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

Filing 22

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, 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)

Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
Telephone:
[phone]
Facsimile:
[phone]
Attorneys for the Sterling Defendants
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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SECURITIES INVESTOR PROTECTION
:
CORPORATION,
:
:
Plaintiff-Applicant,
:
:
- against :
:
BERNARD L. MADOFF INVESTMENT
:
SECURITIES LLC,
:
:
:
Defendant.
:
----------------------------------- x
In re:
:
:
:
BERNARD L. MADOFF,
:
:
Debtor.
:
----------------------------------- x
IRVING H. PICARD,
:
:
:
Plaintiff,
:
:
- against :
:
SAUL B. KATZ, et al.
:
:
Defendants.
:
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Adv. Pro. No. 08-01789 (BRL)
SIPA LIQUIDATION
(Substantively Consolidated)

Adv. Pro. No. 10-05287 (BRL)

STERLING DEFENDANTS’
STATEMENT OF UNDISPUTED
MATERIAL FACTS PURSUANT
TO LOCAL RULE 7056-1(A)

Pursuant to Rule 7056-1(a) of the Local Rules of the United States Bankruptcy
Court for the Southern District of New York, the Sterling Defendants, by their attorneys,
respectfully submit this statement of undisputed material facts in support of their motion
to dismiss the amended complaint or, in the alternative, for summary judgment.
The Founding of Sterling Equities and Its Great Success
1.

Nearly 40 years ago, brothers-in-law Fred Wilpon and Saul Katz started

Sterling Equities (“Sterling”), a small real estate company. Soon thereafter, their
brothers, Richard Wilpon and Michael Katz, joined them, and over the years Sterling
grew and prospered as a family-owned and operated enterprise. (Deposition Transcript
of Fred Wilpon (“Wilpon Tr.”), July 20, 2010, 16:15-17:13 (Declaration of Dana M.
Seshens (“Seshens Decl.”), dated Mar. 20, 2011, Ex. E); Declaration of Saul B. Katz (“S.
Katz Decl.”), dated Mar. 19, 2011, ¶ 2.)
2.

Historically, Sterling’s primary business has been real estate, although

Sterling has diversified its investments through holdings in baseball, including the New
York Mets baseball franchise, media, including a controlling interest in SportsNet New
York (“SNY”), and private equity. (Deposition Transcript of Arthur Friedman
(“Friedman Tr.”), June 22-24, 29, 2010, 43:23-44:14 (Seshens Decl., Ex. H); Rule 27
Deposition of Arthur Friedman (“Friedman Rule 27 Tr.”), June 29, 2010, 5:13-6:11
(Seshens Decl., Ex. F); S. Katz Decl. ¶¶ 3-6.)
3.

With Peter Stamos and Merrill Lynch, the Sterling Partners also have a

passive ownership interest in Sterling Stamos Partners (“Sterling Stamos”), a hedge fund
of funds. (Deposition Transcript of Saul Katz (“S. Katz Tr.”), Aug. 4, 2010, 10:8-18;
36:21-37:1; 151:10-12 (Seshens Decl., Ex. D).)

2

4.

The businesses of the Sterling Partners have been extremely successful

over the years, including before the first Sterling-related investments were made with
BLMIS in 1985. (S. Katz Decl. ¶ 7.)
Madoff Was a Luminary in the Investment World
When the Sterling Partners Began to Use Him as Their Broker
5.

Fred Wilpon first met Bernie Madoff (“Madoff”) through their children.

(Wilpon Tr. 34:7-35:13 (Seshens Decl., Ex. E).)
6.

The Wilpons and Madoffs were not “everyday” or frequent social friends.

(Id. 42:12-43:13; 48:12-49:6.)
7.

Saul Katz had a “business social” relationship with Madoff. (S. Katz. Tr.

75:14-76:5 (Seshens Decl., Ex. D).)
8.

When the Sterling Partners first began using Bernard L. Madoff

Investment Securities LLC (“BLMIS”) as their broker, Madoff was a member of the
Board of Governors of the National Association of Securities Dealers and also served on
its executive committee, board surveillance committee and long-range planning
committee and chaired its international committee. Peter Chapman, Before the Fall:
Bernard L. Madoff, Traders Mag., Mar. 2009 (Seshens Decl., Ex. Q).
9.

Madoff was a member of the Cincinnati Stock Exchange and pioneered its

conversion to an all-electronic exchange. Id.
10.

Madoff was, until December 11, 2008, a major fixture of the investment

firmament, serving as one of two vice-chairmen of the Securities Industry Association
and head of its Trading Committee and chairman of the NASDAQ Board of Directors.
Id.

3

11.

Arthur Levitt and Howard Squadron held Madoff in great esteem.

(Wilpon Tr. 39:25-40:7; 44:15-45:7 (Seshens Decl., Ex. E).)
12.

Madoff was a “guru” who was “renowned in the [investment] field.” (Id.)

13.

In late 1985, when a few of the Partners had some extra liquidity from

their business ventures, they decided to open accounts at BLMIS. (Friedman Tr. 107:24108:15; 116:24-118:2; 188:19-189:3 (Seshens Decl., Ex. H); Wilpon Tr. 33:13-34:6,
39:1-9 (Seshens Decl., Ex. E); S. Katz Tr. 24:1-25:5 (Seshens Decl., Ex. D).)
14.

