UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 1 of 13

UNITED STATES DISTRICT COURT 12-mc-00115 (JSR)
SOUTHERN DISTRICT OF NEW YORK
(Relates to consolidated proceedings on
SECURITIES INVESTOR PROTECTION Antecedent Debt)
CORPORATION,

Plaintiff-Applicant,

v.

BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,

Defendant.

In re:

MADOFF SECURITIES

MEMORANDUM OF LAW OF THE
SECURITIES INVESTOR PROTECTION CORPORATION

IN OPPOSITION TO THE MOTION FOR
CERTIFICATION FOR INTERLOCUTORY APPEAL

SECURITIES INVESTOR
PROTECTION CORPORATION
805 Fifteenth Street, N.W., Suite 800
Washington, D.C. 20005
Telephone: (202) 371-8300
JOSEPHINE WANG
General Counsel
KEVIN H. BELL
Senior Associate General Counsel
For Dispute Resolution
LAUREN T. ATTARD
Assistant General Counsel

 

Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 2 of 13

TABLE OF CONTENTS PAGE

SUMMARY OF THE ARGUMENT ..............................................................................................1
STANDARD UNDER 28 U.S.C. § 1292(b)....................................................................................2
ARGUMENT ...................................................................................................................................3

I. Defendants Cannot Present Authority Conflicting with
this Court’s Holding that Defendants’ Purported
Damage Claims Do Not Constitute “Antecedent Debt” ....................................3

II. Defendants Provide No Support for Their
Inter-Account Transfer and Reset to Zero Theories,
Which Were Rejected by This Court .................................................................7

CONCLUSION ...............................................................................................................................9

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Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 3 of 13

TABLE OF AUTHORITIES

CASES: PAGE

Am. Tel. & Tel. Co. v. N. Am. Indus. of New York, Inc., 783 F. Supp. 810 (S.D.N.Y. 1992)......3, 7

In re Bayou Group, LLC, 439 B.R. 284 (S.D.N.Y. 2010) ...........................................................3, 7

In re Bernard L. Madoff Investment Securities LLC, 654 F.3d 229 (2d Cir. 2011), reh’g and
reh’g en banc den. (2d Cir. Nov. 8, 2011), cert. dismissed, 132 S.Ct. 2712 (2012), and
cert. denied, 133 S. Ct. 24 and 133 S. Ct. 25 (2012) ...........................................................4

Boston Trading Grp., Inc. v. Burnazos, 835 F.2d 1504 (1st Cir. 1987) ..........................................6

In re Del-Val Fin. Corp. Sec. Litig., 874 F. Supp. 81 (S.D.N.Y. 1995) ..........................................5

Donell v. Kowell, 533 F.3d 762 (9th Cir.), cert. den., 555 U.S. 1047 (2008)..................................7

German by German v. Fed. Home Loan Mortgage Corp.,
896 F. Supp. 1385 (S.D.N.Y. 1995)................................................................................. 2-3

In re Klein, Maus & Shire, Inc., 301 B.R. 408 (Bankr. S.D.N.Y. 2003) .........................................6

In re Methyl Tertiary Butyl Ether, 399 F. Supp. 2d 320 (S.D.N.Y. 2005) ......................................5

Perkins v. Haines, 661 F.3d 623 (11th Cir. 2011) ...........................................................................8

Picard v. Katz, 466 B.R. 208 (S.D.N.Y. 2012)............................................................................3, 6

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 476 B.R. 715 (S.D.N.Y),
supplemented (May 15, 2012)..........................................................................................4, 6

Sender v. Buchanan (In re Hedged-Investments Assoc., Inc.), 84 F.3d 1286 (10th Cir. 1996)...5, 7

In re Sharp Int’l Corp., 403 F.3d 43 (2d Cir. 2005) ........................................................................6

Smith v. Creative Fin. Mgmt., Inc. (In re Virginia-Carolina Fin. Corp.), 954 F.2d 193
(4th Cir. 1992)......................................................................................................................5

Visconsi v. Lehman Bros, Inc., 244 F. App’x 708 (6th Cir. 2007) ..........................................3, 4, 8

Westwood Pharmaceuticals, Inc. v. National Fuel Gas Dist. Corp., 964 F.2d 85 (2d Cir. 1992) ..2

Williston v. Eggleston, 410 F. Supp. 2d 274 (S.D.N.Y. 2006) ................................................3, 5, 7

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Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 4 of 13

TABLE OF AUTHORITIES
(cont.)

