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Baker & H(stetler LLP

45 R$ckefeller Plaza
New Y$rk, NY 10111
Teleph$ne: (212) 589-4200
Facsimile: (212) 589-4201

David J. Sheehan Lauren Resnick


Email: dsheehan@bakerlaw.c$m Email: lresnick@bakerlaw.c$m
Th$mas Lucchesi Tracy C$le
Email: tlucchesi@bakerlaw.c$m Email: tc$le@bakerlaw.c$m
Marc Hirschfield
Email: mhirschfield@bakerlaw.c$m

Att#rneys f#r Irving H. Picard, Esq.,


Trustee f#r the SIPA Liquidati#n #f
Bernard L. Mad#ff Investment Securities LLC

UNITED STATES BANKRUPTCY COURT


SOUTHERN DISTRICT OF NEW YORK

SIPA LIQUIDATION
In re:
N$. 08-01789 (BRL)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,

Debt$r.

IRVING H. PICARD, Trustee f$r the Liquidati$n Adv. Pr$. N$. 09-1197 (BRL)
$f Bernard L. Mad$ff Investment Securities LLC,

Plaintiff,

v.

JEFFRY M. PICOWER, individually and


as trustee f$r the Pic$wer F$undati$n, et al.

Defendants.

MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ PARTIAL MOTION


TO DISMISS UNDER FED. R. BANKR. P. 7012(b) AND 7009
TABLE OF CONTENTS

Page

PRELIMINARY STATEMENT................................................................................................ 1
BACKGROUND....................................................................................................................... 2
I. Pic$wer benefited tremend$usly fr$m Mad$ff’s fraud and is n$t a victim. .......... 2
II. Pic$wer knew $r sh$uld have kn$wn that he was benefiting fr$m a fraud. .......... 3
SUMMARY OF ARGUMENT ............................................................................................... 11
ARGUMENT .......................................................................................................................... 15
I. THE ALLEGATIONS AGAINST PICOWER ARE PLED WITH SPECIFICITY....... 15
II. THE TRUSTEE HAS ADEQUATELY ALLEGED CONSTRUCTIVE FRAUD ........ 18
A. Pic$wer has received ample n$tice pleading $f the c$nstructive fraud
claims............................................................................................................... 19
B. The preference claim is pled in the alternative. ................................................. 21
C. Fictiti$us pr$fit d$es n$t c$nstitute fair c$nsiderati$n. ...................................... 22
D. The Net Equity Dispute is irrelevant t$ the Trustee’s claims and cann$t be
determined in a m$ti$n t$ dismiss..................................................................... 25
III. THE TRUSTEE HAS ALLEGED FACTS SUFFICIENT TO PIERCE THE
CORPORATE VEIL AND HOLD PICOWER LIABLE FOR THE TRANSFERS
TO ALL DEFENDANTS, AND DEFENDANTS FAIL TO CHALLENGE THE
SUFFICIENCY OF THE TRUSTEE’S AGENCY ALLEGATIONS ........................... 27
A. The Trustee has pled facts sufficient t$ pierce the c$rp$rate veil $f each
Defendant and imp$se alter eg$ liability up$n Pic$wer and $ther
Defendants. ...................................................................................................... 28
1. The determinati$n $f whether t$ ign$re the c$rp$rate f$rms
requires a fact specific inquiry int$ the t$tality $f the
circumstances. ...................................................................................... 30
2. The C$mplaint amply pleads a basis f$r piercing the c$rp$rate veil....... 32
B. Defendants fail t$ challenge the Trustee’s agency allegati$ns. .......................... 34
IV. ALL DEFENDANTS, INCLUDING THE FOUR NOT LISTED ON EbHIBIT B
TO THE COMPLAINT, RECEIVED AVOIDABLE TRANSFERS ............................ 36
V. THE TRUSTEE’S TURNOVER CLAIM IS PROPERLY STATED............................ 36
VI. THE RELEVANT DATE FOR THE SIb YEAR CONVEYANCES IS
CORRECTLY ALLEGED........................................................................................... 39
A. State law limitati$ns peri$ds are relevant $nly until the bankruptcy case is
filed.................................................................................................................. 39
1. Pic$wer’s argument c$ntravenes 25 years $f bankruptcy case law......... 41

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2. There is n$ evidence $f c$ntrary C$ngressi$nal intent........................... 45


B. The state statute $f limitati$ns has n$t run. ....................................................... 46
1. The Bankruptcy case filing stays the running $f the statute $f
limitati$ns under New Y$rk law............................................................ 47
2. Secti$n 108(c) $f the Bankruptcy C$de als$ stays the running $f
the New Y$rk statute $f limitati$ns. ...................................................... 48
3. The state statute $f limitati$ns is als$ equitably t$lled as t$ b$th
real and hyp$thetical credit$rs f$r claims based $n actual fraud. ........... 50
VII. THE TRUSTEE HAS SUFFICIENTLY PLED A CAUSE OF ACTION BASED
ON THE DISCOVERY RULE .................................................................................... 51
A. There is n$ requirement at this stage $f the acti$n t$ specifically identify
the credit$r(s) wh$se claims are being asserted................................................. 52
B. While the Trustee has adequately alleged the existence $f credit$rs wh$
c$uld n$t reas$nably have disc$vered the fraud, evaluati$n $f this issue is
premature. ........................................................................................................ 55
1. The evaluati$n $f which invest$rs c$uld $r c$uld n$t have
disc$vered the fraud cann$t be made $n this m$ti$n t$ dismiss. ............ 56
2. Pic$wer is a s$phisticated invest$r wh$ had access t$ inf$rmati$n
– including fraud in his $wn acc$unts – that $ther invest$rs lacked. ...... 57
VIII. THE TRUSTEE HAS PROPERLY ALLEGED A CLAIM TO AVOID
SUBSEQUENT TRANSFERS..................................................................................... 59
Ib. THE TRUSTEE HAS PROPERLY ALLEGED DISALLOWANCE OF
DEFENDANTS’ SIPA CLAIMS ................................................................................. 62
A. The plain language $f Secti$n 502(d) defeats Defendants’ argument. ............... 63
B. The Net Equity dispute is n$t pr$perly bef$re the C$urt in the c$ntext $f a
m$ti$n t$ dismiss. ............................................................................................ 64
b. DEFENDANTS’ MOTION TO DISMISS CERTAIN REQUESTED REMEDIES
IN THIS CASE IS PROCEDURALLY IMPROPER AND WITHOUT MERIT........... 65

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Cases

546-552 West 146th Street LLC v. Arfa, 863 N.Y.S.2d 412 (1st Dep’t 2008)............................. 34

Acciai Speciali Terni USA, Inc. v. M#mene, 202 F. Supp. 2d 203 (S.D.N.Y. 2002) ............. 29, 30

Am. Express Travel Related Servs. C#., Inc. v. N. Atl. Res#urces, Inc., 691 N.Y.S.2d 403 (1st
Dep’t 1999) .......................................................................................................................... 35

Am. Tissue, Inc. v. D#nalds#n, Lufkin & Jenrette Sec. C#rp., 351 F. Supp. 2d 79 (S.D.N.Y. 2004)
............................................................................................................................................. 22

Andrew Velez C#nstr., Inc. v. C#ns#lidated Edis#n C#. #f New Y#rk (In re Andrew Velez C#nstr.,
Inc.), 373 B.R. 262 (Bankr. S.D.N.Y. 2007).................................................................... 37, 66

Ap#ll# Fuel Oil v. United States, 195 F.3d 74 (2d Cir. 1999) .................................................... 34

Ashcr#ft v. Iqbal, 129 S.Ct. 1937 (2009)................................................................................... 15

Baldi v. Samuel S#n & C#. (In re McC##k Metals, LLC) N$. 05 C 2990, 2007 WL 4287507
(N.D. Ill. Dec. 4, 2007), aff’d, 548 F.3d 579 (7th Cir. 2008)................................................... 43

Ban# v. Uni#n Carbide C#rp., 273 F.3d 120 (2d Cir. 2001) ...................................................... 35

Barnhill v. J#hns#n, 503 U.S. 393 (1992) ................................................................................. 22

Barr v. Charterh#use Gr#up Int’l, Inc. (In re Everfresh Beverages, Inc.), 238 B.R. 558 (Bankr.
S.D.N.Y. 1999)..................................................................................................................... 44

Bash v. Cunningham (In re Cunningham), Adv. N$. 07-01146, 2008 WL 2746023 (Bankr. N.D.
Ohi$ July 11, 2008) .............................................................................................................. 44

Bay State Milling C#. v. Martin (In re Martin), 142 B.R. 260 (Bankr. N.D. Ill. 1992) ......... 41, 46

Bay#u Accredited Fund, LLC v. Redw##d Gr#wth Partners, L.P. (In re Bay#u Gr#up, LLC), 396
B.R. 810 (Bankr. S.D.N.Y. 2008) ......................................................................................... 17

Bay#u Superfund, LLC v. WAM L#ng/Sh#rt Fund II, LLP (In re Bay#u Gr#up, LLC), 362 B.R.
624 (Bankr. S.D.N.Y. 2007) ......................................................................................20, 22, 23

Bear, Stearns Sec. C#rp. v. Gredd (In re Manhattan Inv. Fund Ltd.), 397 B.R. 1 (S.D.N.Y. 2007)
............................................................................................................................................. 16

Belf#rd v. Martin-Trig#na (In re Martin-Trig#na), 763 F.2d 503 (2d Cir. 1985) ....................... 49

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Bell Atlantic C#rp. v. Tw#mbly, 550 U.S. 544 (2007)...............................................15, 18, 20, 60

Bertrum v. Laughlin (In re Laughlin), 18 B.R. 778 (Bankr. W.D. M$. 1982) ............................ 67

Bl##m v. Fry (In re Leach), 380 B.R. 25 (Bankr. D.N.M. 2007)................................................ 41

Br#wn v. General Elec. Capital C#rp. (In re F#xmeyer C#rp.), 290 B.R. 229 (Bankr. D. Del.
2003) .................................................................................................................................... 29

Br#wning v. Williams (In re Silver Wheel Freightlines, Inc.), 64 B.R. 563 (Bankr. D. Or. 1986)42

Buchman v. Am. F#am Rubber C#rp., 250 F. Supp. 60 (S.D.N.Y. 1965)................................... 44

Capital Wireless v. Del#itte, 627 N.Y.S.2d 794 (3d Dep’t 1995)............................................... 34

Carr v. Equistar Offsh#re Ltd., N$. 94 Civ. 5567, 1995 WL 562178 (S.D.N.Y. Sept. 21, 1995) 61

CDS Rec#veries L.L.C. v. Davis, 715 N.Y.S.2d 517 (3d Dep’t 2000)........................................ 47

Center v. Hampt#n Affiliates, Inc., 488 N.E.2d 828 (N.Y. 1985)............................................... 34

C#hen v. K#enig, 25 F.3d 1168 (2d Cir. 1994).......................................................................... 35

C#llins v. K#hlberg & C#. (In re S#uthwest Supermarkets, LLC), 325 B.R. 417 (Bankr. D. Ariz.
2005) .................................................................................................................................... 50

C#nley v. Gibs#n, 355 U.S. 41 (1957)....................................................................................... 20

Crigger v. Fahnest#ck & C#., 443 F.3d 230 (2d Cir. 2006)....................................................... 58

Cr#see v. BCBSD, Inc., 836 A.2d 492 (Del. 2003) .................................................................... 29

Dampskibsselskabet AF 1912 v. Black & Geddes, Inc. (In re Black & Geddes, Inc.), 16 B.R. 148
(Bankr. S.D.N.Y. 1981) ........................................................................................................ 66

DelC#stell# v. Int’l Br#th. Of Teamsters, 462 U.S. 151 (1983).................................................. 40

DirecTV, Inc. v. Webb, 545 F.3d 837 (9th Cir. 2008) ................................................................ 40

D#nell v. K#well, 533 F.3d 762 (9th Cir. 2008), cert. denied, 129 S.Ct. 640 (2008) ............ 20, 23

D#yle v. Pa#lin# (In re Energy Savings Center, Inc.), 61 B.R. 732 (E.D. Pa. 1986) ............ 38, 39

Drenis v. Haligiannis, 452 F. Supp. 2d 418 (S.D.N.Y. 2006) .................................................... 16

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Dzik#wski v. Friedlander (In re Friedlander Capital Mgmt.), Adv. N$. 05-03088-PGH, 2009
WL 1231085 (Bankr. S.D. Fla. Apr. 29, 2009)...................................................................... 44

Eisenberg v. Feiner (In re Ahead By A Length, Inc.), 100 B.R. 157 (Bankr. S.D.N.Y. 1989)..... 41

Erbe v. Linc#ln R#chester Trust C#., 144 N.E.2d 78 (N.Y. 1957) ............................................. 56

Ericks#n v. Pardus, 551 U.S. 89 (2007) .............................................................................. 19, 59

ESI, Inc. v. C#astal P#wer Pr#d. C#., 995 F.Supp. 419 (S.D.N.Y. 1998) .................................. 66

Espin#sa v. Rand, 806 N.Y.S.2d 186 (1st Dep’t 2005).............................................................. 35

FDIC v. Hirsch (In re C#l#nial Realty C#.), 980 F.2d 125 (2d Cir. 1992) ......................38, 47, 48

Feldman v. First Nat’l City Bank, 511 F.2d 460 (2d Cir. 1975)................................................. 44

Fink v. Graven Aucti#n C#. (In re Graven), 64 F.3d 453 (8th Cir. 1995)................................... 43

First Uni#n Nat’l. Bank v. Gibb#ns (In re Princet#n-New Y#rk Inv. Inc.), 219 B.R. 55 (D.N.J.
1998) .................................................................................................................................... 41

Fitzgibb#ns v. Th#mas#n (In re Th#mas#n), 202 B.R. 768 (Bankr. D. C$l$. 1996) ................... 50

Fletcher v. Atex, Inc., 68 F.3d 1451(2d Cir. 1995) .............................................................. 28, 29

Geyer v. Ingers#ll Publicati#ns C#., 621 A.2d 784 (Del. Ch. 1992) .................................... 29, 31

G-I H#ldings, Inc. v. Th#se Parties Listed #n Exhibit A (In re G-I H#ldings, Inc.), 313 B.R. 612
(Bankr. D.N.J. 2004) ...................................................................................................... 42, 48

Gl#bal Cr#ssing Estate Rep. v. Winnick, N$. 04 Civ. 2558, 2006 WL 2212776 (S.D.N.Y. Aug. 3,
2006) .............................................................................................................................. 44, 54

Gl#sser v. S. & T. Bank (In re Ambulat#ry Medical & Surgical Health Care), 187 B.R. 888
(Bankr. W.D. Pa. 1995) ........................................................................................................ 42

G#ldman v. Belden, 754 F.2d 1059 (2d Cir. 1985) .................................................................... 15

Graham C#unty S#il & Water C#nservati#n Dist. v. U.S. ex rel. Wils#n, 545 U.S. 409 (2005).. 40

Granite Partners, L.P. v. Bear, Stearns & C#., 58 F. Supp. 2d 228 (S.D.N.Y. 1999)................. 58

Gredd v. Bear, Stearns Sec. C#rp. (In re Manhattan Inv. Fund Ltd), 359 B.R. 510 (Bankr.
S.D.N.Y. 2007), aff’d in part and rev’d in part sub n#m. Bear, Stearns Sec. C#rp. v. Gredd (In
re Manhattan Inv. Fund Ltd.), 397 B.R. 1 (S.D.N.Y. 2007)................................................... 16
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Grumman Allied Indus., Inc. v. R#hr Indus., Inc., 748 F.2d 729 (2d Cir. 1984))........................ 58

Halpert v. Engine Air Serv., Inc.,116 F. Supp. 13 (E.D.N.Y. 1953)........................................... 44

Hassett v. Zimmerman (In re OPM Leasing Servs., Inc.), 32 B.R. 199 (Bankr. S.D.N.Y. 1983) 16,
43, 51

Higazy v. Templet#n, 505 F.3d 161 (2d Cir. 2007) .................................................................... 26

Hirsch v. Gersten (In re Centennial Textiles, Inc.), 220 B.R. 165 (Bankr. S.D.N.Y. 1998).. 43, 66

H#ffenberg v. H#ffman & P#ll#k, 288 F.Supp.2d 527 (S.D.N.Y. 2003)..................................... 51

Hunter v. Hansen (In re Hansen), 114 B.R. 927 (Bankr. N.D. Ohi$ 1990)................................ 45

Ideal Steel Supply C#rp. v. Fang, 767 N.Y.S.2d 644 (2d Dep’t 2003) ....................................... 35

In re Asia Gl#bal Cr#ssing, Ltd., 333 B.R. 199 (Bankr. S.D.N.Y. 2005)................................... 64

In re K#reag, C#ntr#le et Revisi#n S.A., 961 F.2d 341 (2d Cir. 1992) ....................................... 66

In re Mid Atlantic Fund, Inc., 60 B.R. 604 (Bankr. S.D.N.Y. 1986) .......................................... 63

In re RCM Gl#bal L#ng Term Capital Appreciati#n Fund, Ltd., 200 B.R. 514 (Bankr. S.D.N.Y.
1996) .............................................................................................................................. 53, 54

In re Taubman, 160 B.R. 964 (Bankr. S.D. Ohi$ 1993)............................................20, 22, 23, 24

In re Vitre#us Steel Pr#ds. C#., 911 F.2d 1223 (7th Cir. 1990) ................................................. 50

Irwin & Leight#n, Inc. v. W.M. Anders#n C#., 532 A.2d 983 (Del. Ch. 1987) ........................... 29

Jalbert v. Zurich Am. Ins. C#. (In re Payt#n C#nstr. C#rp.), 399 B.R. 352 (Bankr. D. Mass.
2009) .................................................................................................................................... 21

Jenkins v. New Y#rk City Transit Auth#rity, --- F. Supp. 2d ---, N$. 08 Civ. 6814, 2009 WL
1940103 (July 1, 2009) ......................................................................................................... 15

Kaliner v. L#ad Rite Trailers, Inc. (In re Sverica Acquisiti#n C#rp.),179 B.R. 457 (Bankr. E.D.
Pa. 1995) ........................................................................................................................ 42, 48

L.A. Clarke & S#n, Inc. v. D#nald (In re L.A. Clarke & S#n, Inc.), 59 B.R. 856 (Bankr. D.D.C.
1986) .................................................................................................................................... 42

Lawler v. RepublicBank Dallas (In re Lawler), 53 B.R. 166 (Bankr. N.D. Tex. 1985) .............. 44

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Lefk#witz v. Appelbaum, 685 N.Y.S.2d 460 (2d Dep’t 1999) .................................................... 51

Levit v. Spatz (In re Spatz), 222 B.R. 157 (N.D. Ill. 1998)......................................................... 41

Lippe v. Bairnc# C#rp., 225 B.R. 846 (S.D.N.Y. 1998) ............................................................ 51

L#presti v. Terwilliger, 126 F.3d 34 (2d Cir. 1997)................................................................... 35

Mab#n, Nugent & C#. v. Texas Am. Energy C#rp., 1998 WL 5492 (Del. Ch. 1988).................. 30

Mab#n, Nugent & C#. v. Texas Am. Energy C#rp., CIV.A. N$. 8578, 1990 WL 44267 (Del. Ch.
Apr. 12, 1990) ...................................................................................................................... 31

MacLe#d v. Kapp, 81 F. Supp. 512 (S.D.N.Y. 1948) ................................................................ 44

Mah#ney, Tr#cki & Ass#cs., Inc. v. Kunzman (In re Mah#ney, Tr#cki & Ass#cs., Inc.), 111 B.R.
914 (Bankr. S.D. Cal. 1990).................................................................................................. 40

Mancus# v. C#nt’l Bank Nat’l Ass’n Chicag# (In re T#pc#r, Inc.), 132 B.R. 119 (Bankr. N.D.
Tex. 1991) .................................................................................................................41, 45, 46

Marine Midland Bank v. J#hn E. Russ# Pr#duce C#., 405 N.E.2d 205 (N.Y. 1980).................. 35

Mendels#hn v. Jac#b#witz (In re Jac#bs), 394 B.R. 646 (Bankr. E.D.N.Y. 2008) ... 19, 21, 37, 38,
39

Mercury Capital C#rp. v. Shepherds Beach, Inc., 723 N.Y.S.2d 48 (2d Dep’t 2001)................. 47

Mills v. P#lar M#lecular C#rp., 12 F.3d 1170 (2d Cir. 1993).................................................... 35

Mi-L#r C#rp. v. G#ttsegen (In re Mi-L#r C#rp.) 233 B.R. 608 (Bankr. D. Mass. 1999) ............ 41

M#bil Oil C#rp. v. Linear Films, Inc., 718 F. Supp. 260 (D. Del. 1989) .............................. 29, 30

M#st v. M#nti, 456 N.Y.S.2d 427 (2d Dep’t 1982).................................................................... 59

Netjets Aviati#n, Inc. v. LHC C#mmunicati#ns, LLC, 537 F.3d 168 (2d Cir. 2008) . 30, 31, 32, 33,
34

O’C#nnell v. Shall# (In re Die Fleidermaus LLC), 323 B.R. 101 (Bankr. S.D.N.Y. 2005) ........ 42

Official C#mm. #f Unsecured Credit#rs v. Reliance Capital Gr#up, Inc. (In re Buckhead
America C#rp.), 178 B.R. 956 (D. Del. 1994) ....................................................................... 31

Old Orchard Bank & Trust C#. v. J#sefik (In re J#sefik), 72 B.R. 393 (Bankr. N.D. Ill. 1987) .. 43

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Orbach v. Pappa, 482 F. Supp. 117 (S.D.N.Y. 1979)................................................................ 22

Orr v. Bernstein (In re Bernstein), 259 B.R. 555 (Bankr. D.N.J. 2001) ............................... 42, 48

Pauley Petr#leum, Inc. v. C#ntinental Oil C#., 231 A.2d 450 (Del. Ch. 1967), aff’d, 239 A.2d
629 (Del. 1968) .................................................................................................................... 30

Phillips v. Levie, 593 F.2d 459 (2d Cir. 1979)........................................................................... 51

P#l#netsky v. Better H#mes Dep#t, Inc., 760 N.E.2d 1274 (N.Y. 2001) .................................... 35

Publicker Indus. v. R#man Ceramics C#rp., 603 F.2d 1065 (3d Cir. 1979) ............................... 30

Resp#nsible Pers#n #f Musicland H#lding C#rp. v. Best Buy C#. (In re Musicland H#lding
C#rp.), 398 B.R. 761 (Bankr. S.D.N.Y. 2008)............................................................52, 53, 54

R#berts#n-Cec# C#rp. v. C#rnelius, N$. 3:03cv475, 2007 WL 1020326 (N.D. Fla. Mar. 30,
2007) .................................................................................................................................... 29

R#sania v. Haligas (In re Dry Wall Supply, Inc.), 111 B.R. 933 (D. C$l$. 1990) ...........40, 41, 46

Schmidt v. McKay, 555 F.2d 30 (2d Cir. 1977) ..............................................................51, 56, 57

Sch#les v. Lehmann, 56 F.3d 750 (7th Cir. 1995)............................................... 20, 22, 23, 24, 27

Sears Petr#leum & Trans. C#. v. Burgess C#nstr. Servs., Inc., 417 F. Supp. 2d 212 (D. Mass.
2006) .................................................................................................................................... 41

Sec. Invest#r Pr#tect. C#rp. v. Stratt#n Oakm#nt, Inc., 234 B.R. 293 (Bankr. S.D.N.Y. 1999).. 19

Seligs#n v. N.Y. Pr#duce Exch., 378 F. Supp. 1076 (D.C.N.Y. 1974)........................................ 44

Sender v. Buchannan (In re Hedged-Investments Ass#cs.), 84 F.3d 1286 (10th Cir. 1996) . 20, 22,
23, 24

Shlaifer Nance & C#. v. Estate #f Andy Warh#l, 119 F.3d 91 (2d Cir. 1997)............................. 58

Silverman v. K.E.R.U. Realty, C#rp. (In re All#u Distribs.), 379 B.R. 5 (Bankr. E.D.N.Y. 2007)
............................................................................................................................................. 59

Sim#nds v. Sim#nds, 380 N.E.2d 189 (N.Y. 1978) .................................................................... 66

Smith v. Am. F#unders Fin., C#rp., 365 B.R. 647 (S.D. Tex. 2007) .......................................... 41

S#lutia Inc. v. FMC C#rp., 456 F. Supp. 2d 429 (S.D.N.Y. 2006) ............................................. 58

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Steege v. Ly#ns (In re Ly#ns), 130 B.R. 272 (Bankr. N.D. Ill. 1991) ................................... 44, 48

T.C.I. Ltd. v. Sears Bank & Trust C#. (In re T.C.I. Ltd.), 21 B.R. 876 (Bankr. N.D. Ill. 1982) ... 44

Tab P’ship v. Grantland Fin. C#rp., 866 F. Supp. 807 (S.D.N.Y. 1994) ............................. 56, 58

Tabas v. Gigi Advertising Partnership (In re Kaufman & R#berts, Inc.), 188 B.R. 309 (Bankr.
S.D. Fl. 1995) ....................................................................................................................... 42

Tekinsight.c#m, Inc. v. Stylesite Mktg., Inc. (In re Stylesite Mktg., Inc.), 253 B.R. 503 (Bankr.
S.D.N.Y. 2000)..................................................................................................................... 66

Tese-Milner v. TPAC, LLC (In re Ticketplanet.c#m), 313 B.R. 46 (Bankr. S.D.N.Y. 2004)....... 29

Trepuk v. Frank, 376 N.E.2d 924 (N.Y. 1978) rev’d #n #ther gr#unds, 437 N.E.2d 278 (N.Y.
1982) .................................................................................................................................... 56

Trevin# v. Mersc#rp, Inc., 583 F. Supp. 2d 521 (D. Del. 2008) ................................................. 31

Tsai v. Buildings By Jamie, Inc. (In re Buildings by Jamie, Inc.), 230 B.R. 36 (Bankr. D.N.J.
1998) .................................................................................................................................... 41

Uni#n Carbide C#rp. v. M#ntell N.V., 944 F. Supp. 1119 (S.D.N.Y. 1996)............................... 31

United States v. Bestf##ds, 524 U.S. 51 (1998) ......................................................................... 28

United States v. G#lden Acres, Inc., 702 F. Supp. 1097 (D. Del. 1988), aff’d, 879 F.2d 857 (3d
Cir. 1989) ............................................................................................................................. 31

Visc#nsi v. Lehman, N$. 06-3304, 2007 WL 2258827 (6th Cir. Aug. 8, 2007) .................... 23, 24

Wallace v. W##d, 752 A.2d 1175 (Del. Ch. 1999)..................................................................... 29

