Irving H. Picard v. Saul B. Katz et al

Filing 119

RESPONSE re: 102 Rule 56.1 Statement. Document filed by Charles 15 Associates, Charles 15 LLC, Charles Sterling LLC, Charles Sterling Sub LLC, College Place Enterprises LLC, Coney Island Baseball Holding Company LLC, Estate of Leonard Schreier, FFB Aviation LLC, FS Company LLC, Fred Wilpon Family Trust, Arthur Friedman, Ruth Friedman, Iris J. Katz and Saul B. Katz Family Foundation, Inc., Judy and Fred Wilpon Family Foundation, Inc., Amy Beth Katz, David Katz, Dayle Katz, Gregory Katz, Howard Katz, Iris Katz, 157 J.E.S. LLC, Air Sterling LLC, BAS Aircraft LLC, Jason Bacher, Bon Mick Family Partners LP, Bon-Mick, Inc., Brooklyn Baseball Company LLC, C.D.S. Corp., Michael Katz, Saul B. Katz, Todd Katz, Katz 2002 Descendants' Trust, Heather Katz Knopf, Natalie Katz O'Brien, Mets II LLC, Mets Limited Partnership, Mets One LLC, Mets Partners, Inc., Minor 1 (REDACTED), Minor 2 (REDACTED), L. Thomas Osterman, Phyllis Rebell Osterman, Irving H. Picard, Realty Associates Madoff II, Red Valley Partners, Robbinsville Park LLC, Ruskin Garden Apartments LLC, Saul B. Katz Family Trust, Michael Schreier, Deyva Schreier Arthur, See Holdco LLC, See Holdings I, See Holdings II, Sterling 10 LLC, Sterling 15C LLC, Sterling 20 LLC, Sterling Acquisitions LLC, Sterling American Advisors II LP, Sterling American Property III LP, Sterling American Property IV LP, Sterling American Property V LP, Sterling Brunswick Corporation, Sterling Brunswick Seven LLC, Sterling Dist Properties LLC, Sterling Equities, Sterling Equities Associates, Sterling Equities Investors, Sterling Heritage LLC, Sterling Internal V LLC, Sterling Jet II Ltd., Sterling Jet Ltd., Sterling Mets Associates, Sterling Mets Associates II, Sterling Mets LP, Sterling Pathogenesis Company, Sterling Third Associates, Sterling Thirty Venture LLC, Sterling Tracing LLC, Sterling Twenty Five LLC, Sterling VC IV LLC, Sterling VC V LLC, Edward M. Tepper, Elise C. Tepper, Jacqueline G. Tepper, Marvin B. Tepper, Valley Harbor Associates, Kimberly Wachtler, Philip Wachtler, Bruce N. Wilpon, Daniel Wilpon, Debra Wilpon, Fred Wilpon, Jeffrey Wilpon, Jessica Wilpon, Judith Wilpon, Richard Wilpon, Scott Wilpon, Valerie Wilpon, Wilpon 2002 Descendants' Trust, Robin Wilpon Wachtler. (Wagner, Karen)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------- x
:
IRVING H. PICARD,
:
:
Plaintiff,
:
: 11-CV-03605 (JSR)(HBP)
- against :
:
SAUL B. KATZ, et al.,
:
:
Defendants.
:
----------------------------------- x

DEFENDANTS’ RESPONSE TO TRUSTEE’S STATEMENT OF UNDISPUTED
MATERIAL FACTS PURSUANT TO LOCAL RULE 56.1

DAVIS POLK & WARDWELL LLP
450 Lexington Avenue
New York, New York 10017
[phone]
Attorneys for Defendants

Pursuant to Rule 56.1(b) of the Local Civil Rules of the Southern District of New
York, Defendants respectfully submit this response to the Trustee’s Statement of
Undisputed Material Facts Pursuant to Local Rule 56.1 (“Trustee’s Rule 56.1
Statement”), which was filed in support of the Trustee’s motion for partial summary
judgment (“Trustee’s Partial Summary Judgment Motion”).
The Trustee’s Rule 56.1 Statement violates Local Rule 56.1(a) in numerous
respects. It is replete with expert and legal conclusions; when it asserts facts, they are
often immaterial and irrelevant to the Trustee’s motion for partial summary judgment;
and many factual assertions are not supported by the cited evidence. Defendants object
to these improper assertions and have identified them in their responses set forth below.
1.

Madoff founded BLMIS as a sole proprietorship in 1960 and registered

BLMIS as a broker-dealer with the Securities Exchange Commission (“SEC”) as of
January 19, 1960.
Defendants’ Response:
Not disputed.
2.

BLMIS purported to operate three business units: a market making

business, a proprietary trading business, and the investment advisory business.
Defendants’ Response:
Not disputed.

3.

The market making and proprietary trading businesses were referred to

within BLMIS as “House 5.”
Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion. Defendants do not dispute that the expert report of Bruce G. Dubinsky
(the “Dubinsky Report”) states that the market making and proprietary trading business
units of BLMIS were referred to internally at BLMIS as “House 5.” (Dubinsky Report
¶ 28 (Declaration of Bruce G. Dubinsky, MST, CPA, CFE, CVA, CFF, CFFA
(“Dubinsky Decl.”), dated Jan. 26, 2012, Ex. 1).)
4.

The investment advisory business was referred to within BLMIS as

“House 17.”
Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion. Defendants do not dispute that the Dubinsky Report states that the
investment advisory business unit of BLMIS was referred to internally at BLMIS as
“House 17.” (Id.)
5.

House 5 provided execution for broker-dealers, banks, and financial

institutions, and was a member of the National Association of Securities Dealers, Inc.
Defendants’ Response:
Not disputed that BLMIS, which included “House 5” as described in the
Dubinsky Report, was a broker-dealer registered with the SEC and “provided execution
for broker-dealers, banks, and financial institutions, and was a member of the National
2

Association of Securities Dealers, Inc.” (See supra ¶ 1; Dubinsky Report ¶¶ 28, 212
(Dubinsky Decl., Ex. 1); Picard v. Katz, No. 11 Civ. 3605 (JSR), 2012 U.S. Dist. LEXIS
5143, at *7 n.3 (S.D.N.Y. Jan. 17, 2012); Picard v. Katz, No. 11 Civ. 3605 (JSR), 2011
U.S. Dist. LEXIS 109595, at *8 (S.D.N.Y. Sept. 27, 2011).)
6.

