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

Filing 153

DECLARATION of DANA M. SESHENS in Support re: 143 MOTION in Limine TO BAR USE OF PREJUDICIAL PHRASE., 145 MOTION in Limine TO EXCLUDE STERLING STAMOS DOCUMENTS.. 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, 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. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C, # 4 Exhibit D, # 5 Exhibit E, # 6 Exhibit F, # 7 Exhibit G, # 8 Exhibit H, # 9 Exhibit I, # 10 Exhibit J, # 11 Exhibit K, # 12 Exhibit L, # 13 Exhibit M, # 14 Exhibit N, # 15 Exhibit O, # 16 Exhibit P)(Seshens, Dana)

EXHIBIT E

Media Contact:
Amanda Remus
212-847-2826
PRESS RELEASE OF IRVING H. PICARD
TRUSTEE FOR LIQUIDATION OF BERNARD L. MADOFF INVESTMENT
SECURITIES OPPOSES MOTION TO DISMISS COMPLAINT AGAINST
STERLING EQUITIES
NEW YORK, NY – May 19, 2011 – Irving H. Picard, the Trustee for the liquidation of Bernard L.
Madoff Investment Securities LLC (“BLMIS”), today filed his opposition brief in the United States
Bankruptcy Court for the Southern District of New York against the motion by Sterling Equities
(“Sterling”), its partners, their family members, and certain related trusts and entities (the “Sterling
Defendants”) seeking either the dismissal of the Trustee’s complaint against them or summary
judgment.
In the opposition brief, the Trustee describes two critical components of the fiduciary mandate
which form the basis of his claims against the Sterling Defendants. The first is to locate and recover
fictitious profits, or “other people’s money,” that the Sterling Defendants received from BLMIS and
to redistribute those assets equitably to those who withdrew less than they deposited.
The second critical component of the Trustee’s claims against the Sterling Defendants emanates
from the bankruptcy law concept of good faith. A lack of good faith under the bankruptcy law does
not require that the defendant actually did something illegal or knew that it was dealing with a Ponzi
scheme. Instead, under bankruptcy law, a defendant did not act in good faith if what it knew about
BLMIS gave it a reason to inquire further, but instead it turned a blind eye and continued to take
money from an enterprise it should have known might be a fraud.
“Fred Wilpon, Saul Katz and the Sterling Partners are holding $300 million in fictitious profits
consisting of ‘other people’s money,’ stolen money that they received from Bernard Madoff. Yet
they refuse to return this stolen money,” said David J. Sheehan, counsel to the Trustee and a partner
at Baker & Hostetler LLP, the court-appointed counsel for the Trustee.

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“This case is one of many actions undertaken by the Trustee to fulfill his fiduciary obligation to
return stolen money to the rightful owners, who are BLMIS customers and creditors with approved
claims,” said Mr. Sheehan. “As today’s filing shows, the law and the facts verify the Trustee’s
allegations against the Sterling Defendants. There is no rationale – in law or in fact – that justifies
their retention of stolen money.”
The opposition brief submits evidence – including information and testimony presented for the first
time – which substantiates the Trustee’s allegations against the Sterling Defendants, including that
they disregarded warnings from trusted advisors and their own suspicions that BLMIS might be a
fraud, because they were “fixated on continuing to profit from their access to Madoff and his
returns.”
“The law does not permit ‘bad faith’ investors to retain money they received from an enterprise after
indicia of possible fraud becomes apparent,” said Fernando A. Bohorquez, Jr., counsel to the
Trustee and a partner at Baker & Hostetler LLP. “Even if the Sterling Defendants did not
specifically know that BLMIS was a Ponzi scheme, they cannot keep the hundreds of millions of
dollars in principal transfers they received under circumstances indicating that they should have
known of possible fraud at BLMIS.”
The Sterling Defendants must return to the Trustee all of the money that they received from BLMIS
if they were on notice of facts suggesting that BLMIS might be a fraud, but failed to conduct a
diligent investigation. The Trustee’s pre-complaint investigation yielded evidence that shows that
the Sterling Defendants were aware that BLMIS might have been a fraud but failed to investigate,
including:
In 2001, the Sterling Partners explored purchasing “fraud insurance” for their BLMIS
investments that would cover a Ponzi scheme;
Sterling Partner David Katz’s own testimony that by 2002, he was “screaming for
diversification” of the Sterling Partners’ investments away from Madoff because “we don’t know
what he does” and so created their own hedge fund, Sterling Stamos, to achieve “Madoff-like
returns”;

