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

Filing 157

MEMORANDUM OF LAW in Opposition re: 143 MOTION in Limine TO BAR USE OF PREJUDICIAL PHRASE. Trustee's Memorandum of Law in Opposition to Defendants' Motion In Limine to Bar Use of Prejudicial Phrase. Document filed by Irving H. Picard. (Bohorquez, Fernando)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
In re:

Adv. Pro. No. 08-01789 (BRL)

BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Debtor,

SIPA LIQUIDATION
(Substantively Consolidated)

IRVING H. PICARD, Trustee for the Liquidation of Adv. Pro. No. 10-05287 (BRL)
Bernard L. Madoff Investment Securities LLC,
Plaintiff,
v.

11 Civ. 03605 (JSR) (HBP)

SAUL B. KATZ, et al.,
Defendants.

TRUSTEE’S MEMORANDUM OF LAW IN OPPOSITION TO
DEFENDANTS’ MOTION IN LIMINE TO BAR USE OF PREJUDICIAL PHRASE

TABLE OF CONTENTS
Page
I.

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

II.

ARGUMENT ..................................................................................................................... 3
A.
B.

III.

The Central Premise of Defendants’ Motion is Untenable Given the
Undisputed Facts and the Established SIPA Procedures ....................................... 3
The Relief Sought By Defendants Would be Unfairly Prejudicial to the
Trustee.................................................................................................................... 6

CONCLUSION .................................................................................................................. 7

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CASES
In re Adler Coleman Clearing Corp.,
211 B.R. 486 (Bankr. S.D.N.Y. 1997) .......................................................................................3
AIA Holdings, S.A. v. Lehman Bros., Inc.,
No. 97 Civ. 4978, 2002 U.S. Dist. LEXIS 22559 (S.D.N.Y. Nov. 21, 2002) ...........................5
Aristocrat Leisure Ltd. v. Deutsche Bank Trust Co. Ams.,
No. 04 Civ. 10014, 2009 U.S. Dist. LEXIS 89183 (S.D.N.Y. Sept. 28, 2009) .........................5
Costantino v. Herzog,
203 F.3d 164 (2d Cir. 2000)...................................................................................................4, 5
Donell v. Kowell,
553 F.3d 762 (9th Cir. 2008) .....................................................................................................4
Highland Capital Mgmt. L.P. v. Schneider,
551 F. Supp. 2d 173, 192 (S.D.N.Y. 2008)................................................................................5
Plew v. Limited Brands, Inc.,
No. 08 Civ. 3741, 2012 U.S. Dist. Lexis 14966 (S.D.N.Y. Feb. 6, 2012) .................................5
Rosenman Family LLC v. Picard,
395 Fed. Appx. 766 (2d Cir. 2010) ............................................................................................3
SEC v. Better Life Club of Am., Inc.,
995 F.Supp. 167 (D.D.C. 1998) .................................................................................................4
Sprint/United Mgmt v. Mendelsohn,
552 U.S. 379 (2008) ...................................................................................................................6
U.S. v. Ruskjer, Crim.
No. 09-00249HG, 2011 WL 3841854 (D. Haw. Aug. 29, 2011) ..............................................5
United States Commodity Futures Trading Comm’n v. Linton,
786 F. Supp. 2d 1374 (D. Ariz. 2011) .......................................................................................4
STATUTES
11 U.S.C. § 548(c) ...........................................................................................................................4
15 U.S.C. §§ 78aaa et seq. ...............................................................................................................1
15 U.S.C § 78fff-2(b) ...................................................................................................................2, 3
15 U.S.C § 78lll(2) ...........................................................................................................................2
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TABLE OF CONTENTS
(continued)
Page
15 U.S.C § 78lll(4) ...........................................................................................................................2
15 U.S.C § 78lll(11) .....................................................................................................................2, 3
RULES
Fed. R. Evid. 403 .........................................................................................................................4, 6
OTHER AUTHORITIES
Weinstein’s Federal Evidence § 403.04[1][a] (2d ed. 1997) ...........................................................4

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Irving H. Picard (the “Trustee”), as Trustee for the substantively consolidated liquidation
of the business of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and the estate of
Bernard L. Madoff (“Madoff”), under the Securities Investor Protection Act (“SIPA”), 15 U.S.C.
§§ 78aaa et seq., by and through his undersigned counsel, respectfully submits this Memorandum
of Law in Opposition to Defendants’ Motion In Limine to Bar Use of Prejudicial Phrase. For the
reasons set forth below, Defendants’ motion in limine should be denied.
I.

