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

Filing 27

DECLARATION of DANA M. SESHENS in Support re: 20 MOTION to Dismiss THE AMENDED COMPLAINT OR, IN THE ALTERNATIVE, FOR SUMMARY JUDGMENT.. Document filed by Charles 15 Associates, Charles 15 LLC, Charles Sterling LLC, Charles Sterling Sub LLC, College Place Enterprises LLC, Coney Island Baseball Holding Company LLC, Estate of Leonard Schreier, FFB Aviation LLC, FS Company LLC, Fred Wilpon Family Trust, Arthur Friedman, Ruth Friedman, Iris J. Katz and Saul B. Katz Family Foundation, Inc., Judy and Fred Wilpon Family Foundation, Inc., Amy Beth Katz, David Katz, Dayle Katz, Gregory Katz, Howard Katz, Iris Katz, 157 J.E.S. LLC, Air Sterling LLC, BAS Aircraft LLC, Jason Bacher, Bon Mick Family Partners LP, Bon-Mick, Inc., Brooklyn Baseball Company LLC, C.D.S. Corp., Michael Katz, Saul B. Katz, Todd Katz, Katz 2002 Descendants' Trust, Heather Katz Knopf, Natalie Katz O'Brien, Mets II LLC, Mets Limited Partnership, Mets One LLC, Mets Partners, Inc., Minor 1 (REDACTED), Minor 2 (REDACTED), L. Thomas Osterman, Phyllis Rebell Osterman, Realty Associates Madoff II, Red Valley Partners, Robbinsville Park LLC, Ruskin Garden Apartments LLC, Saul B. Katz Family Trust, Michael Schreier, Deyva Schreier Arthur, See Holdco LLC, See Holdings I, See Holdings II, Sterling 10 LLC, Sterling 15C LLC, Sterling 20 LLC, Sterling Acquisitions LLC, Sterling American Advisors II LP, Sterling American Property III LP, Sterling American Property IV LP, Sterling American Property V LP, Sterling Brunswick Corporation, Sterling Brunswick Seven LLC, Sterling Dist Properties LLC, Sterling Equities, Sterling Equities Associates, Sterling Equities Investors, Sterling Heritage LLC, Sterling Internal V LLC, Sterling Jet II Ltd., Sterling Jet Ltd., Sterling Mets Associates, Sterling Mets Associates II, Sterling Mets LP, Sterling Pathogenesis Company, Sterling Third Associates, Sterling Thirty Venture LLC, Sterling Tracing LLC, Sterling Twenty Five LLC, Sterling VC IV LLC, Sterling VC V LLC, Edward M. Tepper, Elise C. Tepper, Jacqueline G. Tepper, Marvin B. Tepper, Valley Harbor Associates, Kimberly Wachtler, Philip Wachtler, Bruce N. Wilpon, Daniel Wilpon, Debra Wilpon, Fred Wilpon, Jeffrey Wilpon, Jessica Wilpon, Judith Wilpon, Richard Wilpon, Scott Wilpon, Valerie Wilpon, Wilpon 2002 Descendants' Trust, Robin Wilpon Wachtler. (Attachments: # 1 Exhibit T, # 2 Exhibit U, # 3 Exhibit V, # 4 Exhibit W, # 5 Exhibit X, # 6 Exhibit Y, # 7 Exhibit Z, # 8 Exhibit AA, # 9 Exhibit BB)(Wagner, Karen)

EXHIBIT U

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

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
ADV. PRO. NO. 08-01789 (BRL)

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SECURITIES INVESTOR PROTECTION
CORPORATION,

Videotaped

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Plaintiff-Applicant,
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v.

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BERNARD L. MADOFF INVESTMENT
SECURITIES, LLC,
Defendant.
-------------------------------x
In Re:

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BERNARD L. MADOFF,

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Rule 2004
Examination of:

Debtor.
-------------------------------x

9

ARTHUR FRIEDMAN
(Volume I)

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TRANSCRIPT of testimony as taken by and before

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NANCY C. BENDISH, Certified Court Reporter, RMR, CRR

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and Notary Public of the States of New York and New

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Jersey, at the offices of Baker & Hostetler, 45

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Rockefeller Plaza, New York, New York on Tuesday,

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June 22, 2010, commencing at 10:11 a.m.

