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

Filing 90

DECLARATION of DANA M. SESHENS in Support re: 79 MOTION 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 A, # 2 Exhibit B, # 3 Exhibit C PART 1, # 4 Exhibit C PART 2, # 5 Exhibit D, # 6 Exhibit E, # 7 Exhibit F, # 8 Exhibit G, # 9 Exhibit H, # 10 Exhibit I, # 11 Exhibit J, # 12 Exhibit K, # 13 Exhibit L, # 14 Exhibit M, # 15 Exhibit N, # 16 Exhibit O, # 17 Exhibit P, # 18 Exhibit Q, # 19 Exhibit R, # 20 Exhibit S, # 21 Exhibit T, # 22 Exhibit U, # 23 Exhibit V, # 24 Exhibit W, # 25 Exhibit X, # 26 Exhibit Y, # 27 Exhibit Z, # 28 Exhibit AA)(Seshens, Dana)

EXHIBIT S

2

t.1

u

H

JJ

s

n

55RDA[ii--IIRL)

Robert R. Williams

-4 Deborah R. Russell

Ann D. Borowiec
Patrick J. McHugh

July 1993

.

J.?. Morgânts Analysis of Bernard L. Madoff' s. Investment Management.
for
Saul B. Katz (Account KW024) for 1992

LI

u

'I
H

o
o
z

2

DISCLAIMER: Analysis of Madofîs investment management rúutts are based on in-depth analysis for one account (Katz IS IKWO24) for 1992, and a Curser)'
analysis of this account fo! 199j. As a result, conclusions should be tempered by this short time frame.

Appendices

How Morgan Can Compliment

Risk

Return

Investment Strategy/StyJe

Conclusions

Overview

Table of Contents

J.P. Morgan's Analysis of Bernard L. Madoff s Investment Managemeñt for
Saul B. Katz (Account KW024) for 1992

DISCLAIMER: Analysis of Mdoff s investment management results are b.Sd on in-depth analysis foroneaccount.(Katz #11CW024) for 1992, and acwtoiy
analysis ofthis account for 199!. As a result, conclusions should be tempelS by this short time frame.

- In depth analysis based on.one account for 1992 (see disclaimer)
- Determine what drives return
- Determine the rislç or volatility, inherent in this portfolio
- Determine how investment strategy changes over twoyear (1991-1992)

Morgan's analysis involve4 several steps

- Better understand Madoff' s results
- Determine if this portfolio is "risk free"
- Determine how Morgan can add value

Specific purpose for this analysis

'I

- Over 8 years
- In excess of 20 percent

Very good historical performance with Madoff

Overview

g

8

DISCLAiMER: Analysis of Madoffs investment management results are based on In-depth analysis for one account (Katz ill KW024) for t 992, and a cursory
analysis of this account for 1991. As a result, conclusions should be tempered by this short time frame.

- Diversification benefits

Morgan can compliment this strategy

- Many months unhedged
- Small number of securities in portfolio
- Expected volatility changes over time

Portfolio is not "risk-free"

- Attributed to stock selection and options trading
- What is the investment process?(e.g., stock selection, option valuation)

Good return in 1992 of 20.8%

Conclusions

z

a
bi

t'i
H

o

(Figuré 1 and 2)

5

Hedge strategy changes throughout 1991 and 1992

Jan - June: approximately 6 stocks and only one stock collared
July - Nov: approximately 15 stocksand partial to 11111 S&P collars:
Dee: approximately 9 stocks and SItP collar
(Details in Appendix B)

Strategy changes several times in 1992

Jan - June: approximateiy 10 stocks with each stock individually collared
July - Oct: approximately 18 stocks with some individual collars àndpartiàl S&P collars
Nov: liquidates portfolio and holds cash
Dee: approximately 6 stocks *ith no collars
(Details in Appendix A)

Strategy changes several times.in 1991

Investment Strategy/Style

,

C

w

0.00% -

20.00%

40.00%

60.00%

80.00%

100.00%

J120.00% -

140.00%

160.00% -

180.00%

200.00%

C

.O

''o

2

o.

C

IO

2

y-

2

C

o

1991

6

>.