Each investor executed a Customer Agreement, a Trading Authorization,

and an Option Agreement with BLMIS. (See, e.g., Declaration of Arthur Friedman
(“Friedman Decl.”), In re Bernard L. Madoff Inv. Sec. LLC, No. 08-01789, doc. no. 720
at ¶ 4 & Exs. A-C (Nov. 12, 2009).)
15.

Each of these agreements gave Madoff discretion to invest pursuant to his

“split strike conversion” strategy in each Sterling account. (Id.)
16.

Each BLMIS customer received monthly customer statements, quarterly

reports, and regular trade confirmations, which showed account activity and holdings of
blue chip stocks ranging from Exxon-Mobil to Coca-Cola when Madoff was “in the
market” and U.S. Treasuries when he was not. (Id. ¶ 7 & Ex. D.)
17.

Over the period of their relationship, Fred Wilpon and Saul Katz would

meet once a year with Madoff to discuss BLMIS and the economy in general. (Wilpon
Tr. 42:12-43:13 (Seshens Decl., Ex. E); S. Katz Tr. 77:7-19; 96:10-21 (Seshens Decl.,
Ex. D).)
18.

Fred Wilpon did not otherwise discuss business with Madoff. (Wilpon Tr.

42:12-43:13 (Seshens Decl., Ex. E).)

4

19.

Saul Katz occasionally spoke with Madoff on the phone. (S. Katz Tr.

77:7-19 (Seshens Decl., Ex. D).)
The Partners’ Individual BLMIS
Investments Increased Over Time
20.

Most of the Sterling Partners eventually had individual BLMIS accounts,

and some also had joint or tenant-in-common (“TIC”) accounts, typically with each other
or with family members. (Friedman Tr. 255:19-256:3; 380:8-20 (Seshens Decl., Ex. H).)
21.

The decision to invest through BLMIS was an individual one. As each

Partner received funds from the various businesses in which he held interests, he decided
what to do with them. (Wilpon Tr. 55:3-12 (Seshens Decl., Ex. E); S. Katz Tr. 22:2427:1 (Seshens Decl., Ex. D); Friedman 107:24-109:16 (Seshens Decl., Ex. H).)
22.

There was no “Sterling” BLMIS account, “Sterling” way of investing, or

“mastermind” making investment decisions for the Partners, their families, and the
operating businesses they owned. (Id.)
23.

For their businesses, the Sterling Defendants used BLMIS accounts in

much the same manner as they might have used traditional bank accounts, to deposit
excess cash for short term investment before withdrawing it for use in operating their
businesses. For example, when season tickets for the Mets were sold in the winter, the
cash generated would be deposited into a Mets BLMIS account so that returns could be
maximized until the funds were needed, a few months thereafter, to meet expenses.
(Friedman Tr. 358:5-18 (Seshens Decl., Ex. H); see also Compl. ¶ 794.)
24.

For administrative ease, Arthur Friedman, who became Sterling’s treasurer

and “administrative” partner shortly after the first BLMIS accounts were opened, was
charged with day-to-day administration of all accounts. (Friedman Tr. 39:23-40:13;
5

116:24-117:12; 250:12-23; 298:20-299:4; 600:21-601:8 (Seshens Decl., Ex. H); Wilpon
Tr. 51:1-12; 53:2-10 (Seshens Decl., Ex. E).)
The Partners Shared the Madoff
Opportunity with Friends and Family
25.

The Sterling Partners helped their friends and family members who were

interested in opening BLMIS accounts. At the time, the Sterling Partners believed they
were doing something positive. (Wilpon Tr. 87:6-16; 143:7-20 (Seshens Decl., Ex. E).)
26.

Saul Katz viewed the Madoff investments as “such a blessing that [he]

wanted to share with [his] friends and family.” (S. Katz Tr. 90:10-17 (Seshens Decl., Ex.
D).)
27.

The Sterling Partners offered BLMIS as an investment option in Sterling’s

self-directed 401(k) Retirement Plan because they wanted to do something positive for
employees. (Friedman Tr. 538:14-539:4 (Seshens Decl., Ex. H).)
28.

No Sterling Defendant “solicited” investors for BLMIS, nor did they

“steer” family and friends to BLMIS. (S. Katz Tr. 119:25-120:9 (Seshens Decl., Ex. D);
Wilpon Tr. 84:15-18 (Seshens Decl., Ex. E).)
29.

If people asked, the Partners offered to help. (S. Katz Tr. 119:25-120:9

(Seshens Decl., Ex. D); Wilpon Tr. 86:5-87:5 (Seshens Decl., Ex. E).)
30.

Once an account was opened, Arthur Friedman added it to his

administrative duties. (Friedman Tr. 360:18-361:6; 600:21-601:16 (Seshens Decl., Ex.
H); Friedman Rule 27 Tr. 17:1-19:20 (Seshens Decl., Ex. F).)
31.

No payment or benefit was ever solicited or received for this service.

