10

In re Adler Coleman Clearing Corp.,

195 B.R. 266 (Bankr. S.D.N.Y. 1996)................................................................ 13

In re Allou Distribs., Inc.,

379 B.R. 5 (Bankr. E.D.N.Y. 2007)..................................................................... 35

In re Allou Distribs., Inc.,

387 B.R. 365 (Bankr. E.D.N.Y. 2008) ................................................................. 32

In re AppliedTheory Corp.,
323 B.R. 838 (Bankr. S.D.N.Y. 2005) ................................................................. 27

In re AppliedTheory Corp.,
330 B.R. 362 (S.D.N.Y. 2005) .......................................................................33, 37

In re Bayou Group LLC,

396 B.R. 810 (Bankr. S.D.N.Y. 2008) ............................................................29, 35

In re Bayou Hedge Fund Litig.,

534 F. Supp. 2d 405 (S.D.N.Y. 2007) .......................................................... 12, 13

In re Caremerica, Inc.,
409 B.R. 737 (E.D.N.C. 2009)......................................................................passim

vi
In re Donahue Secs., Inc.,
318 B.R. 667 (Bankr. S.D. Ohio 2004)................................................................ 15

In re Enron Corp.,
333 B.R. 205 (Bankr. S.D.N.Y. 2005) ................................................................. 44

In re First Cent. Fin. Corp.,

377 F.3d 209 (2d Cir. 2004) ................................................................................ 20

In re Gluth Bros. Const., Inc.,

2009 WL 4037795 (Bankr. N.D. Ill. Nov. 19, 2009) ......................................... 11

In re Image Masters, Inc.,

421 B.R. 164 (Bankr. E.D. Pa. 2009) ...........................................................passim

In re Jacobs,
394 B.R. 646 (Bankr. E.D.N.Y. 2008) ................................................................. 42

In re MarketXT Holdings Corp.,

361 B.R. 369 (Bankr. S.D.N.Y. 2007) ................................................................. 35

In re Merrill Lynch & Co., Inc. Research Reports Secs. Litig.,

2008 WL 2594819 (S.D.N.Y. June 26, 2008)....................................................... 36

In re Metiom, Inc.,
301 B.R. 634 (Bankr. S.D.N.Y. 2003) ................................................................. 43

In re Mid Atl. Fund, Inc.,

60 B.R. 604 (Bankr. S.D.N.Y. 1986) ................................................................... 43

In re Musicland Holding Corp.,

386 B.R. 428 (S.D.N.Y. 2008) ............................................................................ 18

In re Musicland Holding Corp.,

398 B.R. 761 (Bankr. S.D.N.Y. 2008) ................................................................. 40

In re New Times Sec. Servs.,

371 F.3d 68 (2d Cir. 2004)................................................................................. 13

In re Sharp Int’l Corp.,

403 F.3d 43 (2d Cir. 2005)......................................................................30, 34, 38

In re Theatre Row Phase II Assocs.,

385 B.R. 511 (Bankr. S.D.N.Y. 2008)................................................................ 41

Jana Master Fund, Ltd. v. JPMorgan Chase & Co.,

2008 WL 746540 (N.Y. Sup. Ct. Mar. 12, 2008)................................................ 13

vii
Joan Hansen & Co., Inc. v. Everlast World’s Boxing Headquarters Corp.,
744 N.Y.S.2d 384 (App. Div. 2002) ...............................................................19, 20

Jordan (Bermuda) Inv. Co., Ltd. v. Hunter Green Invs., Ltd.,

2003 WL 1751780 (S.D.N.Y. 2003) .................................................................. 17

Kaiser Steel Corp. v. Pearl Brewing Co. (In re Kaiser Steel Corp.),
952 F.2d 1230 (10th Cir. 1991) ........................................................................... 39

Kassover v. UBS AG,

619 F. Supp. 2d 28 (S.D.N.Y. 2008) .................................................................. 12

Kaul v. Hanover Direct, Inc.,

296 F. Supp. 2d 506 (S.D.N.Y. 2004) .................................................................. 16

Kramer v. Lockwood Pension Servs., Inc.,

653 F. Supp. 2d 354 (S.D.N.Y. 2009) .............................................................20, 21

Lefkowitz v. Bank of New York,

2009 WL 5033951 (S.D.N.Y. Dec. 22, 2009) ................................................... 18

Leveto v. Lapina,
258 F.3d 156 (3d Cir. 2001)............................................................................... 25

LNC Invs., Inc. v. First Fidelity Bank, N.A. N.J.,

173 F.3d 454 (2d Cir. 1999) ................................................................................ 14

Lustig v. Weisz & Assocs. Inc. (In re Unified Commercial Capital, Inc.),
260 B.R. 343 (Bankr. W.D.N.Y. 2001) ................................................................ 27

Marcus v. Frome,
329 F. Supp. 2d 464 (S.D.N.Y. 2004) ................................................................ 12

Matsumura v. Benihana Nat’l Corp.,

542 F. Supp. 2d 245 (S.D.N.Y. 2008) .................................................................. 11

Merrill v. Allen (In re Universal Clearing House Co.),

60 B.R. 985 (D. Utah 1986)............................................................................... 26

Nanjing Textiles IMP/EXP Corp., Ltd. v. NCC Sportswear Corp.,

2006 WL 2337186 (S.D.N.Y. Aug. 11, 2006) .................................................19, 20

O’Connell v. Arthur Andersen LLP (In re AlphaStar Ins. Group Ltd.),

383 B.R. 231 (Bankr. S.D.N.Y. 2008) ............................................................11, 44

Official Comm. of Unsecured Creditors of M. Fabrikant & Sons, Inc.

v. JPMorgan Chase Bank, N.A. (In re M. Fabrikant & Sons, Inc.),
394 B.R. 721 (Bankr. S.D.N.Y. 2008) ................................................................. 29

viii
Orlick v. Kozyak (In re Fin. Federated Title & Trust, Inc.),
309 F.3d 1325 (11th Cir. 2008) ........................................................................... 27

Pani v. Empire Blue Cross Blue Shield,

152 F.3d 67 (2d Cir. 1998)................................................................................. 25

Pelkey v. Pelkey,
258 N.Y.S. 562 (App. Div. 1932) ........................................................................ 21

Picard v. Taylor (In re Park S. Secs., LLC),

326 B.R. 505 (Bankr. S.D.N.Y. 2005) ................................................................. 35

Pro Bono Invs., Inc. v. Gerry,

2005 WL 2429787 (S.D.N.Y. Sept. 30, 2005)...................................................... 13

PVM Oil Futures, Inc. v. Banque Paribas,

554 N.Y.S.2d 606 (App. Div. 1990) .................................................................... 20

Rhythms NetConnections, Inc. v. Cisco Systems, Inc. (In re Rhythms

NetConnections),
300 B.R. 404 (Bankr. S.D.N.Y. 2003) ................................................................. 43

Roden v. Dan’s Papers, Inc.,

2006 WL 3437528 (N.Y. Sup. Ct. App. Term Nov. 9, 2006)................................. 16

Savage & Assocs., P.C. v. BLR Servs. SAS (In re Teligent, Inc.),
307 B.R. 744 (Bankr. S.D.N.Y. 2004) ................................................................. 22

Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC,

2010 Bankr. LEXIS 495 (Bankr. S.D.N.Y. Mar. 1, 2010) ....................................... 7

SEC v. Cohmad Secs. Corp.,

2010 WL 363844 (S.D.N.Y. Feb. 2, 2010)......................................................10, 17

Sedona Corp. v. Ladenburg Thalmann & Co., Inc.,

2005 WL 1902780 (S.D.N.Y. Aug. 9, 2005) ........................................................ 12

Seta Corp. v. Atl. Computer Sys. (In re Atlantic Computer Sys.),

173 B.R. 858 (S.D.N.Y. 1994) ............................................................................ 43

Silverman v. Actrade Capital Inc. (In re Actrade Fin. Techs., Ltd.),

337 B.R. 791 (Bankr. S.D.N.Y. 2005).......................................................... 35, 38

Staehr v. Hartford Fin. Servs. Group, Inc.,

547 F.3d 406 (2d Cir. 2008)................................................................................. 3

Sugarman v. Weisz,
310 N.Y.S.2d 394 (App. Div. 1970) ................................................................... 20

ix
Summerville v. Lipsig,
704 N.Y.S.2d 598 (App. Div. 2000) .................................................................... 45

Thyroff v. Nationwide Mutual Ins. Co.,

2010 WL 76154 (2d Cir. Jan. 11, 2010) ............................................................. 18

Trepel v. Abdoulaye,
185 F. Supp. 2d 308 (S.D.N.Y. 2002) .................................................................. 45

Van Brunt v. Rauschenberg,

799 F. Supp. 1467 (S.D.N.Y. 1992)..................................................................... 21

Wachovia Sec., LLC v. Joseph,

866 N.Y.S.2d 651 (App. Div. 2008) .................................................................... 20

Waldman v. Englishtown Sportswear, Ltd.,

460 N.Y.S.2d 552 (App. Div. 1983) .................................................................... 21

Weizmann Inst. of Science v. Neschis,

229 F. Supp. 2d 234 (S.D.N.Y. 2002) .................................................................. 21

Welch v. TD Ameritrade Holding Corp.,

2009 WL 2356131 (S.D.N.Y. July 27, 2009) ....................................................... 11

Whitehall Tenants Corp. v. Estate of Olnick,

623 N.Y.S.2d 585 (App. Div. 1995)................................................................... 12

FEDERAL STATUTES AND RULES

11 U.S.C. § 101(53A) ................................................................................................... 39

11 U.S.C. § 105(a) .......................................................................................................... 9

11 U.S.C. § 502......................................................................................................... 9, 43

11 U.S.C. § 542....................................................................................................9, 22, 23

11 U.S.C. § 544.......................................................................................................passim

11 U.S.C. § 546............................................................................................................. 39

11 U.S.C. § 547 .............................................................................................. 9, 24, 25, 26

11 U.S.C. § 548 .......................................................................................................passim

11 U.S.C. § 550 ............................................................................................................... 9

11 U.S.C. § 551 ............................................................................................................... 9

x
11 U.S.C. § 741....................................................................................................... 39, 42

15 U.S.C. § 78fff(b) ........................................................................................................ 9

15 U.S.C. § 78fff-1(a) ...................................................................................................... 9

15 U.S.C. § 78fff-2(c)(3).............................................................................................9, 22

Fed. R. Bankr. P. 7008 ..................................................................................................... 1

Fed. R. Bankr. P. 7009 ..................................................................................................... 1

Fed. R. Bankr. P. 7012(b) ............................................................................................1, 10

Fed. R. Civ. P. 8 .......................................................................................................passim

Fed. R. Civ. P. 9(b)...................................................................................................passim

Fed. R. Civ. P. 12(b)(6) ...............................................................................................1, 10

STATE STATUTES AND RULES

N.Y. Gen. Bus. Law § 352................................................................................... 12, 13, 14

N.Y. C.P.L.R. § 203(f).................................................................................................... 40

N.Y. C.P.L.R. § 213(8) ................................................................................................... 40

N.Y. Debt. & Cred. Law § 270 ......................................................................................... 9

N.Y. Debt. & Cred. Law § 272 ....................................................................................... 38

N.Y. Debt. & Cred. Law § 276 ..................................................................................34, 39

N.Y. Debt. & Cred. Law § 276-a ......................................................................... 34, 39, 42

N.Y. Debt. & Cred. Law § 278 ....................................................................................... 36

OTHER AUTHORITIES

Wright & Miller, Federal Practice and Procedure § 1357 (3d ed. 2009)....................... 25

xi
 Defendants Mark and Andrew Madoff respectfully submit this memorandum of law in

support of their motion to dismiss the Complaint in its entirety, pursuant to Federal Rules of Civil

Procedure 8, 9(b), and 12(b)(6), and Federal Rules of Bankruptcy Procedure 7008, 7009, and 7012(b).

PRELIMINARY STATEMENT

On December 10, 2008, Bernard L. Madoff revealed to his sons his massive betrayal of

the markets, of his investors—and of them. They acted immediately. Within hours, they reported his

crimes to the authorities, and thereby prevented the dissipation of $170 million more in customer

funds. Their revelation of their father’s crimes led to the collapse of the profitable—and concededly

legitimate—market-making and trading businesses that they had spent their professional lives

building. For this, among many other reasons, they rank among the numerous victims of their father’s

terrible crimes.

Notwithstanding all of this, the Trustee now brings this lawsuit, seeking tort damages

from them, as well as to avoid a variety of transfers—including their duly earned compensation for

running the market-making and trading businesses. It is an exercise in gross overreaching. Long on

rhetoric, but short on legal or factual support, this is a case that as a matter of fairness never should

have been brought, and as a matter of law should be dismissed.

Nearly all of the common-law claims are due to be dismissed because they are

preempted by the Martin Act. Under black-letter New York law, common-law tort claims of this kind,

which pertain to securities, are in the exclusive province of the Attorney General. And, precedent

makes clear that the broad preemptive sweep of the Martin Act extends to trustees in bankruptcy like

the Plaintiff here.

Even if these claims were not preempted, they reach too far in other ways. For

example, many of the claims are predicated on purported duties the Trustee alleges that Mark and

Andrew Madoff owed to Bernard Madoff’s investment advisory (“IA”) clients. But the Trustee’s own
pleading makes clear that Mark and Andrew Madoff’s role at BLMIS was to run the market-making

and trading businesses—thereby rendering it totally illogical that either Mark or Andrew could have a

legal duty to customers of a business that they had nothing to do with. The sole allegation in the

Complaint purporting to tie Mark and Andrew to the IA business is the most conclusory assertion that

Mark and Andrew met with IA clients—citing not a single example, even though the Trustee has had

access to the books and records of BLMIS for over a year. Under the pleading standards set forth by

the Supreme Court in Iqbal and Twombly, this kind of bare, ipse dixit allegation must collapse under

the weight that the Trustee tries to rest upon it.

