Case 17-2992, Document 1098-1, 05/10/2018, 2299542, … · Comm. of Unsecured Creditors of...

17-2992(L) 17-2995(CON), 17-2996(CON), 17-2999(CON), 17-3003(CON), 17-3004(CON), 17-3005(CON), 17-3006(CON), 17-3007(CON), 17-3008(CON), 17-3009(CON), 17-3010(CON), 17-3011(CON), 17-3012(CON), 17-3013(CON), 17-3014(CON), 17-3016(CON), 17-3018(CON), 17-3019(CON), 17-3020(CON), 17-3021(CON), 17-3023(CON), 17-3024(CON), 17-3025(CON), 17-3026(CON), 17-3029(CON), 17-3032(CON), 17-3033(CON), 17-3034(CON), 17-3035(CON), 17-3038(CON), 17-3039(CON), 17-3040(CON), 17-3041(CON), 17-3042(CON), 17-3043(CON), 17-3044(CON), 17-3047(CON), 17-3050(CON), 17-3054(CON), 17-3057(CON), 17-3058(CON), 17-3059(CON), 17-3060(CON), 17-3062(CON), 17-3064(CON), 17-3065(CON), 17-3066(CON), 17-3067(CON), 17-3068(CON), 17-3069(CON), 17-3070(CON), 17-3071(CON), 17-3072(CON), 17-3073(CON), 17-3074(CON), 17-3075(CON), 17-3076(CON), 17-3077(CON), 17-3078(CON), 17-3080(CON), 17-3083(CON), 17-3084(CON), 17-3086(CON), 17-3087(CON), 17-3088(CON), 17-3091(CON), 17-3100(CON), 17-3101(CON), 17-3102(CON), 17-3106(CON), 17-3109(CON), 17-3112(CON), 17-3113(CON), 17-3115(CON), 17-3117(CON), 17-3122(CON), 17-3126(CON), 17-3129(CON), 17-3132(CON), 17-3134(CON), 17-3136(CON), 17-3139(CON), 17-3140(CON), 17-3141(CON), 17-3143(CON), 17-3144(CON), 17-3862(CON)

United States Court of Appeals FOR THE SECOND CIRCUIT

IN RE: IRVING H. PICARD, TRUSTEE FOR THE LIQUIDATION OF

BERNARD L. MADOFF INVESTMENT SECURITIES LLC

On Appeal from a Final Judgment of the United States Bankruptcy Court for the Southern District of New York

REPLY BRIEF OF STATUTORY INTERVENOR SECURITIES INVESTOR PROTECTION CORPORATION

OF COUNSEL: JOSEPHINE WANG General Counsel KEVIN H. BELL Senior Associate General Counsel SECURITIES INVESTOR For Dispute Resolution PROTECTION CORPORATION 1667 K Street, N.W., Suite 1000 NATHANAEL S. KELLEY Washington, D.C. 20006

Associate General Counsel Telephone: (202) 371-8300

Case 17-2992, Document 1098-1, 05/10/2018, 2299542, Page1 of 46

i

TABLE OF CONTENTS PAGE

TABLE OF AUTHORITIES ................................................................................... iii

PRELIMINARY STATEMENT ............................................................................... 1

REPLY ARGUMENT ……………………………………………………………. 2

I. THE MONIES AT STAKE WERE MISAPPROPRIATED FROM SECURITIES CUSTOMERS ................................................... 2 II. APPELLEES ARE INCORRECT THAT “WHEREVER LOCATED” IS CONTAINED ONLY IN 11 U.S.C. SECTION

541(a). THE SAME PHRASE IN SIPA PROVIDES AN INDEPENDENT BASIS FOR RECOVERY EXTRATERRITORIALLY .................................................................. 5

1. Extraterritorial Application Under the Bankruptcy Code ........... 5 2. Extraterritorial Application Under SIPA .................................... 7 A. The Bankruptcy Court Has Exclusive Jurisdiction Over Debtor Property .......................................................... 7 B. To Be Recoverable, A Transfer Need Only Be Voidable or Void Under Title 11 ........................................ 8 C. Because Customer Property Means Unlawfully Converted

Customer Property, the Converted Customer Property Remains Customer Property Even After It Is Transferred. Because the Converted

Customer Property Is Deemed to Be Debtor Property for Avoidance Purposes, the Bankruptcy Court Has

Exclusive Jurisdiction Over It ........................................... 10 D. The Legislative Intent........................................................ 13


ii

TABLE OF CONTENTS PAGE

III. THE APPELLEES’ ATTEMPTS TO DIMINISH THE POWER OF THE SIPA TRUSTEE LACK FOUNDATION ............ 14 A. The Appellees Do Not Read Section 78fff-2(c)(3) In Its Entirety ............................................................................ 14 B. The Role of the SIPA Trustee ................................................... 15 C. Appellees Misconstrue the Meaning of “The Laws of Any State to the Contrary Notwithstanding” ............................ 16 D. Appellees Misperceive the Purposes of SIPA .......................... 18

IV. THE FOCUS IS ON THE INITIAL TRANSFERS OF MISAPPROPRIATED FUNDS WHICH INVOLVED

DOMESTIC AND NOT FOREIGN CONDUCT. AS SUCH, THE SUBSEQUENT TRANSFERS ABROAD OF THE SAME STOLEN CUSTOMER MONEY DID NOT LAUNDER THE MONEY ................................................................. 19 V. NO DEFERENCE IS DUE AS A MATTER OF COMITY ............... 26 VI. THE ASSERTED FOREIGN INTERESTS DO NOT TRUMP THOSE OF THE U.S. .......................................................... 35 CONCLUSION ........................................................................................................ 37

