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

Filing 160

DECLARATION of David J. Sheehan in Support re: 158 FOURTH MOTION in Limine To Exclude All Evidence and Arguments Relating to the BLMIS-Merrill Lynch Technology Partnership.. Document filed by Irving H. Picard. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4)(Sheehan, David)

Exhibit 1

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C O N F I D E N T I A L

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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
11-CV-03605(JSR)(HBP)

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4
5

--------------------------------x

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IRVING H. PICARD, Trustee for
the Liquidation of Bernard L.
Madoff Investment Securities LLC,

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8

Videotaped
Deposition of:

Plaintiff,
v.

KEVIN DUNLEAVY

9
SAUL B. KATZ, et al.,
10
Defendants.
11
--------------------------------x
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13
14
15

TRANSCRIPT of testimony as taken by and before

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MONIQUE VOUTHOURIS, Certified Court Reporter, RPR,

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CRR, and Notary Public of the States of New York and

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New Jersey, at the offices of Baker & Hostetler, 45

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Rockefeller Plaza, New York, New York, on Wednesday,

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December 21, 2011, commencing at 9:13 a.m.

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PICARD v. KATZ, et al.

CONFIDENTIAL

KEVIN DUNLEAVY 12/21/11
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A P P E A R A N C E S:

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BAKER & HOSTETLER, LLP
45 Rockefeller Plaza
New York, New York 10111
BY: REGINA L. GRIFFIN, ESQ.
STACEY A. BELL, ESQ.
AMANDA E. FEIN, ESQ.
For Plaintiff, Irving Picard, Trustee

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DAVIS, POLK & WARDWELL, LLP
450 Lexington Avenue
New York, New York 10017
BY: KAREN E. WAGNER, ESQ.
ALEX A. CROHN, ESQ.
For Sterling Equities and certain
affiliated entities

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11
12

LOEB & LOEB, LLP
345 Park Avenue
New York, New York 10154-1895
BY: ALYSON M. WEISS, ESQ.
For the witness, Kevin Dunleavy

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ALSO PRESENT:
DANIEL McCLUTCHY, Videographer

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2

Q.

Okay.

Did there come a time that you

held a different position than account representative?

3

A.

4

Q.

5

A.

Yes.
And what position did you then take on?
I was at some point in my career in

6

the -- call it -- I don't know the exact time frame,

7

but at some point I was made a manager of the sales

8

group.

9

Q.

And I take it from your answer that

10

you -- you're having trouble recollecting approximately

11

when that was.

12
13
14
15
16
17

A.
Q.

Yes.
Okay.

Did there come a time that you

held a different position?
A.

I was then elevated to run the

national sales force.
Q.

18

that was?

19

A.

And do you know approximately when

20
21
22

Q.

Mid-'90s.
And what position -- I'm sorry, what

was the title of that position?
A.

23

income sales.

24

Q.

Managing director in charge of fixed

25

Did there come a time after that you

held a different position?
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2
3
4
5

A.
Q.
A.

Yes.
And what position was that?
Co-head of the global rates and

securities business.
Q.

And could you tell me what you did as

6

the co-head of the global rates and securities

7

business?

8

A.

9
10
11

It was a business that predominantly

looked at sovereign bonds, trading, sales and
financing.
Q.

12

position?

13

A.

And how long did you hold that

14
15
16
17

Q.
A.
Q.
A.

Two years.
And did you move into a new position?
Yes.
And what position was that?
It was a -- it was a -- it was a

18

special assignment where I was asked to put together

19

with outside consultants a client relationship

20

management software system to be able to track and

21

understand our client flows and information.

22
23
24
25

Q.

And approximately what time period are

we talking about that you held that position?
A.

Approximately, you know, somewhere in

1999, 2000.
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2
3
4
5
6
7

Q.

Did there come a time after that that

you held a different position at Merrill Lynch?
A.
Q.
A.

Yes.
And what position was that?
The next position I then held was in

relationship management, focused on all hedge funds.
Q.

Can you tell me what you did in regard

8

to that position in relationship management focused

9

on all hedge funds?

10

A.

Broadly, it was looking at hedge

11

funds, their business, their interactions with

12

Merrill Lynch, connecting in as many parts of our

13

firm as we could to those clients appropriately to

14

garner the greatest amount of market share and

15

revenue.

16

Q.

17

clients.

18

referring to as clients?

19
20
21
22
23
24
25

A.

In your answer you just referred to
Who do you mean by clients?

Or who are you

Broadly, anybody that could have a

relationship with Merrill Lynch to pay them revenues.
Q.

Would that cover both institutional

and individual clients?
A.
Q.

