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

Filing 166

MEMORANDUM OF LAW in Opposition re: 158 FOURTH MOTION in Limine To Exclude All Evidence and Arguments Relating to the BLMIS-Merrill Lynch Technology Partnership.. 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. (Wise, Robert)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
IRVING H. PICARD,
:
:
Plaintiff,
:
:
11-CV-03605 (JSR) (HBP)
- against :
:
SAUL B. KATZ, et al.,
:
:
Defendants.
:
:
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MEMORANDUM OF LAW IN OPPOSITION TO TRUSTEE’S
MOTION IN LIMINE NO. 4 TO EXCLUDE ALL EVIDENCE AND
ARGUMENTS RELATING TO THE BLMIS-MERRILL LYNCH
TECHNOLOGY PARTNERSHIP

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

TABLE OF CONTENTS
PAGE
PRELIMINARY STATEMENT .........................................................................................1
ARGUMENT.......................................................................................................................2
CONCLUSION....................................................................................................................6

TABLE OF AUTHORITIES
PAGE
CASES
George v. Celotex Corp., 914 F.2d 26 (2d Cir. 1990) .................................................... 2, 5
United States v. Figueroa, 618 F.2d 934 (2d Cir. 1980) .................................................... 2
United States v. Quattrone, 441 F.3d 153 (2d Cir. 2006)................................................... 2
United States v. Southland Corp., 760 F.2d 1366 (2d Cir. 1985)....................................... 2
Vinieris v. Byzantine Mar. Corp., 731 F.2d 1061 (2d Cir. 1984) ....................................... 2

STATUTES & RULES
22 N.Y. Comp. Codes R. & Regs. tit. 22, § 1200.0........................................................ 4, 5
Fed. R. Evid. 401 ................................................................................................................ 2
Fed. R. Evid. 403 ................................................................................................................ 2

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Defendants respectfully submit this memorandum of law in opposition to the
Trustee’s motion in limine to exclude all evidence and arguments relating to the joint
venture entered into by Bernard L. Madoff Investment Securities LLC (“Madoff
Securities”) and Merrill Lynch.
PRELIMINARY STATEMENT
In 1999 Madoff Securities entered into a joint venture with Merrill Lynch,
Goldman Sachs, Morgan Stanley, and other prominent financial institutions to form
Primex Trading N.A. (“Primex”), an electronic stock trading platform that launched at
the end of 2001. Saul Katz was aware of this widely publicized joint venture, which
confirmed his view of Bernard L. Madoff’s (“Madoff”) stellar reputation. That three of
the largest and most sophisticated financial firms in the world were entering into a joint
venture with Madoff Securities was a strong indicator to Mr. Katz that Madoff was both
legitimate and sophisticated and is relevant to Mr. Katz’s state of mind and actual belief
concerning Madoff Securities. Nonetheless, the Trustee seeks to preclude this evidence
because it undercuts irrelevant testimony the Trustee intends to elicit from a former
Merrill Lynch executive that the Trustee knows is factually inaccurate. Based on that
erroneous testimony, the Trustee intends to argue that Merrill Lynch would not do
business with Madoff Securities, which he contends should have been a “red flag” to
Defendants.
The Trustee has no basis to preclude evidence of the Primex joint venture from
trial. The principal issue in this case is whether Defendants were willfully blind when
they invested with Madoff Securities. Saul Katz’s knowledge of a joint venture involving