CERTIFICATE OF COMPLIANCE ....................................................................... 38


iii

TABLE OF AUTHORITIES

CASES: PAGE

Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) ................................................................................................. 26 Bank of New York v. Treco (In re Treco, 240 F.3d 148 (2d Cir. 2001) ................... 35 Clark v. Rameker, __ U.S. __, 134 S. Ct. 2242 (2014) ........................................... 10 Corley v. United States, 556 U.S. 303 (2009) .......................................................... 10 Danielson v. Flores (In re Flores), 735 F.3d 855 (9th Cir. 2013) ..................... 22-23 Ferris, Baker Watts, Inc. v. Stephenson (In re MJK Clearing, Inc.), 286 B.R. 109 (Bank. D. Minn. 2002), aff’d, 2003 WL 1824937 (D. Minn. April 7, 2003), aff’d, 371 F.3d 397 (8th Cir. 2004) ................................................................................................. 24 In re French, 440 F.3d 145 (4th Cir. 2006), cert. den. sub nom., French v. Liebmann, 549 U.S. 815 (2006) .................................................... 25 In re KB Toys Inc., 736 F.3d 247 (3d Cir. 2013), Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 559 (3d Cir. 2003) ..... 23 Koreag, Controle et Revision S.A. v. Refco F/X Assocs., Inc. (In re Koreag, Controle et Revision S.A.), 961 F.2d 341 (2d Cir. 1992) ........................................................................ 4-5 Kunstsammlungen Zu Weimar v. Elicofon, 536 F. Supp. 829 (E.D.N.Y. 1981), aff'd, 678 F.2d 1150 (2d Cir. 1982) .................................. 12 Mastan v. Salamon (In re Salamon), 854 F.3d 632 (9th Cir. 2017) ........................ 22 Moore Capital Management, L. P., v. Giddens (In re Lehman Brothers, Inc.), 533 B.R. 362 (S.D.N.Y. 2015) ............................................................................................. 16


iv

TABLE OF AUTHORITIES (cont.)

CASES: PAGE

Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010) .................................... 6 Note Holders v. Large Private Beneficial Owners (In re Tribune Company Fraudulent Conveyance Litigation), 818 F.3d 98 (2d Cir. 2016), petition for cert. filed sub nom., Deutsche Bank Tr. Co. Ams. v. Robert R. McCormick Foundation (No. 16-317) .................................................................................................. 22 Official Comm. Of Unsecured Creditors v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(c), 575 B.R. 229 (Bankr. S.D.N.Y. 2017), reconsideration den., 2018 WL 718399 (Bankr. S.D.N.Y. 2018).................................................... 25 Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings, 763 F.3d 198 (2d Cir. 2014) .......................................................................... 26 Picard v. Bureau of Labor Insurance (In re Bernard L. Madoff), 480 B.R. 501 (Bankr. S.D.N.Y. 2012) .................................................... 25-26 Picard v. Fairfield Greenwich Ltd., 762 F.3d 199 (2d Cir. 2014) .......................... 21 Picard v. Maxam Absolute Return Fund, LP. (Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC), 460 B.R. 106 (Bankr. S.D.N.Y. 2011), aff’d, 474 B.R. 76 (S.D.N.Y. 2012) ................ 13, 14 Richards v. United States, 369 U.S. 1 (1962) .................................................... 10, 13 RJR Nabisco, Inc. v. European Community, __ U.S. __ , 136 S. Ct. 2090 (2016) ............................................................. 5, 20, 21, 22, 26 Sagor v. Picard (In re Bernard L. Madoff Inv. Sec., LLC), 697 F. App’x. 708 (2d Cir. 2017) .................................................................... 4


v


CASES: PAGE

SEC v. Albert & Maguire Sec. Co., 560 F.2d 569 (3d Cir. 1977) ..................... 15, 16 SEC v. F. O. Baroff Co., 497 F.2d 280 (2d Cir. 1974) ............................................ 36 SIPC v. Barbour, 421 U.S. 412 (1975) ................................................................ 8, 36 SIPC v. Bernard L. Madoff Inv. Sec. LLC, 513 B.R. 222 (S.D.N.Y. 2014) ......................................................................................... 6, 33 SIPC v. Charisma Sec. Corp., 506 F.2d 1191 (2d Cir. 1974).................................. 24 SIPC v. Christian-Paine & Co., 755 F.2d 359 (3d Cir. 1985) ................................ 15 United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365 (1988)....................................................................................... 23 United States v. Dotterweich, 320 U.S. 277 (1943) ................................................. 28 United States v. Harris, 838 F.3d 98 (2d Cir. 2016), cert. den., __ U.S. __, 137 S. Ct. 840 (2017) ................................................ 10 United States v. Monasterski, 567 F.2d 677 (6th Cir. 1977) .................................... 11 United States v. Portrait of Wally, 105 F. Supp. 2d 288 (S.D.N.Y. 2000) ............................................................................................. 11 United States v. Prevezon Holdings, Ltd., 251 F. Supp. 3d 685 (S.D.N.Y. 2017) ............................................................................................. 24


vi


STATUTES AND RULES : PAGE Securities Investor Protection Act, as amended, 15 U.S.C. § 78eee(b)(2)(A)(i) ........................................................................................ 5, 7, 10, 12 78eee(b)(4) ................................................................................................. 5, 8, 10, 12 78fff(a)(1) ................................................................................................................... 8 78fff(b) ..................................................................................................................... 24 78fff-1(a) .................................................................................................................. 15 78fff-2(c)(1) ............................................................................................................... 5 78fff-2(c)(3) .............................................................................. 5, 7-10, 12, 14-16, 18 78lll(2) ........................................................................................................................ 5 78lll(4) ........................................................................................................ 4, 5, 11, 12 Securities Investor Protection Act of 1970, § 6(b)(1) ...................................................................................................................... 16 6(c)(2)(B) ................................................................................................................. 13 7(d) ........................................................................................................................... 27 United States Bankruptcy Code, as amended, 11 U.S.C. § 541 ........................................................................................................................ 7, 23 541(a) ............................................................................................................... 6, 7, 23 548 .................................................................................................................. 6, 21, 23 548(a)(1) ..................................................................................................................... 6 550 ............................................................................................................ 6, 21, 23, 24 550(a) ......................................................................................................................... 6 550(a)(2) ................................................................................................................... 21 United States Bankruptcy Act (repealed 1978), 11 U.S.C. § 96(e) ......................................................................................................................... 12