In 1983, BLMIS registered Madoff Holdings Limited in London, which

began operating as Madoff Securities International Limited (“MSIL”) in 1988.
Defendants’ Response:
Not disputed, but immaterial and irrelevant for purposes of the Trustee’s Partial
Summary Judgment Motion.
7.

In 1987, BLMIS moved from its location at 110 Wall Street to the

“Lipstick Building” at 885 Third Avenue, where it eventually leased the 17th, 18th, and
19th floors.
Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion. Defendants do not dispute that BLMIS leased the 18th floor at 885
Third Avenue starting on April 1, 1987; the 17th floor starting on February 14, 1990; and
the 19th floor starting on January 15, 1997. (See Dubinsky Report ¶ 29 & n.16 (citing
CWIE-BR00002468) (Dubinsky Decl., Exs. 1, 5).)
8.

BLMIS’s market making and proprietary trading businesses (House 5)

were located on the 18th and 19th floors of the Lipstick Building. The investment
advisory business (House 17) was located on the 17th floor.

3

Defendants’ Response:
Not disputed, but immaterial and irrelevant for purposes of the Trustee’s Partial
Summary Judgment Motion. Defendants note that the Dubinsky Report, which is the
evidence cited by the Trustee for this assertion, relies upon documents that do not support
these assertions. (See id. ¶ 29 & nn. 17-18.)
9.

On December 11, 2008, Madoff was arrested and charged with securities

fraud, investment advisor fraud, mail fraud, wire fraud, international money laundering to
promote fraud in the sales of securities, international money laundering the conceal the
proceedings of fraud in the sale of securities, money laundering, making false statements,
perjury, making a false filing with the SEC, and theft from an employee benefit plan.
Defendants’ Response:
Not disputed.
10.

Madoff pleaded guilty to the eleven-count information, which alleged—

and he admitted—that he operated a massive Ponzi scheme through the IA Business of
BLMIS.
Defendants’ Response:
Not disputed.
11.

For his crimes, Madoff was sentenced to 150 years in prison.

Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion. Defendants do not dispute that Bernard L. Madoff (“Madoff”) was

4

sentenced, in part, to a term of imprisonment of 150 years for the criminal counts to
which he pleaded guilty.
12.

Five other BLMIS employees and accomplices have pleaded guilty to

federal fraud charges for assisting Madoff in operating his Ponzi scheme through the IA
Business of BLMIS.
Defendants’ Response:
Defendants do not dispute that at least five individuals have pleaded guilty to
criminal charges in connection with the fraud perpetrated by Madoff through BLMIS, but
dispute that these five individuals pleaded guilty to “assisting Madoff in operating his
Ponzi scheme through the IA Business of BLMIS.” (See Plea Allocution of Frank
DiPascali (“DiPascali Plea”), United States v. DiPascali, No. 09 Crim. 764 (S.D.N.Y.
Aug. 11, 2009) at 44:18-20 (admitting that he “helped Bernie Madoff, and other people,
carry out the fraud that hurt thousands of people,” but not allocuting to the existence of a
“Ponzi scheme”) (Declaration of David J. Sheehan in Supp. of Trustee’s Mot. for Partial
Summ. J. (“Sheehan Decl.”), dated Jan. 26, 2012, Ex. 4); Plea Allocution of David
Friehling (“Friehling Plea”), United States v. Friehling, No. 09 Crim. 700 (S.D.N.Y. Nov.
3, 2009) at 34:20-35:4 (“First and foremost, it is critical for your Honor to be aware that
at no time was I ever aware that Bernard Madoff was engaged in a Ponzi scheme.”)
(Sheehan Decl., Ex. 5); Plea Allocution of Eric S. Lipkin, United States v. Lipkin, 10
Crim. 228 (S.D.N.Y. June 6, 2011) at 31:21-35:2 (admitting to working “with Bernard L.
Madoff Investment Securities’ employees to deceive others,” but not allocuting to the
existence of a “Ponzi scheme”) (Sheehan Decl., Ex. 6); Plea Allocution of David Kugel,

5

United States v. Kugel, No. 10 Crim. 228 (S.D.N.Y. Nov. 21, 2011) at 32:1-19 (admitting
to providing “historical trade information to other BLMIS employees, which was used to
create false, profitable trades in the Investment Advisory clients’ accounts at BLMIS,”
but not allocuting to the existence of a “Ponzi scheme”) (Sheehan Decl., Ex. 7); Plea
Allocution of Enrica Cotellessa-Pitz, United States v. Cotellessa-Pitz, No. 10 Crim. 228
(S.D.N.Y. Dec. 19, 2011) at 34:1-5 (“Although I now know that the crimes I committed
helped to cover up and perpetuate Bernard Madoff’s fraudulent Ponzi scheme, at the time
I committed these crimes I did not know that Madoff and others were stealing investors’
money instead of actually investing the money through securities trading.”) (Sheehan
Decl., Ex. 8).)
13.

These employees face jail sentences for their involvement in the scheme.

Defendants’ Response:
Not disputed, but immaterial and irrelevant for purposes of the Trustee’s Partial
Summary Judgment Motion.
14.

In December 2008, BLMIS was placed into liquidation and the Trustee

was appointed to, among other things, marshal estate assets and determine customer
claims.
Defendants’ Response:
Not disputed, but immaterial and irrelevant for purposes of the Trustee’s Partial
Summary Judgment Motion.

6

15.

Madoff operated a Ponzi scheme through the investment advisory business

of BLMIS.
Defendants’ Response:
Not disputed that Madoff engaged in a fraudulent scheme in which he purported
to execute, but did not actually execute, securities transactions on behalf of BLMIS
customers. Defendants dispute that labeling that fraud a “Ponzi scheme” has any legal
relevance.
16.