,

3

o,
=

A changing hedgè strategy is evident in 1991

Figure l

S mdiv. Stock Collars

D S&P Collars/Puts

a
H
o
o

(M

'D

11

H

H

'I

o

-

---t.

E

C
w

'5
t-

w

w

o

t

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

t,

140.00%

-

-

I mdiv. Stock Cellars

D S&P Collars/Puts

A changing hedge stratégy in even more evident ¡n .1992

Figure 2

-Margin appears to run approximately 10% of account
-Only interest cost considered in our analysis

Leverage may play a role

s

-74% from stock selection (Figure 3)
-25% from options trading (Figure 3)
-Two stocks provide 60% of equity return (Intel & P&G)
-Half return is earned in July (Figure 4)
-Three options trades produce July options returns (Figure 5)

1992 return of 20.8%

Return

z

e
M

H

z
I1

o

Q

25%

H.

20.8 %

1%

9

74%

1992 return of 2O.8%Wás driven by. stock sélectionifld
options trading

[i OPTIONS

[iEQUITY

o

C

z
o

C
I-

-0,04

-0.02

o

0.02

0.04

OE06

0.08 -

Oi

Jan
Feb

4

Mar

1

Apr
May

lo

1992

Jul

±I i 4

Aug

±
Sep

±
Oct

±
Nov

Approximately half of the 1992 return is earned in July

Figure 4

Dec

-0,04 --

-0.02

o --

0.02

0.04

0.06 -

0.08 -

0.1 -

Significant options trading profits are evident in July

Figure 5

MOEX

D Stock Se!ect ieri

Options

OCash

12

-OEX (S&P 100) expected variance is constant
-Expected variance from stock selection goes down as number of stocks goes up
-Expected variance is reduced with options that collar.eqüities
-Cash also reduces expected variance of overall portfolio

"Expected variance" can be broken into components (Figure 7)

-Variance is a meSure of volatility that can be broken into additive components
-Expected variance is cùlculatcd monthly based on month, end pórifolio holdings
-High expected variance first 6 months of the year
(limited number of large stock holdings with one stock collared)
-Lower expected variance during last 6 months of the yeS
(additional stocks purchased and S&P hedges purih place)

"Expected variance" changes significantly during 1992 (Figure 6)

Risk

400

>

(5

200

-

g 300 --

a,

a'

500

600 -

700.

Jan

Feb

--I-Mar

Apr

May

1:3

June

JuI,,

Aug

Sept

0cl:.

Nov

"Expectedvariance" changes Significantly during1992

Figure 6

Dec

21

e

H

z

-600

-400

-200

IL

n
a'
L

II
1992

14

.4.

I

-I

The collars significantly reduce "expected varlänce" when
thêy are put ¡n place.

Figure 7

L....

U CEX Risk

[j Stock Selection

-

ut options

Cash

tassumes inflation at 4%

15

Expected avenge
Expected Standard
fleviations of returns
annual nnminal retum*
2.8%
CASH( bills)
5.5%
6.0%
7.3%
BONDS (treasuries)
17.5%
11.4%
US Lg cap STOCKS
24.6%
US Sm cap STOÇKS
14.5%
22,4%
13.0%
INTERNATIONAL STOCKS
25.0%
14.8%
EMERGING MKTS

Frame of reference from risk/return tradeoff is helpful

-Standard deviation of Treasury Bills (Cash) is bench mark for risk free level of volatility
-Expected standard deviation ranges front 23-26% during first 6 months of 1992
-Expected standard deviation ranges from 6-11% during last 6 months of 1992

Portfolio is not "rísk-frce"

.Standard deviation is another measure of volatility
-High expected standard deviation first 6 months of the year
-Lower expected standard deviation during last G months of the year

"Expected standard deviation" changes significantly during 1992 (Figure 8)

Risk

Q.O%

5.0%

25.0%

30.0%

Jan
Feb

Mr

Apr

Ma

16

1992

June

July

Aug

Sept

Oct

Nov

Diç

stock(17.5%)

Large Cap US

"Expected standard deviation" also changes ignficantly
during 1992

Figure 8.