STATUES: PAGE

28 U.S.C. §
1292(b)................................................................................................................................... passim
United States Bankruptcy Code, as amended, 11 U.S.C. §
548(c) ...............................................................................................................................................1

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Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 5 of 13

The Securities Investor Protection Corporation (“SIPC”) submits this opposition to the
Motion to Amend October 15, 2013 Opinion and Order Regarding Antecedent Debt Issues to
Add 28 U.S.C. § 1292(b) Certification for Interlocutory Appeal (“Motion”) (Docket No. 490).
SIPC joins in the brief in opposition to the Motion submitted by Irving Picard, as Trustee for the
liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) under the Securities
Investor Protection Act, 15 U.S.C. § 78aaa et seq. (“SIPA”), and provides this limited
supplemental brief to address issues five, six, and seven raised in Defendants’ memorandum of
law accompanying the Motion (Docket No. 491) (“Memo”).

SUMMARY OF THE ARGUMENT
In its Order, dated October 15, 2013 (Docket No. 489) (“Order”), this Court held that the
payments of fictitious profits to customers were not made on account of “antecedent debt.” The
Court held that in a SIPA proceeding, the payment of damage claims could not constitute
“antecedent debt” when the Trustee is seeking the return of customer property. See Order at 11-
14. The Court based this holding on the fact that in a SIPA liquidation, customers recover their
property for a different reason than they would in a bankruptcy of a Ponzi scheme under Title 11
of the United States Code (“Bankruptcy Code”): customers in a SIPA liquidation receive a
return of their principal because they have a claim for their “net equity,” not because they have a
claim for restitution, as they would in a typical bankruptcy. Id. at 11. Accordingly, the Court
held that section 548(c) of the Bankruptcy Code does not necessarily apply to the fund of
“customer property” in the same way that it applies to the general creditor estate. Id. at 12.
Damage claims, which Defendants contend constitute “value” under section 548(c), cannot form
the basis for valid antecedent debt when the Trustee is seeking the return of “customer property”.
Id. at 14.

 

Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 6 of 13

By their Motion, Defendants seek immediate review of the Order. In their issues five and
seven, Defendants contend that this Court erred in its holding that Defendants’ damage claims
cannot form the basis for antecedent debt, even though this holding is consistent with two prior
rulings by this Court in cases related to the BLMIS liquidation. In their issue six, Defendants ask
this Court to revisit its holding that Defendants’ inter-account transfer and “reset to zero”
theories are not appropriate here, without offering any support for their positions.

Defendants cannot meet a basic requirement of 28 U.S.C. section 1292(b): they cannot
show a substantial ground for a difference of opinion. In their Memorandum, Defendants fail to
recognize the substantial body of law that forms the basis for this Court’s decision in this matter.
Defendants also fail to recognize that many of the cases that Defendants argue are “conflicting
authority” were actually distinguished by this Court in its Order or in its prior rulings on
antecedent debt. As a result, Defendants concoct bald assertions regarding the disagreements
between their position and that of the Trustee and SIPC. Such disagreements cannot rise to the
level of a “substantial ground for difference of opinion” worthy of certification.

STANDARD UNDER 28 U.S.C. SECTION 1292(b)
28 U.S.C. section 1292(b) states that the Court of Appeals may entertain an appeal of an
interlocutory order if the district court certifies that the order “involves a controlling question of
law as to which there is substantial ground for difference of opinion and that an immediate
appeal from the order may materially advance the ultimate termination of the litigation.” The
Second Circuit has “urge[d] the district courts to exercise great care in making a § 1292(b)
certification.” Westwood Pharmaceuticals, Inc. v. National Fuel Gas Dist. Corp., 964 F.2d 85,
89 (2d Cir. 1992). “[Certification] is not intended as a vehicle to provide early review of difficult
rulings in hard cases.” German by German v. Fed. Home Loan Mortgage Corp., 896 F. Supp.