(S. Katz Tr. 215:5-21 (Seshens Decl., Ex. D); Wilpon Tr. 87:6-16 (Seshens Decl., Ex. E);
Friedman Tr. 378:17-379:6 (Seshens Decl., Ex. H).)
6

32.

The Partners were helping their family and friends, not trying to make

money. (Wilpon Tr. 87:6-16; 143:7-18 (Seshens Decl., Ex. E); S. Katz Tr. 216:13-217:1
(Seshens Decl., Ex. D).)
The Sterling Defendants Trusted
Madoff with Their Money Until the End
33.

Saul Katz was about to move nearly all of his Sterling Stamos investments

back to BLMIS right before the disclosure of the fraud. (Deposition of Peter Stamos
(“Stamos Tr.”), Aug. 19, 2010, 199:24-201:8 (Seshens Decl., Ex. A).)
34.

Within weeks of December 11, 2008, the Sterling Partners deposited

millions of dollars with BLMIS. (S. Katz Decl. ¶ 11.)
35.

On the day that Madoff was arrested, but before the arrest was publicly

known, a Sterling-related foundation wired $1 million for deposit in its BLMIS account.
(Id.)
36.

BLMIS owed the Sterling Defendants over half a billion dollars in

securities on the date of the SIPA filing. (Id. ¶ 12.)
37.

The Sterling Defendants trusted Madoff as a broker and as a friend. Fred

Wilpon was devastated by Madoff’s confession. (Wilpon Tr. 64:15-25 (Seshens Decl.,
Ex. E).)
No One at Sterling Stamos Told the Sterling
Partners that Madoff Was a “Scam” or a Fraud
38.

Up until the day Madoff’s fraud was disclosed, Peter Stamos stood in awe

of Madoff and thought he was “among the most honest and honorable men that we will
ever meet.” (Stamos Tr. 211:3-212:4 (Seshens Decl., Ex. A).)

7

39.

Up until the day that Madoff’s fraud was disclosed, Peter Stamos thought

that Madoff was one of the greatest hedge fund managers of all time, a “[l]egend in the
industry.” (Id.; 161:23-162:7.)
40.

Peter Stamos does not recall ever stating that Madoff was a “scam” or “too

good to be true.” (Id. 237:6-11.)
41.

Peter Stamos does not recall anyone at Sterling Stamos, prior to December

11, 2008, ever saying that Madoff was a “scam” or “too good to be true.” (Id. 241:4-15.)
42.

Neither Ashok Chachra nor anyone else at Sterling Stamos had “reason to

think there was anything wrong [at BLMIS].” (Deposition Transcript of Ashok Chachra
(“Chachra Tr.”), Oct. 8, 2010, 206:6-12 (Seshens Decl., Ex. C).)
43.

Ashok Chachra viewed Madoff as “very talented” and a “pioneer” and

“the grandfather of electronic trading.” (Id. 168:8-16; 209:13-210:2.)
44.

Ashok Chachra regarded the split-strike conversion strategy as “amazing.”

(Id. 200:7-20.)
45.

At no time prior to December 11, 2008, did Ashok Chachra think or tell

anyone that Madoff or BLMIS was not trading and running Ponzi scheme. (Declaration
of Ashok Chachra (“Chachra Decl.”), dated Mar. 16, 2011, ¶ 4.)
46.

Ashok Chachra never told the Sterling Partners not to invest with Madoff

or BLMIS. (Id. ¶ 7.)
Sterling Stamos Did Not Advise the Sterling Partners
That They Should Not Invest with Madoff
47.

Peter Stamos never warned Saul Katz about Madoff or suggested that Mr.

Katz redeem his Madoff investments. (Stamos Tr. 165:3-17; 213:11-20; 227:19-228:12
(Seshens Decl., Ex. A); S. Katz Decl. ¶ 13.)
8

48.

Peter Stamos only warned Saul Katz about the concentration risk

associated with keeping so much money with any one manager. (Stamos Tr. 165:3-17;
213:11-20; 227:19-228:12 (Seshens Decl., Ex. A).)
49.

Peter Stamos competed with Madoff for the Sterling Defendants’ money.

(Id. 154:6-155:1; see also id. 163:2-11; Chachra Tr. 83:15-24 (Seshens Decl., Ex. C);
S. Katz Tr. 158:3-159:1 (Seshens Decl., Ex. D).)
50.

Concentration risk was not specific to Madoff and has nothing to do with

fraud. (Stamos Tr. 147:6-148:2 (Seshens Decl., Ex. A).)
The Sterling Partners Are Not
Sophisticated Stock Market Experts
51.

Saul Katz is not a sophisticated stock market investor. (S. Katz Tr. 45:7-

46:6 (Seshens Decl., Ex. D).)
52.

Fred Wilpon does not have expertise in stock market investments.

(Wilpon Tr. 191:6-13 (Seshens Decl., Ex. E).)
53.

Arthur Friedman is not a professional securities investor. (Friedman Rule

27 Tr. 6:12-23 (Seshens Decl., Ex. F).)
54.

David Katz spends 90% of his time working for non-profits and is “not a

numbers guy.” (Deposition Transcript of David Katz (“D. Katz Tr.”), Aug. 31, 2010,
304:3-7 (Seshens Decl., Ex. G).)
55.