The Complaint also sweeps too far insofar as it is predicated on the faulty assumption

that Mark and Andrew Madoff are in breach of duties because they exercised some kind of compliance

function at the IA business. They in fact had no such function, and a careful reading of the Complaint

makes clear that any assertion otherwise is mere say-so of the kind that cannot sustain a complaint.

The mere repetition of the allegation cannot make it so. The Trustee cites numerous policy documents

internal to BLMIS, but none of them actually supports the conclusion that Mark and Andrew fulfilled a

compliance role at the firm at all—much less in connection with the IA business. Notably, although

the Complaint does cite one IA compliance manual, it cites no passage in which Mark and Andrew are

held out as having a compliance role.

The Trustee’s various claims under the Bankruptcy Code overreach as well. For

instance, the Trustee seeks to avoid transfers made in excess of six years before this adversary

proceeding, despite having no basis in law for doing so. With respect to transfers within the last six

years, the Complaint is entirely conclusory, pleading undifferentiated lump sums, notwithstanding the

stringent requirements of Rule 9(b). And with respect to those claims requiring proof of intent, the

Complaint does not even remotely approach the pleading burden. In this regard, the Complaint

appears to have adopted the reasoning that “they’re the sons—they must have known,” which may

2
suffice for a press release or a talk show, but is patently insufficient to satisfy the more sober review

that this Court’s pleading standards demand.

Perhaps most egregiously, the Trustee seeks to recover the salary and bonus that Mark

and Andrew earned from running the market-making and trading businesses, despite conceding in his

Complaint both that they ran these businesses for years, and that the businesses were legitimate. In

point of fact, the Trustee sold Mark and Andrew’s business for $25 million, which will help

compensate victims of Bernard Madoff’s fraud. It turns logic—and fairness—on its head to then seek

to claw back the compensation Mark and Andrew received in consideration for building that business.

For all of these reasons, and the many others set forth below, all of the claims against

Mark and Andrew Madoff should be dismissed.

BACKGROUND1

Mark and Andrew Madoff spent their entire professional careers building the market-

making and proprietary trading businesses at Bernard L. Madoff Investment Securities LLC

(“BLMIS”). (Cplt. ¶¶ 7-8.) Under Mark and Andrew’s management, BLMIS became one of the

largest and most well-regarded market makers in the securities industry; by the early-1990s, it was

responsible for approximately 10 percent of all trades of NYSE-listed stocks. (Ex. A.) And, by 1997,

BLMIS was executing 40,000 trades daily on NASDAQ, making markets for 500 customers in over

800 publicly traded stocks. (Ex. B.) At all times, BLMIS was a leader in technological innovation,

including offering innovations such as internet access to its services, providing more off-board

1
Although Mark and Andrew Madoff vigorously dispute many of the allegations of the Trustee’s
Complaint, we assume for now the truth solely of the well-pleaded facts therein, supplemented by
publicly available documents that this Court may consider on a motion to dismiss. See, e.g., Staehr v.
Hartford Fin. Servs. Group, Inc., 547 F.3d 406, 425 (2d Cir. 2008) (judicial notice “of the fact that
press coverage, prior lawsuits, or regulatory filings contained certain information, without regard to the
truth of their contents” is appropriate on a motion to dismiss). These documents are contained in the
Declaration of Martin Flumenbaum, dated March 15, 2010, and cited hereafter as “Ex. __.”

3
executions of listed order flow than any of its estimated eighty competitors, and allowing customers

the option to purchase large blocks of securities in a single transaction with the opportunity to cancel

the order if they were dissatisfied with the average price per security. (Id.) In 1999, BLMIS, then

considered a “third trading market giant,” made markets in approximately 1,000 securities (Ex. C.)

Based on the business’s stellar reputation, fast order execution, and vast trading volume, experts

reportedly valued the market making business at $200-$400 million in 2008. (Exs. D-E.)2

Of course, the legitimate market making and proprietary trading businesses managed

by Mark and Andrew Madoff were only two of the three business units at BLMIS. (Cplt. ¶ 24.) As the

world now knows, Bernard Madoff operated a third business, the investment advisory business, two

floors below the legitimate operations that the Trustee himself has acknowledged “had nothing to do

with the investment advisory business.” (Ex. G at 97.)

On December 10, 2008, Bernard Madoff confessed to his sons that the IA business

was, in fact, a Ponzi scheme “of epic proportions.” (Ex. H.) Mark and Andrew contacted the federal

authorities within hours of learning of their father’s betrayal of their trust (and that of his investors).

Bernard Madoff was arrested the following morning, before he could further dispose of his investors’

assets. (Id.; Ex. I.) Indeed, it was later revealed that there were $173 million of checks to investors

sitting in Madoff’s drawer, additional customer funds that would have—but for Mark and Andrew’s

timely action—been dissipated. (Ex. J.) Bernard Madoff’s criminal complaint, guilty plea, and

sentencing followed, and he is now serving a 150-year sentence. (Ex. K.)

Although the name Bernard Madoff is now synonymous with scandal, prior to

December 10, 2008, all of this was unthinkable. Bernard Madoff was a leader in the securities

2
Even after Bernard Madoff destroyed the firm’s reputation, the Trustee was able to sell the business to
an independent investor for approximately $25 million. (Ex. F, Second Amended and Restated Asset
Purchase Agreement §§ 4.1(a)-(b).)

4
industry and a prominent philanthropist. (See Ex. L.) He had been the chairman of NASDAQ, and

had propelled BLMIS’s innovations in the market making business since the 1970s. (Ex. M.) He was

a titan in the securities industry, widely-respected—and no more so than by his sons. It is easy to now

say in hindsight, as the Trustee does, that the consistent returns of the IA business should have been

cause for concern; however, as has now been widely reported, that business had been examined on

numerous occasions by the SEC and cleared without incident. (Exs. N-P.) It was also vetted by

numerous widely-known individual and institutional investors of outstanding reputation who were IA

clients, none of whom detected the fraud. (Ex. Q.) What is more, several prominent and apparently

legitimate investors have achieved results similar to those reported by Madoff.3 Like the rest of the

world, and indeed more so, Mark and Andrew viewed the success of the IA business as an outgrowth

of their father’s legendary trading skills, and had no reason to question his honesty or integrity before

December 10, 2008. And to be clear, although the Trustee’s allegations must be treated as true for

purposes of this motion, Mark and Andrew dispute each and every allegation even suggesting that they

had knowledge of their father’s fraud before he revealed it to them on December 10, 2008.

A. The Alleged Transfers

The Complaint alleges that Mark and Andrew Madoff received a series of transfers

from BLMIS, amounting to $66,859,311 and $60,644,821 respectively, that should be avoided. (Cplt.

¶¶ 74, 85.) These alleged transfers fall into four categories: (1) salary and bonuses received from

2001 to 2008 (Cplt. ¶¶ 74, 85); (2) proceeds from allegedly fictitious stock trades in investment

advisory accounts purportedly under their control (Cplt. ¶¶ 76-82; 86-92); (3) proceeds from loans

3
To cite some examples: Warren Buffett’s Berkshire Hathaway has averaged annual returns in excess of
20% after taxes for the past 43 years (Ex. R at 2), James Simons’ Medallion Fund has returned an
average of over 35% annually since 1989 (Ex. S), George Soros averaged annual returns of 30% in his
Quantum Fund from 1970 to 2000 (Ex. T), and in 2007 Paulson & Co. reported four different funds
with returns in excess of 100%, including one earning nearly 590% during that year. (Ex. U.)

5
allegedly paid out of BLMIS funds (Cplt. ¶ 84, 94); and (4) personal expenses charged to the BLMIS

credit card. (Id.) The Complaint also seeks money damages and equitable relief. (See Cplt. ¶¶ 112-

214.) Although these amounts may appear sinister in hindsight because the IA fraud now overshadows

all of the operations at BLMIS, Mark and Andrew Madoff dedicated their entire professional lives—

some two decades each—to the legitimate trading businesses of BLMIS, and they received each of

these transfers in good faith.

Compensation: The Trustee claims that Mark and Andrew earned “astronomical

compensation” of $29,320,830 and $31,105,505, respectively, from 2001 to 2008. (Cplt. ¶¶ 74, 85.)

Salaries and bonuses over this period of time and of this magnitude are fully consistent with the

amount of remuneration regularly paid to top traders in the financial industry. (Exs. V-W.) The

success and respect earned by the proprietary trading and market making businesses managed by Mark

and Andrew has been well-documented and the value those businesses created easily situates Mark

and Andrew well within the range of comparable traders at peer firms who earned similar or greater

compensation. (Exs. V-W.) The Trustee derides that Mark and Andrew lived comfortable, public

lifestyles (Cplt. ¶¶ 74, 85), but they had nothing to hide. In addition to their salaries and bonuses,

Mark and Andrew also earned money that was placed in deferred compensation accounts at BLMIS.

As the Trustee notes, Mark submitted a claim for $44,815,520 to this Court and Andrew submitted a

claim for $40,624,525, in order to preserve their rights to recover such deferred compensation. (Cplt.

¶¶ 75, 85.) Mark and Andrew were promised these amounts as part of their compensation for their

years of service to BLMIS, but had not received them at the time of the firm’s collapse.

Investments: The Trustee alleges that Mark and Andrew reaped “massive gains” from

“brazenly fabricated transactions” in their IA customer accounts. (Cplt. ¶¶ 76, 88.) Over the course of

more than a decade, Mark and Andrew did earn significant returns on investments made by their father

in their personal investment accounts at BLMIS, which they believed to be legitimate. So too did

6
thousands of other IA clients. The Trustee alleges that Mark and Andrew “knew, or should have

known, that the amounts withdrawn from [their] accounts were the product of fictitious and backdated

trading activity” because of their “level of financial experience and sophistication and [their]

supervisory position at BLMIS.” (Cplt. ¶ 83.) Of course, the Trustee notably does not allege that

Mark and Andrew maintained a supervisory position over the IA business—and as for financial

sophistication, the same could be said of hundreds of other IA investors, as well as the regulators that

failed to detect fictitious trading patterns.

Loans: Although the Complaint identifies certain loans made to Mark and Andrew

Madoff (Cplt. ¶¶ 84, 94), the Trustee fails to note anything sinister about the loans, omits that Mark

and Andrew executed promissory notes in favor of the lender, and does not contend that loans from the

owner of a family to two of its successful traders generally would be improper.

Credit Cards: The Trustee alleges that BLMIS funds were used to pay for personal

expenses charged on Mark and Andrew’s corporate American Express credit cards. (Cplt. ¶¶ 84, 94.)

The Complaint contains no allegations that such charges were not authorized by BLMIS.

B. Mark And Andrew Madoff’s Purported Compliance Responsibilities

Although Mark and Andrew had no oversight or compliance responsibilities in the IA

business, the Complaint alleges that they failed to perform supervisory tasks that would have

uncovered a fraud that repeated SEC examinations could not. (See, e.g., Cplt. ¶¶ 28-36.) As the

Complaint acknowledges, “Mark and Andrew Madoff had important roles in BLMIS’s market-making

business and at its proprietary trading desk,” but the Complaint also acknowledges—as this Court has

similarly acknowledged in Securities Investment Protection Corp. v. Bernard L. Madoff Investment

Securities LLC, 2010 Bankr. LEXIS 495, at *12 (Bankr. S.D.N.Y. Mar. 1, 2010)—that these legitimate

divisions of the company were separate and distinct from the fraudulent IA business. (Cplt. ¶ 49.)

Though the Complaint also alleges upon “information and belief” that Mark and Andrew had direct

7
contact with unspecified investors of the IA, the Trustee offers absolutely no supporting allegations for

this entirely general assertion. Id. The paucity of this allegation is telling, given the Trustee’s many

months of access to the books and records of all components of the BLMIS enterprise, including the

IA business. With the wealth of information available to him, the Trustee still has not connected Mark

and Andrew to the IA business—because there is no connection to be made.

In the absence of any plausible connection to the IA business, the Trustee posits that

Mark and Andrew had some general, unspecified supervisory duty towards the company as a whole.

This theory is not supported even by bare allegations. The Complaint makes repeated references to

BLMIS compliance materials. The abundance of these references, however, cannot alter their

irrelevance to Mark and Andrew Madoff’s clearly defined roles at BLMIS. The Complaint alleges

only one particular compliance manual, dating from 1998, that even mentions either Defendant by

name, and this provision merely lists Mark Madoff as “responsible for carrying on the Firm’s policy”

as a matter of last resort, should the company’s first two choices be indisposed. (Cplt. ¶ 35.) Other

than this single, decade-old document, the Trustee merely alleges unspecified “later manuals” that also

allegedly designate Mark and Andrew with vague fallback responsibilities. Id. The numerous other

compliance materials cited by the Trustee that do not mention either Mark or Andrew also do not

impose some generalized compliance duty on them over the IA business by virtue of their roles

managing BLMIS’s separate, legitimate businesses. (Cplt. ¶¶ 28, 32.) Notably, the Complaint

references the manual that governed the IA business, but fails entirely to acknowledge that this

document makes no mention whatsoever of either Mark or Andrew. (Cplt. ¶ 31.)4

4
The Complaint’s selective inclusion of compliance-related evidence is also telling. It is well
documented in publicly available information that BLMIS underwent numerous audits by objective
third parties (such as FINRA and the SEC), yet the Complaint makes no mention of the fact that these
third party securities experts were satisfied with the company’s compliance activities. (Ex. N-P.)