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BENDISH REPORTING, INC.
Litigation Support Services
877.404.2193
www.bendish.com

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A P P E A R A N C E S:

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BAKER & HOSTETLER, LLP
3200 National City Center
1900 East 9th Street
Cleveland, OH 44114-3485
BY: THOMAS R. LUCCHESI, ESQ.
For Irving Picard, Trustee
BAKER & HOSTETLER, LLP
45 Rockefeller Plaza
New York, New York 10111
BY: KATHRYN M. ZUNNO, ESQ.
FERNANDO A. BOHORQUEZ, ESQ.
LAUREN RESNICK, ESQ.
KATHRYN M. HEIM, ESQ.
For Irving Picard, Trustee

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DAVIS POLK & WARDWELL LLP
450 Lexington Avenue
New York, NY 10017
BY: DANA M. SESHENS, ESQ.
KAREN E. WAGNER, ESQ.
For Sterling Equities, certain
affiliated entities, and the Witness

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ALSO PRESENT:
GREGORY P. NERO, ESQ., Sterling Equities
DANIEL McCLUTCHY, Videographer

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A.

Same for the Brooklyn Cyclones.

Q.

Now that's a -- just because I'm not

from here, that's a minor league team?
A.

Yes.

Q.

Single A.

Single A?

A.

Single A, not a full season, they

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start in June.

8

Q.

9
10
11
12
13
14

A.
Q.
A.
Q.
operations?
A.

Is it affiliated with the Mets?
Oh, yes.

We own the team.

Part of the Fund system?
Yes.
Do the Mets have other minor league
Do they have a double A?
They do, but it's an affiliation.

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Brooklyn Cyclones is the only one that we own, but

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we have affiliation with all levels.

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Q.

And those, you don't have any -- the

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affiliated minor league operations, you don't have

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any job responsibilities with respect to those

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entities?

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A.

22

Q.

No.

No.

Did you provide -- let me just

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continue with the last part of the business that you

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identified.

25

were counting, the third or the fourth business

You identified, depending on how you

72

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grouping for the Sterling entities as the

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investments.

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least in my mind, kind of Madoff and then other

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investments.

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good time, what were your responsibilities with

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respect to the investments being made by Sterling

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partners or Sterling entities with Bernard Madoff?

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9
10

A.
Q.
A.

Under that you broke out I think, at

So, can you tell me, maybe this is a

With regard to Bernard Madoff?
Yes.
As I said, I was the liaison with the

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Madoff firm.

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Madoff was done through me.

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so that whenever anybody wanted to invest money in

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Madoff, they would send me the check, or -- it

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usually was in the form of a check, and I would

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forward it on to Madoff.

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wanted to withdraw money, they would notify me,

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either by email or letter or telephone what they

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wanted to withdraw, from what account, when, if

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there was an urgency, and I would, again, transmit

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that information to Madoff.

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Any dealings with the investment in
That was by design, and

And vice versa, if they

So, in every sense I was the liaison.
Q.

You said that was by design.

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that the design?

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A.

Why was

From, to my recollection, from day

121

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referred to as the ten accounts, that there were

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actually ten accounts that were added and we just

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grouped them, and I think for our own information we

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referred to them as the ten accounts.

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next, in other words four to thirteen, I don't

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recollect if there was any in between.

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Q.

Okay.

Were they the

We have some documents that

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show the ten accounts.

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subsequent accounts, just generally.

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So, let's just talk about

Were you given direction by somebody

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to invest with Madoff, or did you make that decision

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on behalf of the Sterling entities on your own?

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A.

I never made a determination on my

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own to open an account or to have somebody else open

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an account.

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17
18

Q.

Okay.

So, were you directed then to

open accounts at Madoff?
A.

As each account was opened, or if it

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was a case of more than one account at a time, there

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was a discussion and I might very well have been

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directed to do whatever was necessary to open

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accounts in such and such name.

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24
25

Q.

You say there was a discussion.

Who

would be the participants in the discussion?
A.

It would usually be Mr. Saul Katz.

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It may have been all of the partners in a given

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situation, or whoever might have been involved in

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opening the accounts.

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5

Q.

What would be the subject of

discussion?

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A.

Might be the names of the accounts,

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who the partners were, what percentages, if there

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were more than one partner, if it was a tenant-in-

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common account, for example, what the percentages

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were.

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signing, what Social Security number would be used,

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again, if it was more than one person.

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basics of opening the account.

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And the paperwork involved, who would be

Q.

Just the

Other than the basics of opening the

15

account, what you've just mentioned, were there any

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other factors or matters that were taken into

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consideration in deciding whether to open a new

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account with Bernie Madoff?

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A.

I wasn't involved, that I can

recollect, in making any kind of determination.
Q.

Did you -- well, let me back up.
Did you have any understanding, when

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you joined Sterling in January of '86, regarding

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Madoff's investment strategy?

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MS. SESHENS:

At the time he joined?

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Right?

Correct?

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MS. SESHENS:
A.
Q.
A.
Q.
A.
Q.