Sterling Equities does not hold itself out as being in the business of

investing in securities. (Friedman Rule 27 Tr. 6:12-23 (Seshens Decl., Ex. F).)
56.

Peter Stamos did not view the Sterling Partners as particularly experienced

in the investment industry. (Stamos Tr. 167:18-25 (Seshens Decl., Ex. A).)

9

No Sterling Partner Became an Expert in the Brokerage
Business Through Sterling Stamos or Otherwise
57.

No Sterling Partner, including Saul Katz and David Katz, had any material

involvement with Sterling Stamos’ investment strategies or decisions. (Chachra Tr.
121:4-122:2; 124:5-10; 133:22-134:3 (Seshens Decl., Ex. C); Stamos Tr. 136:18-21;
137:8-138:13 (Seshens Decl., Ex. A); D. Katz Tr. 173:24-174:12, 174:21-175:4 (Seshens
Decl., Ex. G); S. Katz Tr. 128:12-18; 138:11-25; 139:9-23 (Seshens Decl., Ex. D).)
58.

In its early days, Sterling Stamos did not have a formal investment

committee, but its four or five employees would meet regularly to discuss investment
decisions. (Stamos Tr. 60:11-61:23 (Seshens Decl., Ex. A).)
59.

In Sterling Stamos’ early days, Peter Stamos periodically would involve

Saul Katz in Sterling Stamos discussions where investment decisions had to be made.
(Id. 61:24-62:12.)
60.

In Sterling Stamos’ early days, the money that Sterling Stamos was

investing principally came from Saul Katz and the other Sterling Partners. (Id. 137:8138:13; 141:25-142:11; S. Katz Decl. ¶ 5.)
61.

Saul Katz and David Katz were not two of the four primary portfolio

decision makers at Sterling Stamos. (Chachra Tr. 132:6-134:22 (Seshens Decl., Ex. C).)
62.

“SP Trading” was a brokerage account for David Katz in which he traded

a particular credit card stock up and down. (D. Katz. Tr. 157:11-16; 159:6-9 (Seshens
Decl., Ex. G).)

10

No Sterling Partner Was Familiar with
Sterling Stamos’ Due Diligence Process
63.

No Sterling Partner was familiar with Sterling Stamos’ due diligence

requirements, either before or after the Merrill Lynch investment. (S. Katz Tr. 141:17143:7 (Seshens Decl., Ex. D); D. Katz Tr. 195:3-14; 195:25-196:6; 197:13-15 (Seshens
Decl., Ex. G).)
64.

Neither Sterling Stamos general nor limited partners had access to Sterling

Stamos’ due diligence process. (Chachra Tr. 118:20-119:6 (Seshens Decl., Ex. C); cf. id.
128:24-129:10 (Seshens Decl., Ex. C).)
65.

During the course of the Trustee’s Rule 2004 investigation, Sterling

produced agendas and minutes from every Sterling Partners’ meeting (“Partner Meeting
Minutes”) for which they were taken and maintained. (Seshens Decl. ¶ 13.)
66.

There is no record in the Partner Meeting Minutes of any discussion of

any warning about the legitimacy of Madoff’s operations. (Id. ¶ 14.)
67.

There is no record in the Partner Meeting Minutes of any discussion of the

specifics of Sterling Stamos’ due diligence process. (Id.)
68.

There is no record in the Partner Meeting Minutes of any discussion of

Sterling Stamos’ investment decision-making process. (Id.)
69.

No Sterling witness testified to any discussion at Partners’ meetings of any

warning about the legitimacy of Madoff’s operations, the specifics of Sterling Stamos’
due diligence process, or Sterling Stamos’ investment decision-making process.

11

BLMIS Did Not Fail Sterling Stamos’ and Merrill
Lynch’s Due Diligence Processes Because of Fraud
70.

As Sterling Stamos grew, its due diligence process evolved, and, over

time, Sterling Stamos elected not to invest in non-transparent managers. (Stamos Tr.
201:19-202:3; 209:19-210:13; 225:1-10 (Seshens Decl., Ex. A); Chachra Tr. 172:12173:17 (Seshens Decl., Ex. C).)
71.

Although, over time, BLMIS did not fit Sterling Stamos’ criteria for

investment of third-party money, Peter Stamos held Madoff in high esteem. (Stamos Tr.
162:1-162:7; 211:12-212:4 (Seshens, Decl., Ex. A).)
72.

Sterling Stamos never conducted any diligence on BLMIS because

BLMIS was ineligible for investment by Sterling Stamos due to its proprietary trading
strategy. (Id. 149:11-14; 162:18-23; Chachra Tr. 139:10-18 (Seshens Decl., Ex. C).)
73.

Sterling Stamos never turned down the opportunity to invest with Madoff.

(Stamos Tr. 192:4-13 (Seshens Decl., Ex. A); see also Chachra Decl. ¶ 5.)
74.

In its early stages, Sterling Stamos wanted to invest with BLMIS. (Stamos

Tr. 191:24-192:22 (Seshens Decl., Ex. A).)
75.

