UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
IRVING H. PICARD, Trustee for the Liquidation
of Bernard L. Madoff Investment Securities LLC,
Plaintiff,
v.
JPMORGAN CHASE & CO., JPMORGAN
CHASE BANK, N.A., J.P. MORGAN
SECURITIES LLC, and J.P. MORGAN
SECURITIES LTD.,
Defendants.
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11 Civ. 913 (CM)
OPENING BRIEF IN SUPPORT OF JPMORGAN’S MOTION
TO DISMISS THE TRUSTEE’S COMPLAINT
Dated: June 3, 2011
WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd Street
New York, NY 10019
(212) 403-1000
Attorneys for Defendants JPMorgan Chase & Co.,
JPMorgan Chase Bank, N.A., J.P. Morgan Securities
LLC and J.P. Morgan Securities Ltd.
Case 1:11-cv-00913-CM Document 33 Filed 06/03/11 Page 1 of 77
i
TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT .....................................................................................................1
BACKGROUND .............................................................................................................................6
A. JPMorgan’s contacts with Madoff ...........................................................................6
B. The Trustee’s lawsuit against JPMorgan .................................................................7
ARGUMENT...................................................................................................................................9
POINT I THE TRUSTEE LACKS STANDING TO BRING COMMON
LAW CLAIMS AGAINST JPMORGAN. ..............................................................9
A. Under Caplin and Wagoner, the Trustee lacks standing to bring
common law claims against JPMorgan....................................................................9
B. SIPA does not grant the Trustee standing to bring common law
claims on behalf of BMIS’s customers..................................................................11
C. The Trustee lacks standing to sue JPMorgan as a bailee. ......................................12
1. Redington is not good law..........................................................................13
2. Wagoner and Hirsch control over Redington. ...........................................15
3. A thief cannot be a bailee...........................................................................16
D. The Trustee lacks standing to sue JPMorgan as a subrogee. .................................17
E. The Trustee lacks standing to sue JPMorgan as an assignee. ................................20
POINT II THE TRUSTEE’S COMMON LAW CLAIMS ARE
PRECLUDED BY SLUSA....................................................................................22
A. SLUSA must be interpreted broadly to foreclose securities class
actions based on state law. .....................................................................................22
B. SLUSA preempts the Trustee’s claims on behalf of
Madoff’s customers. ..............................................................................................24
1. This action is based on state law................................................................24
2. This action alleges misrepresentations or omissions in connection
with the purchase or sale of securities. ......................................................24
3. This is a covered class action.....................................................................25
Case 1:11-cv-00913-CM Document 33 Filed 06/03/11 Page 2 of 77
ii
POINT III THE COMPLAINT FAILS TO STATE CLAIMS FOR AIDING AND
ABETTING FRAUD AND BREACH OF FIDUCIARY DUTY. ........................29
A. The Trustee must plead the elements of aiding and abetting
liability with particularity. .....................................................................................30
B. The burden of pleading actual knowledge is a heavy one. ....................................32
C. The Trustee has failed to allege facts showing that JPMorgan
had actual knowledge of Madoff’s fraud. ..............................................................35
1. The Trustee’s allegations with respect to the 703 Account
do not show actual knowledge...................................................................36
2. The Trustee’s allegations concerning JPMorgan’s structured
products due diligence do not show actual knowledge..............................38
D. The Trustee has failed to allege facts showing that JPMorgan
substantially assisted Madoff’s fraud.....................................................................43
E. The Trustee has failed to plead that JPMorgan’s conduct was the
proximate cause of the alleged injury. ...................................................................45
F. The Trustee has failed to plead individual fraud claims. .......................................46
POINT IV THE COMPLAINT FAILS TO STATE CLAIMS FOR
CONVERSION AND UNJUST ENRICHMENT. ................................................48
A. The Complaint fails to state a claim for conversion. .............................................48
B. The Complaint fails to state a claim for unjust enrichment. ..................................50
POINT V THE TRUSTEE HAS NO VALID CLAIM FOR “FRAUD ON
THE REGULATOR.”............................................................................................51
POINT VI THE TRUSTEE’S CLAIMS TO AVOID PAYMENTS FROM
BMIS TO JPMORGAN SHOULD BE DISMISSED. ..........................................56
A. As acts of setoff or repayments of secured debts, the alleged
transfers from BMIS to JPMorgan are not avoidable. ...........................................56
1. The Trustee cannot avoid the loan repayments..........................................56
2. The Trustee cannot avoid the fee payments...............................................61
B. The Trustee’s fraudulent transfer claims are barred by the Second
Circuit’s decision in Sharp International. .............................................................62
CONCLUSION..............................................................................................................................66
Case 1:11-cv-00913-CM Document 33 Filed 06/03/11 Page 3 of 77
iii
TABLE OF AUTHORITIES
Page
Cases
Albion Alliance Mezzanine Fund v. State Street Bank & Trust,
8 Misc. 3d 264 (N.Y. Sup. Ct. N.Y. Co. 2003), aff’d, 2 A.D.3d 162 (1st Dep’t 2003).......... 38
AmSouth Bank v. Dale,
386 F.3d 763 (6th Cir. 2004) .......................................................................................... 54 n.10
Andrew Velez Constr., Inc. v. Consol. Edison Co. of N.Y., Inc.
(In re Andrew Velez Constr., Inc.),
373 B.R. 262 (Bankr. S.D.N.Y. 2007)............................................................................ 65 n.16
Anwar v. Fairfield Greenwich Ltd.,
728 F. Supp. 2d 372 (S.D.N.Y. 2010)............................................................................... 40 n.8
Ascot Fund Ltd. v. UBS PaineWebber, Inc.,
No. 600341/03 (Sup. Ct. N.Y. Co. Dec. 17, 2004),
aff’d, 28 A.D.3d 313 (1st Dep’t 2006).................................................................................... 33
Ashcroft v. Iqbal,
129 S. Ct. 1937 (2009)............................................................................................................ 30
ATSI Commc’ns, Inc. v. Shaar Fund, Ltd,
493 F.3d 87 (2d Cir. 2007)...................................................................................................... 30
Bankruptcy Services, Inc. v. Ernst & Young (In re CBI Holding Co.),
529 F.3d 432 (2d Cir. 2008)........................................................................................ 21, 22 n.5
Bear, Stearns Securities Corp. v. Gredd,
275 B.R. 190 (S.D.N.Y. 2002)........................................................................................... 60-61
Belford v. Union Trust. Co. (In re Wild Bills, Inc.),
206 B.R. 8 (Bankr. D. Conn. 1997) ........................................................................................ 59
Bell Atl. Corp. v. Twombly,
550 U.S. 544 (2007)................................................................................................................ 30
B.E.L.T., Inc. v. Wachovia Corp.,
403 F.3d 474 (7th Cir. 2005) .......................................................................................... 54 n.10
Berman v. Morgan Keegan & Co.,
2011 WL 1002683 (S.D.N.Y. Mar. 14, 2011) ...................................................... 31, 32, 34, 45
Bloor v. Carro, Spanbock, Londin, Rodman & Fass,
754 F.2d 57 (2d Cir. 1985)...................................................................................................... 45
Boston Trading Group, Inc. v. Burnazos,
835 F.2d 1504 (1st Cir. 1987)........................................................................................... 63, 64
Brecht v. Abrahamson,
944 F.2d 1363 (7th Cir. 1991) ................................................................................................ 14
Case 1:11-cv-00913-CM Document 33 Filed 06/03/11 Page 4 of 77
iv
Breeden v. Kirkpatrick & Lockhart, LLP (In re Bennett Funding Grp., Inc.),
268 B.R. 704 (S.D.N.Y. 2001), aff’d, 336 F.3d 94 (2d Cir. 2003) ......................................... 16
Buckman Co. v. Plaintiffs’ Legal Committee,
531 U.S. 341 (2001).............................................................................................. 52, 53, 54, 55
Cape Ann Investors, LLC v. Lepone,
296 F. Supp. 2d 4 (D. Mass. 2003) ......................................................................................... 28
Caplin v. Marine Midland Grace Trust Co. of N.Y.,
406 U.S. 416 (1972).................................................................................................. 2, 9, 11, 12
Carmona v. Spanish Broadcasting System,
2009 WL 890054 (S.D.N.Y. Mar. 30, 2009) .......................................................................... 50
Carran v. Morgan,
2007 WL 3520480 (S.D. Fla. Nov. 14, 2007)................................................................. 54 n.10
Cement and Concrete Workers Dist. Council Welfare Fund, Pension Fund, Legal
Services Fund and Annuity Fund v. Lollo,
148 F.3d 194 (2d Cir. 1998).................................................................................................... 55
Chemical Bank v. Ettinger,
196 A.D.2d 711 (1st Dep’t 1993) ........................................................................................... 58
Chemtex, LLC v. St. Anthony Enter.,
490 F. Supp. 2d 536 (S.D.N.Y. 2007)..................................................................................... 32
Citadel Mgmt. v. Telesis Trust,
123 F. Supp. 133 (S.D.N.Y. 2000).......................................................................................... 49
City of New York v. Cyco.Net, Inc.,
383 F. Supp. 2d 526 (S.D.N.Y. 2005)..................................................................................... 55
Clark-Fitzpatrick, Inc. v. Long Island R.R.,
70 N.Y.2d 382 (1987) ........................................................................................................ 50-51
Clarkson Co. v. Shaheen,
533 F. Supp. 905 (S.D.N.Y. 1982).......................................................................................... 58
Colavito v. N.Y. Organ Donor Network,
8 N.Y.3d 43 (2006) ................................................................................................................. 48
Czech Beer Importers, Inc. v. C. Haven Imports, LLC,
2005 WL 1490097 (S.D.N.Y. June 23, 2005) ........................................................................ 50
Daly v. Deptula (In re Carrozzella & Richardson),
286 B.R. 480 (D. Conn. 2002) ................................................................................................ 66
Edwards & Hanly v. Wells Fargo Secs. Clearance Corp.,
602 F.2d 478 (2d Cir. 1979).................................................................................................... 46
Fenton v. Ives,
222 A.D.2d 776 (3d Dep’t 1995) ............................................................................................ 58
Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., LLC,
479 F. Supp. 2d 349 (S.D.N.Y. 2007)............................................................................... 35 n.6
Case 1:11-cv-00913-CM Document 33 Filed 06/03/11 Page 5 of 77
v
Giddens v. D.H. Blair & Co., Inc. (In re A.R. Baron & Co., Inc.),
280 B.R. 794 (Bankr. S.D.N.Y. 2002).................................................................................... 21
HBE Leasing Corp. v. Frank,
48 F.3d 623 (2d Cir. 1995)...................................................................................................... 63
Henry v. Lehman Commercial Paper Inc. (In re First Alliance Mortg. Co.),
471 F.3d 977 (9th Cir. 2006) .................................................................................................. 60
Hirsch v. Arthur Andersen & Co.,
72 F.3d 1085 (2d Cir. 1995)........................................................................................ 10, 15, 16
Holmes v. SIPC,
503 U.S. 258 (1992).................................................................................................... 18, 19 n.4
Holyoke Nursing Home, Inc. v. Health Care Fin. Admin. (In re Holyoke Nursing Home),
273 B.R. 305 (Bankr. D. Mass. 2002) ............................................................................... 58-59
In re Agape Litig.,
681 F. Supp. 2d 352 (E.D.N.Y. 2010) ............................................................................... 43-44
In re Agape Litig.,
2011 WL 1136173 (E.D.N.Y. Mar. 29, 2011)................................................................. passim
In re All-Type Printing, Inc.,
274 B.R. 316 (Bankr. D. Conn. 2002),
aff’d, 80 F. App’x 700 (2d Cir. 2003)..................................................................................... 64
In re Am. Remanufacturers, Inc.,
2008 WL 2909871 (Bankr. D. Del. July 25, 2008) ................................................................ 58
In re Amaranth Natural Gas Commodities Litig.,
612 F. Supp. 2d 376 (S.D.N.Y. 2009)..................................................................................... 44
In re AOL Time Warner, Inc. Sec. Litig.,
503 F. Supp. 2d 666 (S.D.N.Y. 2007)..................................................................................... 26
In re Beacon Assocs. Litig.,
745 F. Supp. 2d 386 (S.D.N.Y. 2010)............................................................................... 25, 46
In re Bennett Funding Grp.,
146 F.3d 136 (2d Cir. 1998)............................................................................................... 57-58
In re CBGB Holdings, LLC,
439 B.R. 551 (Bankr. S.D.N.Y. 2010)............................................................................ 62 n.14
In re ICN/Viratek Sec. Litig.,
1996 WL 164732 (S.D.N.Y. Apr. 9, 1996)............................................................................. 47
In re J.P. Jeanneret Assocs., Inc.,
2011 WL 335594 (S.D.N.Y. Jan. 31, 2011) ............................................................................25
In re National Century Financial Enterprises, Inc.,
2011 WL 1397813 (S.D. Ohio Apr. 12, 2011) ....................................................................... 60
In re Oppenheimer Funds Fees Litig.,
419 F. Supp. 2d 593 (S.D.N.Y. 2006)..................................................................................... 25
Case 1:11-cv-00913-CM Document 33 Filed 06/03/11 Page 6 of 77
vi
In re Tremont Sec. Law, State Law & Ins. Litig.,
703 F. Supp. 2d 362 (S.D.N.Y. 2010)..................................................................................... 40
In re Unified Commercial Capital,
2002 WL 32500567 (W.D.N.Y. June 21, 2002)..................................................................... 66
Jana Master Fund v. JPMorgan Chase & Co.,
2008 WL 746540 (Sup. Ct. N.Y. Co. Mar. 12, 2008)............................................................. 47
Jet Star Enters., Ltd. v. Soros,
2006 WL 2270375 (S.D.N.Y. Aug. 9, 2006).......................................................................... 50
Jordan (Bermuda) Inv. v. Hunter Green Inv.,
566 F. Supp. 2d 295 (S.D.N.Y. 2008)............................................................................... 30, 45
Kagan v. K-Tel Entm’t, Inc.,
172 A.D.2d 375 (1st Dep’t 1991) ........................................................................................... 51
Kalnit v. Eichler,
264 F.3d 131 (2d Cir. 2001).................................................................................................... 45
Kaufman v. Cohen,
307 A.D.2d 113 (1st Dep’t 2003) ............................................................................... 30, 32, 44
Kingdom 5-KR-41 v. Star Cruises PLC,
2004 WL 444554 (S.D.N.Y. Mar. 10, 2004) .......................................................................... 24
Kirschner v. Grant Thornton LLP,
2009 WL 1286326 (S.D.N.Y. Apr. 14, 2009), aff’d, 626 F.3d 673 (2d Cir. 2010) ................ 10
Kirschner v. KPMG, LLP,
15 N.Y.3d 446 (2010) ............................................................................................................. 10
Kolbeck v. LIT America,
939 F. Supp. 240 (S.D.N.Y. 1996)......................................................................... 31, 32, 44-45
LaBarbera v. Clestra Hauserman, Inc.,
369 F.3d 224 (2d Cir. 2004).............................................................................................. 14 n.2
Lama Holding Co. v. Smith Barney, Inc.,
88 N.Y.2d 413 (1996) ............................................................................................................. 55
Lander v. Hartford Life & Ann. Ins.,
251 F.3d 101 (2d Cir. 2001).................................................................................................... 23
LaSala v. Bordier et Cie,
519 F.3d 121 (3d Cir. 2008)........................................................................................ 26, 27, 28
Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.),
78 F.3d 30 (2d Cir. 1996) ....................................................................................................... 63
Lee v. Bankers Trust Co.,
166 F.3d 540 (2d Cir. 1999).................................................................................................... 42
Lerner v. Fleet Bank, N.A.,
459 F.3d 273 (2d Cir. 2006).............................................................................................. 30, 31
Case 1:11-cv-00913-CM Document 33 Filed 06/03/11 Page 7 of 77
vii
Levinson v. PSCC Servs.,
2009 WL 5184363 (D. Conn. Dec. 23, 2009)......................................................................... 25
Leykin v. AT&T Corp.,
216 F. App’x 14 (2d Cir. 2007) .............................................................................................. 25
Lippe v. Bairnco Corp.,
249 F. Supp. 2d 357 (S.D.N.Y. 2003), aff’d, 99 F. App’x 274 (2d Cir. 2004)....................... 59
Mandarin Trading Ltd. v. Wildenstein,
16 N.Y.3d 173 (2011) ............................................................................................................. 50
Martin v. Briggs,
235 A.D.2d 192 (1st Dep’t 1997) ........................................................................................... 17
Melamed v. Lake County Nat’l Bank,
727 F.2d 1399 (6th Cir. 1984) ................................................................................................ 60
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit,
547 U.S. 71 (2006)....................................................................................................... 22-23, 24
Miller v. Forge Mench P’ship Ltd.,
2005 WL 267551 (S.D.N.Y. Feb. 2, 2005)............................................................................. 60
Mishkin v. Peat, Marwick, Mitchell & Co.,
744 F. Supp. 531 (S.D.N.Y. 1990)................................................................................... passim
MLSMK Inv. Co. v. JP Morgan Chase & Co.,
737 F. Supp. 2d 137 (S.D.N.Y. 2010)............................................................................... 33, 42
Newdow v. Rio Linda Union Sch. Dist.,
597 F.3d 1007 (9th Cir. 2010) ................................................................................................ 14
Newfield v. Ettlinger,
194 N.Y.S.2d 670 (N.Y. Sup. Ct. 1959) ................................................................................. 59
Nigerian Nat’l Petroleum Corp. v. Citibank, N.A.,
1999 WL 558141 (S.D.N.Y. July 30, 1999) ..................................................................... 30, 43
O’Brien v. Nat’l Property Analysts Partners,
936 F.2d 674 (2d Cir. 1991).................................................................................................... 31
Parks v. ABC, Inc.,
2008 WL 205205 (S.D.N.Y. Jan. 24, 2008) ........................................................................... 49
Pereira v. Dow Chem. Co. (In re Trace Int’l Holdings, Inc.),
301 B.R. 801 (Bankr. S.D.N.Y. 2003), vacated on other grounds, 2009 WL 1810112
(S.D.N.Y. June 25, 2009)........................................................................................................ 63
Picard v. JPMorgan Chase & Co.,
2011 WL 2119720 (S.D.N.Y. May 23, 2011) .......................................................................... 7
Picard v. Taylor (In re Park South Securities, LLC),
326 B.R. 505 (Bankr. S.D.N.Y. 2005).................................................................................... 20
Piccoli A/S v. Calvin Klein Jeanswear Co.,
19 F. Supp. 2d 157 (S.D.N.Y. 1998)....................................................................................... 51
Case 1:11-cv-00913-CM Document 33 Filed 06/03/11 Page 8 of 77
viii
Pivar v. Graduate Sch. of Figurative Art of the N.Y. Acad. of Art,
290 A.D.2d 212 (1st Dep’t 2002) ........................................................................................... 17
Reading Int’l v. Oaktree Capital Mgmt.,
317 F. Supp. 2d 301 (S.D.N.Y. 2003)..................................................................................... 50
Redington v. Touche Ross & Co.,
592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560 (1979) ............................................... passim
Renner v. Chase Manhattan Bank,
2000 WL 781081 (S.D.N.Y. June 16, 2000) .............................................................. 39, 41, 44