PRELIMINARY STATEMENT

Defendants’ motion must be denied because the relief sought is at odds with the reality of
the Ponzi scheme perpetrated by Madoff, as well as the rights of BLMIS customers in this SIPA
proceeding. There is no dispute that, during the course of Madoff’s fraud, BLMIS investors’
funds were principally deposited into a bank account at J.P. Morgan Chase (the “703 Account”).1
The money received from customers was not invested in securities for the benefit of those
customers as purported, but instead was primarily used to make distributions to, or payments on
behalf of, other investors. As Madoff explained at his plea hearing, “Up until I was arrested . . . I
never invested [customer] funds in the securities, as I had promised. Instead, those funds were
deposited in [the 703 Account]. When clients wished to receive the profits they believed they
had earned with me or to redeem their principal, I used the money in the [703 Account] that
belonged to them or other clients to pay the requested funds.” Ex. 2, to Sheehan Decl. to
Trustee’s Motion for Partial Summary Judgment, Dkt. No. 87. The transfers Defendants
received from BLMIS therefore came from a commingled account and included or consisted of,
at least in part, other people’s money.

1

The facts of Madoff’s Ponzi scheme are not in dispute. See Trustee’s Rule 56.1 Statement in support of his Motion
for Partial Summary Judgment, Dkt. No. 87, and Defendant’s Rule 56.1 Counter Statement, Dkt. No. 119.

300205261

Defendants’ central premise is also flawed because “their money” is not at issue. Under
SIPA, a fund of “customer property” is established for priority distribution to the “customers” of
the debtor. See SIPA § 78lll(4)2; SIPA § 78lll(2). Each customer then has a claim to a pro rata
share in the fund of customer property to the extent of his “net equity.” See SIPA § 78lll(11);
SIPA § 78fff-2(b). SIPA does not, as Defendants suggest in their motion, entitle any customer to
a “return” of “their money” or “their principal.”
Defendants’ motion is an attempt to distort the framework of the case to be put before the
jury by wrongly suggesting that the Trustee is seeking to recover “their money” as opposed to
the recovery of Customer Property. Far from acting as a “later day Robin Hood,” as Defendants
brazenly suggest, the Trustee is fulfilling his undisputed, statutory mandate as set forth by
Congress in SIPA. The Trustee distributes funds to customers with valid, approved claims on an
equitable and ratable basis—without regard to economic status, or any other factor. To suggest
that the Trustee is somehow in the business of stealing from the rich and giving to the poor is
both patently false and highly prejudicial.
Defendants’ motion must be denied because the Trustee’s reference to “other people’s
money,” or any like wording, is completely accurate and not at all prejudicial when describing to
the jury the nature of a Ponzi scheme. The $300 million-plus in transfers at issue for trial consist
of funds that were stolen from other BLMIS customers from a single, common account (before
being conveyed to Defendants in furtherance of Madoff’s admitted Ponzi scheme.) As such, it
would in fact be unfairly prejudicial to the Trustee to allow the Defendants to describe the funds

2

SIPA § 78lll(4) defines “Customer Property” as “cash and securities . . . at any time received, acquired, or held by
or for the account of a debtor from or for the securities accounts of a customer, and the proceeds of any such
property transferred by the debtor, including property unlawfully converted.”

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remaining at issue to the jury as somehow “their money” or as a “return” of “their principal”
when the undisputed facts belie such characterizations.
II. ARGUMENT
A.

The Central Premise of Defendants’ Motion is Untenable Given the
Undisputed Facts and the Established SIPA Procedures