Wassau Business Ins. C#. v. Turner C#nst. C#., 141 F. Supp. 2d 412 (S.D.N.Y. 2001) ............. 28

William Passalacqua Builders, Inc. v. Resnick Devel#pers S#uth, Inc., 933 F.2d 131 (2d Cir.
1991) ............................................................................................................. 28, 30, 32, 33, 34

Wilshire Westw##d Ass#cs. v. Atlantic Richfield C#rp., 881 F.2d 801(9th Cir. 1989) ................ 46

W##ds & Ericks#n LLP v. Le#nard (In re Avi, Inc.), 389 B.R. 721(B.A.P. 9th Cir. 2008) ......... 39

Y#ung v. Param#unt C#mmc’ns, Inc. (In re Wingspread C#rp.), 178 B.R. 938 (Bankr. S.D.N.Y.
1995) .................................................................................................................................... 53

Zahn v. Yucaipa Capital Fund, 218 B.R. 656 (D.R.I. 1998) ................................................ 52, 56
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Zilkha Energy C#. v. Leight#n, 920 F.2d 1520 (10th Cir. 1990) .......................................... 45, 46

Zubik v. Zubik, 384 F.2d 267 (3d Cir. 1967)) ............................................................................ 30

Zuckerman v. 234-6 W. 22nd St. C#rp., 645 N.Y.S.2d 967 (Sup. Ct. 1996) ............................... 47

Statutes

11 U.S.C. § 108 (2009)...................................................................................... 13, 44, 48, 49, 50

11 U.S.C. § 362 (2009)............................................................................................................. 47

11 U.S.C. § 502 (2009)...................................................................................... 14, 51, 62, 63. 64

11 U.S.C. § 541 (2009)............................................................................................................. 38

11 U.S.C. § 542 (2009)....................................................................................................... 37, 38

11 U.S.C. § 544 (2009).............................................................. 13, 37, 39, 40, 41, 42, 43, 44, 45,
.....................................................................................................46, 47, 48, 49, 50, 51, 52, 54

11 U.S.C. § 546 (2009).....................................................................40, 41, 42, 43, 44, 45, 46, 48

11 U.S.C. § 547 (2009)....................................................................................................... 37, 63

11 U.S.C. § 548 (2009)...........................................................................19, 63, 37, 38, 40, 43, 44

11 U.S.C. § 550 (2009)..................................................................................................59, 63, 66

15 U.S.C. § 78aaa et seq. (2009) .............................................................................................. 11

15 U.S.C. § 78fff-2(b) (2009).................................................................................................... 64

15 U.S.C. § 78fff-2(c)(3) (2009)................................................................................................ 37

15 U.S.C. § 78lll(11) (2009) ............................................................................................... 25, 62

N.Y. C.P.L.R. § 203 (McKinney 2009)............................................................................... 50, 51

N.Y. C.P.L.R. § 204 (McKinney 2009)............................................................................... 47, 48

N.Y. Debt. & Cred. Law § 272 (McKinney 2009)............................................................... 19, 27

N.Y. Debt. & Cred. Law § 273 (McKinney 2009)..................................................................... 19

-x-
TABLE OF AUTHORITIES
(c$ntinued)
Page

N.Y. Debt. & Cred. Law § 274 (McKinney 2009)..................................................................... 51

N.Y. Debt. & Cred. Law § 275 (McKinney 2009)..................................................................... 51

N.Y. Debt. & Cred. Law § 276 (McKinney 2009)..................................................................... 51

N.Y. Debt. & Cred. Law § 278 (McKinney 2009)..................................................................... 51

N.Y. Debt. & Cred. Law § 279 (McKinney 2009)..................................................................... 51

Rules

Fed. R. Civ. P. 8 (2009) ...................................................................................................... 22, 59

Fed. R. Civ. P. 9 (2009) .................................................................................................15, 19, 61

Fed. R. Civ. P. 12(b)(6) (2009) ................................................................................................. 62

Fed. R. Civ. P. 54(c) (2009)...................................................................................................... 65

Treatises

4 C#llier #n Bankruptcy¶ 544.03[2] (L.King 15th ed. 1989) ...................................................... 44

5 C#llier #n Bankruptcy ¶ 544.09 (2009) .................................................................................. 44

5 C#llier #n Bankruptcy ¶ 546.02 (2009) ............................................................................ 42, 46

5 C#llier #n Bankruptcy ¶ 546.LH (2009)................................................................................. 46

5 C#llier #n Bankruptcy ¶ 548.05 (2009) .................................................................................. 26

5 C#llier #n Bankruptcy ¶ 550.07 (2009) .................................................................................. 39

William Meade Fletcher, Fletcher Cycl$pedia $f the Law $f C$rp$rati$ns § 41.32 (2009)........ 29

Stephen B. Presser, Piercing the C#rp#rate Veil § 2.8 (2009) ................................................... 28

Wright and Miller, 5 Fed. Prac. & Pr$c. Civ.3d § 1215 (2009).................................................. 60

Wright and Miller, 5 Fed. Prac. & Pr$c. Civ.3d § 1255 (2009)................................................. 65

-xi-
PRELIMINARY STATEMENT

Jeffry Pic$wer t$$k fr$m Bernard L. Mad$ff Investment Securities (“BLMIS”) m$re than

$7 billi$n $f $ther invest$rs’ m$ney under circumstances that, at a minimum, sh$uld have put

him $n n$tice $f fraud. In resp$nse t$ the Trustee’s av$idance acti$n, Pic$wer (t$gether with the

$ther Defendants, all $f which are c$ntr$lled by him) has m$ved t$ dismiss many $f the causes

$f acti$n asserted by the Trustee.1 Pic$wer’s m$ti$n, h$wever, is, by its $wn admissi$n, little

m$re than a public relati$ns exercise designed t$ cast Pic$wer as an inn$cent victim $f Mad$ff’s

scheme.2

Alth$ugh his m$ti$n presents a myriad $f supp$sed backgr$und facts – alm$st all $f

which are irrelevant t$ the questi$n $f whether the Trustee has stated a claim and s$me $f which

are directly c$ntradict$ry t$ what is asserted in the Trustee’s C$mplaint – Pic$wer fails t$

ackn$wledge the billi$ns $f d$llars $f $ther invest$rs’ m$ney that he received fr$m BLMIS.

Despite Pic$wer’s c$ntenti$n that the C$mplaint fails t$ plead fraud pr$perly, Pic$wer als$ fails

even t$ ackn$wledge – let al$ne resp$nd t$ – the stark evidence $f fraud that $ccurred in his

BLMIS acc$unts and that is described thr$ugh$ut the Trustee’s C$mplaint. The few arguments

1
The Trustee seeks rec$very $f av$idable transfers fr$m each Defendant. Based $n the evidence available t$ the
Trustee, it is apparent that Pic$wer c$ntr$lled all $f the BLMIS acc$unts at issue. In additi$n t$ Pic$wer’s c$ntr$l
$f the acc$unts described herein, and as alleged in the C$mplaint, Pic$wer and/$r Decisi$ns Inc. (“Decisi$ns”)
(described in Pic$wer’s m$ti$n as “the principal entity thr$ugh which Mr. Pic$wer transacts his investment
business”) is a general partner $r direct$r $f Capital Gr$wth C$mpany, JA Primary Limited Partnership, JA Special
Limited Partnership, JAB Partnership, JEMW Partnership, JF Partnership, JFM Investment C$mpany, JLN
Partnership, JMP Limited Partnership, Jeffry M. Pic$wer Special C$., Fav$rite Funds, Jeffry M. Pic$wer P.C.
(c$llectively, and t$gether with Decisi$ns, the “Pic$wer C$rp$rate Entities”) and a Trustee $f the Pic$wer
F$undati$n. (C$mpl. ¶¶ 37–49, 53.) Acc$rding t$ publicly available filings with the U.S. Securities and Exchange
C$mmissi$n, Pic$wer is the s$le st$ckh$lder, s$le direct$r, and Chairman $f the B$ard $f Decisi$ns. See, e.g.,
Alaris Medical System Inc., Statement $f Changes in Beneficial Ownership (F$rm 4) (June 25, 2004) (Jeffry M.
Pic$wer), available at http://sec.g$v/Archives/edgar/data/817161/000090266404001043/xslF345b02/srz04-
0471_ex.xml. Decisi$ns and m$st $f the Pic$wer C$rp$rate Entities maintained an address at 22 Saw Mill River
R$ad, Hawth$rne, New Y$rk, a st$re fr$nt $ffice where little $r n$ business was c$nducted. (C$mpl. ¶ 37 et seq.)
Thr$ugh$ut this resp$nse, the Trustee may refer t$ “Pic$wer” and “the Defendants” interchangeably.
2
(See Def.’s M$t. t$ Dismiss at 4 n.2 [hereinafter “MTD”] (ackn$wledging that the “facts pr$vided herein are n$t
$ffered $r relied up$n as bases f$r dismissal $f the C$mplaint. Rather, these backgr$und facts are simply presented
t$ c$rrect and pr$vide c$ntext t$ facts alleged in the C$mplaint.”).)
by Pic$wer that d$ ackn$wledge the factual allegati$ns in the C$mplaint are n$t c$gnizable

bases f$r a m$ti$n t$ dismiss.

Th$ugh Pic$wer’s alleged facts generally are, as Pic$wer c$ncedes, irrelevant t$ the

determinati$n $f the m$ti$n, it w$uld be irresp$nsible f$r the Trustee t$ let the m$st egregi$us

misrepresentati$ns stand unc$rrected. Acc$rdingly, s$me $f them are addressed in the f$ll$wing

secti$n.

BACKGROUND

I. PICOWER BENEFITED TREMENDOUSLY FROM MADOFF’S FRAUD AND IS


NOT A VICTIM.

The theme $f Pic$wer’s m$ti$n t$ dismiss is that he, like $ther BLMIS invest$rs, is a

“victim” $f Mad$ff’s fraud, suffering “devastating” and “immeasurable” l$ss. N$thing c$uld be

further fr$m the truth. Many invest$rs were damaged by the BLMIS fraud, but Pic$wer was n$t

$ne $f them. Based up$n the Trustee’s investigati$n t$ date, Pic$wer was instead the biggest

beneficiary $f Mad$ff’s scheme, having withdrawn either directly $r thr$ugh the entities he

c$ntr$lled m$re than $7.2 billi$n $f $ther invest$rs’ m$ney. Of this am$unt, m$re than $2.4

billi$n was received by Pic$wer within the past six years al$ne. The sums received by Pic$wer

are staggering by any measure. Given that Pic$wer withdrew m$re $f $ther invest$rs’ m$ney

than any $ther cust$mer $f BLMIS, Pic$wer’s repeated references t$ himself as a “victim” ring

h$ll$w.

Pic$wer als$ claims that he is a victim $f “$verreaching” by the Trustee. Pic$wer

c$ntends that this acti$n is driven by the Trustee’s desire t$ “fav$r later BLMIS invest$rs $ver

earlier $nes.” (MTD at 2.) The Trustee, Pic$wer claims, unfairly paints him as a villain in “a

frenzied eff$rt t$ deliver t$ the estate unprecedented sums fr$m $ne $f Mad$ff’s wealthiest

invest$rs.” (MTD at 4.) Pic$wer is mistaken. It is the Trustee’s $bligati$n t$ bring acti$ns $n

2
behalf $f the estate t$ rec$ver av$idable transfers. Seeking the rec$very $f fictiti$us pr$fits

received by invest$rs in a P$nzi scheme is wh$lly appr$priate. Indeed, the law is well-settled

that the Trustee can rec$ver such payments within the relevant peri$ds regardless $f the

invest$rs’ g$$d faith $r lack $f kn$wledge $f the scheme. Even if Pic$wer were, as he claims,

“taken in” by Mad$ff, and even putting aside the evidence $f patent fraud disc$vered by the

Trustee and alleged in the C$mplaint, the Trustee w$uld still be entitled t$ rec$ver the billi$ns $f

d$llars in false pr$fits – funds $btained fr$m $ther invest$rs – that BLMIS paid t$ Pic$wer. If

Pic$wer is c$rrect that rec$very by the Trustee in this case will “deliver t$ the estate

unprecedented sums” (see MTD at 4), that is $nly because Pic$wer received an unprecedented

am$unt $f $ther invest$rs’ m$ney fr$m BLMIS.

II. PICOWER KNEW OR SHOULD HAVE KNOWN THAT HE WAS BENEFITING


FROM A FRAUD.

As alleged in the C$mplaint, Pic$wer’s acc$unts were riddled with blatant and $bvi$us

fraud. The C$mplaint alleges, am$ng $ther things, that Pic$wer’s acc$unts rep$rted: pr$fitable

trading bef$re they were $pened $r funded (see C$mpl. ¶ 63(e)); executi$n $f trading

instructi$ns that hadn’t yet been given (see, e.g., C$mpl. ¶¶ 63(f), (h), (i)); inexplicable changes

in acc$unt p$siti$ns (see, e.g., C$mpl. ¶ 63(i)); $utlandish returns (see, e.g., C$mpl. ¶¶ 3, 63(a)-

(c), (e)); and – at Pic$wer’s directi$n – the acc$mplishment $f investment results $ver time

peri$ds that already had expired (see C$mpl. ¶ 63(f)). Indeed, the C$mplaint alleges purp$rted

trading that is s$ inc$nsistent with n$rmal trading activity as t$ c$mpel the c$nclusi$n that

Pic$wer had t$ have kn$wn that impr$per trading activity was $ccurring. Faced with these

allegati$ns $f fraud, Pic$wer argues $nly that his withdrawal $f large sums $f m$ney is

inc$nsistent with his participati$n in the P$nzi scheme and challenges certain examples $f

purp$rted rates $f return. The allegati$ns $f irregular acc$unt activity are $therwise c$mpletely

3
disregarded. Presumably, this is because the facts alleged in the C$mplaint indisputably

establish, at a minimum, that Pic$wer was – $r sh$uld have been – $n n$tice that he was

participating in a fraud.

A. Pic(wer’s pr(fit fr(m the P(nzi scheme d(es n(t pr(ve his inn(cence.

Pic$wer makes the parad$xical argument that he c$uld n$t have been c$mplicit in the

P$nzi scheme because he made t$$ much m$ney fr$m it. His en$rm$us withdrawals, he argues,

w$uld have placed a strain $n BLMIS because they required BLMIS t$ raise additi$nal billi$ns

$f d$llars $n sh$rt n$tice. Thus, Pic$wer c$ntends, the fact $f his large withdrawals establishes

that he must have been unaware $f the fraud. This argument d$es n$t speak t$ the legal

sufficiency $f the allegati$ns in the C$mplaint, as is required in a m$ti$n t$ dismiss.

N$netheless, Pic$wer’s premise that making billi$ns $f d$llars fr$m a P$nzi scheme is a badge

$f inn$cence is dubi$us at best. And it is n$t merely the sheer am$unt $f pr$fit he reaped that

sh$uld have put Pic$wer $n n$tice $f fraud. As alleged in the C$mplaint, the unusual (if n$t

unlawful) activity in his acc$unts, including $ne rep$rted negative net cash balance $f

appr$ximately $6 billi$n at the time $f Mad$ff’s arrest (C$mpl. ¶ 63(d)), was clear evidence that

s$mething was seri$usly amiss at BLMIS. N$ legitimate br$ker-dealer w$uld all$w this invest$r

t$ maintain such a staggering margin balance.

As t$ Pic$wer’s argument that his withdrawals must have strained the P$nzi scheme, it is

w$rth n$ting that Pic$wer’s largest withdrawals were generally made quarterly. (See C$mpl. Ex.

A.) Acc$rdingly, BLMIS c$uld anticipate Pic$wer’s withdrawals and there was n$ need f$r

Mad$ff t$ raise the funds $n sh$rt n$tice. It is significant, m$re$ver, that as early as 2003 – even

bef$re Mad$ff’s scheme began t$ unravel – BLMIS c$uld n$t pay Pic$wer the quarterly sums

that he was demanding. Instead, $n several $ccasi$ns starting in September 2003, BLMIS paid

Pic$wer $nly a fracti$n $f the am$unt that he $riginally requested. BLMIS’ failure t$ pay

4
Pic$wer sums that purp$rtedly were in his acc$unts $r $therwise available t$ him is further

evidence that Pic$wer knew $r sh$uld have kn$wn $f Mad$ff’s fraud. This evidence bec$mes

even m$re c$mpelling given Pic$wer’s apparent lack $f c$mplaint ab$ut his inability t$ access

billi$ns $f d$llars rep$rted $n his BLMIS acc$unt statements.

B. Pic(wer knew (r sh(uld have kn(wn (f (bvi(us fictiti(us activity in his


(wn acc(unts.

Pic$wer c$mplains that the Trustee has failed t$ allege with specificity facts that w$uld

dem$nstrate that he was $n n$tice $f fraud at BLMIS. Am$ng the many flaws in this argument

is that Pic$wer simply ign$res the pages $f detailed factual allegati$ns in the C$mplaint

describing patent fraud in his acc$unts. While n$t apparent fr$m Pic$wer’s l$ne allusi$n t$

“what the Trustee refers t$ as Mad$ff’s ‘backdating’ $f certain trades” in certain years (MTD at

16), the C$mplaint describes numer$us examples $f c$nduct specific t$ Pic$wer’s acc$unts that

sh$uld have made it clear that he was participating in a fraud.

Despite Pic$wer’s attempts t$ wave them $ff, the instances $f “backdating” alleged in the

C$mplaint are far fr$m min$r $r is$lated events. F$r example, the C$mplaint alleges that $n

April 18, 2006, Pic$wer wired $125 milli$n t$ BLMIS in $rder t$ $pen an acc$unt. (C$mpl. ¶

63(e).) This dep$sit c$nstituted m$re than 1/4 $f the t$tal cash that Pic$wer ever invested in

BLMIS. Within tw$ weeks, the $125 milli$n dep$sit had purp$rtedly gr$wn t$ $164 milli$n

because $f a dramatic “gain” $n the securities held in the acc$unt – all $f which supp$sedly had

been purchased three m$nths earlier, in January. (C$mpl. ¶ 63(e).) S$ Pic$wer, wh$ carefully

m$nit$red these acc$unts thr$ugh his $wn p$rtf$li$ appraisal system as well as thr$ugh p$rtf$li$

management rep$rts and cust$mer statements received fr$m BLMIS, knew $r sh$uld have

kn$wn that within tw$ weeks after he $pened his acc$unt, he had made alm$st $40 milli$n fr$m

trading that supp$sedly $ccurred m$nths bef$re the acc$unt was $pened $r funded. Because $f

5
this spectacular – and $bvi$usly fictiti$us – trading success, Pic$wer was able t$ withdraw his

$riginal $125 milli$n within five m$nths $f investing it, leaving a purp$rted $81 milli$n in the

acc$unt t$ enj$y c$ntinued “gr$wth” in value. This is but $ne example $f patently fraudulent

activity. Numer$us $ther incidents are alleged in the C$mplaint and $therwise kn$wn t$ the

Trustee based $n his c$ntinued investigati$n. There is n$ legitimate explanati$n f$r these events

n$r any p$ssibility that they escaped Pic$wer’s n$tice.

1. Pic$wer cl$sely m$nit$red his BLMIS acc$unts.

As a thresh$ld matter, the C$mplaint alleges that Pic$wer knew $r sh$uld have kn$wn

ab$ut the fraud in Defendants’ acc$unts because he c$ntr$lled and cl$sely m$nit$red each

acc$unt. The C$mplaint alleges that Pic$wer directed withdrawals fr$m and transfers am$ng the

vari$us acc$unts; directed supp$sed trading activity within the acc$unts, including directi$n that

sales $r purchases be made f$r purp$ses $f achieving gains $r l$sses; directed payments t$ and

am$ng vari$us Defendants fr$m vari$us acc$unts; and executed cust$mer agreements, trade

auth$rizati$n agreements and $ther d$cumentati$n f$r the acc$unts. (C$mpl. ¶ 60.) The

C$mplaint als$ alleges that, t$gether with his agent April Freilich, Pic$wer maintained his $wn

c$mputerized client appraisal $r p$rtf$li$ appraisal system, thr$ugh which he tracked and

m$nit$red each acc$unt, including the securities purp$rtedly held in each acc$unt, the date they

were supp$sedly purchased, the price, the quantity, and the unrealized gain $r l$ss. (C$mpl. ¶

61.) In additi$n, Pic$wer was $ne $f a select few BLMIS invest$rs wh$, acc$rding t$ BLMIS

rec$rds, received the full “p$rtf$li$ management rep$rt” generated by BLMIS. Am$ng $ther

things, these BLMIS rep$rts included a target rate $f return (C$mpl. ¶ 59) against which the

purp$rted actual rate $f return, which als$ was included, c$uld be tracked. Thus, as alleged in

the C$mplaint, due t$ his active inv$lvement in his BLMIS acc$unts and investments, Pic$wer

was $r sh$uld have been aware $f all $f the activity alleged in each $f his acc$unts.

6
2. Pic$wer was aware $f fraudulent activity in his acc$unts.

Pic$wer fails t$ address in any way the Trustee’s allegati$ns $f specific fraudulent

activity in his acc$unts because they al$ne suffice t$ defeat his m$ti$n, even with$ut all $f the

$ther indicia $f fraud alleged in the C$mplaint. The C$mplaint identifies specific fraudulent

transacti$ns, generally including date, acc$unt, and am$unt at issue, in m$re than sufficient

detail t$ put Pic$wer $n n$tice $f the basis $f the Trustee’s claims. F$r example:

• The C$mplaint alleges that acc$rding t$ BLMIS rec$rds, in May 2007, Pic$wer

and Freilich asked BLMIS empl$yees t$ change the trading activity that had supp$sedly

$ccurred in the Pic$wer F$undati$n Acc$unt f$r January and February 2006 in $rder t$ generate

additi$nal gains. (C$mpl. ¶ 63(f).) After s$me discussi$n ab$ut the exact am$unt $f gain

Pic$wer wanted, and clarificati$n that the gains sh$uld be f$r 2007, Freilich directed BLMIS t$

generate $12.3 milli$n in gains f$r January and February.3 (C$mpl. ¶ 63(f)(i).) Alth$ugh it was

several m$nths t$$ late t$ make any actual trades in January $r February, BLMIS created

statements that rep$rted new transacti$ns in January and February 2007 resulting in a purp$rted

gain $f $12.6 milli$n. (C$mpl. ¶ 63(f)(ii).) Putting aside the fact that Pic$wer and his agent

specifically directed such fictiti$us activity, this revisi$nist hist$ry was $r sh$uld have been

$bvi$us t$ Pic$wer, wh$ m$nit$red these acc$unts thr$ugh cust$mer statements, his $wn

p$rtf$li$ appraisal system, and BLMIS’ full p$rtf$li$ management rep$rt. Pic$wer knew $r

sh$uld have kn$wn that the Pic$wer F$undati$n’s May 2007 statement reflected different

h$ldings than had been reflected in its acc$unt statements f$r January thr$ugh April 2007.

3
Alth$ugh the C$mplaint specifies that the trades t$$k place in 2007 (C$mpl. ¶ 63(f)(ii) (“transacti$ns f$r the
m$nths $f January and February 2007”)), elsewhere it suggests that they t$$k place in 2006, c$nsistent with
Freilich’s $riginal suggesti$n. (C$mpl.¶ 63(f)(ii) ( “…m$re than 15 m$nths earlier”).) F$r clarity, the trades were
rep$rted by BLMIS as taking place in January and February 2007, three t$ f$ur m$nths bef$re the c$nversati$ns at
issue.

7
(C$mpl. ¶ 63(f)(ii).) The t$tal value $f the acc$unt was $54.6 milli$n higher $n May 31, 2007

than it had been in April 2007 largely because $f these newly fabricated h$ldings and new

hist$ry. (C$mpl. ¶ 63(f)(ii).) This “new” acc$unt inf$rmati$n sh$uld have been inc$nsistent

with the inf$rmati$n in Pic$wer’s $wn p$rtf$li$ appraisal system. These allegati$ns indicate

fraud.

• The C$mplaint alleges several $ther examples $f evidently fictiti$us trading

activity. F$r example, Pic$wer faxed a letter dated December 1, 2005 directing vari$us sales

acr$ss vari$us acc$unts. BLMIS rep$rted the sales as having settled $n December 2. This al$ne

is suspici$us, as settlement is typically three business days after the trade date, and the sales

w$uld thus have had t$ take place bef$re December 1. But the letter was n$t actually faxed t$

BLMIS $n December 1– it was faxed $n December 22 and backdated by Pic$wer t$ December

1. (C$mpl. ¶ 63(h).) In case there was any questi$n as t$ the timing, attached t$ the faxed letter

(and referenced in it) was a c$py $f pages fr$m Pic$wer’s p$rtf$li$ appraisal rep$rt dated

December 16. Pic$wer’s $wn independently maintained rec$rds reflect the st$ck that was

supp$sedly s$ld bef$re December 2 was still held by the acc$unts as $f December 16. (C$mpl. ¶

63(h).) In $ther w$rds, Pic$wer knew $r sh$uld have kn$wn that certain st$ck was supp$sedly

held in his acc$unts $n December 16; that $n December 22 he faxed a letter (that was backdated

t$ December 1) requesting that the st$ck be s$ld; and that the st$ck was rep$rted as having been

s$ld bef$re December 1. These allegati$ns indicate fraud.

• Similarly, the C$mplaint alleges that in December 2005, BLMIS created

backdated “purchases” $f st$ck in certain acc$unts, rec$rding them as having settled alm$st a

full year earlier– between January 12 and January 20, 2005. (C$mpl. ¶ 63(i)(ii).) Al$ng with an

instant unrealized gain $f ab$ut $79 milli$n, the acc$unts were instantly credited, in December

8
2005, with quarterly dividends f$r March, June and September 2005, t$taling ab$ut $82,000.

(C$mpl. ¶ 63(i)(ii).) Neither the dividends n$r the purchases appear $n Pic$wer’s 2005 acc$unt

statements f$r the m$nths fr$m January 2005 thr$ugh N$vember 2005 fr$m BLMIS. (C$mpl. ¶

63(i)(ii).) N$r d$ the st$ck p$siti$ns, which supp$sedly w$uld have been held since January,

appear $n the p$rtf$li$ appraisal system that Pic$wer maintained as $f N$vember 30, 2005. We

kn$w this because Pic$wer attached print$uts fr$m his system t$ a fax he sent t$ BLMIS $n

December 29, 2005. (C$mpl. ¶ 63(i).) These allegati$ns indicate fraud.

These allegati$ns are separate fr$m and in additi$n t$ the $ther indicia $f fraud alleged in

the C$mplaint, including, am$ng $ther things, implausible rep$rted returns and trading success,

an en$rm$us negative equity balance, and specified irregularities in BLMIS’ general $perati$ns.