RGH Liquidating Trust v. Deloitte & Touche,
71 A.D.3d 198 (1st Dep’t 2009) ....................................................................................... 28, 29
Richardson v. Huntington Nat’l Bank (In re CyberCo Holdings, Inc.),
382 B.R. 118 (Bankr. W.D. Mich. 2008).......................................................................... 60, 61
Riley v. Cordis Corp.,
625 F. Supp. 2d 769 (D. Minn. 2009)..................................................................................... 54
Romano v. Kazacos,
609 F.3d 512 (2d Cir. 2010).................................................................................................... 23
Rosner v. Bank of China,
528 F. Supp. 2d 419 (S.D.N.Y. 2007)..................................................................................... 45
Rosner v. Bank of China,
2008 WL 5416380 (S.D.N.Y. Dec. 18, 2008),
aff’d, 349 F. App’x 637 (2d Cir. 2009).................................................31, 33-34, 37, 39-40, 43
Ryan v. Hunton & Williams,
2000 WL 1375265 (E.D.N.Y. Sept. 20, 2000) ................................................................. 38, 44
Saltz v. First Frontier LP,
2010 WL 5298225 (S.D.N.Y. Dec. 23, 2010) ........................................................................ 40
Schmidt v. Fleet Bank,
1998 WL 47827 (S.D.N.Y. Feb. 4, 1998)............................................................................... 30
Schwartz v. Capital Liquidators, Inc.,
984 F.2d 53 (2d Cir. 1993)...................................................................................................... 49
Seaboard Sand & Gravel Corp. v. Moran Towing Corp.,
154 F.2d 399 (2d Cir. 1946).................................................................................................... 17
SEC v. Cohmad Sec. Corp.,
2010 WL 363844 (S.D.N.Y. Feb. 2, 2010)............................................................................. 40
Sharp Int’l Corp. v. State St. Bank & Trust Co. (In re Sharp Int’l Corp.),
403 F.3d 43 (2d Cir. 2005).............................................................................. 30, 44, 63, 64, 65
Shearson Lehman Hutton, Inc. v. Wagoner,
944 F.2d 114 (2d Cir. 1991)............................................................................................. passim
SIPC v. BDO Seidman, LLP,
49 F. Supp. 2d 644 (S.D.N.Y. 1999)............................................................... 11, 15 n.3, 19, 20
Case 1:11-cv-00913-CM Document 33 Filed 06/03/11 Page 9 of 77
ix
SIPC v. BDO Seidman, LLP,
222 F.3d 63 (2d Cir. 2000)................................................................................................ 47, 52
Swan Brewery Co. v. U.S. Trust Co.,
832 F. Supp. 714 (S.D.N.Y. 1993).......................................................................................... 58
Timberlake v. Synthes Spine, Inc.,
2011 WL 711075 (S.D. Tex. Feb. 18, 2011) .......................................................................... 54
Wells v. Bank of New York,
181 Misc. 2d 574 (N.Y. Sup. Ct. N.Y. Co. 1999)................................................................... 48
Williams v. Bank Leumi Trust Co.,
1997 WL 289865 (S.D.N.Y. May 30, 1997) .................................................................... 32, 37
Williams v. Dow Chem. Co.,
255 F. Supp. 2d 219 (S.D.N.Y. 2003)..................................................................................... 53
Statutes and Rules
11 U.S.C. § 101(54) ...................................................................................................................... 58
11 U.S.C. § 544(b) ................................................................................................................. passim
11 U.S.C. § 547(b) .................................................................................... 57, 61 & n.13, 62 & n.14
11 U.S.C. § 548(a) ................................................................................................................. passim
11 U.S.C. § 548(d) ........................................................................................................................ 64
12 C.F.R. § 21.11 .............................................................................................................. 53, 54, 55
12 C.F.R. § 225.4(f) ...................................................................................................................... 53
12 U.S.C. § 93............................................................................................................................... 53
12 U.S.C. § 161............................................................................................................................. 53
12 U.S.C. § 164(d) .................................................................................................................. 53, 54
12 U.S.C. § 325............................................................................................................................. 53
12 U.S.C. § 481............................................................................................................................. 53
12 U.S.C. § 483............................................................................................................................. 53
12 U.S.C. § 1818........................................................................................................................... 53
12 U.S.C. § 1844(a) ...................................................................................................................... 53
12 U.S.C. § 1847..................................................................................................................... 53, 54
15 U.S.C. § 77p(b) .................................................................................................................. 23, 25
15 U.S.C. § 77p(f)(2)(A)............................................................................................................... 26
15 U.S.C. § 77p(f)(2)(C)......................................................................................................... 27, 28
15 U.S.C. § 78o............................................................................................................................. 53
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15 U.S.C. § 78u-2 ................................................................................................................... 53, 54
15 U.S.C. § 78bb(f)(1) ............................................................................................................ 23, 25
15 U.S.C. § 78bb(f)(5)(B)............................................................................................................. 26
15 U.S.C. § 78bb(f)(5)(D)....................................................................................................... 27, 28
15 U.S.C. § 78eee(b)(3) ................................................................................................................ 11
15 U.S.C. § 78fff..................................................................................................................... 20, 21
15 U.S.C. § 78fff(a)(1)(B) ............................................................................................................ 21
15 U.S.C. § 78fff(a)(3).................................................................................................................. 18
15 U.S.C. § 78fff-1 ................................................................................................................. 11, 12
15 U.S.C. § 78fff-1(a) ................................................................................................................... 12
15 U.S.C. § 78fff-1(d)................................................................................................................... 12
15 U.S.C. § 78fff-2(b)............................................................................................................. 20, 21
15 U.S.C. § 78fff-3(a) ....................................................................................................... 17, 18, 19
31 U.S.C. § 5318(g)(3) ................................................................................................................. 41
N.Y. Debt. & Cred. Law § 272 ................................................................................................ 64-65
N.Y. Debt. & Cred. Law § 273 ..................................................................................................... 64
N.Y. Debt. & Cred. Law § 274 ......................................................................................................64
N.Y. Debt. & Cred. Law § 275 ......................................................................................................64
N.Y. Debt. & Cred. Law § 276 ......................................................................................................65
Other Authorities
1 G. Glenn, Fraudulent Conveyances and Preferences (rev. ed. 1940) ....................................... 63
5 Collier on Bankruptcy ¶ 553.09 (16th ed. 2009) ...................................................................... 58
9 N.Y. Jur. 2d (Banks) § 303 ........................................................................................................ 57
H.R. Rep. No. 95-595 (1977)........................................................................................................ 58
S. Rep. No. 105-182 (1998) .......................................................................................................... 26
Case 1:11-cv-00913-CM Document 33 Filed 06/03/11 Page 11 of 77
JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities
LLC and J.P. Morgan Securities Ltd. (together, “JPMorgan”) respectfully submit this brief in
support of their motion to dismiss all of the common law claims (causes of action 17 through 21)
and certain of the bankruptcy claims (causes of action 1 through 8) in the Complaint filed by the
Trustee for the liquidation of Bernard L. Madoff Investment Securities (“BMIS”).
PRELIMINARY STATEMENT
As the appointed successor to Madoff’s disgraced brokerage firm, the Trustee has
no authority under the Securities Investor Protection Act to bring common law damages claims
against JPMorgan on behalf of Madoff’s customers. Nor does the Trustee have authority to
circumvent the Securities Litigation Uniform Standards Act, which expressly bars the
aggregation of more than 50 state law securities claims in a single action. Yet that is precisely
what the Trustee is trying to do here. The core of this lawsuit ― causes of action 17-21 ―
involves an illegitimate attempt by the Trustee to usurp and assert thousands of common law
securities claims that belong not to BMIS but exclusively to its customers. The Trustee has
overstepped the limits of his power. Causes of action 17-21 should be dismissed for lack of
standing and for violating SLUSA.
These common law claims should also be dismissed on the merits. At the outset
of the Complaint, the Trustee announces ominously that there is a “myth” that Madoff “acted
alone” and that he will tell the “true story” of how JPMorgan was “at the very center of” and
“thoroughly complicit in” Madoff’s crimes. But the Trustee never delivers. He repeatedly
couches his allegations in terms of what JPMorgan “could have,” “should have,” and “would
have” known had it acted differently. But the Complaint never alleges facts showing that anyone
at JPMorgan knew that Madoff was a crook. Nor does the Trustee substantiate his utterly
Case 1:11-cv-00913-CM Document 33 Filed 06/03/11 Page 12 of 77
2
implausible theory that JPMorgan collaborated with Madoff in operating a Ponzi scheme,
supposedly to earn routine banking fees from BMIS.
Point I below will show that the Trustee has no standing under SIPA to bring
customer damages claims. Under bedrock Second Circuit law, which itself is based on long-
settled case law from the United States Supreme Court, a bankruptcy trustee “has no standing
generally to sue third parties on behalf of the estate’s creditors, but may only assert claims held
by the bankrupt corporation itself.” Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114,
118 (2d Cir. 1991) (citing Caplin v. Marine Midland Grace Trust Co. of N.Y., 406 U.S. 416, 434
(1972)). In addition, a claim against third parties for participating in a failed corporation’s fraud
“accrues to creditors, not to the guilty corporation.” Wagoner, 944 F.2d at 120. As the successor
to BMIS, the Trustee is thus unequivocally barred from bringing customer claims against
JPMorgan to redress the harm caused by BMIS’s fraud. Id.
To escape the consequences of these settled principles, the Trustee argues that he
has “broader powers” than an ordinary bankruptcy trustee and that SIPA permits him to pursue
claims against third parties as a “bailee” of customer property and as a “subrogee” or “assignee”
of customer claims. SIPA, however, does no such thing: although it carefully delineates the
powers that a SIPA trustee may exercise, the statute never authorizes a SIPA trustee to assert
claims against third parties on behalf of a broker’s customers.
Lacking support in the text of the statute, the Trustee relies on Redington v.
Touche Ross & Co., 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560 (1979), in which the
Second Circuit: (1) held that a broker-dealer’s customers had an implied private right of action
under section 17(a) of the Securities Exchange Act; and (2) found that a SIPA trustee as a
“bailee,” and SIPC as a “subrogee,” had standing to assert this implied cause of action. But the
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Supreme Court reversed the Second Circuit’s decision implying a private right of action, thereby
concluding that the lower court erred in reaching the question of standing. As Judge Pollack has
recognized, the Supreme Court’s decision “wiped out everything that had occurred up to that
time,” with the result that Redington “does not stand as the law of this circuit.” Moreover, even
if Redington were still good law, it is not applicable here: the Trustee’s standing theories fail on
other grounds, including that a thief like BMIS (or its successor) is not a bailee and cannot sue to
recover property that it stole.
Point II will show that the Court can dismiss causes of action 17-21 without
reaching the flawed theories of customer standing put forward by the Trustee, because even if the
Trustee has standing to bring state-law claims belonging to Madoff’s customers, SLUSA bars the
aggregation and assertion of those claims in this action. SLUSA has its genesis in another
federal statute, the Private Securities Litigation Reform Act of 1995, in which Congress
promulgated a comprehensive regime imposing procedural and substantive limitations on the
filing of federal claims alleging securities fraud. Congress enacted SLUSA to prevent plaintiffs
from evading that regime by filing state law securities fraud class actions. SLUSA requires
dismissal of “covered class actions” based on state law that allege securities fraud.
This action falls squarely within SLUSA’s definition of a “covered class action.”
That definition encompasses not only lawsuits explicitly styled as class actions but also any other
action that aggregates more than 50 individual claims. Here, in purporting to bring customer
claims as a “bailee,” the Trustee’s Complaint explicitly alleges that he is suing “on behalf of”
customers, the exact language of SLUSA’s statutory definition. Likewise, in purporting to bring
claims as an assignee or a subrogee of Madoff’s customers, the Trustee is again aggregating
claims belonging to more than 50 injured parties, precisely the activity that SLUSA prevents. In
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sum, the very devices that the Trustee has used in seeking to assert standing under Redington
have put this action in direct conflict with SLUSA.
Point III will show that the Complaint fails to state a claim for aiding and abetting
either Madoff’s fraud or breach of fiduciary duty. To bring those claims, the Trustee must plead
particularized facts raising a “strong inference” that JPMorgan had “actual knowledge” of
Madoff’s crimes. Suspicions of wrongdoing are not enough to hold a secondary defendant liable
to third parties for someone else’s fraud. The allegations concerning the activity in BMIS’s bank
account at JPMorgan do not support an aiding and abetting claim for the simple reason that the
Complaint never alleges facts showing that anyone at JPMorgan ever even suspected fraud based
on that activity. The allegations concerning JPMorgan’s investments in Madoff feeder funds are
also insufficient. The Complaint’s allegations that JPMorgan conducted multiple rounds of due
diligence relating to those investments and yet failed to discover Madoff’s fraud refute the
conclusory assertion that JPMorgan had “actual knowledge” of that fraud. For these and other
reasons, the Complaint fails to state claims for aiding and abetting.
Point IV will show that the Complaint fails to state claims for conversion and
unjust enrichment. Under New York law, a customer of a broker has no possible conversion
claim against a bank for funds stolen by the broker and deposited in the broker’s bank account.
Moreover, a plaintiff cannot pursue a claim for unjust enrichment in the absence of any
relationship with the defendant; here, Madoff’s customers did not have a relationship with
JPMorgan in connection with their investments in BMIS.
Point V will show that the Trustee’s “fraud on the regulator” claim is defective for
multiple reasons. The Trustee relies on New York state law to claim that JPMorgan deceived its
federal regulators by not telling them that Madoff was running a Ponzi scheme. This claim fails
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because (1) New York does not recognize a claim for fraud on a federal regulator; (2) even if it
did, such a claim is preempted by federal law; and (3) in any event, the Trustee has failed to
plead the elements of a fraud claim against JPMorgan.
Finally, Point VI will show that the Trustee’s bankruptcy claims to recover
payments made directly from BMIS to JPMorgan — including the repayment of a $145 million
loan and the payment of fees to JPMorgan — fail as a matter of law. The Complaint alleges that
JPMorgan debited BMIS’s account to satisfy BMIS’s debts to JPMorgan. Under settled law, a
debit from a bank account to satisfy a debt to the bank is a setoff, not a transfer that is capable of
avoidance. Moreover, even if it were a transfer, the repayment of a secured debt — such as
BMIS’s obligations to JPMorgan — is not avoidable either as a fraudulent transfer or a
preference, because such a repayment does not diminish the pool of assets that would otherwise
be available to unsecured creditors. In any event, the repayment of any antecedent debt cannot
be recovered as a fraudulent transfer absent insider dealing or knowing participation in fraud by
the defendant, which the Trustee has failed to plead. For all these reasons, the Trustee’s first
eight causes of action — which seek to recover loan repayments and fees paid directly to
JPMorgan within six years of BMIS’s bankruptcy — should be dismissed.
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BACKGROUND1
On December 11, 2008, the FBI arrested Bernard Madoff, and the U.S. Attorney
for the Southern District of New York charged him with conducting a multi-billion-dollar
securities fraud. Compl. ¶ 48. Days later, SIPC filed an application in this Court seeking to
commence a liquidation proceeding for BMIS. Id. ¶ 49. Judge Stanton granted SIPC’s
application and appointed Irving H. Picard as the Trustee for the liquidation of BMIS. Id. ¶ 50.
On March 12, 2009, Madoff pleaded guilty to federal securities fraud and
admitted that he operated a Ponzi scheme through BMIS. Id. ¶ 52. On June 29, this Court
sentenced Madoff to 150 years in prison. Id. ¶ 52. Madoff was BMIS’s Founder, Chairman,
Chief Executive Officer and sole owner. Id. ¶ 32.
A. JPMorgan’s contacts with Madoff
JPMorgan Chase is one of the largest banking institutions in the world with
approximately $2 trillion in assets. Compl. ¶ 18. BMIS had a bank account at JPMorgan and at
a series of predecessor banks since 1986. Id. ¶ 178. During that period, BMIS deposited
customer investments into its so-called “703 Account” at JPMorgan and transferred money out
of that account from time to time. Id. ¶¶ 2, 173.
JPMorgan made relatively small, fully secured loans to BMIS and received fees
for providing commercial banking services. In 2005 and 2006, JPMorgan made secured loans to
BMIS of $145 million, which were repaid by BMIS. Id. ¶¶ 257-66 & Ex. A. During the six-year
1 The facts recited are drawn from the Complaint and documents subject to judicial notice.
Allegations in the Complaint are accepted as true only for purposes of this motion. References
to the “Decl.” are to the accompanying Declaration of Emil A. Kleinhaus.
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period prior to Madoff’s bankruptcy, JPMorgan received approximately $597,000 in fee
payments from BMIS for banking services. See id. ¶ 277 & Ex. A.
In addition, in 2006, J.P. Morgan Securities Ltd., a UK affiliate of JPMorgan
Chase Bank, invested approximately $338 million in four Madoff “feeder funds,” i.e., third-party
investment funds that invested their assets with BMIS. These investments served as hedges for
certain financial products that were tied to the feeder funds’ returns. See, e.g., id. ¶¶ 109, 123.
After JPMorgan acquired Bear Stearns, JPMorgan conducted an across-the-board
review of its exposure to hedge funds. Id. ¶ 122. That review resulted in the bank making
significant redemptions from numerous hedge funds, including redemptions of approximately
$276 million from three Madoff feeder funds — Fairfield Sentry Ltd., Fairfield Sigma Ltd. and
Herald Fund s.p.c. Id. ¶ 169 & Ex. E.
B. The Trustee’s lawsuit against JPMorgan
On December 2, 2010, the Trustee commenced this action. Last month, this
Court granted JPMorgan’s motion to withdraw the reference of this proceeding from the
Bankruptcy Court. Picard v. JPMorgan Chase & Co., 2011 WL 2119720 (S.D.N.Y. May 23,
2011).