In Sterling Stamos’ early stages, Peter Stamos asked Saul Katz if BLMIS

could be one of ten managers as part of a diversified portfolio. (Id. 194:16-195:2.)
76.

Peter Stamos was told by Saul Katz that Madoff did not take capital from

funds of funds. (Id. 191:24-192:22.)
77.

When Peter Stamos learned that Madoff did permit investments by funds

of funds, he felt, not that this was a potential badge of fraud, but that “Sterling was being
treated less favorably than other managers.” (Id. 198:6-12.)

12

78.

Peter Stamos personally invested with BLMIS and developed a positive

view of Madoff. (Id. 146:6-21.)
79.

Peter Stamos withdrew his funds from BLMIS in 2003 and 2004 for

personal reasons and to invest in Sterling Stamos—not because he had any suspicion of
Madoff. (Id. 117:5-25.)
80.

It was not uncommon for a fund manager to either refuse or not be able to

complete a transparency report as part of Sterling Stamos’ due diligence process
following Merrill Lynch’s acquisition of an interest in Sterling Stamos. (Id. 310:9311:2.)
BLMIS’ Proprietary “Black Box”
Strategy Was Not a “Red Flag”
81.

Black box quantitative strategies are common, unremarkable, and entirely

legal. See, e.g., Concept Release on Equity Market Structure, Exchange Act Release No.
34-61358, 75 Fed. Reg. 3594, 3606 (Jan. 21, 2010); Short Selling in Connection with a
Public Offering, Exchange Act Release No. 34-56206, 72 Fed. Reg. 45,094, 45,099 (Aug.
10, 2007). (See also Stamos Tr. 116:4-13 (Seshens Decl., Ex. A).)
82.

No Sterling Stamos employee or industry professional ever warned the

Sterling Partners that Madoff’s “black box” strategy was an indication of fraud. (Stamos
Tr. 116:4-13; 204:7-18 (Seshens Decl., Ex. A); S. Katz Decl. ¶ 13.)
83.

“Black box” strategies could perform well in stressed markets. (Stamos

Tr. 204:7-18 (Seshens Decl., Ex. A).)
84.

The Sterling Partners understood that part of Madoff’s strategy was

intentionally proprietary and that did not cause them concern. (S. Katz Tr. 108:1-20

13

(Seshens Decl., Ex. D); D. Katz Tr. 146:10-23 (Seshens Decl., Ex. G); Friedman Tr.
272:21-273:10 (Seshens Decl., Ex. H).)
85.

Sterling Stamos provided investment advice to third parties and, therefore,

had different considerations than an individual investor. (Stamos Tr. 161:18-162:7
(Seshens Decl., Ex. A); Chachra Tr. 172:12-173:17 (Seshens Decl., Ex. C).)
Sterling Stamos Was Not Restructured to
Help Madoff Evade SEC Scrutiny
86.

The Sterling Partners and Peter Stamos started Sterling Stamos as an

alternative investment opportunity for the Sterling Partners and their families. (S. Katz
Tr. 151:17-24 (Seshens Decl., Ex. D); D. Katz Tr. 347:20-25 (Seshens Decl., Ex. G).)
87.

Over time, the non-Sterling assets invested through Sterling Stamos grew,

and Peter Stamos’ vision for Sterling Stamos changed. (S. Katz Tr. 151:17-152:14
(Seshens Decl., Ex. D); D. Katz Tr. 103:7-19; 329:21-330:3 (Seshens Decl., Ex. G).)
88.

Consistent with its growing group of investors and with recent changes in

the laws applicable to funds such as Sterling Stamos, in 2005 Sterling Stamos decided to
register as an investment advisor. (D. Katz Tr. 165:16-20 (Seshens Decl., Ex. G); Stamos
Tr. 46:8-47:3 (Seshens Decl., Ex. A); Chachra Tr. 49:2-23 (Seshens Decl., Ex. C).)
89.

In connection with Sterling Stamos’ registration, the Sterling Partners

were concerned that registration as an investment advisor would require disclosure of all
of their business and family investments and relationships. (S. Katz Decl. ¶ 18.)
90.

In connection with Sterling Stamos’ registration, the Sterling Partners

were concerned about having increased legal exposure to third-party investors when they
did not have any investment experience and were not involved in the investment
decisions at Sterling Stamos. (Id. ¶ 17.)
14

91.

The Sterling Partners’ relationship with Sterling Stamos was restructured

to ensure that they could limit their third-party liability and remain private. (Id. ¶ 19.)
92.

The motivation behind the restructuring of the Sterling Partners’

relationship with Sterling Stamos was not driven in any way by a desire to protect
BLMIS or Madoff from regulatory scrutiny. (Id. ¶ 20; Stamos Tr. 51:5-12; 274:15275:10 (Seshens Decl., Ex. A).)
No One at Sterling Stamos Nor Any Sterling
Partner Thought Madoff Was Front Running
93.

Peter Stamos did not think that Madoff was front running. (Stamos Tr.

152:11-20 (Seshens Decl., Ex. A).)
94.

Peter Stamos told Saul Katz that he did not think that Madoff was front

running. (Id.)
95.

Ashok Chachra did not tell the Sterling Partners that he thought Madoff

was front running. (Chachra Tr. 210:3-17 (Seshens Decl., Ex. C).)
96.