Prior to the revelation of the massive fraud, BLMIS investment advisory

customers would deposit money in accounts they opened with BLMIS’s investment
advisory business, and Madoff would purport to engage in different investment strategies
on their behalf.
Defendants’ Response:
Disputed. The evidence cited by the Trustee does not support the assertions in
paragraph 16. Moreover, there is no evidence that any Defendant understood Madoff to
be investing in “different investment strategies.”
17.

BLMIS investment advisory customers received account statements from

BLMIS that purported to reflect securities transactions and investment returns that
appeared as though their investments with BLMIS were profitable.
Defendants’ Response:
Not disputed insofar as account statements were received from BLMIS that
purported to reflect transactions and investment returns in each Defendant’s account (see,
e.g., Declaration of Arthur Friedman, dated Nov. 11, 2009, ¶ 7 & Ex. D (doc. no. 110)),
7

but disputed insofar as the investments reflected on BLMIS account statements were not
always reported to be profitable. (Bankruptcy Rule 2004 Deposition Transcript of Arthur
Friedman, June 22-24, 29, 2010, 125:11-15 (Declaration of Dana M. Seshens in Supp. of
Mot. for Summ. J. (doc. no. 90), Ex. J).)
18.

None of the purported investment strategy securities transactions reflected

on the BLMIS investment advisory customer statements took place.
Defendants’ Response:
Not disputed that BLMIS did not execute the transactions reflected on
Defendants’ BLMIS account statements.
19.

As far as back as the 1970s, there is no evidence that the purported

investment transactions reflected in the customer statements of BLMIS’ investment
advisory business customers ever occurred, and in fact the evidence reveals that those
transactions did not and could not have occurred.
Defendants’ Response:
Paragraph 19 violates Local Rule 56.1(a) insofar as it sets forth the conclusion
that certain investment transactions “did not and could not have occurred,” which is
improperly included in the Trustee’s Rule 56.1 Statement. Defendants do not dispute that
the Dubinsky Report states that there is “no evidence that the purported investment
transactions for House 17 customers ever occurred at least as far back as the 1970s”
(Dubinsky Report ¶ 19 (Dubinsky Decl., Ex. 1)), but note that Madoff stated during his
plea allocution that, “[t]o the best of [his] recollection, [his] fraud began in the early

8

1990s.” (Plea Allocution of Bernard L. Madoff (“Madoff Plea”), United States v.
Madoff, No. 09 Crim. 213 (S.D.N.Y. Mar. 12, 2009) at 25:12-13 (Sheehan Decl., Ex. 2).)
20.

During the 1970s through the mid-1990s, BLMIS generally represented to

its investment advisory customers that it was investing in a “convertible arbitrage
strategy.”
Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion, and disputed. Madoff represented to BLMIS customers that he was
engaged in a split strike conversion strategy. (Madoff Plea 25:20-26:18 (Sheehan Decl.,
Ex. 2).)
21.

Convertible securities are generally fixed income and preferred equity

instruments that permit the purchaser to convert that security to shares of stock under prespecified conditions and time-frames set forth by the issuer.
Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion. Defendants do not dispute that the Dubinsky Report states that
“[c]onvertible securities are generally fixed income and preferred equity instruments that
allow the purchaser to convert that security to shares of stock under pre-specified
conditions set forth by the issuer.” (Dubinsky Report ¶ 66 (Dubinsky Decl., Ex. 1).)
22.

It was impossible for BLMIS to have engaged in the convertible arbitrage

securities trades reported in the BLMIS customer statements.

9

Defendants’ Response:
Paragraph 22 violates Local Rule 56.1(a) because it does not contain a fact and
instead sets forth a conclusion. Paragraph 22 also is immaterial and irrelevant for
purposes of the Trustee’s Partial Summary Judgment Motion. Accordingly, Paragraph 22
is improperly included in the Trustee’s Rule 56.1 Statement and no response is required.
To the extent a response is required, the evidence cited by the Trustee does not support
the conclusion set forth in paragraph 22. Defendants do not dispute that the Dubinsky
Report concludes, based on a sampling analysis of market volume that is limited in both
time period and the number of accounts tested, that the “purported transactions
underlying the convertible arbitrage strategy . . . could not have been legitimate.”
(Id. ¶ 78.)
23.

BLMIS could not have engaged in the convertible arbitrage securities

trades reported in customer statements in the 1970s-1980s because in many instances, the
volume of convertible securities trades reflected in BLMIS investment advisory customer
statements (both in the aggregate and on an individual customer account basis over time)
exceeded the entire reported market volume for those particular securities on the days
they were supposedly traded—at times by a multiple of more than 150 times the entire
market volume.
Defendants’ Response:
Paragraph 23 violates Local Rule 56.1(a) because it does not contain a fact and
instead sets forth a conclusion. Paragraph 23 also is immaterial and irrelevant for
purposes of the Trustee’s Partial Summary Judgment Motion. Accordingly, Paragraph 23

10

is improperly included in the Trustee’s Rule 56.1 Statement and no response is required.
To the extent a response is required, Defendants do not dispute that the Dubinsky Report
identifies certain examples where, for the accounts and time periods utilized for testing
purposes, the daily volume of transactions in particular securities reported by BLMIS
exceeded the daily market volume for those particular securities. (Id. ¶¶ 72, 76-77.)
24.

BLMIS could not have engaged in the convertible arbitrage securities

trades reported in customer statements in the 1970s-1980s because in many instances, on
many trading days, trades were recorded at prices that were impossible, as they were
outside the range of market-reported trading prices on those given days.
Defendants’ Response:
Paragraph 24 violates Local Rule 56.1(a) because it does not contain a fact and
instead sets forth a conclusion. Paragraph 24 also is immaterial and irrelevant for
purposes of the Trustee’s Partial Summary Judgment Motion. Accordingly, Paragraph 24
is improperly included in the Trustee’s Rule 56.1 Statement and no response is required.
To the extent a response is required, Defendants do not dispute that the Dubinsky Report
identifies certain examples where, for the accounts and time periods utilized for testing
purposes, the prices at which particular securities transactions reported by BLMIS were
executed fell outside the daily reported market price range for those particular securities.
(Id. ¶¶ 80-82.)
25.