The first 16 causes of action in the Complaint are “clawback” claims aimed at
recovering payments made to JPMorgan before Madoff’s fraud was revealed. Compl. ¶¶ 292-
429 (Claims 1-16). The challenged payments fall into two categories: First, the Complaint seeks
to recover direct payments by BMIS to JPMorgan, including $145 million in loan repayments,
$3.48 million in interest payments on those loans, as well as $597,000 in banking fees. See id. ¶¶
292-347 & Ex. A (Claims 1-8). Second, the Complaint seeks to recover the approximately $276
million in redemptions made by JPMorgan from Fairfield Sentry, Fairfield Sigma and Herald
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Fund, alleging that those redemptions paid by the feeder funds indirectly came from BMIS. Id.
¶¶ 348-429 & Ex. E (Claims 9-16).
The Trustee’s clawback claims pale in comparison to the Trustee’s common law
claims, as to which the Trustee seeks to recover approximately $6 billion. See id. ¶¶ 430-82
(Claims 17-21). Based on state law theories of aiding and abetting fraud and breach of fiduciary
duty, as well as a theory of “fraud on the regulator,” the Trustee asserts that JPMorgan is liable
for at least $5.4 billion, apparently the amount that Madoff’s customers allegedly lost between
December 2004 and December 2008. Id. ¶¶ 443, 458, 482. In addition, based on theories of
conversion and unjust enrichment, the Trustee claims that Madoff’s customers are entitled to all
the amounts that JPMorgan earned, directly or indirectly, from Madoff’s account, which the
Trustee estimates (without any factual support) to be $500 million. Id. ¶¶ 468, 471-72, 465.
Recognizing that the losses he is seeking to recover were suffered by customers of
BMIS as opposed to BMIS itself, the Trustee has explicitly brought this lawsuit as a
representative of BMIS’s former customers and is purporting to assert their claims. The Trustee
alleges that he is suing “as bailee . . . on behalf of the customer-bailors,” that SIPC is a “subrogee
of claims paid, and to be paid, to customers” by SIPC, and that he is an “assignee” of “certain
claims” that customers “could have asserted” and “stands in the shoes of persons who have
suffered injury-in-fact.” Id. ¶¶ 17(f)-(i) (emphasis added).
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ARGUMENT
POINT I
THE TRUSTEE LACKS STANDING TO BRING
COMMON LAW CLAIMS AGAINST JPMORGAN.
Causes of action 17-21 assert common law damages claims belonging to BMIS’s
customers, none of whom are parties to this proceeding. As shown below, the Trustee lacks
standing to assert any of these customer claims. Each of the Trustee’s common law claims
should be dismissed for lack of standing.
A. Under Caplin and Wagoner, the Trustee lacks standing
to bring common law claims against JPMorgan.
In Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991), the
Second Circuit set forth a two-pronged doctrine to govern the standing of a bankruptcy trustee.
The first prong of Wagoner reaffirms the well-settled rule, established by the Supreme Court in
the Caplin case, that a bankruptcy trustee “has no standing generally to sue third parties on
behalf of the estate’s creditors, but may only assert claims held by the bankrupt corporation
itself.” Wagoner, 944 F.2d at 118 (citing Caplin v. Marine Midland Grace Trust Co. of N.Y.,
406 U.S. 416, 434 (1972) (holding that a bankruptcy trustee lacked standing to assert claims on
behalf of the holders of debentures issued by the debtor corporation)).
In Caplin, the Supreme Court declared that creditors “are capable of deciding for
themselves whether or not it is worthwhile to seek to recoup whatever losses they may have
suffered by an action against” third parties. Caplin, 406 U.S. at 431. Permitting a bankruptcy
trustee to aggregate and assert creditors’ claims, the Court reasoned, would (1) deprive creditors
of the opportunity to “make their own assessment of the respective advantages and
disadvantages” of litigation; (2) create the risk that “a suit by [the trustee] on behalf of [creditors]
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may be inconsistent with any independent actions” creditors might bring; and (3) raise questions
as to who would be “bound by any settlement.” Id. at 431-32. Thus, under Caplin and Wagoner,
“the trustee stands in the shoes of the debtors, and can only maintain those actions that the
debtors could have brought prior to the bankruptcy proceedings.” Hirsch v. Arthur Andersen &
Co., 72 F.3d 1085, 1093 (2d Cir. 1995).
Under the second prong of Wagoner, now known as the Wagoner rule, a claim
against a third party for defrauding a failed corporation with the cooperation of the corporation’s
own management “accrues to creditors, not to the guilty corporation.” Wagoner, 944 F.2d at
120 (emphasis added). Accordingly, “when a bankrupt corporation has joined with a third party
in defrauding its creditors, the trustee cannot recover against the third party for the damage to the
creditors.” Id. at 118; see also Kirschner v. Grant Thornton LLP, 2009 WL 1286326, at *10
(S.D.N.Y. Apr. 14, 2009), aff’d, 626 F.3d 673 (2d Cir. 2010) (dismissing trustee’s claims against
third parties where debtor “participated in, and benefitted from, the very wrong for which it
seeks to recover”).
The Wagoner rule is rooted in the doctrine of in pari delicto. See Kirschner v.
KPMG, LLP, 15 N.Y.3d 446 (2010) (confirming New York’s adherence to the principles of in
pari delicto that underlie the Wagoner rule). The Wagoner rule “derives from the fundamental
principle of agency that the misconduct of managers within the scope of their employment will
normally be imputed to the corporation.” Kirschner, 2009 WL 1286326, at *5 (quotation marks
omitted). “[B]ecause a trustee stands in the shoes of the corporation, the Wagoner rule bars a
trustee from suing to recover for a wrong that he himself essentially took part in.” Id. (quotation
marks omitted).
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In this case, the Complaint repeatedly alleges that the losses at issue were suffered
by Madoff’s customers, not BMIS itself. Compl. ¶¶ 443, 458, 468, 471, 481. Moreover, the
Complaint acknowledges, as it must, that BMIS was engaged in Madoff’s massive fraud. As the
Trustee alleges: “BLMIS was a fraud,” and it “perpetrat[ed] a massive Ponzi scheme.” Id.
¶¶ 440, 445. Accordingly, under Caplin and Wagoner, the Trustee lacks standing to bring
common law claims against JPMorgan, either on behalf of BMIS or its customers.
B. SIPA does not grant the Trustee standing to bring
common law claims on behalf of BMIS’s customers.
Despite Caplin and Wagoner, the Trustee asserts that, as a SIPA trustee, he has
“broader powers” than an ordinary bankruptcy trustee to bring claims against third parties.
Compl. ¶ 16. The Trustee alleges that under SIPA, he has standing to sue JPMorgan as a bailee
of customer property, as a subrogee of customer claims paid by SIPC, and as an assignee of
customer claims. Id. ¶¶ 17(f)-(i).
But SIPA does not provide the Trustee with any of these powers. SIPA is a
comprehensive statutory scheme that created “a new form of liquidation proceeding” for
brokerage firms, which was “designed to accomplish the completion of open transactions and the
speedy return of most customer property.” SIPC v. BDO Seidman, LLP, 49 F. Supp. 2d 644, 649
(S.D.N.Y. 1999) (quotation marks omitted). The Trustee is a creature of this statute: his
authority is created by and limited to the specific powers that the legislation conferred on him.
See 15 U.S.C. § 78eee(b)(3) (providing for appointment of a SIPA trustee); 15 U.S.C. § 78fff-1
(setting forth “Powers and duties of a [SIPA] trustee”).
Although Congress could easily have authorized a SIPA trustee to assert the rights
of brokerage customers against third parties, not a word in the statute does so. Instead, in the
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section of SIPA entitled “Powers and duties of a Trustee,” 15 U.S.C. § 78fff-1, the statute
provides that a trustee “shall be vested with the same powers and title with respect to the debtor
and the property of the debtor . . . as a trustee in a case under title 11,” including the power to
bring avoidance claims. Id. at § 78fff-1(a). In the same section, the statute also authorizes the
trustee to perform three additional tasks: to hire and fix the compensation of the broker’s
personnel, to utilize SIPC employees in the liquidation, and to maintain customer accounts. Id.
In contrast, there is nothing in this section or elsewhere in SIPA that states or
suggests that a SIPA trustee can assert damages claims on behalf of customers, or that the rules
set forth in Caplin and Wagoner do not apply in SIPA proceedings. To the contrary, the
language and structure of the statute are inconsistent with any notion that a SIPA trustee can
assert customer claims against third parties. The statute’s grant to the trustee of specified
“powers” speaks only in terms of “the debtor and the property of the debtor,” not customers or
the property of customers. Id. Likewise, the “Investigations” mandated of a trustee include
reporting to the court “any causes of action available to the estate,” not to customers. Id. at §
78fff-1(d) (emphasis added).
C. The Trustee lacks standing to sue JPMorgan as a bailee.
As noted above, the Complaint alleges, without elaboration, that the Trustee is
entitled to bring claims “on behalf of the customer-bailors” as a “bailee” of customer property.
Compl. ¶ 17(f). But not a word in SIPA provides the Trustee with such authority; the terms
bailor, bailment, or bailee do not appear anywhere in the legislation. The Trustee, accordingly,
lacks authority to bring customer claims against JPMorgan as a “bailee.”
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1. Redington is not good law.
Without an express grant of authority in SIPA for his asserted standing on behalf
of customers as a “bailee” of customer property, the Trustee will no doubt rely on the Second
Circuit’s decision in Redington v. Touche Ross & Co., 592 F.2d 617 (2d Cir. 1978), rev’d, 442
U.S. 560 (1979), on remand, 612 F.2d 68 (2d Cir. 1979). Redington, however, is not good law.
Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 557-58 (S.D.N.Y. 1990).
In Redington, a SIPA trustee and SIPC brought suit against a broker’s accountant,
asserting claims on behalf of the broker’s customers for violations of section 17(a) of the
Securities Exchange Act and state law claims. The Second Circuit majority, over a vigorous
dissent by Judge Mulligan, reversed the district court, concluding that — although there was no
indication in section 17 or its legislative history that Congress intended to create a private
remedy — an implied right of action accorded with the general legislative purpose of protecting
customers. 592 F.2d at 622-23. The majority then pushed this analysis one step further. Again,
without any support in the language or legislative history of SIPA, the majority concluded that a
SIPA trustee and SIPC had implied third-party standing to assert the customers’ private cause of
action under section 17. The court rested this conclusion on nothing more than extra-statutory
common law principles of bailment and subrogation. Id. at 624-25.
The Supreme Court granted certiorari in Redington to address not only the issue
of whether there is an implied private right of action under section 17, but also the standing
issues presented by that case — and the case now before this Court. Decl. Ex. 1 (Brief for
Petitioner), at 2-3 (Questions Presented).
The Supreme Court reversed the Second Circuit’s decision, holding that there was
no implied private right of action to enforce section 17 and thus finding it “unnecessary to reach”
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the standing issues. 442 U.S. at 567 n.9, 579. By reversing the Second Circuit on the predicate
ruling creating an implied right of action under section 17, the Supreme Court effectively held
that the Second Circuit erred in reaching the issue of whether the SIPA trustee had implied
standing to bring this nonexistent claim. The Second Circuit’s ruling on the standing issue is
thus no longer good law. See Newdow v. Rio Linda Union Sch. Dist., 597 F.3d 1007, 1041 (9th
Cir. 2010) (“[W]hen the Supreme Court reverses a lower court’s decision on a threshold
question,” the Supreme Court “effectively holds the lower court erred by reaching” other issues,
and rulings on those issues are not precedential); Brecht v. Abrahamson, 944 F.2d 1363, 1370
(7th Cir. 1991) (where Supreme Court granted certiorari to resolve an issue but did not reach the
issue in reversing the decision, the Supreme Court’s reversal “deprived [appellate court’s]
opinion of authority” on that issue).2
While the Supreme Court in Redington did not need to reach the issues of
bailment or subrogation, its ruling leaves no doubt that the Second Circuit’s standing analysis
was defective. In refusing to recognize an implied private cause of action under section 17, the
Supreme Court held that “[t]he ultimate question is one of congressional intent, not one of
whether this Court thinks that it can improve upon the statutory scheme that Congress enacted.”
442 U.S. at 575, 578. The same error that led to the Second Circuit majority’s erroneous section
17 decision — namely, the implication of broad powers to pursue claims despite the absence of
2 The jurisdictional posture of Redington makes it especially clear that the Second Circuit’s
ruling on standing is not binding authority. Following the Supreme Court’s reversal, the Second
Circuit considered the trustee’s “alternative bases for jurisdiction” over the remaining claims and
found that, absent the section 17(a) claim, there were no grounds for federal subject matter
jurisdiction. 612 F.2d at 70-73. The reversal thus undermined any basis that the Second Circuit
had for exercising subject matter jurisdiction. See LaBarbera v. Clestra Hauserman, Inc., 369
F.3d 224, 226 n.2 (2d Cir. 2004) (decision reversed for lack of subject matter jurisdiction “is of
no precedential value”).
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statutory language or even legislative history — likewise infected the Second Circuit’s
conclusion that the trustee had standing to invoke that implied power to sue third parties. 592
F.2d at 624-25. Indeed, the Supreme Court’s decision in Redington sided with Judge Mulligan’s
dissent in the Second Circuit, in which Judge Mulligan characterized the majority’s ruling on
standing as “circumvent[ing] the intent of Congress” and its creation of a private right of action
as “judicial legislation.” Id. at 634-35.
As Judge Pollack subsequently recognized in Mishkin v. Peat, Marwick, as a
result of the Supreme Court’s reversal of the Second Circuit’s decision in Redington, that
decision “does not stand as the law of this circuit”; rather, the Supreme Court “wiped out
everything that . . . occurred up to that time, and sent the case back accordingly.” Decl. Ex. 2, at
32-33. In Mishkin, therefore, Judge Pollack was free to reject the decision of the Redington
majority, adopt the reasoning of the Redington dissent, and hold that “the liquidating trustee” in a
SIPA case “is not granted the power to bring fraud claims against third parties on behalf of
customers.” 744 F. Supp. 531, 558 (S.D.N.Y. 1990) (emphasis added).3
2. Wagoner and Hirsch control over Redington.
The Second Circuit’s decisions in Wagoner and Hirsch, both of which post-date
Redington, demonstrate that — even if Redington were good law — the Trustee may not sue as a
bailee in the circumstances presented in this case.
3 In BDO Seidman, despite believing (incorrectly) that the Second Circuit’s standing decision in
Redington remains binding, Judge Preska likewise concluded that the “well-reasoned” opinion in
Mishkin was “more persuasive” and “more faithful to the letter and purpose of” SIPA than
Redington and disagreed with Redington’s bailee theory. BDO Seidman, 49 F. Supp. 2d at 654.
On appeal, the Second Circuit determined that it had no need to revisit Redington, even if it were
justified in doing so, since the claims failed on other grounds. SIPC v. BDO Seidman, LLP, 222
F.3d 63, 69 (2d Cir. 2000).
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In Hirsch, the Second Circuit applied Wagoner to claims brought by a bankruptcy
trustee against third parties for alleged participation in the bankrupt debtors’ Ponzi scheme. The
court held that claims arising from fraud on the investors in the Ponzi scheme “are the property
of those investors, and may be asserted only by them and to the exclusion of [the trustee].”
Hirsch, 72 F.3d at 1094 (emphasis added); see also id. at 1093 (“when creditors . . . have a claim
for injury that is particularized as to them, they are exclusively entitled to pursue that claim, and
the bankruptcy trustee is precluded from doing so”). The court concluded further that the trustee
could not bring claims against the third parties on behalf of the debtors, since the debtors
participated in the Ponzi scheme. Id.; see also Breeden v. Kirkpatrick & Lockhart, LLP (In re
Bennett Funding Grp., Inc.), 268 B.R. 704, 714 n.8 (S.D.N.Y. 2001), aff’d, 336 F.3d 94 (2d Cir.
2003) (finding that “involvement of [the debtor’s] dominant management in the Ponzi scheme
defeats the trustee’s standing by operation of the Wagoner rule”).
The Second Circuit’s holdings in Wagoner and Hirsch prevent the Trustee from
asserting claims as a “bailee” of customer property. If BMIS’s customers are “bailors,” as the
Trustee alleges, then the entity to which they entrusted their property, BMIS, is the “bailee.”
And when the Trustee alleges that he is entitled to pursue customer claims as a “bailee,” he is
standing in the shoes of BMIS, an admitted Ponzi schemer. BMIS’s wrongdoing forecloses the
Trustee from asserting supposed rights as bailee to sue for damages arising from BMIS’s fraud.
To the extent that Redington held otherwise, it has been superseded by Wagoner and Hirsch.
3. A thief cannot be a bailee.
The Trustee’s bailee theory also fails, regardless of whether Redington is good
law, for the independent reason that a thief cannot be a bailee. Under New York law, a bailment
relationship can arise only if the bailee takes “lawful possession” of the relevant property
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“without present intent to appropriate” it. Pivar v. Graduate Sch. of Figurative Art of the N.Y.
Acad. of Art, 290 A.D.2d 212, 213 (1st Dep’t 2002) (quotation marks omitted); accord Seaboard
Sand & Gravel Corp. v. Moran Towing Corp., 154 F.2d 399, 402 (2d Cir. 1946); Martin v.
Briggs, 235 A.D.2d 192, 197 (1st Dep’t 1997).
Here, as alleged in the Complaint, customers of BMIS delivered possession of
their property to BMIS, not to the Trustee or to anyone else. Compl. ¶¶ 32-34. And as alleged in
the Complaint, BMIS and Madoff accepted customer property precisely in order to appropriate
(i.e., steal) it. E.g., Id. ¶¶ 37-44. Accordingly, the Trustee, as the successor to a thief, has no
possible standing to bring suit as a bailee.
D. The Trustee lacks standing to sue JPMorgan as a subrogee.
The Trustee alleges that SIPC has standing to assert customer claims against third
parties as a subrogee of claims satisfied by SIPC (which have been assigned to the Trustee).
Compl ¶ 17(i). But as in the case of bailment, no provision of SIPA subrogates either SIPC or
the Trustee to customer claims against third parties.
SIPA grants SIPC certain express, limited subrogation rights that do not include
the right to assert customer claims against third parties. As provided by section 78fff-3(a):
To the extent moneys are advanced by SIPC to the trustee to pay or
otherwise satisfy the claims of customers, in addition to all other rights
it may have at law or in equity, SIPC shall be subrogated to the claims
of such customers with the rights and priorities provided in this
chapter . . . .
Because “the claims of such customers” that SIPC pays constitute “net equity”
claims, which are defined in SIPA section 78lll(11) as claims against the debtor, it is well-settled
that this provision grants SIPC subrogation rights only with respect to customer claims against
the debtor’s estate. Indeed, even the Second Circuit in Redington interpreted the provision in
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this manner. See 592 F.2d at 624 (“SIPA provides expressly that SIPC, upon reimbursing a
customer’s losses, shall be subrogated to the customer’s claims against the debtor’s . . . estate.”);
see also Holmes v. SIPC, 503 U.S. 258, 270 (1992) (noting that “SIPC assumes that SIPA
provides for subrogation to the customers’ claims against the failed broker-dealers, but not
against third parties like Holmes”).