8
 The most that the Trustee alleges specifically with regard to Mark and Andrew’s

purported compliance duties is that each are “FINRA-registered securities principals” by virtue of their

having taken the FINRA Series 24 examination. (Cplt. ¶¶ 47-48.) Yet merely taking this exam and

obtaining the resulting license does not automatically impose supervisory responsibilities with regard

to an entire diversified company. As employees of BLMIS’s legitimate trading operations, Mark and

Andrew Madoff did not assume supervisory responsibilities as to the company as a whole or to the IA

business, and the Complaint’s mere repetition ad nauseum of bald assertions that lack any support

cannot make it so.

C. The Complaint

On or about October 2, 2009, the Trustee filed a Complaint in this adversary

proceeding pursuant to 15 U.S.C. §§ 78fff(b), 78fff-1(a), and 78fff-2(c)(3), and 11 U.S.C. §§ 105(a),

502(d), 542, 544, 547, 548(a), 550(a), and 551 (together, the “Bankruptcy Code”), the New York

Fraudulent Conveyance Act (N.Y. Debt. & Cred. Law §§ 270 et. seq.), and other applicable law,

against Mark and Andrew Madoff, along with their uncle, Peter Madoff, and cousin, Shana Madoff

Swanson. The Complaint asserts eighteen causes of action, including one count for turnover and

accounting, nine counts to avoid transfers under different provisions of the Bankruptcy Code and the

New York Debtor and Creditor Law, one count objecting to Mark and Andrew’s bankruptcy claims

and one count seeking equitable subordination of those claims. The Trustee also asserts common-law

claims for breach of fiduciary duty, conversion, unjust enrichment, negligence, constructive trust and

accounting.

Notably, the Complaint does not acknowledge that thousands of sophisticated investors

as well as numerous SEC examinations missed the very fraud that Mark and Andrew were alleged to

have missed as well. Indeed, Judge Stanton recently concluded that Bernard Madoff'
s investment

advisory business “did not give notice of fraud,” even to long-time associates of Madoff at Cohmad

9
Securities Corp. who worked in BLMIS’s offices directly with Madoff and his investment advisory

staff. SEC v. Cohmad Secs. Corp., 2010 WL 363844, at *4 (S.D.N.Y. Feb. 2, 2010). Furthermore,

Britain’s Serious Fraud Office recently concluded that it would not pursue legal action against MSIL or

its directors (which included Mark and Andrew) due to lack of evidence of wrongdoing. (Ex. X.)

ARGUMENT

To survive a motion to dismiss, the Trustee must “raise a right to relief above the

speculative level.” ATSI Commc’ns Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). As the Supreme Court has repeatedly

emphasized in recent years, “only a complaint that states a plausible claim for relief [will] survive a

motion to dismiss.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949-50 (2009). This plausibility standard

requires “more than a sheer possibility that a defendant has acted unlawfully,” and “more than an

unadorned, the defendant-unlawfully-harmed-me accusation.” Id. at 1949; see also Twombly, 550 U.S.

at 555 (“a plaintiff’s obligation to provide the grounds of his entitlement to relief requires more than

labels and conclusions”).

In applying these standards under Federal Rule of Civil Procedure 12(b)(6), which

applies here pursuant to Rule 7012(b) of the Federal Rules of Bankruptcy Procedure, a court must

accept as true well-pleaded factual allegations. Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996).

However, allegations consisting of a “formulaic recitation of the elements of a cause of action will not

do.” Twombly, 550 U.S. at 555. Conclusions unsupported by the facts alleged, legal conclusions, bald

assertions or unwarranted inferences do not survive a motion to dismiss. Id.

The heightened pleading standard announced in Iqbal and Twombly applies equally to

bankruptcy trustees and civil plaintiffs. See, e.g., In re 1031 Tax Group, LLC, 2009 WL 4342635

(Bankr. S.D.N.Y. Dec. 3, 2009); In re Caremerica, Inc., 409 B.R. 737 (E.D.N.C. 2009). In fact, “the

trustee is certainly more likely to have access to [] information than the antitrust plaintiffs in Twombly

10
or the Pakistani detainee in Iqbal. If these claimants were held to a heightened pleading standard, so

too can a trustee in bankruptcy.” In re Caremerica, Inc., 409 B.R. at 754. The trustee, after all, has

access to the Debtor’s books and records and the full discovery powers of the Court through the

bankruptcy court procedures. Id.; see also In re Gluth Bros. Const., Inc., 2009 WL 4037795, at *6

(Bankr. N.D. Ill. Nov. 19, 2009) (“[a]s the creditor trustee, the Plaintiff should have enough access to

information on the Debtor’s finances to be able to allege at least some minimal factual support for its

allegation.”).

Moreover, for claims based in fraud, the even higher standard of Rule 9(b) of the

Federal Rules of Civil Procedure applies. O’Connell v. Arthur Andersen LLP (In re AlphaStar Ins.

Group Ltd.), 383 B.R. 231, 257 (Bankr. S.D.N.Y. 2008) (“Even where fraud is not an element of the

claim, the allegations must satisfy Fed. R. Civ. P. 9(b) if the claim is based on fraudulent conduct.”);

Matsumura v. Benihana Nat’l Corp., 542 F. Supp. 2d 245, 251 (S.D.N.Y. 2008) (“[C]ourts in the

Second Circuit have applied Rule 9(b) to any cause of action that bears a close legal relationship to

fraud or mistake . . . .”). As a result, Rule 9(b) applies to each of the Trustee’s claims containing a

“quintessential averment of fraud.” Id. at 252; Welch v. TD Ameritrade Holding Corp., 2009 WL

2356131, at *22-24 (S.D.N.Y. July 27, 2009) (applying Rule 9(b) to, inter alia, breach of fiduciary

duty, negligence and unjust enrichment claims where claims were based on allegations of fraud

described throughout the complaint and each claim incorporated by reference all of the allegations in

the complaint). To the extent the Trustee pleads a non-fraud predicate for any of his claims, he does

not meaningfully distinguish his fraud allegations and, instead, incorporates by reference all

allegations in every count. Therefore, the Trustee’s Complaint is required to pass muster under the

rigorous pleading standard of Rule 9(b) as well as under Rule 8 of the Federal Rules of Civil

Procedure.

11
 Here, ten months passed from the Trustee’s December 15, 2008 appointment to the

filing of this Complaint. During that interval, the Trustee had access to all of BLMIS’s books and

records, and had vast amounts of information subpoenaed from financial institutions around the world.

Despite the Trustee’s unique position to summon information to bring these claims, the Trustee fails to

allege sufficient facts to maintain claims of any kind against Mark and Andrew.

I. THE TRUSTEE’S COMMON LAW CLAIMS FAIL AS A MATTER OF LAW

A. The Martin Act Preempts The Trustee’s Claims for Breach Of Fiduciary Duty,
Conversion, Unjust Enrichment, Negligence, And Constructive Trust

The Trustee’s common law claims fail as a matter of law because they are precluded by

the Martin Act, New York’s statutory mechanism for regulating the securities industry. The Martin

Act, N.Y. Gen. Bus. Law § 352, et. seq., grants the New York State Attorney General exclusive

enforcement power over claims arising out of securities transactions. To allow private plaintiffs to

bring common law claims related to the Martin Act would detract from the New York State Attorney

General’s exclusive enforcement power over the Act, which does not allow for private rights of action.

Abbey v. 3F Therapeutics, Inc., 2009 WL 4333819, at *14 (S.D.N.Y. Dec. 2, 2009) (dismissing

negligent misrepresentation claim pursuant to Martin Act preemption); Sedona Corp. v. Ladenburg

Thalmann & Co., Inc., 2005 WL 1902780, at *21-23 (S.D.N.Y. Aug. 9, 2005) (dismissing breach of

fiduciary duty and negligence claims).5

5
The “vast majority of state and federal courts” hold that causes of action related to securities fraud
claims that do not include scienter as an essential element of the claim are preempted by the Martin
Act. In re Bayou Hedge Fund Litig., 534 F. Supp. 2d 405, 421 (S.D.N.Y. 2007); see, e.g., Assured
Guaranty (UK) Ltd. v. J.P. Morgan Inv. Mgmt., Inc., No. 603755/08, 12 (N.Y. Sup. Ct. Jan. 28, 2010)
(dismissing fiduciary duty and gross negligence claims as preempted by Martin Act) (Ex. Y): Kassover
v. UBS AG, 619 F. Supp. 2d 28, 35-39 (S.D.N.Y. 2008) (dismissing various state and common law
claims as precluded by the Martin Act); Marcus v. Frome, 329 F. Supp. 2d 464, 476 (S.D.N.Y. 2004);
Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 190 (2d Cir. 2001) (affirming Martin Act
preemption of breach of fiduciary duty claim); Whitehall Tenants Corp. v. Estate of Olnick, 623
N.Y.S.2d 585, 585 (App. Div. 1995) (“[P]rivate plaintiffs will not be permitted through artful pleading

12
 This preclusionary rule applies to all common law claims that resemble claims the

Attorney General could assert under the Martin Act, which includes five out of the six common law

claims alleged in the Complaint: breach of fiduciary duty, conversion, unjust enrichment, negligence,

and constructive trust. See Pro Bono Invs., Inc. v. Gerry, 2005 WL 2429787, at *16 (S.D.N.Y. Sept.

30, 2005); Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., 651 F. Supp. 2d 155, 182

(S.D.N.Y. 2009). Indeed, a court has recently held that the Martin Act’s preclusion of related claims

applies specifically to claims arising out of Bernard Madoff’s fraudulent IA business. Barron v.

Igolnikov, No. 09 Civ. 4471, at 11-13 (S.D.N.Y. Mar. 10, 2010) (Ex. Z); see also In re Bayou Hedge

Fund Litig., 534 F. Supp. 2d 405, 407, 422 (S.D.N.Y. 2007) (dismissing fiduciary duty claim against

investment advisor that allegedly did not conduct due diligence for fund that was a Ponzi scheme

because Martin Act preempted the claim). And, there can be no question that the Martin Act’s

preemption provisions apply to causes of action brought by a bankruptcy trustee.6 Thus, the Trustee

here must be considered akin to a private plaintiff whose common law claims are nothing more than

to press any claim based on the sort of wrong” covered by the Martin Act); Jana Master Fund, Ltd. v.
JPMorgan Chase & Co., 2008 WL 746540, at *5 (N.Y. Sup. Ct. Mar. 12, 2008); CPC Int’l Inc. v.
McKesson Corp., 70 N.Y.2d 268, 276-77 (1987).
6
See Granite Partners, L.P. v. Bear Stearns & Co., Inc., 17 F. Supp. 2d 275, 282, 291-92 (S.D.N.Y.
1998). In Granite Partners, the court found that common law claims were preempted by the Martin
Act when they were brought by the Litigation Advisory Board, an entity appointed by the court to
succeed the prior bankruptcy trustee and have “exclusive authority on behalf of and in the name of” the
bankrupt funds. So too here, under the approval of the very same court, the SIPA Trustee was
“appointed the Trustee for the liquidation of the business of BLMIS . . . for the benefit of the estate and
its creditors.” (Cplt. ¶¶ 16-17, 19.) The Securities Investor Protection Corporation (“SIPC”), which
chooses and works closely with the SIPA Trustee, is a “nonprofit, private membership corporation to
which most registered brokers and dealers are required to belong.” In re New Times Sec. Servs., 371
F.3d 68, 72 n.3 (2d Cir. 2004) (internal citation omitted); 15 U.S.C. § 78fff(b) (stating SIPA
liquidations are conducted as though they are liquidations under the Bankruptcy Code); In re Adler
Coleman Clearing Corp., 195 B.R. 266, 269 (Bankr. S.D.N.Y. 1996) (holding SIPC is a non-profit
corporation and a “SIPA liquidation is essentially a bankruptcy liquidation”).

13
attempts to plead Martin Act claims in common law form, and are therefore preempted by the statute.

(See Cplt. ¶¶ 183-84, 190, 195, 201, 207.)

B. The Complaint Fails To State Claims For Breach Of Fiduciary Duty And Negligence

Counts Thirteen and Sixteen of the Complaint, for breach of fiduciary duty and

negligence, suffer from additional defects that independently require dismissal. The Complaint

includes no allegations even suggesting that Mark and Andrew had a fiduciary relationship with IA

customers, nor could it. Moreover, the Trustee fails to allege any breach of the duties Mark and

Andrew owed to BLMIS and as a matter of law, Bernard Madoff’s massive and unforeseeable fraud,

not any action of Mark or Andrew Madoff, caused the damages to BLMIS that the Trustee seeks to

recover.

Under New York law, a claim for breach of fiduciary duty requires three elements:

“breach by a fiduciary of a duty owed to plaintiff; defendant’s knowing participation in the breach; and

damages.” Am. Fin. Int’l v. Bennett, 2007 WL 1732427, at *4 (S.D.N.Y. June 14, 2007) (quoting SCS

Commc’ns, Inc. v. Herrick Co., Inc., 360 F.3d 329, 342 (2d Cir. 2004)). “[W]here damages are sought

for breach of fiduciary duty under New York law, the plaintiff must demonstrate that the defendant’s

conduct proximately caused injury in order to establish liability.” LNC Invs., Inc. v. First Fidelity

Bank, N.A. N.J., 173 F.3d 454, 465 (2d Cir. 1999). The elements of a claim for negligence under New

York law are similar: “(i) a duty owed to the plaintiff by the defendant; (ii) breach of that duty; and

(iii) injury substantially caused by that breach.” DeBlasio v. Merrill Lynch & Co., Inc., 2009 WL

2242605, at *35 (S.D.N.Y. July 27, 2009) (quoting Lombard v. Booz Allen & Hamilton, Inc., 280 F.3d

209, 215) (2d Cir. 2002)).