BLMIS could not have engaged in the convertible arbitrage securities

trades reported in customer statements in the 1970s-1980s because in many instances,
dividend payments and/or accrued interest—which generally constitute a major
11

component of a convertible arbitrage transaction—were not reported on investment
advisory business customer statements even though the real convertible securities paid
dividends or interest.
Defendants’ Response:
Paragraph 25 violates Local Rule 56.1(a) because it does not contain a fact and
instead sets forth a conclusion. Paragraph 25 also is immaterial and irrelevant for
purposes of the Trustee’s Partial Summary Judgment Motion. Accordingly, Paragraph 25
is improperly included in the Trustee’s Rule 56.1 Statement and no response is required.
To the extent a response is required, Defendants do not dispute that the Dubinsky Report
identifies certain examples where, for the securities utilized for testing purposes, BLMIS
did not properly account for dividends that were paid by those particular securities.
(Id. ¶¶ 85-88.)
26.

BLMIS could not have engaged in the convertible arbitrage securities

trades reported in customer statements in the 1970s-1980s because those trades were
recorded as having occurred on dates after the securities had already been called and
converted—and therefore those securities could no longer have possibly been held by an
investor.
Defendants’ Response:
Paragraph 26 violates Local Rule 56.1(a) because it does not contain a fact and
instead sets forth a conclusion. Paragraph 26 also is immaterial and irrelevant for
purposes of the Trustee’s Partial Summary Judgment Motion. Accordingly, Paragraph 26
is improperly included in the Trustee’s Rule 56.1 Statement and no response is required.

12

To the extent a response is required, Defendants do not dispute that the Dubinsky Report
identifies certain examples where transactions in securities reported by BLMIS occurred
on dates after which those securities already had been called. (Id. ¶¶ 83-84.)
27.

BLMIS could not have engaged in the convertible arbitrage securities

trades reported in customer statements in the 1970s-1980s because there were no
independent transfer records evidencing that the purported convertible securities were
ever converted by the IA Business into common shares, despite being shown as having
been converted on the BLMIS investment advisory customer statements, again
demonstrating that the purported trading activity never happened.
Defendants’ Response:
Paragraph 27 violates Local Rule 56.1(a) because it does not contain a fact and
instead sets forth a conclusion. Paragraph 27 also is immaterial and irrelevant for
purposes of the Trustee’s Partial Summary Judgment Motion. Accordingly, Paragraph 27
is improperly included in the Trustee’s Rule 56.1 Statement and no response is required.
To the extent a response is required, Defendants do not dispute that the Dubinsky Report
identifies certain examples where, for the securities utilized for testing purposes, there
was no documentation relating to the transfer or conversion of those securities.
(Id. ¶¶ 93-94.)
28.

In the early 1990s, BLMIS changed the primary purported investment

strategy for customers from convertible arbitrage to a split strike conversion strategy,
later stating that “the opportunity within the marketplace to trade convertible arbitrage
has decreased.”
13

Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion, and disputed. The evidence relied upon does not support the assertion
that Madoff changed his purported investment strategy in the early 1990s. (See id. ¶ 112
n.124 (citing AMF00139075 (letter from BLMIS to unidentified client on March 16,
1999, indicating that BLMIS has been engaged in the split strike conversion strategy “for
more than fifteen years”) (Dubinsky Decl., Ex. 7); AMF00139560 (Trading
Authorization Guidelines dated July 3, 1991 and signed on behalf of Roofers Local 195
Pension Fund, authorizing Madoff to engage in discount convertible arbitrage
transactions, premium convertible arbitrage transactions, and split-conversion hedge
option transactions) (Dubinsky Decl., Ex. 20)).)
29.

A split-strike conversion investment strategy typically involves buying a

basket of stocks closely correlated to an index, while concurrently selling call options and
buying put options on the index.
Defendants’ Response:
Not disputed, but immaterial and irrelevant for purposes of the Trustee’s Partial
Summary Judgment Motion.
30.

BLMIS’s investment advisory business purportedly used a split-strike

strategy based on the S&P 100 equity index, which included the 100 largest U.S. stocks
as determined by the S&P index committee.

14

Defendants’ Response:
Not disputed, but immaterial and irrelevant for purposes of the Trustee’s Partial
Summary Judgment Motion.
31.

BLMIS never engaged in the split-strike conversation securities trades

reported in customer statements between the 1990s and 2008.
Defendants’ Response:
Not disputed insofar as the assertion in paragraph 31 should read “split-strike
conversion” rather than “split-strike conversation.”
32.

BLMIS could not have engaged in the split-strike conversion securities

trades reported in customer statements in the 1990s-2008 because the available records
from Depository Trust & Clearing Corporation (“DTCC”)—which, through its
subsidiaries, provides clearance for almost all equity, bond, government securities,
mortgage-backed securities, money market instruments and over-the-counter derivative
transactions in the U.S. Market—did not record any security holdings for BLMIS
investment advisory customers during this time.
Defendants’ Response:
Paragraph 32 violates Local Rule 56.1(a) because it does not contain a fact and
instead sets forth a conclusion. Paragraph 32 also is immaterial for purposes of the
Trustee’s Partial Summary Judgment Motion. Accordingly, Paragraph 32 is improperly
included in the Trustee’s Rule 56.1 Statement and no response is required. To the extent
a response is required, Defendants do not dispute that the Dubinsky Report provides that,
for the time period analyzed, there were no DTC records relating to accounts in the
15

investment advisory business unit of BLMIS. (Dubinsky Report ¶¶ 138-42 (Dubinsky
Decl., Ex. 1).)
33.