The Trustee’s asserted subrogee standing is therefore not supported by the
limited, express subrogation rights granted by SIPA. Nor is there any basis to imply subrogation
rights in favor of SIPC that cannot be found in the statute. As explained by the dissent in
Redington, because SIPA delineates certain specific and limited subrogation rights, “its failure to
provide for subrogation against any third party would clearly dictate that none exist under the . . .
principle: Expressio unius est exclusio alterius.” 592 F.2d at 634-35 (Mulligan, J., dissenting).
Confirming this conclusion is section 78fff(a)(3) of SIPA, which provides that a purpose of a
SIPA liquidation proceeding is “to enforce rights of subrogation as provided in this chapter.”
(emphasis added). Similarly, section 78fff-3(a) of SIPA provides that “SIPC shall be subrogated
to the claims of such customers with the rights and priorities provided in this chapter.”
(emphasis added). Thus, the text of SIPA contemplates that SIPC will have only limited
subrogation rights that are expressly created by and subject to SIPA’s statutory scheme.
In Mishkin, Judge Pollack closely analyzed the limited subrogation rights found in
SIPA and held that the statute did not grant a SIPA trustee subrogee standing to bring customer
claims against a broker’s accountants. 744 F. Supp. at 558. Following the reasoning of Judge
Mulligan’s dissent in Redington, the Mishkin court concluded that crafting extra-statutory
subrogation rights for SIPC would circumvent Congress’s intent that SIPC have the limited
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subrogation rights set forth in the statute. Id. at 558 n.15.4 Similarly, in BDO Seidman, Judge
Preska criticized Redington for “its creation of a common law right that circumvents
Congressional intent by ignoring the directive of SIPA that SIPC be subrogated with the rights
and priorities provided in [Section 78fff].” 49 F. Supp. 2d at 653, 654 (internal quotation marks
omitted).
In arguing that they can assert claims against third parties as a subrogee, the
Trustee and SIPC may attempt to rely, as they did in opposing withdrawal of the reference, on
the phrase in SIPA stating that SIPC’s subrogation rights against the estate are “in addition to all
other rights it may have at law or in equity.” 15 U.S.C. § 78fff-3(a). Any such reliance is
misplaced. In both Mishkin and BDO Seidman, the courts properly concluded that neither “law”
nor “equity” authorizes SIPC, an agency whose powers are defined by SIPA, to assert claims
against third parties absent statutory authority. See Mishkin, 744 F. Supp. at 558 (“Nor did the
addition of the words ‘in addition to all other rights it may have at law or in equity’ . . . give the
trustee the power to bring . . . fraud claims against third parties on behalf of customers.”); BDO
Seidman, 49 F. Supp. 2d at 654 (finding that any interpretation of those words to permit SIPC to
assert customer claims against third parties “conflicts with the rest of [SIPA]”).
4 In Holmes v. SIPC the Supreme Court cited Mishkin with approval and noted that SIPC’s
“theory of subrogation” — essentially the same theory of subrogation rights advanced by the
Trustee — was “fraught with unanswered questions.” 503 U.S. at 270. Although the Court did
not decide the issue of subrogee standing, it noted that SIPC had left the Court “to guess at the
nature of the ‘common law rights of subrogation’ that it claims” and “whether they derive from
federal or state common law, or, if the latter, from common law of which State.” Id. at 270-71.
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E. The Trustee lacks standing to sue JPMorgan as an assignee.
The Complaint also alleges, without any specificity or explanation, that the
Trustee has received “multiple, express assignments of certain claims” from customers. Compl.
¶ 17(g). But the Trustee lacks authority under SIPA to sue JPMorgan as an assignee. Under the
statute, the limited authority of a trustee to take assignments as a condition to paying claims does
not include assignments of customer claims against third parties. Rather, under section 78fff-
2(b) of SIPA, a trustee may condition payments to customers “pursuant to this subsection,”
which relates to “net equity” claims against the debtor, upon “the trustee requiring claimants to
execute . . . assignments.” 15 U.S.C. § 78fff-2(b).
Courts in this district have repeatedly held that this provision authorizes a SIPA
trustee to take assignment of customer claims against the estate — not claims that customers may
have against third parties. BDO Seidman, 49 F. Supp. 2d at 654 n.7 (“When read in the entire
context of Section 78fff, it is clear that those assignments [in Section 78fff-2(b)] relate to
payments for net equity claims. And . . . that does not extend the Trustee’s authority to bring suit
beyond the brokerage firm-customer relationship to include claims against a third party.”);
Mishkin, 744 F. Supp. at 551 (“SIPA does not provide for compensation of claims of banks nor
does it allow the assignment of choses in action by the banks to a SIPC trustee.”); Picard v.
Taylor (In re Park South Securities, LLC), 326 B.R. 505, 515 (Bankr. S.D.N.Y. 2005) (SIPA
trustee “does not have standing as a contractual assignee of the injured customers” because
Section 78fff-2(b) assignments extend “only to a customer’s net equity claim”).
The decision rejecting SIPA standing by assignment in Giddens v. D.H. Blair &
Co., Inc. (In re A.R. Baron & Co., Inc.), 280 B.R. 794 (Bankr. S.D.N.Y. 2002), is instructive.
There, a SIPA trustee contended that he had standing to assert customer claims against third
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parties on the ground that the trustee had required and received assignments from customers.
The Bankruptcy Court made short work of this contention, explaining that because “section
78fff-2(b) makes it clear that the only payments a trustee can make to customers pursuant to that
section are payments for net equity claims, it follows that the only claims that customers could
have assigned to the Trustee are their net equity claims and not claims against the defendants.”
Id. at 803 (emphasis added).
The result should be the same here. Although the Complaint pleads no facts
regarding the alleged customer assignments, it appears that the Trustee has required customers,
as a condition to receiving SIPC payments, to assign to the Trustee rights that they may have
against third parties. Such assignments are not authorized by SIPA. The statute requires a
trustee to “satisfy net equity claims” of customers, 15 U.S.C. §§ 78fff(a)(1)(B), 78fff-2(b) —
subject, as noted above, to the trustee’s right to condition such payment on assignment of those
net equity claims, id. § 78fff-2(b). The Trustee “has overreached his statutory authority” in
seeking to predicate his standing on assignments that are nowhere contemplated by the statute
and that the Trustee is not entitled to require as a condition to satisfying claims. In re A.R. Baron
& Co., 280 B.R. at 803.
Faced with narrow statutory language and a solid wall of SIPA precedent
rejecting standing by assignment, the Trustee may rely, as he did in opposing JPMorgan’s
motion to withdraw the reference, on Bankruptcy Services, Inc. v. Ernst & Young (In re CBI
Holding Co.), a chapter 11 case that did not involve SIPA or a SIPA trustee. 529 F.3d 432 (2d
Cir. 2008). In CBI Holding, the court found that a disbursing agent created under a chapter 11
plan could take a post-bankruptcy assignment of specific creditor claims against the debtor’s
accountants pursuant to that plan. Id. at 441, 455. CBI Holding does not support the Trustee,
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because the Bankruptcy Code cannot be used to trump the express terms of SIPA, which only
authorize the assignment of claims against the estate. Under SIPA, provisions of the Bankruptcy
Code are applicable to a SIPA liquidation only “[t]o the extent consistent with [SIPA].” 15
U.S.C. § 78fff (emphasis added). Permitting the Trustee to assert claims against third parties that
were assigned to him by customers would be inconsistent with SIPA.5
POINT II
THE TRUSTEE’S COMMON LAW CLAIMS
ARE PRECLUDED BY SLUSA.
Even if the Trustee has standing under SIPA to assert state law claims on behalf
of BMIS’s former customers, SLUSA bars the Trustee’s aggregation and assertion of those
claims in a single action. The Trustee has resorted to state common law to avoid the pleading
and substantive requirements imposed by federal securities law. But in so doing, the Trustee has
run headlong into SLUSA, which mandates that securities class actions, as broadly defined by
the statute, be litigated in federal court under federal law. Causes of action 17 to 21 violate
SLUSA and should be dismissed for this reason as well.
A. SLUSA must be interpreted broadly to
foreclose securities class actions based on state law.
SLUSA has its genesis in the PSLRA, which imposed new procedural and
substantive requirements for filing securities actions under federal law in federal court. Congress
enacted the PSLRA to curb “perceived abuses of the class-action vehicle in litigation involving
5 CBI Holding is further distinguishable because it involved a voluntary assignment in
connection with a settlement as part of a chapter 11 plan upon emergence from bankruptcy,
whereas here the Trustee has apparently required customers to assign their potential claims
against third parties in order to obtain the SIPC payments to which they are entitled under SIPA.
See In re CBI Holding, 529 F.3d at 458.
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nationally traded securities.” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71,
81-82 (2006). But this reform had an unintended consequence: it prompted the filing of
securities suits under state law, often in state court, as purported class representatives sought to
circumvent “the obstacles set in their path by the [PSLRA].” Id. at 82.
Congress enacted SLUSA in 1998 to “stem this ‘shif[t] from Federal to State
courts’ and ‘prevent certain State private securities class action lawsuits alleging fraud from
being used to frustrate the objectives’ of the Reform Act.” Id. (quoting SLUSA, Pub. L. No.
105-353, §§ 2(2), (5), 112 Stat. 3227 (1998) (internal quotation marks omitted)). SLUSA
accomplished this objective “by making federal court the exclusive venue for class actions
alleging fraud in the sale of certain covered securities and by mandating that such class actions
be governed exclusively by federal law.” Lander v. Hartford Life & Ann. Ins., 251 F.3d 101,
108 (2d Cir. 2001).
SLUSA’s preemption provision states as follows:
No covered class action based upon the statutory or common law
of any State or subdivision thereof may be maintained in any State
or Federal court by any private party alleging —
(A) a misrepresentation or omission of a material fact in connec-
tion with the purchase or sale of a covered security; or
(B) that the defendant used or employed any manipulative or de-
ceptive device or contrivance in connection with the purchase or
sale of a covered security.
15 U.S.C. §§ 77p(b), 78bb(f)(1). Thus, by its terms, SLUSA mandates dismissal of (1) any cov-
ered class action, (2) based on state law, (3) alleging a material misrepresentation or omission or
the use of a manipulative or deceptive device or contrivance in connection with the purchase or
sale of a covered security. E.g., Romano v. Kazacos, 609 F.3d 512, 518 (2d Cir. 2010).
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The United States Supreme Court has held that SLUSA must be afforded a “broad
construction” in order to effectuate Congress’s intent, explaining that “[a] narrow reading of the
statute would undercut the effectiveness of the 1995 Reform Act and thus run contrary to
SLUSA’s stated purpose.” Dabit, 547 U.S. at 85-86. Moreover, “[c]ourts in this circuit have
consistently rejected plaintiffs’ attempts through artful pleading to avoid the clear precepts of
SLUSA and its preemption of state law securities claims for damages.” Kingdom 5-KR-41, Ltd.
v. Star Cruises PLC, 2004 WL 444554, at *3 (S.D.N.Y. Mar. 10, 2004).
B. SLUSA preempts the Trustee’s claims
on behalf of Madoff’s customers.
The Trustee cannot dispute that if a former customer of BMIS purported to bring
a class action asserting the same state law claims that the Trustee has leveled against JPMorgan,
SLUSA would stop the action in its tracks. The outcome should be exactly the same in this case,
where the Trustee is purporting to bring state law claims on behalf of numerous customers. As
demonstrated below, the Trustee’s action satisfies each of the elements of SLUSA preemption.
1. This action is based on state law.
The non-bankruptcy claims that the Trustee has asserted on behalf of Madoff’s
customers ― causes of action 17 to 21 ― are all brought under state common law theories,
including fraud on the regulator, aiding and abetting fraud and breach of fiduciary duty, unjust
enrichment, and conversion.
2. This action alleges misrepresentations or omissions in
connection with the purchase or sale of securities.
The Complaint also contains allegations of a material misrepresentation or
omission, or the use of a manipulative or deceptive device or contrivance, in connection with the
purchase or sale of a covered security. The Complaint alleges that Madoff made “intentional
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misrepresentation[s] of fact” to carry out his fraudulent scheme (Compl. ¶ 43) — namely, he
falsely claimed to be purchasing and selling publicly traded securities (Compl. ¶ 37) ― and that
JPMorgan “substantially assisted” Madoff’s securities fraud (Compl. ¶ 216). Additionally, the
Trustee alleges that JPMorgan “ignored blatant misrepresentations” (Compl. ¶ 208) and was
engaged in its own “fraud” due to its supposed failure to report Madoff’s conduct to the
securities and banking regulators (Compl. ¶ 474). Courts in this Circuit have consistently held
that claims relying on these types of allegations are covered by SLUSA. See, e.g., In re Beacon
Assocs. Litig., 745 F. Supp. 2d 386, 430 (S.D.N.Y. 2010) (“There is ‘no question that Madoff’s
Ponzi scheme was ‘in connection with’ the purchase and sale of securities.’”); accord In re J.P.
Jeanneret Assocs., Inc., 2011 WL 335594, at *18 (S.D.N.Y. Jan. 31, 2011).
All of the Trustee’s common law claims meet the “misrepresentation or omission”
requirement. SLUSA preempts any “action . . . alleging a misrepresentation or omission.” 15
U.S.C. §§ 78bb(f)(1), 77p(b) (emphasis added), whether or not the claims for relief in the action
are labeled “fraud.” In light of the Trustee’s allegations, SLUSA thus bars not only the Trustee’s
claims for fraud on the regulator and aiding and abetting fraud but also his claims for aiding and
abetting breach of fiduciary duty, unjust enrichment, and conversion. See, e.g., Leykin v. AT&T
Corp., 216 F. App’x 14, 17 (2d Cir. 2007) (SLUSA preempted claim for breach of fiduciary
duty); In re Oppenheimer Funds Fees Litig., 419 F. Supp. 2d 593, 596 (S.D.N.Y. 2006) (SLUSA
preempted unjust enrichment claim); Levinson v. PSCC Servs., 2009 WL 5184363, at *12-13 (D.
Conn. Dec. 23, 2009) (SLUSA preempted aiding and abetting conversion claim).
3. This is a covered class action.
In opposing withdrawal of the reference, the Trustee’s only argument against
SLUSA preclusion was that this is not a “covered class action.” This argument fails. SLUSA
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defines “covered class action” to include not only actions styled as class actions, but all lawsuits
in which common issues other than reliance predominate and (1) “damages are sought on behalf
of more than 50 persons” or (2) the plaintiffs sue “on a representative basis on behalf of
themselves and other unnamed parties similarly situated.” 15 U.S.C. §§ 77p(f)(2)(A),
78bb(f)(5)(B).
SLUSA’s legislative history, like its language, makes clear that Congress intended
for the “covered class action” definition to “be interpreted broadly to reach . . . all [] procedural
devices that might be used to circumvent the class action definition.” S. Rep. No. 105-182, at 6
(1998) (emphasis added). As the Third Circuit has recognized:
[T]he statutory text and legislative history signal that the definition
[of “covered class action”] was designed to prevent securities-
claims owners from bringing what are, in effect, class actions by
assigning claims to a single entity. . . . Put simply, Congress’s goal
was to prevent a class of securities plaintiffs from running their
claims through a single entity . . . .
LaSala v. Bordier et Cie, 519 F.3d 121, 136 (3d Cir. 2008); see also In re AOL Time Warner,
Inc. Sec. Litig., 503 F. Supp. 2d 666, 671 (S.D.N.Y. 2007) (“SLUSA sets in place certain limita-
tions on class actions and other ‘mass actions’ . . . .” (emphasis added)).
Under the plain language of the statute, this action is a “covered class action.”
The Trustee’s common law causes of action aggregate and assert thousands of separate,
individual claims of Madoff’s customers. Indeed, in seeking to pursue claims as a “bailee,” the
Trustee expressly acknowledges that his claims are brought “on behalf of” customers, the very
language of SLUSA’s covered class action definition. Compl. ¶ 17(f). Moreover, although the
Complaint does not specify precisely how many customers he purports to represent, the Trustee
cannot dispute that it is well in excess of 50. The full list of Madoff customers disclosed by the
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Trustee in the bankruptcy court included thousands of names. See In re Bernard L. Madoff, No.
08-1789, Docket No. 76, Exhibit A (Bankr. S.D.N.Y. Feb. 4, 2009).
In opposing JPMorgan’s motion to withdraw the reference, the Trustee relied on
SLUSA’s “Counting” provision, which states that a “corporation . . . or other entity, shall be
treated as one person or prospective class member, but only if the entity is not established for the
purpose of participating in the action.” 15 U.S.C. §§ 77p(f)(2)(C), 78bb(f)(5)(D). By its terms,
however, that provision is not an exception to the “covered class action” definition. Rather, it
simply clarifies that when an entity such as a corporation brings an action, it will generally count
as one person under SLUSA — so that a claim brought by a corporation on its own behalf will
not run afoul of SLUSA. The provision, in other words, respects “the usual rule of not looking
through an entity to its constituents unless the entity was established for the purpose of bringing
the action.” LaSala, 519 F.3d at 132-33.
SLUSA’s counting provision, therefore, does not help the Trustee. Under the
plain language of the statute, the relevant question is whether the plaintiff is bringing claims “on
behalf of” more than 50 persons; if he is, it makes no difference if the plaintiff is “one person” or
many. Here, the Trustee is not asserting claims on behalf of the corporation to which he is the
court-appointed successor; rather, he is explicitly bringing claims on behalf of (and belonging to)
more than 50 of Madoff’s many customers, making this a “covered class action.”
The Third Circuit’s decision in LaSala is directly on point. In LaSala, the trustees
for a liquidating trust brought claims that originally belonged to a debtor as well as claims that
originally belonged to purchasers of the debtor’s stock. Although both sets of claims had been
assigned to the liquidating trust, the court concluded that the trustees’ assertion of the claims of
the purchasers/creditors — as opposed to the claims belonging to the debtor corporation itself —
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“would seem to take the form of a covered class action.” Id. at 138. The Third Circuit explained
that, where numerous claims are assigned to a single entity, SLUSA applies when “the original
owners of the claim” number more than 50. Id. at 134 (emphasis added). That requirement is
met here, where the Trustee is purporting to bring his claims not only as an assignee of more
than 50 customer claims but also as a bailee “on behalf of the customer-bailors.” Compl. ¶ 17.