Object to the form.

Yes.
You managed the accounts?
Yes.
You set up many of the accounts?
What does it mean, "set up"?
You did the paperwork to open the

accounts with Madoff?
A.

I had the paperwork prepared and

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necessary signatures and submitted them to the

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Madoff firm, yes.

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14

Q.

of the accounts --

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MR. LUCCHESI:
Q.

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Well, strike that.

Did you purposely set up many of the

accounts as tenants in common?

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Was it your understanding that many

MS. SESHENS:
A.
Q.

Objection.

Yes.
Do you understand what "tenants in

common" -A.
Q.
A.

Yes.
What is that?

What is that?

Tenants in common are an account of

more than one person, two or more, whereby there's

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First of all, what do you recall him saying other

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than, We ought to diversify?

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saying anything more than that?

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A.

Do you recall him

It was just -- no warning about

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Madoff or any uneasy feeling about Madoff.

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just a good idea which nobody disagreed with, to

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spread money to more than one place.

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9
10
11

Q.

Okay.

It's

And then was that generally

agreed with, that we -- that you should spread the
money to more than one place?
A.

I think the point was made, and maybe

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some heads were nodded.

13

anything like that, but everybody understood the

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concept of diversifying and respected it and thought

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it was the right thing.

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17
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Q.

There wasn't a vote or

What steps were taken, if any, to

diversify?
A.

At one point, Saul Katz decided that

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we should -- diversification -- He wanted to

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diversify, and his thought was a fund of funds would

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be a good place to diversify funds.

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conservative.

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That's how Sterling Stamos was born.

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25

Q.

Relatively

The returns were purportedly good.

Before Sterling Stamos was born, you

had discussions with IV Management?

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Does that say how to --

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3

A.
Q.

4

A.

5

Q.

6

Define.
How to define fraud?
Yes.

that on this?

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A.

What was that?

Why did you write

I was taking notes.

I don't know,

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conversation, I don't know with whom, maybe one or

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more partners, I don't know.

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11

Q.

Do you recall what the concern

was, how to define fraud?

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A.

13
14

Okay.

The question -MS. SESHENS:

Q.

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Objection to form.

Let me rephrase the question.
Was there an issue or a concern

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raised about how fraud was defined in the insurance

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policy?

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19
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A.

There was just a curiosity, a fact-

finding question, how did it define.
Q.

It wasn't...

Other than learning that American

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Securities had purchased third-party insurance for

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their accounts at Madoff, was there any other

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precipitating event that made the Sterling Group

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think insurance was a good idea, potentially?

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MS. SESHENS:

Objection to the form.

425

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A.

2
3

Q.

Do you recall anything about the

discussion -- strike that.

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5

No.

Was there a discussion among the
partners about how fraud was defined?

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A.

I don't remember the discussion.

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presume it took place, but I don't remember.

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just how is it defined, passed the information on

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I

that I received and that was the end of it.

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11

Q.

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20

Next line of handwriting says, "Get

Robert Duran here."

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A.

It was

Correct?

Yeah, speak to him directly, one on

one.
Q.

And that's the meeting that you

referred to that you attended with Michael Katz?
A.
Q.

Yes.
Now, is the second page of that

document your notes from that meeting?
A.
Q.

Yes.
Do all of the -- is all of the

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writing on that page related to the meeting with

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Robert Duran?

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24
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A.
Q.

No, doesn't appear to be.
Is it just the part that's labeled

number 1 at the top?

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you to all partners dated June 2001, June 13th,

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2001.

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13
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Is this a memo that you authored?
A.
Q.

Yes.
Is that the memo that you were

referring to a minute ago?
A.
Q.

Yes.
Does this help you place in time when

you may have met with Mr. Duran?
A.
Q.

Yes.
When do you think you met with

Mr. Duran?
A.

Probably very shortly before June

13th, 2001.
Q.

Okay.

So, your initial memo, Exhibit

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20, on this subject was in February, and you meet

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with Mr. Duran in June.

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passage of time?

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for the passage of time.

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until June to set up that meeting?

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A.

Was there a reason for the

I guess there's always a reason
Was there a reason it took

I think for the most part the reason

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was that there was no sense of urgency.

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he wasn't available or we weren't available, that I

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don't recollect.

24
25

(Exhibit AF-22 marked for
identification.)

But whether

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page of the chart.
A.

Okay.

If it was levered, you know, I

3

didn't think so, but it's not a great surprise that

4

it was a levered or doubling-up account.

5
6

Q.

Okay.

All right.

Okay, that's all I

have for that right now.

