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

Filing 74

REPLY MEMORANDUM OF LAW re: 73 Memorandum of Law Reply of SIPC to the Amicus Brief on "Reset to Zero". Document filed by Securities Investor Protection Corporation. (Attachments: # 1 Certificate of Service)(Bell, Kevin)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------------- :
SECURITIES INVESTOR PROTECTION
:
CORPORATION,
:
:
Plaintiff-Applicant,
:
:
v.
:
:
BERNARD L. MADOFF INVESTMENT
:
SECURITIES LLC,
:
:
Defendant.
:
-------------------------------------------------------------- :
In re:
:
BERNARD L. MADOFF,
:
:
Debtor.
:
-------------------------------------------------------------- :
IRVING H. PICARD, Trustee for the Liquidation :
of Bernard L. Madoff Investment Securities LLC, :
:
Plaintiff,
:
:
v.
:
:
SAUL B. KATZ, et al.,
:
:
Defendants.
:
-------------------------------------------------------------- :

Adv. Pro. No. 08-01789 (BRL)
SIPA LIQUIDATION
(Substantively Consolidated)

Case No. 1:11-cv-03605-JSR

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

REPLY OF THE
SECURITIES INVESTOR PROTECTION CORPORATION
TO THE AMICUS BRIEF ON “RESET TO ZERO”
SECURITIES INVESTOR PROTECTION CORPORATION
805 Fifteenth Street, N.W., Suite 800
Washington, D.C. 20005
Telephone: [phone]
JOSEPHINE WANG
General Counsel
KEVIN H. BELL
Senior Associate General Counsel for Dispute Resolution
CHRISTOPHER H. LAROSA
Associate General Counsel
LAUREN T. ATTARD
Staff Attorney

TABLE OF AUTHORITIES
PAGE
CASES
Sender v. Buchanan (In re Hedged-Investments Assoc., Inc.), 84 F.3d 1286 (10th Cir. 1996) ...... 4
STATUTES
Bankruptcy Code, 11 U.S.C. §
548(c) ...................................................................................................................................... 1, 3
548(d)(2)(A)................................................................................................................................ 1

Pursuant to this Court’s Order of November 28, 2011, the Securities Investor Protection
Corporation (“SIPC”) submits this reply to the amicus brief on the “reset to zero” method [Dkt.
No. 73] (“Amicus Brief”), filed by certain defendants (“Amicus Defendants”) in other adversary
proceedings related to the Bernard L. Madoff Investment Securities LLC (“BLMIS”) liquidation.
As previously discussed by SIPC,1 whether transfers in this case were of principal or
fictitious profit is relevant to the defense provided in Section 548(c) of the Bankruptcy Code (11
U.S.C.) to an otherwise avoidable fraudulent transfer. In pertinent part, under Section 548(c), a
transferee may retain property transferred so long as the transferee “takes for value and in good
faith.” Under Bankruptcy Code Section 548(d)(2)(A), “value” includes the “satisfaction…of
a(n) . . . antecedent debt of the debtor.” If a transferee withdrew “principal” from his brokerage
account, the withdrawal would be made “for value” because the withdrawal would satisfy
BLMIS’s obligation to return investment principal on demand. On the other hand, if a transfer
was in payment of fictitious profit not owed to the transferee, there would be no antecedent debt,
no value provided by the transferee in exchange for the transfer, and hence, no defense to
avoidance of the transfer. In sum, the “for value” defense is available only if, and to the extent
that, at the time of the transfer, BLMIS held some of the transferee’s investment principal, and
thus had an “antecedent debt” to the transferee in the amount of that unreturned principal.
The theory concocted by the Amicus Defendants is without precedent or legal support.
Amicus Defendants treat “antecedent debt” not as a defense, as they should, but as an absolute
right. As an initial matter, their use of the term “reset to zero” is misleading. For no apparent
1

Memorandum of Law of the Securities Investor Protection Corporation Regarding Calculation
of Fictitious Profits, filed herein on October 25, 2011 [Dkt. No. 61] (“Footnote 6 Brief”) and the
Reply Memorandum of Law of the Securities Investor Protection Corporation Regarding
Calculation of Fictitious Profits, filed herein on November 4, 2011 [Dkt. No. 68] (“Footnote 6
Reply”). SIPC incorporates herein by reference the Footnote 6 Brief and the Footnote 6 Reply.

reason, other than a self-serving one, their approach resets only withdrawals to zero, and not
deposits. “Antecedent debt” means money owing to a customer by the debtor. But while
recognizing deposits in prior periods, Amicus Defendants ignore all withdrawals in the period
immediately preceding the two-year period at issue (the “Two Year Period”), even if the deposit
in the Two Year Period, in effect, extinguished a previous debt owing to the debtor by the
customer. Amicus Defendants do not point to any support for the proposition that deposits made
in the Two Year Period can be “double counted.”