BLMIS could not have engaged in the split-strike conversion securities

trades reported in customer statements in the 1990s-2008 because the reported equity and
options trades exceeded the entire reported market value for the relevant securities on
numerous trading days.
Defendants’ Response:
Paragraph 33 violates Local Rule 56.1(a) because it does not contain a fact and
instead sets forth a conclusion. Paragraph 33 also is immaterial for purposes of the
Trustee’s Partial Summary Judgment Motion. Accordingly, Paragraph 33 is improperly
included in the Trustee’s Rule 56.1 Statement and no response is required. To the extent
a response is required, Defendants do not dispute that the Dubinsky Report identifies
certain examples where, for the time period analyzed, the daily volume of transactions in
particular securities reported by BLMIS exceeded the daily market volume for those
particular securities. (Id. ¶¶ 115-16.) The assertion in paragraph 33 is also nonsensical
insofar as it states that “the reported equity and options trades exceeded the entire
reported market value for the relevant securities on numerous trading days.”
34.

BLMIS could not have engaged in the split-strike conversion securities

trades reported in customer statements in the 1990s-2008 because hundreds of thousands
of purported trades affecting 5,500 accounts were recorded at impossible prices, as they
were outside the range of reported trading prices on those days.

16

Defendants’ Response:
Paragraph 34 violates Local Rule 56.1(a) because it does not contain a fact and
instead sets forth a conclusion. Paragraph 34 also is immaterial for purposes of the
Trustee’s Partial Summary Judgment Motion. Accordingly, Paragraph 34 is improperly
included in the Trustee’s Rule 56.1 Statement and no response is required. To the extent
a response is required, Defendants do not dispute that the Dubinsky Report identifies
certain examples where, for the time period analyzed, the prices at which particular
securities transactions reported by BLMIS were executed fell outside of the daily
reported market price range for those particular securities. (Id. ¶ 117.)
35.

BLMIS could not have engaged in the split-strike conversion securities

trades reported in customer statements in the 1990s-2008 because thousands of trades
affecting over 3,700 accounts were recorded as having settled after hours or on weekends
or holidays when the exchanges were closed, and thousands of trades were reported as
having settled on days not within the standard required timeframe for settling
transactions.
Defendants’ Response:
Paragraph 35 violates Local Rule 56.1(a) because it does not contain a fact and
instead sets forth a conclusion. Paragraph 35 also is immaterial for purposes of the
Trustee’s Partial Summary Judgment Motion. Accordingly, Paragraph 35 is improperly
included in the Trustee’s Rule 56.1 Statement and no response is required. To the extent
a response is required, Defendants do not dispute that the Dubinsky Report identifies
certain examples where, for the time period analyzed, the settlement date for particular

17

securities transactions reported by BLMIS either fell on dates when the securities markets
were closed or fell outside of the standard settlement timeframe. (Id. ¶¶ 128-31.)
36.

BLMIS could not have engaged in the split-strike conversion securities

trades reported in customer statements in the 1990s-2008 because dividends reflected on
BLMIS customer statements as having been paid by the respective companies were never
received by BLMIS on behalf of its investment advisory customers.
Defendants’ Response:
Paragraph 36 violates Local Rule 56.1(a) because it does not contain a fact and
instead sets forth a conclusion. Paragraph 36 also is immaterial for purposes of the
Trustee’s Partial Summary Judgment Motion. Accordingly, Paragraph 36 is improperly
included in the Trustee’s Rule 56.1 Statement and no response is required. To the extent
a response is required, Defendants do not dispute that the Dubinsky Report provides that,
for the time period and BLMIS accounts analyzed, dividends reported on BLMIS account
statements were never received from the issuer of the security by BLMIS. (Id. ¶¶ 16067.)
37.

Madoff perpetuated his fraud by creating false customer statements and

fictitious documents. BLMIS customer statements false reported trades that were
purportedly executed in a prior month’s period but in actuality the trades were never
recorded in that previous month’s statement (“prior month backdated trades”).
Defendants’ Response:
Defendants do not dispute that Madoff perpetuated his fraud by creating fictitious
documents, including false BLMIS customer statements that reflected transactions that
18

were never executed. Defendants also do not dispute that the Dubinsky Report identifies
certain examples where BLMIS customer statements “reported trades that were
purportedly executed in a prior month’s period, sometime stretching back years, but in
actuality were never recorded on that previous month’s statement.” (Id. ¶ 205.)
38.

The computer system for the investment advisory business—run from an

IBM AS/400 with code originating from programs written in the 1970s and early-to-mid
‘80s—could not support a broker-dealer environment where actual trades were being
executed because it did not link with any of the standard platforms used in a trading or
investment environment, such as NASDAQ or the DTC, a subsidiary of DTCC.
Defendants’ Response:
Paragraph 38 violates Local Rule 56.1(a) insofar as it states the conclusion that
the IBM AS/400 computer system at BLMIS “could not support a broker-dealer
environment,” which is improperly included in the Trustee’s Rule 56.1 Statement. In
addition, paragraph 38 is immaterial and irrelevant for purposes of the Trustee’s Partial
Summary Judgment Motion. Defendants do not dispute that the Dubinsky Report
characterizes the programming code found on the IBM AS/400 system at BLMIS as
having been “developed in the late 1970s through the early-to-mid 1980s,” and that there
was “no evidence” demonstrating that this system was connected to standard trading
platforms such as NASDAQ or the DTC. (Id. ¶¶ 190, 192.)
39.

The BLMIS investment advisory business’ IBM’s computer code allowed

BLMIS to generate random trade orders used to create fictitious backdated trade histories
for its customers.
19

Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion. Defendants do not dispute that the Dubinsky Report provides that
programming code for the IBM AS/400 system enabled BLMIS to generate random sets
of orders for specific securities that were used to generate fictitious backdated trade
histories for BLMIS customers. (Id. ¶¶ 196-203.)
40.

The computer system for the BLMIS investment advisory business also

contained software capable of generating fake DTC reports and fake DTC screen printouts created to replicate official DTC inquiry look-ups, for which there was no legitimate
business purpose.
Defendants’ Response:
Paragraph 40 violates Local Rule 56.1(a) insofar as it states the legal conclusion
that “there was no legitimate business purpose,” which is improperly included in the
Trustee’s Rule 56.1 Statement. Paragraph 40 also is immaterial and irrelevant for
purposes of the Trustee’s Partial Summary Judgment Motion. Defendants do not dispute
that the Dubinsky Report provides that the IBM AS/400 computer system at BLMIS
contained software capable of creating fake DTC reports and fake DTC screenshots.
(Id. ¶¶ 143-52.)
41.

