picard response picower's mtod

8/14/2019 Picard Response Picower's MtoD

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Baker & H ( stetler LLP45 R $ ckefeller Plaza

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

David J. SheehanEmail: [email protected] $ mTh$ mas LucchesiEmail: [email protected] $ m

Lauren Resnick Email: [email protected] $ mTracy C $ leEmail: tc$ [email protected] $ mMarc HirschfieldEmail: [email protected] $ 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 COURTSOUTHERN DISTRICT OF NEW YORK

In re:

BERNARD L. MADOFF INVESTMENTSECURITIES LLC,

Debt $ r.

SIPA LIQUIDATION

N$ . 08-01789 (BRL)

IRVING H. PICARD, Trustee f $ r the Liquidati $ n$ f Bernard L. Mad $ ff Investment Securities LLC,

Plaintiff,

v.

JEFFRY M. PICOWER, individually andas trustee f $ r the Pic $ wer F $ undati $ n, et al.

Defendants.

Adv. Pr $ . N$ . 09-1197 (BRL)

MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS PARTIAL MOTIONTO DISMISS UNDER FED. R. BANKR. P. 7012(b) AND 7009


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TABLE OF CONTENTS

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

BACKGROUND....................................................................................................................... 2

I. Pic $ wer benefited tremend $ usly fr $ m Mad $ ffs fraud and is n $ t a victim........... 2II. 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 fraudclaims............................................................................................................... 19

B. The preference claim is pled in the alternative. ................................................. 21C. Fictiti $ us pr $ fit d $ es n $ t c$ nstitute fair c $ nsiderati $ n....................................... 22

D. The Net Equity Dispute is irrelevant t $ the Trustees claims and cann $ t bedetermined in a m $ ti$ n t$ dismiss..................................................................... 25

III. THE TRUSTEE HAS ALLEGED FACTS SUFFICIENT TO PIERCE THECORPORATE VEIL AND HOLD PICOWER LIABLE FOR THE TRANSFERSTO ALL DEFENDANTS, AND DEFENDANTS FAIL TO CHALLENGE THESUFFICIENCY OF THE TRUSTEES 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 $ rmsrequires a fact specific inquiry int $ the t$ tality $ f thecircumstances. ...................................................................................... 30

2. The C $ mplaint amply pleads a basis f $ r piercing the c $ rp$ rate veil....... 32

B. Defendants fail t $ challenge the Trustees agency allegati $ ns. .......................... 34

IV. ALL DEFENDANTS, INCLUDING THE FOUR NOT LISTED ON E b HIBIT BTO THE COMPLAINT, RECEIVED AVOIDABLE TRANSFERS ............................ 36

V. THE TRUSTEES TURNOVER CLAIM IS PROPERLY STATED............................ 36VI. THE RELEVANT DATE FOR THE SI b YEAR CONVEYANCES IS

CORRECTLY ALLEGED........................................................................................... 39

A. State law limitati $ ns peri $ ds are relevant $ nly until the bankruptcy case isfiled.................................................................................................................. 39

1. Pic $ wers argument c $ ntravenes 25 years $ f bankruptcy case law......... 41


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TABLE OF CONTENTS(c$ ntinued)

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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$ threal and hyp $ thetical credit $ rs f $ r claims based $ n actual fraud. ........... 50

VII. THE TRUSTEE HAS SUFFICIENTLY PLED A CAUSE OF ACTION BASEDON 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................................................. 52B. 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 havedisc $ 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 AVOIDSUBSEQUENT TRANSFERS..................................................................................... 59

Ib . THE TRUSTEE HAS PROPERLY ALLEGED DISALLOWANCE OFDEFENDANTS 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 am$ ti$ n t$ dismiss. ............................................................................................ 64

b . DEFENDANTS MOTION TO DISMISS CERTAIN REQUESTED REMEDIESIN THIS CASE IS PROCEDURALLY IMPROPER AND WITHOUT MERIT......... .. 65