17

-OEX returned approximately 3% during 1992
-Assume this portfolio had tracking error of approximately 7%
-Reasonable to assume this portfolio would have returned between 4% and 10%
4-ledges on OEX would not totally pérallel portfolio performance
-Concept only relevant during last 6 mònths of 1992 when OEX edgea put in place

Illustration of tracking error can be helpful

-Tracking error can be used to measure how well two streams of returns track each other
-Tracking errar here looks at how OEX options really hedge this portfolio
-Concept rdevant during last 6.thonths of 1992 when OEX hedges put in place
-Tracking error of 5-8% is relatively high for hedging purposes

Tracking error of the OEX hedges range from 5-8 % (Figure 9)

0.00% --

2.00% -

4.00%

Jan

.tFeb

Mr

-Apr

May

18

June:

July

Aug

Sept

0cv

Ñov

Dec

Tracking error of the OEX hedges -rànge from 5 to 8 percent

Figure 9

:

19

-All or most of liquidity is invested with ont manager
-Madoff uses large capitalization US stocks
-International equities can offer diversification benefits (Figure I O)
-Low correlation of US equity and International equity returns
-Morgan offers several international investment alternatives

Diversification Benefits

How Morgan Can Compliment this Investment Strategy

z

b

H

z

n
o

I

i

100% US Equities

c'

i

c:

c

I

20

80% US Equities 120% Non-US Equities

Increasing volatility

j

L

/i

t

t

i

T

100% Non-Us Equities

Combining US and Non-ILS Equities can create a more efficient portfolio

Figure 10

C - How do we measure risk?

B - Summary of Investment Account 1992

A - Summary of Investment Account 1991

Appendices

2.1

AMO 05%
Alad 4%

DCC 19%

FiAI. .5%

laM 1%
P60 22%

DOC 20%

'udtu .5%

1%

buyo both CIOA&dsP
holds

OvuLa' Qaus 5%
RMSIO.,Pspntß%

FaG 25%

IBM 0%

F.dt. .5%

holds
holds

solos
hoods

u.0550dwoflP015i

holds
holds
holds
holds
holds
holds
holds

SIP 100 PsI 65%

Poids
holds

holds

SMrsos SO coPo.

2CC colo,

'60 coS.t

SIne

93 Sown

(OVAL '3.34551

floods,

satt

P60 33%
OuSte Oste 15%

mldt%

Alzi 10%
90
5%
OMya.55026%
0W 20%
fadte .5%

-.

hold,

I

Gosh 0%

Folds
holds
colds
holds

h5444

52.5 Sn

IrIS?. 0%

Midi
boldo

holds
holds
holds
holds
holds
holds
coSte onwoo,d

Fold,

Psi uspats aosta
told.

iOTE. Tin Isba do., 505 ecbud. lhmrltI .ibu,o IM tollero taud IT lOI .ad o? 555. floods

53.551m

¡Cus?. 5%

Cash 0%

holds
todd.

:asoocAsn EOUIVALLNTSI
CaSh 0%
:5,?. 5%

ssobds

holds
holds

lusSe' Cuoi Casio
lobosa Ptesss toas,

'odt

MM'

udc. cots.

SMcoOso

hoOds

hold.

add.

sstds

colo.

s'sOdi

'.445

RSslonPuiivaS%

Gjsi.w Otis ts%

PLQ 36%

MI%

FIAIs .5%

DCC 11%

6o2sg.5%
BMyu.aS022.5%
DEC 20%

DotL, .5%
5Uy5155035%

Alo. 5.5%

ti,. etAl.

holds

lsoo,onPw.ai 7%

0u1v 0es 7%

PIG 22%

Mi
Alga 9.5%

saC.

1015 ctA.,

3PTIOMSICOLLARS:

tj5500Pu.ua 7%

boitte Cii. 7%

P50 22%

Oint.. Goss '%
RiIuonPojin 7%

15513%

60.fç .5%
BM,w.5010%

sMvaaSØ 59%

8h

FadE. .5%

Wa. 0%

SlIt 7.3%
sotto 5%

DEC 53%

ßoen .5%
ØM5,,13021%

Ma 15%

f

fab.