Although the Trustee purports to bring breach of fiduciary duty and negligence claims

on behalf of both BLMIS and Bernard Madoff’s investors, Mark and Andrew Madoff owed a duty to

BLMIS only, and not to its IA customers. As a matter of law, “there is no fiduciary duty owed to the

14
investing public, or to the customers of a corporation by a controlling shareholder, officer, or director

of a corporation.” Am. Fin., 2007 WL 1732427, at *4 (citations omitted). Nor do corporate

employees have any general fiduciary duties to the investing public. In re Donahue Secs., Inc., 318

B.R. 667, 676-77 (Bankr. S.D. Ohio 2004), aff’d, Lutz v. Chitwood, 337 B.R. 160 (S.D. Ohio 2005).

The Trustee’s allegations that Mark and Andrew were “general securities principals pursuant to the

FINRA Securities 24 examination” (Cplt. ¶ 48) similarly fail to give rise to a fiduciary responsibility to

the IA customers. There is no caselaw to support the illogical inference that simply by virtue of

passing certain FINRA exams, Mark and Andrew Madoff had a fiduciary responsibility for the

operation of the entire diversified securities firm, including aspects of the firm, such as the IA

business, over which the Complaint does not even contend that they had actual responsibility.

As BLMIS employees who ran the legitimate and profitable market making and

proprietary trading desks (Cplt. ¶¶ 7-8), Mark and Andrew Madoff owed a duty to BLMIS to properly

manage those operations. The Trustee does not—and cannot—allege that Mark or Andrew failed to

properly manage the market making or proprietary trading desks. Indeed, the Trustee’s sale of the

legitimate market making business was one of his first recoveries for IA customers.

1. The Trustee Fails To Plead That Mark Or Andrew Breached Any Duty To BLMIS

The Trustee’s breach of duty claims consist of two basic allegations: (1) that Mark and

Andrew failed to carry out compliance and supervisory responsibilities; and (2) that Mark and Andrew

received corporate assets for their personal use. (Cplt. ¶¶ 184, 201.) Neither constitutes a breach of

duties Mark and Andrew owed to BLMIS; they thus should be dismissed as a matter of law. As stated

in Section I.B and pages 7-9, above, the Trustee has not alleged that Mark and Andrew failed to carry

out their actual responsibilities over the market making and proprietary trading desks. Instead, the

Trustee misstates the scope and nature of Mark and Andrew’s responsibilities at BLMIS (of which this

Court may take notice, because such misstatements stand in flat contradiction to the very documents

15
the Trustee himself cites in the Complaint), then claims that Mark and Andrew failed to attend to the

responsibilities he retroactively assigns them.

The Trustee’s claims related to the alleged transfers of corporate assets to Mark and

Andrew Madoff fail as breaches of fiduciary duty because each of the alleged transfers, including the

payment of salaries and bonuses and use of the company’s credit card, would have been initiated or

approved by BLMIS through its sole shareholder, Bernard Madoff. By initiating or approving the

transactions, BLMIS waived any claims against Mark or Andrew Madoff for breach of fiduciary duty.

See Roden v. Dan’s Papers, Inc., 2006 WL 3437528, at *2 (N.Y. Sup. Ct. App. Term Nov. 9, 2006)

(employer’s approval of employee’s conduct waived employer’s counterclaims for breach of

employee’s duty of loyalty related to that conduct); Kaul v. Hanover Direct, Inc., 296 F. Supp. 2d 506,

542 (S.D.N.Y. 2004) (no breach of fiduciary duty for employee’s acceptance of car allowance payment

when senior management authorized the transaction). Because any alleged transfers of corporate

assets to Mark or Andrew Madoff would have been approved by BLMIS, Mark and Andrew did not

“act[] in any manner inconsistent with [their] agency or trust.” Gortat v. Capala Bros., Inc., 585 F.

Supp. 2d 372, 366 (E.D.N.Y. 2008).

2. Bernard Madoff’s Massive Fraud Was The Cause Of BLMIS’s Damages

Even if the Trustee had adequately alleged a breach of a duty owed to BLMIS by Mark

or Andrew, this purported breach was not the cause of its alleged losses: Bernard Madoff’s massive

and unforeseeable fraud caused BLMIS to collapse. “Under ordinary circumstances no one is

chargeable with damages because he has not anticipated the commission of a crime by some third

party.” Berenson v. Nat’l Surety Co., 260 N.Y. 299, 303 (1932) (citations omitted). Here, the criminal

conduct of Bernard Madoff destroyed the causal relationship between any purported negligent conduct

by Mark or Andrew Madoff and the injuries suffered by investors. See id.; Ehle v. Howard, 2006 WL

948120, at *1 (N.Y. Sup. Ct. Apr. 7, 2006) (dismissing claim where, inter alia, “intervening criminal

16
acts of a third-party supersede[d] the claimed negligence”). Because negligence liability and a

fiduciary duty claim for damages require that a plaintiff’s injury must be a foreseeable result of the

defendant’s conduct, “an intervening act, tortious or criminal, will ordinarily insulate a negligent

defendant from liability when the subsequent act could not have been reasonably anticipated by the

defendant.” Cullen v. BMW of N. Am., Inc., 691 F.2d 1097, 1101 (2d Cir. 1982) (holding that the

defendant automobile distributor was not negligent in failing to more carefully supervise one of its

franchises because it was not reasonably foreseeable that the franchise’s majority owner would steal a

customer’s payment.) Bernard Madoff’s fraud in the present case is all the more unforeseeable and

beyond the realm of ordinary events. See S.E.C. v. Cohmad Secs. Corp., 2010 WL 363844, at *2

(S.D.N.Y. Feb. 2, 2010).

C. The Trustee’s Claim for Conversion Fails As A Matter Of Law Because The Funds Over
Which Mark And Andrew Madoff Allegedly Assumed Unauthorized Control Were Not
“Specifically Identifiable”

In yet another example of overreaching, the Trustee purports to assert a conversion

claim, as if a conversion claim is simply equivalent to a claim for money damages. It is not, and the

Trustee fails to meet the requisite standards for this equitable claim. Funds deposited in a personal

bank or investment account must be “sufficiently specific and identifiable” in relation to the

institution’s other funds in order to be subject to conversion claims. Fundacion Museo de Arte v. CBI-

TDB Union Bancaire Privee, 160 F.3d 146, 148 (2d Cir. 1998) (affirming dismissal of conversion

claim).7 The Trustee’s pleading identifies no such specific funds, and this claim therefore should be

dismissed.

7
See also Jordan (Bermuda) Inv. Co., Ltd. v. Hunter Green Invs., Ltd., 2003 WL 1751780, at *5, 14
(S.D.N.Y. 2003) (dismissing conversion claim because money at issue was “incapable of being
described or identified in the same manner as a specific chattel” since it was deposited into a general
account rather than maintained separately) (quoting High View Fund, L.P. v. Hall, 27 F. Supp. 2d 420,
429 (S.D.N.Y. 1998)); Citadel Mgmt., Inc. v. Telesis Trust, Inc., 123 F. Supp. 2d 133, 148 n.4, 151

17
 The Trustee’s allegation that investment funds of IA customers were generally used for

“loans, payments, and other transfers” does not allege any facts tying specific sums deposited by

particular customers of the IA business to identifiable amounts received by Mark or Andrew Madoff.

(Cplt. ¶ 190.) The Trustee cannot even tie the alleged transfers to the IA business, much less to

specific IA customers. BLMIS had numerous substantial sources of income deriving from its

legitimate market making and proprietary trading businesses. (Exs. D-E, G.) The Trustee does not

offer any facts supporting the contention that the amounts allegedly received by Mark and Andrew

originated from deposits by IA customers rather than from these other sources of revenue. See In re

Musicland Holding Corp., 386 B.R. 428, 440 (S.D.N.Y. 2008) (affirming bankruptcy court’s dismissal

of conversion claim because funds were not specifically identifiable where appellee might have been

paid from loan advance rather from the proceeds of appellants’ collateral). The Trustee’s conversion

claim therefore fails as a matter of law.8

D. The Trustee’s Unjust Enrichment Claim Fails As A Matter of Law Because Mark And
Andrew Madoff Did Not Have Any Direct Relationship With Investors

Under New York law, claims for unjust enrichment require the plaintiff to have an

“actual, substantive relationship” with the defendant. See, e.g., Carmona v. Spanish Broad. Sys., Inc.,

2009 WL 890054, at *6 (S.D.N.Y. Mar. 30, 2009) (requiring “direct dealing” between plaintiff radio

(S.D.N.Y. 2000) (dismissing conversion claim because funds were not “segregated or earmarked in a
distinct account”).
8
This claim fails for two additional reasons. First, the Trustee failed to make a formal demand that
Mark and Andrew return the money at issue. See Coty Inc. v. L' Oreal S.A., 2008 WL 331360, at *5
(S.D.N.Y. Feb. 4, 2008) (where demand has not been made, the court “must” dismiss claim of
conversion); Thyroff v. Nationwide Mutual Ins. Co., 2010 WL 76154, at *2 (2d Cir. Jan. 11, 2010)
(affirming dismissal of conversion claim for failure to produce sufficient evidence of demand).
Second, Mark and Andrew did not receive any “unauthorized” transfers subject to conversion. See
Lefkowitz v. Bank of New York, 2009 WL 5033951, at *17-18 (S.D.N.Y. Dec. 22, 2009) (dismissing
conversion claim because bank acted with authority to set aside money to satisfy plaintiff’s
obligations). The Trustee does not allege that any transfers were unauthorized by either BLMIS or its
sole shareholder, Bernard Madoff.

18
station listener who responded to on-air trivia contest and defendant radio station); Nanjing Textiles

IMP/EXP Corp., Ltd. v. NCC Sportswear Corp., 2006 WL 2337186, at *12 (S.D.N.Y. Aug. 11, 2006)

(dismissing unjust enrichment claim because apparel provider did not have direct dealing with

defendant, but rather sold to defendant through an intermediary). Even crediting the Trustee’s bare

factual allegations, they are insufficient to establish any actual, substantive relationship between the IA

customers, and Mark and Andrew.

Additionally, corporate employees and officers are not personally liable for unjust

enrichment claims based on benefits conferred on a corporation. Heller v. Kurz, 228 A.D.2d 263, 264

(N.Y. App. Div. 1996); Joan Hansen & Co., Inc. v. Everlast World’s Boxing Headquarters Corp., 744

N.Y.S.2d 384, 389 (App. Div. 2002). Even where a defendant is actively involved in a corporation’s

affairs—which was not the case here because Mark and Andrew had no involvement whatsoever in the

IA business, or in the overall management of BLMIS—a claim for unjust enrichment fails if the

plaintiff “points to no service that was rendered to defendant . . . for which plaintiff can reasonably

expect compensation.” Joan Hansen, 744 N.Y.S.2d at 389.9 Receiving compensation as an employee

of a corporation, even if the corporation undertook wrongful actions, is not a sufficient basis for an

unjust enrichment claim. Am. Fin. Int’l v. Bennett, 2007 WL 1732427, at *3 (S.D.N.Y. June 14, 2007)

(dismissing unjust enrichment claim). Because IA customers transferred funds to BLMIS rather than

to Mark and Andrew Madoff personally, the Trustee’s claim for unjust enrichment against Mark and

Andrew fails as a matter of law.

The Trustee’s unjust enrichment claim also fails because such a claim must be based on

an unfulfilled expectation of services. Heller, 228 A.D.2d at 265 (affirming dismissal of claim against

9
Even these cases deal with high level officers of the corporations at issue. Mark and Andrew ran
BLMIS’s proprietary trading and market making businesses, but there is no allegation that they were
high-level employees of BLMIS overall, and certainly not of the IA business. They therefore are even
less connected to the actions of the corporation than the defendants in the cases cited above.

19
individual shareholders where corporation’s underwriter “made no showing that he performed any

additional services for the individual defendants for which he reasonably expected compensation from

them”); Nanjing Textiles, 2006 WL 2337186, at *12; Joan Hansen, 744 N.Y.S.2d at 389. BLMIS had

no expectation that Mark and Andrew would provide any services to the company beyond their

responsibilities in the proprietary trading and market making businesses, which Mark and Andrew

dutifully carried out.

E. The Trustee’s Claims For Constructive Trust And Accounting Fail As A Matter of Law

Four elements are required in order to obtain a constructive trust under New York law:

“(1) a confidential or fiduciary relationship; (2) a promise, express or implied; (3) a transfer of the

subject res made in reliance on that promise; and (4) unjust enrichment.” In re First Cent. Fin. Corp.,

377 F.3d 209, 212 (2d Cir. 2004) (internal citations omitted). Similarly, the right to an accounting also

rests on “existence of a fiduciary and confidential relationship between the parties.” PVM Oil Futures,

Inc. v. Banque Paribas, 554 N.Y.S.2d 606, 608 (App. Div. 1990) (affirming dismissal of accounting

claim) (citing Kaminsky v. Kahn, 20 N.Y.2d 573, 582 (1967)); Kramer v. Lockwood Pension Servs.,

Inc., 653 F. Supp. 2d 354, 396 (S.D.N.Y. 2009) (“In order to sustain an equitable action for accounting

under New York law, a plaintiff must show either a fiduciary or confidential relationship with the

defendant”).

As explained above, Mark and Andrew did not have any fiduciary duties or general

compliance responsibilities towards BLMIS as a whole or to the IA customers (see supra Section I.B).