vii


LEGISLATIVE MATERIALS: PAGE H. R. Rep. No. 109-31 (2005), reprinted in 2005 U.S.C.C.A.N. 88 ......................... 8 PUBLICATIONS: Charles H. Meyer, The Law Of Stockbrokers and Stock Exchanges (1931) .................................................................................. 17 James Wm. Moore and Lawrence P. King, Collier on Bankruptcy (14th ed. 1977) ¶ 60.72 ......................................................................................................... 16-17 ¶ 60.73[2] ........................................................................................................... 13 Michael E. Don and Josephine Wang, Stockbroker Liquidations Under

the Securities Investor Protection Act and Their Impact on Securities Transfers, 12 Cardozo Law Review 509 (1990) ......................................... 17-18

WEBSITES: https://www.sipc.org/for-investors/investor-faqs/#non-residents ........................... 19


PRELIMINARY STATEMENT

It is a sad day for investors when financial institutions and representatives of

the securities industry join forces in defense of those who receive stolen customer

money, profit from it, and refuse to return it to the rightful owners. The Securities

Investor Protection Corporation (“SIPC”) submits this reply brief in support of the

Trustee in these consolidated appeals.

The appellees contend that it is improper for the Trustee in this liquidation

proceeding to seek to recover for customers the funds that were misappropriated

from them. The appellees support the decision of the Bankruptcy Court, guided

by the District Court, under which a fraudster can steal billions of dollars from

securities customers, transfer the money to entities that send it abroad, and once the

money has passed through the hands of a couple of foreign entities, it no longer

belongs to customers. Appropriately, according to the appellees, Jt. Br. at 61,1 to

try to recover the money and at great expense to the estate, the Trustee must chase

the laundered customer funds worldwide, in foreign courts, under foreign law,

while the applicable domestic law and the home court where such recoveries

should proceed, are ignored and made powerless.

To the appellees, the consequences in the U.S. of this outcome are

insignificant. Yet, as the ability to recover stolen customer property is diminished,

1 Joint Brief for Defendants-Appellees, filed on April 18, 2018 (Doc. 935) (“Jt. Br.”).


2

the demands upon the SIPC Fund and U.S. taxpayer money grow. Less stolen

customer money recovered means larger advances from SIPC and as the SIPC

Fund is depleted, the use of taxpayer monies, intended as a remedy of last resort,

will become routine. Even worse, investor confidence, a key objective of SIPA, is

eroded by a statutory construction that contradicts the plain meaning and language

of SIPA, and undermines the legislative intent. With limited analysis, the domestic

Court readily surrenders its jurisdiction and ignores where U.S. interests lie. This,

perhaps most curiously in this liquidation proceeding, in spite of at least one of the

foreign Courts allowing the suits in question by the Trustee to proceed. But all of

that – as described by the appellees, no more than a “parade of horribles” -- is

appropriate according to them. Jt. Br. at 24. The decision of the lower Court

should be reversed.

REPLY ARGUMENT

I. THE MONIES AT STAKE WERE MISAPPROPRIATED FROM SECURITIES CUSTOMERS

The views of the appellees are consistent with Appellees’ characterization of

the Securities Investor Protection Act2 as a “limited” statute, with a “modest

purpose.” Jt. Br. at 9. However modest Appellees believe SIPA may be, they

ignore that it serves an important purpose. SIPA protects securities customers who

2 15 U.S.C. § 78aaa et seq. (“SIPA”). For convenience, references hereinafter to provisions of SIPA will omit “15 U.S.C.”


3

are key to growth of the U.S. capital markets. Customer protection inspires

confidence in the markets so that investors continue to invest and the capital

markets continue to grow.

Investor confidence is impaired when the misuse of customer monies is met

with indifference or worse. The appellees do not dispute that the funds in question

were misappropriated from customers investing through Bernard L. Madoff

Investment Securities LLC (“BLMIS”). As the appellees concede, almost all of

the assets of the main hedge funds or feeder funds at issue -- the Fairfield Funds

(“Fairfield”), the Kingate Funds (“Kingate”), and Harley – were invested with

BLMIS. Jt. Br. at 6-8. See id. at 5 n.3. When BLMIS made the initial transfers of

money, the transfers were of stolen monies belonging to BLMIS customers.

Because they otherwise had few assets of their own, when Fairfield, Kingate, and

Harley redistributed the money to subscribers, money managers, and others, the re-

distributions were of the same misappropriated customer funds.

To the appellees, the initial fraudulent transfers are irrelevant. To them,

each subsequent transfer is a new transfer to be judged on its own and without

regard to how the transfers originated or their source. To the appellees, each

subsequent transfer washes the money clean as if the thefts never occurred. Thus,

the transfers become ones made in the ordinary course, and the appellees ignore

that the funds were never the debtor’s to transfer. But no matter how many times


4

they are transferred, the funds remain “customer property.” In Sagor v. Picard (In

re Bernard L. Madoff Inv. Sec., LLC), 697 F. App’x. 708, 711 (2d Cir. 2017), in

the context of calculating customers’ “net equity” or what customers are owed, this

Court held that paper transfers of imaginary profit from one customer’s account to

another customer’s account do not make the imaginary profit real. Similarly, the

transfer of stolen customer property from one person to another does not undo the

theft. The property remains what it was from the beginning: property belonging to

customers. SIPA specifically so states. Under SIPA Section 78lll(4), “customer

property” means not only cash and securities received, acquired, or held by or for

the broker for securities accounts of customers, but it also means such “property

unlawfully converted [emphasis added].”