3. Pic$wer’s acc$unts rep$rted implausible rates $f return.

Instead $f engaging in any discussi$n $f the specified fraudulent activity alleged in his

acc$unts, Pic$wer challenges the rep$rted rates $f return alleged in the C$mplaint. Specifically,

he disputes the C$mplaint’s allegati$ns that $ne acc$unt purp$rted t$ earn $ver 950% in 1999

and that tw$ $ther acc$unts rep$rted annual rates $f return $ver 100% f$r the years 1996 thr$ugh

1999. The acc$unt statements f$r these acc$unts, he argues, sh$w that the first acc$unt $nly

earned a 37.6% return in 1999 and that neither $f the $ther acc$unts earned an annual return $f

m$re than 100% in any $f the listed years. (See MTD at 14.)

Putting aside the fact that the rates $f return rep$rted by these three acc$unts in these

years are $nly a small fracti$n $f the implausibly high rates $f return rep$rted by Pic$wer’s m$re

than twenty-f$ur acc$unts $ver at least twenty-five years, Pic$wer misses the p$int. N$ acc$unt

at BLMIS actually “earned” any rate $f return: BLMIS did n$t engage in any securities trading

activity. At issue in this case is what BLMIS t$ld Pic$wer his acc$unts were earning. The

purp$rted rates $f return (b$th actual and target) f$r each acc$unt were specified $n the p$rtf$li$

9
management rep$rts that Pic$wer received fr$m BLMIS. The C$mplaint c$rrectly alleges that

these $utrage$usly high fabricated rates $f return – including $ver 100%, $ver 550%, and $ver

950% – were rep$rted t$ Pic$wer $n these d$cuments. (Other acc$unts, as alleged in the

C$mplaint, rep$rted wildly l$w rates $f return). If the rates $f return rep$rted in the p$rtf$li$

management rep$rts were inc$nsistent with inf$rmati$n c$ntained in Pic$wer’s cust$mer

acc$unt statements, this in itself was $r sh$uld have been an independent sign t$ Pic$wer that

BLMIS was n$t engaged in legitimate trading activity.

M$re$ver, if Pic$wer did in fact attempt t$ calculate his acc$unts’ rates $f return based

$n the inf$rmati$n c$ntained in cust$mer statements, $r f$r that matter his $wn p$rtf$li$

appraisal system, this exercise al$ne w$uld have emphasized the irregularities in Pic$wer’s

acc$unts. One $f the fact$rs that must be c$nsidered in determining an acc$unt’s rate $f return is

the equity that it h$lds at vari$us p$ints in time. Since rep$rts $f purchases and sales $f st$ck

were created in Pic$wer’s acc$unts m$nths after the transacti$ns that they supp$sedly described,

he sh$uld have had great difficulty calculating c$mprehensible rates $f return based $n his

acc$unt statements, and any attempt t$ d$ s$ w$uld have emphasized the already $bvi$us

irregularities.

Pic$wer als$ argues that the returns rep$rted in his acc$unts, even as alleged in the

C$mplaint, were n$t t$$ far $ut $f line with the results $f investment managers such as the

legendary James Sim$ns and $thers – alth$ugh, as the SEC and the media have widely rep$rted,

James Sim$ns himself f$und Mad$ff’s investment returns s$ unusual and suspici$us that he

investigated them, withdrew his funds fr$m BLMIS and urged $ther invest$rs t$ d$ s$ as well.4

4
See Office $f Investigati$ns, U.S. Securities and Exchange C$mmissi$n, Investigati$n $f Failure $f the SEC t$
Unc$ver Bernard Mad$ff’s P$nzi Scheme (Public Versi$n), Rep. N$. OIG-509, 145-57 (Aug. 31, 2009), available
at http://www.sec.g$v/news/studies/2009/$ig-509.pdf; Jenny Strasburg and Sc$tt Patters$n, The Mad#ff Fraud:

10
Pic$wer’s argument $nce again fails t$ address the legal sufficiency $f the C$mplaint.

M$re$ver, aside fr$m the fundamental flaws in Pic$wer’s premise, his $wn m$ti$n dem$nstrates

the inherent n$nsense $f this c$mparis$n. As Pic$wer p$ints $ut, “Defendants’ acc$unt

statements reflected investments m$stly in blue chip c$rp$rate equity securities and l$w-risk

securities such as sh$rt-term U.S. Treasury Bills $r m$ney market funds” and “did n$t reflect

any $pti$ns trading.” (MTD at 7.) Pic$wer’s $wn argument in defense $f the credibility $f his

returns, theref$re, is that BLMIS purp$rted t$ surpass the returns achieved by the m$st

successful investment managers in the w$rld, and purp$rted t$ d$ s$ based entirely $n l$w risk

c$nservative buy-and-h$ld investments in blue chip st$cks and Treasury Bills. This is a feat that

has been acc$mplished by n$ $ne. Pic$wer knew $r sh$uld have kn$wn that this scheme was far

t$$ g$$d t$ be true.

SUMMARY OF ARGUMENT

Pic$wer’s m$ti$n is a c$nc$cti$n $f irrelevant c$unter-facts, arguments that ign$re b$th

the allegati$ns in the C$mplaint and the relevant legal standards, and factual challenges that are

n$t pr$perly bef$re the C$urt $n a m$ti$n t$ dismiss. Pic$wer als$ makes multiple attempts t$

raise here the questi$n $f h$w claims submitted by invest$rs sh$uld be evaluated by the Trustee

pursuant t$ the Securities Invest$r Pr$tecti$n Act, 15 U.S.C. § 78aaa et seq. (2009) (“SIPA”).

N$ne $f this is a basis f$r a m$ti$n t$ dismiss the C$mplaint.

P(int I: Every Allegati(n (f Fraud in the C(mplaint is Supp(rted by Specific Facts


(resp$nding t$ MTD P$int I)

Pic$wer challenges the particularity $f the allegati$ns $f fraud against him, alth$ugh he

d$es n$t identify which allegati$ns he challenges. The fraud at issue in this case is the fraud

Renaissance W#rried Ab#ut Mad#ff in ‘03, Wall St. J., Sept. 8, 2009, at C3; Aar$n Luchetti & Jenny Strasburg,
Sim#ns’ N#ti#n: All In, Then All Out, Wall St. J., Feb. 25, 2009, at C1.

11
c$mmitted by Bernard Mad$ff and BLMIS, which is indisputably alleged in the C$mplaint and

c$nceded by Pic$wer. Each allegati$n c$ncerning what Pic$wer knew $r sh$uld have kn$wn

regarding Mad$ff’s fraud is supp$rted by ample factual allegati$ns, m$st $f which are ign$red

by Pic$wer in his m$ti$n.

P(int II: The C(mplaint Alleges Av(idance Claims Based (n C(nstructive Fraud
(resp$nding t$ MTD P$int VII)

Pic$wer als$ claims that the Trustee’s c$nstructive fraud claims are insufficient because

he has n$t and cann$t allege that Pic$wer did n$t pr$vide “fair c$nsiderati$n” f$r the Transfers.

Like many $ther claims challenged by Pic$wer, whether invest$rs pr$vided fair c$nsiderati$n is

a factual determinati$n that is n$t pr$perly bef$re the C$urt $n a m$ti$n t$ dismiss. But here

again, Pic$wer fails t$ ackn$wledge, much less address, the C$mplaint’s allegati$ns, which

establish b$th that Pic$wer failed t$ pr$vide reas$nably equivalent value f$r the Transfers in

excess $f his investment and that he lacked g$$d faith. The Trustee is entitled t$ alternatively

plead a preference claim, as he did. Pic$wer’s argument based $n h$w net equity sh$uld be

calculated under SIPA (the “Net Equity Dispute”) is n$t pr$perly raised in a m$ti$n t$ dismiss

and is already bef$re the C$urt pursuant t$ the Scheduling Order dated September 10, 2009.

P(int III: The C(mplaint Alleges Pic(wer’s Alter Eg( Liability


(resp$nding t$ MTD P$int II)

Pic$wer’s remaining arguments attempt, with equal futility, t$ nibble away at the edges

$f the C$mplaint. In P$int II $f his m$ti$n (addressed at P$int III herein), Pic$wer argues that

the Trustee has failed t$ allege an alter eg$ claim against him. The C$mplaint alleges facts

sufficient t$ state a claim that the Defendants, under the d$mini$n and c$ntr$l $f Pic$wer, were

b$th used f$r fraud and $ther wr$ngful c$nduct and served as mere instrumentalities $f Pic$wer.

T$ the extent that Pic$wer challenges the facts in the C$mplaint supp$rting th$se allegati$ns, his

m$ti$n in this regard is n$t pr$perly bef$re the C$urt. N$tably, Pic$wer d$es n$t challenge the

12
Trustee’s agency allegati$ns, which require imputati$n $f his kn$wledge and c$nduct t$ all

Defendants and pursuant t$ which he is liable f$r his $wn c$nduct.

P(int IV: All Defendants Received Av(idable Transfers


(resp$nding t$ MTD P$int III)

Pic$wer c$mplains that Exhibit B t$ the C$mplaint fails t$ identify transfers t$ f$ur

defendants, but ign$res the C$mplaint’s allegati$ns that Exhibit B is n$t exhaustive and that the

Trustee’s investigati$n is c$ntinuing; specific transfers t$ these f$ur defendants have been

identified and are attached t$ this resp$nse as Exhibit 1.

P(int V: The Trustee’s Turn(ver Claim is Pr(perly Stated


(resp$nding t$ MTD P$int IV)

Pic$wer’s argument that the Trustee’s turn$ver claim is n$t ripe until after the av$idance

claim is decided ign$res the express language $f SIPA that such pr$perty is pr$perty $f the

debt$r, and sh$uld als$ be denied f$r reas$ns $f judicial ec$n$my.

P(int VI: The Relevant Date f(r the Six Year C(nveyances is C(rrectly Alleged
(resp$nding t$ MTD P$int V)

Pic$wer’s argument that the peri$d f$r the “six year transfers” sh$uld begin six years

pri$r t$ May 12, 2009 (the filing $f the adversary c$mplaint against Pic$wer) rather than six

years pri$r t$ December 11, 2008 (the filing $f the SIPA pr$ceeding) is wh$lly with$ut merit.

Pic$wer’s p$siti$n, as he tacitly c$ncedes, is c$ntradicted by 25 years $f case law, and it finds n$

supp$rt in the statute $r legislative intent. M$re$ver, it is irrelevant since the state statute $f

limitati$ns peri$d has n$t yet run, having been t$lled under New Y$rk law, Secti$n 108(c) $f the

Bankruptcy C$de, and having been equitably t$lled under the C.P.L.R. and Secti$n 544(a) $f the

C$de.

13
P(int VII: The Trustee Has Sufficiently Alleged
a Cause (f Acti(n Based (n the Disc(very Rule
(resp$nding t$ MTD P$int VI)

Similarly meritless is Pic$wer’s argument that the Trustee may n$t rely $n the disc$very

rule. The Trustee is n$t required under the law $f this District t$ identify in the C$mplaint a

specific credit$r wh$ c$uld n$t reas$nably have learned $f Mad$ff’s fraud. The fact that the

Trustee has alleged “red flags” that w$uld have been apparent t$ invest$rs $ther than Pic$wer in

n$ way suggests that “every single $ther BLMIS invest$r” (see MTD at 45) c$uld have

disc$vered – $r, like Pic$wer, knew $r sh$uld have kn$wn – $f the fraud. Like many $f

Pic$wer’s $ther challenges, this is a fact-specific inquiry that is n$t pr$perly bef$re the C$urt $n

this m$ti$n t$ dismiss. (MTD at 45.)

P(int VIII: The C(mplaint Adequately Alleges Subsequent Transfers


(resp$nding t$ MTD P$int VIII)

Similarly, Pic$wer’s argument that the Trustee’s subsequent transfer claim must be

dismissed ign$res that the Defendants are alleged $n inf$rmati$n and belief t$ be subsequent

transferees based $n the pattern $f activity, transfers and mutual c$ntr$l within BLMIS, as

described in the C$mplaint. These allegati$ns are sufficient t$ state a claim.

P(int I[: The C(mplaint Pr(perly Alleges Disall(wance (f Defendants’ SIPA Claims
(resp$nding t$ MTD P$int Ib)

Pic$wer ign$res the fact that the Trustee’s cause $f acti$n t$ disall$w Pic$wer’s SIPA

claim is based n$t $nly $n the inadequacy $f the claims but $n Secti$n 502 $f the Bankruptcy

C$de, which prevents the transferee $f an av$idable transfer fr$m receiving a distributi$n unless

he first returns the transfer. Pic$wer’s sec$nd attempt t$ raise the Net Equity Dispute, which is

already bef$re this C$urt and scheduled f$r a separate hearing inv$lving all interested parties,

must als$ fail.

14
P(int [: Pic(wer’s M(ti(n t( Dismiss Certain Remedies is Impr(per and With(ut Merit
(resp$nding t$ MTD P$int b)

Finally, a m$ti$n t$ dismiss f$r facial insufficiency cann$t be based $n the Trustee’s

ch$ice $f remedies s$ught in his prayer f$r relief, including a c$nstructive trust and the return $f

tax refunds, b$th $f which are justified in this acti$n.

ARGUMENT

In determining whether a m$ti$n t$ dismiss sh$uld be granted, a c$urt must analyze

whether a c$mplaint c$ntains “sufficient factual matter, accepted as true, t$ ‘state a claim t$

relief that is plausible $n its face.’” Ashcr#ft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (qu#ting Bell

Atlantic C#rp. v. Tw#mbly, 550 U.S. 544, 570 (2007)). “When there are well-pleaded factual

allegati$ns, a c$urt sh$uld assume their veracity and then determine whether they plausibly give

rise t$ an entitlement t$ relief.” Id. at 1950. In c$nsidering a m$ti$n t$ dismiss under Rule

12(b)(6), “[t]he C$urt’s functi$n . . . is ‘n$t t$ weigh the evidence that might be presented at [a]

trial but merely t$ determine whether the c$mplaint itself is legally sufficient.’” Jenkins v. New

Y#rk City Transit Auth#rity, --- F. Supp. 2d ---, N$. 08 Civ. 6814, 2009 WL 1940103, at *1 (July

1, 2009) (qu#ting G#ldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985)).

I. THE ALLEGATIONS AGAINST PICOWER ARE PLED WITH SPECIFICITY

In P$int I $f his m$ti$n, Pic$wer argues that the C$mplaint lacks factual supp$rt f$r

claiming that “Mr. Pic$wer was a participant in Mad$ff’s fraud.” (MTD at 13.) This argument is

n$t $ffered in supp$rt $f the dismissal $f any particular claim; rather, Pic$wer demands that the

Trustee’s “fraud allegati$ns” sh$uld be dismissed f$r failure t$ c$mply with the particularity

required by Rule 9(b).5 Fed. R. Civ. P. 9(b) (2009); (MTD at 13-17.) Pic$wer c$ntests the

5
Rule 9(b) is applicable t$ fraud pleadings in the bankruptcy c$ntext, alth$ugh such pleadings are extended greater
liberality because a trustee is “a third party $utsider t$ the fraudulent transacti$n, that must plead fraud $n

15
Trustee’s allegati$ns regarding rep$rted rates $f return (and argues that they are “unremarkable”

in any event (MTD at 15)), argues that his ability t$ withdraw funds fr$m the P$nzi scheme in

fact sh$ws his inn$cence, and asserts that the allegati$ns $f “backdating” d$ n$t supp$rt the

inference that Pic$wer knew that Mad$ff was running a P$nzi scheme. (MTD at 14-16.) Given

Mad$ff’s reputati$n and Pic$wer’s pattern $f withdrawals, he c$ncludes, the Trustee has failed

t$ allege facts supp$rting “claims $f c$mplicity” and fraud against Pic$wer. (MTD at 17.)

Alth$ugh n$t apparent fr$m Pic$wer’s m$ti$n, the Trustee has n$t br$ught a claim

seeking damages fr$m Pic$wer as a c$-c$nspirat$r $f BLMIS. Rather, the C$mplaint alleges

that BLMIS engaged in fraud (see, e.g., C$mpl. ¶¶ 1, 14, 19-32) and that Pic$wer knew $r

sh$uld have kn$wn that he was benefiting fr$m and being c$mpensated f$r fraudulent activity. 6

(See, e.g., C$mpl. ¶¶ 3, 4, 59, 63.) Mad$ff’s fraud is alleged in the C$mplaint and is c$nceded

by Pic$wer. The allegati$ns in the C$mplaint c$ncerning what Pic$wer knew $r sh$uld have

kn$wn are amply supp$rted by specific factual allegati$ns, as described ab$ve.

Pic$wer n$netheless demands that the Trustee’s “fraud allegati$ns against Mr. Pic$wer

and the Defendants” be stricken. (MTD at 17.) But, since Pic$wer ign$res m$st $f the factual

allegati$ns dem$nstrating his fraudulent intent $r kn$wledge, and since his attempt t$ c$ntradict

sec$ndhand kn$wledge f$r the benefit $f the estate and all $f its credit$rs.” Hassett v. Zimmerman (In re OPM
Leasing Servs., Inc.), 32 B.R. 199, 203 (Bankr. S.D.N.Y. 1983) (Lifland, J.).
6
N$tably, Pic$wer makes n$ legal argument challenging the sufficiency $f the Trustee’s claims f$r av$idance $f the
Transfers based $n actual fraudulent intent. This is because Pic$wer has n$ basis t$ raise any such challenge. See,
e.g., Bear, Stearns Sec. C#rp. v. Gredd (In re Manhattan Inv. Fund Ltd.), 397 B.R. 1, 8 (S.D.N.Y. 2007) (where
debt$r is engaged in a P$nzi scheme, actual intent t$ defraud may be presumed as a matter $f law); Drenis v.
Haligiannis, 452 F. Supp. 2d 418, 429 (S.D.N.Y. 2006) (same). This s$-called “P$nzi presumpti$n” is based $n the
rec$gniti$n that “transfers made in the c$urse $f a P$nzi scheme c$uld have been made f$r n$ purp$se $ther than t$
hinder, delay, $r defraud credit$rs.” Bear, Stearns Sec. C#rp. v. Gredd (In re Manhattan Investment Fund Ltd.), 397
B.R. at 8 (qu#ting Gredd v. Bear, Stearns Sec. C#rp. (In re Manhattan Fund Ltd), 359 B.R. 510, 517-18 (Bankr.
S.D.N.Y. 2007) (Lifland, J.)).

16
$thers is c$ncededly irrelevant t$ his m$ti$n,7 it is difficult t$ ascertain what allegati$ns he

wishes t$ strike. F$r example, Pic$wer references Paragraph 63(f) $f the C$mplaint and asserts,

“[a]s with the Trustee’s $ther unsupp$rted fraud allegati$ns, he pleads n$ facts t$ supp$rt his

rank speculati$n that the Defendants believed th$se trades t$ be fictiti$us and c$ncluded, based

$n th$se trades, that Mad$ff was running a P$nzi scheme.”8 (MTD at 16.) Paragraph 63(f)

alleges that Defendants “knew $r sh$uld have kn$wn that they were participating in fraudulent

activity” because Pic$wer and his agents “directed fictiti$us, backdated trades in $rder t$ achieve

fictiti$us gains $r l$sses in earlier peri$ds.” (C$mpl. ¶ 63(f).) It then details, $ver m$re than a

page, an example in which Pic$wer and Freilich directed BLMIS t$ engage in trading activity f$r

a peri$d that had already passed. There is n$ “unsupp$rted fraud allegati$n” in this paragraph

that c$uld be stricken.

The $ne allegati$n Pic$wer specifically identifies as “c$nclus$ry” is the Trustee’s

allegati$n $n inf$rmati$n and belief that Pic$wer was being c$mpensated f$r perpetuating the

P$nzi scheme by investing and maintaining milli$ns $f d$llars in BLMIS. (C$mpl. ¶ 63(a).)

C$ntrary t$ Pic$wer’s argument, the basis f$r the Trustee’s belief is indeed specified in the

C$mplaint. F$r clarity, any allegati$n by the Trustee ab$ut what Pic$wer knew $r sh$uld have

kn$wn is based n$t just $n any particular sentence in the C$mplaint but $n the t$tality $f all $f

7
See MTD at 4 n.2, 14 (“Alth$ugh the Trustee’s allegati$ns must be taken as true f$r purp$ses $f this m$ti$n t$
dismiss, it sh$uld be n$ted that numer$us alleged ‘facts’ in the C$mplaint are c$ntradicted by [BLMIS acc$unt
rec$rds].”).
8
Pic$wer suggests repeatedly in his m$ti$n that the Trustee must pr$ve that Pic$wer was aware $f and c$mplicit in
the full extent and every aspect $f BLMIS’ P$nzi scheme. This is n$t s$. An invest$r wh$ bec$mes aware $f
circumstances that sh$uld trigger further inquiry int$ whether there is a fraud is deemed t$ be $n “inquiry n$tice” $f
the entire fraud. See, e.g., Bay#u Accredited Fund, LLC v. Redw##d Gr#wth Partners, L.P. (In re Bay#u Gr#up,
LLC), 396 B.R. 810, 845 (Bankr. S.D.N.Y. 2008) (“a transferee may be $n ‘inquiry n$tice’ with$ut actual
kn$wledge $f a fraud $r $ther circumstance. Rather, a transferee is $n ‘inquiry n$tice’ if it knew $r sh$uld have
kn$wn $f inf$rmati$n placing it $bjectively $n alert that there was a p$tential pr$blem . . . such that the transferee
sh$uld have attempted t$ learn m$re”) (internal citati$ns $mitted; emphasis $mitted). Acc$rdingly, an invest$r may
be $n inquiry n$tice $f fraud even if he d$es n$t kn$w $r suspect the fraud is a P$nzi scheme as $pp$sed t$ fr$nt
running, rec$rd-keeping vi$lati$ns, $r an$ther type $f fraud.

17
the facts alleged. See, e.g., Iqbal, 129 S. Ct. at 1949 (n$ting that “f$r the purp$ses $f a m$ti$n t$

dismiss,” c$urts “must take all $f the factual allegati$ns in the c$mplaint as true”) (emphasis

added); Tw#mbly, 550 U.S. at 555 (“Factual allegati$ns must be en$ugh t$ raise a right t$ relief

ab$ve the speculative level, $n the assumpti$n that all the allegati$ns in the c$mplaint are true . .

. .”) (emphasis added) (internal citati$ns $mitted). These facts include but are n$t limited t$ the

facts that Pic$wer pr$fited by billi$ns $f d$llars $f $ther invest$rs’ m$ney; that Pic$wer directed

fraudulent trading in his acc$unts; that his acc$unts rep$rted implausibly high and an$mal$usly

l$w rates $f return; and that he was $r sh$uld have been aware $f the multiple instances $f

$bvi$us and indisputable fraud specified in the C$mplaint.

II. THE TRUSTEE HAS ADEQUATELY ALLEGED CONSTRUCTIVE FRAUD

In P$int VII $f his m$ti$n, Pic$wer claims that the Trustee’s fraudulent c$nveyance

claims based $n c$nstructive fraud are insufficient because the C$mplaint d$es n$t adequately

allege that the relevant transfers were made with$ut “fair c$nsiderati$n” t$ BLMIS. (MTD at

45-50.) Pic$wer is mistaken. The Trustee has alleged b$th that Pic$wer failed t$ pr$vide

reas$nably equivalent value f$r the transfers (as required by the Bankruptcy C$de) and that

Pic$wer failed t$ exchange fair value in g$$d faith (as required by New Y$rk Debt$r and

Credit$r Law), and the ultimate success $f these claims will depend $n a fact-based inquiry that

cann$t be determined $n a m$ti$n t$ dismiss. Pic$wer d$es n$t address, much less challenge,

the Trustee’s allegati$ns. Instead, this argument is $ne $f multiple attempts t$ gratuit$usly insert

a challenge t$ the Trustee’s meth$ds $f determining claims, an issue that is neither ripe n$r

relevant t$ this m$ti$n. Like the rest $f Pic$wer’s arguments, it fails.

18
A. Pic(wer has received ample n(tice pleading (f the c(nstructive fraud
claims.

A transfer may be av$ided as c$nstructively fraudulent under the Bankruptcy C$de if,

am$ng $ther things, the transferee received m$ney fr$m the debt$r f$r which the transferee did

n$t pr$vide “reas$nably equivalent value.” 11 U.S.C. § 548(a)(1)(B) (2009). The parallel

pr$visi$n in the New Y$rk Debt$r and Credit$r Law permits a trustee t$ av$id a c$nveyance that

was made with$ut “fair c$nsiderati$n.” N.Y. Debt. & Cred. Law § 273 (McKinney 2009). “Fair

c$nsiderati$n” under New Y$rk law is defined generally the same as “reas$nably equivalent

value” under the Bankruptcy C$de, except that it als$ requires that the transferee pr$vided the

value $r c$nsiderati$n “in g$$d faith.” N.Y. Debt. & Cred. Law § 272 (McKinney 2009);

Mendels#hn v. Jac#b#witz (In re Jac#bs), 394 B.R. 646 (Bankr. E.D.N.Y. 2008). The questi$n

$f whether the debt$r received fair c$nsiderati$n f$r a transfer is a highly fact based inquiry that

requires an examinati$n int$ the t$tality $f circumstances, and theref$re is n$t pr$perly bef$re

the C$urt $n a m$ti$n t$ dismiss. See, e.g., 5 C#llier #n Bankruptcy ¶ 548.05(1)(b) (2009) (“In

$rder t$ determine if a fair ec$n$mic exchange has $ccurred in a case $f a suspected fraudulent

transfer, the bankruptcy c$urt must analyze all the circumstances surr$unding the transfer in

questi$n.”).

When a c$mplaint alleges c$nstructive fraud, the heightened requirements $f Federal

Rule $f Civil Pr$cedure 9(b) d$ n$t apply. See, e.g., Drenis, 452 F. Supp. 2d at 428-29;

Spanierman Gallery, PSP v. L#ve, 320 F. Supp. 2d 108, 113 (S.D.N.Y. 2004); Sec. Invest#r

Pr#tect. C#rp. v. Stratt#n Oakm#nt, Inc., 234 B.R. 293, 319 (Bankr. S.D.N.Y. 1999). The

plaintiff need n$t pr$vide specific facts t$ supp$rt its allegati$ns, see Ericks#n v. Pardus, 551

U.S. 89, 93 (2007); rather, the plaintiff need $nly “give the defendant fair n$tice $f what the . . .

19
claim is and the gr$unds up$n which it rests,” Tw#mbly, 550 U.S. at 555 (qu#ting C#nley v.

Gibs#n, 355 U.S. 41, 47 (1957)).