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Testimony of one of the Sterling Partners that he had heard Madoff might be front-running,
which he understood meant that Madoff might be taking “information and us[ing] it illegally . . .
to his own benefit or to benefit his clients”;

Testimony that the Sterling Partners were warned by their hedge fund business partners of the
danger that their hundreds of millions of dollars at BLMIS could be frozen if there were an
investigation into Madoff’s operations.
Sterling Stamos Documents and Testimony Show that the Sterling Partners Were Warned
Of particular note, the opposition brief provides more detail from the testimony of Peter Stamos,
the chief executive officer of Sterling Stamos, the hedge fund co-founded by Mr. Stamos and the
Sterling Partners. After describing his high opinion of Madoff, Peter Stamos in the very next breath
stated that Sterling Stamos’s due diligence protocols would have “stopped [Madoff] at the door” and
that he conveyed this information to a Sterling Partner.
Within days of the collapse of BLMIS, there were written communications from Sterling Stamos
stating that they had recommended to the Sterling Partners for years that they should have taken
their money out of BLMIS, but that they had refused to do so despite these warnings. In particular,
a December 2008 email by Sterling Stamos’s chief investment strategist read: “In fact, we had
recommended to them [Sterling Partners] to redeem [from BLMIS] for years but they kept their investment
independent of our recommendation.”
Before the collapse of the Madoff Ponzi scheme, other credible investment advisors expressed
similar misgivings to the Sterling Partners about Madoff, including:
A Merrill Lynch executive who told Saul Katz that Madoff would not pass Merrill Lynch’s due
diligence process;
A consultant to the Sterling Defendants who told Saul Katz that he “couldn’t make Bernie’s
math work” and “Something wasn’t right.”
“Instead of listening to the advice of their own, hand-picked hedge fund managers and other
advisors, the Sterling Defendants restructured Sterling Stamos to accommodate Madoff’s
unorthodox demands for secrecy,” said Mr. Sheehan. “Peter Stamos’s testimony confirms that, to
appease Madoff’s desire to avoid disclosures regarding the Sterling Partners’ investments with
BLMIS, Sterling Stamos’s operations and management were entirely restructured at great time and
expense.”

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Bayou Fund Ponzi Scheme – A Lesson Ignored
In addition to warnings from experienced investment advisors, the Sterling Partners had previous
experience with another Ponzi scheme in 2005. The Trustee’s opposition brief details the lessons
that the Sterling Partners should have learned from the Bayou Fund Ponzi scheme and that they
should have applied to Madoff, but deliberately failed to do so.
“The facts are undeniable and inescapable. The Sterling Partners used their BLMIS accounts and
the consistent, steady returns as a source of liquidity for their various businesses, including the Mets.
They also used their BLMIS accounts for leverage, borrowing against them to obtain additional
capital which they then reinvested into their BLMIS accounts to double their returns,” said Mr.
Sheehan. “As our evidence shows, the Sterling Defendants were aware of and ignored indicia of
fraud, despite a series of escalating warnings about Madoff. Of this there is no doubt.”
The Sterling complaint was initially filed under seal on December 7, 2010 in the United States
Bankruptcy Court for the Southern District of New York. The original complaint was unsealed on
February 4, 2011, at the Trustee’s request, and amended on March 18, 2011.
A copy of the opposition brief and other motions in this matter are available on the Trustee's
website at www.madofftrustee.com or on the Bankruptcy Court’s website at
www.nysb.uscourts.gov; Docket No. 10-5287 (BRL). The Bankruptcy Court will hold a hearing on
the Sterling Defendants’ motion on Wednesday, June 29, 2011.

In addition to Mr. Sheehan and Mr. Bohorquez, the Trustee acknowledges the contributions of the
Baker & Hostetler attorneys who worked on this filing: Lauren Resnick, Regina Griffin, Tracy Cole,
Tom Warren, Keith Murphy, Kathryn Zunno, George Klidonas, and Amanda Fein.

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