Because the existence of such duties is an essential element of claims for a constructive trust and an

accounting, these causes of action fail as a matter of law. Wachovia Sec., LLC v. Joseph, 866 N.Y.S.2d

651, 653 (App. Div. 2008) (holding absence of a fiduciary relationship precludes entitlement to a

constructive trust); Sugarman v. Weisz, 310 N.Y.S.2d 394, 394 (App. Div. 1970) (reversing order

directing an accounting because of absence of fiduciary relationship between the parties). Moreover,

20
the absence of any unjust enrichment by Mark and Andrew also negates the unjust enrichment element

of the Trustee’s constructive trust claim. (Cplt. ¶ 209.) Because the Trustee’s unjust enrichment claim

fails as a matter of law (see supra Section I.D), so does his attempt to impose a constructive trust.10

The Trustee’s constructive trust claim also fails as a matter of law because the

Complaint does not allege “a promise” or a “transfer of property in reliance thereof.” Weizmann Inst.

of Science v. Neschis, 229 F. Supp. 2d 234, 258 (S.D.N.Y. 2002) (dismissing claim for a constructive

trust because of plaintiffs’ failure “to allege either a promise or a transfer of any property in reliance on

a promise”); Van Brunt v. Rauschenberg, 799 F. Supp. 1467, 1474 (S.D.N.Y. 1992) (“Without a

transfer of property in reliance of a promise or agreement, there cannot be a constructive trust.”). The

Trustee does not allege that Mark and Andrew made unfulfilled promises to BLMIS or to customers of

the IA business, nor does the Trustee allege that BLMIS or IA customers transferred property in

reliance on any such unfulfilled promises. The same rationale dooms the accounting claim. Waldman

v. Englishtown Sportswear, Ltd., 460 N.Y.S.2d 552, 556 (App. Div. 1983) (holding an employment

relationship is insufficient to establish an accounting).

The Trustee’s accounting claim also fails because the Trustee has not alleged that Mark

and Andrew were “intrusted with the custody and control of the property of another” and that they

“exercised such powers for the owner.” Pelkey v. Pelkey, 258 N.Y.S. 562, 563 (App. Div. 1932);

Kramer, 653 F. Supp. 2d at 396 (dismissing claim for accounting because “there is no allegation that

[plaintiff] entrusted property to [defendant]”). The Trustee has not even alleged that Mark and Andrew

received funds deposited by IA customers (see supra Section I.C), much less that the IA customers

trusted Mark and Andrew with control of their property. Similarly, any amounts that Mark and

10
Additionally, bankruptcy courts are reluctant to impose a constructive trust unless there is a special need
for doing so because “by creating a separate allocation mechanism outside the scope of the bankruptcy
system, the constructive trust doctrine can wreak . . . havoc with the priority system ordained by the
Bankruptcy Code.” In re First Cent. Fin. Corp., 377 F.3d at 217 (citations omitted).

21
Andrew allegedly received from BLMIS as loans or compensation for employment services were not

transfers requiring Mark and Andrew to maintain sums that still belonged to another party.11

II. THE TRUSTEE’S BANKRUPTCY LAW CLAIMS SHOULD BE DISMISSED

A. The Trustee’s Turnover And Accounting Claim Is Precluded As A Matter Of Law

Because The Transfers Are Not “Property of the Estate”

Count One of the Complaint purports to seek the “immediate” turnover and accounting

of all BLMIS transfers purportedly made to Mark and Andrew Madoff pursuant to Section 542 of the

Bankruptcy Code and 15 U.S.C. § 78fff-2(c)(3). (Cplt. ¶¶ 112-15.) In the Second Circuit, however,

property transferred by a debtor before a bankruptcy filing and subject to an avoidance action is not

subject to the turnover and accounting remedies of Section 542(a). See FDIC v. Hirsch (In re Colonial

Realty Co.), 980 F.2d 125, 131 (2d Cir. 1992) (based on language of Section 541(a)(3), property that is

alleged to have been fraudulently transferred “is not to be considered property of the estate until it is

recovered”) (citations omitted). Transferred property only becomes property of the estate upon

recovery after a successful avoidance action. Id.

The Trustee cannot use a turnover action to bypass the more rigorous requirements for

avoidance under Sections 544, 547 and 548 of the Bankruptcy Code. See Savage & Assocs., P.C. v.

BLR Servs. SAS (In re Teligent, Inc.), 307 B.R. 744, 751 (Bankr. S.D.N.Y. 2004) (holding that the

Chapter 11 “trustee cannot compel the turnover of non-estate property under Section 542 and

circumvent the more restrictive fraudulent transfer claim requirements in the process”); Andrew Velez

11
Moreover, where the plaintiff can use discovery to determine the amount of money at issue, an
accounting claim should be dismissed. IMG Fragrance Brands, LLC v. Houbigant, Inc., 2009 WL
5171741, at *11 (S.D.N.Y. Dec. 18, 2009) (dismissing claim for accounting). Here, the Trustee in fact
has access to the books and records of BLMIS. It is thus nonsensical that he should require more
information about the matters in his Complaint; regardless, he can, if necessary, obtain further
documentation about any relevant amounts through the ordinary means of discovery. (Cplt. ¶¶ 74-94.)
Plaintiff thus has an adequate remedy at law for discovering any relevant sums, rendering the equitable
remedy of accounting unnecessary.

22
Constr. Inc. v. Consol. Edison Co. of New York, Inc. (In re Andrew Velez Constr., Inc.), 373 B.R. 262,

273 (Bankr. S.D.N.Y. 2007) (same).12 To recover any transfers, the Trustee first must avoid the

transfers under Sections 544, 547 or 548, and then establish a basis for recovery under Section 550.

Teligent, 307 B.R. at 749 (“The Code separates the avoidance of a fraudulent transfer from the

recovery of a fraudulent transfer.”). “Once the grounds for setting aside a transfer have been shown,

the Trustee faces the second hurdle of establishing a means of recovery under § 550(a), the remedies

section.” Id. (citations omitted). Because the Trustee has ignored these procedures, the Section 542

turnover and accounting claim should be dismissed.

B. The Trustee Fails To State A Claim For Recovery Of The Preference Period Transfers

Count Two seeks to recover compensation payments made to Mark and Andrew

Madoff, as insiders, during the one year period before the Filing Date pursuant to Section 547 of the

Bankruptcy Code. (Cplt. ¶¶ 116-26.) However, Count Two fails because the Trustee’s allegations lack

any semblance of the specificity required under Rules 8 or 9(b). Rather than specifying the transferee,

the amount of the transfer, and the date on which the transfer occurred, the Trustee lumps together the

entire amount of compensation that Mark and Andrew allegedly received over seven years (Cplt.

¶¶ 74, 85) with the entire amount of compensation that all four so-called “Family Defendants”

received during the one-year preference period. (Cplt. ¶ 108.) These aggregated allegations lack

sufficient factual detail and thus should be dismissed.13

12
SIPA’s relevant language is consistent with this interpretation and authorizes the trustee to recover
property transferred by the debtor only “if and to the extent that such transfer is voidable or void under
the provisions of Title 11 . . . .” 15 U.S.C. § 78fff-2(c)(3).
13
Contra In re Caremerica, Inc., 409 B.R. 737, 750-51 (Bankr. E.D.N.C. 2009) (table of transfers listing
the transferees, amounts, and dates of each transfer provided sufficient factual support under Twombly
and Iqbal that allegedly preferential transfers were made to defendants); In re Gluth Bros. Const., Inc.,
2009 WL 4110122, at *12-13 (Bankr. N.D. Ill. Nov. 25, 2009) (allegations that the debtor made
“interest payments to the Defendant on the loan, including payments of $12,775.57 on March 9, 2007,

23
 The Complaint also fails to allege the nature and amount of the antecedent debt that

BLMIS owed to each of Mark and Andrew Madoff. As one court explained, “In order to satisfy the

pleading requirements under Iqbal, the court finds that the trustee is obligated to allege facts regarding

the nature and amount of the antecedent debt which, if true, would render plausible the assertion that a

transfer was made for or on account of such antecedent debt.” In re Caremerica, Inc., 409 B.R. at 751.

In addition, facts supporting the remaining elements of a Section 547 claim—a transfer made to or for

the benefit of a creditor, the insolvency of the transferor on the date of the transfers outside the 90-day

period, and the receipt of more through the alleged preferential transfer than available under a Chapter

7 liquidation—appear nowhere in the Complaint. See 11 U.S.C. § 547(b)(1), (3), (4), (5); In re

Caremerica, 409 B.R. at 750-54 (applying Iqbal pleading standards to each element). Instead, the

Trustee’s allegations merely mimic the elements of Section 547(b) (Cplt. ¶¶ 119-24), and should be

dismissed. See Twombly, 550 U.S. at 555 (“a formulaic recitation of the elements of a cause of action

will not do”).

C. The Trustee Fails To State A Claim For Actual Fraudulent Transfers Under The
Bankruptcy Code

Pursuant to Bankruptcy Code Section 548(a)(1)(A), Count Three seeks to recover

transfers made to Mark and Andrew Madoff within the two years before the petition date on the

ground that such transfers constitute actual fraudulent transfers. (Cplt. ¶¶ 127-31.) Count Three fails

because the Complaint itself shows the transfers were made “for value and in good faith,” and in all

events, the Trustee fails to plead fraud with the particularity required by Rule 9(b).

$14,144.39 on April 2, 2007, and $13,688.12 on May 10, 2007” were sufficient to plead a preference
claim under Twombly/Iqbal).

24
 1. The Trustee’s Actual Fraudulent Transfer Claim Must Be Dismissed Because The
Alleged Transfers Were “For Value And In Good Faith”

The Trustee’s actual fraudulent transfer claim under the Bankruptcy Code should be

dismissed because Mark and Andrew received the transfers “for value and in good faith” in accordance

with Section 548(c). See Balaber-Strauss v. Sixty-Five Brokers (In re Churchill Mortgage Inv. Corp.),

256 B.R. 664, 676 (Bankr. S.D.N.Y. 2000) (dismissing actual fraudulent conveyance claims because

trustee made no allegations that transfers were not “for value and in good faith”), aff’d, Balaber-

Strauss v. Lawrence, 264 B.R. 303, 308 (S.D.N.Y. 2001).14 Because the statute only targets transfers

connected to the fraud, “[n]ot every transaction which has the effect of exacerbating the harm to

creditors by increasing the amount of claims while diminishing the debtor’s estate is a fraudulent

conveyance.” Churchill, 256 B.R. at 681. Courts readily dismiss complaints that demonstrate “for

value and in good faith.” Id. at 680, 682; In re Image Masters, 421 B.R. 164, 180 n.19, 183 (Bankr.

E.D. Pa. 2009) (dismissing actual fraud claims where allegations in the complaint established that

transfers were made for equivalent value and in good faith).

(a) The Alleged Transfers Were Made For Value

The statute governing actual fraudulent transfers (11 U.S.C. § 548) is not a “catch-all

provision” indiscriminately covering all transfers that diminish the estate. Churchill, 256 B.R. at 681.

Rather, transfers that are made “for value” may not be avoided because the company received

consideration in exchange and benefited from that value. Id. at 680. The “for value” assessment

14
Even if the rule permitting fraudulent transfers made for value and in good faith is considered an
affirmative defense, the cases cited above demonstrate that where “the defense appears on the face of
the complaint,” it may mandate dismissal of a complaint. Pani v. Empire Blue Cross Blue Shield, 152
F.3d 67, 74 (2d Cir. 1998); Leveto v. Lapina, 258 F.3d 156, 161 (3d Cir. 2001) (holding a complaint
may be dismissed under Rule 12(b)(6) if an affirmative defense is apparent on the face of the
complaint); see also 5B Wright & Miller, Federal Practice and Procedure § 1357 (3d ed. 2009)
(stating case law is clear that a complaint is “subject to dismissal under Rule 12(b)(6) when its
allegations indicate the existence of an affirmative defense that will bar award of any remedy”).

25
“focus[es] on the value of the goods and services provided” in the specific transfers at issue.15 Id.

Transfers to those rendering services are “for value” if they are proportionate to “like commissions

paid for like services in the marketplace during the Relevant Period by similar but legitimate business

entities.” Churchill, 256 B.R. at 679; Merrill v. Allen (In re Universal Clearing House Co.), 60 B.R.

985, 1000 (D. Utah 1986) (“a determination of whether value was given under section 548 should

focus on the value of the goods and services provided”).

The transfers that the Trustee seeks to avoid include the salaries received by Mark and

Andrew. However, the Complaint does not allege that Mark and Andrew had “no show” jobs; to the

contrary, the Trustee can make no such allegations given the value for which he sold the very business

that they ran. A bare allegation of excessive compensation, without more, does not sustain the

Complaint in the face of all of the other facts contained therein. Count Three of the Complaint thus

should be dismissed. F.C.C. v. NextWave Personal Commc’ns, Inc. (In re NextWave Personal

Commc’ns, Inc.), 200 F.3d 43, 56 (2d Cir. 1999) (holding that it “is uncontested that the question of

reasonably equivalent value is determined by the value of the consideration exchanged between the

parties at the time of the conveyance or incurrence of debt which is challenged”); Cohen v. UN-Ltd.

Holdings, Inc. (In re Nelco, Ltd.), 264 B.R. 790, 813 (Bankr. E.D. Va. 1999) (dismissing claim because

company received reasonably equivalent value, measured by the totality of the circumstances, as

15
This reasoning goes on to add that the determination should not focus on “the impact that the goods and
services had on the bankrupt enterprise.” Churchill, 256 B.R. at 680; see also Merrill v. Allen (In re
Universal Clearing House Co.), 60 B.R. 985, 1000 (D. Utah 1986). This added provision even further
counsels towards finding that the alleged transfers were “for value.” However, even if the impact of
the transferee’s services were relevant to the “for value” consideration, Mark and Andrew’s alleged
transfers would still be “for value” because they molded the market making business into the profitable
entity that ended up being sold for $25 million even after being unfairly associated with BLMIS’s
fraudulent IA business. (Ex. F.)