It is virtually a universally-accepted rule – indeed, Pic$wer himself c$ncedes – that when

invest$rs invest in a P$nzi scheme, payments that exceed their investments are n$t made f$r

reas$nably equivalent value and c$nstitute fraudulent c$nveyances that may be rec$vered by the

Trustee. See, e.g., D#nell v. K#well, 533 F.3d 762, 770 (9th Cir. 2008), cert. denied, 129 S. Ct.

640 (2008) (“Where causes $f acti$n are br$ught . . . against P$nzi scheme invest$rs, the general

rule is that t$ the extent inn$cent invest$rs have received payments in excess $f the am$unts $f

principal that they $riginally invested, th$se payments are av$idable as fraudulent transfers . . .

.”); Sender v. Buchannan (In re Hedged-Investments Ass#cs.), 84 F.3d 1286, 1290 (10th Cir.

1996); Sch#les v. Lehmann, 56 F.3d 750, 757-58 (7th Cir. 1995) (P$sner, J.); Bay#u Superfund,

LLC v. WAM L#ng/Sh#rt Fund II, LLP (In re Bay#u Gr#up, LLC), 362 B.R. 624, 636 (Bankr.

S.D.N.Y. 2007) (“Plaintiffs are c$rrect in asserting in their brief that virtually every c$urt t$

address the questi$n has held unflinchingly that t$ the extent that invest$rs have received

payments in excess $f the am$unts they have invested, th$se payments are v$idable as fraudulent

transfers.”) (internal qu$tati$ns $mitted); In re Taubman, 160 B.R. 964, 986 (Bankr. S.D. Ohi$

1993).

Each Defendant withdrew fictiti$us pr$fits in excess $f that Defendant’s investment in

BLMIS. The Trustee has alleged that Pic$wer c$ntr$lled the acc$unts $f each $f the Defendants.

(See C$mpl. ¶¶ 60-61.) The C$mplaint alleges that Pic$wer’s acc$unts withdrew a t$tal $f m$re

than $5 billi$n in fictiti$us pr$fit (see, e.g., C$mpl. ¶ 2), and the Trustee’s c$ntinuing

investigati$n indicates that the actual number is greater than $7 billi$n. The Trustee has alleged

that this entire am$unt c$nsists $f fictiti$us pr$fit generated by a P$nzi scheme and is, in reality,

20
n$thing m$re than m$ney $btained fr$m $ther invest$rs. (See, e.g., C$mpl. ¶¶ 2, 66.) The

Trustee specified initial dates, meth$ds $f payment, and am$unts $f av$idable Transfers in the

C$mplaint. (See n$n-exhaustive list $f transfers (the “Transfers”) included in the C$mplaint at

Exhibit B and list $f Defendants’ acc$unts at Exhibit A.) These allegati$ns put Pic$wer $n

ample n$tice $f the claims against him and the basis $f these claims, and satisfies the Trustee’s

pleading $bligati$ns. See, e.g., Drenis, 452 F. Supp. 2d at 428-29 (“There is n$ argument that

plaintiffs’ pleadings fail t$ meet” c$nstructive fraud pleading standard where plaintiffs alleged

that defendants received distributi$ns that exceeded their c$ntributi$ns t$ a P$nzi scheme);

Jalbert v. Zurich Am. Ins. C#. (In re Payt#n C#nstr. C#rp.), 399 B.R. 352, 365 (Bankr. D. Mass.

2009) (identificati$n $f time frame and nature $f the transfers s$ught t$ be av$ided was

sufficient n$tice t$ defendant). The Trustee has additi$nally alleged that the specified Transfers

were made f$r less than fair c$nsiderati$n because Pic$wer failed t$ act in g$$d faith. See In re

Jac#bs, 394 B.R. at 662. As discussed ab$ve, the C$mplaint details numer$us facts

dem$nstrating that Pic$wer knew $r sh$uld have kn$wn that he was participating in a fraudulent

enterprise, an enterprise that the debt$r has admitted and sw$rn was a P$nzi scheme. These

allegati$ns are sufficient t$ sh$w Pic$wer’s lack $f fair c$nsiderati$n f$r each transfer alleged.

B. The preference claim is pled in the alternative.

Pic$wer seizes $n the fact that the Trustee has br$ught a claim t$ rec$ver transfers made

within 90 days $f the filing as v$idable preferences.9 Because a preference exists $nly when

there is an antecedent debt, Pic$wer argues, the Trustee has c$nceded the existence $f an

antecedent debt f$r the 90 day transfers – and f$r every $ther transfer alleged in the C$mplaint.

9
C$ntrary t$ Pic$wer’s claim, the Transfers made during the 90-day preference peri$d include transfers by check
that cleared during the relevant peri$d, even if the check was dated earlier. See Barnhill v. J#hns#n, 503 U.S. 393,

21
Pic$wer, $f c$urse, ign$res that this c$unt has been pled “[i]n the alternative” (C$mpl. ¶¶ 71,

81), as specifically permitted under the Federal Rules $f Civil Pr$cedure, see Fed. R. Civ. P.

8(b)(2) and (3) (2009). The ultimate questi$n $f whether there was $r was n$t an antecedent

debt is a questi$n $f fact t$ be determined at trial and is n$t pr$perly bef$re the C$urt in a m$ti$n

t$ dismiss. See, e.g., Am. Tissue, Inc. v. D#nalds#n, Lufkin & Jenrette Sec. C#rp., 351 F. Supp.

2d 79, 106 (S.D.N.Y. 2004) (“whether a transfer is f$r reas$nably equivalent value is largely a

questi$n $f fact”) (internal qu$tati$n $mitted); Orbach v. Pappa, 482 F. Supp. 117, 120

(S.D.N.Y. 1979) ("What c$nstitutes fair c$nsiderati$n under this secti$n must be determined

up$n the facts and circumstances $f each particular case."). Pic$wer’s m$ti$n suggests that he

intends t$ argue that every Transfer was $n acc$unt $f an antecedent debt, regardless $f whether

$r n$t the Transfer c$nstituted fictiti$us pr$fit and alth$ugh the Trustee has alleged Pic$wer’s

lack $f g$$d faith. Acc$rdingly, alternative pleading $f these causes $f acti$n, t$ preserve every

alternative claim the Trustee has t$ these funds, is appr$priate.

C. Fictiti(us pr(fit d(es n(t c(nstitute fair c(nsiderati(n.

As discussed ab$ve, virtually every c$urt t$ address the issue has held that invest$rs in a

P$nzi scheme, regardless $f their g$$d faith, must surrender t$ the trustee the false pr$fit they

$btained during their participati$n in the scheme. See D#nell, 533 F.3d at 770; In re Hedged-

Investments Ass#cs., 84 F.3d at 1290; Sch#les, 56 F.3d at 757-58; Bay#u Superfund, LLC v.

WAM L#ng/Sh#rt Fund II, LLP (In re Bay#u Gr#up, LLC), 362 B.R. at 636; In re Taubman, 160

B.R. at 986. While a g$$d faith transferee has the right t$ retain payment f$r a b$na fide

antecedent debt, fictiti$us pr$fits fr$m a P$nzi scheme d$ n$t c$nstitute such a debt. This is

because an invest$r in a P$nzi scheme has n$ legitimate claim t$ fictiti$us pr$fits that in fact

394-95 (1992) (in determining if a transfer $ccurred within the 90-day preference peri$d, a transfer made by check

22
c$nsist $f m$ney invested by $ther invest$rs. T$ the extent the debt$r pr$mised such pr$fits t$

the invest$r, the pr$mise was fraudulent, and c$urts will n$t enf$rce a fraud t$ the detriment $f

$ther inn$cent credit$rs. See D#nell, 533 F.3d at 770; In re Hedged-Investments Ass#cs., 84

F.3d at 1290; Sch#les, 56 F.3d at 757-58; Bay#u Superfund, LLC v. WAM L#ng/Sh#rt Fund II,

LLP (In re Bay#u Gr#up, LLC), 362 B.R. at 636; In re Taubman, 160 B.R. at 986.

The single case relied $n by Pic$wer is inapp$site. In Visc#nsi v. Lehman, N$. 06-3304,

2007 WL 2258827 (6th Cir. Aug. 8, 2007), the circuit c$urt affirmed enf$rcement $f an

arbitrati$n award against what was at the time a s$lvent entity. Lehman Br$thers was alleged t$

have failed t$ supervise a st$ckbr$ker in its empl$y. The invest$r br$ught an arbitrati$n claim

against Lehman, and the arbitrat$r was urged t$ award the invest$r the full am$unt $f his

expectancy damages as remedy f$r the br$ker’s fraud. Id. at *4-5. Pic$wer claims, based $n

Lehman, that there is s$me distincti$n between the trustee’s generally accepted right t$ rec$ver

fictiti$us pr$fits in a P$nzi scheme, and his rights t$ rec$very “when the P$nzi scheme $perat$r

is a br$ker dealer.” (MTD at 47.) But the fact that a P$nzi scheme inv$lves the sale $f securities

d$es n$t preclude a trustee fr$m rec$vering fictiti$us pr$fit. See, e.g., D#nell, 533 F.3d at 770;

In re Hedged-Investments Ass#cs., 84 F.3d at 1290; Sch#les, 56 F.3d at 757-58; Bay#u

Superfund, LLC v. WAM L#ng/Sh#rt Fund II, LLP (In re Bay#u Gr#up, LLC), 362 B.R.at 636; In

re Taubman, 160 B.R. at 986.

The difference between Lehman and the vast b$dy $f case law supp$rting the Trustee’s

av$idance claim is n$t that Lehman inv$lved a br$ker dealer. It is that Lehman had t$ d$ with

the enf$rceability $f an arbitrat$r’s award and n$thing whats$ever t$ d$ with bankruptcy. The

main issue in Lehman was whether the defendants, having f$ught t$ enf$rce the arbitrati$n

sh$uld be deemed t$ $ccur $n the date the drawee bank h$n$rs the check).

23
clause in their c$ntract with the plaintiffs, w$uld be b$und by the arbitrat$r’s determinati$n $f

damages. Enf$rcing the arbitrat$r’s award was neither against public p$licy n$r t$ the detriment

$f $ther credit$rs since Lehman was n$t in bankruptcy and the rights $f $ther credit$rs were n$t

implicated. See, e.g., Sch#les, 56 F.3d at 757-58 (argument that it may seem “$nly fair” that

invest$r be entitled t$ pr$fits $n trades made with his m$ney was true as between invest$r and

P$nzi scheme $perat$r, but was n$t true as between invest$r and $ther invest$rs); In re

Taubman, 160 B.R. at 986.

The case that is anal$g$us t$ Pic$wer’s situati$n is n$t Lehman but In re Hedged

Investments Ass#ciates, 84 F.3d 1286 (10th Cir. 1996). There, an invest$r in an investment fund

that turned int$ a P$nzi scheme attempted t$ defend against a trustee’s av$idance claim f$r

fictiti$us pr$fit. Like Pic$wer, the invest$r argued that under applicable law (in her case,

C$l$rad$), she w$uld have had a claim f$r her full expectancy damages and that theref$re the

full am$unt $f the transfers had been f$r value. The Tenth Circuit rejected her argument,

reas$ning that as a matter $f public p$licy, a C$l$rad$ state c$urt w$uld n$t permit an invest$r in

a bankrupt P$nzi scheme t$ enf$rce her fraudulent c$ntract with the defendant at the expense $f

$ther invest$rs. Since she had n$ enf$rceable claim f$r am$unts bey$nd her initial investment,

the debt$r had n$ debt t$ her f$r th$se am$unts and she had n$t pr$vided value f$r th$se

transfers. Id. at 1289. Whatever rights t$ expectancy damages an invest$r the$retically may

have as a fraud plaintiff, in $ther w$rds, d$ n$t $verc$me the rule that payments t$ invest$rs in a

P$nzi scheme in excess $f the am$unts $f their investments are av$idable as fraudulent transfers.

D. The Net Equity Dispute is irrelevant t( the Trustee’s claims and cann(t
be determined in a m(ti(n t( dismiss.

Pic$wer als$ claims that he is entitled t$ the “expectancy measure $f damages” under the

SIPA statute, and theref$re t$ establish lack $f fair c$nsiderati$n the Trustee must allege that the

24
transfers exceeded the value $f securities reflected $n the acc$unts’ last BLMIS acc$unt

statements. This is $ne $f several attempts by Pic$wer t$ challenge, in the c$ntext $f this m$ti$n

t$ dismiss, the Trustee’s interpretati$n $f “net equity” as defined under Secti$n 78lll(11) $f SIPA

in its determinati$n $f cust$mer claims. See 15 U.S.C. § 78lll(11) (2009). The Net Equity

Dispute is irrelevant t$ Pic$wer’s argument, and in any event cann$t be determined in the

c$ntext $f this m$ti$n.

Like s$me $ther invest$rs, Pic$wer claims that each acc$unt’s “net equity” f$r purp$ses

$f the SIPA statute is the am$unt sh$wn $n the last cust$mer statement issued by BLMIS.

(MTD at 10, 51-52.) Because th$se cust$mer statements issued by BLMIS included fictiti$us

pr$fits and were entirely fraudulent, h$wever, the Trustee is n$t relying $n the acc$unt balances

appearing $n the cust$mer statements f$r purp$ses $f claims determinati$ns. Instead, the

Trustee is evaluating claims based $n the am$unts that a cust$mer actually dep$sited with

BLMIS, less the am$unts that the cust$mer withdrew fr$m the acc$unt, s$metimes referred t$ as

the “cash in/cash $ut” appr$ach. (MTD at 52.)

The issue $f “net equity” applies t$ the determinati$n $f all cust$mer claims in this SIPA

liquidati$n, as well as litigati$ns br$ught by the Trustee. Acc$rdingly, it will be heard by the

C$urt, after briefing by interested parties in acc$rdance with this C$urt’s September 10, 2009

Scheduling Order. (See Mem. Dec. & Order Granting Trustee’s M$t. t$ Dismiss, Sept. 10, 2009

[hereinafter “Peskin Order”].) As this C$urt stated in its decisi$n ad$pting the Scheduling Order

and dismissing a c$mplaint by an$ther invest$r, “[w]ith m$re than 15,000 claims filed in the

Mad$ff pr$ceeding and multi-billi$ns $f d$llars at stake, the issue $f h$w the Trustee determines

claimants’ ‘net equity’ f$r distributi$n purp$ses is a central questi$n t$ be determined in this

25
SIPA liquidati$n.” (Peskin Order at 2.) The C$urt’s reas$ning in that decisi$n, dismissing an

invest$r’s c$mplaint f$r a declarati$n $f the sc$pe $f her claims, is equally applicable here:

The Scheduling M$ti$n will address the c$ncerns $f a variety $f cust$mers with
different acc$unt hist$ries and balances, including b$th net winners and net
l$sers, and will pr$vide every$ne inv$lved with the benefits fr$m the submissi$n
$f a c$mprehensive and c$mplete rec$rd $n this issue. All$wing Plaintiffs, wh$
represent $nly $ne gr$up $f cust$mers…t$ pr$ceed with the adversary pr$ceeding
t$ determine the Net Equity Issue that will apply t$ all cust$mer claims will yield
an inc$mplete rec$rd that might result in piecemeal litigati$n $n this issue.
M$re$ver, Plaintiffs will suffer n$ prejudice in having the Net Equity Issue
decided pursuant t$ the Scheduling M$ti$n while $ther cust$mers will suffer great
harm if Plaintiffs are permitted t$ pr$ceed with$ut their participati$n.

(Id. at 12-13, as amended per the Errata Order dated Sept. 11, 2009.) M$re$ver, the precise

am$unt $f equity in the cust$mer acc$unts – under whatever meth$d – is a heavily factual issue

that remains under investigati$n and cann$t be decided in the c$ntext $f a m$ti$n t$ dismiss.

See, e.g., Higazy v. Templet#n, 505 F.3d 161, 174 (2d Cir. 2007) (“Where there is a dispute ab$ut

the material facts, this questi$n must be res$lved by the fact finder.”) (citati$n $mitted).

In any event, whatever remedies Pic$wer may $r may n$t have under SIPA d$ n$t answer

the questi$n whether Pic$wer pr$vided “fair c$nsiderati$n” t$ BLMIS f$r the transfers at issue.

The c$ncept $f fair c$nsiderati$n refers t$ the value received by the debt$r in exchange f$r the

transfer. The am$unt $f value given by an invest$r is n$t altered based $n whether $r n$t a

br$kerage firm is registered with SIPC, whether $r n$t a SIPA acti$n is c$mmenced, $r whether

any $r all $f the invest$r’s investments are pr$tected under SIPA $r f$r h$w much, because n$ne

$f this affects the value that the invest$r gave t$ the debt$r in exchange f$r the transfer. See,

e.g., 5 C#llier #n Bankruptcy ¶ 548.05(1)(b) (2009) (“Because the ultimate issue is the impact $f

the transfer $n the debt$r’s estate, the c$urt must thus determine whether the debt$r, as $pp$sed

t$ s$me $ther entity, received such value.”); Sch#les, 56 F.3d at 757-58 (a party is entitled t$

retain pr$fit fr$m a P$nzi scheme $nly if the payment $f that pr$fit, which reduced the net assets

26
$f the estate, was $ffset by an equivalent value t$ the estate). The value that Pic$wer gave t$

BLMIS and its impact $n the BLMIS estate is n$t greater because this acti$n takes place under

SIPA, regardless $f what remedies Pic$wer may ultimately be determined t$ have under the

statut$ry scheme.

Finally, in additi$n t$ requiring that a transfer be made in satisfacti$n $f an antecedent

debt by the debt$r, “fair c$nsiderati$n” under New Y$rk law requires b$th that the transfer be

made “in g$$d faith” and be a “fair equivalent” t$ the $bligati$n. N.Y. Debt. & Cred. Law §

272. The Trustee has amply alleged that the Transfers t$ Pic$wer were utterly dispr$p$rti$nate

t$ any c$nsiderati$n pr$vided by him t$ BLMIS and that the Transfers were received by him in

bad faith. The m$ti$n t$ dismiss this c$unt theref$re sh$uld be denied.

III. THE TRUSTEE HAS ALLEGED FACTS SUFFICIENT TO PIERCE THE


CORPORATE VEIL AND HOLD PICOWER LIABLE FOR THE TRANSFERS
TO ALL DEFENDANTS, AND DEFENDANTS FAIL TO CHALLENGE THE
SUFFICIENCY OF THE TRUSTEE’S AGENCY ALLEGATIONS

Pic$wer inc$rrectly claims, in P$int II $f his m$ti$n, that the C$mplaint fails t$ allege

adequate cause f$r piercing the c$rp$rate veils $f the vari$us partnerships, funds, f$undati$ns

and $ther entities named in the C$mplaint (the “Pic$wer Entities”). (See MTD at 17-23.)

Whether $r n$t Pic$wer and the $ther Defendants are liable under the alter eg$ the$ry, like m$st

$f the challenges raised in Pic$wer’s m$ti$n, requires a fact-specific analysis and cann$t be

res$lved in a m$ti$n t$ dismiss. But the C$mplaint amply alleges b$th that the Pic$wer Entities

were mere instrumentalities $f Pic$wer and that they were used t$ achieve fraud, each $f which

c$nstitutes an independent basis f$r alter eg$ liability.

In any event, Pic$wer fails t$ challenge the sufficiency $f the Trustee’s allegati$ns that

Pic$wer and/$r his agent Freilich acted as Defendants’ auth$rized agents in numer$us capacities,

including with$ut limitati$n direct$r, partner, $fficer and trustee (C$mpl. ¶¶ 34-54, 60), and that

27
in such capacities they engaged in transacti$ns with BLMIS that they knew $r sh$uld have

kn$wn were false, fraudulent and fictiti$us (see id. ¶¶ 3-4, 28, 53-55, 59-64). These allegati$ns

establish that Pic$wer’s kn$wledge and c$nduct must be imputed t$ all Defendants. They als$

establish that Pic$wer is pers$nally liable f$r his $wn fraudulent and t$rti$us c$nduct, perf$rmed

b$th $n behalf $f himself and the Pic$wer Entities.

A. The Trustee has pled facts sufficient t( pierce the c(rp(rate veil (f each
Defendant and imp(se alter eg( liability up(n Pic(wer and (ther
Defendants.

The U.S. Supreme C$urt has declared that it is a “fundamental principle $f c$rp$rate

law . . . that the c$rp$rate veil may be pierced and the shareh$lder held liable f$r the

c$rp$rati$n’s c$nduct when, inter alia, the c$rp$rate f$rm w$uld $therwise be misused t$

acc$mplish certain wr$ngful purp$ses, m$st n$tably fraud, $n the shareh$lder’s behalf.” United

States v. Bestf##ds, 524 U.S. 51, 62 (1998). In general, the state $f f$rmati$n $f the entity

determines whether its f$rm may be disregarded and its liability-limiting veil may be pierced.

See Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995).10 Under Delaware law, “a c$urt

can pierce the c$rp$rate veil $f an entity where there is fraud $r where a subsidiary is in fact a

mere instrumentality $r alter eg$ $f its $wner.” Geyer v. Ingers#ll Publicati#ns C#., 621 A.2d

784, 793 (Del. Ch. 1992) (shareh$lder was c$rp$rate alter eg$ where he dealt with substantial

c$rp$rate assets and $bligati$ns as his $wn).

10
Analysis $f Defendants’ “alter eg$” liability herein is based $n Delaware law as exp$unded by state and federal
c$urts c$nstruing Delaware as well as New Y$rk law, which are substantially similar. See Wassau Business Ins. C#.
v. Turner C#nst. C#., 141 F. Supp. 2d 412, 417 (S.D.N.Y. 2001) (Delaware and New Y$rk law “substantially
similar” $n piercing c$rp$rate veil). This is necessary because the “law $f piercing the c$rp$rate veil has n$t been
as fully devel$ped in Delaware as in many $ther jurisdicti$ns” and “it is rare f$r the Delaware c$urts t$ spell $ut in
any detail h$w the determinati$n t$ pierce the c$rp$rate veil is t$ be made.” Stephen B. Presser, Piercing the
C#rp#rate Veil § 2.8, at 2-73 & 2-76 (2009). T$ the extent that this C$urt may be required t$ apply Fl$rida law in
imp$sing alter eg$ $r similar liability $n any $f the Defendants, it sh$uld be $bserved that such law is als$
substantially similar t$ New Y$rk and Delaware law. See William Passalacqua Builders, Inc. v. Resnick Devel#pers
S#uth, Inc., 933 F.2d 131, 137 (2d Cir. 1991) (New Y$rk and Fl$rida law $f piercing c$rp$rate veil “virtually

28
The test f$r piercing the veil is disjunctive: c$urts may disregard c$rp$rate f$rm either

where there is fraud $r s$mething like it, as discussed bel$w, $r where the entity $r entities are

used as mere instrumentalities $r alter eg$s $f their $wner. See Acciai Speciali Terni USA, Inc.

v. M#mene, 202 F. Supp. 2d 203, 207-208 (S.D.N.Y. 2002) (c$llecting cases).

N$twithstanding Defendants’ asserti$ns t$ the c$ntrary,11 it is generally ackn$wledged

that actual intent t$ defraud is n$t essential where evidence $f c$nstructive fraud $r $ther similar

inequitable c$nduct is present, see William Meade Fletcher, Fletcher Cycl$pedia $f the Law $f

C$rp$rati$ns § 41.32 (2009) (c$llecting cases), and c$nduct sh$rt $f active intent t$ deceive

required t$ establish fraud may justify piercing the c$rp$rate veil. Irwin & Leight#n, Inc. v.

W.M. Anders#n C#., 532 A.2d 983, 987 (Del. Ch. 1987). M$re$ver, c$urts may disregard

c$rp$rate f$rm and pierce the veil f$r a wide range $f unlawful and inequitable c$nduct, ranging

fr$m fraudulent activity such as that engaged in by Defendants, t$ c$ntraventi$n $f law $r

c$ntract generally, t$ public wr$ng and situati$ns where equitable c$nsiderati$ns am$ng

members $f a c$rp$rate entity require it. See M#bil Oil C#rp., 718 F. Supp. at 268 (“fraud $r

s$mething like fraud,” such as injustice $r inequity, justifies disregard $f c$rp$rate f$rm);

identical”); R#berts#n-Cec# C#rp. v. C#rnelius, N$. 3:03cv475, 2007 WL 1020326, at *7 n.7 (N.D. Fla. Mar. 30,
2007) (Delaware and Fl$rida law “the same” $n the issue $f veil-piercing).
11
Relying $n $verly br$ad dicta in Wallace v. W##d, 752 A.2d 1175, 1184 (Del. Ch. 1999), Defendants claim that
all $f the activities $f Pic$wer and the Pic$wer Entities must c$nstitute an unqualified fraud and sham f$r alter eg$
liability t$ attach t$ him and f$r the veil $f the vari$us entities t$ be pierced. (See MTD at 19-20.) This is inc$rrect.
“[F]raud $r a sham, strictly speaking, need n$t be sh$wn t$ justify the piercing $f a c$rp$rate veil under Delaware
law.” Br#wn v. General Elec. Capital C#rp. (In re F#xmeyer C#rp.), 290 B.R. 229, 236 (Bankr. D. Del. 2003)
(citing M#bil Oil C#rp. v. Linear Films, Inc., 718 F. Supp. 260, 268 (D. Del. 1989) and Fletcher, 68 F.3d at 1458).
All that the Trustee needs t$ sh$w is “an $verall element $f injustice $r unfairness.” Id. (citati$ns $mitted). The
reas$n why the limited partner plaintiffs’ attempt t$ pierce the c$rp$rate veil $f their general partner and imp$se
pers$nal liability $n its $fficers in Wallace v. W##d failed is that plaintiffs “merely state[d] that the purp$se $f the
General Partner [was] t$ manage and $perate the Partnership” and pled n$ $ther “facts that if true w$uld justify
disregarding the c$rp$rate f$rm $f the General Partner.” 752 A.2d at 1184. Defendants are als$ inc$rrect when they
claim that Delaware c$urts will n$t disregard c$rp$rate entities unless they are c$mplete shams created s$lely f$r the
purp$se $f defrauding $thers. (See MTD at 18-19 (citing Tese-Milner v. TPAC, LLC (In re Ticketplanet.c#m), 313
B.R. 46, 70 (Bankr. S.D.N.Y. 2004) and Cr#see v. BCBSD, Inc., 836 A.2d 492, 497 (Del. 2003).) As the Sec$nd
Circuit recently declared, t$ pierce the c$rp$rate veil, “the plaintiff need n$t pr$ve that the c$rp$rati$n was created

29
Mab#n, Nugent & C#. v. Texas Am. Energy C#rp., 1998 WL 5492, at *3 (Del. Ch. 1988) (under

Delaware law, fraud is n$t the $nly basis t$ pierce c$rp$rate veil); Pauley Petr#leum, Inc. v.