Ashok Chachra did not think that Madoff was front running. (Id. 206:6-

97.

Saul Katz did not think that Madoff was front running. (S. Katz. Tr.

15.)

88:15-20 (Seshens Decl., Ex. D); Stamos Tr. 153:3-12 (Seshens Decl., Ex. A).)
Self-Custodying Securities Is Not a “Red Flag”
98.

Self-custody arrangements are not remarkable. Matt Ackermann, Fidelity

Unit Seeks Growth Via Self-Clearing Market, American Banker, Apr. 9, 2008 (Seshens
Decl., Ex. I). (See also Chachra Tr. 174:18-175:5 (Seshens Decl., Ex. C).)
99.

One of the risks associated with Madoff being both an investment

manager and a broker-dealer who cleared his own trades was a risk of front running.
15

(Chachra Tr. 205:16-206:15 (Seshens Decl., Ex. C); Stamos Tr. 83:22-84:15 (Seshens
Decl., Ex. A).)
100.

No one told any Sterling Partner that BLMIS’ custody arrangement was in

any way improper. (S. Katz Decl. ¶¶ 10, 13.)
Sterling Stamos’ Bayou Experience Had
Nothing to Do with BLMIS or Madoff
101.

One of the reasons Sterling Stamos redeemed its Bayou investment was

that the fund manager changed investment strategies from trading short-term and small
cap equities to trading currencies and commodities. (Stamos Tr. 175:17-176:20 (Seshens
Decl., Ex. A); Chachra Tr. 176:11-24 (Seshens Decl., Ex. C).)
102.

The Bayou fund manager told Sterling Stamos that he was going to

implement this new strategy and substantially increase his assets under management in
three months time, which Sterling Stamos did not think was feasible. (Chachra Tr.
176:11-24 (Seshens Decl., Ex. C).)
103.

The November 2005 “special” investment opportunity offered by Madoff

was a one-time, “short-term” investment opportunity. (See, e.g., A. Friedman Mem.,
dated Nov. 28, 2005 (Seshens Decl., Ex. J); Friedman Tr. 434:16-435:4 (Seshens Decl.,
Ex. H).)
104.

Nothing was different about Madoff’s “special investment” strategy

except the options. (Friedman Tr. 449:19-24 (Seshens Decl., Ex. H); see also id. 447:15449:18; Compl. ¶ 1041.)
105.

No Sterling Partner ever questioned the legality of the short-term “special”

investment. (Friedman Rule 27 Tr. 11:14-12:16 (Seshens Decl., Ex. F).)

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106.

Peter Stamos understood that Madoff had a “substantial infrastructure in

his broker-dealer.” (Stamos Tr. 230:22-231:8 (Seshens Decl., Ex. A).)
107.

Peter Stamos does not recall ever knowing who Madoff’s auditor was or

ever discussing Madoff’s auditor with Saul Katz. (Id. 229:23-230:21.)
The Sterling Partners Undertook Diligence of Madoff
108.

At the start of the Partners’ investment relationship with BLMIS, Arthur

Friedman undertook many due diligence exercises to try to understand BLMIS’ “split
strike conversion” strategy. (Friedman Tr. 123:13-125:10 (Seshens Decl., Ex. H);
Friedman Rule 27 Tr. 9:7-11:2 (Seshens Decl., Ex. F); see also Compl. ¶¶ 754-765.)
109.

For a few years Arthur Friedman tracked transaction prices by comparing

them against publicly available information in the newspapers to see if they were within
the reported price ranges—which they were—and to see if the value was at the high, low,
or middle of the range. (Friedman Tr. 123:13-125:10 (Seshens Decl., Ex. H); see also id.
139:25-142:1; Friedman Rule 27 Tr. 20:21-22:13 (Seshens Decl., Ex. F).)
110.

Arthur Friedman prepared projections of maximum gains and losses for

the Sterling Partners’ BLMIS accounts, given the securities they held, and giving effect
to the puts and the calls, which established a ceiling and a floor for the BLMIS returns.
(Friedman Tr. 123:13-125:10 (Seshens Decl., Ex. F).)
111.

Through this exercise, Mr. Friedman tried to project the maximum the

accounts could gain and lose one month in advance, and the values and returns always
fell within his anticipated ranges. (Id.)
112.

Arthur Friedman tried to replicate the “split strike conversion” strategy on

paper to see if he could generate a profit. (Id. 144:14-145:17; see also id. 140:7-141:5)

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He identified specific transactions and then mimicked those transactions using different
transaction dates and different quantities of the subject securities. (Id. 144:14-145:17)
113.

Arthur Friedman “determined in [his] own mind that the strategy was

good, it worked, but not to the extent that it worked for [Madoff].” (Id. 144:14-145:9.)
114.

Mr. Friedman attributed his inability to do exactly what Madoff did to

timing and the absence of commission costs. (Id. 145:18-146:8; 163:14-20.)
115.

Arthur Friedman ceased his diligence exercises after the first few years

because the number of Sterling accounts had begun to grow, making the effort
burdensome, and he had not observed any inconsistencies between market information
and what Madoff was reporting. (Id. 139:25-142:1; Friedman Rule 27 Tr. 21:5-22:13
(Seshens Decl., Ex. F).)
116.

