Pacific West Health Medical Center Inc. Employees Retirement Trust et al v. Fairfield Greenwich Group et al

Filing 9

DECLARATION of Michael Thorne in Opposition re: 6 Order to Show Cause,,,, 2 MOTION for Preliminary Injunction and TRO Restraining Certain Assets of Defendants and Application for Expedited Discovery.. Document filed by Fairfield Greenwich Advisors LLC, Philip Toub, Matthew C. Brown, Jacqueline Harary, Julia Luongo, Mark Mckeefry, Andrew Smith. (Attachments: # 1 Certificate of Service by hand, # 2 Certificate of Service by Federal Express)(Cunha, Mark)

Download PDF
Pacific West Health Medical Center Inc. Employees Retirement Trust et al ...ld Greenwich Group et al Doc. 9 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK PACIFIC WEST HEALTH MEDICAL CENTER INC. EMPLOYEES RETIREMENT TRUST, On Behalf of Itself and All Others Similarly Situated, Plaintiff, vs. FAIRFIELD GREENWICH GROUP, FAIRFIELD GREENWICH LIMITED, FAIRFIELD GREENWICH (BERMUDA) LTD., FAIRFIELD GREENWICH ADVISORS LLC, WALTER M. NOEL, JR., ANDRES PIEDRAHITA, JEFFREY TUCKER, BRIAN FRANCOUER, AMIT VIJAYVERGIYA, YANK0 DELLAW SCHIAVA, PHILIP TOUB, LOURDES BARFWNECHE, CORNELIS BOELE, MATTHEW C. BROWN, VIANNEY D'HENDECOURT, HAROLD GREISMAN, JACQUELINE HARAY, DAVID HORN, RICHARD LANDSBERGER, DAVID LIPTON, JULIA LUONGO, MARK MCKEEFRY, MARIA TERESA PULIDO MENDOZO, CHARLES MURPHY, SANTIAGO REYES, and ANDREW SMITH, Defendants. Case No.: 09 Civ. 00134 (UA) MICHAEL THORNE DECLARATION MICHAEL THORNE, under penalty -perjury, declares the following is true and correct: 1. I am an attorney duly admitted in New York and currently serve as Managing Director and Associate General Counsel of Fairfield Greenwich Advisors LLC ("FG"). I submit this declaration in opposition to Plaintiffs Motion for a TRO and Preliminary Injunction in the above-captionedcase. I am fully familiar with the facts contained in this declaration based on my personal knowledge and the review of information and documents in the possession of FG. 2. Pacific West Health Medical Center Inc. Employees Retirement Trust, the named plaintiff ("Plaintiff") in the above-captioned matter, is an account held by Pacific West Health Medical Center, an institutional investor located in Los Angeles, California. As of January 1,2009, Pacific West Health Medical Center Inc. Employees Retirement Trust held 154.8452 shares of Fairfield Sentry Limited ("Fairfield Sentry Fund") that at one time was worth US $200,000. See Pacific West Health Medical Center Subscription Report dated 1/8/09, annexed hereto as Exhibit 1. 3. Fairfield Greenwich (Bermuda) Ltd. ("FG Investment Manager") is the Investment Manager and Fairfield Greenwich Limited ("FG Placement Agent") is the Placement Agent for Fairfield Sentry Fund. FG is an affiliate of the FG Investment Manager and FG Placement Agent and receives a portion of the management fee paid to FG Investment Manager for certain internal accounting and operational services. The "Fairfield Greenwich Group" ("FGG") is an informal collective name for FG, FG Investment Manager, FG Placement Agent and other associated entities and is not itself an independent entity. 4. Plaintiff seeks to freeze any and all property derived from payment of fees to defendants in this case ("Defendants") from monies invested with Madoff. These fees have been among Defendants' earnings for several years, and I am presently unaware of any practical way to disentangle property derived from them from Defendants' other property. Entry of the order requested by Plaintiff would appear to effectively freeze virtually all of Defendants' assets. 5. Plaintiffs proposed temporary restraining order would freeze millions of dollars of assets of the Fairfield Greenwich management companies and would cause enormous hardship to the management companies and their employees and trade creditors for the reasons stated in FG's memorandum in opposition to Plaintiffs application for a restraining order. -2- 6 . On or before January 5,2009, investors with FGG funds with accounts at Madoff, including the Fairfield Sentry Fund, were advised that no money had been paid out by the funds since December 11,2008 and that the funds were taking steps to ensure that no money would be paid without their consent. Investors were also notified that the FGG management companies had voluntarily suspended the receipt of management fees and performance fees until further notice. See January 5,2009 Letter to Investors attached hereto as Exhibit 2. 7. The individually named Defendants in the above-captioned matter who are partners of the Fairfield Greenwich management companies collectively have suffered losses from the Madoff fraud far exceeding the amount of Pacific West Health Center's $200,000 investment. 8. An almost identical application for a temporary restraining order freezing a defendant manager's assets in a Madoff fraud related case was not granted last month by Judge Sullivan in The Calibre Fund, LLC, et al. v. J. Ezra Merkin, United States District Court for the SDNY, 08 CV 11002 (RSJ). See Transcript of Merkin TRO hearing attached hereto as Exhibit 3. DATED: January 12,2009 Michael Thorne -3- Exhibit 1 CITCO Citco Fund Services (Europe) B.V. PACIFIC WEST HEALTH MEDICAL CENTER INT. DR. LAURENCE WIENER TRUSTEE C/O PACIFIC WEST HEALTH MEDICAL CENTER 11540 SANTA MONICA BL #203 LOS ANGELES, CA 90035 Fund ID : 03302 Holder I D : 11460602 Account I D : 11460602 Contract No. : 64601602 Date : Jan-13-2009 Order No. : 28383902 FAX Number: 001 310 914 76 : LWDC123@YAHOO.COM Email Account name: PACIFIC WEST HEALTH MEDICAL CENTER INT EMPLOYEES RHIREMENT TRUST FAIRFIELD SENTRY LIMITED I I n accordance with your instructions we confirm having ISSUED the following voting shares Va Iuation/NAV Date Trade Date Value/Cash Date Total Consideration USD in FAIRFIELD SENTRY 1 Dw-31-2007 Jan-01-2008 Dec-19-2007 200,000.00 Net Proceeds Subscription Price No. of voting shares Issued Total Consideration Received to Date USD 200,000.00 1,291.6127 154.8452 200,000.00 USD Your balance following this