C#ntinental Oil C#., 231 A.2d 450, 452-53 (Del. Ch. 1967), aff’d, 239 A.2d 629 (Del. 1968).

See als# Publicker Indus. v. R#man Ceramics C#rp., 603 F.2d 1065, 1069 (3d Cir. 1979)

(appr$priate t$ disregard c$rp$rate existence when “c$urt must prevent fraud, illegality, $r

injustice, $r when rec$gniti$n $f c$rp$rate entity w$uld defeat public p$licy $r shield s$me$ne

fr$m liability f$r a crime” (qu#ting Zubik v. Zubik, 384 F.2d 267, 272 (3d Cir. 1967))).

In cases where liability is premised, n$t $n fraud $r s$mething like it, but $n the mere

instrumentality d$ctrine, a tw$-pr$ng test must be met. The $wner and entity must be sh$wn t$

have $perated as a single ec$n$mic unit and an $verall element $f injustice $r unfairness must be

present. See Acciai Speciali Terni, 202 F. Supp. 2d at 207; cf. Passalacqua, 933 F.2d at 138

(under New Y$rk law, c$rp$rate veil may be pierced either when c$rp$rate f$rm is used t$

achieve fraud, $r when c$ntr$l and d$minati$n $f entity by $wner are used t$ c$mmit wr$ng,

fraud, breach $f duty $r dish$nest $r unjust act).

1. The determinati$n $f whether t$ ign$re the c$rp$rate f$rms requires a fact


specific inquiry int$ the t$tality $f the circumstances.

The legal test f$r determining when c$rp$rate f$rm sh$uld be ign$red in equity cann$t be

reduced t$ a single f$rmula. Irwin & Leight#n, 532 A.2d at 989. N$ single fact$r can justify a

decisi$n t$ disregard the c$rp$rate entity but s$me c$mbinati$n $f them is required and, as stated

ab$ve, an $verall element $f injustice $r unfairness must be present if the c$rp$rate veil is t$ be

pierced. United States v. G#lden Acres, Inc., 702 F. Supp. 1097, 1104 (D. Del. 1988), aff’d, 879

F.2d 857 (3d Cir. 1989). Alth$ugh c$urts have vari$usly identified certain c$nsiderati$ns that

with fraud $r unfairness in mind. It is sufficient t$ pr$ve that it was s$ used.” Netjets Aviati#n, Inc. v. LHC
C#mmc’ns, LLC, 537 F.3d 168, 177 (2d Cir. 2008) (citati$ns $mitted).

30
may be relevant t$ determining when a parent and subsidiary, $r $wner and entity, $perate as an

ec$n$mic unit f$r purp$ses $f the instrumentality test, they are n$t c$nclusive. See Uni#n

Carbide C#rp. v. M#ntell N.V., 944 F. Supp. 1119, 1144-45 (S.D.N.Y. 1996).

Just as there is n$ talismanic set $f fact$rs f$r determining when it is appr$priate t$ pierce

the c$rp$rate veil, there is n$ single test f$r determining the sufficiency $f pleading an alter eg$

claim. Again, the c$nsiderati$ns identified by c$urts as p$tentially relevant t$ determining when

a parent and subsidiary, $r $wner and entity, $perate as an ec$n$mic unit f$r purp$ses $f the

instrumentality test are n$t c$nclusive. See Uni#n Carbide C#rp., 944 F. Supp. at 1144-45.

M$re$ver, there is n$ judicial auth$rity requiring dismissal $f alter eg$ allegati$ns where they d$

n$t happen t$ fit the misleading versi$n $f Delaware’s c$rp$rate disregard d$ctrine that

Defendants are attempting t$ f$ist up$n this C$urt.12 See id.

Given the intensively factual inquiry required, the nature and extent $f Pic$wer’s

wr$ngd$ing and his d$mini$n and c$ntr$l $ver the $ther Defendants are n$t pr$per subjects f$r

res$luti$n $n a m$ti$n t$ dismiss. See id.; see als# Official C#mm. #f Unsecured Credit#rs v.

Reliance Capital Gr#up, Inc. (In re Buckhead America C#rp.), 178 B.R. 956, 975 (D. Del.

1994); Geyer, 621 A.2d at 793; Mab#n, Nugent & C#. v. Texas Am. Energy C#rp., CIV.A. N$.

8578 1990 WL 44267, at *5 (Del. Ch. Apr. 12, 1990). The C$mplaint m$re than adequately sets

f$rth facts that, if true, establish a basis t$ pierce the c$rp$rate veil under any relevant law; the

ultimate success $f this claim will depend up$n the t$tality $f facts and circumstances disc$vered

thr$ugh trial.

12
Defendants qu$te the inc$mplete and, in part, irrelevant fact$rs set f$rth in Trevin# v. Mersc#rp, Inc., 583 F.
Supp. 2d 521, 528-29 (D. Del. 2008), and then demand that the Trustee c$nf$rm his C$mplaint t$ their the$ry $f the
case at risk $f dismissal. (See MTD at 18-19.) The far m$re c$mprehensive and relevant fact$rs discussed in
Netjets Aviati#n, 537 F.3d 168, the m$st auth$ritative analysis $f alter eg$ liability yet handed d$wn by the Sec$nd

31
2. The C$mplaint amply pleads a basis f$r piercing the c$rp$rate veil.

The C$mplaint pleads facts that amply supp$rt alter eg$ liability. The Sec$nd Circuit

recently, and exhaustively, expl$red many $f the fact$rs c$nsidered under Delaware law when

c$nsidering imp$sing alter eg$ liability in Netjets Aviati#n, Inc. v. LHC C#mmunicati#ns, LLC,

537 F.3d 168 (2d Cir. 2008). It c$nducted a similarly th$r$ugh analysis $f the same issue under

virtually identical principles $f New Y$rk law in Passalacqua, 933 F.2d at 139, where the

plaintiff s$ught t$ pierce the c$rp$rate veil $f the c$ntracting defendant c$rp$rati$n and imp$se

alter eg$ liability $n its family real estate business $wners, $perating thr$ugh a web $f

partnerships and c$rp$rati$ns, all c$ntr$lled either directly $r indirectly by the family members.

The Sec$nd Circuit reversed the district c$urt’s dismissal $f plaintiff’s claim, finding plaintiff’s

alter eg$ allegati$ns sufficient t$ g$ t$ the jury. The allegati$ns in the Trustee’s C$mplaint are

clearly sufficient under the analysis c$nducted in these cases. Indeed, they largely track the alter

eg$ indicia that the Sec$nd Circuit held sufficient t$ require that the issue $f piercing the

c$rp$rate veil and imp$sing alter eg$ liability be presented t$ the factfinder. F$r example:

The C$mplaint asserts that Pic$wer knew $r sh$uld have kn$wn that he was a
maj$r beneficiary $f Mad$ff’s fraud f$r $ver 25 years and withdrew m$re than $6
billi$n $f Mad$ff’s victims’ m$ney. (C$mpl. ¶¶ 2-4, 28, 53-55, 59-64.)

The C$mplaint alleges that Pic$wer knew $r sh$uld have kn$wn that he was
engaged, directly and thr$ugh the $ther Defendants, which are entities he directly
$r indirectly $wns and/$r c$ntr$ls, in pr$fiting fr$m BLMIS’s fraud. (See, e.g.,
C$mpl. ¶¶ 3-4; c$mpare the c$llective c$ntr$l and management $f affiliates in
Netjets Aviati#n, 537 F.3d at 179-80, 182 and Passalacqua, 933 F.2d at 139-40.)

The C$mplaint avers that Pic$wer and/$r $ne $f his agents were the managers $f
all $f the Pic$wer Entities. (See, e.g., C$mpl. ¶¶ 37-52; c$mpare the limited
number $f identical direct$rs and $fficers in Netjets Aviati#n, 537 F.3d at 179 and
Passalacqua, 933 F.2d at 139-40.)

Circuit, are n$where discussed in Defendant’s papers, perhaps, we suggest, because they are t$$ unc$mf$rtably
similar t$ the facts specifically alleged in the C$mplaint.

32
The C$mplaint states that in the c$urse $f perpetrating his wr$ngful c$nduct –
which f$r purp$ses $f alter eg$ the$ry c$nstitute fraud in law – Pic$wer used his
c$ntr$lling pers$nal and c$rp$rate auth$rity t$ direct the $pening $f acc$unts f$r
and manage the investments $f Defendants. (See, e.g., C$mpl. ¶¶ 34-52, 55-56,
60; c$mpare the c$llective acc$unting meth$ds and lack $f arm’s length dealing
in Netjets Aviati#n, 537 F.3d at 179-80 and Passalacqua, 933 F.2d at 139-40.)

The C$mplaint alleges that many $f the Defendants shared $ffice space and
mailing addresses with each $ther, including 1410 S$uth Ocean B$ulevard, Palm
Beach, Fl$rida; 950 Third Avenue, New Y$rk, New Y$rk; and/$r 22 Saw Mill
River R$ad, Hawth$rne, New Y$rk. (See, e.g., C$mpl. ¶¶ 34-52; c$mpare the
shared $ffice space and empl$yee res$urces in Netjets Aviati#n, 537 F.3d at 179
and Passalacqua, 937 F.2d at 140.)

The C$mplaint asserts that Pic$wer and his agent maintained a p$rtf$li$ appraisal
system which enabled Pic$wer t$ centralize, c$$rdinate and direct all $f the
investments $f the Defendants with BLMIS. (See, e.g., C$mpl. ¶ 61; c$mpare the
centralized and intermingled financial management at Netjets Aviati#n, 537 F.3d
at 179-82 and Passalacqua, 933 F.2d at 140.)

The C$mplaint asserts that Pic$wer used $ne $f his BLMIS acc$unts as the
primary s$urce $f cash withdrawals f$r all $f the Defendants, and that he
pers$nally managed and supervised such withdrawals, which t$taled m$re than $6
billi$n. (See, e.g., C$mpl. ¶¶ 60, 63(d); c$mpare the similar cash management and
withdrawal systems in Netjets Aviati#n, 537 F.3d at 179-82 and Passalacqua, 933
F.2d at 140.)

The C$mplaint states that Pic$wer engaged in extra$rdinarily heavy margin call
b$rr$wing t$ finance his speculative trading p$siti$ns. (See, e.g., C$mpl. ¶ 63(c)-
(d); c$mpare the heavy margin and debt p$siti$ns in Netjets Aviati#n, 537 F.3d at
181-82 and Passalacqua, 933 F.2d at 139-40.)

The C$mplaint alleges that Pic$wer’s purp$rted b$rr$wings fr$m BLMIS $n


behalf $f defendants exceeded $6 billi$n, which, in light $f the fictiti$us nature $f
their assets, raises the $verwhelming presumpti$n that they were severely
undercapitalized, if n$t entirely ins$lvent (See, e.g., C$mpl.¶ 63(c)-(d); c$mpare
finding $f severe undercapitalizati$n in Passalacqua, 933 F.2d at 139-40.)

The C$mplaint avers that Pic$wer directed back-dated, fictiti$us and fraudulent
trades with BLMIS f$r his $wn acc$unts and the acc$unts $f $ther Defendants.
(See, e.g., C$mpl. ¶ 63(e)-(f); c$mpare the deceptive and unlawful acc$unting
ficti$ns in Netjets Aviati#n, 537 F.3d at 179-83.)

The C$mplaint affirms that in dealing with BLMIS, Pic$wer exercised c$mplete
d$mini$n $ver and used the Pic$wer Entities as instruments t$ advance his
pers$nal interests; acc$rdingly, they functi$ned as his alter eg$s and n$ c$rp$rate
veil can be maintained between them. (See, e.g., C$mpl. ¶ 53; c$mpare the

33
findings in Netjets Aviati#n, 537 F.3d at 182-84 and Passalacqua, 933 F.2d at
140.)

Given the Sec$nd Circuit’s analysis in Netjets Aviati#n and Passalacqua, the allegati$ns

$f the C$mplaint are m$re than sufficient t$ warrant denial $f Defendants’ m$ti$n t$ dismiss.

B. Defendants fail t( challenge the Trustee’s agency allegati(ns.

As discussed ab$ve, the C$mplaint is replete with specific allegati$ns $f the facts and

circumstances giving rise t$ actual $r c$nstructive kn$wledge $n the part $f Pic$wer and Freilich

regarding their fraudulent transacti$ns with BLMIS. The Defendants d$ n$t attack the

sufficiency $f the Trustee’s allegati$ns that Pic$wer was an agent $f the Pic$wer Entities, acting

within the sc$pe $f his auth$rity, and that all Defendants were the primary beneficiaries $f

wr$ngful c$nduct and in fact accepted and enj$yed the benefits there$f f$r decades. (See, e.g.,

C$mpl. ¶¶ 28, 54.) Under such circumstances, it is black letter law that the acts and kn$wledge

$f agents are imputed t$ their principals, and that the principals cann$t retain the fruits $f their

agent’s c$nduct. Center v. Hampt#n Affiliates, Inc., 488 N.E.2d 828, 829 (N.Y. 1985); 546-552

West 146th Street LLC v. Arfa, 863 N.Y.S.2d 412, 414 (1st Dep’t 2008); Capital Wireless v.

Del#itte, 627 N.Y.S.2d 794, 797 (3d Dep’t 1995); see als# Ap#ll# Fuel Oil v. United States, 195

F.3d 74, 76-77 (2d Cir. 1999) (when agent acquires kn$wledge material t$ empl$yment, such

kn$wledge is imputed t$ the principal, and c$rp$rati$n can be guilty $f kn$wing vi$lati$ns $f

law thr$ugh d$ctrine $f resp$ndeat superi$r).

N$t $nly d$es the C$mplaint establish that Defendants are liable f$r Pic$wer’s c$nduct, it

als$ establishes that Pic$wer is liable f$r his $wn participati$n in fraudulent $r t$rti$us c$nduct

(b$th $n behalf $f himself and $n behalf $f the Pic$wer Entities). New Y$rk law imp$ses

individual pers$nal liability $n $fficers, direct$rs and $ther c$rp$rate agents wh$ engage in

fraudulent acts $r $ther t$rts, even if such c$nduct is in the c$urse $f their duties. Ban# v. Uni#n

34
Carbide C#rp., 273 F.3d 120, 133 (2d Cir. 2001); L#presti v. Terwilliger, 126 F.3d 34, 42 (2d

Cir. 1997); Mills v. P#lar M#lecular C#rp., 12 F.3d 1170, 1177 (2d Cir. 1993). M$re$ver, this

liability may be imp$sed $n $fficers and direct$rs whether they actually participate in the fraud

$r t$rt, $r merely have kn$wledge $f it. See, e.g., C#hen v. K#enig, 25 F.3d 1168, 1173 (2d Cir.

1994); P#l#netsky v. Better H#mes Dep#t, Inc., 760 N.E.2d 1274, 1278 (N.Y. 2001); Marine

Midland Bank v. J#hn E. Russ# Pr#duce C#., 405 N.E.2d 205, 212 (N.Y. 1980); Ideal Steel

Supply C#rp. v. Fang, 767 N.Y.S.2d 644, 645 (2d Dep’t 2003) (s$le shareh$lders and $fficers $f

c$rp$rati$n that allegedly engaged in fraud necessarily participated in such fraud themselves and

may be individually liable).

Given that Pic$wer has c$nfined his $bjecti$n t$ the asserti$n $f liability against him

s$lely $n alter eg$ gr$unds (see MTD at 17-23), it sh$uld be n$ted that agents wh$ direct,

participate $r kn$w $f a c$rp$rati$n’s fraudulent, t$rti$us $r $ther inequitable c$nduct are

pers$nally liable irrespective $f whether alter eg$ liability is imp$sed $n them. Am. Express

Travel Related Servs. C#., Inc. v. N. Atl. Res#urces, Inc., 691 N.Y.S.2d 403, 404 (1st Dep’t

1999). C$rp$rate agents wh$ participate in the c$mmissi$n $f a t$rt are held individually liable

regardless $f whether they acted $n behalf $f the c$rp$rati$n in the c$urse $f $fficial duties and

regardless $f whether the c$rp$rate veil is pierced. Id.; see als# Espin#sa v. Rand, 806 N.Y.S.2d

186, 187 (1st Dep’t 2005). Acc$rdingly, Pic$wer may n$t escape individual pers$nal liability

f$r fraudulent and t$rti$us c$nduct c$mmitted by him as an agent $f the Defendants in the c$urse

$f c$ntr$lling, directing, $r participating in their false, fictiti$us and fraudulent transacti$ns with

BLMIS, and this liability exists in additi$n t$ any alter eg$ liability the C$urt may imp$se up$n

him when it pierces, as it is amply justified in d$ing here, the c$rp$rate veil.

35
IV. ALL DEFENDANTS, INCLUDING THE FOUR NOT LISTED ON E[HIBIT B
TO THE COMPLAINT, RECEIVED AVOIDABLE TRANSFERS

Pic$wer argues in P$int III $f his m$ti$n that f$ur $f the defendants sh$uld be dismissed

because they are n$t alleged t$ have received any transfers. Here he misreads the C$mplaint,

which states that the Transfers identified in Exhibit B are n$t an all-inclusive list $f direct

transfers $f estate pr$perty t$ defendants. (C$mpl.¶ 57.) Indeed, the Trustee’s investigati$n int$

BLMIS’ b$$ks and rec$rds is $ng$ing, and additi$nal inf$rmati$n c$ntinues t$ bec$me

available. At the time the C$mplaint was filed, certain acc$unts were alleged t$ be transferees

$n inf$rmati$n and belief based $n then available inf$rmati$n. Since filing, the Trustee has

$btained additi$nal inf$rmati$n fr$m rec$rds g$ing back substantially further in time and n$w

pr$vides particulars that underlie the fraudulent transfer allegati$ns in the C$mplaint.

It is telling that Pic$wer st$ps sh$rt $f asserting that the “N$n-Transferee” Defendants

received n$ transfers fr$m BLMIS. As he sh$uld be aware, pri$r t$ 1995 there were transfers

fr$m BLMIS t$ each $f the N$n-Transferee Defendants t$taling m$re than $100 milli$n,

evidence $f which the Trustee has disc$vered since the C$mplaint was filed. A list $f the initial

dates, meth$ds $f payment, and am$unts $f transfers t$ these Defendants is attached t$ this

mem$randum as Exhibit 1. If the C$urt finds that the allegati$ns against the “N$n-Transferee”

Defendants as pleaded in the C$mplaint, t$gether with the additi$nal particulars pr$vided here,

are insufficient, the Trustee w$uld amend t$ include these recently-identified transfers.

V. THE TRUSTEE’S TURNOVER CLAIM IS PROPERLY STATED

Pic$wer argues in P$int IV $f his m$ti$n that the Trustee’s claim f$r turn$ver $f the

Transfers is n$t ripe because the C$urt has n$t yet av$ided th$se Transfers pursuant t$ Secti$ns

544, 547, and 548 $f the Bankruptcy C$de 11 U.S.C. §§ 544, 547-8 (2009). Each $f the

36
Transfers in questi$n, h$wever, is the subject $f separate av$idance c$unts in this same acti$n.

The inclusi$n $f a turn$ver c$unt, theref$re, is appr$priate.

Pic$wer’s argument als$ ign$res express pr$visi$ns $f the SIPA statute c$ncerning the

status $f pr$perty transferred by a debt$r when funds are insufficient t$ satisfy claims in full. In

relevant part, the statute pr$vides:

…the trustee may rec$ver any pr$perty transferred by the debt$r which, except
f$r such transfer, w$uld have been cust$mer pr$perty if and t$ the extent that such
transfer is v$idable $r v$id under the pr$visi$ns $f title 11. … F$r purp$ses $f
such rec$very, the pr#perty s# transferred shall be deemed t# have been the
pr#perty #f the debt#r…

15 U.S.C. § 78fff-2(c)(3) (2009) (emphasis added). The key here is that the statute makes plain

that as t$ pr$perty that was cust$mer pr$perty pri$r t$ the transfer, that pr$perty when “s$

transferred” is deemed t$ have been pr$perty $f the estate pri$r t$ the transfer, and theref$re

subject t$ the turn$ver pr$visi$ns $f Secti$n 542. See 11 U.S.C. § 542 (2009). In $ther w$rds, if

there were any d$ubt ab$ut the nature $f cust$mer pr$perty, this SIPA pr$visi$n makes it clear

that f$r the purp$se $f av$idance acti$ns, cust$mer pr$perty is always pr$perty $f the estate.

Here, in the c$ntext $f a P$nzi scheme, it c$uld n$t be $therwise.

Even aside fr$m the SIPA statute, h$wever, it is appr$priate under the Bankruptcy C$de

t$ pair a turn$ver claim with an av$idance acti$n. The c$re functi$n $f a turn$ver claim

pursuant t$ Secti$n 542 is t$ permit the Trustee t$ rec$ver “pr$perty that the trustee may use,

sell, $r lease” fr$m any pers$ns h$lding that pr$perty. See 11 U.S.C. § 542(a) . While the case

law pertaining t$ this subject is n$t unif$rm, see, e.g., Andrew Velez C#nstr., Inc. v. C#ns#lidated

Edis#n C#. #f New Y#rk (In re Andrew Velez C#nstr., Inc.), 373 B.R. 262, 273 (Bankr. S.D.N.Y.

2007), a number $f cases stand f$r the pr$p$siti$n that a turn$ver claim may be pr$perly paired

with an av$idance claim. F$r example, in In re Jac#bs, the c$urt granted summary judgment t$

the trustee in an av$idance acti$n and held that a transfer $f pr$perty fr$m the debt$rs t$ the

37
defendants was b$th actually and c$nstructively fraudulent. In re Jac#bs, 394 B.R. at 664-72. In

the same ruling, the c$urt als$ granted summary judgment $n the trustee’s turn$ver and

acc$unting claim f$r that pr$perty. Id. In s$ ruling, the c$urt $bserved that by virtue $f its ruling

$n the av$idance claim, the pr$perty was a transfer $f pr$perty $f the debt$r and subject t$

turn$ver and av$idance. Id. at 674. This basic principle was als$ set f$rth in D#yle v. Pa#lin#

(In re Energy Savings Center, Inc.), 61 B.R. 732 (E.D. Pa. 1986), where the c$urt n$ted that:

A claim made under Secti$n 542, h$wever, is n$t necessarily distinct fr$m claims
under $ther secti$ns. F$r example, if a particular transfer $f pr$perty is v$idable
as a fraudulent transfer under Secti$n 548, then this pr$perty, n$w deemed
pr$perty $f the estate, bec$mes subject t$ the “turn$ver” auth$rity c$ntained in
Secti$n 542.

Id. at 735.

In challenging the Trustee’s claim f$r turn$ver, Pic$wer relies $n dicta in the Sec$nd

Circuit’s decisi$n in FDIC v. Hirsch (In re C#l#nial Realty C#.), 980 F.2d 125 (2d Cir. 1992), in

which the Sec$nd Circuit n$ted that $nly $nce a transfer is av$ided and rec$vered d$es the

pr$perty that was subject t$ that claim bec$me “pr$perty $f the estate” within the meaning $f

Secti$n 541(a)(3). Id. at 131; 11 U.S.C. § 541(a)(3) (2009). In re C#l#nial Realty, h$wever, was

n$t a turn$ver case. Rather, the issue the C$urt determined in that case was that the aut$matic

stay applied t$ a prepetiti$n fraudulent transfer claim regardless $f whether the fraudulently

transferred pr$perty was, $r was n$t, pr$perty $f the estate. In re C#l#nial Realty C#., 980 F.2d.

at 131-2. In re C#l#nial Realty thus d$es n$t address the issue here: whether a turn$ver claim

may be pr$perly paired with an av$idance claim.

The pairing $f these claims is appr$priate f$r reas$ns $f judicial ec$n$my. By the

Defendants’ l$gic, the Trustee als$ c$uld n$t bring a rec$very claim under Secti$n 550 until the

transfer is av$ided. But it is c$mm$nly rec$gnized that this can be d$ne, see 5 C#llier’s #n

Bankruptcy ¶ 550.07 (2009), since requiring the Trustee t$ bring $ne adversary pr$ceeding t$

38
av$id the transfer and then a separate pr$ceeding t$ rec$ver the transfer $r its value w$uld be a

waste $f res$urces. See generally W##ds & Ericks#n LLP v. Le#nard (In re Avi, Inc.), 389 B.R.

721, 734-35 (B.A.P. 9th Cir. 2008) (h$lding that an av$idance and rec$very acti$n may be

br$ught simultane$usly t$ “av$id absurd results” and t$ “pr$tect the trustee fr$m attempts t$

impede rec$very” and t$ “aff$rd[] flexibility when a transferee $r its assets have disappeared.”).

The same rati$nale sh$uld apply t$ permit Secti$n 542 claims t$ be paired with av$idance

claims.

F$r these reas$ns, the Trustee requests that this C$urt f$ll$w the SIPA statute, and the

reas$ning $f In re Jac#bs and In re Energy Savings Center, and deny the Defendants’ m$ti$n t$

dismiss C$unt One.

VI. THE RELEVANT DATE FOR THE SI[ YEAR CONVEYANCES IS


CORRECTLY ALLEGED

In P$int V $f his m$ti$n, Pic$wer expends much energy in arguing that transfers that

$ccurred within six years $f the filing $f the bankruptcy case $n December 11, 2008, but m$re

than six years bef$re the adversary filing $n May 12, 2009, sh$uld n$t be rec$verable under 11

U.S.C. § 544(b) (2009). In $ther w$rds, Pic$wer challenges this basis f$r rec$vering transfers

made t$ him in the peri$d between December 11, 2002 and May 12, 2003. The m$tivati$n f$r

this argument is understandable, since the Transfers at issue t$tal m$re than $520 milli$n d$llars.

N$netheless, Pic$wer’s argument is ill$gical and finds n$ supp$rt in the statute $r the caselaw. It

is als$ irrelevant, since c$ntrary t$ Pic$wer’s assumpti$n, the underlying state law statute $f

limitati$ns $n such transfers did n$t actually expire bef$re the adversary pr$ceeding was filed,

having been t$lled by, am$ng $ther things, the very fact $f the filing $f the bankruptcy petiti$n.

39
A. State law limitati(ns peri(ds are relevant (nly until the bankruptcy
case is filed.

The Bankruptcy C$de n$t $nly creates the causes $f acti$n referred t$ by 11 U.S.C. §

544(b), it specifically pr$vides the limitati$ns peri$d within which they are t$ be br$ught.

Acc$rdingly, the case law pr$perly h$lds that if the cause $f acti$n exists at the petiti$n date, the

$nly applicable statute $f limitati$ns f$r bringing it thereafter is 11 U.S.C. § 546(a) (2009).