It makes no difference, moreover, that the plaintiff here is a trustee rather than a
typical lead plaintiff. As the Appellate Division observed in RGH Liquidating Trust, when a
trustee attempts to assert “claims that did not originally belong to the bankrupt” debtor, his
purpose “is no different than that of any shareholder class representative.” RGH Liquidating
Trust v. Deloitte & Touche, 71 A.D.3d 198, 215 (1st Dep’t 2009) (quotation marks omitted). In
LaSala, likewise, the Third Circuit recognized that “Congress’s clear intent” that SLUSA not
“reach claims asserted by a bankruptcy trustee” embraced only “claims that the debtor-in-
possession once owned.” LaSala, 519 F.3d at 135 (emphasis added). In a case such as this one,
therefore, where the Trustee is seeking to assert claims that the debtor BMIS never owned,
SLUSA controls to the same extent as in any other mass action. RGH, 71 A.D.3d at 215 (“To
paraphrase a well-worn expression, a class representative by any other name would offend
SLUSA as much.”); Cape Ann Investors, LLC v. Lepone, 296 F. Supp. 2d 4, 10 (D. Mass. 2003)
(explaining that the role of a trustee bringing claims that did not originally belong to the debtor is
no different under SLUSA “than that of any other shareholder class representative”).
Finally, although the counting provision of SLUSA has no relevance here, even if
it were relevant, the Trustee could not rely on it. The counting provision only permits an entity
to be treated as one person if it was “not established for the purpose of participating in the
action.” 15 U.S.C. §§ 77p(f)(2)(C), 78bb(f)(5)(D). In applying this provision, although some
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cases have looked to an entity’s “primary purpose,” in the statute itself “the word ‘purpose’ is
not modified in any way.” RGH, 71 A.D.3d at 210. In any event, it is readily apparent that a
primary purpose of the Trustee’s appointment was to pursue causes of action. When the Trustee
was appointed, the Madoff estate had minimal assets and no way to recover assets other than
through litigation or the threat of litigation. As the Trustee has reported to the bankruptcy court,
it was precisely because the amount of “customer property” in the estate was insufficient to pay
customers’ claims in full that the Trustee commenced hundreds of adversary proceedings,
making the Trustee the head of an enormous litigation enterprise. See Trustee’s Fourth Interim
Report for the Period Ending September 30, 2010 at ¶ 52, In re Bernard L. Madoff, No. 08-1789,
Docket No. 3083 (Bankr. S.D.N.Y. Oct. 30, 2010).
* * *
The plain language of the statute, the legislative history, and the judicial decisions
demonstrate that SLUSA prohibits the aggregation of thousands of state law securities claims in
a single mass action. Because that is precisely what the Trustee is attempting to do here, his
common law claims ― causes of action 17 to 21 of the Complaint ― must be dismissed.
POINT III
THE COMPLAINT FAILS TO STATE CLAIMS FOR AIDING AND
ABETTING FRAUD AND BREACH OF FIDUCIARY DUTY.
Even if the Trustee has standing to bring common law claims, all of those claims
are defective and should be dismissed on the merits. The Trustee’s aiding and abetting claims,
causes of action 17 and 18, fail to state a claim because the Complaint contains no particularized
facts giving rise to a strong inference that JPMorgan had actual knowledge of Madoff’s fraud,
that JPMorgan substantially assisted the fraud, or that any damages were proximately caused by
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JPMorgan’s conduct. There is, moreover, nothing in the Complaint that would allow the Court
to find plausible the Trustee’s theory that JPMorgan knowingly facilitated Madoff’s inevitably
doomed Ponzi scheme supposedly in order to earn routine banking fees. See, e.g., Schmidt v.
Fleet Bank, 1998 WL 47827, at *6 (S.D.N.Y. Feb. 4, 1998) (“Ponzi schemes are doomed to
collapse . . . and while an individual may be able to escape with the proceeds of a Ponzi scheme,
a bank cannot. Thus, participation in the scheme would not appear to be in the bank’s economic
interest.”).
A. The Trustee must plead the elements of aiding
and abetting liability with particularity.
To state a claim for aiding and abetting fraud under New York law, a plaintiff
must allege: “(1) the existence of a fraud; (2) [the] defendant’s knowledge of the fraud; and
(3) that the defendant provided substantial assistance to advance the fraud’s commission.”
Lerner v. Fleet Bank, N.A., 459 F.3d 273, 292 (2d Cir. 2006) (internal quotation marks omitted);
Nigerian Nat’l Petroleum Corp. v. Citibank, N.A., 1999 WL 558141, at *8 (S.D.N.Y. July 30,
1999). Similarly, to state a claim for aiding and abetting a breach of fiduciary duty, a plaintiff
must allege: (1) a “‘breach by a fiduciary of obligations to another,’ of which the aider and
abettor had ‘actual knowledge’”; (2) “‘that the defendant knowingly induced or participated in
the breach’”; and (3) “‘that plaintiff suffered damage as a result of the breach.’” Sharp Int’l
Corp. v. State St. Bank and Trust Co. (In re Sharp Int’l Corp.), 403 F.3d 43, 49-50 (2d Cir. 2005)
(quoting Kaufman v. Cohen, 307 A.D.2d 113, 125 (1st Dep’t 2003)). In addition, both aiding
and abetting claims require a showing that the plaintiff’s injury was proximately caused by the
defendant’s conduct. Jordan (Bermuda) Inv. Co. v. Hunter Green Invs. LLC, 566 F. Supp. 2d
295, 300 (S.D.N.Y. 2008).
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To survive a motion to dismiss under Rule 12(b)(6), a complaint must plead
“factual allegations sufficient ‘to raise a right to relief above the speculative level.’” ATSI
Commc’ns, Inc. v. Shaar Fund, Ltd, 493 F.3d 87, 98 (2d Cir. 2007) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007)). A complaint does not state a claim by making allegations
that are “merely consistent with” a defendant’s liability, or that raise a “sheer possibility” that a
defendant has acted unlawfully. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quotations
omitted). Rather, the complaint’s well-pled, non-conclusory factual allegations must “state a
claim to relief that is plausible on its face” by creating a “reasonable inference that the defendant
is liable for the misconduct alleged.” Id. at 1949 (quotations omitted).
“The Second Circuit has applied the heightened pleading requirements of Rule
9(b) to claims for aiding and abetting fraud.” Rosner v. Bank of China, 2008 WL 5416380, at *4
(S.D.N.Y. Dec. 18, 2008). Those requirements also apply to claims for aiding and abetting a
breach of fiduciary duty where, as here, “the underlying primary violations are based on fraud.”
Kolbeck v. LIT America Inc., 939 F. Supp. 240, 245 (S.D.N.Y. 1996); accord Berman v. Morgan
Keegan & Co., 2011 WL 1002683, at *7 (S.D.N.Y. 2011).
To comply with Rule 9(b), allegations must be supported by an “ample factual
basis,” including facts giving rise to a “strong inference” of fraudulent intent. See, e.g., O’Brien
v. Nat’l Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991). In an aiding and abetting
case, accordingly, a complaint must allege facts that “create a strong inference” of the
defendant’s “actual knowledge” of the underlying fraud. Lerner, 459 F.3d at 294.
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B. The burden of pleading actual knowledge is
a heavy one.
To plead an aiding and abetting claim, a plaintiff must plead facts showing that
the defendant had “actual knowledge” of the primary violator’s wrongdoing. E.g., Kolbeck, 939
F. Supp. at 246.
Actual knowledge means just that: “Ordinarily, evidence of recklessness,
conscious avoidance, or willful blindness as to whether the primary actor is engaged in fraud is
not sufficient to satisfy the knowledge element of [an] aiding and abetting fraud claim.” In re
Agape Litig., 2011 WL 1136173, at *8 (E.D.N.Y. Mar. 29, 2011) (internal quotation marks and
alteration omitted). By the same measure, “constructive knowledge” of another’s wrongdoing is
“legally insufficient to impose aiding and abetting liability.” Kaufman, 307 A.D.2d at 125; see
also Williams v. Bank Leumi Trust Co., 1997 WL 289865, at *5 (S.D.N.Y. May 30, 1997)
(“constructive knowledge [] is insufficient to state a claim for aiding and abetting”); see also
Berman, 2011 WL 1002683, at *10 (“Mere ‘allegations of constructive knowledge or
recklessness are insufficient’ to satisfy the knowledge requirement.”).
The “actual knowledge” requirement is a fundamental principle of aiding and
abetting law. As Judge Mukasey explained in Kolbeck, “[t]o hold all defendants to a standard of
constructive knowledge and subject to a duty of inquiry would mean that all defendants,
regardless of their independent obligations to plaintiff, could be liable for inaction.” 939 F.
Supp. at 247 (citing Restatement (Second) of Torts).
The “burden of demonstrating actual knowledge, although not insurmountable, is
nevertheless a heavy one.” Chemtex, LLC v. St. Anthony Enters., 490 F. Supp. 2d 536, 546
(S.D.N.Y. 2007) (internal quotation marks omitted). Actual knowledge must be established by
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detailed factual pleading. As the Second Circuit has held, “conclusory statements” of “actual
knowledge” are “insufficient to support an aiding-and-abetting claim under New York law.”
Rosner v. Bank of China, 349 F. App’x 637, 639 (2d Cir. 2009); see also MLSMK Invs. Co. v. JP
Morgan Chase & Co., 737 F. Supp. 2d 137, 145 (S.D.N.Y. 2010) (“Plaintiff’s conclusory
allegations of knowledge are insufficient to plead aiding and abetting breach of fiduciary duty.”);
Ascot Fund Ltd. v. UBS PaineWebber, Inc., No. 600341/03, at 14 (Sup. Ct. N.Y. Co. Dec. 17,
2004) (concluding that allegations of actual knowledge were “conclusory” and dismissing the
claims because “[t]here are simply no facts from which it could be inferred that [defendant] had
actual knowledge”), aff’d, 28 A.D.3d 313, 314 (1st Dep’t 2006).
Numerous cases from courts in this Circuit demonstrate the difficulty of pleading
an aiding and abetting claim against a financial intermediary (often the only deep pocket once a
fraud collapses). In Rosner v. Bank of China, 2008 WL 5416380 (S.D.N.Y. Dec. 18, 2008),
aff’d, 349 F. App’x 637 (2d Cir. 2009), the Second Circuit affirmed the dismissal of aiding and
abetting claims against a bank. In Rosner, the receiver for a corporation that had defrauded
investors attempted to show that Bank of China had knowledge of the fraud by virtue of
suspicious banking activity, including large, almost daily cash movements that were inconsistent
with the corporation’s supposed business as a currency trader. Dismissing the case, the district
court observed that “New York courts overwhelmingly recognize that a plaintiff does not satisfy
Rule 9(b) by alleging a bank’s actual knowledge of a fraud based on allegations of the bank’s
suspicions or ignorance of obvious ‘red flags’ or warnings signs indicating the fraud’s
existence.” Id. at *6. The Second Circuit affirmed, holding that mere allegations of what a bank
“should have known” are “insufficient” to plead actual knowledge. 349 Fed. App’x at 639
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(“Even if [the bank] had reason to suspect that [a customer] was laundering money, this does not
mean that [the bank] had actual knowledge of the fraudulent scheme.”).
Earlier this year, in Berman v. Morgan Keegan & Co., Judge Castel cited Rosner
in dismissing aiding and abetting claims against a broker-dealer brought by investors in a Ponzi
scheme. 2011 WL 1002683 (S.D.N.Y. Mar. 14, 2011). The broker-dealer maintained an
account for a corporation that was fraudulently marketing tax deferral devices. In attempting to
show actual knowledge, the investors relied on a close relationship between an executive of the
broker-dealer and the customer’s principals, as well as suspicious account activity. Id. at *4-5.
The investors also alleged that the broker-dealer must have known about the customer’s fraud as
a result of “Know Your Customer Rules.” Id. at *5, *10. As in Rosner, the court held that the
facts alleged did “not give rise to a strong inference” of actual knowledge. Id. at *12; see also id.
at *10 (explaining that the “Know Your Customer Rules” governing the broker-dealer “at most
speak to whether [the broker-dealer] should have known of the fraud; they do not reflect actual
knowledge of fraud”).
Judge Spatt of the Eastern District has since followed Rosner and Berman in
again dismissing claims by investors in a Ponzi scheme that a bank had aided and abetted the
fraud. In re Agape Litig., 2011 WL 1136173 (E.D.N.Y. Mar. 29, 2011). In Agape, the plaintiff-
investors tried to show actual knowledge by alleging that the bank established a special branch at
the fraudster’s headquarters; allowed the fraudster, a convicted felon, to open and use numerous
accounts under different names; and enabled the fraudster to transfer investor funds and
commingle that money with other funds. Id. at *2-3. The investors also relied heavily on
allegations of suspicious account activity, including commingling of investor funds, transfers in
and out of the account in equal amounts, empty accounts, and unusually large transfers. Id. at
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*4, *9. The court rejected the claim, holding that even if “hindsight” would tend to “indicate the
obviousness of the fraud,” the investors had failed to show actual knowledge with the “level of
specificity that New York state courts and courts in the Second Circuit have routinely required
before holding that a plaintiff has sufficiently alleged facts that raise a strong inference of actual
knowledge from circumstantial evidence.” Id. at *19.6
C. The Trustee has failed to allege facts showing that
JPMorgan had actual knowledge of Madoff’s fraud.
These principles of New York law foreclose the Trustee’s aiding and abetting
claims. The Complaint attempts to establish actual knowledge through two sets of allegations.
The first involve BMIS’s supposedly “suspicious” activity in its bank account at JPMorgan; the
second involve JPMorgan’s due diligence in connection with the issuance of Madoff-related
structured products. The allegations relating to BMIS’s bank account, however, do not even
show suspicion on the part of the bank. And the allegations relating to JPMorgan’s due
diligence, read in the light most favorable to the Trustee, show nothing more than suspicion.
None of these allegations supports any inference, let alone a strong inference, that JPMorgan had
actual knowledge of Madoff’s Ponzi scheme.
6 In discussing the “actual knowledge” requirement, the Agape court noted that certain courts
have allowed a plaintiff to meet that burden by showing “conscious avoidance,” which only
“occurs when it can almost be said that a defendant actually knew because he or she suspected a
fact and realized its probability, but refrained from confirming it in order later to be able to deny
knowledge.” Agape, 2011 WL 1136173, at *8 (quoting Fraternity Fund Ltd. v. Beacon Hill
Asset Mgmt., LLC, 479 F. Supp. 2d 349, 367 (S.D.N.Y. 2007)). The Agape court also observed
that “a theory of actual knowledge based on conscious avoidance requires facts supporting an
inference that the defendant acted with a culpable state of mind,” such that “[p]lausibly alleging
actual knowledge through conscious avoidance is a very high bar.” Id. at *8, *20.
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1. The Trustee’s allegations with respect to the 703
Account do not show actual knowledge.
To try to show that JPMorgan knew about Madoff’s fraud, the Trustee relies on
alleged irregularities in the 703 Account that Madoff opened at a predecessor bank in 1986.
Those allegations, however, fall far short of establishing actual knowledge.
The Complaint is replete with allegations concerning what JPMorgan “should”
have done as to the 703 Account and what a review of Madoff’s accounts “would have
revealed.” Compl. ¶¶ 175, 193. For instance, the Trustee suggests that the supposedly
suspicious activity in the accounts should have triggered JPMorgan’s anti-money laundering
system. Id. ¶ 175. The Trustee also suggests that JPMorgan “should have also been” monitoring
transactions between BMIS and Norman Levy, a bank client and BMIS customer. Id. ¶ 232. Yet
according to the Complaint, the bank’s anti-money laundering and know-your-customer
programs “were not effectively executed.” Id. ¶ 188. Supposedly, the bank’s automated system
for detecting suspicious activity “issued only a single account alert” with respect to Madoff. Id.
¶ 239. Moreover, according to the Trustee, JPMorgan “never meaningfully investigated the
connection between Madoff and Levy.” Id. ¶ 247.
These allegations go nowhere in terms of showing JPMorgan’s actual knowledge
of fraud. The Trustee does not allege that JPMorgan ever disabled, compromised or ignored its
detection system for Madoff’s benefit; indeed, when the system did alert, the Trustee recognizes
that a JPMorgan employee followed up. Compl. ¶ 239. And while the Complaint alleges that
certain transactions “should have prompted a check-kiting investigation, which undoubtedly
would have revealed more suspicious behavior,” the Complaint does not allege that JPMorgan
ever took steps that actually uncovered Madoff’s fraud. Id. ¶ 230 (emphasis added). Indeed,
while the Complaint claims that JPMorgan was “uniquely situated” to uncover the fraud, id. ¶¶ 2,
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276, and asserts in conclusory fashion that JPMorgan had “actual knowledge of the fraud,” id. ¶
431, it ultimately alleges that JPMorgan “utterly failed to ‘know its customer’ when it came to
Madoff and BMIS,” and even made loans to BMIS, thus refuting any claim that JPMorgan had
actual knowledge of Madoff’s crimes. Id. ¶¶ 2, 192.7
Moreover, as the Rosner court observed, New York courts have consistently
rejected attempts to plead “actual knowledge” by relying on supposedly suspicious activity in a
bank account. For instance, in Williams v. Bank Leumi Trust, the plaintiff brought aiding and
abetting claims against a bank based on damages allegedly suffered as a result of a check-kiting
and embezzlement scheme. The plaintiff’s theory of “actual knowledge” was that the bank “was
aware of the scheme” by virtue of the questionable activity in three separate bank accounts.
1997 WL 289865, at *1-2, *5 (S.D.N.Y. May 30, 1997). The court rejected this theory, holding
that the bank’s knowledge of the “sequence of [] account transfers” “[a]t most . . . raise[d] the
issue of constructive knowledge which is insufficient to state a claim for aiding and abetting.”
Id. at *5; see also Agape, 2011 WL 1136173, at *20-21 (complaint inadequately alleged that
bank had “actual knowledge” of customer’s fraud despite suspicious account activity and
accusations of fraud on the part of the customer that were brought to the bank’s attention).
7 The Trustee also claims that Madoff’s FOCUS Reports “contained glaring irregularities that
should have been probed by” JPMorgan. Compl. ¶ 4 (emphasis added). But the Complaint is
again devoid of any allegation that anyone at JPMorgan concluded, based on the FOCUS
Reports, that Madoff was engaged in fraud. Although the Complaint recites examples of
irregularities in the FOCUS Reports, see id. ¶¶ 202-13, there is no allegation that anyone at
JPMorgan noticed or drew any negative inferences from those reports. Nor is there any
allegation that anyone deliberately compromised the bank’s procedures with respect to FOCUS
Reports in order to permit Madoff’s scheme to succeed.