Over many years the Sterling Defendants and other customers continued

to make deposits and withdrawals in an unremarkable manner and to receive statements
and confirmations that reflected the purchase and sale of equity securities. (Friedman Tr.
150:22-153:10; 600:16-601:2; 602:16-603:12; 610:5-23 (Seshens Decl., Ex. H).)
117.

Major financial institutions reviewed the Sterling Defendants’ BLMIS

holdings for the purposes of determining their value as collateral and as a source of
liquidity, in some cases making loans to certain of the Sterling Defendants to be used as
leverage, like margin loans, to increase returns on their securities investments. (Id.
256:12-257:23; 475:25-476:20; S. Katz Tr. 165:4-13 (Seshens Decl., Ex. D); (Deposition
Transcript of Mark Peskin (“Peskin Tr.”), July 29-30, 2010, 179:21-181:5 (Seshens
Decl., Ex. K).)

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118.

In every instance, the BLMIS holdings were accepted as valuable

collateral. (Peskin Tr. 186:6-187:8 (Seshens Decl., Ex. K).)
119.

In 1990 the Mets were seeking financing from Travelers Insurance

Company, which sought information about the BLMIS investments of certain Sterling
Partners and the Mets. (S. Katz Tr. 53:11-54:6 (Seshens Decl., Ex. D).)
120.

Madoff allowed Travelers’ due diligence and spoke with a Travelers

representative. (Barry Gonder Mem., dated Aug. 24, 1990 (Seshens Decl., Ex. L).)
121.

Travelers’ due diligence confirmed the Sterling Partners’ understanding

about Madoff’s strategy and provided them with additional comfort concerning their
BLMIS investments. (S. Katz Tr. 53:19-24; 56:23-57:6 (Seshens Decl., Ex. D).)
122.

It was widely publicized in 2003 that Madoff had entered into a joint

venture with several Wall Street firms, including Goldman Sachs and Merrill Lynch.
(S. Katz Decl. ¶ 9.)
123.

Although questions occasionally arose about Madoff, on each occasion the

questions were answered in a manner that confirmed Madoff’s honesty and standing.
(Friedman Tr. 163:21-165:14 (Seshens Decl., Ex. H); Wilpon Tr. 190:9-23; 199:15201:24 (Seshens Decl., Ex. E).)
124.

The Sterling Partners knew of a widely publicized SEC investigation in

1992, in which Madoff had been completely cleared of any wrongdoing. (S. Katz Tr.
52:3-53:6 (Seshens Decl., Ex. D); Wilpon Tr. 198:5-199:7 (Seshens Decl., Ex. E).) See
also Randall Smith, Wall Street Mystery Features a Big Board Rival, Wall St. J., Dec. 16
1992, at C1 (Seshens Decl., Ex. M).

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125.

The Sterling Partners took comfort from the fact BLMIS was an SEC-

registered broker-dealer that had government oversight. (Stamos Tr. 153:3-12 (Seshens
Decl., Ex. A); Chachra Tr. 206:21-207:14 (Seshens Decl., Ex. C).)
126.

The comfort the Sterling Partners took from the SEC’s clearance of

Madoff was widespread among Madoff customers. SEC Office of Investigations, Report
No. OIG-509, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi
Scheme – Public Version 25 (2009), available at
http://www.sec.gov/news/studies/2009/oig-509.pdf (last visited Mar. 18, 2011).
The Sterling Defendants Did Not Receive “Staggering” Profits
127.

Had the Sterling Defendants invested their funds with Berkshire Hathaway

rather than with BLMIS, the return on their investment would have been vastly greater.
See Berkshire Hathaway Inc., Annual Report 2 (2009), available at
http://www.berkshirehathaway.com/2009ar/2009ar.pdf (last visited Mar. 18, 2011).
The Remaining Allegations Are Not Specific, Immaterial, or Irrelevant
128.

Ivy Asset Management (“Ivy”) has been sued by its investors and the New

York State Attorney General for concealing its Madoff concerns. See, e.g., In re Beacon
Assocs. Litig., 09 Civ. 777, 2010 U.S. Dist. LEXIS 106355 (S.D.N.Y. Oct. 5, 2010);
Complaint, People v. Ivy Asset Mgmt. LLC, No. 450489/2010 (N.Y. Sup. Ct. May 11,
2010).
129.

David Katz did not know that Ivy was a Madoff investor. (D. Katz Tr.

155:19-22 (Seshens Decl., Ex. G).)

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130.

Saul Katz has no recollection of anyone from Ivy ever advising him of any

concerns Ivy had about Madoff or that Ivy had withdrawn its proprietary investment with
BLMIS. (S. Katz Decl. ¶ 14.)
131.

Saul Katz has no recollection of any consultant retained either by Sterling

Stamos or Sterling ever telling him that the consultant “couldn’t make Bernie’s math
work and something wasn’t right.” (Id. ¶ 15.)
132.

The Sterling Partners determined that fraud insurance was an unnecessary

expense given their comfort with Madoff. (S. Katz Tr. 102:7-19 (Seshens Decl., Ex. D);
Friedman Tr. 434:1-4 (Seshens Decl., Ex. H).)
133.