transaction will be 154.8452 voting shares . For more information or any inquiries, please contact Citco Investor Relations Group Tel: (31-20) 572 2850 Fax: (31-20) 572 2610 E-mail: I c - - - - m c - - - - < Citco B a d d i n g Telestone - Teleport Naritaweg 165 1043 B W Amsterdam The Netherlands Phone: (31-20) 5722100 Fax: (31-20) 572261 O Chamber of Commerce 33205112 Exhibit 2 FAIRFIELD SENTRY LIMITED Romasco Place, Wickhams Cay 1 Road Town, Tortola British Virgin Islands, VG 1110 January 5,2009 Dear Shareholder, We are writing to apprise you of further developments concerning Fairfield Sentry Limited (the "Company") and the matter of Bernard Madoff and Bernard L. Madoff Investment Securities LLC ("BMIS"). As a preliminary matter, we can assure shareholders that no money has been paid out by the Company since December 11, 2008 and the directors are taking steps to ensure that no money is paid out without their consent. In this regard and as previously advised, the manager to the Company, Fairfield Greenwich (Bermuda) Limited (the "Manager"), has suspended the payment of its management fee and performance fee until fixther notice. In addition, the directors and the Manager are taking steps to realise to the greatest extent possible any assets of the Company. On December 15, 2008, the Honorable Louis L. Stanton, a Federal Judge in the United States District Court for the Southern District of New York, appointed Irving Picard, Esq. as Securities Investor Protection Corporation ("SIPC") Trustee for the liquidation of BMIS. Mr. Picard, the SIPC Trustee, has engaged Lazard Freres & Co LLC to assist in the sale of the trading operations of BMIS. Also, Lee S. Richards, Esq., has been appointed Receiver for Madoff Securities International Ltd. The Manager is liaising with the SIPC Trustee on behalf of the Company to ensure the interests of the Company are represented with SIPC and to seek to retrieve any available assets of the Company as promptly as possible. As we previously wrote to you, the Company has retained counsel in the British Virgin Islands (Conyers Dill & Pearman) where the Company is incorporated, as well as counsel in the U.S. (Seward & Kissel LLP). The Company, with the advice of counsel, will analyze the Company's rights and remedies and consider potential claims. In addition, the U.S. Securities and Exchange Commission ("SEC") is reviewing the vast amount of records and information involving Madoff and BMIS. The SEC has issued a statement that "those records are increasingly exposing the complicated steps that Mr. Madoff took to deceive investors, the public and regulators" and that "progress to date indicates that Mr. Madoff kept several sets of books and false documents, and provided false information involving his advisory activities to investors and regulators." We know that shareholders are anxious to learn whatever they can about the status of their investments and the assets of the Madoff companies. Please be assured that all of those involved are working diligently to investigate this matter and to locate and preserve assets that can be used for restitution to investors. We will continue to endeavor to keep you advised of developments with respect to the Company. Yours faithfully, The Board of Directors Page 2 Exhibit 3 1 1 2 3 4 THE CALIBRE FUND, LLC., et al. , Plaintiffs, V. 5 6 7 8 9 08 CV 11002 (RJS) J. EZRA MERK'IN, Defendant. 10 11 Before : WON. RICHARD J. SULLIVAN, 12 13 14 15 16 District Judge APPEARANCES 17 18 SUSMAN, GODFREY, LLP 654 Madison Avenue, 5th Floor New York, NY 10065 . Attorneys for Plaintiffs JACOB W. BUCHDAHL Am SUBRAMANIAN R DECHERT, LLP 19 20 21 22 23 1095 Avenue of t h e Americas New York, 'NY 10036-6797 Attorneys for Defendant GARY J. M E N N L W NEIL A . STEINER 24 25 SOUTHERN DISTRICT REPORTERS, P.C. ( 2 1 2 ) 805-0300 2 8ciQcalC 1 (In open court) . 2 3 4 THE COURT: Calibre Fund, LLC v. J. Ezra Merkin, 08 CV First of all, I'm sorry that this is a later 11002. lifting-off than I 'had told you. We had an interesting one right before this, but nonetheless this is important. So I appreciate your patience. around. I don't like to have lawyers waiting 5 6 7 It is one of the things I hated when I was g'eneral 8 counsel because I still had to write the checks, and I try to be very' careful about not having lawyers just sitting cooling their heels in a courtroom. 9 10 11 12 13 So I don't ever do cattle calls. Hard to I just thought we'd be done by 5:OO with the last one. get lawyers to be quiet. Anyway, let me get appearances for plaintiffs. MR. BUCHDAHL: Your Honor, Jacob Buchdahl and A m r 14 15 Subramanian from Susman, Godfrey for the plaintiff The Calibre 16 Fund. THE COURT: MR. 17 18 Mr. Buchdahl and Mr. Subramanian. That's correct, your Honor. SUBRAMANIAN: 19 20 THE COURT: M R . MEPJNITT: Good afternoon. Your Honor, Gary Mennitt of Dechert, 21 LLP . And with me from Dechert is Neil Steiner. Steiner. 22 23 THE COURT: MII STEINER: Steiner, y e s , your Honor. THE COURT: MR. MENNITT: 24 , Mr. Steiner and MK. Mennitt. 25 Mennitt. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 3 8ciQcalC 1 2 3 THE COURT: No R. Correct. MFt. MENNITT: THE COURT: A l l right. First of a l l , 1'11 te 1 you 4 5 what I have, I have the application for a TRO and order to show cause for a preliminary injunction, as well as t h e original complaint and attachments filed by plaintiffs, and I have declarations in support of it as well as a groposed.TR0. 6 7 8 9 That's.whatI have. Did I fail to mention something? A That's what I've gotten, memorandum of law, of course. Mr. Buchdahl? 10 11 MR. BUCHDAHL: Yes, sir, that's all. 12 13 14 THE COURT: Have you seen this, Mr. Mennitt? Yes, your Honor. M R . MENNITT: We were served with this late this morning. THE COURT: 15 16 17 Let's talk about what you want to do in The parties have had a chance to talk now. t h e first instance. So what do the parties want . to do at this point? 