26
consideration for compensating employee who operated the business and was responsible for

company’s success until fraud was detected).16

Even services to a fraudulent business may be for value if the services constitute

consideration for compensation. Churchill, 256 B.R. at 680. As the court in Orlick v. Kozyak (In re

Fin. Federated Title & Trust, Inc.), 309 F.3d 1325, 1332-33 (11th Cir. 2008) made clear, if an

employee who is also the child of the operator of a Ponzi scheme provides services that are not

connected to the company’s fraudulent activity, such work can still be considered “for value and in

good faith.” Id. (holding district court erred in determining defendant employee was barred from

claiming transfers were exchanged “for value and in good faith”). Otherwise “no one who in any way

dealt with, worked for, or provided services to” the debtor, including the debtor’s landlord, utility

company, or any other party having no involvement whatsoever in the debtor’s fraudulent business,

could prevent the avoidance of any conveyances they received. Id. (quoting In re Universal Clearing

House Co., 60 B.R. 985, 999 (D. Utah 1986)); see also Lustig v. Weisz & Assocs. Inc. (In re Unified

Commercial Capital, Inc.), 260 B.R. 343, 352-53 (Bankr. W.D.N.Y. 2001) (holding as a matter of law

that paying “commercially recognized” value constitutes reasonably equivalent value); Image Masters,

421 B.R. at 180 n.19, 183. All the more so here, where the alleged transfers were concededly for

services performed for the separate, legitimate businesses of BLMIS; such compensation should be

considered “for value” as a matter of law.

Payments that discharge antecedent debt also constitute reasonable value. 11 U.S.C.

§ 548(d)(2)(A) (stating antecedent debt constitutes reasonably equivalent value); In re AppliedTheory

Corp., 323 B.R. 838, 842 (Bankr. S.D.N.Y. 2005) (granting defendant summary judgment because

16
The terms “fair value” under Section 548(c), “reasonably equivalent value” under the constructive
fraud provision of the Bankruptcy Code (§ 548(a)(1)(B)), and “fair consideration” under the New York
Debtor & Creditor Law “have the same fundamental meaning.” Churchill, 256 B.R. at 677.

27
securing prior loan constituted reasonably equivalent value); HBE Leasing Corp. v. Frank, 48 F.3d

623, 635 (2d Cir. 1995) (applying New York Debtor and Creditor Law (“DCL”)). Because even

alleged payments that were not formally labeled compensation for their work at BLMIS’s legitimate

businesses—such as the alleged loans received by Mark and Andrew—were transferred in exchange

for other pre-existing debt owed to Mark and Andrew (such as the deferred compensation that is still

owed to them), all of the alleged transfers were made for value and therefore may not be avoided by

the Trustee.

(b) Mark And Andrew Received The Alleged Transfers In Good Faith

Based on the facts alleged in the Complaint as well as publicly available information,

the fraudulent transfer claims should be dismissed because Mark and Andrew accepted the alleged

transfers in good faith. Churchill, 256 B.R. at 673; Chemtex, LLC v. St. Anthony Enters., Inc., 490 F.

Supp. 2d 536, 544 (S.D.N.Y. 2007) (holding defendant, who was “a purchaser for fair consideration

and without knowledge (actual or constructive) of SAE’s alleged fraud, is thus entitled to the

protection” from actual fraudulent transfer claim). In addition to alleging no facts indicating that Mark

and Andrew had either actual knowledge or inquiry notice of the IA fraud, the Trustee also

acknowledges that Mark and Andrew worked for the legitimate proprietary trading and market making

businesses for decades; he does not tie Mark or Andrew to the IA business.17 (Cplt. ¶¶ 24, 31, 49; Ex.

G.)

The good faith determination, one readily applied to parties that rendered services to a

company that engaged in fraud, rests on objective evidence of whether the defendant knew or should

have known of the fraud, but also accounts for “objective evidence of the transferee’s subjective good

17
Chemtex deals with the state rather than federal actual fraudulent transfers statute, but “the two statutes
are interpreted similarly by the courts.” Churchill, 256 B.R. at 677 (citing HBE, 48 F.3d at 638 and
other cases).

28
faith.” In re Bayou Group LLC, 396 B.R. 810, 854 (Bankr. S.D.N.Y. 2008) (dismissing on summary

judgment claim against investor in Ponzi scheme based on good faith defense); Atlanta Shipping Corp.

v. Chem. Bank, 818 F.2d 240, 249 (2d Cir. 1987) (affirming dismissal of fraudulent conveyance claims

because where defendant knew transfers would not adversely affect debtor’s balance sheet or ability to

pay creditors, plaintiff did not plead “any cognizable theory on which a court could conclude” that

transfers to defendant were in bad faith).

The bankruptcy court in Image Masters dismissed an actual fraudulent transfer claim

based on the “for value and good faith” provision of Section 548(c) because “[n]othing in the

Complaint suggests that Defendants [who facilitated a Ponzi scheme by providing loan refinancing to

homeowners] were in any way connected with the Ponzi scheme . . . or that Defendants actually acted

with anything less than good faith when they received the transfers.” Id. at 182. Even though the

complaint in Image Masters alleged that defendants should have known or inquired about the fraud

based on their relationship with and information available from the Ponzi scheme operator, the court

held the allegations to be “nothing more than conclusions of law” that did not meet the heightened

pleading requirements of Rule 9(b) and also were based on an “incorrect legal assumption that

Defendants had some legal duty to investigate” the operator of the fraud. Id. at 182, 184 n. 25.

Precisely the same is true here.

2. The Trustee Fails To Identify The Two-Year Transfers With Particularity

A claim to avoid an actual fraudulent transfer must satisfy the pleading requirements of

Rule 9(b), and describe “the property that was allegedly conveyed, the timing and frequency of those

allegedly fraudulent conveyances [and] the consideration paid.” Official Comm. of Unsecured

Creditors of M. Fabrikant & Sons, Inc. v. JPMorgan Chase Bank, N.A. (In re M. Fabrikant & Sons,

Inc.), 394 B.R. 721, 733 (Bankr. S.D.N.Y. 2008) (dismissing actual fraudulent transfer claims for

failure to identify “any specific transfer, transferor, transferee, or date of transfer”) (quoting United

29
Feature Syndicate, Inc. v. Miller Feature Syndicate, Inc., 216 F. Supp. 2d 198, 221 (S.D.N.Y. 2002));

Fed. Nat’l Mortgage Assoc. v. Olympia Mortgage Corp., 2006 WL 2802092, at *9 (E.D.N.Y. Sept. 28,

2006) (dismissing intentional fraudulent transfer claims that aggregated a series of cash transfers made

over a three to five year period without identifying how many transfers were being challenged or the

specific dates or amounts of those transfers). The Trustee fails to identify any of the Two-Year

Transfers with the requisite particularity. Instead, the Trustee asserts the existence of 129 transfers

totaling $58,666,811 for all four so-called Family Defendants. (Cplt. ¶ 107.) The only transfers

identified as allegedly made to Mark and Andrew Madoff and falling within the two year statutory

period consist of two loans for $6,645,000 and $4,485,000 for home purchases in 2008. (Cplt. ¶¶ 84,

94.) Other than these two loans, the Complaint fails to identify which of the Two-Year Transfers went

to Mark or Andrew, the dates of the loans, the amount of the transfers and the consideration paid. For

this reason, Count Three should be dismissed.

3. The Trustee Fails To Plead Actual Intent On Behalf Of The Transferor With
Particularity

Even if the Trustee did otherwise properly allege the other elements of an actual

fraudulent transfer claim, this claim also fails because the Trustee does not allege that the transfers

made to Mark and Andrew were made by BLMIS or Bernard Madoff in furtherance of the fraudulent

scheme, as the law in the Second Circuit requires.18 Many of the alleged transfers to Mark and

18
In re Sharp Int’l Corp., 403 F.3d 43, 56 (2d Cir. 2005) (dismissing actual fraudulent conveyance claim
because the fraud alleged in the complaint did not relate to the transaction at issue); Image Masters,
421 B.R. at 186-87 (dismissing actual fraudulent transfer claim because “a plaintiff must set forth
factual allegations of fraudulent intent in connection with the specific transfer sought to be avoided”);
Brandt v. Am. Nat’l Bank & Trust Co. (In re Foos), 188 B.R. 239, 244 (Bankr. N.D. Ill. 1995)
(dismissing actual fraudulent conveyance claims because where the individual “operating the Ponzi
scheme conducts ordinary business transactions outside of the Ponzi scheme, the basis for presuming
fraud is not present”); see also Bear, Stearns Sec. Corp. v. Gredd (In re Manhattan Inv. Fund, Ltd.),
397 B.R. 1, 11 (S.D.N.Y. 2007) (holding that actual intent is not presumed to apply to transfers
sufficiently unrelated to the Ponzi scheme).

30
Andrew compensated them for work in BLMIS’s legitimate trading businesses, and none furthered the

Ponzi scheme. The claims seeking to avoid these transfers thus should be dismissed.

D. The Trustee Fails To State A Claim For Constructive Fraudulent Transfers Under The
Bankruptcy Code

Pursuant to Bankruptcy Code Section 548(a)(1)(B), Count Four alleges that the Two-

Year Transfers qualify as constructive fraudulent conveyances. (Cplt. ¶¶ 132-40.) This claim fails

because the Complaint contains insufficient factual allegations to meet even the Rule 8 pleading

standard and because the Trustee has failed to adequately allege that BLMIS did not receive

“reasonably equivalent value” for the alleged transfers.

1. The Trustee Fails To Allege Facts Supporting A Constructive Fraudulent Transfer

Claim

To state a claim under this Section, the Trustee must plausibly allege facts supporting

two statutory elements: first, that BLMIS received less than reasonably equivalent value for the Two-

Year Transfers, and second, that BLMIS (i) was or was rendered insolvent at the time of the Two-Year

Transfers, (ii) became insufficiently capitalized following the Two-Year Transfers, (iii) intended to

incur debts beyond its ability to repay, or (iv) made the Two-Year Transfers for the benefit of an insider

under an employment contract, outside the ordinary course of business. 11 U.S.C.

§ 548(a)(1)(B)(ii)(I)-(IV). The Trustee limits his allegations to “a formulaic recitation of the elements

of [the] cause of action,” that does not suffice under Rule 8. See Twombly, 550 U.S. at 555.

For the first element, the Trustee alleges simply that “BLMIS received less than a

reasonably equivalent value in exchange for each of the Two-Year Transfers.” (Cplt. ¶ 134.) For the

second element, instead of alleging facts to support one of the four alternative elements, the Trustee

simply mimics the statutory language for all four elements. (See Cplt. ¶¶ 135-38.) In In re

Caremerica, Inc., 409 B.R. 737 (Bankr. E.D.N.C. 2009), like here, the complaint alleged that the

transferors “received less than reasonably equivalent value in exchange from the defendant for such

31
fraudulent transfer” and these transferors were “insolvent on the date of each fraudulent transfer or

became insolvent as a result of the fraudulent transfer.” Id. at 756. Acknowledging that “the trustee’s

allegations mirror the elements of § 548(a)(1)(B),” the Caremerica court found “the trustee fails to

support such allegations with factual assertions.” Id. Specifically, “[m]issing from the Amended

Complaint is an identification of the consideration received by each transferor, information as to why

the value of such consideration was less than the amount transferred, and facts supporting the debtors’

insolvency at the time of the transfer.” Id. The court concluded that “[i]n the absence of such factual

assertions, the trustee’s claims based on constructive fraud fail to meet the Rule 8 pleading standard.”

Id.

Similarly, in In re Image Masters, Inc., 421 B.R. 164, 179 (Bankr. E.D. Pa. 2009), the

court found the trustee’s constructive fraudulent transfer allegations to “consist primarily of bald legal

conclusions” such as “Image Masters received no value whatsoever in exchange for the Transfers

alleged in this case-let alone reasonably equivalent value.” Citing Twombly and Iqbal, the court

granted a motion to dismiss the constructive fraud counts because the trustee’s complaint alleged “a

threadbare, formulaic recitation of the elements of a cause of action for avoidance of a transfer based

on constructive fraud” and as a result “lacks sufficient factual matter to state a claim to relief for

avoidance of the transfers based on constructive fraud that is plausible on its face.” Id. at 180.

Like the trustees in Caremerica and Image Masters, the Trustee here fails to identify

the consideration received by BLMIS and provide any information as to why the value of any

consideration was less than the amount transferred. The Trustee’s allegations that BLMIS was

insolvent merely repeat the statutory elements relating to insolvency without any supporting facts.

(See Cplt. ¶ 100.) Indeed, the Trustee’s allegations are more deficient than those dismissed in

Caremerica. In Caremerica, the complaint contained factual assertions regarding the dates, amounts

and names of transferees, but nonetheless failed. 409 B.R. at 756; contra In re Allou Distribs., Inc.,

32
387 B.R. 365, 404 (Bankr. E.D.N.Y. 2008) (complaint stated a claim for constructive fraudulent

transfer where each transfer was identified “by the date, the check or wire transfer number, and the

amount”). Here, the Trustee limits the factual allegations concerning the Two-Year Transfers to his

assertion that at least 129 of such transfers in the aggregate amount of $58,666,811 occurred for all

four “Family Defendants.” (Cplt. ¶ 107.) Again, the only transfers identified that expressly purport to

involve Mark and Andrew that fall within the two year statutory period consist of two loans made in

2008 for $6,645,000 and $4,485,000 for the purchase of homes.19 Other than these two loans, the

Complaint fails to identify which of the Two-Year Transfers went to Mark and Andrew, the dates of the

transfers, and their amounts. Without this information, and any facts to support the first and second

elements of Section 548(a)(1)(B), Count Four of the Complaint must be dismissed.