In the Trustee’s pursuit of stolen customer property, however, the appellees

would have the Trustee stand in line in foreign proceedings. Jt. Br. at 20. But

more than avoidance principles are implicated here. If the situation were reversed

so that property was in the U.S. and a foreign debtor was seeking to take

possession of it, the property would not be turned over to the foreign debtor unless

the foreign debtor had an interest in it. As stated in Koreag, Controle et Revision

S.A. v. Refco F/X Assocs., Inc. (In re Koreag, Controle et Revision S.A.), 961 F.2d

341 (2d Cir. 1992):

“… the estate of a foreign debtor is defined by the law of the jurisdiction in which the foreign proceeding is


5

pending, with other applicable law serving to define the estate’s interest in particular property.”

961 F.2d at 348 (emphasis in original and citations omitted). SIPA establishes a complete program with regard to the identification,

collection, and disposition of customer property. It defines what customer property

is, how it is to be collected and retrieved, states by whom it is to be shared, how it

is to be distributed, and identifies the court with exclusive jurisdiction over the

property. See SIPA §§ 78lll(2), 78lll(4), 78eee(b)(2)(A)(i), 78eee(b)(4), 78fff-

2(c)(1), and 78fff-2(c)(3). Congress has specified that the fact that customer

property has been misappropriated does not change its nature. The Courts should

not allow themselves to be used in attempts to do so.

II. APPELLEES ARE INCORRECT THAT “WHEREVER LOCATED” IS CONTAINED ONLY IN 11 U.S.C. SECTION 541(a).

THE SAME PHRASE IN SIPA PROVIDES AN INDEPENDENT BASIS FOR RECOVERY EXTRATERRITORIALLY

1. Extraterritorial Application Under the Bankruptcy Code

Appellees rely upon RJR Nabisco, Inc. v. European Community, __ U.S. __,

136 S. Ct. 2090 (2016), for the proposition that the legislative intent that a statute

can be applied extraterritorially must be unmistakable. Jt. Br. at 30. They ignore

that in the same decision, the Supreme Court held that “an express statement of

extraterritoriality is not essential[,]” and that “context can be consulted as well.”

Id., 136 S. Ct. at 2102. Context can include a consideration of other provisions


6

within the same law. See Morrison v. National Australia Bank Ltd., 561 U.S. 247,

264 (2010). The District Court below agreed. See SIPC v. Bernard L. Madoff Inv.

Sec. LLC, 513 B.R. 222, 228 (S.D.N.Y. 2014) (SPA-213) (“context” includes

consideration of “surrounding provisions of the Bankruptcy Code, to determine

whether Congress nevertheless intended” extraterritorial application),

supplemented by 2014 WL 3778155 (S.D.N.Y. July 28, 2014).

Appellees dispute that other related sections of the Bankruptcy Code (Title

11) provide the necessary context. Initially, 11 U.S.C. Section 550, entitled

“Liability of transferee of avoided transfer,” is one of the grounds for recovery

against the appellees as subsequent transferees. Section 550(a) allows recovery of

property transferred if the transfer has been avoided, among other provisions and

as sought in these cases, under 11 U.S.C. Section 548. Section 548(a)(1) refers to

the avoidance of a transfer of an “interest of the debtor in property.” That same

phrase, “an interest of the debtor in property,” appears in 11 U.S.C. Section 541(a)

which defines such interests as property of the estate, “wherever located and by

whomever held.” If the initial avoided transfer can be of property “wherever

located and by whomever held,” then the subsequent transfer of the same property

also is recoverable.3

3 See Brief of Statutory Intervenor Securities Investor Protection Corporation, filed herein on January 10, 2018 (Doc. No. 496) (“SIPC Br.”), at 48-49.


7

Appellees assert that only Section 541(a) contains the phrase “wherever

located.” Jt. Br. at 34. They are wrong. SIPA Section 78eee(b)(2)(A)(i) contains

the same phrase, and SIPA Section 78fff-2(c)(3), in conjunction with Section

78eee(b)(2)(A)(i), provides a second, and the overarching, basis for recovery of

these subsequent transfers of stolen customer property.

2. Extraterritorial Application Under SIPA

A. The Bankruptcy Court Has Exclusive Jurisdiction Over Debtor Property

A SIPA proceeding is initiated when SIPC files in federal District Court, an

application seeking to have a firm placed in liquidation. Under SIPA Section

78eee(b)(2)(A)(i), upon the filing of the application, the District Court acquires

“exclusive jurisdiction of [the] debtor and its property wherever located.”

(emphasis added). Section 78eee(b)(2)(A)(i) provides:

Upon the filing of an application with a court for a protective decree with respect to a debtor, such court –

(i) shall have exclusive jurisdiction of such debtor and its property wherever located (including property located outside the territorial limits of such court and property held by any other person as security for a debt or subject to a lien) ….

The phrase “wherever located” in SIPA Section 78eee(b)(2)(A)(i) also

appears in Section 541 of the Bankruptcy Code which defines property of the

estate. There, no less than in SIPA Section 78eee(b)(2)(A)(i), “wherever located”


8

refers to property worldwide. See H.R. Rep. No. 109-31, pt. 1, at 118 (2005), as

reprinted in 2005 U.S.C.C.A.N. 88, 180 (United States has “worldwide jurisdiction

over property of a domestic or foreign debtor in a full bankruptcy case”). See also

SIPC Br. at 45.

If the SIPA customer protective decree is entered, the liquidation proceeding

is removed to the Bankruptcy Court which acquires the same exclusive jurisdiction

over the debtor and its property “wherever located.” SIPA § 78eee(b)(4). See

SIPC v. Barbour, 421 U.S. 412, 414 (1975).

B. To Be Recoverable, A Transfer Need Only Be Voidable or Void Under Title 11

A central purpose of the SIPA liquidation proceeding is to return customer

property to customers. SIPA § 78fff(a)(1). Where customer property is

insufficient to satisfy customer and other specified claims in the proceeding, the

trustee may seek to recover transferred customer property if the elements under

Title 11 for avoidance of the transfer are met. The trustee’s authority to do so is

pursuant to SIPA Section 78fff-2(c)(3) which provides as follows:

Whenever customer property is not sufficient to pay in full the claims set forth in subparagraphs (A) through (D) of paragraph (1), the trustee may recover any property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the provisions of title 11. Such recovered property shall be treated as customer property. For purposes of such recovery, the property so transferred shall be deemed to have been the


9

property of the debtor and, if such transfer was made to a customer or for his benefit, such customer shall be deemed to have been a creditor, the laws of any State to the contrary notwithstanding.