Under New Y$rk state law, as in m$st $ther states, a transfer$r cann$t av$id its $wn

transfers – the right bel$ngs t$ the credit$rs $r, f$ll$wing bankruptcy, debt$r in p$ssessi$n.

C$nsequently, a cause $f acti$n f$r a trustee in bankruptcy is created by the Bankruptcy C$de,

and it c$mes int$ being at the same time as the bankruptcy case itself. See, e.g. Mah#ney, Tr#cki

& Ass#cs., Inc. v. Kunzman (In re Mah#ney, Tr#cki & Ass#cs., Inc.), 111 B.R. 914, 920 (Bankr.

S.D. Cal. 1990) (“a fraudulent transfer acti$n maintained by a debt$r-in-p$ssessi$n under 11

U.S.C. secti$n 544(b) is clearly the creati$n $f the Bankruptcy C$de”); R#sania v. Haligas (In re

Dry Wall Supply, Inc.), 111 B.R. 933, 935 n.2 (D. C$l$. 1990) (cause $f acti$n under Secti$n

546(b) is n$t $ne that c$uld have been br$ught by the debt$r).

A federal cause $f acti$n is g$verned by federal statute $f limitati$ns, where $ne exists.

Only if n$ federal statute $f limitati$ns applies d$ the federal c$urts l$$k t$ a state statute. See

e.g., Graham C#unty S#il & Water C#nservati#n Dist. v. U.S. ex rel. Wils#n, 545 U.S. 409, 414

(2005); DelC#stell# v. Int’l Br#th. Of Teamsters, 462 U.S. 151, 158-161 (1983); DirecTV, Inc. v.

Webb, 545 F.3d 837, 847 (9th Cir. 2008). In this instance, 11 U.S.C. § 546 specifically pr$vides

a statute $f limitati$ns f$r, am$ng $ther things, pr$ceedings under Secti$n 544. 11 U.S.C. §

546(a). Neither Secti$n 544 n$r Secti$n 546, n$r any $ther pr$visi$n $f the Bankruptcy C$de,

pr$vides that the Trustee must c$ntinue t$ l$$k t$ the pr$cedural limitati$ns $f state law $nce the

Trustee has acquired the substantive rights given t$ him by Secti$n 544 $f the Bankruptcy

40
C$de.13 Instead, Secti$n 546(a) specifically pr$vides the $perative limitati$ns peri$d f$r the

rights created by Secti$n 544. In $ther w$rds, and c$ntrary t$ the assumpti$n $f the Defendants,

Secti$n 544(a) d$es n$t s$ much t$ll the state statute as supersede it.14

1. Pic$wer’s argument c$ntravenes 25 years $f bankruptcy case law.

M$re than 25 years $f case law under the Bankruptcy C$de c$nfirms that the state law

statute $f limitati$ns d$es n$t have any c$ntinued effect after the bankruptcy case is filed and the

Trustee’s Secti$n 544(b) rights arise. The f$ll$wing cases are all directly $n p$int and all s$

h$ld: Eisenberg v. Feiner (In re Ahead By A Length, Inc.), 100 B.R. 157, 164 (Bankr. S.D.N.Y.

1989); Bl##m v. Fry (In re Leach), 380 B.R. 25, 29-30 (Bankr. D.N.M. 2007); Smith v. Am.

F#unders Fin., C#rp., 365 B.R. 647, 677-78 (S.D. Tex. 2007); Sears Petr#leum & Trans. C#. v.

Burgess C#nstr. Servs., Inc., 417 F. Supp. 2d 212, 225 (D. Mass. 2006); Mi-L#r C#rp. v.

G#ttsegen (In re Mi-L#r C#rp.) 233 B.R. 608 (Bankr. D. Mass. 1999); Tsai v. Buildings By

Jamie, Inc. (In re Buildings by Jamie, Inc.), 230 B.R. 36, 45 (Bankr. D.N.J. 1998); In re

Princet#n-N.Y. Inv., Inc., 219 B.R. at 65-66; Levit v. Spatz (In re Spatz), 222 B.R. 157, 164 (N.D.

Ill. 1998); Bay State Milling C#. v. Martin (In re Martin), 142 B.R. 260, 265-66 (Bankr. N.D. Ill.

1992); Mancus# v. C#nt’l Bank Nat’l Ass’n Chicag# (In re T#pc#r, Inc.), 132 B.R. 119 (Bankr.

N.D. Tex. 1991); In re Mah#ney, Tr#cki & Ass#cs., Inc., 111 B.R. at 914, 917-18 ; and In re Dry

Wall Supply, Inc., 111 B.R. at 936-37. In each $f these cases, the trustee filed an av$idance

13
The applicable New Y$rk statute $f limitati$ns, N.Y. C.P.L.R. § 213(8), is strictly a pr$cedural statute $f
limitati$ns. See First Uni#n Nat’l. Bank v. Gibb#ns (In re Princet#n-New Y#rk Invs., Inc.), 219 B.R. 55, 66 (D.N.J.
1998). In c$ntrast t$ pr$visi$ns such as 11 U.S.C. § 548 (tw$ year reachback fr$m bankruptcy filing date), it d$es
n$t create a “reachback” peri$d measured by a particular event. It just sets a time within which, as t$ any given
transfer, an acti$n must be c$mmenced. Theref$re, where a credit$r has the right t$ av$id transfers under the New
Y$rk Unif$rm Fraudulent C$nveyance Act, the transfers in questi$n c$ntinue t$ be v$idable as t$ that credit$r even
after the limitati$ns peri$d expires, and if the applicable statute $f limitati$ns is waived (such as by the defendant
n$t pleading it), changed, $r is $therwise rendered inapplicable, the substantive rights remain.
14
Cf. In re Princet#n-New Y#rk Inv., Inc., 219 B.R. at 66, and Am. F#unders Fin., C#rp., 365 B.R. at 677-78,
finding that Secti$n 546(a), because $f preempti$n, pr$vides the $nly relevant time peri$d within which a trustee

41
acti$n t$ $verturn a transfer that had taken place l$nger ag$ than the peri$d specified by the

primary state statute $f limitati$ns. H$wever, at the time the bankruptcy petiti$n was filed, the

credit$rs in wh$se sh$es the trustee was standing were n$t yet barred. Each $f these c$urts

acc$rdingly held that the trustee’s acti$n under Secti$n 544(b) was timely because it was filed

within the peri$d prescribed by 11 U.S.C. § 546(a).

M$re$ver, numer$us cases in $ther c$ntexts have als$ stated plainly that s$ l$ng as the

applicable statute $f limitati$ns has n$t expired pri$r t$ the filing $f the bankruptcy case, the

trustee may bring a Secti$n 544(b) av$idance acti$n at any p$int during the peri$d set $ut in

Secti$n 546(a). E.g., O’C#nnell v. Shall# (In re Die Fleidermaus LLC), 323 B.R. 101, 107

(Bankr. S.D.N.Y. 2005); G-I H#ldings, Inc. v. Th#se Parties Listed #n Exhibit A (In re G-I

H#ldings, Inc.), 313 B.R. 612, 646 (Bankr. D.N.J. 2004); Orr v. Bernstein (In re Bernstein), 259

B.R. 555, 558 (Bankr. D.N.J. 2001); Gl#sser v. S. & T. Bank (In re Ambulat#ry Medical &

Surgical Health Care), 187 B.R. 888, 901 (Bankr. W.D. Pa. 1995); Kaliner v. L#ad Rite Trailers,

Inc. (In re Sverica Acquisiti#n C#rp.),179 B.R. 457, 466 (Bankr. E.D. Pa. 1995); Tabas v. Gigi

Advertising Partnership (In re Kaufman & R#berts, Inc.), 188 B.R. 309, 312, 314 (Bankr. S.D.

Fl. 1995); Br#wning v. Williams (In re Silver Wheel Freightlines, Inc.), 64 B.R. 563, 568 (Bankr.

D. Or. 1986); L.A. Clarke & S#n, Inc. v. D#nald (In re L.A. Clarke & S#n, Inc.), 59 B.R. 856,

860-862 (Bankr. D.D.C. 1986). C$llier’s als$ agrees unequiv$cally. 5 C#llier #n Bankruptcy ¶

546.02[1][b] (2009) (“If the state law limitati$ns peri$d g$verning a fraudulent transfer acti$n

has n$t expired at the c$mmencement $f a bankruptcy case, the trustee may bring the acti$n

must bring a Secti$n 544(b) acti$n, even if the time limits are set by state law pursuant t$ a statute $f rep$se rather
than a statute $f limitati$ns. Under either the$ry, the result is the same.

42
pursuant t$ Secti$n 544(b), pr$vided that it is c$mmenced within the Secti$n 546(a) limitati$ns

peri$d.”)15

Defendants have c$nceded, as they must, that much case law is against them. What may

n$t be apparent fr$m Defendants’ brief, h$wever, is that $f the m$re than 20 cases they rely up$n

in attempting t$ make the c$ntrary argument, n#t a single #ne actually supp$rts their p$siti$n:

n$t $ne case c$nsiders the Secti$n 546(a) statute $f limitati$ns and c$ncludes – even in dicta –

that a trustee’s right t$ bring a rec$very adversary c$mplaint that existed $n the filing date can

p$tentially expire bef$re the time set $ut in Secti$n 546(a).

M$st $f the cases Pic$wer relies up$n are s$ far afield that they d$ n$t even menti$n

Secti$n 546 and are patently n$t attempting t$ make a pr$n$uncement that deals with what

happens if the state law statute $f limitati$ns expires between the bankruptcy filing date and

when the Trustee must bring his $r her claim.16

15
Defendants make much $f the fact that Secti$n 544(a) includes specific reference t$ the c$mmencement $f the
case, while Secti$n 544(b) d$es n$t. H$wever, this is likely attributable t$ the fact that they derive fr$m tw$
different Secti$ns $f the Act – 70(c) and 70(e) respectively, which hist$rically had similar differences in language –-
70(c), the predecess$r $f Secti$n 544(a), see. e.g., H.R. REP. NO. 95–595, at 371 (1977), defined the trustee’s p$wers
and the hyp$thetical credit$rs’ p$wers as $f the date $f the bankruptcy, while Secti$n 70(e), the predecess$r $f
Secti$n 544(b), did n$t. Secti$n 544(a), and its predecess$r, Secti$n 70(c) $f the Bankruptcy Act, primarily define
p$wers the precise sc$pe $f which are determined by relative pri$rities am$ng lien credit$rs, b$na fide purchasers,
and $ther secured credit$rs $r claimants. The exact date $n which the hyp$thetical lien $r $ther p$wer ar$se and
attached is crucial t$ the determinati$n $f respective pri$rities, and thus had t$ be specified exactly in the statut$ry
language, $r the pr$visi$n c$uld have been rendered wh$lly ineffectual. Secti$n 544(b), which referenced rights $f
an actual credit$r, did n$t suffer fr$m the same imperative.
16
See, e.g. Baldi v. Samuel S#n & C#. (In re McC##k Metals, LLC) N$. 05 C 2990, 2007 WL 4287507, *3 n. 7
(N.D. Ill. Dec. 4, 2007) (says $nly that “The UFTA, h$wever, pr$vides a different timeline than secti$n 548 $f the
Bankruptcy C$de. . . . Under secti$n 6 $f the UFTA, an acti$n must be br$ught within f$ur years $f the disputed
transfer. . . . There is n$ allegati$n here that the L$ngview Trustee did n$t bring this acti$n within the pr$per
timeframe.”), aff’d 548 F.3d 579 (7th Cir. 2008); Fink v. Graven Aucti#n C#. (In re Graven), 64 F.3d 453, 455-56,
and n. 5 (8th Cir. 1995) (in a case with n$ limitati$ns issues, merely c$mmenting, with$ut discussing Secti$n 546,
“secti$n 544 may all$w the trustee t$ reach back t$ transfers made m$re than $ne year bef$re the bankruptcy filing,
because the statute $f limitati$ns fr$m the state $r applicable n$nbankruptcy law applies and may all$w the
av$idance $f transfers m$re than $ne year $ld.”); Hirsch v. Gersten (In re Centennial Textiles, Inc.), 220 B.R. 165,
171 (Bankr. S.D.N.Y. 1998) (in a case with$ut statute $f limitati$ns issues $r discussi$ns, stating that Secti$n 544(b)
inc$rp$rates and makes applicable n$nbankruptcy law.); In re O.P.M. Leasing Servs., Inc., 32 B.R. at 201-2 (in a
case n$t raising Secti$n 546 issues, stating that a six year statute $f limitati$ns applies under Secti$n 544, thus
permitting the Trustee t$ state a cause $f acti$n f$r s$mething that was bey$nd the Secti$n 548 reachback peri$d.);
Old Orchard Bank & Trust C#. v. J#sefik (In re J#sefik), 72 B.R. 393, 395, 397 (Bankr. N.D. Ill. 1987) (state statute

43
The few cases cited that menti$n Secti$n 546 d$ n$thing t$ further Pic$wer’s arguments.

T$ the c$ntrary, they ackn$wledge that the state statute $f limitati$ns under Secti$n 544 has n$

relevance after the bankruptcy petiti$n date. See, e.g., Barr v. Charterh#use Gr#up Int’l, Inc. (In

re Everfresh Beverages, Inc.), 238 B.R. 558, 571-3 (Bankr. S.D.N.Y. 1999) (refers t$ Secti$n

546 as the “$nly relevant” statute $f limitati$ns while h$lding that the plaintiff cann$t use the

state statute $f limitati$ns $r Secti$n 108(a) t$ extend his time f$r bringing Secti$n 544(b) suits

past the limit that Secti$n 546 sets); Gl#bal Cr#ssing Estate Rep. v. Winnick, N$. 04 Civ. 2558,

2006 WL 2212776, at *6, *6 n. 6 (S.D.N.Y. Aug. 3, 2006) (citing 4 C#llier #n Bankruptcy ¶

544.03[2] at 544-21, 544-22 (L. King 15th ed. 1989) f$r the pr$p$siti$n that “[$]nce the case has

c$mmenced, secti$n 546(a) . . . specifies the time within which the trustee must act under secti$n

544(b)” and further c$mmenting at f$$tn$te 6, “On the $ther hand, a state statute $f limitati$ns

may be relevant t$ a secti$n 544(b) claim if it expires bef$re the bankruptcy case c$mmences . . .

.”); Steege v. Ly#ns (In re Ly#ns), 130 B.R. 272, 278 (Bankr. N.D. Ill. 1991) (“If the credit$r int$

wh$se sh$es the trustee seeks t$ step . . . still had time t$ pursue the remedy at the time $f the

petiti$n, the trustee must bring the acti$n within the time fixed by secti$n 546.”); Hunter v.

$f limitati$ns expired bef$re the filing $f the bankruptcy case; §546 neither relevant n$r discussed); T.C.I. Ltd. v.
Sears Bank & Trust C#. (In re T.C.I. Ltd.), 21 B.R. 876 (Bankr. N.D. Ill. 1982) (d$es n$t deal with either Secti$n
544 $r Secti$n 546); Dzik#wski v. Friedlander (In re Friedlander Capital Mgmt.), Adv. N$. 05-03088-PGH, 2009
WL 1231085, *3, *10 n. 1 (Bankr. S.D. Fla. Apr. 29, 2009) (stating $nly, “Defendants d$ n$t dispute the Trustee’s
asserti$n that the applicable statute $f limitati$n is f$ur years, $r that the Trustee’s claim is timely br$ught” and then
reciting in the c$rresp$nding f$$tn$te, “The applicable state law limitati$ns peri$d applies t$ acti$ns br$ught under
secti$n 544(b).’ 5 C#llier #n Bankruptcy ¶ 544.09 (2009)”); and Bash v. Cunningham (In re Cunningham), Adv.
N$. 07-01146, 2008 WL 2746023, 2008 Bankr. LEbIS 4125 at *25-26 and n.5 (Bankr. N.D. Ohi$ July 11, 2008) (in
a case expressly disclaiming any statute $f limitati$ns issues under either §544 $r §548, id. at *26 n$te 5, remarking,
with$ut ever menti$ning Secti$n 546, “Once a fraudulent transfer is made, a trustee in bankruptcy generally must
bring a claim within f$ur years $f the transfer, See O.R.C. § 1336.09.”). In additi$n, $f c$urse, the Bankruptcy Act
cases cited by the defendants als$ are inapp$site t$ the §546 issue. These include Buchman v. Am. F#am Rubber
C#rp., 250 F. Supp. 60 (S.D.N.Y. 1965); Feldman v. First Nat’l City Bank, 511 F.2d 460 (2d Cir. 1975); Halpert v.
Engine Air Serv., Inc.,116 F. Supp. 13 (E.D.N.Y. 1953); Lawler v. RepublicBank Dallas (In re Lawler), 53 B.R. 166
(Bankr. N.D. Tex. 1985); MacLe#d v. Kapp, 81 F. Supp. 512 (S.D.N.Y. 1948); and Seligs#n v. N.Y. Pr#duce Exch.,
378 F. Supp. 1076 (D.C.N.Y. 1974).

44
Hansen (In re Hansen), 114 B.R. 927, 933 (Bankr. N.D. Ohi$ 1990) (“The state limitati$ns

peri$d is als$ extended by § 546(a) when the trustee is pr$ceeding under 544(b) . . . ”).

2. There is n$ evidence $f c$ntrary C$ngressi$nal intent.

As m$st $f the cases p$int $ut, the p$licies $f the Bankruptcy C$de als$ str$ngly supp$rt

all$wing the trustee ($r debt$r in p$ssessi$n as the case might be) adequate time t$ determine

what causes $f acti$n are viable and sh$uld be br$ught. Otherwise, valuable rights that c$uld be

asserted f$r the benefit $f all the credit$rs w$uld simply expire with$ut rec$gniti$n.

N$ legislative hist$ry indicates that C$ngress intended any $ther result. M$re$ver,

C$ngress has had many $pp$rtunities t$ “c$rrect” the statute as part $f its peri$dic $verhauls $f

the Bankruptcy C$de if the many, many c$urts that have ruled $n the issue $ver the decades were

d$ing s$ c$ntrary t$ its intenti$ns – and it has n$t d$ne s$. Defendants misrepresent the 1994

amendment $f Secti$n 546(a) in 1994 as “sh#rtening [the tw$ year] limitati$ns peri$d t$ 1 year

after the app$intment $r electi$n $f the first trustee.” (MTD at 39 (citati$n $mitted).) The 1994

amendment res$lved a dispute am$ng c$mpeting lines $f cases whether the tw$ year limit $f

Secti$n 546(a) was supp$sed t$ run fr$m when a bankruptcy case was first filed by a debt$r in

p$ssessi$n $r whether it was supp$sed t$ begin t$ run $nly when a trustee was app$inted.

C#mpare, e.g., In re T#pc#r, Inc., 132 B.R. at 124-25 (statute begins t$ run when trustee is

app$inted) with Zilkha Energy C#. v. Leight#n, 920 F.2d 1520, 1524 (10th Cir. 1990) (statute

begins t$ run when a debt$r in p$ssessi$n files f$r bankruptcy). The c$mpr$mise pr$visi$n

c$nfirmed that the statute sh$uld be tw$ years fr$m the bankruptcy case filing in m$st situati$ns

(and n$t m$re than three years at the $utside), but at the same time ensured that a trustee wh$

was app$inted t$ take $ver fr$m a debt$r-in-p$ssessi$n within the first tw$ years w$uld have at

least a year’s w$rth $f “breathing time” t$ determine which causes $f acti$n t$ bring. In certain

factual situati$ns, theref$re, the amendment extended the statute bey$nd the strict tw$ year limits

45
that w$uld have been acc$rded t$ it by the Zilkha line $f cases, and in n$ event restricted the

statute t$ less than tw$ years fr$m the petiti$n date. See generally 5 C#llier #n Bankruptcy ¶

546.02[1][c], n.10; 546.LH[1][a] (2009). Defendants are simply inc$rrect t$ categ$rize this

amendment as evidence $f C$ngress’ desire t$ further cut back the estate’s time t$ sue.

M$re$ver, C$ngress did n$thing in its 1994 amendments – n$r has it at any time since –

t$ alter the interpretati$n $f the Secti$n that had been rendered already by such cases as In re

Martin, 142 B.R. at 265-66; In re T#pc#r, Inc., 132 B.R. at 123-24; In re Mah#ney, Tr#cki &

Ass#cs., Inc., 111 B.R. at 917-18; and In re Dry Wall Supply, Inc., 111 B.R. at 936-37. In each

$f these cases, the c$urt held squarely that a Secti$n 544(b) acti$n c$uld be filed despite the

argument that the state statute $f limitati$ns had already expired p$st-petiti$n because the

adversary pr$ceeding was filed within the tw$ year limit $f Secti$n 546(a). While later

amendments are n$t c$nsidered the best evidence $f $riginal legislative intent, they still acc$rded

interpretive weight. See, e.g., Wilshire Westw##d Ass#cs. v. Atlantic Richfield C#rp., 881 F.2d

801, 808 (9th Cir. 1989) (n$ting that amendments that dealt with the t$pic at issue but left

existing interpretati$ns undisturbed sh$uld be c$nsidered when analyzing pri$r c$ngressi$nal

intent).

In sh$rt, the many c$urts wh$ have c$nsidered the issue $ver the last quarter century have

f$und against the Defendants’ p$siti$n, and C$ngress has never acted t$ change the effect $f

such cases, despite repeatedly having the $pp$rtunity t$ d$ s$ in $ther amendments t$ Secti$n

546. This C$urt sh$uld reject Defendants’ p$siti$n as well.

B. The state statute (f limitati(ns has n(t run.

In any event, Pic$wer’s entire Secti$n 546 argument is irrelevant because the state law

statute $f limitati$ns has n#t expired. Defendant’s entire argument is falsely premised $n the

belief that, as t$ certain transacti$ns, the New Y$rk state statute $f limitati$ns applicable t$

46
fraudulent transfer expired between the filing $f the bankruptcy case and the c$mmencement $f

the instant adversary pr$ceeding. Because $f the t$lling pr$visi$ns pr$vided by b$th New Y$rk

and bankruptcy law, h$wever, n$ underlying credit$r has had his $r her New Y$rk law

av$idance claim expire. S$ even if Pic$wer c$uld $verc$me the vast b$dy $f case law discussed

ab$ve, his argument fails because av$idance acti$ns against transfers $ccurring m$re than six

years pri$r t$ the adversary filing, and less than six years pri$r t$ the filing $f the instant

bankruptcy case, are indisputably timely.

1. The Bankruptcy case filing stays the running $f the statute $f limitati$ns
under New Y$rk law.

New Y$rk law pr$vides that “[w]here the c$mmencement $f an acti$n has been stayed by

a c$urt $r by statut$ry pr$hibiti$n, the durati$n $f the stay is n$t a part $f the time within which

the acti$n must be c$mmenced.” N.Y. C.P.L.R. § 204 (McKinney 2009). Secti$n 362 $f the

Bankruptcy C$de, which aut$matically stays all credit$rs fr$m filing fraudulent c$nveyance

rec$very cases while the bankruptcy case is pr$ceeding as t$ their debt$r, see In re C#l#nial

Realty C#., 980 F.2d 125, is precisely the type $f stay that t$lls New Y$rk statutes $f limitati$ns

pursuant t$ N.Y. C.P.L.R § 204(a). E.g., Mercury Capital C#rp. v. Shepherds Beach, Inc., 723

N.Y.S.2d 48 (2d Dep’t 2001); CDS Rec#veries L.L.C. v. Davis, 715 N.Y.S.2d 517, 519 (3d Dep’t

2000); Zuckerman v. 234-6 W. 22nd St. C#rp., 645 N.Y.S.2d 967, 971 (Sup. Ct. 1996) (aut$matic

stay t$lls statutes $f limitati$ns under New Y$rk law). Because a credit$r’s state law fraudulent

c$nveyance acti$n is subject t$ the aut$matic stay $f the Bankruptcy C$de, C.P.L.R. § 204(a)

stays the running $f the statute $f limitati$ns as t$ that credit$r.

When a state law statute $f limitati$ns is t$lled as t$ a credit$r, a Trustee wh$ is standing

in the sh$es $f that credit$r pursuant t$ 11 U.S.C. § 544(b) likewise gets the benefit $f that

47
t$lling.17 Because C.P.L.R. § 204(a) stayed the running $f the six year statute $f limitati$ns

applicable t$ the Trustee’s claims under Secti$n 544(b), that statute $f limitati$ns c$uld n$t have

expired in the peri$d between the c$mmencement $f this SIPA case and the filing $f the instant

adversary pr$ceeding, n$ matter which transfers are c$nsidered.

2. Secti$n 108(c) $f the Bankruptcy C$de als$ stays the running $f the New
Y$rk statute $f limitati$ns.

The same result is reached pursuant t$ 11 U.S.C. § 108(c) (2009), which likewise

suspends the running $f statutes $f limitati$ns against credit$rs when they are prevented by

Secti$n 362’s aut$matic stay fr$m c$mmencing $r c$ntinuing a civil acti$n in a c$urt $ther than

in a bankruptcy c$urt $n a claim against the debt$r.18 The reas$n f$r this is set $ut in In re

C#l#nial Realty C#., 980 F.2d at 127-8. In that case, the FDIC s$ught pursuant t$ its $wn

statut$ry av$idance auth$rity t$ rec$ver assets alleged t$ have been fraudulently c$nveyed,

prepetiti$n, by a bankruptcy debt$r. Id. Alth$ugh the c$urt c$ncluded that neither the FDIC

acti$n n$r the pr$perty it s$ught t$ rec$ver were technically “pr$perty $f the estate,” it

n$netheless held the acti$n barred because the FDIC was effectively acting “t$ rec$ver a claim

against the debt$r” and the aut$matic stay theref$re applied. Id. at 132.

17
See, e.g., In re G-I H#ldings, Inc., 313 B.R. at 639-40 (h$lding a credit$r c$mmittee standing in the sh$es $f a
trustee c$uld benefit fr$m the $ne year t$lling $f the state statute $f limitati$ns f$r asbest$s claims); In re Bernstein,
259 B.R. at 560 (denying defendant’s m$ti$n t$ dismiss because the trustee standing in the sh$es $f an unsecured
credit$r may have been able t$ pr$ve that the unsecured credit$r c$uld have availed himself $f a $ne year t$lling
pr$visi$n and timely filed its c$mplaint alleging fraudulent transfers as $f the petiti$n date); In re Sverica
Acquisiti#n C#rp.,179 B.R. at 470 (n$ting the c$mm$n law “adverse d$minati$n” t$lling d$ctrine may apply t$ a
trustee standing in the sh$es $f a credit$r); In re Ly#ns, 130 B.R. at 279-81 (stating that the d$ctrine $f equitable
t$lling c$uld apply t$ a trustee standing in the sh$es $f a credit$r).
18
While Defendants cite t$ many cases h$lding the t$lling pr$visi$n $f 11 U.S.C. § 108(a) is inapplicable t$ extend
the state statutes $f limitati$ns relating t$ fraudulent c$nveyance cases, neither Defendants n$r th$se cases discuss
Secti$n 108(c). The reas$n may well be that a discussi$n $f this pr$visi$n is n$rmally unnecessary because $f the
c$urts’ universal end$rsement $f the pr$p$siti$n that Secti$n 546(a) all$ws Secti$n 544(b) acti$ns t$ be br$ught f$r
tw$ years after the petiti$n date s$ l$ng as the acti$n was viable $n the petiti$n date. See 11 U.S.C. §§ 544(b) &
546(a).