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Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 7 of 13

1385, 1398 (S.D.N.Y. 1995) (finding no substantial ground for difference of opinion). In fact, “a
district judge has unfettered discretion to deny certification of an order for interlocutory appeal
even when a party has demonstrated that the criteria of 28 U.S.C. § 1292(b) are met.” See
Picard v. Katz, 466 B.R. 208, 210 (S.D.N.Y. 2012) (internal quotations omitted).

For certification to be appropriate, Defendants must present a “substantial ground for
difference of opinion.” 28 U.S.C. § 1292(b). “[T]he fact that the parties themselves disagree as
to the interpretation of persuasive authority [does not] constitute ‘a difference of opinion’
sufficient to warrant certification.” Williston v. Eggleston, 410 F. Supp. 2d 274, 277 (S.D.N.Y.
2006). A “substantial conflict” does not exist simply because a party’s position has not been
“authoritatively addressed” or explicitly rejected. Id., see also Am. Tel. & Tel. Co. v. N. Am.
Indus. of New York, Inc., 783 F. Supp. 810, 814 (S.D.N.Y. 1992).

ARGUMENT
I. Defendants Cannot Present Authority Conflicting with this Court’s Holding that

Defendants’ Purported Damage Claims Do Not Constitute “Antecedent Debt”
In issues five and seven, Defendants argue that their purported claims for damages
against BLMIS constitute “antecedent debt.”
First, in issue five, Defendants suggest that this Court’s holding is erroneous because
BLMIS was a broker-dealer with a fiduciary duty to its customers, and, as such, the Court should
have only relied on cases that concern a broker-dealer and its customers. Specifically,
Defendants argue that cases such as In re Bayou Group, LLC, 439 B.R. 284 (S.D.N.Y. 2010),
which did not concern a broker-dealer and its customers, should be distinguished on that ground
alone. Defendants maintain that the holding in Visconsi v. Lehman Bros, Inc., 244 F. App’x 708,
713-14 (6th Cir. 2007), should be extended to provide that a fraudulent account statement can

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Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 8 of 13

form the basis of “antecedent debt” in a fraudulent transfer action. See Memo at 9. Defendants’
reliance on Visconsi, however, is misplaced.

Visconsi did not concern a SIPA liquidation, a bankruptcy, a fraudulent transfer action in
a bankruptcy, or even a Ponzi scheme. See Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv.
Sec. LLC, 476 B.R. 715, 725 (S.D.N.Y.) (“Greiff”) (distinguishing Visconsi “in three important
respects”), supplemented (May 15, 2012). Rather, in Visconsi, the court affirmed an arbitration
award against a solvent brokerage firm in which the amount of damages was based on inflated
values printed on account statements. 244 F. App’x at 713-14. Defendants construct bare
assertions that Visconsi is controlling, but fail to cite to any case extending Visconsi to a SIPA
liquidation, bankruptcy case, or an avoidance action in a bankruptcy case. Defendants
essentially ask this Court to revisit its decision in Greiff, which included a fulsome analysis of
Visconsi and the reasons that it is distinguishable. 476 B.R. at 725. Because Visconsi is not on
point, it cannot present a “difference of opinion,” let alone a “substantial” one.

Extension of the holding in Visconsi to this case as Defendants suggest would create a
direct conflict with the law of this Circuit as articulated in the “net equity” decision. See In re
Bernard L. Madoff Investment Securities LLC, 654 F.3d 229 (2d Cir. 2011), reh’g and reh’g en
banc den. (2d Cir. Nov. 8, 2011), cert. dismissed, 132 S.Ct. 2712 (2012), and cert. denied, 133 S.
Ct. 24 and 133 S. Ct. 25 (2012). In that case, the Second Circuit held that customers could not
rely on BLMIS fictitious account statements as a measure of the amounts owed to them. 654
F.3d at 238-39. The Circuit’s decision that the statement cannot be used as a measure of a
customer’s “net equity” eviscerates Defendants’ attempted extrapolation of Visconsi to hold that
a fraudulent statement should be the measure of Defendants’ “antecedent debt” here. Thus, even
if Visconsi, a holding of the Sixth Circuit, were directly on point, the Second Circuit’s holding

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Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 9 of 13

would render such “conflicting authority” as less than “substantial.” See, e.g., Williston v.
Eggleston, 410 F. Supp. 2d 274, 277 (S.D.N.Y. 2006) (“The district court must ‘analyze the
strength of the arguments in opposition to the challenged ruling, and determine whether there is
‘substantial doubt’ that the district court's order was correct.’”), quoting In re Methyl Tertiary
Butyl Ether, 399 F. Supp. 2d 320, 322 (S.D.N.Y. 2005).