Section 78fff-2(c)(3) does a number of things. First, it specifies that if

customer property is insufficient to satisfy specified claims, customer property that

has been transferred may be recovered if the transfer is void or voidable under

Title 11. Second, it provides that once recovered, the property again is called

customer property. Third, for purposes of recovery by avoidance, it deems the

customer property that was transferred to have been “property of the debtor.” And

fourth, if the transfer was to or for a customer, it deems the transferee to have been

a creditor, even if the customer had a different status under state law.

In sum, at its most basic under Section 78fff-2(c)(3), the claims of customers

are to be satisfied from customer property that is on hand, but if it is insufficient,

the trustee may recapture customer property transferred by the debtor. The

avoidance provisions of Title 11 provide the means by which transfers may be

avoided, and Section 78fff-2(c)(3) recharacterizes the property transferred and in

some instances, recharacterizes the transferee, to bring the transfers within the

avoidance provisions. However, in specifying that “the trustee may recover any

property transferred by the debtor” if the transfer is voidable or void under title 11,

SIPA Section 78fff-2(c)(3) itself, independent of the Bankruptcy Code, makes the

void or voidable transfers recoverable. In short, a transfer of customer property


10

need only be void or voidable under Title 11. Recovery of the transfer is then

effectuated under SIPA Section 78fff-2(c)(3).

C. Because Customer Property Means Unlawfully Converted Customer Property, the Converted Customer Property Remains Customer Property Even After It Is Transferred. Because the Converted Customer Property Is Deemed to Be Debtor Property for Avoidance Purposes, the Bankruptcy Court Has Exclusive Jurisdiction Over It

Although the appellees give it short shrift, Jt. Br. at 48, Section 78fff-2(c)(3)

is significant in another way for purposes of this matter. It is “fundamental that a

section of a statute should not be read in isolation from the context of the whole

Act, and that … in interpreting legislation, … [a court should] look to the

provisions of the whole law, and to its object and policy.” Richards v. United

States, 369 U.S. 1, 11 (1962). Moreover, it is a basic interpretive canon that a

“‘statute should be construed so that effect is given to all of its provisions, so that

no part will be inoperative or superfluous, void or insignificant.’” Corley v. United

States, 556 U.S. 303, 314 (2009) (citation omitted); Clark v. Rameker, __ U.S. __,

134 S. Ct. 2242, 2248 (2014); United States v. Harris, 838 F.3d 98, 106 (2d Cir.

2016), cert. den., __ U.S. __, 137 S. Ct. 840 (2017). These principles apply here.

Pursuant to SIPA Sections 78eee(b)(2)(A)(i) and 78eee(b)(4), the

Bankruptcy Court in a SIPA proceeding has exclusive jurisdiction of the debtor

and “its property wherever located.” If SIPA Section 78fff-2(c)(3), in recasting

transferred customer property as “property of the debtor” for avoidance purposes,


11

is read in the context of SIPA, giving effect to all of its provisions, then the

Bankruptcy Court must be deemed to have had exclusive jurisdiction over the

transferred customer property since, for avoidance purposes, it would have been

“property of the debtor.” That exclusive jurisdiction over the property, wherever

located, continues even after the property is transferred.

As previously discussed, under SIPA Section 78lll(4), customer property

means “property unlawfully converted.” The term refers to an ongoing unlawful

conversion since if recovered, customer property would no longer be unlawfully

converted. SIPA § 78lll(4). Cf., United States v. Monasterski, 567 F.2d 677, 680

(6th Cir. 1977) (stolen property recovered by the owner or his agent loses its

character as stolen property and is no longer “stolen”); United States v. Portrait of

Wally, 105 F. Supp. 2d 288, 290 (S.D.N.Y. 2000) (“well-established federal law”

that stolen property recovered by owner or agent is no longer stolen). Appellees’

interpretation that converted customer property is customer property only after it is

recovered makes the term meaningless. Jt. Br. at 54-55.

Re-labeling customer property as property of the debtor makes the transfer

avoidable. But the significance of Congress defining unlawfully converted

property as customer property is that the nature of the property does not change

upon a conversion. The property remains customer property throughout, and

notwithstanding, the conversion. Because the property is customer property


12

throughout the conversion, then when it is re-labeled as debtor property for

avoidance purposes, it remains debtor property qua customer property throughout

the conversion. As the property is debtor property, the Bankruptcy Court has

exclusive jurisdiction over it wherever located. SIPA § 78eee(b)(2)(A)(i).

Once the transfer is avoided, the recovered property is no longer deemed to

be debtor property and again, it is called customer property. In this manner, the

provisions of SIPA that are relevant here, Sections 78eee(b)(2)(A)(i), 78eee(b)(4),

78fff-2(c)(3), and 78lll(4), all are given effect, and none is made inoperative or

meaningless.4

4 Appellees contend that upon transfer, the transferee becomes the owner of the converted property. But, as in the case of stolen property, a transferor cannot convey title to property that it does not own. As stated in Kunstsammlungen Zu Weimar v. Elicofon, 536 F. Supp. 829, 833 (E.D.N.Y. 1981), aff'd, 678 F.2d 1150 (2d Cir. 1982):

It is a fundamental rule of law in New York that a thief or someone who acquires possession of stolen property after a theft “cannot transfer a good title even to a bona fide purchaser for value [because] [o]nly the true owner's own conduct, or the operation of law ... can act to divest that true owner of title in his property ....” [citation omitted].