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New York law is equally clear that, even if a bank becomes suspicious that an
account-holder is involved in fraud, such suspicion “cannot be equated with actual knowledge”
for purposes of an aiding and abetting claim. E.g., Albion Alliance Mezzanine Fund v. State
Street Bank & Trust Co., 8 Misc. 3d 264, 273 (N.Y. Sup. Ct. N.Y. Co. 2003), aff’d, 2 A.D.3d 162
(1st Dep’t 2003). To impose aiding and abetting liability, “suspicions” are simply not enough:
[W]hile the . . . inaccuracies in [the company’s] account information
certainly gave the Bank reason to be highly suspicious of its veracity,
such suspicions cannot be equated with actual knowledge —
particularly not actual knowledge that the [fraudsters] were diverting
tens of millions of dollar of corporate funds.
Id. at 273 (emphasis added); see also Ryan v. Hunton & Williams, 2000 WL 1375265, at *9
(E.D.N.Y. Sept. 20, 2000) (bank’s “suspicions” of fraud based on account activity and analysis
by the bank’s in-house fraud investigators did “not raise an inference of actual knowledge”).
These decisions foreclose imposing aiding and abetting liability based on the
allegations concerning the 703 Account. The Complaint contains no particularized facts
showing that BMIS’s account activity caused anyone at JPMorgan to become suspicious of
Madoff, let alone to conclude that he was operating a Ponzi scheme.
2. The Trustee’s allegations concerning JPMorgan’s structured
products due diligence do not show actual knowledge.
The Complaint also makes various allegations relating to the due diligence that
JPMorgan conducted, beginning in 2006, in connection with structured products issued by
JPMorgan that were tied to the returns of Madoff feeder funds. According to the Complaint, as
of 2007, when JPMorgan’s UK affiliate began issuing those products, the due diligence was
“preliminary.” Compl. ¶¶ 89-92. The Trustee alleges that JPMorgan had “concerns,” but never
suggests that anyone at JPMorgan learned at that time that Madoff was engaged in fraud. Id. ¶
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107. In fact, as late as November 2007, the Trustee claims that JPMorgan was still looking for
“answers.” Id. ¶ 119.
The Trustee alleges that the bank engaged in another round of due diligence
beginning in March of 2008, when it acquired Bear Stearns and sought to reassess firm-wide
exposure in the hedge fund sector. Compl. ¶¶ 121-22. Accordingly, in July 2008, certain
JPMorgan employees went to Austria to perform a “refresh” of its initial due diligence on a
Madoff feeder fund. Id. ¶ 123. The Complaint recites a number of “questions” that JPMorgan
was asking at this time — “many of the same questions it had asked more than a year before.”
Id. ¶¶ 128-29.
The Trustee makes no effort to explain why JPMorgan would conduct multiple
rounds of due diligence relating to Madoff if the bank already knew he was operating a Ponzi
scheme. Instead, the Trustee relies on generic “red flags” to allege that JPMorgan “could have,”
“should have,” and “would have” discovered the fraud if it had only done more. E.g., Compl. ¶¶
141, 163. For instance, the Trustee cites Madoff’s lack of transparency (id. ¶¶ 5(b), 140);
Madoff’s role as clearing broker, sub-custodian, and investment advisor (id. ¶ 5(e)); the fact that
JPMorgan could not identify Madoff’s counterparties for options trades (id. ¶¶ 5(c), 99, 134); the
consistency of Madoff’s returns (id. ¶ 5(a)); Madoff’s use of a small, unknown auditor (id. ¶¶
5(d), 7, 88, 135, 140); and “public speculation” that Madoff was operating a Ponzi scheme or
was otherwise engaged in illegal activity (id. ¶ 5(g)).
But these “red flag” allegations that the Trustee has alleged establish, at the very
most, some degree of “constructive knowledge,” which is no substitute for actual knowledge.
Under New York law, what a party “should have known is irrelevant.” Renner v. Chase
Manhattan Bank, 2000 WL 781081, at *8 (S.D.N.Y. June 16, 2000). Indeed, a “request that the
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Court ‘impute’ actual knowledge through [a bank’s] alleged willful blindness . . . concedes a lack
of actual knowledge.” Rosner, 2008 WL 5416380, at *7 (emphasis added).
In numerous cases arising out of Madoff’s fraud, courts have rejected attempts by
plaintiffs to rely on the very same red flags that the Trustee seeks to rely upon in his Complaint.
See, e.g., Saltz v. First Frontier, LP, 2010 WL 5298225, at *3, *9-10 (S.D.N.Y. Dec. 23, 2010)
(dismissing common law fraud claims against auditors of Madoff feeder fund where plaintiff
alleged such “red flags” as the “uncanny consistency” of investment returns and Madoff’s use of
a small, unknown audit firm); In re Tremont Sec. Law, State Law & Ins. Litig., 703 F. Supp. 2d
362, 368, 371 (S.D.N.Y. 2010) (dismissing securities fraud claims against auditors of Madoff
feeder fund and rejecting such “red flags” as the inability to duplicate Madoff’s returns using his
reported investment strategy; the excessive volume of Madoff’s purported options trading; and
that Madoff’s lack of transparency); SEC v. Cohmad Sec. Corp., 2010 WL 363844, at *5-6
(S.D.N.Y. Feb. 2, 2010) (holding that the SEC failed to plead facts supporting plausible
inference of scienter against broker-dealer used by Madoff and observing that “[i]n light of
Madoff’s established reputation as a successful and respected investment advisor, the high
returns he produced were not generally perceived (even by professionals) as a badge of fraud”).8
The Trustee also relies on a suspicious activity report, or a “SAR,” that JPMorgan
filed in the UK at the end of October 2008, just 45 days before Madoff’s fraud was revealed to
the world. As alleged, after conducting further due diligence, JPMorgan began in October 2008
8 In Anwar v. Fairfield Greenwich Ltd., although the court sustained an aiding and abetting
claim against the administrator of a Madoff feeder fund, the complaint alleged that the
administrator had “actual knowledge” not of the Ponzi scheme but of the manager’s
misrepresentations to investors in the fund regarding the extent and quality of the manager’s due
diligence on Madoff. 728 F. Supp. 2d 372, 442-43 (S.D.N.Y. 2010).
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to redeem some — but not all — of its investments in the feeder funds. According to the
Complaint, these redemptions led to a phone call in which a third party threatened a JPMorgan
employee by saying that “Colombian friends” would “cause havoc” if JPMorgan went through
with its plan to redeem the investments. Compl. ¶ 143. Following this conversation, JPMorgan
filed a “suspicious activity report” with the British government. Id. ¶¶ 144-46. According to the
complaint, the report described the background of JPMorgan’s redemptions, but it did not point
to any new evidence about Madoff showing that he was engaged in a fraud. Rather, the report
stated that Madoff’s returns “appear” to be too good to be true and that thus they “probably” are.
Id. ¶¶ 9, 146. At most, the report indicates suspicion of fraud, not the actual knowledge required
to sustain an aiding and abetting claim. See, e.g., Renner, 2000 WL 781081, at *17, *21
(dismissing aiding and abetting claim for failure to plead actual knowledge, despite alleged
“suspicions” of fraud on the part of Chase).
The Trustee’s reliance on this SAR as a basis to impose liability on JPMorgan is
not only unavailing in showing actual knowledge, but it also violates federal law and policy
prohibiting the imposition of liability on a financial institution for filing such a report. The entire
purpose of the suspicious activity reporting regime is to encourage early reporting of possible
wrongdoing. That objective would be severely undermined if financial institutions faced
potential liability for reporting their suspicions. Accordingly, under federal statute, “[a]ny
financial institution that makes a voluntary disclosure of any possible violation of law or
regulation . . . shall not be liable to any person under any law or regulation of the United States
or any constitution, law, or regulation of any State or political subdivision thereof, for such
disclosure . . . .” 31 U.S.C. § 5318(g)(3) (emphasis added). In relying on the SAR to prosecute
his baseless claims, the Trustee ignores this federal statute, as well as Second Circuit precedent
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holding that the statute creates “an unqualified privilege” that “broadly and unambiguously
provides for immunity from any law (except the federal Constitution) for any statement” in a
SAR. Lee v. Bankers Trust Co., 166 F.3d 540, 544 (2d Cir. 1999).
Nor does JPMorgan’s redemption of its investments from the feeder funds show
actual knowledge of fraud. The decision in MLSMK Investments Co. v. JP Morgan Chase & Co.
makes that plain. The plaintiff in that case, like the Trustee here, sought to rely upon
JPMorgan’s decision to liquidate part of its investments in Madoff feeder funds as evidence that
JPMorgan was aware that Madoff was a fraud. MLSMK, 737 F. Supp. 2d at 144-45. The court
squarely rejected the MLSMK plaintiff’s allegations and dismissed the claim for aiding and
abetting a breach of fiduciary duty — observing that even if JPMorgan “could have connected
the dots to determine that Madoff was committing fraud, Plaintiff offers no facts to support the
claim that [JPMorgan] actually reached such a conclusion.” Id. at 144 (emphasis added).
The Trustee also points to evidence following the revelation of Madoff’s fraud to
criticize JPMorgan’s due diligence. But those allegations again refute any inference of actual
knowledge. The Trustee, for example, cites a “Lessons Learned” document circulated after the
fraud was revealed. Compl. ¶¶ 166-71. But that document never suggests that anyone at
JPMorgan knew that BMIS was a criminal enterprise; instead, it focuses on ways for JPMorgan
to strengthen its due diligence procedures going forward so that the bank will not fall victim to
future Ponzi artists. The document suggests that JPMorgan put undue reliance on the same
positive factors — such as BMIS’s status as a regulated business, the absence of any adverse
regulatory actions against Madoff, and Madoff’s previously solid reputation — that permitted
Madoff to deceive banks and investors around the world. See, e.g., id. ¶ 170 (emphasizing
JPMorgan’s reliance on Madoff’s “reputation and SEC regulation”).
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Ultimately, therefore, none of the Complaint’s allegations relating to JPMorgan’s
due diligence support the inference that JPMorgan knew that Madoff was conducting a fraud, as
required for an aiding and abetting claim. In essence, the Trustee is trying to hold JPMorgan
liable for Madoff’s fraud because the bank could have ferreted out the fraud had it conducted
more extensive due diligence or monitored its customer differently. Such allegations, however,
are not enough to support an aiding and abetting claim.9
D. The Trustee has failed to allege facts showing that
JPMorgan substantially assisted Madoff’s fraud.
Just as the Trustee has failed to plead any facts showing that JPMorgan had actual
knowledge of Madoff’s fraud, the Trustee has also failed to plead facts showing that JPMorgan
substantially assisted the fraud. The Trustee’s argument is that JPMorgan assisted the fraud by
(1) providing routine commercial banking services to BMIS, (2) investing approximately $250
million in Madoff feeder funds, and (3) not reporting Madoff to regulators.
First, “the mere fact that participants in a fraudulent scheme use accounts at a
bank to perpetrate it, without more, does not in and of itself rise to the level of substantial
assistance.” Rosner, 2008 WL 5416380, at *12 (internal quotation marks omitted). The banking
services provided by JPMorgan to Madoff are precisely the “conventional banking services” that
New York courts have consistently held to be insufficient to show “substantial assistance” as a
predicate for aiding and abetting liability. E.g., In re Agape Litig., 681 F. Supp. 2d 352, 365
9 The Trustee’s conclusory allegation that JPMorgan “consciously avoided knowledge of the
fraud” likewise fails to establish actual knowledge. Compl. ¶ 431. The Complaint alleges no
facts showing that anyone at JPMorgan avoided “confirming” knowledge of the fraud “in order
later to be able to deny” such knowledge, as required by the case law. See, e.g., In re Agape
Litig., 2011 WL 1136173, at *8.
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(E.D.N.Y. 2010); Nigerian Nat’l, 1999 WL 558141, at *8 (bank’s execution of repeated wire
transfers for millions of dollars did not constitute substantial assistance for an aiding and abetting
fraud claim); Renner, 2000 WL 781081, at *12 (Chase did not give substantial assistance to
participants of prime bank guarantee scam simply because participants used accounts at Chase);
Ryan, 2000 WL 1375265, at *9 (“The affirmative acts of opening the accounts, approving
various transfers, and then closing the accounts . . . do not constitute substantial assistance.”); In
re Amaranth Natural Gas Commodities Litig., 612 F. Supp. 2d 376, 392-93 (S.D.N.Y. 2009)
(characterizing bank’s extension of credit to fraudster as “routine” banking service insufficient to
support an aiding and abetting claim).
Second, the Trustee’s allegation that JPMorgan substantially assisted Madoff by
investing $250 million in the feeder funds turns the substantial assistance requirement on its
head. Whether that money ever actually made its way to BMIS is never alleged. But even if it
did, such a tiny fraction of the tens of billions of dollars that Madoff is known to have collected
from investors cannot plausibly be characterized as “substantial assistance.” Moreover, by the
Trustee’s theory, everyone who invested in one of the feeder funds or directly with Madoff
himself — i.e., his victims — “substantially assisted” his fraud. This argument is absurd.
Third, the Trustee cannot adequately plead substantial assistance by alleging that
JPMorgan failed to comply with federal anti-money laundering laws or that it “ignor[ed]”
allegedly suspicious activity in Madoff’s account. Compl. ¶ 441. These allegations all amount
to inaction, which cannot amount to substantial assistance unless the defendant owes a fiduciary
duty “directly to the plaintiff.” Kaufman, 307 A.D.2d at 126; see also Sharp International, 403
F.3d at 51-52 (allegations that “come down to omissions or failures to act” do not support a
claim of “substantial assistance”); Kolbeck, 939 F. Supp. at 247 (“[I]naction, or a failure to
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investigate, constitutes actionable participation only when a defendant owes a fiduciary duty
directly to the plaintiff; that the primary violator owes a fiduciary duty to the plaintiff is not
enough.”). The alleged failure “to comply with domestic and international bank secrecy, know-
your-customer, and anti-money laundering laws, decrees, and regulations” does “not elevate
[defendants’] actions into the realm of ‘substantial assistance.’” Rosner v. Bank of China, 528 F.
Supp. 2d 419, 427 (S.D.N.Y. 2007); accord Berman, 2011 WL 1002683, at *10.
The Complaint, in sum, fails to allege facts showing that JPMorgan took any
actions to provide “substantial assistance” to Madoff’s Ponzi scheme. Given that the Ponzi
scheme was doomed to fail, the Trustee’s claim that JPMorgan knowingly assisted Madoff in his
crimes, risking both liability and reputational harm, is not only unsupported by factual
allegations but also utterly implausible. See Kalnit v. Eichler, 264 F.3d 131, 140-41 (2d Cir.
2001) (refusing to credit allegations of fraudulent conduct that “def[y] economic reason”).
E. The Trustee has failed to plead that JPMorgan’s
conduct was the proximate cause of the alleged injury.
To state an aiding and abetting claim, “the complaint must allege that the acts of
the aider and abettor proximately caused the harm to the [plaintiff] on which the primary liability
is predicated.” Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 62-63 (2d Cir.
1985); Jordan, 566 F. Supp. 2d at 300. “Aiding and abetting liability arises only when plaintiffs’
injury was a ‘direct or reasonably foreseeable result’ of the complained-of conduct. ‘But-for’
causation does not suffice; the breach must proximately cause the loss.” Kolbeck, 939 F. Supp.
2d at 249 (internal citation omitted); accord Bloor, 754 F.2d at 63 (“Allegations of a ‘but for’
causal relationship are insufficient.”).
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The Trustee’s theory of proximate cause appears to be that Madoff could not have
run his Ponzi scheme without the commercial banking services provided by JPMorgan. But the
Complaint never alleges that BMIS — which after all fooled the SEC and scores of financial
institutions around the world — would have been unable to obtain routine banking services from
another bank. Compl. ¶¶ 442, 457; see, e.g., In re Beacon, 745 F. Supp. 2d at 394 (“Madoff
deceived countless investors and professionals, as well as his primary regulators, the Securities
and Exchange Commission (‘SEC’) and the Financial Industry Regulatory Authority
(‘FINRA’).”). The Complaint thus fails to establish proximate cause. Edwards & Hanly v.
Wells Fargo Secs. Clearance Corp., 602 F.2d 478, 484 (2d Cir. 1979) (allegation that fraudster
“would not have been able to finance or to conceal” the fraud without defendant’s
“acquiescence” and lending of money did not amount to proximate cause); In re Agape, 2011
WL 1136173, at *25 (“conventional banking” services provided to Ponzi schemer were “not the
proximate cause of the Plaintiffs’ damages”).
F. The Trustee has failed to plead individual fraud claims.
The aiding and abetting claims also fail because the Complaint makes no attempt
to satisfy the requirements for pleading any of the thousands of individual underlying fraud
claims on which those claims are predicated. To plead those individual claims, the Trustee
would have to identify each customer who was defrauded, specify the misstatements or
omissions that each customer relied upon, and explain why each customer’s reliance was
reasonable. Instead, the Trustee lumps all of Madoff’s customers together as if they were a
single, unitary plaintiff — even though the Trustee himself has publicly alleged that various
customers, including large feeder funds such as Fairfield Sentry and Ascot Partners, participated
in Madoff’s fraud and did not act reasonably in relying on Madoff. See, e.g., Picard v. Merkin et
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al., No. 09-01182 (Bankr. S.D.N.Y.) (Complaint filed May 7, 2009); Picard v. Fairfield Sentry
Limited et al., No. 09-01239 (Bankr. S.D.N.Y.) (Amended Complaint filed July 20, 2010).
The Court should not indulge the Trustee’s fiction. This is not a fraud-on-the-
market case where the plaintiff may dispense with pleading certain elements of fraud. Here, if
the Trustee is allowed to aggregate thousands of separate customer fraud claims in a single
action, he has to plead the elements of those claims. See, e.g., SIPC v. BDO Seidman, LLP, 222
F.3d 63, 73 (2d Cir. 2000) (dismissing fraudulent misrepresentation claim brought by SIPC and
SIPA trustee on behalf of customers on the grounds that the complaint failed to plead reliance by
the customers on the alleged misstatements); Jana Master Fund, Ltd. v. JPMorgan Chase & Co.,
2008 WL 746540, at *4-5 (Sup. Ct. N.Y. Co. Mar. 12, 2008) (dismissing aiding and abetting
fraud and aiding and abetting fiduciary duty claims where plaintiffs did not “particularize the
reasonableness of any purchaser’s reliance on anything said or communicated”); In re
ICN/Viratek Sec. Litig., 1996 WL 164732, at *12 (S.D.N.Y. Apr. 9, 1996) (dismissing fraud
claims of absent parties where named plaintiffs failed to show “individualized reliance” on the
part of such parties).