18 19 20 21 22 MR. MENNITT: Your Honor, we are prepared to address this. We think that it can be dealt with today. If the Court felt that additional briefing was required, obviously we'd be happy to provide that. We think it can be dealt with. THE COURT: OK, if that's what you think. I am never 23 24 25 a f a n of unnecessary extra briefing. If you don't think so, then I don't think so. Mr. Buchdahl, do you agree? MR. BUCHDAHL: . That's fine with the plaintiff, your SOUTHERN DISTRICT'REPORTERS, P. C . (212) 805-0300 4 8ciQcalC 1 Honor. THE COURT: 2 So, I obviously know what M r - Buchdahl 3 4 thinks because I've seen his papers. Maybe I should start with you, Mr. Mennitt. MR. MENNIT": 5 6 7 8 Your Honor, Mr. Merkin i not s Mr. Madoff. THE COURT: That much I think we can take judicial notice of. Mr. Buchdahl, do you agree they're different people? MFt. BUCHDAHL: 9 10 We do. That's the essence of the fraud 11 12 13 in this case, your Hon,or. THE COURT: The essence of the fraud is that they're different people? MR. BUCHDAHL: 14 15 Is that Mx. Merkin claimed to be the sole manager and decision-maker for the Ascot Fund, and instead, not only in derogation of his fiduciary duty, but as a fraud, he handed over entire responsibility f o r making investment decisions to M r . Madoff in a way that was not disclosed to the limited partners of the Calibre Fund. .I6 17 18 19 20 21 22 THE COURT: Mr. Mennitt, I don't know whether you disagree with that point, but you were making a different point. MR. MENNITT: 23 24 25 I actually do disagree with that point, and I will address that shortly. The confidential offering memorandum for A s c o t Partners U P , which SOUTHERN DISTRICT REPORTERS, have copies of P.C. -- (212) 805-0300 5 8ciQcalC 1 2 THE COURT: It's not attached, is it? It's not. attached to what you gave me, M r . guchdahl, is it? MR. BUCHDAHL: 3 It is not. Your Honor, that offering memorandum 4 5 'MR. MENMITT: discloses in a number of places that the Madoff firm is at that point in time one of the prime brokers that Ascot Partners LLP .6 7 is using. That's disclosed in a number o places. f THE COURT: 8 9 The prime broker. In addition, on the very f i r s t MR. PlENNITT: Correct. 10 11 page of the offering memorandum, it's disclosed that the partnership will make investments through third-party managers including managed accounts, and then there are other types of investments listed, but: clearly that is one of the types of investments that is listed, so it's not true to say that it was not disclosed that he would be using -- t h a t he would be investing through other THE COURT: 12 13 14 15 16. 17 -- relying on other managers. Let m e just stop you. You are focused now 18 on likelihood of success on the merits. talking about? MR. MENNITT: Is that what you're 19 20 Your Honor, I wanted to make just a 21 22 couple of these points up front. Really, the focus and the reason I think this motion can be resolved here without further briefing or affidavits is that as Judge Kaplan has held in 2004 in the OSRecovery, Inc. v . O n e Group Internationa1, Inc. case 305 F.Supp. 2d 340, an attempt to get an order freezing a SOUTHEIW -DISTRICTREPOQTERS, P C ._ (212) 805-0300 . 23 24 25 6 8ciQcalC n s defendant's assets i a case where a money judgment i sought is not something that this Court can do. i THE COURT: That's what I always thought, M r . Buchdahl. We'll come to you in a minute. But it seems to The irreparable harm is that me that this is all about money. the firm or individual may be insolvent, but that happens all the time too, doesn't it? It can't be that there gets to be TROs every time somebody looks like they might be going into bankruptcy. MR. MENNITT: Your Honor, here, the only w a y Mr. Merkin is insolvent is if he loses'these lawsuits. THE COURT: Lawsuits against? MR. -1TT: Against M s . Merkin -- this is the third lawsuit that we're aware of that names Mr. Merkin as a defendant. THE COURT: He might be insolvent for any variety of reasons. MR. MENNITT: He could be. That's correct, your There is nothing in Honor. But there is no evidence of that. the record that suggests that. What the cases hold, including the Supreme Court case, Grupo Mexicano. Then there's New York What those cases say is Court of Appeals case C r e d i t Agricole. that in these circumstances you cannot at the outset of a case simply freeze a defendant's assets'because you're suing him on a money judgment. It's as simple as that. Those cases, the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 7 8ciQcalC 1 2 3 4 Credit Agricole and Grupo Mexican0 case are both cited in the Judge Kaplan decision that I reference. ' So I wanted to make a couple of these.points up front about, you know,. if you get into the facts, we dispute that the claims are what Mr, Buchdahl says they are.,but really to us the dispositive issue is just at the very threshoid level the 5 6 7 Supreme Court has held Kaplan's decision: -- and I am reading directly from Judge 8 9 "The Supreme Court has held that a Federal Court does not have the power in the exercise of it showing equitable jurisdiction to i s s u e a preliminary injunction in an action for money damages to prevent the defendant from transferring assets in which the plaintiff claims no lien or equitable interest. THE COURT: I' 10 11 12 .13 14 15 16 17 Well, I figured you'd say something like that. So let me hear from you, Mr. Buchdahl. M R . BUCHDAHL: Your Honor -- THE COURT: Your memorandum is a little light on law 18 19 for the proposition that you get tp get a TRO on somebody where you're seeking money damages just because that person is connected to a front-page story. MR. BUCHDAHL: 20 21 We certainly would not t r y to support 22 23 24 the proposition that you just stated, your Honor. We are seeking a limited TRO in this case, three forms of relief. First of all, the rather uncontroversial remedy that the defendant be enjoined from destroying or concealing documents S O U T H F J h D I S T R I C T REPORTERS, P . C . 