The fact that customer cash is misappropriated instead of customer securities does not alter the analysis. The definition of customer property to mean unlawfully converted property was derived from Section 60(e) of the Bankruptcy Act, 11 U.S.C. § 96(e) (repealed 1978). In pertinent part, Section 60(e) defined the single and separate fund, the predecessor to customer property under SIPA, as follows:

All property at any time received, acquired, or held by a stockbroker from or for the account of customers, except


13

D. The Legislative Intent

As mentioned above, “in interpreting legislation, … [a court should] look to

the provisions of the whole law, and to its object and policy.” Richards v. United

States, 369 U.S. at 11. The legislative intent is to keep the disposition of customer

property under the supervision of one court. The reasons for doing so were

discussed by Bankruptcy Judge Lifland in Picard v. Maxam Absolute Return Fund,

LP. (Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC), 460 B.R. 106

(Bankr. S.D.N.Y. 2011), aff’d, 474 B.R. 76 (S.D.N.Y. 2012). There, the Trustee

sought an injunction prohibiting Maxam Absolute Return Fund, LTD from

pursuing an action against the Trustee in the Cayman Islands (“Cayman”). The

Trustee had sued several related Maxam Funds in avoidance, and seeking to put an

end to the actions, Maxam brought an action in a Cayman Court for declaratory

relief that Maxam did not owe the Estate the money sought.

In finding that the action violated various stays, in pertinent part, Bankruptcy

Judge Lifland stated the following:

cash customers who are able to identify specifically their property ... and the proceeds of all customers’ property rightfully transferred or unlawfully converted by the stockbroker, shall constitute a single and separate fund...”

See James Wm. Moore and Lawrence P. King, Collier on Bankruptcy, ¶ 60.73[2] at 1171 (14th ed. 1977). Thus, even if securities have been reduced to cash and misappropriated, the proceeds still would be part of the then single and separate fund, and now, customer property. In 1970, the single and separate fund was defined at SIPA Section 6(c)(2)(B), 15 U.S.C. § 78fff(c)(2)(B) (1970).


14

The Cayman Action is a clear attack on this Court’s exclusive jurisdiction and a blatant attempt to hijack the key issues to another court for determination. It is a thinly-veiled effort to forum-shop and ultimately wrest control over the Trustee’s claims from this Court.

* * * *

While courts recognize a potential burden given a location abroad, ‘often the interests of the plaintiff and the forum in the exercise of jurisdiction will justify even the serious burdens placed on the alien defendant.’ … [T]he United States has a strong interest in applying the fraudulent transfer … provisions of its Bankruptcy Code since the Trustee’s claims arise under it, and Defendants’ transfers have allegedly deprived United States’ creditors of distributions to which they are entitled in the BLMIS liquidation.

460 B. R. at 106, 113, 119 (citations omitted).

III. THE APPELLEES’ ATTEMPTS TO DIMINISH THE POWER OF THE SIPA TRUSTEE LACK FOUNDATION

A. The Appellees Do Not Read Section 78fff-2(c)(3) In Its Entirety

In an effort to limit the ability of a SIPA trustee to recover customer

property, the appellees portray the Trustee as having no greater role or

responsibility than a trustee in a Title 11 case absent an express grant of authority

in SIPA. With regard to the recovery of customer property, Appellees argue that

pursuant to SIPA, Title 11 provides the only source. But in order to support their

argument, they omit from their reading of SIPA Section 78fff-2(c)(3), the words


15

“the trustee may recover any property transferred by the debtor [emphasis added]”

if the transfer is void or voidable under Title 11. Moreover, instead of “to the

extent such transfer is voidable or void under the provisions of title 11,” they

incorrectly read Section 78fff-2(c)(3) to provide “to the extent such transfer is

recovered under the provisions of title 11 [emphasis added].” See Jt. Br. at 48

(“SIPA merely incorporates certain Bankruptcy Code provisions, including those

that enable the recovery of property. Since those recovery provisions do not reach

extraterritorially, neither do the sections of SIPA that incorporate those

provisions.”). For the reasons discussed above, the appellees fail to give effect to

Section 78fff-2(c)(3) in its entirety and to the proper construction of the provision

in the context of SIPA as a whole.

B. The Role of the SIPA Trustee

The appellees’ attempts to minimize the powers of the SIPA trustee also are

to no avail. While the SIPA trustee indeed has the powers and title of a Title 11

trustee under SIPA Section 78fff-1(a), those powers are in addition to others that

enable him to perform the special functions of a SIPA liquidation. See SIPC v.

Christian-Paine & Co., 755 F.2d 359, 361 (3d Cir. 1985). As the Court observed

in SEC v. Albert & Maguire Sec. Co., 560 F.2d 569, 574 (3d Cir. 1977), in

commenting on the authority of the SIPA trustee who, under SIPA as enacted, had


16

the powers of a trustee in a case under Chapter X of the Bankruptcy Act, see SIPA

§ 6(b)(1), 15 U.S.C. § 78fff(b)(1) (1970):

‘Thus, the SIPA trustee, upon order of the court, will have the combined powers of a trustee in ordinary bankruptcy, a Chapter X trustee and a federal equity receiver. In making available the additional rights and powers of a receiver in equity, it was the Congressional purpose to arm the trustee with even greater powers than those of a trustee in bankruptcy.’ [footnotes omitted]. 3A Collier on Bankruptcy ¶60.85[2].

Albert & Maguire, 560 F.2d at 574. Most significantly, for purposes of these

cases, the functions of the SIPA trustee include the recovery of customer property.

See Moore Capital Management, L. P., v. Giddens (In re Lehman Brothers, Inc.),

533 B.R. 362, 364 (S.D.N.Y. 2015) (the “SIPA trustee is charged with recovering

‘customer property.’”). The trustee’s ability to do so must be commensurate with

the scope of his duty to recover customer property, even when converted.

C. Appellees Misconstrue the Meaning of “The Laws of Any State to the Contrary Notwithstanding”

The appellees also err in asserting that the portion of Section 78fff-2(c)(3)

that deems a transferee to be a general creditor instead of a customer, “the laws of

any State to the contrary notwithstanding,” demonstrates a legislative intent that

the powers of the SIPA trustee be exercised only domestically. Jt. Br. at 50-51.