BLMIS was “schtupping” certain customers’ purported investment returns

utilizing a process to provide those customers with extra fictitious trades that were rigged
to generate additional fictitious gains in order to reach pre-determined rates of return

20

thresholds. BLMIS employees followed DiPascali’s handwritten instructions to manually
increase the returns of certain accounts in order to meet these customers’ expectations.
Defendants’ Response:
Paragraph 41 violates Local Rule 56.1(a) insofar as it sets forth an inference and,
accordingly, is improperly included in the Trustee’s Rule 56.1 Statement. Paragraph 41
also is immaterial and irrelevant for purposes of the Trustee’s Partial Summary Judgment
Motion. Defendants do not dispute that the Dubinsky Report identifies an example of
handwritten instructions signed by Frank DiPascali relating to a “B.SCHUPT” trading
program. (Id. ¶ 171.)
42.

BLMIS did not register as an Investment Adviser with the SEC when the

Uniform Application for Investment Advisor Registration (“Form ADV”) became
required in 1979, even though it had the requisite number of client accounts.
Defendants’ Response:
Paragraph 42 violates Local Rule 56.1(a) insofar as it states the legal conclusion
that BLMIS “had the requisite number of client accounts,” which is improperly included
in the Trustee’s Rule 56.1 Statement. Paragraph 42 also is immaterial and irrelevant for
purposes of the Trustee’s Partial Summary Judgment Motion. Defendants do not dispute
that the Dubinsky Report states that BLMIS registered with the SEC as an investment
advisor in 2006. (Id. ¶ 212.)
43.

Once BLMIS registered as an investment advisor in 2006, Madoff made

material misrepresentations in every report filed with the SEC regarding the number of
accounts, assets under management, cash on hand, liabilities, and commissions.
21

Defendants’ Response:
Paragraph 43 violates Local Rule 56.1(a) because it states the legal conclusion
that “Madoff made material misrepresentations,” which is improperly included in the
Trustee’s Rule 56.1 Statement. Defendants do not dispute that the Dubinsky Report
identifies examples of reports filed with the SEC by BLMIS that contained
misrepresentations. (Id. ¶¶ 214-26.) Defendants also do not dispute that certain
individuals stated during their plea allocutions that statements made in documents filed
with the SEC by BLMIS contained certain misrepresentations. (See, e.g., Madoff Plea
28:10-19 (Sheehan Decl., Ex. 2); DiPascali Plea 49:13-21 (Sheehan Decl., Ex. 4).)
44.

BLMIS used an accountant who was a customer of the Investment

Advisory business, who was therefore not independent as required by SEC, AICPA, and
New York law.
Defendants’ Response:
Paragraph 44 violates Local Rule 56.1(a) insofar as it states the legal conclusion
that the accountant used by BLMIS was “not independent,” which is improperly included
in the Trustee’s Rule 56.1 Statement. Paragraph 44 also is immaterial and irrelevant for
purposes of the Trustee’s Partial Summary Judgment Motion. Defendants do not dispute
that David Friehling stated during his plea allocution that he was a BLMIS customer.
(Friehling Plea 36:1-37:7 (Sheehan Decl., Ex. 5).)
45.

BLMIS’s accountant, David Friehling, pleaded guilty to several federal

fraud charges for his involvement in the scheme.

22

Defendants’ Response:
Not disputed that, in connection with the fraud at BLMIS, David Friehling
pleaded guilty to: securities fraud; investment advisor fraud; four counts of making false
filings with the SEC; and three counts of obstructing or impeding the administration of
the Internal Revenue laws. (Id. at 37:12-42:25.)
46.

BLMIS was “hopelessly” insolvent from at least December 11, 2002

because its debts were greater than the fair value of all its property.
Defendants’ Response:
Paragraph 46 violates Local Rule 56.1(a) because it states a legal conclusion.
Accordingly, paragraph 46 is improperly included in the Trustee’s Rule 56.1 Statement
and no response is required.
47.

Hundreds of millions of dollars of investment advisory customer money

was funneled to the other business units of BLMIS, and, by at least 2000, a significant
percentage, if not a majority, of the “revenue” reported by Madoff’s proprietary and
market making businesses was actually customer money from the Ponzi scheme.
Defendants’ Response:
Paragraph 47 violates Local Rule 56.1(a) insofar as it states a conclusion relating
to the revenue of the various business units of BLMIS, which is improperly included in
the Trustee’s Rule 56.1 Statement. In addition, paragraph 47 is immaterial and irrelevant
for purposes of the Trustee’s Partial Summary Judgment Motion, and disputed. The
evidence relied upon does not support the assertions set forth in paragraph 47. (See
Expert Report of Lisa M. Collura (“Collura Report”), Nov. 22, 2011, ¶¶ 16, 19-20
23

(Declaration of Lisa M. Collura (“Collura Decl.”), dated Jan. 26, 2012, Ex. 1); Dubinsky
Report ¶¶ 241-52 (Dubinsky Decl., Ex. 1).) Moreover, these factual assertions are
disputed by Madoff’s plea allocution, during which he stated that BLMIS’ proprietary
trading and market making business units “were legitimate, profitable, and successful in
all respects.” (Madoff Plea 25:6-11 (Sheehan Decl., Ex. 2).)
48.

BLMIS investment advisory customer funds were not used to engage in

any securities transactions in furtherance of its purported investment strategies as set
forth above, but instead, were deposited by BLMIS into a bank account at JPMorgan
Chase Bank (“JPMorgan”), account number xxx-xxx703 (the “703 Account”).
Defendants’ Response:
Defendants do not dispute that BLMIS did not engage in any of the securities
transactions reflected on Defendants’ BLMIS account statements. Defendants also do not
dispute that the Collura Report states that funds provided to BLMIS by its customers for
investment purposes during the period December 1998 to December 2008 were instead
deposited into a bank account numbered xxx-xxx703 (the “Chase 703 Account”) at JP
Morgan Chase. (See Collura Report ¶ 16 (Collura Decl., Ex. 1).)
49.