7

Was the decision to do this

8

leveraging by borrowing money from a bank for

9

deposit into accounts at Madoff, was that the

10

subject of discussion among the partners prior to

11

doing it?

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A.

13

Yes, it was.

Q.

Yes.

Did anyone, did any of the partners

14

disagree that this was an appropriate or a wise

15

investment strategy?

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17
18
19

MS. SESHENS:
A.

Object to the form.

I don't recollect anybody

disagreeing.
Q.

Was there a separate discussion about

20

doubling-up accounts with respect to each time it

21

was done?

22

for Sterling 30, a separate discussion at the time

23

you did Sterling 10, et cetera?

24
25

A.

In other words, was there a discussion

The only discussion was we are

opening a Sterling 20.

If anybody wants to put any

488

1

money in Sterling 20, it's open now, we intend to go

2

ahead and close it on X date.

3

the only discussion because there was a voluntary

4

thing with all of those accounts, Sterling 20 and so

5

forth.

6

that any individual partner put in any money.

7

That virtually was

It wasn't mandatory that you put in any --

Q.

The money that went into the

8

double-up accounts, was there any restriction on

9

where that money, or limitation on where that money

10

could come from?

11

A.

There was an understood restriction

12

that you just couldn't borrow it from Sterling

13

Equities Funding to put it in leverage and put it

14

into Madoff.

That was understood.

15

Q.

16

Madoff account?

17

A.

18
19
20
21
22
23
24
25

Q.

Could you take it out of an existing

Yes.
Did anyone do that, to your

knowledge?
A.
Q.
A.

Yes.
Who did that?
I for one did it.

I think almost

every partner did it.
Q.

Okay.

So Madoff didn't impose any

restrictions on where the money could come from?

562

1

to you, right, that it was cheaper, someone must

2

have told you that?

3

A.

4
5

Q.

A.

7

Q.

8

10

And then you wrote, "Everyone will

ask and know about BM."

6

9

Yes.

Bernard Madoff.
Why is that written there?

A.

That anybody that went into the plan

would have to have a thorough briefing on the Madoff
operation.

11

Q.

Was it a concern on your part that

12

people would, employees would ask and know about

13

Bernie Madoff?

14

A.

15

Q.

No, I don't...
You don't recall ever being

16

encouraged to keep Madoff kind of a well-kept

17

secret?

18

A.

19

Q.

No.
Do you recall any discussion about

20

that point at this meeting, that everyone will ask

21

and know about Madoff?

22

A.

23

or discussion.

24

Q.

No, I don't recall any such concern

25

notes.

I know we're looking at a copy of the
Do you believe you wrote that, everyone will

578

1
2

like that.
Q.

Was there any, ever any discussion

3

between Sterling -- representatives of Sterling and

4

Peter Stamos about Madoff as an investment

5

opportunity?

6
7
8
9
10

A.
Q.
A.
Q.
A.

Between Sterling and Peter Stamos?
Yes.
Yes.
Tell me about those discussions.
Peter Stamos expressed an opinion

11

that Bernie Madoff was not transparent.

12

his, quote, objection.

13

of the opinion that we shouldn't have as much money

14

in Madoff as we do, as we did at the time.

15
16
17
18
19
20
21

Q.

That was

And he advised us, or he was

At the time, this was before the

formation of the Sterling Stamos fund?
A.
Q.
A.
Q.
A.

No, no.
After?
That was in existence.
When did he render that advice?
I don't remember the time, but I

22

remember thinking the natural thought, that, yes, if

23

these were our two major sources of investment,

24

then, sure, he would like us to take some money out

25

of Madoff and no doubt put it into his firm.

579

1
2
3
4
5

Q.

So is it fair to say you discounted

his view, because you didn't think it was objective?
A.
Q.
A.

That's one of the reasons, yes.
What other reasons?
The only danger that he put forth was

6

that if anything ever happened, and he didn't really

7

get into any reason that anything should happen, a

8

problem with Sterling, that Sterling might

9

encounter, would be if accounts were frozen and

10

while any kind of -- if they started to look into

11

Madoff's operation -- again, not saying that they'd

12

find anything, but just saying, just creating a fear

13

of just an investigation.

14

frozen, would we -- and at the same time the banks

15

said, well, pay us the money, you're in default, we

16

might have a problem.

And our accounts were

17

So that was the only -- that was the

18

basis of his warning, we'll say, or saying that you

19

should have less money.

20

point to and say there's something wrong or an

21

investigation would turn up anything wrong.

22

that if there were an investigation and if the money

23

was tied up, then we might run into a problem.

24
25

Q.

Again, not that he could

Just

Now, do you recall Mr. Stamos issuing

this warning and this advice -- you certainly recall

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