To the contrary, Amicus Defendants

acknowledge that prior to the Two Year Period, the definition of antecedent debt does not
change, and any deposit can constitute “antecedent debt” if it meets the requirements of the
definition in the Bankruptcy Code. See Amicus Brief at 4 (“A ‘good-faith’ investor always has
the statutory right to assert ‘antecedent debt’ as a defense, to show that the investor gave ‘fair
equivalent value.’” (emphasis in original)).
Effectively, the Amicus Defendants’ method creates the fiction that in December 2006,
BLMIS absolved all customers of all withdrawals taken prior to December 2006, whether the
amounts were of principal or fictitious profit. This principle is illustrated in two of Amicus
Defendants’ three examples on pages 3-4 of the Amicus Brief. These two examples have been
re-charted below using the same numbers provided by Amicus Defendants.

1998
June 2006 (prior to Two Year Period)
January 2007 (within Two Year Period)
June 2007

Investor A
Amount
Deposited
(Credits)
$200,000

Amount
Withdrawn
(Debits)

Net Account
Value

$500,000
$100,000

$200,000
-$300,000
-$400,000
-$300,000

$100,000

Fraudulent Transfer - Trustee’s Method
Fraudulent Transfer – “Reset to Zero”

$100,000
$0

2

1998
June 2006 (prior to Two Year Period)
January 2007 (within Two Year Period)
June 2007
After June 2007

Investor C
Amount
Deposited
(Credits)
$200,000

Amount
Withdrawn
(Debits)
$500,000
$100,000

$200,000
$100,000

Fraudulent Transfer - Trustee’s Method
Fraudulent Transfer – “Reset to Zero”

$100,000

Net
Account
Value
$200,000
-$300,000
-$400,000
-$200,000
-$200,0002

$200,000
$0

In these examples, Investor A and Investor C each deposited cash with BLMIS during the
Two Year Period. The amounts of principal were less than the amounts of fictitious profits that
these investors received in previous years. Even though they reflect the payment of fictitious
profit, the amounts in the shaded boxes represent the amounts that Amicus Defendants would
characterize as “antecedent debt” under 548(c). Yet, these amounts actually extinguished a debt
owed by the customer to BLMIS, instead of the reverse.
As previously noted, in calculating antecedent debt, the Amicus Defendants offer no
viable support for their theory, or under their theory, for ignoring only withdrawals made in the
period preceding the Two Year Period. Under a true “Reset to Zero” theory, deposits, as well as
withdrawals, made before the Two Year Period would be ignored. This further points out the
absurdity of Amicus Defendants’ position. Withdrawals prior to the Two Year Period not only
inappropriately would increase the amount of fictitious profit that transferees could retain, as
shown above, but investors who actually were owed principal would be deemed instead to owe
money to the debtor. To illustrate: a customer who, hypothetically, deposits $1 million prior to

2

Amicus Defendants characterize Investor C as having “enriched the estate by $100,000” even
though Investor C actually withdrew $200,000 of other customers’ money. See Amicus Brief at
4 (emphasis in original).

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the Two Year Period, and then withdraws $800,000 in the Two Year period, would receive no
credit for the deposit. Instead, if only transactions during the Two Year Period were considered,
under a true Reset to Zero approach, the customer would owe the estate $800,000, even though,
in fact, the $800,000 was in partial payment of the $1 million antecedent debt owed to him. It
bears repeating: antecedent debt is the amount of principal owed by the broker to the customer.
Unless the entire history of an account is examined, the actual amount owed cannot be
determined.
Finally, it is worth noting that under Amicus Defendants’ method, in certain examples
such as Investor D below, the Trustee would be able to recover more from a customer than the
Trustee currently is permitted under the Bankruptcy Code.

1998
June 2006 (prior to Two Year Period)
January 2007 (within Two Year Period)
June 2007

Investor D
Amount
Deposited
(Credits)
$200,000

Amount
Withdrawn
(Debits)
$100,000
$500,000

$200,000

Fraudulent Transfer - Trustee’s Method
Fraudulent Transfer – “Reset to Zero”

Net
Account
Value
$200,000
$100,000
-$400,000
-$200,000

$200,000
$300,000

Any customer who withdrew less money than was on deposit with BLMIS prior to the Two Year
Period, but ultimately withdrew more than his original investment, like Investor D, would be
subject to a higher fraudulent transfer amount under the Amicus Defendants’ method.
In short, the Amicus Method favors those customers who withdrew their principal early
and were living off of the spoils of the Bernard Madoff fraud.

The Amicus Defendants’

approach is self-serving, and contrary to applicable law. See, e.g., Sender v. Buchanan (In re
Hedged-Investments Assoc., Inc.), 84 F.3d 1286, 1290 (10th Cir. 1996) (holding that because a

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victim of a Ponzi scheme did not have an enforceable claim against the debtor for damages in
excess of her original investment, the transfers in excess of her investment were not made on
account of antecedent debt).
CONCLUSION
For all of the reasons stated above, the “Reset to Zero” approach should be rejected.
Dated: Washington, D.C.
December 6, 2011
Respectfully submitted,
JOSEPHINE WANG
General Counsel
/s/ Kevin H. Bell
KEVIN H. BELL
Senior Associate General Counsel for
Dispute Resolution
LAUREN T. ATTARD
Staff Attorney
SECURITIES INVESTOR
PROTECTION CORPORATION
805 15th Street, N.W.
Suite 800
Washington, D.C. 20005
Telephone: [phone]
E-mail: [e-mail]
E-mail: [e-mail]
E-mail: [e-mail]

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