The language reflects no such intent. Historically, different states characterized the

relationship between broker and customer differently. As stated in James Wm.


17

Moore and Lawrence P. King, Collier on Bankruptcy, ¶ 60.72 at 1160-1161 (14th

ed. 1977):

Although the Massachusetts rule treated the relationship between customer and broker as debtor and creditor, in practice it approached the so-called New York rule, which was the prevailing view. Under the latter doctrine the broker was the agent for the customer in purchasing or selling securities.

Moreover, as discussed in Charles H. Meyer, The Law of Stockbrokers and

Stock Exchanges (1931), in executing an order for the purchase or sale of a

security, the relationship of broker to customer was that of agent to principal. Id.

at 249. In the purchase or sale of securities on margin, however, in which the

broker would advance all or a portion of the purchase price and receive in return a

deposit of the security as collateral, the broker would be deemed a creditor of the

customer to the extent of funds provided, and in holding the security as collateral,

the relationship between broker and customer would be one of pledger and

pledgee. Id. at 254.

Finally, as discussed in Michael E. Don and Josephine Wang, Stockbroker

Liquidations Under The Securities Investor Protection Act and Their Impact on

Securities Transfers, 12 Cardozo Law Review 509 (1990):

In states following the lead of New York, the customer would play one of a few roles depending upon the transaction in question. When the customer left securities with the broker for safekeeping, he was a bailor. The same customer who deposited securities as


18

collateral with his broker was a pledger. Likewise, a pledge relationship existed when the broker bought securities for the customer on margin. When the customer left the securities with the broker for sale, he was principal to his broker agent. In all circumstances, under New York law, the customer was deemed to own the securities whether the securities had been fully paid for or bought on margin…. In contrast under the minority rule followed by the Massachusetts courts, the relation of broker and customer, at least with respect to securities bought on margin, was one of debtor to creditor, and not a fiduciary one. Legal title of securities bought on margin was in the broker, and consequently, the margin customer ordinarily could do no better than a general creditor.

Id. at 522-523 (citations omitted). The language of Section 78fff-2(c)(3), relied

upon by the appellees, merely established uniformity in the nature of the

customer/broker relationship for avoidance purposes, and nothing more.

D. Appellees Misperceive the Purposes of SIPA

Appellees advance other grounds in arguing that the nature of SIPA is

domestic. These include that the goal of SIPA is to protect domestic investors; its

purpose is to safeguard the domestic economy; and it regulates domestic broker-

dealers. Jt. Br. at 51. Appellees’ characterization of SIPA not only is wrong, but it

is myopic. The objective of SIPA is to protect all customers who invest through

the SIPC member broker-dealer, wherever the customers may reside and whatever


19

their citizenship.5 It is true that the national economy is served by reinforcing

investor confidence, but those investments may be by foreign, as well as domestic,

investors, and in foreign, as well as domestic, investments. SIPC has no regulatory

authority, and while a brokerage must be a registered broker-dealer to be a SIPC

member, securities held in custody by the brokerage may be kept abroad, at a

foreign depository, foreign clearing agency, or foreign custodian bank. See SIPC

Br. at 53-54. Particularly in light of the global nature of today’s markets, the

notion that SIPA is U.S.-centric has no basis in reality.

IV. THE FOCUS IS ON THE INITIAL TRANSFERS OF MISAPPROPRIATED FUNDS WHICH INVOLVED DOMESTIC

AND NOT FOREIGN CONDUCT. AS SUCH, THE SUBSEQUENT TRANSFERS ABROAD OF THE SAME STOLEN CUSTOMER

MONEY DID NOT LAUNDER THE MONEY

5 Indeed, SIPC’s web site provides:

Are non-residents of the U.S protected by SIPC? What about non-U.S. citizens?

Non-residents and non-U.S. citizens are eligible for the same protections from SIPC as all other customers. There is no requirement that a customer reside in or be a citizen of the United States. An individual residing in a foreign country with an account at a brokerage firm that is a member of SIPC is treated the same as a resident or citizen of the United States with an account at a brokerage firm that is a SIPC member.

https://www.sipc.org/for-investors/investor-faqs/#non-residents


20

Consistent with their attempt to wash the stolen customer money clean, the

appellees argue that the focus here is on the subsequent transfers, and not on the

initial transfers. Jt. Br. at 45. Appellees are wrong. The nature of the property as

stolen customer property was determined by the initial transfers when BLMIS

converted the property to its own use and transferred it. The objective under SIPA

is to recover that property. The fact that the property subsequently travelled

through multiple hands abroad does not change the nature of the property and is

irrelevant.

Although support exists in these cases for extraterritorial application, if this

was not the case, as it is, the Court would consider whether the statute in question

was being applied domestically and not extraterritorially. Toward that end, the

Court would consider the “focus” of the statute and where the conduct occurred

relative to the statute’s focus. RJR Nabisco, __ U.S. __, 136 S. Ct. at 2101

(“RJR”). As the Court stated in RJR:

If the statute is not extraterritorial, then at the second step we determine whether the case involves a domestic application of the statute, and we do this by looking to the statute’s “focus.” If the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.


21

RJR Nabisco, __ U.S. __, 136 S.Ct. at 2101.