BLMIS used the customer deposits in the 703 Account to fund two other

BLMIS bank accounts, JPMorgan account #xxx-xxxxxx509 (the “509 Account”) and
Bankers Trust account #xx-xxx-599 (the “BT Account”), which were almost exclusively
used to fund redemption requests.

24

Defendants’ Response:
Defendants do not dispute that the Collura Report states that, for the period
December 1998 through December 2008, the deposits into the account at JP Morgan
Chase numbered xxx-xxxxxx509 (the “Chase 509 Account”) and into the account at
Bankers Trust numbered xx-xxx-599 (the “BT 599 Account”) consisted solely of
transfers from the Chase 703 Account. (Id. ¶¶ 24, 27.) Defendants also do not dispute
that the Collura Report states that, for the period December 1998 through December
2008, approximately 99% of the outflows from the Chase 509 Account and
approximately 97% of the outflows from the BT 599 Account were “related to customer
withdrawals.” (Id. ¶¶ 26, 29.)
50.

When BLMIS investment advisory customers submitted redemption

requests seeking to withdraw funds they believed they held in their BLMIS accounts,
BLMIS would use the commingled customer deposits held in the 703 Account, and often
transferred to the 509 Account and/or the BT Account to satisfy their requests.
Defendants’ Response:
Not disputed that the Collura Report states that, for the period December 1998
through December 2008, 98% of the outflows from the Chase 703 Account were “related
to customer withdrawals.” (Id. ¶ 23.)
51.

The Sterling Defendants consist of the Saul Katz (“Katz”), Fred Wilpon

(“Wilpon”), other Sterling Equities partners, their family members, and related entities
and trusts, who collectively held over the course of 25 years 185 investment advisory
customer accounts that are the subject of this litigation.
25

Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion, and disputed insofar as there is no evidence that BLMIS accounts were
held “collectively” by Defendants. Furthermore, as a result of the Court’s September 27,
2011 Opinion and Order, a number of Defendants and accounts are no longer the subject
of this litigation. Defendants do not dispute that certain Defendants had a nearly 25-year
relationship with BLMIS.
52.

The Sterling Partners opened their first BLMIS investment advisory

accounts in or around October 1985.
Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion. Defendants do not dispute that Fred Wilpon and Saul Katz each
opened a BLMIS account in or around October 1985. (See Answer, Picard v. Katz, 11
Civ. 3605, doc. no. 48, ¶¶ 62, 69 (S.D.N.Y. Oct. 11, 2011).)
53.

The Sterling Partners, their family members, and related entities each held

interests in multiple IA accounts and in different capacities.
Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion. Defendants do not dispute that the Sterling Partners, their family
members, and certain related entities each held interests in different BLMIS accounts and
at times in different capacities. (See id. ¶¶ 46, 1102.)

26

54.

From October 1, 1985 to December 11, 2008, the Sterling Defendants

engaged in 5,246 cash deposit and withdrawal transactions in the 185 accounts they held.
Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion. As a result of the Court’s September 27, 2011 Opinion and Order, a
number of Defendants and accounts are no longer the subject of this litigation. In
addition, paragraph 54 addresses cash deposit and withdrawal transactions outside of the
two-year period relevant to this case. Defendants do not dispute that the Collura Report
and the expert report of Matthew B. Greenblatt (“Greenblatt Report”) state that there
were 5,246 cash deposit and withdrawal transactions executed during the period October
1, 1985 to December 11, 2008 in 185 BLMIS accounts held, in the aggregate, by
Defendants. (Collura Report ¶ 31 (Collura Decl., Ex. 1); Greenblatt Report ¶ 60
(Declaration of Matthew B. Greenblatt (“Greenblatt Decl.”), dated Jan. 26, 2012, Ex. 1).)
55.

All but 15 of the 5,246 cash deposit and withdrawal transactions related to

the Sterling Defendants Accounts are reflected on BLMIS investment advisory customer
statements, and the remaining 15 transactions which took place during the first eleven
days of December 2008 were traced to BLMIS’s investment advisory Checkbook File.
Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion. As a result of the Court’s September 27, 2011 Opinion and Order, a
number of Defendants and accounts are no longer the subject of this litigation. In
addition, paragraph 55 addresses cash deposit and withdrawal transactions outside of the

27

two-year period relevant to this case. Defendants do not dispute that the Greenblatt
Report provides that 5,231 cash deposits and withdrawals were identified in Defendants’
BLMIS account statements for the period October 1, 1985 through November 30, 2008,
and that 15 cash deposits and withdrawals were identified in the BLMIS Checkbook File
for the period December 1, 2008 through December 11, 2008. (Greenblatt Report ¶ 60
(Greenblatt Decl., Ex. 1).)
56.

For the time period December 1998 to December 2008 based on BLMIS

bank record availability, FTI reconciled approximately 99% of the 225,000 cash
transactions reflected on BLMIS customer statements.
Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion. Defendants do not dispute that the Collura Report states that “99% of
the approximately 225,000 cash deposit and/or withdrawal transactions that were
reflected in all BLMIS customer statements” for the period December 1998 to December
2008 were reconciled against BLMIS bank records for the same period. (Collura Report
¶ 30 (emphasis omitted) (Collura Decl., Ex. 1).)
57.

For the time period December 1998 to December 2008, FTI reconciled

99.4% of the Sterling Defendants’ 5,246 cash transactions reflected on their BLMIS
customer statements.
Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion, and disputed insofar as the assertion in paragraph 57 misstates the
28

number of cash transactions that purportedly were reconciled for the period December
1998 to December 2008. (See id. ¶ 32.)
58.

From October 1, 1985 to December 11, 2008, FTI reconciled 98 percent

(or 5,147) of the Sterling Defendants’ 5,246 cash transactions with available BLMIS
bank records, customer files, and documents/data produced by the Sterling Defendants.
Defendants’ Response:
Immaterial and irrelevant for purposes of the Trustee’s Partial Summary
Judgment Motion. Defendants do not dispute that the Collura Report states that FTI
“reconciled 5,147, representing approximately 98%, of the 5,246 cash transactions
reflected in the customer statements of the 185 Defendants’ Accounts to available
BLMIS bank records, documentation contained in BLMIS customer files, Quicken data
and/or other documents produced by the Defendants themselves.” (Id. ¶ 54.)
59.