The Trustee’s failure to plead fraud on behalf of any individual customer
underscores the basic flaw in the Trustee’s attempt to aggregate the claims of differently situated
customers into one mass action. The Trustee should not be relieved of his pleading burden
because he is trying to pursue an unmanageable, de facto class action.
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POINT IV
THE COMPLAINT FAILS TO STATE CLAIMS FOR
CONVERSION AND UNJUST ENRICHMENT.
In addition to claims for aiding and abetting, the Complaint alleges claims for
conversion and unjust enrichment (causes of action 19 and 20). For the reasons stated above, the
Trustee lacks standing to bring those claims, and they are barred by SLUSA. But the Complaint
also fails to state claims for relief based on these theories.
A. The Complaint fails to state a claim for conversion.
Under New York law, “conversion takes place when someone, intentionally and
without authority, assumes or exercises control over personal property belonging to someone
else, interfering with that person’s right of possession.” Colavito v. N.Y. Organ Donor Network,
8 N.Y.3d 43, 49-50 (2006).
The Trustee’s conversion claim alleges that JPMorgan intentionally exercised
control over “BLMIS customers’ money,” Compl. ¶ 464, but it provides no coherent explanation
as to how JPMorgan could have done that. To the extent the Trustee is saying that JPMorgan
converted customer property by deducting fees from or using the money in BMIS’s account, the
Trustee has no viable claim. Under New York law, “a customer’s bank account is merely a debt
owed to it by the bank and funds deposited in it are not sufficiently specific and identifiable, in
relation to the bank’s other funds, to support a claim for conversion against a bank.” Wells v.
Bank of New York Co., 181 Misc. 2d 574, 577 (N.Y. Sup. Ct. N.Y. Co. 1999) (citing cases).
The conversion claim fails for numerous other reasons as well. First, the
Complaint does not allege facts showing that JPMorgan intentionally deprived anyone of his or
her property. Since the Complaint fails to allege that JPMorgan had actual knowledge of
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Madoff’s crimes, there is no basis to conclude that JPMorgan intentionally deprived customers of
property. See, e.g., In re Agape Litig., 2011 WL 1136173, at *26-27 (dismissing claim against
bank for aiding and abetting conversion where the complaint failed to allege the bank’s “actual
knowledge” of its customer’s “underlying conversion”).
Second, the Complaint fails to allege that JPMorgan took any action with respect
to the 703 Account that was not authorized and directed by BMIS, the bank’s client. To the
contrary, the Complaint makes plain that it was BMIS directing the 703 Account transactions.
See, e.g., Compl. ¶¶ 226, 258-59, 262-64, 266.
Third, the Complaint does not allege that JPMorgan interfered with any
customer’s right of possession over specifically identifiable funds. Money cannot be subject to a
conversion action unless it is “held in a ‘specific, identifiable fund’” and subject to “‘an
obligation to return or otherwise treat in a particular manner the specific fund in question.’”
Citadel Mgmt. v. Telesis Trust, 123 F. Supp. 2d 133, 147 (S.D.N.Y. 2000) (citation omitted).
Here, the Trustee does not allege facts showing that any customer had specifically identifiable
funds in BMIS’s 703 Account.
Finally, to state a claim for conversion, a plaintiff must plead that the defendant
“acted to exclude the rights of the owner.” Parks v. ABC, Inc., 2008 WL 205205, at *5
(S.D.N.Y. Jan. 24, 2008) (internal quotation marks omitted). Nowhere does the Trustee allege
that JPMorgan withheld money in the face of a demand for its return. See Schwartz v. Capital
Liquidators, Inc., 984 F.2d 53, 54 (2d Cir. 1993) (affirming dismissal of conversion claim where
there was no evidence that plaintiff demanded return of property).
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B. The Complaint fails to state a claim for unjust enrichment.
To plead unjust enrichment under New York law, a plaintiff must allege that:
“(1) the other party was enriched, (2) at that party’s expense, and (3) that it is against equity and
good conscience to permit [the other party] to retain what is sought to be recovered.” Mandarin
Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 182 (2011) (internal quotation marks omitted). In
addition, the complaint must allege the existence, between the plaintiff and defendant, of “some
type of direct dealings or an actual, substantive relationship.” Carmona v. Spanish Broadcasting
Sys., Inc., 2009 WL 890054, at *6 (S.D.N.Y. Mar. 30, 2009); accord, e.g., Jet Star Enters., Ltd.
v. Soros, 2006 WL 2270375, at *5 (S.D.N.Y. Aug. 9, 2006).
The Complaint does not state a claim for unjust enrichment. Although the
Complaint asserts summarily that “JPMC has been enriched at the expense of the Trustee and,
ultimately, at the expense of BLMIS’s customers,” Compl. ¶ 471, the Complaint alleges no
direct dealings or actual, substantive relationships between JPMorgan and the BMIS customers
that the Trustee purports to represent. See Czech Beer Importers, Inc. v. C. Haven Imports, LLC,
2005 WL 1490097, at *7 (S.D.N.Y. June 23, 2005) (dismissing unjust enrichment claim for
failure to allege any relationship between the plaintiff and the defendant); Reading Int’l, Inc. v.
Oaktree Capital Mgmt. LLC, 317 F. Supp. 2d 301, 334 (S.D.N.Y. 2003) (same).
Here, the only entity with whom JPMorgan had a relationship was BMIS, but the
Trustee does not purport to bring any unjust enrichment claim on behalf of that entity. The
Wagoner rule, see Point I.A, supra, would bar any such claim. In addition, any such claim
would also be barred by the agreements between BMIS and JPMorgan, including account and
loan agreements. “The existence of a valid and enforceable written contract governing a
particular subject matter ordinarily precludes recovery in quasi contract for events arising out of
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the same subject matter.” Clark-Fitzpatrick, Inc. v. Long Island R.R., 70 N.Y.2d 382, 388
(1987).
The Trustee likewise fails to allege facts showing that “equity and good
conscience” require restitution by JPMorgan. With respect to this element, “a plaintiff, in order
to recover under a theory of quasi-contract,” must “prove that performance” by the plaintiff “was
rendered for the defendant.” Piccoli A/S v. Calvin Klein Jeanswear Co., 19 F. Supp. 2d 157, 166
(S.D.N.Y. 1998) (internal quotation marks omitted). “It is not enough that the defendant
received a benefit from the activities of the plaintiff; if services were performed at the behest of
someone other than the defendant, the plaintiff must look to that person for recovery.” Kagan v.
K-Tel Entm’t, Inc., 172 A.D.2d 375, 376 (1st Dep’t 1991) (internal citations omitted). Here, the
Trustee cannot allege that BMIS customers invested funds for the benefit of, or at the behest of,
JPMorgan. The customers invested for their own benefit, and were acting in their own interest
(at Madoff’s behest) when they invested with BMIS.
POINT V
THE TRUSTEE HAS NO VALID CLAIM FOR
“FRAUD ON THE REGULATOR.”
In his twenty-first cause of action, the Trustee alleges that JPMorgan deceived its
federal regulators ― the SEC, the OCC, and the Federal Reserve ― by failing to inform these
agencies that Madoff was operating a Ponzi scheme. Compl. ¶¶ 474-480. According to the
Trustee, had JPMorgan notified these agencies of Madoff’s crimes, the regulators would have
shut down the Ponzi scheme and massive losses would have been averted. Id. ¶ 480. The
Trustee purports to assert this novel claim under New York common law. This claim fails for
three independent reasons: (1) New York common law does not recognize a cause of action for
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fraud on the regulator; (2) even if it did, the claim would be preempted by federal law; and
(3) the Trustee has failed to plead the elements of fraud.
First, “fraud on the regulator” is a fictional cause of action. Despite extensive
research, JPMorgan is not aware of any New York case that has recognized a cause of action for
fraud on a federal regulator. Nor did the Trustee cite any such case in opposing withdrawal of
the reference. To the extent the issue has been addressed, the Second Circuit has declined to
recognize a theory of “fraud on the regulatory process.” SIPC v. BDO Seidman, LLP, 222 F.3d
63, 71-73 (2d Cir. 2000).
Second, any “fraud on the regulator” claim is preempted by federal law. In
Buckman Co. v. Plaintiffs’ Legal Committee, the United States Supreme Court considered a
state-law “fraud-on-the-FDA” claim brought by medical patients against a consultant to the
manufacturer of orthopedic bone screws, and held that the claim was preempted by the Federal
Food, Drug, and Cosmetic Act. 531 U.S. 341, 348 (2001). Recognizing that “[p]olicing fraud
against federal agencies is hardly a field which the States have traditionally occupied,” the
Supreme Court held that “the relationship between a federal agency and the entity it regulates is
inherently federal in character because the relationship originates from, is governed by, and
terminates according to federal law.” Id. at 347. The Court explained that the federal statute
“prompted” the defendant’s “dealings with the FDA” and “dictated” the “very subject matter” of
the defendant’s statements to the agency. Id. at 347-48. The Court also found that “the federal
statutory scheme amply empower[ed] the FDA to punish and deter fraud against the
Administration,” and that the agency’s “flexibility” in determining how to address misconduct
on the part of regulated businesses “is a critical component of the statutory and regulatory
framework under which the FDA pursues difficult (and often competing) objectives.” Id. at 348,
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349. Accordingly, because any state-law fraud-on-the-FDA claim would conflict with the
enforcement authority delegated to the FDA, the Buckman Court held that plaintiffs’ fraud-on-
the-regulator claims were preempted by federal law. Id.; see also Williams v. Dow Chem. Co.,
255 F. Supp. 2d 219, 232 (S.D.N.Y. 2003) (holding state law “fraud on the EPA” claims
preempted under Buckman).
As in Buckman, JPMorgan’s communications with the SEC, the OCC and the
Federal Reserve in this case were indisputably “prompted” by federal law. Buckman, 531 U.S. at
347. And here, as in Buckman, the relevant statutes and regulations dictate the “very subject
matter” of JPMorgan’s statements to the agencies, including through comprehensive reporting
requirements. Id.; see also 15 U.S.C. § 78o (SEC: “Registration and regulation of brokers and
dealers”); 12 U.S.C. § 161 (OCC: “Reports to Comptroller of the Currency”); 12 C.F.R. § 21.11
(OCC: “Suspicious Activity Report”); 12 C.F.R. § 225.4(f) (Federal Reserve: “Suspicious
activity report”); 12 U.S.C. § 1844(a) (Federal Reserve: “[E]ach bank holding company shall
register with the Board on forms prescribed by the Board. . . .”). For example, the federal
regulations that mandate the filing of a Suspicious Activity Report prescribe when a national
bank is required to file a SAR and in what form. 12 C.F.R. § 21.11(c). In addition, the relevant
statutes grant examination and enforcement authority to the agencies. E.g., 15 U.S.C. § 78u-2
(SEC); 12 U.S.C. §§ 93, 164(d), 481 (OCC); 12 U.S.C. § 1818 (OCC, Federal Reserve, FDIC);
12 U.S.C. §§ 325, 483, 1847 (Federal Reserve).
Significantly, like Congress’s empowerment of the FDA “to punish and deter
fraud” against the FDA noted in Buckman, federal statutes and code provisions empower the
SEC, the OCC and the Federal Reserve to punish and deter fraud or other misconduct by
regulated entities. For example, failure to file a SAR as required by Section 21.11 of the OCC
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regulations can result in “supervisory action” by the OCC. See 12 C.F.R. § 21.11(i). Indeed, if
JPMorgan were to fail to file required reports, the statute provides that fines “shall be assessed
and collected by the Comptroller of the Currency.” 12 U.S.C. § 164(d). Moreover, under federal
statute, JPMorgan is subject to civil penalties if it willfully violates any SEC regulations, see 15
U.S.C. § 78u-2, and criminal penalties if it knowingly violates any provision of the U.S. Code
chapter governing bank holding companies. See 12 U.S.C. § 1847(a).10
Accordingly, like the relationship at issue in Buckman, JPMorgan’s relationship
with its federal regulators is “inherently federal.” 531 U.S. at 347. The Trustee’s cause of action
for fraud on the SEC, OCC and Federal Reserve “inevitably conflict[s] with [the agencies’]
responsibility to police fraud” and infringes upon those agencies’ “flexibility” in pursuing their
“objectives” in regulating national banks such as JPMorgan. Id. at 350, 349; see also Timberlake
v. Synthes Spine, Inc., 2011 WL 711075, at *8-9 (S.D. Tex. Feb. 18, 2011) (“fraud as to the
FDA” claims seeking relief for “false representations” to the FDA preempted under Buckman
because “it is the Federal Government rather than private litigants [that is] authorized to file suit
for noncompliance”); Riley v. Cordis Corp., 625 F. Supp. 2d 769, 777 (D. Minn. 2009) (“a state-
law claim that the defendant made misrepresentations to the [federal agency] is preempted
because such a claim would not exist absent the federal regulatory scheme”). In addition, as was
the case in Buckman, permitting each of the 50 states to authorize private tort claims of the kind
10 The power to enforce any duty to report to the SEC, the OCC and the Federal Reserve lies
exclusively with those regulators; the relevant statutes and regulations do not provide for a
private right of action. See B.E.L.T., Inc. v. Wachovia Corp., 403 F.3d 474, 476 (7th Cir. 2005)
(regulation requiring banks to notify the Treasury Department of “any known or suspected
Federal criminal violation” does not “create a private right of action for damages”); AmSouth
Bank v. Dale, 386 F.3d 763, 777 (6th Cir. 2004) (“the Bank Secrecy Act does not create a private
right of action”); Carran v. Morgan, 2007 WL 3520480, at *5 (S.D. Fla. Nov. 14, 2007) (“Of
course, there is no private right of action for failure to file a suspicious activity report.”).
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asserted by the Trustee would “dramatically increase the burdens” facing regulated entities in a
way that was not contemplated by Congress. Buckman, 531 U.S. at 350.
Third, and finally, the “fraud on the regulator” claim does not meet the basic
requirements for a fraud claim under New York law. To state a claim for fraud under New York
law, “the plaintiff must prove a misrepresentation or a material omission of fact which was false
and known to be false by defendant, made for the purpose of inducing the other party to rely
upon it, justifiable reliance of the other party on the misrepresentation or material omission, and
injury.” Lama Holding Co. v. Smith Barney, Inc., 88 N.Y.2d 413, 421 (1996).
These elements are not satisfied. The Complaint fails to allege that JPMorgan
knowingly misrepresented or concealed any facts from anyone. See Point III, supra. The
Complaint likewise fails to allege that JPMorgan knowingly withheld information from its
federal regulators “for the purpose of inducing” BMIS or its customers to rely on that omission;
indeed, any such allegation would be entirely implausible given that OCC regulations prohibit
banks from disclosing the reports filed with regulators. See 12 C.F.R. § 21.11(k)(1)(i). Nor does
the Complaint plead the element of “justifiable reliance.” The Complaint alleges that
JPMorgan’s misrepresentations and omissions were directed at the bank’s regulators. Compl.
¶ 474. But “a plaintiff does not establish the reliance element of fraud for purposes of . . . New
York law by showing only that a third party relied on a defendant’s false statements.” Cement
and Concrete Workers Dist. Council Welfare Fund, Pension Fund, Legal Services Fund and
Annuity Fund v. Lollo, 148 F.3d 194, 196 (2d Cir. 1998) (emphasis added); see also City of New
York v. Cyco.Net, Inc., 383 F. Supp. 2d 526, 565 (S.D.N.Y. 2005) (dismissing common law
fraud claim under New York law for failure to plead reliance where plaintiff alleged that it had
relied on defendants’ submission of reports to a non-party, rather than reports to the plaintiff).
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The “fraud on the regulator” should therefore be dismissed along with the Trustee’s other
common law claims.
POINT VI
THE TRUSTEE’S CLAIMS TO AVOID PAYMENTS
FROM BMIS TO JPMORGAN SHOULD BE DISMISSED.
The first 16 causes of action in the Complaint seek recovery of approximately
$425 million from all of the Defendants under the avoidance provisions of the Bankruptcy Code.
Invoking those avoidance provisions, the Trustee seeks to recover: (1) approximately $597,000
in fees paid by BMIS to JPMorgan during the six-year period before BMIS’s bankruptcy,
including approximately $23,941.65 paid to JPMorgan during the 90 days before the SIPA
proceeding (causes of action 1 to 8); (2) repayments of principal and interest on $145 million in
secured loans extended to BMIS in late 2005 and early 2006 (causes of action 4 to 8); and
(3) payments received by JPMorgan from Fairfield Sentry, Fairfield Sigma, and Herald upon the
redemption of investments in those funds in 2008 (causes of action 9 to 16). For the reasons set
forth below, the Trustee’s claims to recover the loan repayments and the payments of fees fail to
state a claim; accordingly, the first through the eighth causes of action should be dismissed.11
A. As acts of setoff or repayments of secured debts, the alleged
transfers from BMIS to JPMorgan are not avoidable.
1. The Trustee cannot avoid the loan repayments.
Because the loan repayments were made more than two years before the Madoff
bankruptcy filing, they are not subject to avoidance under the Bankruptcy Code’s preference
11 The Trustee’s ninth through the sixteenth causes of action seek recovery of alleged indirect
payments to JPMorgan from BMIS feeder funds, as opposed to the direct payments from BMIS
(which are the subject of causes of action 1 through 8). JPMorgan reserves all of its rights and
defenses with respect to those claims, but is not moving to dismiss them at this time.
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provision or its fraudulent transfer provision. See 11 U.S.C. § 547(b)(4) (90-day look-back
period for preferences); 11 U.S.C. § 548(a)(1) (two-year look-back period for federal-law
fraudulent transfers). Thus, in seeking to recover the loan repayments, the Trustee relies on
section 544(b) of the Bankruptcy Code, which authorizes a trustee to avoid a “transfer of an
interest of the debtor in property” that “a creditor holding an unsecured claim” could avoid under
applicable state law. 11 U.S.C. § 544(b)(1).
As explained below, however, (i) the repayment of the loan constituted an act of
setoff rather than a “transfer” subject to avoidance; and (ii) even if it were not an act of setoff,
the repayment of a secured loan is not avoidable, because it does not injure unsecured creditors.
The loan repayment was a setoff, not a transfer.
The Complaint alleges that the BMIS loan was repaid when “Madoff sent a letter
to JPMC requesting a decrease in BLMIS’s loan amount to zero, and authorizing JPMC to debit
the $145 million principal amount of the loan from the 703 Account. JPMC did as Madoff
requested, and debited $145 million from the 703 Account that same day.” Compl. ¶ 266.