Suspicion that Madoff was engaged in a Ponzi scheme did not motivate

the Sterling Partners’ consideration of fraud insurance. (Friedman Tr. 430:18-431:22
(Seshens Decl., Ex. H).)
134.

In and around 2001, Arthur Friedman did not even know what a Ponzi

scheme was. (Id. 430:18-431:22.)
135.

Peter Stamos told Saul Katz that Sterling Stamos looked for consistent

returns when evaluating fund managers. (Stamos Tr. 205:6-11 (Seshens Decl., Ex. A).)
136.

In a 2004 lenders’ presentation, the future annual returns of both Madoff

and Sterling Stamos were predicted to be positive 99.9% of the time. (Lenders’ Meeting
Presentation, dated March 9, 2004, at 27, 28 (Seshens Decl., Ex. N).)
137.

The Sterling Partners analyzed and confirmed that Madoff’s returns were

tied to the Treasury rate. (Seshens Decl., Ex. O.)
138.

Sterling Stamos was not expected to achieve the same results as BLMIS.

(D. Katz Tr. 240:5-15 (Seshens Decl., Ex. G).)

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139.

A hedge fund of funds with numerous different investment managers

employing varied strategies is far different from a SEC-registered broker employing a
single “split-strike conversion strategy.” (Chachra Tr. 161:18-162:6 (Seshens Decl.,
Ex. C).)
140.

The Sterling Partners used BLMIS returns as a comparative benchmark

because of their longstanding investment relationship with Madoff and because they had
a significant amount of money invested with BLMIS. (D. Katz Tr. 107:4-13 (Seshens
Decl., Ex. G); Chachra Tr. 143:12-144:5 (Seshens Decl., Ex. C).)
141.

Sterling structured their 401(k) Retirement Plan as participant-directed

rather than trustee-directed because it was more popular and would reduce Sterling’s
fiduciary exposure. (Friedman Tr. 561:12-24 (Seshens Decl., Ex. H).)
142.

As either a participant-directed or a trustee-directed retirement plan, all

Plan participants would be aware of Madoff and any Plan participant could ask any
questions about Madoff that they liked. (Id. 537:16-538:10.)
143.

Neither Madoff nor anyone at his firm voiced any concern about or

resistance to the inclusion of BLMIS as an investment option for Sterling’s 401(k) Plan.
(Id. 540:3-540:20.)
144.

The Katzes and the Wilpons made the decision about where to invest the

funds of their respective Family Foundations. (Id. 662:15-663:5; S. Katz Decl. ¶ 16.)
145.

BLMIS advanced money to the Sterling Partners on only one occasion in

connection with their exercise of a buyout option with Cablevision in 2004. (S. Katz Tr.
197:8-199:5 (Seshens Decl., Ex. D); Wilpon Tr. 212:22-216:18 (Seshens Decl., Ex. E);
Friedman Tr. 223:3-224:8 (Seshens Decl., Ex. H).)

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146.

At the time Madoff advanced the funds, a request for a loan from

Sterling’s banks already had been granted. (S. Katz Tr. 197:8-199:5 (Seshens Decl.,
Ex. D); Wilpon Tr. 212:22-216:18 (Seshens Decl., Ex. E); Friedman Tr. 223:3-224:8
(Seshens Decl., Ex. H); see also Compl. ¶¶ 991-992.)
147.

The Partners became concerned that the financing would not close in time

to permit them to exercise their Cablevision buyout option. (S. Katz Tr. 197:8-199:5
(Seshens Decl., Ex. D); Wilpon Tr. 212:22-216:18 (Seshens Decl., Ex. E); Friedman Tr.
223:3-224:8 (Seshens Decl., Ex. H); see also Compl. ¶¶ 991-992.)
148.

The Partners asked Madoff to liquidate certain of their accounts to ensure

they had the necessary funds pending funding by the banks. (S. Katz Tr. 197:8-199:5
(Seshens Decl., Ex. D); Wilpon Tr. 212:22-216:18 (Seshens Decl., Ex. E); Friedman Tr.
223:3-224:8 (Seshens Decl., Ex. H); see also Compl. ¶¶ 991-992.)
149.

Madoff instead offered to make an advance against those accounts so as

not to negatively impact them while he was “in the market.” (S. Katz Tr. 197:8-199:5
(Seshens Decl., Ex. D); Wilpon Tr. 212:22-216:18 (Seshens Decl., Ex. E); Friedman Tr.
223:3-224:8; 226:15-228:3 (Seshens Decl., Ex. H); see also Compl. ¶¶ 991-992.)
150.

Madoff and the banks ended up advancing the funds on the very same day,

so BLMIS’ money was returned immediately. (S. Katz 199:6-14 (Seshens Decl., Ex. D);
Wilpon Tr. 212:22-216:18 (Seshens Decl., Ex. E); Friedman Tr. 233:6-14 (Seshens Decl.,
Ex. H); see also Compl. ¶¶ 993-995.)

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Dated: New York, New York
March 20, 2011
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]
Attorneys for the Sterling Defendants

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