25 (212) 805-0300 8 8ciQcalC 1 2 3 in THE COURT: Wait a minute. I haven't heard W . Mennitt talk about that one. . . I assme he is going to 4 preserve any documents. Right, Mx. Mennitt? MR. MENNITT: 5 6 Yes, your Honor. The individual defendant here is represented by Mr. Levander and the litigation department at Dechert and Schulte, Roth & 7 8 Zabel is representing the funds, and we axe a11 very well aware of what 9 10 11 12 the preservation obligations are here. THE COURT: All right. Having said that, your Honor, I don't MR. BUCHDAHL: know if he's agreeing to the imposition of an order from this Court, but obviously a Court order enjoining him from concealing or destroying documents would have a lot more teeth 13 14 15 16 17 than simply -Than a criminal statute? THE COURT: He would be subject to criminal penalties if he destroyed documents at this point. MR. BUCHDAHL: ia 29 20 The likelihood of a criminal prosecution in a civil lawsuit is rather remote whereas having the Court order imposed at this stage, we believe, would add some teeth to what's otherwise more of a litigation obligation. Your Honor, that's.the first form of relief w e ' r e seeking. 21 22 23 24 25 The second would be what's been called a freeze on assets. We'd like to enjoin Mr. Merkin from distributing S0UT.H~ DISTRICT REPORTERS, P.C. (212) 805-0300 9 8ciQcalC 1 2 3 assets other than for ordinary living expenses and reasonable legal fees. And the third, and perhaps the most important, is that M r . Merkin 4 be called upon to provide accounting of assets 5 6 that are available. Turning to the two-part standard f o r a TRO, the law requires that plaintiff show both irreparable harm and likelihood of success on the merits. I'm going to first 7 8 address the second point only briefly to respond to what counsel for the defendant said. He mentioned that the Madoff firm is the prime broker. That's obviously not the same thing 9 10 31 as making investment decisions. He also pointed out in saying 12 that the offering memorandum disclosed that third-party managers would be used, he essentially disclosed by omission 13 -- 14 15 conceded by omission that Mr. Madoff's name was never listed as someone who would be given discretionary management authority 16 over the funds invested by the limited partners in the Ascot Partners Fund. That's the crux of this case on the merit side, your Honor. It's that people could,havegiven money to Mr. Madoff Instead, they entrusted t h e i r money to 17 18 19 20 had they wanted to. 21 22 Mr. Merkin, and Mr. Merkin wrote glowing reports on a quarterly basis explaining the care which he was treating their assets. And, instead, he literally took all of the money and gave it to Mr. Madoff. 23 24 For that lack of services, your Honor, he charged 25 a 1.5 percent management fee and took a percentage of the SOW- DISTRICT REPORTERS, I?. C . (212) 805-0300 10 8 ci Q c a l C 1 2 returns. Hundreds of millions of dollars over the years. Our.client put in over $10 million at the beginning of this year, your Honor, entrusting that to 3 4 &. Merkin's care. What he did, as disclosed only in December of this year in a letter that they received to their horror last Thursday, was 'say that they had given all of it to the perpetrator of the greatest Ponz: scheme in history. 5 6 7 8 9 Now, obviously, the Court's attention is focused on irreparable harm, and we believe we've met that standard, your 10 11 Honor. While given the time constraints, we didn't bother to cite dozens of cases to the Court, we believe that we've cited two cases that both establish the proposition that in a case where a defendant is facing insolvency, in Judge Posner's words in the American Hospital Supply, that is "a standard ground f o r concluding that harm cannot be cured afterwards by a damages award. " , 12 13 14 15 16 17 18 That makes perfect sense, your Honor, because as Judge Posner explained in that decision, he emphasized that what you're trying to do is minimize the cost of being mistaken at 19 '2 0 this point in making a decision on a TRO. In other words, you 21 22 weigh the harm to the plaintiff if the relief is denied against the harm to defendant if relief is granted. And what would happen here, there would be irreparable harm to the plaintiff if this defendant is permitted to transfer assets or dissipate 23 24 25 the only source of recovery. Because what we now know is that SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 21 8 ciQcalC . I 2 Ascot Partners ' i s completely devoid of recoverable assets. We have been informed now by counsel for Ascot that there are only $9 or 10 million remaining out of a $1.8 billion fund. '3 4 That is not remotely close to satisfying the claims that I would emphasize here that 5 will be made against Mr. Merkin. 6 7 Mr. Merkin is not only facing $1.8 billion in claims based on Ascot Fund alone, but the Court can take judicial notice of the 8 fact that Mr. Merkin is responsible for the Gabriel Fund which suffered huge losses by transferring funds to Mr. Madoff. The 9 10 Ariel Fund, a very similar situation. He was also responsible 11 12 13 14 ' for investment decisions at various charitable organizations and schools, including Yeshiva University which has suffered massive losses. In many of these cases, Mr. Merkin is the only conceivable source of recovery f o r these huge losses that he caused by deliverring all this money to Mr. Madoff. What . 15 16 17 18 19 20 21 22 American Hospital Supp2y said, as 1 quoted before, insolvency is a standard ground for concluding -- THE COURT: A standard ground. What are the Second Circuit cases and Southern District cases like this one where somebody who is accused of the kind of fraud that Mr. Merkin is being accused of here where the Court has stepped in and granted a TRO over their assets? MEil. BUCHDAHL: 23 24 25 Your Honor, we cannot identify a case that involved the exact facts as this. THE COURT: Well, exact facts. Similar facts. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 12 8ciQcalC 1 2 3 MR. BUCHDAHL: Even where..we're asserting a similar kind of Ponzi scheme fraud, 1 have not seen that. We do cite Brenntag International case that Judge Winter decided, and, 4 5 again, the basis for his finding of irreparable harm was insolvency. I n that case, he affirmed the decision by Judge Sweet granting a TRO, and the standard, as he articulated it, w a s t h a t is there a substantial chance that the parties cannot 6 7 8 9 be returned to their positions ex ante. And he recognized that in the insolvency context, you have a situation where the parties cannot be assured of any form of recovery, and this, your Honor, we submit, is a sufficient basis for meeting the standard and for seeking the limited relief that we're asking here. As 10 11 12 13 14 15 counsel has already pointed out, they are already facing many of these obligations just by virtue of the fact that they axe named in civil lawsuits. What we are asking is 16 17 18 the non-controversial request that this defendant be enjoined from, for example, transferring assets overseas, selling assets. We understand that he has an art collection worth hundreds of millions of d o l l a r s . 29 20 21 He should be enjoined at this stage of t h e litigation, your Honor, from transferring assets that are the only likely recoverable source for plaintiffs such 22 23 24 25 as our client, and dissipating those assets, transferring them, doing whatever he might decide to do with them before these cases get resolved. Your Honor, as fax as -- SOUTHERN DISTRICT REPORTERS, P.C. ( 2 1 2 ) 805-0300 13 8ciQcalC 1 THE you COURT: You say it's non-controversial, but then 2 3 4 only cited two cases, one of which is a Seventh Circuit That case. So it's nonkontroversial in the sense that, what? there are two cases that you found? MR. BUCHDAHL: 5 Non-controversial in the sense t h a t no 6 one would suggest that this defendant has the right to begin transferring assets overseas or taking other steps to conceal 7 8 assets. In our discussions with counsel, counsel's first objection to me about why no order is necessary, he said, well, if we did that sort of thing, that would be a fraudulent conveyance in all events. That may be true, your Honor, but an order at this stage would add some teeth to that, would provide some assurances to our client and to other similarly situated individuals who are seeking to recover from Mr. Merkin that he will not take steps to hide the wealth that he amassed at their expense. THE COURT: A m 9 10 11 12 13 14 15 16 17 I literally going to get a TRO request 18 19 20 every time somebody wants to basically send a letter to opposing counsel saying preserve documents and don't fraudulently convey remaining assets? I really need t o be 21 22 dropping everything, put it on the top of my pile, and do this sort of TRO work? MR. BUCHDAHL: 23 Your Honor, we believe that would not 24 25 be the case. First of all, w e think the f a c t that these requests are unusual shows that this is an unusual case. And SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 . 14 8ciQcalC the fact that this is a case with the overwhelming possibility of losses here, and, as we said, just in the Ascot Fund alone $1.8 billion worth of losses, this is a h i g h l y iurusual n situation, and one in which perhaps a unusual remedy is appropriate. ' 'SHE COURT: B u t , look, an unusual situation in the . sense that it's part of the Madoff scheme, which is, let's be honest, it's tabloid fodder and on a scale it's nothing like anyone has ever seen. I get that. In terms of insolvency, as a motive f o r someone fraudulently conveying assets or deep-sixing documents? I mean, that's not terribly out of the ' ordinary, is it? MR. BUCHDAHL: Your Honor, I can't answer the question of how many perpetrators of fraudulent schemes are likely to be insolvent. In my experience, having prosecuted fraud cases, very often they're not insolvent. THE COURT: How many TROs can you cite me where basically what's being sought is what is normally achieved by a letter from counsel to counsel? MR. BUCHDAHL: Your Honor, I cannot cite a case that is on all f o u r s with this or I would have done so. I would submit, it's.notaltogether different from what the SEC did in this case with respect to M r . Madoff. M r . Merkin is not Mr. Madoff While it is true that -- THE COURT: Well, the SEC is -- you're not the SEC SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 - 15 8ciQcalC 1 either, right? M R . 'BUCHDAHL : THE COURT: 2 3 4 Pardon? You're not the SEC either. Absolutely not. But f o r the same M R . BUCHDAHL: 5 6 7 8 9 reasons it's justified there and for the exigencies that they cite, and the fact they,recognizethat this was necessary to protect people with claims, those same arguments, your Honor my only suggestion here is'that those same arguments support the finding of irreparable harm, just as Judge Winter found in -- 10 11 12 13 the Brenntag case. Now, I don't think that.the defendant can dodge the import: of these two decisions which plainly cite insolvency as the "common standard ground" f o r a finding of irreparable harm. So, I think the fact that these applications are perhaps 14 15 16 17 uncommon by plaintiffs does not mean that in the right case they are not appropriate ox supported by the law. And given that the absence of recoverable assets and 18 19 20 the fact that there is a substantial likelihood that a plaintiff may not be able to get full recovery from a situation with overwhelming liability hanging over Mr. Merkin's head, we believe is a proper basis f o r the limited relief that we seek. Again, we are not -- this would not enjoin Mr. Merkin from anything that he should be doing or likely would be permitted 21 22 23 24 25 to do under various laws, your Honor. THE COURT: Let me interrupt you, and just say, while SOUTHERN DISTRICT REPORTERS, .P.C. (212) 805-0300 16 8ciQca1C 1 2 3 4 I am smacking Mr. Buchdahf aroufld, the reality -- the question, I guess, for you, M r . Mennitt, is: Why aren't: you just agreeing to these relatively modest requests, which are, I think, the reason why we don't have a lot of case law on this s typically i that parties agree to this at the early stages of 5 6 7 litigation, right? M R . MENNIT": I don't think