Second, in issue seven, Defendants contend that the issue of whether “damages” can
constitute “antecedent debt” is a novel question worthy of certification. See Memo at 12.
However, as this Court has held, “the interlocutory appeal process should be used sparingly and
the order appealed from must concern something more than a novel and interesting issue about
which there may be substantial disagreement.” In re Del-Val Fin. Corp. Sec. Litig., 874 F. Supp.
81, 83 (S.D.N.Y. 1995). See Williston, 410 F. Supp. 2d at 277.

Issue seven, as presented by Defendants, is not an issue of first impression. In fact, the
ruling by this Court on this issue is grounded in black letter law principles. For example, in the
bankruptcy context, the Fourth and Tenth Circuits have each held that that an unenforceable
claim for damages cannot constitute “antecedent debt.” See Smith v. Creative Fin. Mgmt., Inc.
(In re Virginia-Carolina Fin. Corp.), 954 F.2d 193, 197 (4th Cir. 1992) (holding that a “common
sense approach” to determine whether a transfer was made on account of antecedent debt “is to
consider whether the creditor would be able to assert a claim against the estate, absent the
[transfer]”); see also Sender v. Buchanan (In re Hedged-Investments Assoc., Inc.), 84 F.3d 1286,
1290 (10th Cir. 1996) (holding that because a victim of a Ponzi scheme did not have an
enforceable claim against the debtor for damages in excess of her original investment, the
transfers in excess of her investment were not made on account of antecedent debt).

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Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 10 of 13

In a SIPA liquidation, a claim for damages cannot be satisfied out of the fund of customer
property. In re Klein, Maus & Shire, Inc., 301 B.R. 408, 421 (Bankr. S.D.N.Y. 2003) (claims for
damages do not involve the return of customer property entrusted to broker and are not
“customer” claims). On this basis, this Court held that Defendants could not use their damage
claims as “antecedent debt” to escape returning customer property to the Trustee under the
avoidance provisions. See Order at 10-11. Defendants cannot point to conflicting authority on
these points. The only “difference of opinion” is that posted by Defendants.

Defendants’ citations to In re Sharp Int’l Corp., 403 F.3d 43, 54 (2d Cir. 2005), and
Boston Trading Grp., Inc. v. Burnazos, 835 F.2d 1504, 1509 (1st Cir. 1987), are equally
misplaced. Defendants contend that Sharp and Boston Trading support their contention that this
Court has improperly conflated recovery and priority. See Memo at 12. Presumably, Defendants
take issue with this Court’s holding that the calculation of “net equity” and the calculation of
“antecedent debt” are “inherently intertwined.” See Order at 13. Sharp and Boston Trading,
however, are not SIPA cases, and they do not address how the calculation of “net equity” relates
to the calculation of “antecedent debt,” as Defendants attempt to imply. See Memo at 12; see
also Greiff, 476 B.R. at 723 n.8 (distinguishing Sharp and Boston Trading); Picard v. Katz, 462
B.R. at 454 (distinguishing Sharp). Rather, the court in Sharp held that the debtor failed to
allege that the transfer was not received in good faith and dismissed the fraudulent transfer
claims. 403 F.3d at 56. The court in Boston Trading vacated the district court’s ruling because
the record was insufficient. 835 F.2d at 1514. Neither case supports Defendants’ arguments,
and certainly neither case creates a substantial conflict with this Court’s ruling that Defendants’
receipt of fictitious profits was not made on account of antecedent debt. Thus, Defendants have

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Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 11 of 13

failed to present the requisite “conflicting authority” component of the section 1292(b)
certification standard.
II. Defendants Provide No Support for Their Inter-Account Transfer and