Defendants’ motion must be denied because its central premise is wrong. The hundreds
of millions in transfers that remain the subject of trial do not consist of funds that are accurately
characterized as the “Defendants’ principal.” (Def. Mot. p. 2). BLMIS did not maintain the
funds at issue in segregated accounts in Defendants’ names before “returning” them to any
Defendant. Rather, BLMIS commingled Defendants’ deposits in an unsegregated account with
money from all investors. The transfers at issue, therefore, consist of and include “other
people’s money.”
The money flowing out of BLMIS to its customers came from the common, nonsegregated 703 Account. See Ex. 2 to Sheehan Decl. to Trustee’s Motion for Partial Summary
Judgment, Dkt. No. 87. Upon the liquidation of BLMIS under SIPA, this cash and any
recoveries of customer property by the Trustee are to be distributed ratably to all customers with
net equity claims. See SIPA § 78lll(11); SIPA § 78fff-2(b). No customer has an identifiable
interest in specific funds, but rather has a pro rata claim to a share of the customer fund.
Rosenman Family LLC v. Picard, 395 Fed. Appx. 766, 769 (2d Cir. 2010) (affirming that funds
transferred by investor to BLMIS formed part of the debtor’s property and the bankruptcy estate,
and are therefore subject to SIPA); In re Adler Coleman Clearing Corp., 211 B.R. 486, 496
(Bankr. S.D.N.Y. 1997) (customers’ assets transferred into a Ponzi scheme constitute “customer
property” against which customers do not have an identifiable interest to their investments, but
rather simply have a claim against the collective pot of funds). This is consistent with case law
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recognizing that, in a fraudulent scheme where investors’ money is extensively commingled with
the money of other investors such that the funds are impossible to segregate, each investor is
limited to his or her pro rata interest in the entire asset pool. United States Commodity Futures
Trading Comm’n v. Linton, 786 F. Supp. 2d 1374, 1382 (D. Ariz. 2011) (citing SEC v. Better
Life Club of Am., Inc., 995 F.Supp. 167, 181 (D.D.C. 1998)). At best, if the Defendants were
able to sustain their affirmative defense under section 548(c), any “right” to retain funds that
satisfied their principal investment is not a recognition that it was a return of “their money” or
“their specific funds,” but rather a recognition of a right to a restitution claim, up to their
principal amount invested, as a result of the fraud. See Donell v. Kowell, 553 F.3d 762, 773 (9th
Cir. 2008).
Madoff operated a Ponzi scheme which commingled customers’ assets. The funds the
Sterling Defendants transferred to BLMIS were used to make payments to earlier investors, and
the transfers received by the Sterling Defendants were funds BLMIS received from later
investors. By the Ponzi scheme’s very nature, the hundreds of millions of dollars Defendants
placed into their 180-plus accounts over time neither “belonged” to any of the Defendants nor
were allocable specifically to them; rather, BLMIS placed the funds into a commingled, common
fund of customer property belonging to all customers with valid claims on a pro rata basis. As
such, the transfers received by the Sterling Defendants do not constitute “their money” or “their
principal,” and references to these transfers as consisting of or including “other people’s money”
are in no way unfair. See Costantino v. Herzog, 203 F.3d 164, 174 (2d Cir. 2000) (“Because
virtually all evidence is prejudicial to one party or another, to justify exclusion under Rule 403
the prejudice must be unfair.”) (emphasis in original) (citing Weinstein’s Federal Evidence §
403.04[1][a] (2d ed. 1997)). To show unfairness, Defendants must identify “some adverse effect

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beyond tending to prove a fact or issue that justifies admission.” Id. at 174-75; see also U.S. v.
Ruskjer, Crim. No. 09-00249HG, 2011 WL 3841854 at *4 (D. Haw. Aug. 29, 2011) (denying
motion to preclude use of term “Ponzi scheme” because it merely described the alleged activity
in a succinct fashion and did not pose a danger of unfair prejudice or misleading the jury).
The cases cited by Defendants in their motion regarding the exclusion of “pejorative”
terms are inapposite and as such support the Trustee. Those cases involved terms and phrases
that were facially pejorative and derogatory with respect to the defendants themselves and/or
their alleged conduct – not at all the case here. See Plew v. Limited Brands, Inc., No. 08 Civ.
3741, 2012 U.S. Dist. Lexis 14966, at *6-7 (S.D.N.Y. Feb. 6, 2012) (finding characterization of
Defendants’ actions as “stealing” pejorative); Aristocrat Leisure Ltd. v. Deutsche Bank Trust Co.
Ams., No. 04 Civ. 10014, 2009 U.S. Dist. LEXIS 89183, at *19-20 (S.D.N.Y. Sept. 28, 2009)
(finding use of term “tax haven” inflammatory and derogatory); AIA Holdings, S.A. v. Lehman
Bros., Inc., No. 97 Civ. 4978, 2002 U.S. Dist. LEXIS 22559, at *2-3 (S.D.N.Y. Nov. 21, 2002)
(denying in part and granting in part motion to exclude term “rat trading”). The Trustee’s use of
the phrase “other people’s money,” by contrast, is a factual characterization of the transfers from
BLMIS, explains the Ponzi scheme’s inner workings, explains what the Trustee is doing via the
action before the jury, and is not at all pejorative with respect to Defendants. See Aristocrat
Leisure, 2009 U.S. Dist. LEXIS 89183 at *20 (declining to exclude factual terms including
“hedge funds,” “short selling,” and “off-shore incorporation” because they were not
inflammatory on their face).3

3

Highland Capital Mgmt. L.P. v. Schneider is likewise inapposite because in that case, the court precluded use of
terms such as “securities fraud”, “insider trading”, and the like because no securities claims were at issue in a breach
of contract action, and those terms were only intended to make the Defendants themselves look like “bad people.”
551 F. Supp. 2d 173, 192 (S.D.N.Y. 2008). However, the court did allow use of the factual term “material
nonpublic information.” Id. at 193.