2. The Trustee Has Failed To Allege That BLMIS Did Not Receive “Reasonably
Equivalent Value” For The Alleged Transfers
The term “reasonably equivalent value” under Section 548(a)(1)(B) has the same

meaning as “for value” under Section 548(c). Balaber-Strauss v. Sixty-Five Brokers (In re Churchill

Mortgage Inv. Corp.), 256 B.R. 664, 677 (Bankr. S.D.N.Y. 2000). In both instances, the transfer is fair

if it is proportionate to “like commissions paid for like services in the marketplace during the Relevant

Period by similar but legitimate business entities.” Id. at 679. Here, however, the burden is entirely on

the plaintiff to plead properly that the company received “less than a reasonably equivalent value.” 11

U.S.C. § 548(a)(1)(B)(i); Churchill, 256 B.R. at 677 (holding burden is on “trustee to establish that the

debtor did not receive “reasonably equivalent value”); In re AppliedTheory Corp., 330 B.R. 362, 363

n.3 (S.D.N.Y. 2005) (dismissing constructive fraudulent conveyance claims because debtor received

reasonably equivalent value for the transfer at issue). As explained above (see supra Section

19
Mark and Andrew of course gave “value” for these purchases in the form of promissory notes. (Cplt.
¶¶ 84, 94); 11 U.S.C. § 548(c).

33
II.C.1(a)), because Mark and Andrew received market-value compensation for their dedicated and

productive service to BLMIS’s legitimate trading business, the Trustee has not pleaded that BLMIS

received less than reasonably equivalent value for the amounts allegedly transferred to Mark and

Andrew.

E. The Trustee Fails To State A Claim For Actual Fraudulent Transfers Under The New
York Debtor And Creditor Law

Count Five, alleging that the Six-Year Transfers qualify as actual fraudulent transfers

under Sections 276 and 276-a of the DCL (Cplt. ¶¶ 141-44), fails for the same reasons that Count

Three (alleging actual fraud under the Bankruptcy Code) fails.

1. The Trustee Does Not Identify The Six-Year Transfers With Particularity

Like the Two-Year Transfers, the Complaint does not identify the Six-Year Transfers

with particularity. Sharp Int’l Corp. v. State Street Bank & Trust Co. (In re Sharp Int’l Corp.), 403

F.3d 43, 56 (2d Cir. 2005) (Rule 9(b) specificity requirement applies to actual fraudulent intent claim

under both state law and the Bankruptcy Code). Of the 383 Six-Year Transfers alleged in the

Complaint (Cplt. ¶ 106), only 12 are identified as expressly involving transfers to Mark or Andrew.

(Cplt. ¶¶ 80, 84, 90, 94.) For none of them does the Complaint provide a single specific date on which

the transfer supposedly occurred, much less the parties involved in the transfer and the consideration

paid. Additionally, two of the alleged transfers lump together payments made for credit card charges

for six years, from 2002 to 2008. Such bare-bones allegations cannot withstand a motion to dismiss.

See Fed. Nat’l Mortgage Assoc. v. Olympia Mortgage Corp., 2006 WL 2802092, at *9 (E.D.N.Y.

Sept. 28, 2006).

2. The Trustee Fails To Plead Actual Intent On Behalf Of The Transferor And The
Transferees
Not only does the Trustee fail to allege actual intent on behalf of BLMIS, as transferor,

but the actual fraudulent transfer claims under the DCL fail for the additional reason that the

34
Complaint does not contain any specific allegation, as it must, that Mark and Andrew acted with

fraudulent intent. Although some cases suggest that such intent may not be necessary (see In re Bayou

Group LLC, 396 B.R. 810, 826 (Bankr. S.D.N.Y. 2008)), many find such allegations an essential

element of the claim. See Andrew Velez Constr., Inc. v. Consol. Edison Co. of New York, Inc. (In re

Andrew Velez Constr. Inc.), 373 B.R. 262, 276 (Bankr. S.D.N.Y. 2007); In re MarketXT Holdings

Corp., 361 B.R. 369, 395 (Bankr. S.D.N.Y. 2007); Picard v. Taylor (In re Park S. Secs., LLC), 326

B.R. 505, 517 (Bankr. S.D.N.Y. 2005).

To satisfy Rule 9(b)’s pleading requirements “a complaint must allege with some

specificity the acts constituting fraud . . . conclusory allegations that defendant’s conduct was

fraudulent or deceptive are not enough.” Silverman v. Actrade Capital, Inc. (In re Actrade Fin. Techs.

Ltd.), 337 B.R. 791, 801 (Bankr. S.D.N.Y. 2005) (citations omitted). In bankruptcy cases, a plaintiff

can satisfy this requirement “(a) by alleging that a defendant had both motive and opportunity to

commit fraud or (b) by alleging facts that constitute strong circumstantial evidence of conscious

misbehavior or recklessness.” In re Allou Distrib., Inc., 379 B.R. 5, 17 (Bankr. E.D.N.Y. 2007). The

Trustee has not made any of the necessary allegations.

Relying on their supervisory positions in the legitimate market making and proprietary

trading businesses, the Trustee concludes that Mark and Andrew “knew, should have known, or

deliberately disregarded” that the IA business was a Ponzi scheme. (See, e.g., Cplt. ¶¶ 47, 57.)

However, no facts in the Complaint support a claim that Mark and Andrew knew of or recklessly

disregarded the possibility of the fraud. All that the Trustee offers is a flatly conclusory statement,

without any supporting allegations of fact, that Mark and Andrew were “derelict in [their] duties and

responsibilities” as employees of BLMIS and “[a]s a result, they either failed to detect or failed to stop

the fraud, thereby enabling and facilitating the Ponzi scheme at BLMIS.” (Cplt. ¶ 2.) The Complaint

does not specify any acts constituting fraud nor provide any circumstantial evidence of conscious

35
misbehavior or recklessness. Because the Complaint does not allege actual fraud on behalf of Mark

and Andrew, Count Five must be dismissed.

3. The Trustee’s Claim Must Be Dismissed Because The Alleged Transfers Were
Received For “Fair Consideration And Without Knowledge”

The Trustee’s claim for actual fraudulent transfers under the DCL must also be

dismissed because any conveyances that Mark and Andrew allegedly received were for “fair

consideration and without knowledge.” DCL § 278; Chemtex, LLC v. St. Anthony Enters., Inc., 490 F.

Supp. 2d 536, 544 (S.D.N.Y. 2007) (holding the DCL “offers complete protection to an innocent

purchaser for value regardless of the intent of the debtor”) (citing HBE Leasing v. Frank, 48 F.3d 623,

636 (2d Cir. 1995)). The “fair consideration and without knowledge” requirement of Section 278 of

the DCL equals the “for value and in good faith” standard under Section 548(c) of the Bankruptcy

Code. Balaber-Strauss v. Sixty-Five Brokers (In re Churchill Mortgage Inv. Corp.), 256 B.R. 664,

676-77 (Bankr. S.D.N.Y. 2000) (holding “the two statutes are interpreted similarly by the courts”

(citing HBE Leasing, 48 F.3d at 638 and other cases)). Therefore, for the reasons set forth above under

the federal statute (see supra Section II.C.1), the Trustee’s claim for actual fraudulent conveyance

under the DCL fails.

F. The Trustee Fails to State a Claim for Constructive Fraudulent Transfers Under The
New York Debtor and Creditor Law

Counts Six, Seven and Eight allege that the Six-Year Transfers qualify as constructive

fraudulent conveyances under Sections 273, 274 and 275 of the DCL. (Cplt. ¶¶ 145-59.) These claims

fail for the same reasons that the Bankruptcy Code constructive fraud claim fails.

For one, the Complaint does not assert any facts as to the dates, amounts and

transferees for each of those Six-Year Transfers. For the few transfers that the Complaint does

describe, there is no allegation satisfying Rule 9(b). See In re Merrill Lynch & Co., Inc. Research

Reports Secs. Litig., 2008 WL 2594819, at *8 (S.D.N.Y. June 26, 2008) (Rule 9(b) applies to all

36
averments of fraud, including non-fraud claims based on allegations of defendant’s fraudulent

conduct). For example, the Trustee alleges five separate loan transfers to Mark and Andrew between

2003 and 2008 for real estate purchases in exchange for promissory notes, which the Trustee alleges

were never repaid. (Cplt. ¶¶ 84, 94.) The Complaint does not provide sufficient allegations, however,

that Mark and Andrew gave the promissory notes in bad faith. The conclusory allegation that Mark

and Andrew could not have received any money from BLMIS in good faith falls short of this standard.

(Cplt. ¶ 64.)

For the remaining elements of each of the claims, the Trustee performs the same

exercise as he did with the federal claims—simply mirroring the language of DCL Sections 273, 274

and 275, respectively, without any factual support. As with the Two-Year Transfers, the Complaint

lacks facts to support any of these assertions and “a formulaic recitation of the elements of a cause of

action” will not survive a motion to dismiss. See Twombly, 500 U.S. at 555. Counts Six, Seven and

Eight fail the pleading requirements of Rule 8 and 9(b) and must be dismissed.

1. The Trustee Has Failed To Allege That BLMIS Did Not Receive “Fair
Consideration” For The Alleged Transfers

The constructive fraudulent transfer claim under the DCL should be dismissed for the

same reasons as its federal counterpart. (See supra Section II.C.1(a)) “Fair consideration” under the

DCL has virtually the same meaning as “reasonably equivalent value” under the analogous federal

provision. Churchill Mortgage Inv. Corp., 256 B.R. at 677; In re AppliedTheory Corp., 330 B.R. 362,

363 n.3 (S.D.N.Y. 2005) (equating “reasonably equivalent value” and “fair consideration” as “used

interchangeably by courts” and dismissing constructive fraudulent conveyance claims because debtor

received reasonably equivalent value). Mark and Andrew’s services running the legitimate BLMIS

businesses thus constituted “fair consideration” under the DCL.

37
 The DCL also contains a “good faith” element. The Trustee fails to allege that Mark

and Andrew lacked good faith in exchanging consideration for the transfers, an element of fair

consideration under DCL Section 272(a). See Silverman v. Actrade Capital, Inc. (In re Actrade Fin.

Techs. Ltd.), 337 B.R. 791, 805 (Bankr. S.D.N.Y. 2005) (“the party seeking to have the transfer set

aside has the burden of proof on the element of fair consideration and, since it is essential to a finding

of fair consideration, good faith”). Moreover, because the Second Circuit reads this element of the

DCL very narrowly, even if the Trustee could make a preliminary showing that Mark and Andrew

lacked good faith, such a claim would still not be sufficient to avoid a transfer made for “fair

consideration.” In re Sharp Int’l Corp., 403 F.3d 43, 54 (2d Cir. 2005) (quoting U.S. v. McCombs, 30

F.3d 310, 326 n. 1 (2d Cir. 1994) and holding “bad faith does not appear to be an articulable exception

to the broad principle that the satisfaction of a preexisting debt qualifies as fair consideration for a

transfer of property”) (citations omitted). The Second Circuit precludes only defendants who have

actually participated in the fraud from availing themselves of the “fair consideration” provision of

the DCL. Id. Even knowledge of the fraud—which Mark and Andrew absolutely did not have—

does not prevent a transfer from being considered exchanged for “fair consideration.” Id. The

constructive fraudulent conveyance claims under the DCL should therefore be dismissed. 20

G. Bankruptcy Code 546(e) Precludes Avoidance of Transfers from Mark and Andrew’s
BLMIS Customer Accounts

Even if the Trustee had adequately pleaded any of his avoidance claims—and the

preceding sections show that he did not—Section 546(e) of the Bankruptcy Code nevertheless

20
Mark and Andrew are not affected by the fact that New York courts hold that “preferential payments of
pre-existing obligations . . . to a debtor corporation’s shareholders, officers, or directors are deemed not
to be transfers for fair consideration” because they were neither shareholders, officers, nor directors of
the IA business. HBE Leasing Corp. v. Frank, 48 F.3d 623, 635 (2d Cir. 1995). Moreover, even if this
rule were to apply, it would not apply to their compensation for services that were repaid
contemporaneously with their provision of such services. This rule only applies to pre-existing debts,
but not to a “contemporaneous advance of funds.” Id.

38
precludes him from avoiding transfers to Mark and Andrew made from their BLMIS customer

accounts (Cplt. ¶¶ 76, 86) because these transfers constitute “settlement payments” by a “stockbroker”

in connection with a “securities contract.” 11 U.S.C. § 546(e). First, the law is clear that “settlement

payments” under § 546(e) include a “customer-side settlement” between a stockbroker and its

customer. Kaiser Steel Corp. v. Pearl Brewing Co. (In re Kaiser Steel Corp.), 952 F.2d 1230, 1238

(10th Cir. 1991) (“[l]ogically, the term ‘settlement payment’ may also be used to describe payments

made to settle a customer’s account with its broker”). Second, it is undisputed that BLMIS was a

“stockbroker” as defined by the Bankruptcy Code with respect to its legitimate proprietary trading

business.21 Third, the Bankruptcy Code’s definition of a “securities contract” certainly covers the

transactions here.22 Therefore, the Trustee’s claims to avoid transfers to Mark and Andrew from their

BLMIS customer accounts should be dismissed.