FTI created chronological listings of all cash deposit and withdrawal

transactions for every BLMIS customer account, including the accounts of the Sterling
Defendants, from April 1, 1981 through December 11, 2008. On an account-by-account,
daily basis, FTI calculated every Investment Advisory customer account holder’s
principal balance (the “Principal Balance”) from April 1, 1981 through December 11,
2008 based upon the following seven factors:
(1) The initial investment of each customer, which for accounts opened after April
1, 1981 was either a cash deposit or an inter-account transfer;
(2) Cash deposits made by each account holder in the form of checks or wire
transfers, which were recorded on customer statements as cash deposits;
29

(3) Non-cash deposits of principal, such as securities or bonds, made by
customers;
(4) Inter-account transfers “in” to one BLMIS account from another account in
which no new funds entered or left BLMIS;
(5) Cash withdrawals (or “redemptions”) made by each BLMIS holder and
transferred via wire or check;
(6) Inter-account transfers “out” of one BLMIS account to another account in
which no new funds entered or left BLMIS; and
(7) Payments made by BLMIS on behalf of an account holder to a third party for
apparent legal obligations, such as to the Internal Revenue Service on behalf of foreign
account holders.
Defendants’ Response:
Paragraph 59 violates Local Rule 56.1(a) because the methodology described
therein does not assert any fact. In addition, paragraph 59 is immaterial to the Trustee’s
Partial Summary Judgment Motion. Accordingly, paragraph 59 is improperly included in
the Trustee’s Rule 56.1 Statement and no response is required. To the extent a response
is required, Defendants do not dispute that the Greenblatt Report explains that FTI
employed the methodology set forth in paragraph 59.
60.

“Core Account Documents” were relied upon to calculate Principal

Balances for each Investment Advisory customer account, including: BLMIS customer
statements from November 1978 through November 2008, supported by third party bank
records for all periods that such records are available; Portfolio Management Reports

30

generated by the BLMIS on a monthly basis; Portfolio Management Transaction Reports
created by BLMIS for the time periods from January 1985 through December 1986 and
from January 1990 through December 1995; Spiral bound notebooks containing
handwritten transaction information related almost exclusively to cash receipts and cash
disbursements for the time periods from April 1985 through September 1990 and from
August 1991 through November 1994; and the “Checkbook File,” a data table within the
investment advisory business’s IBM AS/400 computer system that contains manuallyinputted cash receipts and cash disbursements, maintained for the time period from
January 2000 through December 11, 2008.
Defendants’ Response:
Paragraph 60 violates Local Rule 56.1(a) because the description of what
comprised “core account documents” does not assert any fact. In addition, paragraph 60
is immaterial to the Trustee’s Partial Summary Judgment Motion. Accordingly,
paragraph 60 is improperly included in the Trustee’s Rule 56.1 Statement and no
response is required. To the extent a response is required, Defendants do not dispute that
the Greenblatt Report defines “core account documents” to include the various
documents set forth in paragraph 60.

31

61.

Of the Sterling Defendants’ 185 accounts, 144 accounts were “net

winners” of more than $295 million in fictitious profits withdrawn over the life of the
Sterling Defendants’ investment.
Defendants’ Response:
Paragraph 61 violates Local Rule 56.1(a) because it purports to state a legal
conclusion that is in dispute. (See, e.g., Mem. of Law in Supp. of Sterling Defs. Mot. to
Dismiss the Am. Compl. or, in the Alternative, for Summ. J. (doc. no. 21); Mem. of Law
in Supp. of Defs. Mot. for Summ. J. (doc. no. 86); Mem. of Law Regarding
Determination of “For Value” and Net Equity Decision (doc. no. 62); Reply Mem. of
Law Regarding Determination of “For Value” and Net Equity Decision (doc. no. 70).)
Moreover, as a result of the Court’s September 27, 2011 Opinion and Order, a
number of Defendants and accounts are no longer the subject of this litigation. In
addition, paragraph 61 addresses cash deposit and withdrawal transactions outside of the
two-year period relevant to this case.
62.

Within the Two-Year Period, the Two-Year Net Winner Defendants

received transfers of $83,309,162 in fictitious profits from 34 accounts.
Defendants’ Response:
Paragraph 62 violates Local Rule 56.1(a) because it purports to state a legal
conclusion that is in dispute. (See, e.g., Mem. of Law in Supp. of Sterling Defs. Mot. to
Dismiss the Am. Compl. or, in the Alternative, for Summ. J. (doc. no. 21); Mem. of Law
in Supp. of Defs. Mot. for Summ. J. (doc. no. 86); Mem. of Law Regarding

32

Determination of “For Value” and Net Equity Decision (doc. no. 62); Reply Mem. of
Law Regarding Determination of “For Value” and Net Equity Decision (doc. no. 70).)
Defendants do not dispute the account numbers, names of account holders, the
account names, or the numbers set forth in columns 4, 5, and 11 of Exhibit 2 to the
Declaration of Matthew B. Greenblatt (see Greenblatt Decl., Ex. 2), but Defendants
dispute the legal characterization of those numbers (see, e.g., Mem. of Law in Supp. of
Sterling Defs. Mot. to Dismiss the Am. Compl. or, in the Alternative, for Summ. J. (doc.
no. 21); Mem. of Law in Supp. of Defs. Mot. for Summ. J. (doc. no. 86); Mem. of Law
Regarding Determination of “For Value” and Net Equity Decision (doc. no. 62); Reply
Mem. of Law Regarding Determination of “For Value” and Net Equity Decision (doc.
no. 70).)
Dated: New York, New York
February 9, 2012
DAVIS POLK & WARDWELL LLP
By: s/ Karen E. Wagner
Karen E. Wagner
Dana M. Seshens
450 Lexington Avenue
New York, New York 10017
Telephone: [phone]
Facsimile: [phone]

Of Counsel:
Robert B. Fiske, Jr.
Robert F. Wise, Jr.

Attorneys for Defendants

33