5

Defendants’ assertion (Def. Mot. p. 6), that “there is no evidence Defendants received
anyone else’s money other than their own” is completely wrong. The evidence at trial will show
precisely that – Madoff ran a Ponzi scheme and Defendants’ received money from commingled
funds belonging to all BLMIS customers. It is the Defendants who cannot point to any evidence
that the money they received consisted of their segregated funds. Defendants’ further assertion
that use of the phrase “other people’s money” implies that the standard of willful blindness is
automatically met (Def. Mot. p. 6) is a non sequitur and a stretch. Whether the Defendants were
willfully blind to signs of Madoff’s fraud is a separate issue from the commingled nature of the
funds received by Defendants. That Defendants received other people’s money is a relevant,
accurate fact and an inherent result of the Ponzi scheme run by Madoff. The jury will make the
ultimate determination as to whether Defendants were willfully blind to the warning signs of
Madoff’s fraud.
B.

The Relief Sought By Defendants Would be Unfairly Prejudicial to the
Trustee

The relief sought by Defendants, or allowing them to make reference to “their principal”
or similar descriptions of the transfers at issue, would in fact be unfairly prejudicial to Trustee.
Allowing the Defendants to manipulate the terminology of the case in this manner would create
the false impression that the Trustee is somehow attempting to re-distribute “Defendants’
money” to less fortunate, less culpable, or less sophisticated customers. To the contrary, the
Trustee takes valid claimholders as he finds them. He simply seeks to recover Customer
Property for equitable distribution on allowed claims in accordance with SIPA.
What is “fair” must be determined with reference to the undisputed facts. Sprint/United
Mgmt v. Mendelsohn, 552 U.S. 379, 388 (2008) (stating that “[a]pplying Rule 403 to determine if
evidence is prejudicial also requires a fact-intensive, context-specific inquiry.”). Here, the facts
6

concerning the commingled funds at BLMIS support the Trustee’s characterization of “other
people’s money” and foreclose the Defendants’ efforts to misconstrue the transfers as “their
principal.”
Similarly, Defendants’ motion is a backdoor and belated attempt to hamstring the
Trustee’s forensic accounting expert.4 Indeed, Defendants’ motion (pp. 5-6) takes broad aim at
the report of Bruce G. Dubinsky, who will testify about, among other things, the operations of
BLMIS and its lack of legitimacy, certain of the Defendants’ accounts, and Madoff’s purported
investment strategy. Mr. Dubinsky must be allowed to accurately testify to the relevant facts
regarding the Ponzi scheme and how it operated. These facts are directly relevant to establishing
the legal basis for the Trustee’s claims, and necessarily include reference to the commingling of
funds and the fact that “redemptions” from BLMIS consisted of or included other people’s
money. Any challenge Defendants wish to make with regard to the assumptions or conclusions
of Mr. Dubinsky should be done through the cross-examination of Mr. Dubinsky at trial.
III. CONCLUSION
For the foregoing reasons, the Court should deny Defendants’ motion, and should bar
Defendants from referring to the transfers at issue as “their money,” “their principal” or by any
like characterization or phrasing.

4

Motions to strike experts were due on January 26, 2012. Defendants filed no motion as to Mr. Dubinsky and thus
this “argument” is untimely.

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Dated: New York, New York
March 12, 2012

BAKER & HOSTETLER LLP
By: /s/ David J. Sheehan
BAKER & HOSTETLER LLP
45 Rockefeller Plaza
New York, New York 10111
Telephone: [phone]
Facsimile: [phone]
David J. Sheehan
Email: [e-mail]
Fernando A. Bohorquez, Jr.
Email: [e-mail]
Regina L. Griffin
Email: [e-mail]

Attorneys for Irving H. Picard, Trustee for the
Substantively Consolidated SIPA Liquidation
of Bernard L. Madoff Investment Securities
LLC and Bernard L. Madoff

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