that's correct, your 8 9 Honor. THE COURT: No? 10 11 12 13 MR. MENNITT: I mean, perhaps in the context of if they had called and said, we won't sue you, and we'll enter into a tolling agreement, we would have -THE COURT: With respect to documents. A l l it 14 15 16 generally requires is a letter to you saying, you are on notice DO not destroy any documents. MR. MENNITT: We would send back a letter saying we 17. are not going to destroy documents. THE COURT: 18 19 20 21 22 The next request is to not fraudulently convey assets; and, ultimately, they want an accounting of the assets, which they're going to be entitled to, right? MR. MENNITT: Well, if they win the case, they'll be entitled to an accounting of the assets. At the present time,' they're not entitled -- this lawsuit is only against Mr. Merkin individually. They're not .entitled to an accounting of Mr. Merkin's personal assets. SOUTHERN DISTRICT REPORTERS 23 24 25' (212) 805-0300 ; P .c - 17 8ciQcalC 1 And, your Honor, Mr, Buchdahl sort of challenged me to 2 3 try to dodge the American Hospital and the Brenntag case, I would like to try to dodge those cases. The American Hospital case, which is the Seventh Circuit case whi& Judge Posner 4 5 decided, enjoined the defendant from wrongful termination of a distribution contract. It didn't have anything to do with the -factsin this case. The Brenntag case, which is the Second Circuit case,' was an injunction against payment under a letter Of credit where the goods wefen't delivered under the supply 6 7. 8 9 10 contract. So, those cases have nothing to do with this. In fact, the Judge Kaplan case that I cited is an a fortiori case because in that case the defendants were the primary bad guys in a Ponzi scheme. They were the guys Who ran 11 12 13 14 15 16 17 18 a Ponzi scheme. Even under the allegations i n the complaint here, there's no allegation even of that. THE COURT: Of what? Allegation t h a t your client ran a Ponzi scheme? MR. MENNITT: Right, that Mr. Merkin was running a 19 20 fraud. He was a major victim of this fraud, personally. So, you know, it's just simply relief that he's not entitled to 21 22 -- he has no legal basis to seek. With respect to the related relief that he seeks, I .think your Honor's reaction is exactly correct; that those are 23 24 25 discovery matters, and, in fact, in Judge Kaplan's decision, the plaintiff there sought similar relief, and Judge Kaplan SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 ' 18 8ciQcalC 1. footnote 37 said, "plaintiffs seek a grab bag of other purported injunctive relief, such as an accounting" - which is exactly what they're seeking here 2 3 4 - "and disclosure of various sorts of information. These matters are better dealt with in discovery. And, 5 ' 6 your Honor, to come back to the question that you 7 started with, in addition to all of that, the fact that there 8 9 is no factual basis, there is no.lega1 basis f o r this relief. In addition, the entry of such an order seems to suggest that there has been some sort of a wrongdoing, and there hasn't been. There's nothing in the record that suggests that. THE COURT: 10 11 12 13 14 W e l l , 1 mean, the complaint alleges a wrongdoing, doesn't it? M R . ME2JNITT: The complaint alleges a wrongdoing, but 15 they haven't alleged that Mr. Merkin is attempting to secret his assets. They say they suspect that he might be, but there 16 17 18 is absolutely n s shred of c -- they don't submit an affidavit that says that, much less admissible facts to support that. There is no indication that he's doing destroy documents or that his counsel are not behaving in an appropriate manner. THE COURT: 19 20 21 22 23 24 25 You didn't, Mr. Buchdahl, address, I think, the Judge Kaplan case which Mr. Mennitt mmtioned. you seen it? M R . BUCHDAWL: Have I have not seen it. Mr. Mennitt did SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 19 8c 2 c a l C 1 2 3 not provide that to me prior to this proceeding, your Honor. So I'm not prepared to address that at this time. I will say going back to Brenntag for a minute, the 4 5 6 7 8 Second Circuit authority, that they enjoined the defendant from making payment on a letter of credit. That does nothing but retain assets for the defendant the plaintiff asserted he would be entitled to down the road. So, it's really a very similar effect in that it was trying to make sure that this potentially insolvent defendant would not dissipate assets. question before I continue. THE COURT: N o , go ahead. 9 10 I think that -- I'll wait for a 11 12 13 14 1'5 . MII. BUCHDAHL: As far as wrongdoing, of course, we have alleged wrongdoing. We've alleged fraud. We've alleged breach of fiduciary duty, g r o s s negligence, and breach of contract. We think that we've overwhelmingly demonstrated a likelihood of success on the merits. And in light 16 17 18 of the limited relief we're seeking, it's hard to find a sound basis f o r objecting to most of what we're asking given that the 19 20 21 22 defendant can't claim an ability to do most of the things we're enjoining him from doing. THE COURT: My concern is that if insolvency or 23 24 25 suspected insolvency is enough of a basis to get a TRO, who wouldn't be able to get a TRO in virtually every case, right, especially in times like this where there's always the prospect SOUTHERN DISTRICT REPORTERS, P . C . (212) 805-0300 20 8ciQcalC of some insolvency on the part o a defendant? So, I'm not f sure that those cases stand f o r the blanket and broad proposition that insolvency alone i s enough of a basis to demonstrate irreparable harm. I think the point M r . Mennitt was making before wit-, 6 7 8 respect to the allegations of wrongdoing was that there is no specific allegation of h i m engaging in the types of conduct that would perhaps otherwise merit the injunctive relief you're seeking, i.e, the destruction of documents or the squirreling away of assets overseas or elsewhere. You don't have any specific information about that. MR. BUCHDAfIL: 9 10 11 12 13 Your Honor, all I would point to'in that regard is that yesterday when we were discussing these things, we couldn't reach an agreement on these very simple requests, and if the defendant is not willing to say to us, oh, sure, no problem, w e won't send assets overseas, we won't 14 15 16 17 18 destroy documents. He kept relying on other sources of an obligation, saying, well, that would be a fraudulent conveyance. Well, informing me that it would be a fraudulent conveyance is very different from saying this defendant agrees not to transfer assets overseas. So it doesn't provide a lot 19 . 