No, institutional only.
Did there come a -- how long did you

hold that position?
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2
3
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5
6

A.
Q.

For several years.
Did there come a time after that that

you held a different position at Merrill Lynch?
A.
Q.
A.

Yes.
And could you tell me what that was?
In charge of all global client

7

relationships, hedge funds, non-hedge funds, all

8

institutional.

9

Q.

10

position?

11

A.

And how long did you hold that

12

Q.

Until I left.
And what were your responsibilities

13

when you were in charge of all global client

14

relationships?

15

A.

Again, principally overseeing a group

16

of senior managing directors whose principal

17

responsibility was to connect in Merrill Lynch and

18

all of its capabilities and resources to

19

institutional clients to garner the greatest amount

20

of market share and revenue possible.

21

Q.

While you were at Merrill Lynch, did

22

there come a time that you became acquainted with

23

Sterling Stamos?

24

A.

25

Q.

Yes.
And do you remember approximately when
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that was?

2

A.

3
4
5

Q.

Early 2000s.
And at that time your position -- do

you recall what your position was?
A.

My position was in relationship

6

management focused on hedge funds, is what I believe

7

was the -- was my position at that time.

8
9
10

Q.

Can you tell me how you came to be

acquainted with Sterling Stamos?
A.

An individual by the name of Kirk

11

Rostron, who worked for Merrill Lynch in an area we

12

call Capital Introduction, met -- excuse me, met

13

Peter Stamos, and he recommended -- he was impressed

14

by Peter, and he recommended, as I recall, for me to

15

meet with Peter.

16
17
18
19
20
21
22
23

Q.
A.
Q.

Did you meet with Mr. Stamos?
Yes, I did.
And, again, was that in the early

2000s, as you testified previously?
A.
Q.

Yes.
And did you discuss -- well, what was

that meeting about with Mr. Stamos?
A.

You know, to the best of my

24

recollection, the first meeting was essentially just

25

that, an introductory meeting, where, you know, there
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MS. WAGNER:
A.

Objection.

My recollection is we marketed and

3

represented Sterling Stamos in trying to raise

4

outside capital for them from institutional investors

5

for a fee.

6
7
8
9
10

Q.

Were you involved in those efforts

that you just described?
A.
Q.
A.

Yes.
How were you involved?
Broadly, as the proponent for the deal

11

coming into Merrill Lynch, and in a couple of

12

isolated cases where I had client relationships,

13

helping the sales force directly in discussions at a

14

high level with institutions.

15

Q.

What did you do when you were acting

16

as the proponent for the deal coming in?

17

MS. WEISS:

18

A.

Object to the form.

It was my business view that this was

19

a good product; that in consultation with Mike

20

Ricciardi and Dave Barrett, we could sell this for a

21

reasonable, you know, amount of capital and receive a

22

fee that would be a, you know, appropriate revenue

23

for Merrill Lynch.

24
25

Q.

When you say this was a good product,

what were you referring to?
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2

A.
Q.

I don't recall.
During your time that you were

3

involved with Sterling Stamos, did there come a time

4

that it moved offices?

5
6

A.
Q.

Yes.
Did there come a time during your

7

involvement with Sterling Stamos that some of the

8

individuals' e-mail addresses at Sterling Stamos

9

changed?

10
11
12
13
14

A.
Q.

That I don't recall.
Do you have any understanding as to

the reason why Sterling Stamos moved offices?
A.
Q.

No.
You testified earlier that there came

15

a time when Merrill Lynch acquired an ownership

16

interest in Sterling Stamos.

17
18
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20
21
22
23
24
25

A.
Q.
A.
Q.

Yes.
When was that?
Approximately 2007.
Did you have a role in Merrill Lynch

acquiring an ownership interest in Sterling Stamos?
A.
Q.
A.

Yes.
What was that role?
It was identifying that this was a

potentially good investment for us.

Merrill Lynch

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A.

2

Q.

3

parties.

I don't recall the specifics.

4

You said it would make sense to both
What did you mean by that?

A.

That I think that -- I thought that

5

Merrill Lynch could provide distribution mass and

6

also could provide an institutional, you know, an

7

institutional statement, you know, that this was, you

8

know, a recognizable institution with Merrill Lynch

9

behind it and, therefore, would give it greater

10

credence in a marketing world institutionally.

11

And, you know, I thought it would make

12

sense for Merrill Lynch because I truly thought it

13

was a good product that, you know, we would be able

14

to sell and grow and have an ownership stake in the

15

future growth and revenues of a growing concern.

16
17
18
19
20

Q.
A.
Q.
A.
Q.

And what was Peter's response?
Favorable.
Anything else?
Not that I can recall specifically.
Do you know if Merrill Lynch conducted

21

any due diligence in connection with acquiring an

22

ownership interest in Sterling Stamos?