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TABLE OF AUTHORITIES

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Cases

546-552 West 146th Street LLC v. Arfa , 863 N.Y.S.2d 412 (1st Dept 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 (1stDept 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), affd , 548 F.3d 579 (7 th 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 Intl, 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 ), 396B.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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TABLE OF AUTHORITIES(c$ ntinued)

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Dzik # wski v. Friedlander (In re Friedlander Capital Mgmt.) , Adv. N $ . 05-03088-PGH, 2009WL 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 Dept 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 Natl 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 Natl. 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, 31G-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), affd in part and revd in part sub n # m. Bear, Stearns Sec. C # rp. v. Gredd (Inre 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 Dept 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 WL1940103 (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 Dept 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 # ntl Bank Natl Assn 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 Dept 2001)................. 47Mills 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 Dept 1982).................................................................... 59

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

OC # 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), affd , 239 A.2d629 (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).................................................................................................................................... 41Sec. 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 Pship 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) revd # 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), affd , 879 F.2d 857 (3dCir. 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 # mmcns, 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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N.Y. Debt. & Cred. Law 274 (McKinney 2009)..................................................................... 51





Rules

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

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



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


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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 Trustees 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$ wers 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 $ ffs

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 Trustees 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 $ wers 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 Trustees 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 $ theTrustee, it is apparent that Pic $ wer c $ ntr $ lled all $ f the BLMIS acc $ unts at issue. In additi $ n t$ Pic$ wers 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 $ wers 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 SpecialLimited Partnership, JAB Partnership, JEMW Partnership, JF Partnership, JFM Investment C $ mpany, JLNPartnership, 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. 3749, 53.) Acc $ rding t $ publicly available filings with the U.S. Securities and ExchangeC$ 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/xslF345 b 02/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 presentedt$ c$ rrect and pr $ vide c $ ntext t $ facts alleged in the C $ mplaint.).)


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2

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 $ wers 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 MADOFFS FRAUD AND ISNOT A VICTIM.

The theme $ f Pic$ wers m $ ti$ n t$ dismiss is that he, like $ ther BLMIS invest $ rs, is a

victim $ f Mad $ ffs 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 Trustees investigati $ n t$ date, Pic $ wer was instead the biggest

beneficiary $ f Mad $ ffs 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 $ wers 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 Trustees 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 $ ffs wealthiest

invest $ rs. (MTD at 4.) Pic $ wer is mistaken. It is the Trustees $ bligati $ n t$ bring acti $ ns $ n


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3

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 BENEFITINGFROM A FRAUD.

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

fraud. The C $ mplaint alleges, am $ ng $ ther things, that Pic $ wers 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 hadnt 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 $ wers 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


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4

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 ( wers 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 $ wers 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$

ffs arrest (C$

mpl. 63(d)), was clear evidence thats$ 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$ wers argument that his withdrawals must have strained the P $ nzi scheme, it is

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

A.) Acc $ rdingly, BLMIS c $ uld anticipate Pic $ wers 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 $ ffs 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


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5

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 $ ffs fraud. This evidence bec $ mes

even m $ re c$ mpelling given Pic $ wers 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$

wers l$

ne allusi$

n t$

what the Trustee refers t $ as Mad $ ffs backdating $ f certain trades in certain years (MTD at

16), the C $ mplaint describes numer $ us examples $ f c$ nduct specific t $ Pic$ wers acc $ unts that

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

Despite Pic $ wers 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


18/82

6

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 $ wers 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$

wnc$ 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.


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7

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

Pic$ wer fails t $ address in any way the Trustees 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 Trustees 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 $ ns 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 $$ k place in 2007 (C $ mpl. 63(f)( ii) (transacti $ ns f $ r them$ nths $ f January and February 2007)), elsewhere it suggests that they t $$ k place in 2006, c $ nsistent withFreilichs $ riginal suggesti $ n. (C $ mpl. 63(f)( ii) ( m $ re than 15 m $ nths earlier).) F $ r clarity, the trades wererep$ rted by BLMIS as taking place in January and February 2007, three t $ f $ ur m$ nths bef $ re the c $ nversati $ ns atissue.