20 21 22 of comfort. This is a defendant who had no problem defrauding all the limited partners of Ascot by transferring $1.8 billion to Mr. Madoff. 23 24 25 So 'he hasn't demonstrated an overwhelming SOUTHERN DISTRICT REPORTERS, (212) 805-0300 P c. . 21 8ciQcalC 1 2 indication that he will comport with legal obligations. So, your Honor, we think that in a situation where -I think your Honor put your finger on it when you said the 3 4 reason you don't see this a lot of times is because the parties agree to it. Where is the agreement? Why don't we hear 5 6 7 counsel for Mr. Merkin saying, sure, we agree that we won't destroy documents and we're willing to have the Court enter an order to that. We agree that we won't transfer assets overseas, and we're willing to have a court order to that because none of that is anything that our client would ever do. And in 8 9 10 11 an accounting this would seem to be an appropriate 12 13 remedy that we're seeking in the extreme circumstances of this case where there are billions missing, and probably only hundreds of millions available from Mr. Merkin. 14 15 16 17 So, this is a situation where your Honor is appropriately concerned about a rash of similar requests, and the guard against that is to tailor the relief sought to the 18 19 20 21 circumstances of the case. There may be many times when it would be inappropriate to enjoin a corporation from taking certain actions in the normal course tha't would totally disrupt its business simply because it threatened lawsuit or threatened insolvency. 22 23 24 We're not trying to do that here. We're not trying to disrupt Mr. Merkin's life in a way that makes it onerous for him, which is why if you return to Judge Posner's balancing SOUTHERN DISTRICT REPORTERS, P.C. ( 2 1 2 ) 805-0300. 25 22 8ciQcalC 1 2 test, and say, what would the harm be to the plaintiffs and what would the possible harm be to the defendant if I award this relief? And, here, what h a m can Mr. Merkin point to? 3 4 How does it prejudice him in the slightest if he is prohibited from transferring assets overseas, from selling off his art collection, from destroying documents? There is no harm 5 6 7 8 whatsoever because, as counsel forthrightly concedes, in large part he's prohibited from doing all these things anyway. THE COURT: 9 10 11 I think the issue is not what harm would it do to him to impose such an obligation or an order. The issue is what irreparable harm would we fall your client if I didn't do that? 12 I guess the response is, I'm not sure any. I 13 mean, there are other safeguards against that kind of activity, which I think that's the reason why we don't see these that often. MR. BUCHDAHL: 14 15 16 17 Respectfully, the irreparable harm here And that is is the inability to fully collect on what's owed. 18 recognized in the decisions that we've cited, the fact that insolvency presents an irreparable harm. THE COURT: 19 20 Let's start with the first one you asked 21 22 23 for, which is an order enjoining him from the destruction of documents. If I don't grant you that, the irreparable harm will be he'll destroy documents? MR. BUCHDAHL: 24 Potentially, your Honor. .25 THE COURT: But there are other safeguards against the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 23 ' 8ciQcalC destruction of documents, aren't there? MR. BUCHDAHL: 1 2 There may be -- 3 4 THE COURT: Do I just need to duplicate everything that's in the Criminal and Civil Codes and the Code of Judicial -- Code of Ethics, and I guess-NewYork now has a new one. M R . BUCHDAHL:. Of course Mr. Merkin, your Honor, is 5 6 7 8 not subject to the Code of Ethics. 9 THE COURT: Mr. Mennitt is. MR. BUCHDAHL: 10 11 12 13 14 Mr. Mennitt -- unfortunately, if it were M r . Mennitt who were responsible for preserving these documents, I would not be here, your Honor. We have no doubt that Mr. Mennitt will adhere to a11 of his ethical responsibilities. THE COURT: 15 16 My point is: Why do I need to issue . orders that are basically suspenders when there's already a belt? I don't think that's what TROs are supposed to be for. 17 18 They're supposed to be for really the extraordinary circumstances where some harm is going to befall a plaintiff if the Court doesn't take action. 19 20 I don't think you'vemade the 21 22 23 24 25 case that some irreparable harm is going to befall your client if I don't enter t h e order of-therelief that you're asking for. M R - BUCHDAHL: The idea in the case law is that harm is not irreparable if you can be made whole afterward with SOUTHERN DISTRICT REPORTERS, P.C. a (212) 805-0300 24 8ciQcalC 1 2 money judgment. That's the fundamental idea. The rejoinder to that, your Honor, is that if you cannot be made whole because there are insufficient assets available, then the irreparable harm is irreparable. It's as simple as that. Because where there is not a likely prospect for full recovery, you cannot be made whole. 