23

A.

24

Q.

25

Yes.
And what due diligence did Merrill

Lynch conduct?
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A.

We conducted investment due diligence,

2

operational due diligence, you know, background

3

checks on individuals.

4

of things I'm missing there that also were done by

5

the due diligence team.

6
7
8
9

Q.

I'm sure there is a variety

What do you mean by investment due

diligence?
A.

Who they include -- who they were

invested in, their performance and track record, the

10

volatility of the fund, the rate of return on the

11

fund on a risk-adjusted basis.

12
13
14

Q.

Who conducted the investment due

diligence of Sterling Stamos?
A.

It was a team of people that worked

15

for Will Eisenbeis, and an individual by the name of

16

Josh Shapiro, I believe, was the head of that group.

17
18
19
20
21
22
23

Q.
A.
Q.

And did they report to you?
No.

They reported to Will Eisenbeis.

Did they keep you apprised of their

due diligence, investment due diligence?
A.

Yes, you know, I'm sure, you know,

through some e-mails and other methods.
Q.

Do you know whether any reports were

24

prepared concerning Merrill Lynch's investment due

25

diligence of Sterling Stamos?
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3
4

A.
Q.
A.
Q.

Yes.
Do you know who prepared those reports?
Not specifically.
Do you know who else saw the reports

5

of the due diligence, the investment due diligence on

6

Sterling Stamos?

7
8

MS. WAGNER:
Q.

9
10

Objection.

If you know.
MS. WEISS:

A.

11

Objection.

I don't know.
MS. GRIFFIN:

Alyson, I would like to

12

call for the production of this report.

13

seen it yet amongst the things that have been

14

produced yet.

15

MS. WEISS:

We haven't

We have not, "we" meaning

16

my firm, Mr. Dunleavy, have no documents to produce.

17

As you might imagine --

18

MS. GRIFFIN:

19

MS. WEISS:

You're right.
-- any documents relating

20

to, you know, Merrill Lynch's activities in

21

connection with the matters you're discussing today

22

would be retained to the extent they are retained at

23

Merrill Lynch.

24

produced documents to you.

25

My understanding is Merrill Lynch

MS. GRIFFIN:

You're absolutely right.

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Could you do me a favor, just mark
this part of the transcript for me.
Q.

Did you come to learn who -- who

Sterling Stamos was invested in?

5

MS. WAGNER:

6

MS. WEISS:

7
8

Q.

Objection.
Objection.

Through the due diligence process that

you just described, did you come to learn --

9

A.

I'm sure at some point someone showed

10

me a list of their investments, but I don't recall

11

specifically.

12

Q.

Did there come a time through the due

13

diligence process that -- whether you learned that

14

Sterling Stamos had investments directly or

15

indirectly in Bernard Madoff?

16
17

A.
Q.

Yes.
And what did you learn about Sterling

18

Stamos' investments directly or indirectly in Bernard

19

Madoff?

20
21
22
23
24
25

A.

It's my recollection that they had,

you know, a large investment in Madoff.
Q.

What do you mean by a large

investment?
A.
Q.

It was one of their larger holdings.
Do you know how much you are talking
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about?
A.
Q.

No.
Are we talking tens of millions or

hundreds of millions?
A.
Q.

The latter.
How did you come to learn that

7

Madoff -- that Sterling Stamos had a large investment

8

in Madoff?

9

A.

Again, my recollection is that

10

somewhere through our due diligence, but also in

11

conversations with Peter Stamos.

12

Q.

And in those conversations with Peter

13

Stamos about Sterling Stamos' investment in Madoff,

14

what did Peter Stamos say to you?

15

A.

16

directly.

17
18
19

Q.

I can't specifically recall anything

Did you discuss the extent of Sterling

Stamos' investment in Madoff with Mr. Stamos?
A.

I can't specifically recall, but I

20

think I -- I remember more of it kind of coming from

21

the due diligence and it was a large holding.

22

Q.

Do you know was Sterling Stamos'

23

investment in Madoff direct or indirect?

24

MS. WAGNER:

25

MS. WEISS:

Objection.
Objection.

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2

A.
Q.

I don't understand the question.
In the course of the investment due

3

diligence that was conducted by Merrill Lynch, did

4

you come to learn whether or not Sterling Stamos held

5

an account at Madoff B -- I'm sorry, Bernard L.

6

Madoff Investments Securities, LLC?

7

A.

I don't know the specificity to that

8

level of BL -- whatever that is that, you know, the

9

acronym you just gave.

10

My recollection is that in our due

11

diligence there was an investment in Madoff, broadly

12

stated, and that it was a large portion of their

13

investment and, you know, it was not viewed favorably

14

out of the due diligence.