H. The Trustee Cannot Rely On The Discovery Rule To Avoid Transfers That Occurred
More Than Six Years From The Commencement Of The Adversary Proceeding Or To
Obtain Attorneys Fees

Pursuant to DCL Sections 276 and 276-a and Section 544(b) of the Bankruptcy Code,

Count Nine of the Complaint seeks to avoid the transfers to Mark and Andrew, and to recover

attorneys’ fees. (Cplt. ¶¶ 160-64.) The Complaint does not define the term “Transfers,” leaving

unclear exactly what transfers this Count concerns. Quite simply, Count Nine should be dismissed on

21
A stockbroker is a “person—(A) with respect to which there is a customer, as defined in Section 741(2)
of this title; and (B) that is engaged in the business of effecting transactions in securities— (i) for the
account of others; or (ii) with members of the general public, from or for such person’s own
account.” 11 U.S.C. § 101(53A) (emphasis added). Mark and Andrew were “customers” for purpose
of this statute because they had “a claim against a person arising out of . . . (ii) a deposit of cash, a
security or other property with such person for the purpose of purchasing or selling a security.” 11
U.S.C. § 741(2).
22
“Securities contract” means, in relevant part, “(i) a contract for the purchase, sale, or loan of a security,
. . . or option on any of the foregoing, including an option to purchase or sell any such security, . . .” or
“(vii) any other agreement or transaction that is similar to an agreement or transaction referred to in
this subparagraph . . . ” 11 U.S.C. § 741(7) (emphasis added).

39
this basis alone; it fails to meet the pleading standard for fraud. Even if Count Nine could survive

dismissal on this basis, the Trustee’s reference to the so-called “discovery rule” in pleading this Count

suggests that the Trustee seeks to avoid $57,708,392 in “undiscovered transfers” falling outside the

six-year statutory maximum look-back period for fraudulent transfers. (Cplt. ¶ 109.) The discovery

rule permits a plaintiff under limited circumstances—not present here—to assert a fraud claim within

two years from when the plaintiff “discovered the fraud, or could with reasonable diligence have

discovered it.” N.Y. C.P.L.R. §§ 203(f), 213(8).

1. The Trustee’s “Discovery Rule” Claim Fails Because It Does Not Identify
Appropriate Creditors

To invoke the discovery rule and reach beyond the six-year limitation period that

applies to the transfers purportedly made to Mark and Andrew, the Trustee conclusorily asserts that

“the fraudulent scheme perpetrated by BLMIS was not reasonably discoverable by at least one

unsecured creditor of BLMIS.” (Cplt. ¶ 161.) This is not enough; it simply begs the question of the

pleading requirement. A complaint must identify a category of creditors with standing under

applicable non-bankruptcy law to challenge the transaction under Bankruptcy Code Section 544(b). In

re Musicland Holding Corp., 398 B.R. 761, 780-81 (Bankr. S.D.N.Y. 2008) (complaint’s “allegations

specifically identify three categories of unsecured creditors that purport to trigger the plaintiff’s

standing” meeting the “‘category’ standard articulated in Global Crossing”); Global Crossing Estate

Representative v. Winnick, 2006 WL 2212776, at *11 (S.D.N.Y. Aug. 3, 2006) (“to identify the

category of creditors with potentially viable claims [] is unquestionably enough to put defendants on

notice of the creditors who supply the basis for the right to sue, and will permit them to answer, seek

relevant discovery, and defend against these claims”). Failing to identify any specific category of

creditors that could not have reasonably discovered Madoff’s fraud falls far short of the Global

40
Crossing “category” standard. Beyond this failure and more fundamentally, as shown in the next

section, the Trustee’s own allegations defeat the discovery rule.

2. The Trustee’s Own Allegations Preclude Any Inference That A Category Of

Investors Exists Who Could Not Have Discovered The Fraud

Rather than plead that no investor could have discovered Bernard Madoff’s IA fraud,

the Trustee has done the exact opposite. In other adversary complaints, the Trustee has alleged red

flags sufficient to put an investor on inquiry notice of Madoff’s fraud.23 Assuming them to be true, no

category of investors exists who could not have reasonably discovered the IA fraud. For example, in

the Picower Complaint, Adv. Pro. No. 09-1197, the Trustee identified a series of “indicia of irregularity

and fraud” that he contends put BLMIS investors “on notice” of Madoff’s fraud:

• two articles published in the mainstream financial press, including a May 27, 2001
Barron’s article and a May 2001 article in MAR/Hedge;

• the fact that BLMIS functioned as both manager and custodian of securities, and had a
“lack of transparency . . . to other investors, regulators and outside parties”;

• the fact that BLMIS was audited by Friehling & Horowitz, an accounting firm with three
employees; and

• the fact that many banks and industry advisors purportedly refused to deal with BLMIS
“because they had serious concerns that [Madoff’s] IA Business operations were not
legitimate.

(Ex. AA, Picower Cplt. ¶ 64.) The Trustee made identical allegations in the Merkin Complaint, Adv.

Pro. No. 09-1182. (Ex. BB, Merkin Cplt. ¶ 44.) Taking the Trustee’s allegations at face value, no

category of investors exists who could not have reasonably discovered the fraud. The Trustee should

not be permitted to at once claim that the fraud was knowable to the world, yet simultaneously seek the

benefit of the discovery rule.

23
The Court may take judicial notice of the allegations set forth in avoidance complaints filed in the
Trustee’s adversary proceedings against BLMIS investors. In re Theatre Row Phase II Assocs., 385
B.R. 511 (Bankr. S.D.N.Y. 2008).

41
 3. The Trustee’s Claim To Recover Attorneys’ Fees Under DCL Section 276-a Fails
As A Matter of Law Because The Trustee Has Not Alleged That Mark And
Andrew Took The Transfers With Actual Intent To Defraud

The Trustee’s claim for recovery of attorneys’ fees under Section 276-a fails because

the transfers were not “made by the debtor and received by the transferee with actual intent as

distinguished from intent presumed in law, to hinder, delay, or defraud either present or future

creditors.” DCL § 276-a. Section 276-a requires an “explicit finding of actual intent to defraud” by

both the transferor and the transferee. Carey v. Crescenzi, 923 F.2d 18, 21 (2d Cir. 1991); In re Jacobs,

394 B.R. 646, 670 (Bankr. E.D.N.Y. 2008). As discussed above, the Trustee has not sufficiently

alleged actual intent on the part of BLMIS as transferor or of Mark and Andrew as transferees.

Therefore, the Trustee’s claim for attorneys’ fees should be dismissed.

I. The Trustee’s Claim To Avoid Subsequent Transfers Should Be Dismissed Because The
Trustee Has Not Alleged Any Subsequent Transfers

Count Ten, which seeks to avoid subsequent transfers, should be dismissed because the

Complaint fails to identify any subsequent transfers. Count Ten merely alleges that “[o]n information

and belief, some or all of the transfers were subsequently transferred by one or more Family

Defendants to another Family Defendant, either directly or indirectly.” (Cplt. ¶ 167.) For the same

reasons that the Trustee did not meet the standards for pleading its claims for constructive fraudulent

transfers and actual fraudulent transfers, the Trustee fails to meet Rules 8 or 9(b) in pleading the

subsequent transfers that he seeks to avoid. The Complaint does not identify the dates or amounts of

the purported subsequent transfers or the identities of the transferors and transferees. These allegations

fall short of even the basic notice pleading requirements. Twombly, 550 U.S. at 545 (Rule 8(a) requires

a plaintiff to plead enough to “give the defendant fair notice of what the . . . claim is and the grounds

upon which it rests.”).

42
J. The Disallowance Claim Must Be Dismissed Because There Has Been No Adjudication
On The Underlying Avoidance Action And The Trustee Has Not Demonstrated That A
Viable Avoidance Claim Exists

Pursuant to Bankruptcy Code Section 502(d), Count Eleven seeks disallowance of the

claims filed by Mark and Andrew Madoff unless and until they return the Transfers to the Trustee.

(Cplt. ¶ 174.) This Count fails both because there has not been an adjudication on the underlying

avoidance action, and because the Trustee has not demonstrated the existence of a viable avoidance

claim. Section 502(d) acts “to preclude entities which have received voidable transfers from sharing in

the distribution of the assets of the estate unless and until the voidable transfer has been returned to the

estate.” In re Mid Atl. Fund, Inc., 60 B.R. 604, 609 (Bankr. S.D.N.Y. 1986). It “is designed to be

triggered after a creditor has been afforded a reasonable time in which to turn over amounts

adjudicated to belong to the bankruptcy estate.” Rhythms NetConnections, Inc. v. Cisco Sys., Inc. (In

re Rhythms NetConnections), 300 B.R. 404, 409 (Bankr. S.D.N.Y. 2003) (Lifland, J.) (citations

omitted). Absent a predicate judicial determination of the creditor’s liability on the avoidable transfer,

Section 502(d) disallowance is not available. Seta Corp. v. Atl. Computer Sys. (In re Atl. Computer

Sys.), 173 B.R. 858, 862 (S.D.N.Y. 1994) (noting that Section 502(d) envisions a judicial

determination of the underlying avoidance action before claim disallowance); In re Metiom, Inc., 301

B.R. 634, 642 (Bankr. S.D.N.Y. 2003) (same). Therefore, the Trustee’s Section 502(d) claim is

premature and may not be brought unless and until there has been an adjudication on the underlying

avoidance actions.24

24
Although one court in this District has found that on a motion to dismiss, the Court need only
determine whether the complaint asserts a valid cause of action under Section 502(d) and not whether
the claims are disallowed based on the merits of the underlying avoidance actions, Enron Corp. v.
Avenue Special Situations Fund II, L.P. (In re Enron Corp.), 340 B.R. 180, 207 (Bankr. S.D.N.Y.
2006), rev’d on other grounds, 379 B.R. 425 (S.D.N.Y. 2007), since the Trustee’s avoidance actions
will not survive for failure to comply with Rules 8 and 9(b), he does not have a valid cause of action
under Section 502(d) to survive a motion to dismiss.

43
K. The Equitable Subordination Claim Must Be Dismissed Because The Trustee Fails To
Adequately Plead Any Underlying Inequitable Conduct

In Count Twelve, the Trustee seeks to equitably subordinate Mark and Andrew’s claims

because they either acted in breach of their fiduciary duties or were complicit in the fraud at BLMIS.

(Cplt. ¶¶ 176-80.) This Count fails because the Trustee fails to plead adequately that Mark and

Andrew engaged in any inequitable conduct. To equitably subordinate a claim, the Court must find

that: (i) the claimant engaged in some type of inequitable conduct; (ii) the misconduct resulted in

injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and (iii)

equitable subordination of the claim is not inconsistent with the provisions of the Bankruptcy Code. In

re Enron Corp., 333 B.R. 205, 217 (Bankr. S.D.N.Y. 2005). Under the first element, three categories

of inequitable conduct have been recognized: (a) fraud, illegality and breach of fiduciary duties; (b)

substitution of debt for capital when a company is undercapitalized; or (c) control or use of the debtor

as an alter ego for the benefit of the claimant. Id.; O’Connell v. Arthur Andersen LLP (In re AlphaStar

Ins. Group Ltd.), 383 B.R. 231, 276 (Bankr. S.D.N.Y. 2008). As set forth in Sections I.B-E, the

Trustee fails to plead adequately its fraud and fiduciary duty claims; the Trustee also does not attempt

to plead any allegations that fall into any of the other categories of inequitable conduct. Therefore, the

equitable subordination claim fails because the Trustee does not state a claim for the predicate

wrongful acts. See AlphaStar, 383 B.R. at 276-77 (where fraud claim and fraud-based breach of

fiduciary duty claim failed to satisfy Rule 9(b), “the Trustee also failed to satisfy the pleading

requirements to support his fraud-based equitable subordination claims.”).

III. THE TRUSTEE’S REQUEST FOR PUNITIVE DAMAGES IS INAPPROPRIATE

The Trustee requests punitive damages as a remedy for the breach of fiduciary duty,

negligence and conversion claims. (Cplt. ¶¶ 187, 193, 205.) Under New York law, “punitive damages

are not available in the ordinary fraud and deceit case; a plaintiff must plead that defendant’s conduct

44
was morally culpable.” Trepel v. Abdoulaye, 185 F. Supp. 2d 308, 311 (S.D.N.Y. 2002). The purpose

of punitive damages is “to punish the wrongdoer and deter future similar conduct.” Summerville v.

Lipsig, 704 N.Y.S.2d 598, 599 (App. Div. 2000). Neither of these goals are served here, where Mark

and Andrew should not be punished for their father’s wrongdoing. At most, if proved, the Trustee’s

claims amount to claims of passive shortcomings regarding non-existent compliance duties and

allegations of turning a blind eye; this is not the kind of “morally culpable” conduct that punitive

damages address.

CONCLUSION

For all the foregoing reasons, Mark and Andrew Madoff respectfully request that the

Court grant their motion and dismiss the Complaint in its entirety with prejudice.

Dated: March 15, 2010

New York, New York

Respectfully submitted,

PAUL, WEISS, RIFKIND, WHARTON &

GARRISON LLP

By: /s/ Martin Flumenbaum

Martin Flumenbaum (mflumenbaum@paulweiss.com)
Stephen J. Shimshak (sshimshak@paulweiss.com)
Andrew J. Ehrlich (aehrlich@paulweiss.com)
Hannah S. Sholl (hsholl@paulweiss.com)
1285 Avenue of the Americas
New York, NY 10019-6064
Telephone: (212) 373-3000
Facsimile: (212) 757-3990

Attorneys for Defendants Mark Madoff and Andrew Madoff

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