Reset to Zero Theories, Which Were Rejected by This Court
In summary fashion, Defendants articulate the basis for their request for certification on
issue six as follows: “There appears to be no federal appellate authority on these calculation
issues in SIPA avoidance proceedings in the Second Circuit or otherwise.” See Memo at 10.
The lack of appellate authority on Defendants’ arguments, however, standing alone, is not
grounds for certification. In fact, Defendants fail to provide any support in their discussion of
this issue. As this Court has held, a “substantial conflict” does not exist simply because a party’s
position has not been “authoritatively addressed” or explicitly rejected. Williston v. Eggleston,
410 F. Supp. 2d 274, 277 (S.D.N.Y. 2006), and Am. Tel. & Tel. Co. v. N. Am. Indus. of New
York, Inc., 783 F. Supp. 810, 814 (S.D.N.Y. 1992).
Defendants fail to identify any conflicting authority on the issues of inter-account
transfers and the “reset to zero” method because Defendants’ positions on these issues have been
rejected by this Court and others. For example, in In re Bayou Group, LLC, 439 B.R. 284
(S.D.N.Y. 2010), this Court rejected arguments similar to the Defendants’ arguments here on
inter-account transfers. In Bayou, investors argued that they should receive credit for the full
amount of a rolled-over account as if it constituted only principal. Id. at 338-39. The Court
disagreed and held that the rolled-over account included both principal and fictitious profits on
the investors’ original investment. Id.; see also Donell v. Kowell, 533 F.3d 762, 780 (9th Cir.)
(considering the defendant’s original investment in a Ponzi scheme four years prior to a
receivership as “value”), cert. den., 555 U.S. 1047 (2008); In re Hedged-Investments Assoc.,
Inc., 84 F.3d at 1288-89 (looking to the twelve-year history of the investments to determine

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Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 12 of 13
whether transfers constituted principal or fictitious profits). Similarly, variations of the “reset to
zero” method have been rejected by numerous courts, which have looked beyond two years to
determine whether “value” was given in exchange for a transfer made within the two year period.
See, e.g., Perkins v. Haines, 661 F.3d 623 (11th Cir. 2011) (holding that in a Ponzi scheme, only
the amount invested with a debtor constitutes “value,” even if the transfers were made up to nine
years prior to the petition date of the bankruptcy proceeding);1 In re Hedged-Investments Assoc.,
Inc., 84 F.3d at 1290 (looking to the twelve year history of investments). Accordingly,
Defendants’ arguments in this respect also fail.

                                                           

1 A statement of facts is available in the Memorandum in Support of Trustee’s Motion for Partial
Summary Judgment, In re International Management Associates, LLC, Case No. 09-00601-pwb,
(Bankr. N.D. Ga. Apr. 1, 2009), Docket No. 7.

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Case 1:12-mc-00115-JSR Document 503 Filed 11/19/13 Page 13 of 13

CONCLUSION

For the aforementioned reasons, the Court should deny Defendants’ Motion.

Dated: Washington, D.C.
November 19, 2013

Respectfully submitted,

JOSEPHINE WANG
General Counsel

/s/ Kevin H. Bell
KEVIN H. BELL
Senior Associate General Counsel
For Dispute Resolution

LAUREN T. ATTARD
Assistant General Counsel

SECURITIES INVESTOR
PROTECTION CORPORATION
805 Fifteenth Street, N.W., Suite 800
Washington, D.C. 20005
Telephone: (202) 371-8300
Facsimile: (202) 371-6728
E-mail: [email protected]
E-mail: [email protected]
E-mail: [email protected]

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Case 1:12-mc-00115-JSR Document 503-1 Filed 11/19/13 Page 1 of 1

UNITED STATES DISTRICT COURT 12-mc-00115 (JSR)
SOUTHERN DISTRICT OF NEW YORK
(Relates to consolidated proceedings on
SECURITIES INVESTOR PROTECTION Antecedent Debt)
CORPORATION,

Plaintiff-Applicant,

v.

BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,

Defendant.

In re:

MADOFF SECURITIES,

CERTIFICATE OF SERVICE

 IT IS HEREBY CERTIFIED that a true and correct copy of the foregoing MEMORANDUM
OF LAW OF THE SECURITIES INVESTOR PROTECTION CORPORATION IN
OPPOSITION TO THE MOTION FOR CERTIFICATION FOR INTERLOCUTORY
APPEAL was served this 19th day of November 2013, upon counsel for those parties who
receive electronic service through ECF.

/s/ Kevin H. Bell
KEVIN H. BELL