ASAR '5%

$10Cc H0&DI0S:

ito,

Mold?. (od PoutisIa lOald.ni;

Su.swus,sisno,6 Sas lilas hssnin.am &ccovnMina9.d by 9.rn. M.do5l. liti

ossa 1%

OtiS

-. -.

t8154n.o.sA%
P50 35%

MaccL 3%

MoocS,.no.s3%

sues
5455

MG .5%
Amoco '.5%

t tadit 5%
D.snty 1%

A(3 .5%

«so' wswo,a,d

po.ssol coi.. 92%
holds

pu,IidCISac2I%

s4%

Poids

'3.1_s

COSOS 0%

22

C's?. o

555 bO tool.. 27% SIP lOO cols. 3%
SIP 100550 20%

Colo' usissoid

h41d5

0.015510nlJ25%

Folds

holds

50,5,01 00400

co°d coao. 40%

colui sesu000'd

w'woIad

Laentmdfpsit .wcntd

petIso colse 54%

[c.sh 0%

ils

Cash i 5%

5&PlDoc.l.q 13% SAP loOcoase 73%

hoods

s.clisOcoOu.23%

holds

psIiol CIan 52%

saSs

SchAums.,0., .5%

SctAtuv.bt.2f .5%

np sp.ot4

uds

3M.asa.oi%

3M .5%

3M .5%
ScMi.bs'5c. .5%
4(3 .5%

NOV.

City bsyihls 0%
Wfls ciste buyslitls

OSSI bun/seas 0%
Cl,lco bean/lass 0%

ted-M.d 22%

I4U 4%

0(5%

Cocu Colo '9.5%

DCC 13.5%

BM1nSÒ3I%

GuadI-CZ 500% ¡Css?. 0%

as,owsd

ts,soow.d

sols

s.Cs

saIs

saSs

MS-Misi 3%

Wanautno.l 3%

2%

lles

WulMuol

P.oa.co.esw.3%
Wo,d..ii +frcç. 7%

PjppComoiol.5%

0105.11%

Pts&co 5%

,.l5$ -

suet

lato

Ut.

5455

Pss*s 0%

1.5%

Mauct

R.J 1.5%

.OIJ,moçl4%
Msuct+mon6.S%

GEsssoo.3.5%
GMamoso3%

GE 3%
CM 1%

JIJtisou. 5.5%

CM 1%
J&J 1%
Chambos 1%

Gt.mo..]%

Ct 3%

siOt

tssonsmoc. tS%

seos

sub

Osons ,w* 5%

OdAbisolic 4 .flat2%

AT&T.u,auS%

seo,
Sols

5155

sol,

Coca Ccl. 3%

B.0 AsSolse 0%

AT&T 2%

sauTs

8M.,y.o..2s5%

sao.

sols

(soon 4%

BAIISC4.c a (soot t
sao
0uPon i mcc. 2%
Eosos'*ato'u 4%

0.5 Alba-dc 1%
Ccc. Cod. 2%
Du Pool 2%
Esson 4%

MMA,5%
P60 26.5%

solds '.5%

BMy«s50,.o.(u32%

buys

01.

Ou Pons 2%

AT&T,ffib..2%

AT&T 2%

.0051

FaG 2%

iliMOuoo.u4%

FadEs .5%

CMyorsSO,moi,2) 6My.osSG,.w.26 5MisS028%
DCC 30%
0CC 9%
DCC 59%

Oo.s.gu

ssO.

549t.

- Suimnary of Account 1991

MossI 1%

I

Appendix

n

H

z
iii

O

û

'

TOTAL:

$3.Omm

CASH/CASH (OUWALENTS:
Cubo%
jC.ø.O%

PakoirIt cob'

O PT IO N S/CO LtARS:
'

sIi

PINoso lit

S2.Bnrn

'C,ihO%

coo,: Ufl*iJ14

42.4mm

Cus .2%

XMs,i cola

OAsi' 50%

P30 30%

P3097%

P50 75%
.

sai

Ñ.i ii%

Wzd,w134%

.l.I IS'

'

0111%

,

0(10%

Wsdss'29%

.

W.k,ni3o% ,

'

WsMs,tlZ%

,

Cab' m.d. 29%

m5

'

Much

CoSo 39%

.

Feb.

J&Jld%

'

Jan.

STOCK HOLDINOSt
5M«.Sq 22%
ncc
Cake 20%
COSI 5%
Ott 94%
m'Is
061%
015%

OIf. Holding

UcaIh End Poitlocto Hold'

C,,t,0%

sali.d ,i'as.,d

sas

P5032%

Wflsi'i15%

52%

CaSe 39%

ApilO

.