Madoff Securities and, among others, Merrill Lynch is plainly relevant to his subjective
beliefs about the legitimacy of Madoff Securities and its principal, Madoff.
ARGUMENT
Rule 401 of the Federal Rules of Evidence creates a liberal standard of relevance.
United States v. Southland Corp., 760 F.2d 1366, 1375 (2d Cir. 1985). Under Rule 401,
evidence is “relevant” if “it has any tendency to make a fact more or less probable than it
would be without the evidence” and that fact “is of consequence in determining the
action.” Fed. R. Evid. 401 (emphasis added). Rule 403 permits the exclusion of relevant
evidence, but only “if its probative value is substantially outweighed by a danger of . . .
unfair prejudice, confusing the issues, [or] misleading the jury.” Fed. R. Evid. 403
(emphasis added). Evidence is unfairly prejudicial “only when it tends to have some
adverse affect upon a [party] beyond tending to prove the fact or issue that justified its
admission into evidence.” United States v. Quattrone, 441 F.3d 153, 186 (2d Cir. 2006)
(quoting United States v. Figueroa, 618 F.2d 934, 943 (2d Cir. 1980)); see also George v.
Celotex Corp., 914 F.2d 26, 31 (2d Cir. 1990) (stating that Rule 403 is “an extraordinary
remedy that must be used sparingly”).
Evidence of the Primex joint venture—including testimony from Saul Katz and an
article from the files of Sterling Partner Arthur Friedman—is highly relevant to the issue
of whether any Defendant was willfully blind to Madoff’s fraud. See Vinieris v.
Byzantine Mar. Corp., 731 F.2d 1061, 1064 (2d Cir. 1984) (holding that the trial court
should “follow[] a liberal policy in admitting evidence directed towards establishing . . .
subjective state of mind”). To support his effort to keep this relevant evidence out, the
Trustee contends that the joint venture is not probative because it involved “House 5” of
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Madoff Securities and not “House 17” where Defendants were invested. (Tr. Limine Mot.
No. 4 at 3-4.) But the Trustee’s division of Madoff Securities into independent “houses”
was an internal Madoff Securities construct discovered during the investigation by the
Trustee’s “fraud” expert, Mr. Dubinsky. (See, e.g., Expert Report of Bruce G. Dubinsky
(“Dubinsky Report”), Nov. 22, 2011, ¶¶ 138-42, 154-58, 185-90 (Seshens Decl. (doc. no.
90), Ex. C).) There is no evidence that Madoff Securities ever held itself out to its
customers as three separate and distinct businesses, nor any evidence that Defendants
viewed it as such, let alone that any Defendant understood there to be a “House” anything.
The account statements, trade confirmations, and other Madoff Securities documentation
stated that they came from Madoff Securities, not “House 17.” And as the Trustee
consistently has recognized, Madoff Securities was a sole proprietorship whose founder,
chairman, chief executive officer, and sole owner was Madoff. (See, e.g., Am. Compl.
¶ 29; Tr. Rule 56.1 ¶ 1; see also, e.g., Dubinksy Report ¶ 39 (Seshens Decl., Ex. C)
(“Madoff was the principal of BLMIS and oversaw both House 5 and House 17
businesses.”).)
A joint venture with Madoff Securities, therefore, was a joint venture with Madoff.
It also was a joint venture with all of Madoff Securites and not a segregated part of the
business that was legitimate. It defies common sense that Merrill Lynch would enter into
a business relationship with Madoff Securities if it believed that its principal—Madoff—
was engaged in fraud in any part of Madoff Securities. And there is no evidence that
Saul Katz or any other Defendant recognized such an artificial distinction within Madoff
Securities or would have had any reason to believe that the willingness of the other joint
venture partners to work with Madoff was anything other than an endorsement of the firm
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as a whole. It is therefore another “green flag” probative as circumstantial evidence of
Mr. Katz’s state of mind.
The Trustee further argues that admitting evidence of the Primex joint venture—
the existence of which the Trustee does not dispute—will “confuse [the Merrill Lynch
executive’s] testimony and mislead the jury.” (Tr. Limine Mot. No. 4 at 4.) But it is the
Trustee who is introducing the confusion. The Trustee intends to elicit testimony from
the Merrill Lynch executive that Merrill demanded that Sterling Stamos divest hundreds
of millions of dollars it had invested with Madoff Securities before Merrill would go
forward with its acquisition of an interest in Sterling Stamos because Madoff Securities
self-cleared—a “House 5” concern. (See id. at 1-2.) The testimony is not only mistaken,
but it is also irrelevant. The Trustee, as the keeper of all Madoff Securities records,
knows that, in fact, Sterling Stamos never had a direct Madoff Securities investment and
the Merrill executive was simply mistaken or confused when he testified that it did. Even
if the testimony were accurate, which it is not, there is no evidence that anything about
the supposed demand by Merrill Lynch for divestiture of Sterling Stamos’ investment at
Madoff Securities was communicated to any Defendant, including Saul Katz. Nor is
there any evidence that the Merrill Lynch executive gave any fraud warning or had a
fraud concern. The Primex joint venture is entirely consistent with his testimony. It is
unfathomable under these circumstances that the Trustee could argue that evidence
grounded in fact might give rise to jury confusion because it conflicts with testimony the
Trustee knows is false because based upon a mistake.1

1

The Trustee’s counsel is ethically prohibited from offering at trial testimony he
knows to be mistaken and false. See 22 N.Y. Comp. Codes R. & Regs. tit. 22, § 1200.0
(…continued)

4

Finally, because there is no dispute that the Primex joint venture did exist and was
known to Saul Katz, there is no basis for exclusion of either fact on the basis of prejudice.
The evidence in this case will prejudice the Trustee, but not because it is unfair. See
Celotex Corp., 914 F.2d at 31 (“Any prejudice . . . was derived from the [evidence]’s
probative force and thus it did not unfairly prejudice [the defendant].” (emphasis in
original)).

(continued…)

(Rule 3.3(a)(3) of the New York Rules of Professional Conduct) (“A lawyer shall not
knowingly . . . offer or use evidence that the lawyer knows to be false.”). Based on
records obtained by the Trustee from Madoff Securities and the evidence from Sterling
Stamos, it is undisputed that Sterling Stamos had no direct investment at Madoff
Securities. The Merrill executive’s belief otherwise is clearly mistaken and therefore
false.
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CONCLUSION
For the reasons set forth above, Defendants respectfully request that the Court
deny the Trustee’s motion in limine to exclude all evidence and arguments relating to the
joint venture entered into by Madoff Securities and Merrill Lynch.
Dated: New York, New York
March 12, 2012
DAVIS POLK & WARDWELL LLP
By:

/s/ Robert F. Wise, Jr.
Robert F. Wise, Jr
Karen E. Wagner
Dana M. Seshens
450 Lexington Avenue
New York, New York 10017
Telephone:
[phone]
Facsimile:
[phone]
Attorneys for Defendants

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