15
16
17
18
19

Q.

Why was it not viewed favorably out of

the due diligence?
A.
Q.
A.

They did their own clearing.
They being -- excuse me -Madoff, Madoff did its own clearing,

20

its own custody, and they transacted with their own

21

broker-dealer.

22

Q.

23
24
25

Were there any other reasons that it

was not viewed favorably out of due diligence?
A.

No, but those specific areas were an

issue for us.
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investment into Madoff have any impact on the

2

negotiations between Merrill and Sterling Stamos

3

concerning the acquisition of an ownership interest?

4

MS. WEISS:

5

MS. WAGNER:

6
7
8
9

A.

Object to the form.
Objection.

It's my recollection that we wanted

them to divest before we would take over our stake.
Q.
A.

And why was that?
Again, because we hadn't seen this

10

self-clearing, self-custody, and didn't want that as

11

part of a program that we would look to, you know,

12

have Merrill Lynch Retail invest in.

13
14
15
16

Q.

Even in spite of the outstanding

performance of Madoff's fund as you just testified to?
A.
Q.

Yes.
And did you communicate or did Merrill

17

Lynch communicate to Sterling Stamos that it wanted

18

them to divest from their investments in Madoff to

19

Sterling Stamos?

20

A.

21
22
23
24
25

Q.

That is my recollection.
And do you know who communicated that

to Sterling Stamos?
A.
Q.

Not specifically.
Do you recall having conversations

with anybody at Sterling Stamos about Merrill Lynch
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wanting them to divest from their investments in

2

Madoff?

3
4
5
6
7

A.
Q.

I can't recall a specific conversation.
Do you remember any general

conversations with anybody about that?
A.
Q.

No.
What is the basis for your recollection

8

that Merrill Lynch communicated to Sterling Stamos

9

that it wanted them to divest from their investments

10
11

in Madoff?
A.

My recollection is -- is that it was a

12

large holding.

13

structure and how they did it through the custody,

14

the clearing and the self-dealing, and this was not

15

something that fit into the parameters of something

16

we would want distributed into retail, and they would

17

have to divest of this before we could purchase it

18

and move it into Merrill Lynch Retail.

19

it into Merrill Lynch Retail, I mean selling that

20

product.

21

Q.

22
23
24
25

We were uncomfortable with the

And by moving

Did Sterling Stamos divest itself from

its investments in Madoff?
A.
Q.

That is my belief, yes.
And did Merrill Lynch thereafter

proceed to acquire an ownership interest in Sterling
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A.

Mr. Katz at a board meeting,

2

post-Merrill Lynch's, obviously, because of the board

3

meeting ownership stake in Sterling Stamos, threw out

4

a suggestion that we should re-look at investing in

5

Madoff because Stamos' capital returns were somewhere

6

low single-digit returns, and he referenced a number,

7

I'm not sure specifically, but memory serves me in

8

the low double-digits returns and, hence, an

9

investment into Madoff would help the overall

10
11
12

performance of Sterling.
Q.
A.

And what did you say to Mr. Katz?
I referred back to our original issue

13

with their self-clearing, self-custody, self-dealing

14

and that that would not be acceptable for Merrill

15

Lynch Retail.

16

Q.

When you referred to their

17

self-clearing --

18

A.

19

and self --

20
21
22

Madoff's self-clearing, self-dealing

MS. WEISS:

I'm sorry.

You said

self-dealing, I think you meant -A.

Self -- well, yes, self-dealing,

23

self-custody and self-clearing, all three, because

24

they also dealt with their own broker-dealer.

25

Q.

I'm sorry.

What do you mean they also

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dealt with their own broker-dealer?

2

A.

It was our understanding that their

3

execution for the fund was done all through their own

4

broker-dealer.

5

Q.

And when you said that Madoff's

6

self-clearing, self-custody, self-dealing would not

7

be acceptable for Merrill Lynch, what did you mean by

8

that?

9

A.

As I stated earlier, this is something

10

that's not the norm practice that we have seen with

11

other asset managers in the industry, and we were not

12

comfortable with it for a product that was going to

13

be distributed through the Merrill Lynch retail

14

system.

15
16

Q.

with Mr. Katz at that board meeting?

17
18
19

A.

Q.

A.

I'm just going to object.

Yeah, I don't know if I can answer

that; I'm not a lawyer.

23

25

What is front-running?
MS. WEISS:

21

24

Other than just the generic numbers

that came out that I just discussed, no.

20

22

Did you discuss Madoff's performance

MS. WEISS:

To the extent he's not a

lawyer.
Q.

Have you ever heard of the term
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