Summay of urne il $.4 KaIfl Inve.Imonl Accouns ManNed by Barde MadoIl. 9992

'
.

.

.

.

::.

e.ido

Alas
IS

'

'

'

'

' PtOkpisll%

'

CS, 3.7%

'

Midi

..., *3.551%

:

...'

AtoR 5,%

:

PIO 3% ' '

Wafrwsaas.tS%" Wihwiis%

t.:

.1

.,:..: CM. 35%
'
01,03% ......' : -.
.

CoüoSI0'%T.'

M

.

.

.

'

.

.

.

,t

.

'

,.i.:.

......

,

.

.

.

.

.

cok. z%

.

..

'

.

,

. Wal.Miuli%

:

.

.

SSS
.
:

'

45V,

2.4mm

Castiga 9.3%

S5PP

Mida

MIdi

7.1%

23

.154 4.3%
toaba 5,3%

l'id 8.1%

035 2.0%

0(1..S

(rOdas 2.9%

Ociu

Ct9.q '.5%

'cid.

pcWi

sait:.
«al,

MWi.'

l'aid,

fawa

IMrsS4 2.3%

.5%

Mid,
Mid,
AT&T 2.5%
90

pÑthi

AIG 2.5%

-s

Midi

said,

-I..
sai

Said p.

Midi
Midi

raIdi.

Mdi

iù.

OTVERSIflEO -sAuEr STOtI HOtOINGS
la):
saldi
.. Zsi, .3% noidi.

CASHJCASH EGUIVALENTS:
Cup. s'
I CotoSa '3.3%

SIP CaM 548%I

,usound

IIU Coin

S&P Cast.. U6%I

Soldi

hod Coil,:
Cimirso Cab,:

..pnskt.a.wW

IOAIS%
DOVERSIFISO SASKEr STOCK HOLDINGS
J13 slicks 43%
li flock. 39%
II s'odo. 37%

.55

,s,

:

'.. '

.

. ....

tin 32%

W&..sni.ms.sl5% W.l'wl9%

C'S.. md 30%

..

..
.

Said

Mid

hSd.t..n. is%

1.ls On aedi,
hod. 1,0%
Misst 2.6%
F.,d 4.3%

heids,.,&d 1t3%

Paid

IiiOdi4.o.o.7.2% Mid
hold,. siw. 10.8% Paid

said

hold

nial

ido, mcl. 5.9%

..

.'
.:'

$1.Dim,, :,

C.S' 0.2%'

nais

ddm an sodo,
MIdi 4iws 5%

.

.

S&P Cöi.t 113%

i'ddi4 sirs. t3%
stildetnwii%
I,&di,s.sçe 9.7%

,

luisit,..es'

Mids sassa 9,5%

12.lrimi

C5ih 9%

ÌwctsH

SIP Coon 56%

.ak&Sih,o sis

idt0,W 5*

03 siocts' 71%

t

..

t:

Wmiafles,.15% WtwsllOi'

sa

Appendix B - .Sáry of Account 192:';.

.

t

.

.

t

..
.

:

t"..

sieglr 54%

'

:

C,a:l%

9&Pi.çI39%

.

'

W5,1i135%

Is the staridad deviation of excess annual returns over a benchmark

i outof6years

-1 Std. Dey.

-15%

2.0%

2outof3years

24

Example illustrates apoflfolio with an expected excess annual mturn of ZO%
and an expected iràcjdngenuroi 3.5%

't

C.
w

w
D

C

il;.

o

o
'I-

.0

w

a
G)

G)

cc

ti

ti

C

Expected Value

I outof6years

$td. Dey.

One standard deviation is the range on eitherside of an expected
average value in which outcomes are likely to fall with about a
two-Thirds probability

Standard Deviation is a statistical measure of dispersion around an expected average value

Tracking Error

How do we:measure !isk?

Appendix C

s
o

I-'

u,

'o

Fa

t',

o,

z
.9

w

"j
H
b

g
z

JPMorg3n

o

5

lo

15

Gain/loss

Put strike

Current
price

Risk profile of cashless èOftár

Ca!I strike

_kthollar

Stock.