20/82

8

(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 $ wers $ 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 $ wers p $ rtf $ li$ appraisal rep $ rt dated

December 16. Pic $ wers $ 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


21/82

9

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 $ wers 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 $ wers 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 $ mplaints 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 $

ugh1999. 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 $ wers 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$


22/82

10

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 $ wers 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 $ wers

acc$ unts. One $ f the fact $ rs that must be c $ nsidered in determining an acc $ unts 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 $ wers 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 $ ffs 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

4See Office $ f Investigati $ ns, U.S. Securities and Exchange C $ mmissi $ n, Investigati $ n $ f Failure $ f the SEC t $ Unc$ ver Bernard Mad $ ffs P $ nzi Scheme (Public Versi $ n), Rep. N $ . OIG-509, 145-57 (Aug. 31, 2009), availableat http://www.sec.g $ v/news/studies/2009/ $ ig-509.pdf; Jenny Strasburg and Sc $ tt Patters $ n, The Mad # ff Fraud:


23/82

11

Pic$ wers argument $ nce again fails t $ address the legal sufficiency $ f the C $ mplaint.

M$ re$ ver, aside fr $ m the fundamental flaws in Pic $ wers 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 $ wers $ 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$ wers 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. 78 aaa 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.


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12

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 $ ffs 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 Trustees 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 $ mplaints 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 $ wers 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 ( wers Alter Eg ( Liability(resp $ nding t $ MTD P $ int II)

Pic$ wers 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


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Trustees 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 $ mplaints allegati $ ns that Exhibit B is n $ t exhaustive and that the

Trustees 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 Trustees Turn ( ver Claim is Pr ( perly Stated(resp $ nding t $ MTD P $ int IV)

Pic$ wers argument that the Trustees 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$ wers 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$ wers 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.


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14

P ( int VII: The Trustee Has Sufficiently Allegeda Cause ( f Acti ( n Based ( n the Disc ( very Rule

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

Similarly meritless is Pic $ wers 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 $ ffs 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$ wers $ 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 $ wers argument that the Trustees 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 I b )

Pic$ wer ign $ res the fact that the Trustees cause $ f acti $ n t$ disall $ w Pic $ wers 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 $ wers 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.


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P ( int [ : Pic ( wers 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 Trustees

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 $ urts 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 $ ffs 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

Trustees 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


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Trustees 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 $ ffs reputati $ n and Pic $ wers 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 $ wers 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 $ ffs 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 Trustees 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 Trustees 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) (wheredebt$ 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 therec$ 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.) , 397B.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.)).


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A. Pic ( wer has received ample n ( tice pleading ( f the c ( nstructive fraudclaims.

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 . . .


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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 Defendants 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 $ wers 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 Trustees 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,


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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 Trustees

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 $ wers 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$ wers 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,


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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 $ wers 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 $ wers

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 aP$ 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


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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 $ kers fraud. Id. at *4-5. Pic $ wer claims, based $ n

Lehman , that there is s $ me distincti $ n between the trustees 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 Trustees

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 $ rs 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).


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

damages. Enf $ rcing the arbitrat $ rs 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$ wers 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 trustees 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 Trustees claims and cann ( tbe 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


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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 Trustees interpretati $ n $ f net equity as defined under Secti $ n 78 lll (11) $ f SIPA

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

Dispute is irrelevant t $ Pic$ wers 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 $ unts 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 $ urts September 10, 2009

Scheduling Order. ( See Mem. Dec. & Order Granting Trustees 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


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SIPA liquidati $ n. (Peskin Order at 2.) The C $ urts reas $ ning in that decisi $ n, dismissing an

invest $ rs 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 withdifferent 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 $ merst $ pr $ ceed with the adversary pr $ ceedingt$ determine the Net Equity Issue that will apply t $ all cust $ mer claims will yieldan 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 Issuedecided pursuant t $ the Scheduling M $ ti$ n while $ ther cust $ mers will suffer greatharm 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 $ rs 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 $ rs 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


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

picard response picower's mtod

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