48
F$r the same reas$n, a fraudulent c$nveyance acti$n, even th$ugh the debt$r is n$t a

defendant, is an acti$n t$ rec$ver “a claim against the debt$r,” within the meaning $f Secti$n

108(c), thus triggering the aut$matic stay. New Y$rk state law fixes a peri$d f$r c$mmencing

fraudulent c$nveyance acti$ns $utside $f bankruptcy c$urt, and the aut$matic stay prevents the

credit$r fr$m bringing such acti$ns. Such an acti$n theref$re fits squarely within b$th the

w$rding19 and the intended purp$se $f the Secti$n 108(c) savings pr$visi$n. Absent such a

pr$visi$n, a bankruptcy filing which is later dismissed c$uld c$st a credit$r its $nly chance t$ file

such a fraudulent c$nveyance rec$very acti$n.

The Sec$nd Circuit has expressly rec$gnized that during the pendancy $f a bankruptcy

case, Secti$n 108(c) pr$tects a credit$r’s right t$ bring a state law fraudulent c$nveyance acti$n

against expirati$n, and that as a result the trustee’s right t$ bring an acti$n under 11 U.S.C. §

544(a) als$ is preserved by Secti$n 108(c). In Belf#rd v. Martin-Trig#na (In re Martin-Trig#na),

763 F.2d 503 (2d Cir. 1985), a n$n-debt$r defendant argued that the statute $f limitati$ns barred

a fraudulent c$nveyance claim because the trustee did n$t bring the acti$n until 1983, five years

after the allegedly fraudulent c$nveyance and after the three year state law limitati$ns w$uld

have expired. Id. at 506. The Sec$nd Circuit dismissed this argument as invalid because $f the

effect $f Secti$n 108(c), stating “[t]his argument ign$res the t$lling $f the statute $f limitati$ns

19
Secti$n 108(c) pr$vides:
(c) Except as pr$vided in secti$n 524 $f this title, if applicable n$nbankruptcy law, an $rder
entered in a n$nbankruptcy pr$ceeding, $r an agreement fixes a peri$d f$r c$mmencing $r c$ntinuing a
civil acti$n in a c$urt $ther than a bankruptcy c$urt $n a claim against the debt$r, $r against an individual
with respect t$ which such individual is pr$tected under secti$n 1201 $r 1301 $f this title, and such peri$d
has n$t expired bef$re the date $f the filing $f the petiti$n, then such peri$d d$es n$t expire until the later
$f –
(1) the end $f such peri$d, including any suspensi$n $f such peri$d $ccurring $n $r after
the c$mmencement $f the case; $r
(2) 30 days after n$tice $f the terminati$n $r expirati$n $f the stay under secti$n 362,
922, 1201, $r 1301 $f this title, as the case may be, with respect t$ such claim.
11 U.S.C. § 108(c).

49
$n December 2, 1980, when the bankruptcy petiti$n was filed. The c$mplaint was timely filed.”

Id. (citing 11 U.S.C. § 108(c) (1982)).

Acc$rdingly, Secti$n 108(c) $f the Bankruptcy C$de als$ has prevented the running $f

the New Y$rk state statute $f limitati$ns as t$ fraudulent c$nveyance acti$ns that c$uld have

been br$ught by a credit$r up thr$ugh the bankruptcy filing date.

3. The state statute $f limitati$ns is als$ equitably t$lled as t$ b$th real and
hyp$thetical credit$rs f$r claims based $n actual fraud.

Finally, the running $f the statute $f limitati$ns is als$ equitably t$lled under New Y$rk

law. N.Y. C.P.L.R. §§ 213(8) and 203(g) b$th permit a plaintiff t$ assert a fraud claim that

w$uld $therwise be untimely if the plaintiff d$es s$ within tw$ years $f the time when the

plaintiff disc$vered the fraud $r c$uld with reas$nable diligence have d$ne s$. N.Y. C.P.L.R. §§

203(g) & 213(8) (McKinney 2009). As pled by the Trustee and discussed bel$w, actual credit$rs

exist wh$ c$uld n$t reas$nably have kn$wn $f the fraud and, thus, have tw$ years fr$m

disc$very t$ bring their causes $f acti$n.

F$r that matter, the statute als$ is t$lled as t$ hyp$thetical credit$rs, in wh$se sh$es the

Trustee may stand pursuant t$ 11 U.S.C. § 544(a) (Trustee has the right t$ “av$id any transfer $f

pr$perty $f the debt$r . . . that is v$idable by” certain hyp$thetical credit$rs, including a credit$r

wh$ extends credit and has an executi$n returned unsatisfied). Such rights $f the Trustee are

“with$ut regard t$ any kn$wledge $f the trustee $r $f any credit$r.” 11 U.S.C. § 544(a).20 B$th

20
While the pr$visi$ns $f 11 U.S.C. § 544(a) are n$t c$mm$nly used t$ av$id fraudulent transfers, cases have
ackn$wledged that fraudulent c$nveyance acti$ns may als$ be br$ught under Secti$n 544(a) by asserting the rights
$f hyp$thetical credit$rs. See, e.g., In re Vitre#us Steel Pr#ds. C#., 911 F.2d 1223, 1235 n. 5 (7th Cir. 1990) (“The
Trustee may als$ have additi$nal p$wers t$ av$id fraudulent transfers using the ‘str$ng arm clause’. . . .”); C#llins v.
K#hlberg & C#. (In re S#uthwest Supermarkets, LLC), 325 B.R. 417, 420, 424-27 (Bankr. D. Ariz. 2005)
(permitting trustee t$ bring fraudulent c$nveyance acti$n under Secti$n 544(a)(2) and h$lding that “the disc$very
rule applicable t$ actual fraudulent transfers prevents the running $f limitati$ns against the hyp$thetical credit$r $f
Secti$n 544(a)(2), wh$ is statut$rily defined t$ lack kn$wledge $f any wr$ngd$ing”); Fitzgibb#ns v. Th#mas#n (In
re Th#mas#n), 202 B.R. 768, 770 (Bankr. D. C$l$. 1996) (rejecting defendant’s argument that the trustee’s

50
Secti$ns 275 and 276 $f the New Y$rk Debt$r and Credit$r Law make transfers available as t$

“future credit$rs,” such as a pri$r claim under 11 U.S.C. § 544(a), and Secti$n 274 makes

available as t$ pers$ns wh$ bec$me credit$rs during the c$ntinuati$n $f the business transacti$n

referenced by that Secti$n. See N.Y. Debt. & Cred. Law §§ 274-6 (McKinney 2009).

VII. THE TRUSTEE HAS SUFFICIENTLY PLED A CAUSE OF ACTION BASED ON


THE DISCOVERY RULE

Secti$n 544(b) $f the Bankruptcy C$de best$ws standing $n the Trustee t$ av$id

transfers that are v$idable under applicable law by a credit$r h$lding an unsecured claim that is

all$wable under Secti$n 502 $f the Bankruptcy C$de. See In re OPM Leasing Servs., Inc., 32

B.R. at 201. A credit$r under New Y$rk law may set aside fraudulent c$nveyances made by a

debt$r, see, e.g., N.Y. Debt. & Cred. Law §§ 276, 276-a, 278, & 279 (McKinney 2009), and may

bring his acti$n within six years fr$m the c$mmissi$n $f the fraud, $r tw$ years fr$m the time $f

disc$very $f the fraud, whichever is later. N.Y. C.P.L.R. § 213(8) & 203(g); see als# H#ffenberg

v. H#ffman & P#ll#k, 288 F.Supp.2d 527, 535-6 (S.D.N.Y. 2003); Lefk#witz v. Appelbaum, 685

N.Y.S.2d 460, 461 (2d Dep’t 1999); Phillips v. Levie, 593 F.2d 459, 462 n.12 (2d Cir. 1979);

Schmidt v. McKay, 555 F.2d 30, 36-37 (2d Cir. 1977); Lippe v. Bairnc# C#rp., 225 B.R. 846,

852-3 (S.D.N.Y. 1998).

Pic$wer claims in P$int VI $f his m$ti$n that the Trustee cann$t rely $n the “disc$very

rule” t$ pursue transfers that t$$k place m$re than six years pri$r t$ the filing date because (i) the

Trustee has n$t named a particular credit$r $r categ$ry $f credit$r in the C$mplaint and a basis

f$r why they c$uld n$t have disc$vered the fraud; and (ii) the “red flags” identified by the

av$idance acti$n, br$ught under Secti$n 544(b), sh$uld be dismissed because Secti$n 544(a) “als$ pr$vides that the
trustee may av$id any transfer $f pr$perty $f the debt$r that such a hyp$thetical perfected lien credit$r c$uld av$id,”
thus making the trustee a credit$r by $perati$n $f law wh$ has the p$wer t$ exercise any right that a credit$r c$uld
exercise, including the right t$ pursue an acti$n under the C$l$rad$ Unif$rm Fraudulent Transfer Act).

51
Trustee as putting Pic$wer $n n$tice $f Mad$ff’s fraudulent scheme essentially preclude the

Trustee fr$m asserting that any invest$r c$uld n$t have disc$vered the fraud. (See MTD at 40-

41.) B$th $f these arguments are unavailing and sh$uld be rejected by the C$urt.

A. There is n( requirement at this stage (f the acti(n t( specifically identify


the credit(r(s) wh(se claims are being asserted.

The C$mplaint alleges that “[a]t all times relevant t$ the Transfers, the fraudulent scheme

perpetrated by BLMIS was n$t reas$nably disc$verable by at least $ne unsecured credit$r $f

BLMIS” (C$mpl. ¶ 120) and that “[a]t all times relevant t$ the Transfers, there have been $ne $r

m$re credit$rs wh$ have held and still h$ld matured $r unmatured unsecured claims against

BLMIS that were and are all$wable . . . .” Id. ¶ 121. Pic$wer claims that these allegati$ns are

insufficient and that the Trustee must further identify the invest$r(s) wh$se claim(s) the Trustee

is asserting pursuant t$ Secti$n 544(b) at the very incepti$n stage $f this litigati$n. Pic$wer is

inc$rrect.

The United States Bankruptcy C$urt f$r the S$uthern District $f New Y$rk recently

reiterated that there is n$ need at the c$mplaint stage t$ specifically identify the credit$r(s) up$n

wh$se claims a trustee bases his standing f$r purp$ses $f Secti$n 544(b). See Resp#nsible

Pers#n #f Musicland H#lding C#rp. v. Best Buy C#. (In re Musicland H#lding C#rp.), 398 B.R.

761, 780-81 (Bankr. S.D.N.Y. 2008); see als# Zahn v. Yucaipa Capital Fund, 218 B.R. 656, 673-

4 (D.R.I. 1998) (“a pr$bing inquiry int$ wh$ the credit$rs are, and what claims they h$ld, is

inappr$priate” at the pleading stage; denying m$ti$n t$ dismiss). Pic$wer’s c$ncessi$n that

“[c]$urts in this District have been reluctant t$ require trustees t$ identify the credit$r(s) giving

rise t$ the trustee’s claims” (MTD at 42) is an understatement. As the In re Musicland c$urt

stated: “[t]he C$urt has n$t been able t$ l$cate a case in this district supp$rting the pr$p$siti$n

52
that the plaintiff must name the qualifying credit$r in the c$mplaint, $r suffer dismissal.” 398

B.R. at 780. N$r has any such case been f$und by the Trustee $r, evidently, by Pic$wer.

N$r d$es the single case fr$m this District relied $n by Pic$wer, Y#ung v. Param#unt

C#mmc’ns, Inc. (In re Wingspread C#rp.), 178 B.R. 938 (Bankr. S.D.N.Y. 1995), supp$rt his

argument. In In re Wingspread, the trustee’s c$mplaint did n$t specifically identify any actual

qualifying credit$r. Id. at 945. Rather, during disc$very, the Trustee identified categ$ries $f

qualifying credit$rs and listed names $f specific credit$rs. Id. The defendants m$ved f$r

summary judgment, claiming that the trustee had n$t identified a single unsecured credit$r int$

wh$se sh$es he c$uld step. Id. While the In re Wingspread c$urt agreed that the trustee

ultimately had t$ pr$ve the existence $f an actual unsecured credit$r with standing, the c$urt did

n$t dismiss the trustee’s c$mplaint even th$ugh the c$mplaint failed t$ name any such credit$r.

Id. at 946. N$r did it grant summary judgment. Instead, the c$urt c$ncluded that factual issues

surr$unding whether the debt$r’s hundreds $f trade credit$rs might have such standing precluded

summary judgment, and n$ted that “at trial, the Trustee must pr$ve the existence $f at least $ne

unsecured credit$r” wh$ w$uld have had standing. Id. “Thus, alth$ugh the c$urt first framed the

issue as $ne $f pleading, Wingspread must be read t$ mean that the c$mplaint d$es n$t have t$

name the qualifying credit$r, and instead, it is sufficient t$ pr$ve the credit$r’s existence at trial.”

In re Musicland, 398 B.R. at 779.

C$ntrary t$ Pic$wer’s argument, judicial auth$rity in this District appr$ves $f alm$st the

very language used by the Trustee. In In re RCM Gl#bal L#ng Term Capital Appreciati#n Fund,

Ltd., 200 B.R. 514 (Bankr. S.D.N.Y. 1996), the c$urt held that the debt$r had adequately pleaded

the existence $f an unsecured credit$r with an all$wable claim by pleading that “as $f the date $f

53
the purp$rted fraudulent c$nveyance, the Debt$r had at least $ne $r m$re credit$rs h$lding

unsecured claims against it.” Id. at 519, 522-525.

While the identificati$n $f a “categ$ry” $f credit$rs has been f$und t$ be

“unquesti$nably en$ugh” t$ put defendants $n n$tice $f the credit$rs wh$ supply the standing t$

sue, see Gl#bal Cr#ssing, 2006 WL 2212776, at *11 (c$urt held that it was sufficient t$ refer t$ a

gr$up $f credit$r n$teh$lders that engaged in an exchange $ffer), there is n$ requirement that any

such categ$ry be specified.21 In any event, the C$mplaint pr$vides ample n$tice t$ Pic$wer $f at

least $ne categ$ry $f credit$rs $n wh$se claims the Trustee f$unds his standing: the cust$mers

$f BLMIS. (See, e.g., C$mpl. ¶ 5 (“The Trustee seeks t$ set aside such transfers and preserve the

pr$perty f$r the benefit $f BLMIS’ defrauded cust$mers”); C$mpl. ¶ 15 (“…the Trustee must

…pursue rec$very fr$m cust$mers wh$ received preferences and/$r pay$uts $f fictiti$us pr$fits

t$ the detriment $f $ther defrauded cust$mers wh$se m$ney was c$nsumed by the P$nzi

scheme”); C$mpl. ¶ 18.) Indeed, Pic$wer can hardly assert that he will have tr$uble identifying,

f$r purp$ses $f disc$very and trial, a relevant categ$ry $f p$tential credit$rs. F$r clarity, the

Trustee reiterates that $ne categ$ry $f qualified credit$r is defrauded cust$mers $f BLMIS –

discussed thr$ugh$ut the C$mplaint – wh$ had and still h$ld unsecured claims against BLMIS.

There will be m$re than sufficient $pp$rtunity during disc$very f$r the Defendants t$

identify cust$mers t$ wh$m the Trustee is referring and/$r at trial f$r the Defendants t$ put f$rth

an argument that the identified credit$rs d$ n$t satisfy the requirements $f Secti$n 544(b) $f the

21
Even th$ugh the In re Musicland c$urt f$und that three categ$ries $f credit$rs were identified in the c$mplaint,
the c$urt did n$t mandate such a pleading standard. Rather, it merely ackn$wledged that the c$mplaint satisfied the
In re RCM Gl#bal case standard as well as the s$mewhat m$re enc$mpassing standard in the Gl#bal Cr#ssing case.
See In re Musicland, 398 B.R. at 780-81. As set f$rth ab$ve, the C$mplaint here als$ identifies at least $ne categ$ry
$f credit$r, thus satisfying b$th the In re RCM Gl#bal and Gl#bal Cr#ssing standards.

54
Bankruptcy C$de if the Defendants s$ desire. At this stage $f the pr$ceeding, the Trustee has

alleged in the C$mplaint all that is required under the law $f this District.

B. While the Trustee has adequately alleged the existence (f credit(rs wh(
c(uld n(t reas(nably have disc(vered the fraud, evaluati(n (f this issue is
premature.

The Defendants next argue that the Trustee is precluded fr$m relying $n the disc$very

rule because he d$es n$t sufficiently allege and will be unable t$ establish that there are BLMIS

invest$rs wh$ c$uld n$t have disc$vered Mad$ff’s fraud with reas$nable due diligence. First,

Pic$wer claims that the C$mplaint c$ntains n$ factual basis fr$m which it c$uld be inferred that

any reas$nable invest$r exists wh$ c$uld n$t have disc$vered Mad$ff’s fraud. Given that

Pic$wer dev$tes several pages $f his m$ti$n t$ hiding behind just th$se invest$rs, this appears t$

be a self-defeating argument. But m$re t$ the p$int, it is spuri$us: the C$mplaint amply alleges

the $perati$n $f the P$nzi scheme and Mad$ff’s steps t$ c$nceal it, which were designed t$ and

did deceive reas$nable invest$rs f$r decades. (See, e.g., C$mpl. ¶¶ 19–27, 29–32, 64(b).)

Pic$wer’s main argument is that having identified certain “red flags” that were available

t$ $ther invest$rs as well as Pic$wer, the Trustee is precluded fr$m arguing that any invest$r was

misled. If this inf$rmati$n put Pic$wer $n n$tice $f fraud, he argues, then “every single $ther

BLMIS invest$r” was als$ $n inquiry n$tice. (MTD at 45.) This argument is simply an$ther

attempt by Pic$wer t$ falsely equate himself with the $rdinary invest$rs wh$ have been

financially ruined by BLMIS. This intent is particularly transparent since the issue $f whether

there is an invest$r wh$ c$uld n$t have disc$vered the fraud is a questi$n that cann$t be

determined $n this m$ti$n t$ dismiss.

55
1. The evaluati$n $f which invest$rs c$uld $r c$uld n$t have disc$vered the
fraud cann$t be made $n this m$ti$n t$ dismiss.

The evaluati$n $f whether there is an unsecured credit$r $f BLMIS wh$ c$uld n$t have

disc$vered the fraud is n$t an analysis that is appr$priate t$ c$nsider in the c$ntext $f Pic$wer’s

m$ti$n t$ dismiss. The questi$n t$ be determined – whether a specific credit$r acting with

reas$nable diligence c$uld reas$nably have inferred the existence $f the fraud – is an inquiry

inv$lving a mixed questi$n $f law and fact that $rdinarily sh$uld n$t be disp$sed $f by summary

judgment. See Schmidt, 555 F.2d at 37; Trepuk v. Frank, 376 N.E.2d 924, 926 (N.Y. 1978)

(“Where it d$es n$t c$nclusively appear that a plaintiff had kn$wledge $f facts fr$m which the

fraud c$uld reas$nably be inferred, a c$mplaint sh$uld n$t be dismissed $n m$ti$n and the

questi$n sh$uld be left t$ the trier $f the facts.”), rev’d #n #ther gr#unds, 437 N.E.2d 278 (N.Y.

1982); Erbe v. Linc#ln R#chester Trust C#., 144 N.E.2d 78, 80-1 (N.Y. 1957) (reversing $rder $f

dismissal because c$urt w$uld n$t speculate as t$ sufficiency $f evidence at trial). The

determinati$n $f what a particular invest$r sh$uld have kn$wn requires examinati$n $f the

t$tality $f the facts and circumstances relating t$ that individual invest$r. This is especially true

given that issues such as the level $f an invest$r’s experience affects “the extent t$ which a c$urt

may pr$perly c$nclude that a particular event sh$uld have influenced that invest$r t$ inquire int$

the likelih$$d $f fraud inv$lving his $r her investment.” See Tab P’ship v. Grantland Fin. C#rp.,

866 F. Supp. 807, 811 n. 3 (S.D.N.Y. 1994)

Given that the Trustee is n$t required, at this juncture, even t$ identify any specific

credit$r up$n wh$se claim he relies, it is premature t$ delve int$ what any specific credit$r

reas$nably c$uld $r c$uld n$t have kn$wn. See Zahn, 218 B.R. at 673 (“a pr$bing inquiry int$

wh$ the credit$rs are, and what claims they h$ld, is inappr$priate” in c$ntext $f m$ti$n t$

dismiss).

56
2. Pic$wer is a s$phisticated invest$r wh$ had access t$ inf$rmati$n –
including fraud in his $wn acc$unts – that $ther invest$rs lacked.

As Pic$wer ackn$wledges, whether an invest$r c$uld have disc$vered the fraud f$r

purp$ses $f the disc$very rule depends $n whether “that credit$r was n$t aware $f facts fr$m

which a pers$n $f $rdinary intelligence reas$nably c$uld have inferred the Mad$ff fraud.”

(MTD at 41 (emphasis in $riginal).) The standing $f each credit$r, in $ther w$rds, is evaluated

based $n the facts $f which he was $r sh$uld have been aware, and what th$se facts sh$uld have

signified t$ that credit$r assuming he is a pers$n $f $rdinary intelligence. See, e.g., Schmidt, 555

F.2d at 36-37 (when a plaintiff c$uld have, acting with reas$nable diligence, disc$vered an

alleged fraud depends up$n whether he p$ssessed kn$wledge $f facts fr$m which he reas$nably

c$uld have inferred the fraud). Pic$wer fails t$ rec$gnize, here as thr$ugh$ut his m$ti$n, that he

is n$t the same as “every single $ther BLMIS invest$r.” (MTD at 45.) He is differently situated

fr$m $ther invest$rs, b$th in the inf$rmati$n available t$ him ab$ut BLMIS and his level $f

s$phisticati$n and experience.

First, as discussed ab$ve, the C$mplaint alleges that the t#tality $f inf$rmati$n available

t$ Pic$wer sh$uld have put him $n n$tice that he was benefiting fr$m fraud. The inf$rmati$n

available t$ him was n$t limited t$ published articles $r any single piece $f inf$rmati$n that

c$uld have been disc$vered by $thers. Rather, inf$rmati$n that indicated $r sh$uld have

indicated t$ Pic$wer that he was benefiting fr$m fraud included inf$rmati$n $btained because $f

his $wn unusual kn$wledge $f and access t$ Mad$ff and BLMIS empl$yees; inf$rmati$n

received fr$m the additi$nal rep$rting fr$m BLMIS that he received f$r his acc$unts; the

an$mal$us rates $f return (b$th high and l$w) in his $wn acc$unts; the prescient st$ck picking

ability rep$rted by BLMIS in his $wn acc$unts; the vast sums $f m$ney he was able t$ extract

fr$m BLMIS in excess $f his investment; and, $f c$urse, the blatant fraud in his $wn acc$unts.

57
Sec$nd, Pic$wer – unlike many $ther BLMIS invest$rs – is a s$phisticated and

experienced invest$r wh$ by his $wn acc$unt netted m$re than $1 billi$n in a single c$rp$rate

transacti$n. In determining what facts sh$uld have pr$mpted an invest$r t$ inquire int$ the

likelih$$d $f fraud in investment transacti$ns, as well as the sc$pe and depth $f inquiry that the

invest$r sh$uld have undertaken, the s$phisticati$n $f that invest$r is critical. See Tab P’ship.,

866 F. Supp. at 811 n. 3; see als# Th#mps#n v. Metr#. Life Ins. C#., 149 F. Supp. 2d 38, 49

(S.D.N.Y. 2001).

This principle is well-settled b$th in the securities c$ntext and thr$ugh$ut New Y$rk law.

“The law is indulgent $f the simple $r untut$red; but the greater the s$phisticati$n $f the

invest$r, the m$re inquiry that is required.” Crigger v. Fahnest#ck & C#., 443 F.3d 230, 235-6

(2d Cir. 2006) (Jac$bs, J.) (jury was c$rrectly charged that s$phisticated invest$rs in a P$nzi

scheme had duty t$ inquire further where guaranteed investment returns were “pretty amazing,”

invest$rs failed t$ c$nsult with $utside advisers t$ c$nfirm legitimacy $f returns, P$nzi $perat$rs

refused t$ issue written $ffering d$cuments $r mem$randa and warned invest$rs n$t t$ discuss

investments with br$ker-dealer/cust$dian that allegedly was sp$ns$ring the scheme “$n pain $f

being aut$matically disqualified fr$m investing.”); see als# Granite Partners, L.P. v. Bear,

Stearns & C#., 58 F. Supp. 2d 228, 260-61 (S.D.N.Y. 1999); Shlaifer Nance & C#. v. Estate #f

Andy Warh#l, 119 F.3d 91, 98 (2d Cir. 1997) (New Y$rk c$urts are “particularly disinclined t$

entertain claims $f justifiable reliance” by “s$phisticated businessmen” wh$ “engag[e] in maj$r

transacti$ns” and “enj$y access t$ critical inf$rmati$n but fail t$ take advantage $f that access.”

(qu#ting Grumman Allied Indus., Inc. v. R#hr Indus., Inc., 748 F.2d 729, 737 (2d Cir. 1984)));

S#lutia Inc. v. FMC C#rp., 456 F. Supp. 2d 429, 448 (S.D.N.Y. 2006) (in evaluating duty $f full

discl$sure: “the m$re s$phisticated the buyer, the less accessible the inf$rmati$n must be t$ be

58
c$nsidered within the seller’s peculiar kn$wledge”)(citati$n $mitted); M#st v. M#nti, 456

N.Y.S.2d 427, 428 (2d Dep’t 1982) (rejecting as implausible the claim that an experienced

businessman assuming a maj$r interest in a c$mmercial enterprise w$uld rely $n verbal

assurances that pr$perty was assessed). The Trustee’s allegati$ns against any defendant $f what

that defendant knew $r sh$uld have kn$wn are based $n that defendant’s $wn access t$

inf$rmati$n and s$phisticati$n and d$ n$t implicate $ther invest$rs at BLMIS.22 Pic$wer was

n$t like “every single $ther BLMIS invest$r” and allegati$ns against him theref$re are irrelevant

t$ the Trustee’s ability t$ rely $n the disc$very rule in this $r any $ther acti$n.

