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 AA

In The Matter Of:
IN RE: BAYOU GROUP, LLC, ET AL

TRIAL
May 11, 2011

SOUTHERN DISTRICT REPORTERS
500 PEARL STREET
NEW YORK, NY 10007
212 805-0330

Original File 15bkbayf.txt

Min-U-Script® with Word Index

TRIAL
May 11, 2011

IN RE: BAYOU GROUP, LLC, ET AL
15B3BAY6

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Page 1361 15B3BAY6

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Israel's arrest for driving under the influence and criminal
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possession of a controlled substance, did not put any defendant 10
on inquiry notice of insolvency or fraudulent purpose. 11
As I instructed you during the trial for purposes of 12
the inquiry notice question, the relevant time period ends in 13
late June 2004, when each defendant submitted its redemption 14
request. Accordingly, in determining whether the defendants 15
were put on inquiry notice, you are to consider the information 16
available to each defendant at the time that it submitted its 17
redemption request. Testimony or exhibits reflecting events 18
that occurred after a defendant submitted its redemption 19
request may also be considered by you on the inquiry notice 20
question to the extent that it sheds light on that defendant's 21
state of mind as of late June 2004 when the redemption request 22
was made.
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That concludes my instructions on the inquiry notice 24
portion of the good faith defense. If you determine that any 25

Banking in 2003, concerning certain records violations which
resulted in a $7,500 fine. The parties have agreed that these
events are not relevant to the inquiry notice issue, and these
events may not be considered by you in your determination of
whether the defendants were on inquiry notice of insolvency or
fraudulent purpose. The parties have further agreed that the
information in the BackTrack reports relating to (1) a lawsuit
against Sam Israel arising out of the rent dispute; and (2) Sam

15B3BAY6

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Jury Charge

Jury Charge

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you must return a verdict in favor of that defendant. If, 3
however, you determine that any defendant has failed to prove
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by a preponderance of the evidence that it was not on inquiry 5
notice of insolvency or fraudulent purpose, then you must move
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on to the second component of the good faith test. I will 7
refer to this component of the good faith test as the diligent
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investigation prong.
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The diligent investigation prong of the good faith 10
test requires you to consider whether (1) each defendant 11
conducted a diligent investigation of the facts that put it on 12
notice that the Bayou hedge funds might be insolvent, or that 13
the redemption payment might be made with a fraudulent purpose; 14
and (2) whether a diligent investigation would have discovered 15
the funds' insolvency or the managers' fraudulent purpose in 16
making the redemption payment. If you find that a defendant 17
did not conduct a diligent investigation of the facts that put 18
it on notice of possible insolvency or fraudulent purpose, and 19
you further find that a diligent investigation of those facts 20
would have led to discovery of insolvency or fraudulent 21
purpose, you must return a verdict in plaintiff's favor and 22
against that defendant. But if you find that a defendant 23
conducted a diligent investigation of the facts that put it on 24
notice of possible insolvency or fraudulent purpose, or you 25

Min-U-Script®

Page 1363

find that a diligent investigation would not have led to
discovery of insolvency or fraudulent purpose, then you must

return a verdict in favor of that defendant.
"Diligent" as used here means an investigation that is
reasonable, prudent, careful, and responsive to the available

information.
It is important to keep in mind that the question you
must decide as to diligent investigation is not whether a
reasonably prudent hedge fund investor would conduct an
investigation or simply close its account. If you conclude
that a defendant or its advisor was put on inquiry notice of
possible insolvency or fraudulent purpose, the law imposes a

duty on such parties to conduct a diligent investigation, or
demonstrate that a diligent investigation would not have led to

discovery of the insolvency or fraudulent purpose.
The defendants' actions are not to be evaluated on
basis of hindsight, or measured on the basis of whether they
were successful or unsuccessful in uncovering the Bayou hedge

funds' insolvency or fraud. Instead, the diligent
investigation question is to be measured by asking what a
reasonably prudent hedge fund investor would have done based on

the information available to the defendants and their advisors
at the time the investors submitted their redemption requests.

As with the inquiry notice question, in determining
whether a defendant conducted a diligent investigation, you

Page 1362 15B3BAY6

defendant has proven by a preponderance of the evidence that it
was not on inquiry notice of insolvency or fraudulent purpose,

Jury Charge

Jury Charge

Page 1364

should consider that defendant's actions under an objective
standard and consider what a reasonably prudent hedge fund
investor would have done. Accordingly, as with the inquiry

notice question, you may consider the standards, norms,
practices, sophistication, and experience generally possessed
by reasonably prudent hedge fund investors to the extent that

the evidence offered in this case has shed light on that.
I instructed you earlier, in connection with the
inquiry notice prong of the good faith test, that you should
consider post-redemption request evidence only to the extent

that it sheds light on a defendant's state of mind when it
submitted its redemption request in June 2004. That time
limitation does not apply to the diligent investigation prong.
Accordingly, you may consider post-June 2004 evidence, such as

public records and the actions of other investors, in
determining whether the defendants conducted a diligent
investigation, and whether a diligence investigation would have

led to discovery of the Bayou hedge funds' insolvency or

fraudulent purpose in making redemption payments.
As with the inquiry notice components, each defendant
has the burden of proving the diligent investigation prong by a
preponderance of the evidence. Accordingly, if you reach the

diligent investigation prong of the good faith test, and you
find that a defendant has shown by a preponderance of the
evidence that it conducted a diligent investigation, or that a

SOUTHERN DISTRICT REPORTERS

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