3 4 5 ' 6 7 8 9 You cannot be returned to where you w e r e before this happened. THE COURT: But there's an entire section of law about . assets that have been dissipated after the initiation of a suit, right? Happens a l l the time. M r . Merkin may have creditors all over the place or all I k n o w . be standing way ahead of your clients. MR. BUCHDAHL: 10 11 Some of them may 12 1.3 That is precisely the point, your 14 Honor, that Judge Winter made in the Brenntag decision, and he addressed the fact that potentially this would be intention with the bankruptcy laws, but he still said that because of the insolvency, the plaintiff had demonstrated an irreparable harm, and he affirmed Judge Sweet's TRO. 15 16 1.7 18 19 20 So, your Honor, I'm not trying to convince the Court that this happens every day or that it should happen every day. I'm just saying in this instance where we have talked to the 21 22 other side, and we have not been able to get agreements for this; where we have overwhelming evidence o a fraud and f overwhelming likelihood that Mr. Merkin will not be able to satisfy all the plaintiffs resulting from the Ascot Fund, let SOUTHERN DISTRICT REPORTERS , P .C . (212) 805-0300 23 24 25 25 8ciQca 1 alone our client, who has lost over $10 million according to a letter he received last week, that i n this case the irreparable harm to my client is that he's not going to get a full recovery, the Calibre Fund will not get a full recovery of its $10 million from M r . Merkin. 2 3 4 5 6 And seeking the relief that M r . Merkin be enjoined from transactions or dissipation of . 7 assets outside his ordinary course of life imposes little to no burden on this defendant. THE COURT: Again, that ' s part of. the analysis, but I 8 9 10 11 12 13 14 15 think it's sort of tail wagging the dog. M R . BUCHRAHL: Your Honor, if the Court is not persuaded by the argument with respect to insolvency, then we do not have an alternative basis for arguing irreparable harm. The real danger here is that an already subpar recovery by our client will be reduced further by actions that are taken. We simply want things held in t h e status quo. THE COURT: 16 17 All r i g h t . I mean, Ms. Giovanola, who is 18 19 20 my law clerk, who is the brains of this operation, handed me a note.indicatingthat Brenntag deals with a case -- is a case and it cites other cases in which there was actual insolvency and not merely the threat of insolvency. 21 Is that a distinction 22 23 that's worth discussing? MR. BUCHRAHL: I think there i s a scale, your Honor. 24 25 I think where in solvency is a merely speculative event, then you would be on very weak ground. I think that the case law SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 26 8ciQc 1c 1 2 3 4 5 does not suggest that there insolvency. I think the Court can look at the situation here, recognize the destruction that Mr. Merkin has left in his wake with regard to the Ascot Fund, the other funds I mentioned and other places where he was entrusted with assets, and say there is no doubt but that insolvency will follow here. Assuming, again, we have to demonstrate a likelihood of success on the merits, but if he has to make whole $1.8 billion worth of claims, there has been 6 7 8 9 no suggestion Mr. Merkin can do that. That's insolvency, your Honor, where your liabilities outweigh your assets by that extent. 10 11 12 13 So we are looking at a situation where insolvency is not a remote or speculative event, but is the necessary consequence. I don't even hear counsel to argue that that's not what would result if plaintiff is successful and other plaintiffs in the other lawsuits that he faces. I think that 14 15 16 17 all of counsel for the defendant's arguments are premised on the fact that he'll somehow overcome the allegations of fraud. But, your Honor, we believe that, first of all, there are three separate requests here, and they can be looked at separately. THE COURT: 18 19 20 21 22 Well, destroying documents, freeze on 23 assets, and an accounting of assets. MR. BUCHDAHL: 24 25 We believe that we have demonstrated the basis for a l l of those to the Court. We do not think this SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 27 '8ciQ alC is a situation that is going to present itself that frequently, and one reason is because of what the Court just identified in terms of whether insolvency is just some remote speculative event or whether just looking at the raw numbers, it appears no way for a defendant to possibly avoid it. Again, in a situation that has been described by the Courts as. a standard right for finding irreparable harm, in a situation that is -THE COURT: 9 You keep saying that. Then I ask you, do you have any cases, and you've cited me exactly one Second 10 11 12 Circuit case. M R . BUCHDAHL: It's that standard. THE COURT: It's that standards. There are certain propositions that 13 14 15 16 MR. BUCWDAHL: perhaps do not bear repeating that often. THE COURT: All right. Let me suggest this: I am not inclined to grant summary judgment -- summary judgment. It's 17 late. I'm not inclined t o grant the TRO in this case. I don't 18 19 20 find that there's been irreparable harm. I'm going to reserve Judge Posner I simply I can take a closer look at Brenntag. admire, but he doesn't pound on my head, whereas Judge Winter 21 22 and h i s friends may. So I will take a closer look at that, and I am going to look at the Kaplan case that you mentioned as 23 24 . well. MR. BUCHDAHL: THE COURT: Your Honor. 25 Yes. SOUTHERN DISTRICT REPORTERS, P . C . (212) 805-0300 28 8ciQcalC 1 2 MFt. BUCHDAKL: May we have until midday tomorrow to put in a letter to respond to Kaplan? THE COURT: 3 4 5 That's fine. I don't w a n t to insist on it because I don't want anybody to feel they need to spend time unnecessarily if they think it's not necessary. I'm not 6 7 ordering it, but if you'd like to, I'll give you till noon. M I T . BUCHDAHL: Since I haven't read it, your HOELOK, 8 9 10 3.3 .we'dappreciate that opportunity. THE COURT: All right. Your Honor, we'll do the same. We'll MR. MENNITT: keep it short. 12 1.3 14 :I 5 THE COURT: That's fine. I don't want t o play this out. I w a n t to get this resolved, as do you. MR. MENNITT: Yes. Good. This was interesting. Good to see I again apologize THE COURT: 1.6 17 you all. And thank you for your patience. for making you wait. MR. MENNITT: MI. BUCHDAHL: Anything else we should cover now? 18 19 20 21 No. Thank you, your Honor. (Ad ourned) j 22 23 24 25 SOUTHERN DISTRICT REPORTERS; P. (212) 805-0300 c.

Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.

Why Is My Information Online?