VIII. THE TRUSTEE HAS PROPERLY ALLEGED A CLAIM TO AVOID


SUBSEQUENT TRANSFERS

Under the plain language $f 11 U.S.C. § 550, a prima facie claim against a subsequent $r

mediate transferee requires the pleading $f an initial transfer that is av$idable, and that the initial

transfer was later made t$ – $r f$r the benefit $f – the subsequent $r mediate transferee. 11

U.S.C. § 550 (2009); Silverman v. K.E.R.U. Realty, C#rp. (In re All#u Distribs.), 379 B.R. 5, 28-

30 (Bankr. E.D.N.Y. 2007). An exact d$llar-f$r-d$llar tracing $f funds fr$m the estate is n$t

required, s$ l$ng as there are sufficient allegati$ns that the funds at issue $riginated with the

debt$r. Id. at 30.

Under Federal Rule $f Civil Pr$cedure 8(a), all that is required is that the c$mplaint give

the $pp$sing party “fair n$tice $f what the . . . claim is and the gr$unds up$n which it rests.” Id.

at 31 (qu$ting Ericks#n, 551 U.S. at 93)($missi$n in $riginal); Fed. R. Civ. P. 8(a) (2009). A

c$mplaint has satisfied the pleading requirement under Rule 8(a) if it c$ntains sufficient factual

allegati$ns t$ enable a defendant t$ resp$nd. Wright and Miller, 5 Fed. Prac. & Pr$c. Civ.3d §

22
C$ntrary t$ Pic$wer’s suggesti$n that the Trustee seeks t$ fav$r later invest$rs $ver earlier invest$rs (MTD at 2),
the length $f time an invest$r was inv$lved with BLMIS is n$t, in the Trusteee’s view, disp$sitive $f whether that

59
1215 (2009). Put an$ther way, a c$mplaint need plead “$nly en$ugh facts t$ state a claim f$r

relief that is plausible $n its face.” Tw#mbly, 550 U.S. at 570.

Here, the Trustee has alleged numer$us specific and direct transfers t$taling m$re than

$6.7 billi$n, and identified a subset $f th$se transfers $n Exhibit B.23 (C$mpl. ¶ 57.) As

discussed ab$ve, all $f the Transfers listed $n Exhibit B c$nstitute av$idable direct transfers $f

estate pr$perty t$ $r f$r the benefit $f the Defendants. Id.

The Trustee has further alleged that Pic$wer $r Decisi$ns c$ntr$lled each $f the $ther

Pic$wer C$rp$rate Entities, which had an address either at 22 Saw Mill River R$ad, Hawth$rne,

New Y$rk, a st$re fr$nt $ffice where little $r n$ business was c$nducted, $r at 25 Virginia Lane,

Th$rnew$$d, New Y$rk; that Pic$wer and Decisi$ns c$nducted business thr$ugh each $f the

Pic$wer C$rp$rate Entities; and that Pic$wer $r Decisi$ns was the general partner $r direct$r $f

each $f the Pic$wer C$rp$rate Entities. (C$mpl. ¶ 37 et seq.) There is n$ indicati$n that any $f

the Pic$wer C$rp$rate Entities engaged in any business $f any kind, $ther than t$ act as entities

that c$uld h$ld funds derived fr$m BLMIS $r c$nduct Pic$wer’s pers$nal investments. The

Trustee has further alleged that the Pic$wer F$undati$n, Pic$wer Institute f$r Medical Research,

and Trust FBO Gabrielle H. Pic$wer were $r are n$npr$fit entities $r trusts that have been

d$minated and c$ntr$lled by Pic$wer. (See C$mpl. ¶ 53 and discussi$n at P$int III ab$ve.) The

Trustee has alleged that Pic$wer, thr$ugh Freilich and/$r Decisi$ns, c$ntr$lled and directed

withdrawals and transfers $f purp$rted cash and securities am$ng and between the Defendants

and the Defendants’ BLMIS acc$unts. Defendants sh$uld be well aware $f these transfers and

invest$r c$uld have disc$vered the fraud.


23
N$r, as explained in the C$mplaint, is Exhibit B expected t$ be an all-inclusive list $f all transfers $f estate
pr$perty t$ all $f the Defendants. (C$mpl. ¶ 57.)

60
withdrawals because Pic$wer and Freilich r$utinely directed BLMIS t$ make them, identifying

the acc$unts and am$unts that sh$uld be transferred.

In light $f the Pic$wer Entities’ c$mm$n address, c$mm$n c$ntr$l, apparent lack $f

indicia $f any $ther business $r pr$fit-making activities, and the backdr$p $f numer$us transfers

directed by Pic$wer and/$r Freilich am$ng Pic$wer Entities, the Trustee has plausibly alleged $n

inf$rmati$n and belief that these entities received and benefited fr$m subsequent transfers $f

BLMIS funds. See Carr v. Equistar Offsh#re Ltd., N$. 94 Civ. 5567, 1995 WL 562178, at *2

(S.D.N.Y. Sept. 21, 1995) (even under heightened pleading standard $f Fed. R. Civ. P. 9(b),

“allegati$ns may be based $n inf$rmati$n and belief when the facts are peculiarly within the

$pp$sing party’s kn$wledge.” (qu#ting IUE AFL-CIO Pensi#n Fund v. Herrmann, 9 F.3d 1049,

1057 (2d Cir. 1993))).

Where, as here, the detailed transacti$nal inf$rmati$n regarding transfers $utside $f

BLMIS is uniquely in the hands $f the defendants and n$t the Trustee, and the Trustee has

identified the nature $f the transfers s$ught t$ be av$ided, dismissal is impr$per and the parties

sh$uld be permitted t$ pr$ceed with disc$very. See In re Payt#n, 399 B.R. at 365 (denying

m$ti$n t$ dismiss c$nstructively fraudulent transfers; alth$ugh specific transfers were n$t

identified, “Jalbert [the trustee] cann$t at this stage be required t$ d$ m$re” than “give a time

frame and specify the nature $f the transfers” because “[h]e is an $utsider t$ these transacti$ns

and will need disc$very t$ identify the specific transacti$ns by date, am$unt and the manner in

which they were effected.”). Like the trustee in In re Payt#n, the Trustee here has $nly very

limited inf$rmati$n bey$nd the d$cumentary evidence in BLMIS’ p$ssessi$n, but has identified

the nature $f the transfers s$ught t$ be av$ided. The inf$rmati$n pr$vided in the C$mplaint is

sufficient t$ permit the parties “t$ distinguish the transacti$ns at issue fr$m th$se that are n$t.”

61
Id. Acc$rdingly, because the pleading is sufficient f$r the Defendants t$ frame a resp$nse,

Defendants’ m$ti$n t$ dismiss the subsequent transfer claims sh$uld be denied.

I[. THE TRUSTEE HAS PROPERLY ALLEGED DISALLOWANCE OF


DEFENDANTS’ SIPA CLAIMS

In $rder t$ have the $pp$rtunity t$ participate in this SIPA liquidati$n, BLMIS cust$mers

and credit$rs must have filed claims with the Trustee in acc$rdance with this C$urt’s December

23, 2008 Order $n $r bef$re the statut$ry July 2, 2009 bar date. (Order, Dec. 23 2008 [hereinafter

“Claims Pr$cedures Order”].) The f$ll$wing Defendants filed timely cust$mer claims f$r their

BLMIS acc$unts with the Trustee in acc$rdance with the Claims Pr$cedures Order: Jeffry

Pic$wer, Barbara Pic$wer, Capital Gr$wth C$mpany, JA Special Limited Partnership, JAB

Partnership, JEMW Partnership, JF Partnership, JLN Partnership, Jeffry M. Pic$wer Special C$.,

and The Pic$wer F$undati$n. (MTD at 11.) N$ claims were filed with the Trustee $n behalf $f

the remaining Defendants. Id. The Trustee’s $bjecti$n in C$unt Eleven applies $nly t$ th$se

claims that were filed.24

The C$mplaint alleges tw$ separate gr$unds $n which Pic$wer’s SIPA claims sh$uld be

disall$wed: (i) that the claims are supp$rted neither by the b$$ks and rec$rds $f BLMIS n$r the

claims materials submitted, and (ii) that the claims sh$uld be disall$wed pursuant t$ Secti$n

502(d) $f the Bankruptcy C$de. (C$mpl. ¶¶ 122-3.); 11. U.S.C. § 502(d) (2009). Pic$wer d$es

n$t ackn$wledge, much less dispute, the sec$nd basis f$r this claim. The thrust $f Defendants’

argument instead f$cuses $n the Trustee’s interpretati$n $f “net equity,” as defined under Secti$n

78lll(11) $f SIPA. See 15 U.S.C. § 78lll(11). In additi$n t$ presenting factual issues that

preclude dismissal under Rule 12(b)(6), and that sh$uld pr$perly be decided in the c$ntext $f a

24
This C$unt was included in the C$mplaint t$ preserve the Trustee’s rights t$ assert its $bjecti$ns, and t$ pr$tect
against any arguments by Pic$wer based $n claim preclusi$n principles.

62
claims pr$ceeding, the Net Equity Dispute is squarely bef$re this C$urt in a separate pr$ceeding

inv$lving all interested parties. As discussed at P$int II, ab$ve, the legal issue underlying

Pic$wer’s arguments will be decided by this C$urt in due c$urse in acc$rdance with the Peskin

Order, which established a schedule and guidelines f$r the c$nsiderati$n $f this issue. (Peskin

Order at 16). Because C$unt Eleven is sufficient $n its face, and the Net Equity Dispute sh$uld

n$t be res$lved within the c$nfines $f this m$ti$n, C$unt Eleven cann$t be dismissed.

A. The plain language (f Secti(n 502(d) defeats Defendants’ argument.

Pic$wer makes the baseless statement that the Trustee “has n$t pleaded . . . a legal basis

f$r disall$wing Defendants’ SIPA claims.” (MTD at 51.) T$ the c$ntrary, the Trustee has

pleaded, am$ng $ther things, that the claims filed by Defendants sh$uld be disall$wed under

Secti$n 502(d) $f the Bankruptcy C$de. (C$mpl. ¶ 133.)

Secti$n 502(d) explicitly mandates the disall$wance $f Defendants’ claims, as it prevents

the transferee $f an av$idable transfer fr$m receiving a distributi$n unless he first returns the

transfer:

N$twithstanding subsecti$ns (a) and (b) $f this secti$n, the c$urt shall disall$w
any claim $f any entity fr$m which pr$perty is rec$verable under secti$n 542,
543, 550, $r 553 $f this title $r that is a transferee $f a transfer av$idable under
secti$n 522(f), 522(h), 544, 545, 547, 548, 549, $r 724(a) $f this title, unless such
entity $r transferee has paid the am$unt, $r turned $ver any such pr$perty, f$r
which such entity $r transferee is liable under secti$n 522(i), 542, 543, 550, $r
553 $f this title.

11 U.S.C. § 502(d). The purp$se $f § 502(d) is t$ “preclude entities that have received v$idable

transfers fr$m sharing in the distributi$n $f assets unless $r until the v$idable transfer has been

returned t$ the estate.” In re Mid Atlantic Fund, Inc., 60 B.R. 604, 609 (Bankr. S.D.N.Y. 1986).

In his C$mplaint, the Trustee has br$ught claims against Defendants f$r the receipt $f

m$re than $5 billi$n $f transfers $f BLMIS’s pr$perty which are rec$verable under Secti$ns 547,

548, and 550 $f the Bankruptcy C$de. 11 U.S.C. §§ 547-8, 550. Defendants have n$t returned

63
such transfers t$ the Trustee. Thus, Secti$n 502(d) clearly applies t$ any claims filed by

Defendants, as they have failed t$ repay $r turn $ver pr$perty rec$verable under Secti$ns 547,

548, and 550 $f the Bankruptcy C$de. See, e.g., In re Asia Gl#bal Cr#ssing, Ltd., 333 B.R. 199,

202 (Bankr. S.D.N.Y. 2005) (stating that Secti$n 502(d) prevents transferee $f an av$idable

transfer fr$m receiving distributi$n unless he first returns transfer). Acc$rdingly, the Trustee has

pled a legal basis f$r disall$wing Defendants’ SIPA claims, and Defendants’ m$ti$n t$ dismiss

this C$unt sh$uld be denied.

B. The Net Equity Dispute is n(t pr(perly bef(re the C(urt in the c(ntext (f
a m(ti(n t( dismiss.

Here again, Defendants argue that the Trustee must all$w their cust$mer claims in the

am$unt sh$wn $n their last cust$mer statements issued by BLMIS.25 (MTD at 10, 51-52.) As

discussed ab$ve, the issue $f “net equity” applies t$ the determinati$n $f all cust$mer claims in

this SIPA liquidati$n, as well as litigati$ns br$ught by the Trustee, and will be heard by the

C$urt after briefing by all interested parties in acc$rdance with this C$urt’s September 10, 2009

Order. This C$urt already has rejected an$ther attempt t$ raise the Net Equity Dispute $utside $f

the appr$priate f$rum. (Peskin Order at 16.) M$re$ver, as discussed ab$ve, the precise am$unt

$f equity in the cust$mer acc$unts is a heavily factual issue that remains under investigati$n and

cann$t be decided in the c$ntext $f a m$ti$n t$ dismiss. Since C$unt Eleven is sufficient as a

matter $f law in any event, the m$ti$n t$ dismiss this c$unt sh$uld be denied.

25
Defendants als$ assert that the $nly rec$rds relevant under SIPA f$r purp$ses $f this determinati$n are the
cust$mer’s last BLMIS statement. (MTD at 51.) There is n$thing in the statute, h$wever, that limits the Trustee t$
review $f the last cust$mer statement in determining cust$mer claims. The plain terms $f SIPA state that payments
t$ cust$mers may be paid “ins$far as such $bligati$ns are ascertainable fr$m the b$$ks and rec$rds $f the debt$r $r
are $therwise established t$ the satisfacti$n $f the Trustee.” 15 U.S.C. § 78fff-2(b) (2009). The “b$$ks and rec$rds”
$f a br$kerage are c$mprised $f m$re than merely the last cust$mer acc$unt statements and include all $f the
financial and c$rp$rate rec$rds $f the Debt$r. Finally, in a fraud case such as this, relying $n the cust$mer
statements as the $nly s$urce $f “b$$ks and rec$rds” is a n$nsensical pr$p$siti$n.

64
[. DEFENDANTS’ MOTION TO DISMISS CERTAIN REQUESTED REMEDIES IN
THIS CASE IS PROCEDURALLY IMPROPER AND WITHOUT MERIT

Pic$wer argues that the Trustee is n$t entitled t$ a c$nstructive trust $r t$ an assignment

$f the Defendants’ tax refunds. As a thresh$ld matter, the Trustee has n$t br$ught a cause $f

acti$n f$r a c$nstructive trust $r f$r Pic$wer’s tax refunds; these are merely am$ng the remedies

requested $n the Trustee’s claims f$r relief. (See C$mpl. ¶ 40, prayers xiii & xiv.) A demand f$r

relief is n$t a part $f the plaintiff’s claim, and a prevailing party shall be granted any relief t$

which it is entitled regardless $f whether that relief has been demanded in its pleadings. See,

e.g., Fed. R. Civ. P. 54(c) (2009) (except in the case $f a default judgment, the “final judgment

sh$uld grant the relief t$ which each party is entitled, even if the party has n$t demanded that

relief in its pleadings”); Wright & Miller, 5 Fed. Prac. & Pr$c. Civ.3d § 1255 (2009) (sufficiency

$f a pleading is tested by claim f$r relief and the demand f$r judgment is n$t c$nsidered part $f

the claim f$r that purp$se; thus, if pleader is entitled t$ any relief demand f$r impr$per remedy

will n$t be fatal t$ a party’s pleading). As the Trustee has pled numer$us causes $f acti$n

entitling him t$ relief, n$ m$ti$n t$ dismiss can be based up$n his selecti$n $f remedy. He will

be entitled t$ all appr$priate remedies, regardless $f the C$mplaint’s demand f$r relief, up$n

judgment. Fed. R. Civ. P. 54(c).

In any event, the remedies s$ught by the Trustee are n$t impr$per. The imp$siti$n $f a

c$nstructive trust is an equitable remedy that is warranted by the facts $f this case, and the

Trustee’s request f$r an assignment $f tax refunds will n$t result in a “windfall” t$ the estate, but

rather is a means t$ ensure rec$very $f all av$idable transfers received by the Defendants.

Funds transferred t$ Pic$wer represent the fruits $f a l$ng-running and c$nv$luted fraud.

As detailed in the C$mplaint, Pic$wer knew $r sh$uld have kn$wn that he was benefiting fr$m

fraud, and the imp$siti$n $f a c$nstructive trust t$ assist in the rec$very $f the ill-g$tten gains

65
held by the Defendants is b$th supp$rted in law, and required by the circumstances t$ effect

equity. The elements f$r a c$nstructive trust relied up$n by Defendants are guidep$sts, see In re

K#reag, C#ntr#le et Revisi#n S.A., 961 F.2d 341, 352-53 (2d Cir. 1992), and every element need

n$t be satisfied in all cases. Tekinsight.c#m, Inc. v. Stylesite Mktg., Inc. (In re Stylesite Mktg.,

Inc.), 253 B.R. 503, 508 (Bankr. S.D.N.Y. 2000); see ESI, Inc. v. C#astal P#wer Pr#d. C#., 995

F. Supp. 419, 436-7 (S.D.N.Y. 1998). The $verriding purp$se $f a c$nstructive trust is the

preventi$n $f unjust enrichment, and the Trustee has clearly alleged sufficient gr$unds

warranting its imp$siti$n. See Sim#nds v. Sim#nds, 380 N.E.2d 189, 194 (N.Y. 1978); In re

K#reag, 961 F.2d at 354. A simple asserti$n that a c$nstructive trust sh$uld be imp$sed,

t$gether with sufficient detail giving n$tice that the m$ney being s$ught is impr$perly held as a

matter $f equity, sufficiently states a cause $f acti$n, see Dampskibsselskabet AF 1912 v. Black

& Geddes, Inc. (In re Black & Geddes, Inc.), 16 B.R. 148, 152-3 (Bankr. S.D.N.Y. 1981), and

theref$re is m$re than sufficient t$ supp$rt the asserti$n $f a requested remedy.

As t$ Defendants’ tax refunds, the Trustee is n$t seeking any d$uble rec$very that c$uld

c$ntravene Secti$n 550 $f the Bankruptcy C$de. T$ the c$ntrary, the Trustee is trying t$ ensure

that he can rec$ver all $f the pr$perty, $r the value $f pr$perty, transferred in acc$rdance with

Secti$n 550. As the Defendants n$te, Secti$n 550 is intended t$ rest$re the estate t$ the financial

c$nditi$n that it w$uld have enj$yed if the transfer had n$t $ccurred. In re Andrew Velez

C#nstr., Inc., 373 B.R. at 274; In re Centennial Textiles, 220 B.R. at 176. The Trustee believes

the inc$me tax refunds s$ught by the Trustee result fr$m payments made by Defendants t$ the

United States, state and l$cal g$vernments based $n fictiti$us pr$fits that the Defendants

received fr$m BLMIS. Any $verpayment $r right t$ a refund c$nstitutes a return t$ the

Defendants $f these fictiti$us pr$fits. Rec$very $f these am$unts is theref$re necessary t$

66
rest$re the estate t$ the financial c$nditi$n that it w$uld have been in had the transfer n$t

$ccurred. The Trustee is permitted t$ rec$ver the full value $f an av$idable transfer, even if

c$mp$site elements $f that value must c$me fr$m m$re than $ne transferee. Bertrum v.

Laughlin (In re Laughlin), 18 B.R. 778, 781 (Bankr. W.D. M$. 1982). In this case, the inc$me

tax refunds c$nstitute a c$mp$nent $f the av$idable transfers and sh$uld be returned f$r the

benefit $f the estate.

CONCLUSION

F$r the reas$ns discussed ab$ve, Pic$wer’s m$ti$n t$ dismiss sh$uld be denied in its

entirety.

Dated: New Y$rk, New Y$rk s/Marc E. Hirschfield


September 30, 2009 Baker & H$stetler LLP
45 R$ckefeller Plaza
New Y$rk, New Y$rk 10111
Teleph$ne: (212) 589-4200
Facsimile: (212) 589-4201

David J. Sheehan
Email: dsheehan@bakerlaw.c$m
Th$mas Lucchesi
Email: tlucchesi@bakerlaw.c$m
Lauren Resnick
Email: lresnick@bakerlaw.c$m
Tracy C$le
Email: tc$le@bakerlaw.c$m
Marc Hirschfield
Email: mhirschfield@bakerlaw.c$m

Att#rneys f#r Irving H. Picard, Esq.,


Trustee f#r the SIPA Liquidati#n #f Bernard L.
Mad#ff Investment Securities LLC

67
SUPPLEMENT TO EXHIBIT B

Bernard L. Madoff Investment Securities, LLC


Summary of Cash Transfers to Defendants

For the Period from 7/1/83 - 12/11/08


A/C# Account Name Date Transfer Amount
1F0002 Favorite Fund 4/4/84 Check $ 36,860
1F0002 Favorite Fund 4/1/85 Check 38,243
1F0002 Favorite Fund 4/1/86 Check 42,234
1F0002 Favorite Fund 4/1/87 Check 37,898
1F0002 Favorite Fund 4/1/88 Check 34,815
1F0002 Favorite Fund 4/3/89 Check 39,784
1F0002 Favorite Fund 4/2/90 Check 38,368
1F0002 Favorite Fund 4/1/91 Check 40,145
1F0002 Favorite Fund 4/1/92 Check 32,480
1F0002 Favorite Fund 4/1/93 Check 32,978
1F0002 Favorite Fund 4/4/94 Check 35,026
1F0002 Favorite Fund 4/3/95 Check 30,146

ACCOUNT TOTAL $ 438,978

1J0005 Jfm Investment Co 4/2/84 Check $ 60,000


1J0005 Jfm Investment Co 4/1/85 Check 60,000
1J0005 Jfm Investment Co 4/1/86 Check 60,000
1J0005 Jfm Investment Co 4/1/87 Check 60,000
1J0005 Jfm Investment Co 4/1/88 Check 60,000
1J0005 Jfm Investment Co 4/3/89 Check 50,000
1J0005 Jfm Investment Co 4/2/90 Check 50,000
1J0005 Jfm Investment Co 4/1/91 Check 50,000
1J0005 Jfm Investment Co 4/1/92 Check 50,000
1J0005 Jfm Investment Co 4/1/93 Check 50,000
1J0005 Jfm Investment Co 4/4/94 Check 50,000

ACCOUNT TOTAL $ 600,000

1J0009 Jmp Limited Partnership 10/27/87 Check 2,000,000


1J0009 Jmp Limited Partnership 8/30/89 Check 2,000,000
1J0009 Jmp Limited Partnership 10/1/90 Check 9,000,000
1J0009 Jmp Limited Partnership 12/20/90 Check 10,000,000
1J0009 Jmp Limited Partnership 4/1/91 Check 7,000,000
1J0009 Jmp Limited Partnership 7/1/91 Check 10,430,815
1J0009 Jmp Limited Partnership 10/1/91 Check 10,623,050

Page 1 of 3
SUPPLEMENT TO EXHIBIT B

Bernard L. Madoff Investment Securities, LLC


Summary of Cash Transfers to Defendants

For the Period from 7/1/83 - 12/11/08


A/C# Account Name Date Transfer Amount
1J0009 Jmp Limited Partnership 1/2/92 Check 10,000,000
1J0009 Jmp Limited Partnership 4/1/92 Check 10,000,000
1J0009 Jmp Limited Partnership 7/1/92 Check 4,139,469
1J0009 Jmp Limited Partnership 10/1/92 Check 1,693,121
1J0009 Jmp Limited Partnership 1/4/93 Check 1,973,487
1J0009 Jmp Limited Partnership 4/1/93 Check 3,999,337
1J0009 Jmp Limited Partnership 7/1/93 Check 3,140,604
1J0009 Jmp Limited Partnership 10/1/93 Check 4,181,606
1J0009 Jmp Limited Partnership 1/3/94 Check 7,600,552

ACCOUNT TOTAL $ 97,782,041

1P0022 Jeffry M Picower, P. C. 9/29/83 Check $ 20,000


1P0022 Jeffry M Picower, P. C. 12/30/83 Check 20,000
1P0022 Jeffry M Picower, P. C. 4/2/84 Check 10,000
1P0022 Jeffry M Picower, P. C. 7/2/84 Check 10,000
1P0022 Jeffry M Picower, P. C. 10/1/84 Check 10,000
1P0022 Jeffry M Picower, P. C. 12/31/84 Check 10,000
1P0022 Jeffry M Picower, P. C. 4/1/85 Check 10,000
1P0022 Jeffry M Picower, P. C. 7/1/85 Check 10,000
1P0022 Jeffry M Picower, P. C. 10/1/85 Check 10,000
1P0022 Jeffry M Picower, P. C. 12/31/85 Check 15,000
1P0022 Jeffry M Picower, P. C. 4/1/86 Check 15,000
1P0022 Jeffry M Picower, P. C. 7/1/86 Check 15,000
1P0022 Jeffry M Picower, P. C. 10/1/86 Check 15,000
1P0022 Jeffry M Picower, P. C. 12/31/86 Check 115,000
1P0022 Jeffry M Picower, P. C. 4/1/87 Check 15,000
1P0022 Jeffry M Picower, P. C. 7/1/87 Check 150,000
1P0022 Jeffry M Picower, P. C. 10/1/87 Check 150,000
1P0022 Jeffry M Picower, P. C. 12/31/87 Check 100,000
1P0022 Jeffry M Picower, P. C. 1/4/88 Check 100,000
1P0022 Jeffry M Picower, P. C. 4/1/88 Check 100,000
1P0022 Jeffry M Picower, P. C. 7/1/88 Check 100,000
1P0022 Jeffry M Picower, P. C. 10/3/88 Check 25,000
1P0022 Jeffry M Picower, P. C. 1/3/89 Check 25,000
1P0022 Jeffry M Picower, P. C. 4/3/89 Check 280,000
1P0022 Jeffry M Picower, P. C. 7/3/89 Check 25,000

Page 2 of 3
SUPPLEMENT TO EXHIBIT B

Bernard L. Madoff Investment Securities, LLC


Summary of Cash Transfers to Defendants

For the Period from 7/1/83 - 12/11/08


A/C# Account Name Date Transfer Amount
1P0022 Jeffry M Picower, P. C. 10/2/89 Check 25,000
1P0022 Jeffry M Picower, P. C. 4/2/90 Check 30,000

ACCOUNT TOTAL $ 1,410,000

GRAND TOTAL $ 100,231,019

Page 3 of 3