The facts as pleaded by the Complaint present a textbook example of a setoff, as
opposed to a transfer. “As a general rule, when a depositor is indebted to a bank, and the debts
are mutual — that is, between the same parties and in the same right — the bank may apply the
deposit, or such portion thereof as may be necessary, to the payment of the debt due it by the
depositor, provided there is no express agreement to the contrary and the deposit is not
specifically applicable to some other purpose.” 9 N.Y. Jur. 2d (Banks) § 303; accord In re
Bennett Funding Grp., 146 F.3d 136, 139 (2d Cir. 1998) (“Ordinarily, funds in a general deposit
account can be used to setoff debts owed to the bank because when a depositor deposits funds
into a general account he parts with title to the funds in exchange for a debt owed to him by the
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bank, thereby establishing a standard debtor-creditor relationship.”); Chemical Bank v. Ettinger,
196 A.D.2d 711, 714 (1st Dep’t 1993) (“a bank has a general lien on funds . . . in its possession
to which it may look for repayment of an account owed by the debtor-depositor to the bank”).12
By pleading that JPMorgan debited the 703 Account at JPMorgan (a JPMorgan
debt to BMIS) in order to satisfy JPMorgan’s loan to BMIS (a BMIS debt to JPMorgan), the
Complaint alleges that a setoff occurred. JPMorgan thus applied “the funds in a general account
to set off debts owed to it by a depositor.” Swan Brewery Co. v. U.S. Trust Co., 832 F. Supp.
714, 718 (S.D.N.Y. 1993); accord, e.g., Fenton v. Ives, 222 A.D.2d 776, 777 (3d Dep’t 1995);
Clarkson Co. v. Shaheen, 533 F. Supp. 905, 925 (S.D.N.Y. 1982).
Under the Bankruptcy Code, a setoff is not an avoidable transfer, because it is not
a “transfer” at all. The definition of “transfer” in the Bankruptcy Code, 11 U.S.C. § 101(54),
deliberately omits any mention of “setoff.” See H.R. Rep. No. 95-595 (1977), reprinted in 1978
U.S.C.C.A.N. 6436, 6439 (statement of Rep. Edwards) (“Inclusion of ‘setoff’ is deleted” from
the definition of “transfer”); 5 Collier on Bankruptcy ¶ 553.09[1][a] (16th ed. 2009) (“The term
‘transfer’ is defined in Code section 101 . . . and the definition intentionally omits ‘setoffs.’”).
Accordingly, a setoff cannot be avoided under the provisions of the Bankruptcy Code that
authorize avoidance of “transfers.” In re Am. Remanufacturers, Inc., 2008 WL 2909871, at *2
(Bankr. D. Del. July 25, 2008) (“it is clear that valid setoffs are not avoidable as preferential or
fraudulent transfers for the simple reason that setoffs are not transfers of property of the estate”);
accord Holyoke Nursing Home, Inc. v. Health Care Fin. Admin. (In re Holyoke Nursing Home,
12 Consistent with standard banking practice, BMIS’s account agreements likewise provided
JPMorgan with setoff rights and stated that the balance of BMIS’s deposit account, along with all
other property held by BMIS at JPMorgan, served as security for any debts of BMIS to the bank.
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Inc.), 273 B.R. 305, 309-10 (Bankr. D. Mass. 2002); Belford v. Union Trust. Co. (In re Wild
Bills, Inc.), 206 B.R. 8, 12-13 (Bankr. D. Conn. 1997).
Section 544(b) of the Bankruptcy Code, on which the Complaint relies to seek
avoidance of the loan repayment, by its express terms allows the avoidance of nothing but a
“transfer.” 11 U.S.C. § 544(b)(1). Thus, the loan repayment made by way of setoff from the 703
Account is simply not a “transfer” subject to avoidance.
Even if it were a transfer, the secured loan repayment is not avoidable.
Under the New York law cited above, JPMorgan’s $145 million loan to BMIS
was secured in full by the balance in the 703 Account. In addition, the Complaint itself alleges
that the $145 million loan debt was fully secured by collateral separate from the 703 Account
balance. See Compl. ¶ 206 (alleging that JPMorgan’s $95 million loan was secured by a $100
million bond); id. ¶ 264 (alleging that JPMorgan’s $50 million loan was secured by $54 million
in bonds); id. ¶¶ 257, 268 (alleging that loan was “fully collateralized”).
As explained by Judge Chin, “it is hornbook law that ‘[a] conveyance cannot be
fraudulent as to creditors if . . . [it] does not deplete or otherwise diminish the value of the assets
of the debtor’s estate remaining available to creditors.’” Lippe v. Bairnco Corp., 249 F. Supp. 2d
357, 375 (S.D.N.Y. 2003), aff’d, 99 F. App’x 274, 281 (2d Cir. 2004) (“In New York,
fraudulent-conveyance liability may not attach absent some prejudice to a creditor of the
transferor.” (citing numerous cases)). New York courts have long recognized that “[t]here can
be no fraudulent conveyance as a matter of fact where there is no resultant diminution of value of
the assets or estate of the debtor which remains available to creditors.” Newfield v. Ettlinger,
194 N.Y.S.2d 670, 678 (N.Y. Sup. Ct. 1959) (Baer, J.).
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By definition, the repayment of a fully secured debt does not prejudice other
creditors of the debtor. Rather, “[r]epayments of fully secured obligations — where a transfer
results in a dollar for dollar reduction in the debtor’s liability — do not . . . put assets otherwise
available in a bankruptcy distribution out of the reach” of other creditors. Henry v. Lehman
Commercial Paper, Inc. (In re First Alliance Mortg. Co.), 471 F.3d 977, 1008 (9th Cir. 2006);
see also Melamed v. Lake County Nat’l Bank, 727 F.2d 1399, 1402 (6th Cir. 1984) (concluding
that the repayment of a secured loan did not “diminish the assets of the debtor which were
available to its creditors” and thus was not avoidable as a fraudulent transfer); In re Nat’l
Century Fin. Enters., Inc., 2011 WL 1397813, at *23 (S.D. Ohio Apr. 12, 2011) (secured loan
repayment by Ponzi scheme operator was not avoidable because “a payment does not harm other
creditors when it results in a dollar-for-dollar reduction in secured, antecedent debt”); Miller v.
Forge Mench P’ship Ltd., 2005 WL 267551, at *4-5 (S.D.N.Y. Feb. 2, 2005) (fraudulent
conveyance plaintiff not entitled to avoid debtor’s transfer of property pledged as collateral);
Richardson v. Huntington Nat’l Bank (In re CyberCo Holdings, Inc.), 382 B.R. 118, 139 (Bankr.
W.D. Mich. 2008) (“[A] debtor cannot fraudulently transfer to a creditor property that has
already been pledged to that creditor as collateral.”).
Here, where the Trustee affirmatively alleges that the loan repayment was on
account of fully secured debts, the property and value transferred would not have been available
to unsecured creditors even if the transfers had not taken place. As a result, there is no basis to
avoid that payment under New York law.
Beyond this, under section 544(b) of the Bankruptcy Code, the repayment of a
secured loan is not a transfer of “an interest of the debtor in property.” The “interest in property”
element limits avoidable transfers to those that injure creditors, as Judge Buchwald recognized
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when she interpreted that statutory language to mean that “only asset transfers that may have
actually harmed creditors may be avoided.” Bear, Stearns Securities Corp. v. Gredd, 275 B.R.
190, 194 (S.D.N.Y. 2002); accord id. at 195 (“creditors must actually be harmed in order to
avoid a fraudulent transfer”). The Bankruptcy Code’s independent requirement that a fraudulent
transfer harm creditors cannot be met where, as here, the challenged payment discharges a fully
secured debt. Richardson, 382 B.R. at 137, 142 (rejecting fraudulent transfer claim against
secured lender under section 544(b) on the basis that the transfer was not of an “interest of the
debtor in property”).
In sum, the allegations of the Complaint establish as a matter of law that the
BMIS loan repayment was an act of setoff, not a transfer. And in any event, state and federal
law each affirm that the repayment of a fully secured loan is not a transfer that harms unsecured
creditors. As a result, the Trustee’s claims to avoid the loan repayment (both principal and
interest) should be dismissed.
2. The Trustee cannot avoid the fee payments.
For similar reasons, the Trustee’s claims to recover fees paid to JPMorgan from
the BMIS bank account, either as preferences or as fraudulent transfers, should likewise be
dismissed.13 The sections of the Bankruptcy Code on which the Trustee relies to recover fees
uniformly require a “transfer of an interest of the debtor in property.” 11 U.S.C. §§ 547(b),
13 In the first cause of action, the Trustee seeks to recover fees paid within 90 days of BMIS’s
bankruptcy as “preferences” under section 547(b) of the Bankruptcy Code. In the second and
third causes of action, the Trustee seeks to recover fees paid within two years of the bankruptcy
as fraudulent transfers under section 548(a)(1) of the Bankruptcy Code; and in the fourth through
eighth causes of action, the Trustee seeks to recover fees paid within six years of the bankruptcy
as fraudulent transfers under section 544(b) of the Bankruptcy Code and New York law.
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548(a)(1), 544(b). But as discussed, debits from a bank account to satisfy debts (here, fees)
owed to the depository bank are setoffs, which are omitted from the Bankruptcy Code definition
of “transfer.” In addition, and again as set forth above, the courts have interpreted the “interest
of the debtor in property” language to require actual harm to unsecured creditors as a result of a
transfer. The Trustee cannot satisfy the “actual harm” requirement with respect to the fee
payments, because as a matter of law JPMorgan was secured by BMIS’s account balance, from
which it had the right to deduct those fees when they were due.14
B. The Trustee’s fraudulent transfer claims are barred by the
Second Circuit’s decision in Sharp International.
Even if the challenged payments to JPMorgan did not amount to setoffs or
repayments of secured debts, the Trustee’s fraudulent transfer claims to recover those payments
(causes of action 2-8) would still have to be dismissed on the basis that the Trustee, in seeking to
recover those transfers, is seeking to avoid the repayment of antecedent debts. While section 547
of the Bankruptcy Code, which governs preferential transfers to creditors, permits a trustee to
recover repayments of certain debts made within 90 days of a bankruptcy, the repayment of a
debt is not avoidable as a fraudulent transfer unless the defendant was an insider or knowingly
participated in the debtor’s fraud. Here, the Trustee has alleged at most that the payments to
14 The Trustee’s claim to avoid payments made within 90 days of the bankruptcy as preferential
(the first cause of action) also fails for a further reason. Under section 547(b)(5) of the
Bankruptcy Code, to succeed on a preference claim, the Trustee must establish that the
challenged transfers enabled JPMorgan “to receive more than [it] would receive” in a chapter 7
liquidation if the transfer had not been made. 11 U.S.C. § 547(b)(5). Since secured lenders
receive 100 cents on the dollar in a chapter 7 liquidation, the repayment of a secured debt can
have no “preferential effect” under Section 547(b)(5). E.g., In re CBGB Holdings, LLC, 439
B.R. 551, 559 (Bankr. S.D.N.Y. 2010).
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JPMorgan from BMIS preferred certain creditors over others, but that is not sufficient to state a
claim for fraudulent transfer.
“[I]f there is in our law one point which is more ungrudgingly accepted than
others, it is that the preferential transfer does not constitute a fraudulent conveyance.” Pereira v.
Dow Chem. Co. (In re Trace Int’l Holdings, Inc.), 301 B.R. 801, 805 (Bankr. S.D.N.Y. 2003),
vacated on other grounds, 2009 WL 1810112 (S.D.N.Y. June 25, 2009) (quoting 1 G. Glenn,
Fraudulent Conveyances and Preferences § 289, at 488 (rev. ed. 1940)). The basic object of
preference law is to ensure “equality of distribution among creditors of the debtor.” Lawson v.
Ford Motor Co. (In re Roblin Indus., Inc.), 78 F.3d 30, 40 (2d Cir. 1996) (quoting H.R. No. 595,
95th Cong., 1st Sess. 177-78 (1977)). In contrast, “[t]he basic object of fraudulent conveyance
law is to see that the debtor uses his limited assets to satisfy some of his creditors.” Sharp Int’l
Corp. v. State St. Bank and Trust Co. (In re Sharp Int’l Corp.), 403 F.3d 43, 54 (2d Cir. 2005)
(emphasis in original) (quoting HBE Leasing Corp. v. Frank, 48 F.3d 623, 634 (2d Cir. 1995)
(quoting Boston Trading Group, Inc. v. Burnazos, 835 F.2d 1504, 1509 (1st Cir. 1987))).
The Second Circuit’s decision in Sharp International is controlling. In that case,
the Court held that a payment that discharges an antecedent debt — absent insider dealing or
knowing participation in fraud by the creditor — is not a fraudulent transfer. Sharp International
involved a massive fraud perpetrated by Sharp’s principals on Sharp’s creditors. State Street,
which was Sharp’s largest creditor, realized that Sharp was engaged in fraud and demanded that
Sharp repay its debt, which was accomplished through a fraud on a new set of lenders. Id. at 51-
52. Despite these facts, the Second Circuit concluded that Sharp’s payment to State Street was
not a fraudulent transfer, holding that “the preferential repayment of preexisting debts to some
creditors does not constitute a fraudulent conveyance.” Id. at 54. In reaching this conclusion,
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the Sharp International Court relied heavily on the First Circuit’s decision in Boston Trading
Group, Inc. v. Burnazos, 835 F.2d 1504 (1st Cir. 1987) (Breyer, J.). In that case, the First Circuit
likewise held that the repayment of a debt to a non-insider was not avoidable as a fraudulent
transfer, despite the creditor’s actual knowledge that it was being repaid with the proceeds of a
fraud. 835 F.2d at 1510-11.
Sharp’s principle that no fraudulent transfer can be found in the repayment of an
antecedent debt — at least in the absence of insider dealing or knowing participation by a lender
in the borrower’s fraud — is codified in each of the statutes under which the Trustee brings his
fraudulent transfer claims.15 To succeed on his claim that the payments to any of the Defendants
were constructively fraudulent under section 548(a) of the Bankruptcy Code, the Trustee must
show, among other things, that BMIS did not receive “reasonably equivalent value.” 11 U.S.C.
§ 548(a)(1)(B). The Bankruptcy Code, however, expressly defines “value” to include the
“satisfaction [of] antecedent debt.” 11 U.S.C. § 548(d)(2)(A); see also, e.g., In re All-Type
Printing, Inc., 274 B.R. 316, 324 (Bankr. D. Conn. 2002), aff’d, 80 F. App’x 700 (2d Cir. 2003)
(holding that transfers in “dollar-for-dollar satisfaction” of antecedent debts provide “reasonably
equivalent value”).
Likewise, to succeed on his claim that payments to JPMorgan were constructively
fraudulent under New York law, the Trustee must show, among other things, that BMIS did not
receive “fair consideration.” N.Y. Debt. & Cred. Law §§ 273-75. Section 272 of the New York
15 To the extent direct transfers to any Defendant were made within two years of BMIS’s
bankruptcy filing, the Trustee sues under both section 544(b) of the Bankruptcy Code,
incorporating New York law, and section 548(a); to the extent they were made more than two
years before the filing date, the Trustee sues only under section 544(b). See Compl. ¶¶ 302-40.
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Debtor-Creditor Law defines “fair consideration” to include satisfaction of an “antecedent debt,”
provided that the payment is a “fair equivalent” of the debt and taken in “good faith.” N.Y.
Debt. & Cred. Law § 272. In Sharp International, the Second Circuit made clear that, absent
insider dealing or knowing participation in fraud, “the satisfaction of a preexisting debt qualifies
as fair consideration for a transfer of property.” 403 F.3d at 54.
Finally, to sustain his claims that the payments to JPMorgan were intentional
fraudulent transfers, the Trustee must plead that the transfers “hinder[ed], delay[ed], or
defraud[ed] either present or future creditors.” 11 U.S.C. § 548(a)(1)(A); N.Y. Debt. & Cred.
Law § 276; Sharp Int’l, 403 F.3d at 56. But here again, Sharp International is controlling,
because the Second Circuit held in that case that the creditor body as a whole was not hindered,
delayed, or defrauded by the repayment of a loan owing to one creditor. Sharp Int’l, 403 F.3d at
56 (“The $12.25 million payment was at most a preference between creditors and did not
‘hinder, delay, or defraud either present or future creditors.’”).16
The Trustee’s claims in this case are even weaker than the claims dismissed in
Sharp International, because unlike State Street Bank, the defendants here are not adequately
alleged to have had knowledge of Madoff’s fraud. Having failed to make such allegations, the
Trustee has not stated a claim to recover the repayment of the $145 million in principal loaned to
BMIS and, accordingly, as in Sharp International, his claims must be dismissed. Nor has the
16 Even apart from Sharp International, the Trustee’s intentional fraudulent transfer claim under
New York law should be dismissed on the basis that the Complaint fails to allege facts showing
fraudulent intent on the part of JPMorgan. “Under the New York statute, unlike a claim under
Bankruptcy Code § 548(a)(1),” the plaintiff “must plead fraudulent intent of both the transferor
and the transferee under § 276.” Andrew Velez Constr., Inc. v. Consol. Edison Co. of N.Y., Inc.
(In re Andrew Velez Constr., Inc.), 373 B.R. 262, 276 (Bankr. S.D.N.Y. 2007) (collecting cases).
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Trustee stated a claim to recover the interest earned on those loans. Courts in this Circuit have
repeatedly held that contractual interest payments on loans made to a Ponzi scheme operator are
not subject to avoidance as fraudulent transfers. In re Unified Commercial Capital, 2002 WL
32500567, at *8-9 (W.D.N.Y. June 21, 2002) (rejecting fraudulent transfer claim to recover a
“contractually provided-for, commercially reasonable rate of interest on what amounted to a
loan”); Daly v. Deptula (In re Carrozzella & Richardson), 286 B.R. 480 (D. Conn. 2002) (same).
Finally, although the Complaint contains little detail regarding the “account fees” that the
Trustee seeks to avoid, the Trustee expressly alleges that the payment of such fees satisfied
antecedent debts. Compl. ¶ 296.
CONCLUSION
For the reasons set forth above, causes of action 17-21 and 1-8 in the Trustee’s
Complaint should be dismissed with prejudice.
Dated: New York, New York
June 3, 2011
Of counsel:
Amy R. Wolf
Douglas K. Mayer
Stephen R. DiPrima
Emil A. Kleinhaus
Meredith L. Turner
Jonathon R. La Chapelle
Respectfully submitted,
WACHTELL, LIPTON, ROSEN & KATZ
By: /s/ John F. Savarese
John F. Savarese
51 West 52nd Street
New York, NY 10019
Telephone: (212) 403-1000
Facsimile: (212) 403-2000
Attorneys for Defendants JPMorgan Chase & Co.,
JPMorgan Chase Bank, N.A., J.P. Morgan Securities
LLC and J.P. Morgan Securities Ltd.
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