The appellees contend that the focus of Bankruptcy Code Section 550(a)(2)

is on the subsequent transfers. Although recovery is made possible under Section

550 only if a transfer is avoided under Section 548, among other sections of Title

11, Appellees argue that avoidance and recovery are governed by separate

provisions and therefore, must be analyzed separately. Jt. Br. at 46. In support of

their position, Appellees erroneously rely upon RJR.6

In RJR, the Court held that, in order for RICO to apply extraterritorially, the

predicate statutory provision at issue must apply extraterritorially. RJR, 136 S. Ct.

at 2102. While recognizing that an extraterritoriality analysis must be conducted

for each provision, the Court also noted that RICO required that each predicate

offense be indictable. Id. In other words, RICO’s explicit terms require a

provision-by-provision analysis of predicate offenses, and those that are not 6 In their attempt to sever Sections 548 and 550 from the Bankruptcy Code’s understanding of property of the estate and of the debtor, Appellees also rely heavily upon this Court’s decision in Picard v. Fairfield Greenwich Ltd., 762 F.3d 199 (2d Cir. 2014). In Fairfield Greenwich, the Court upheld denial of the Trustee’s request to enjoin third party actions to the extent that they laid claim to the same pool of funds that the Trustee sought to avoid and recover as a fraudulent transfer from BLMIS. Id. at 212. The Court, however, did not determine that the lower courts could not have jurisdiction over the property at issue, and it did not address extraterritoriality at all. Instead, its analysis focused on whether the Trustee had satisfied the requirements for a preliminary injunction amidst the uncertainty of ongoing litigation far from resolution. Id. The Court, however, recognized that the Trustee could have, at least, contingent interests in the property at issue and that the third party actions could possibly harm the BLMIS estate by preventing the Trustee from collecting on a judgment. Id. at 213.


22

indictable based upon extraterritorial activity cannot be used as predicates for

extraterritorial application of RICO. When the Court later found that RICO’s

private cause of action did not apply to foreign injuries, it noted that the private

cause of action was more limited by its own terms than RICO’s substantive law

and that such a private cause of action raises separate extraterritoriality concerns.

Id. at 2108-2110.

Importantly, as previously noted, the Court still held that an express

statement of extraterritorial effect is not necessary and that context matters. In

contrast with RICO, the Bankruptcy Code is more unified, and the sections must be

read together in order to give them full effect. See Note Holders v. Large Private

Beneficial Owners (In re Tribune Company Fraudulent Conveyance Litigation),

818 F.3d 98, 120 (2d Cir. 2016) (“A search for legislative purpose is heavily

informed by language, and analyzing all the language of a provision and its

relationship to the [Bankruptcy] Code as a whole is preferable to using literalness

here and perceived legislative purpose (without regard to language) there as needed

to reach particular results.”), petition for cert. filed sub nom., Deutsche Bank Tr.

Co. Ams. v. Robert R. McCormick Foundation (No. 16-317); Mastan v. Salamon

(In re Salamon), 854 F.3d 632, 636 (9th Cir. 2017) (“When interpreting a provision

of the bankruptcy code, we look to its ‘context and ... place in the overall statutory

scheme.’” (quoting Danielson v. Flores (In re Flores), 735 F.3d 855, 859 (9th Cir.


23

2013)). “[C]ourts must be mindful, particularly when examining the Bankruptcy

Code, that statutory interpretation is ‘a holistic endeavor.’ Consequently, courts

‘must not be guided by a single sentence or member of a sentence, but look to the

provisions of the whole law, and to its object and policy.’” In re KB Toys Inc., 736

F.3d 247, 251 (3d Cir. 2013) (quoting Official Comm. of Unsecured Creditors of

Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 559 (3d

Cir. 2003) (en banc)).

Identification of the focus of Section 550 necessarily requires consideration

of the avoidance sections, including Section 548. Section 548 must look to Section

541 in order to determine what “an interest of the debtor in property” is, and in

turn, how such an interest is part of the Estate “wherever located and by whomever

held.” 11 U.S.C. § 541(a). As the Supreme Court held in interpreting the

Bankruptcy Code, “Statutory construction … is a holistic endeavor. A provision

that may seem ambiguous in isolation is often clarified by the remainder of the

statutory scheme-because the same terminology is used elsewhere in a context that

makes its meaning clear, or because only one of the permissible meanings

produces a substantive effect that is compatible with the rest of the law.” United

Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371

(1988) (internal citations omitted). Section 550 cannot be read in a vacuum but


24

rather must be read together with other provisions for it to have meaning and

purpose.

While the focus of Section 550 cannot be analyzed without reference to the

applicable avoidance provisions, equally critical is that the “focus” of the statute be

done through “the lens of the charging statute.” United States v. Prevezon

Holdings, Ltd., 251 F. Supp. 3d 685, 692 (S.D.N.Y. 2017). In these cases, SIPA is

the “charging statute,” and as such, it is an indispensable part of the analysis.

Section 550 would not apply but for SIPA Section 78fff(b). Section 78fff(b)

makes specified provisions of Title 11, including those in Chapter 5 of Title 11,

applicable, but only to the extent consistent with SIPA. To be consistent with

SIPA, Section 550 must be construed so that it does not “substantially impede the

fair and effective operation of SIPA without providing significant countervailing

benefits.” SIPC v. Charisma Sec. Corp., 506 F.2d 1191, 1195 (2d Cir. 1974). See

Ferris, Baker Watts, Inc. v. Stephenson (In re MJK Clearing, Inc.), 286 B.R. 109,

129 (Bankr. D. Minn. 2002) (“While many provisions of the Bankruptcy Code

generally apply, where SIPA is inconsistent with the Bankruptcy Code, it is the

specific provisions of SIPA that control.”), aff’d, 2003 WL 1824937 (D. Minn.

Apr. 7, 2003), aff’d, 371 F.3d 397 (8th Cir. 2004); and SIPC Br. at 42.

Construing the focus of Section 550 to place stolen customer property

beyond the reach of the Trustee because the property has been sent abroad clearly


25

is contrary to the purposes of SIPA and the avoidance provisions available to

further those purposes. SIPA seeks to recover customer property for customers,

not to be a means for further misuse. As the Bankruptcy Court stated in Official

Comm. Of Unsecured Creditors v. Bahrain Islamic Bank (In re Arcapita Bank

B.S.C.(c), 575 B.R. 229, 245 (Bankr. S.D.N.Y. 2017), reconsideration den., 2018

WL 718399 (Bankr. S.D.N.Y. Feb. 5, 2018), with regard to the “focus” generally

of the avoidance and recovery provisions under Title 11:

The Supreme Court has instructed courts to “target [their] inquiry on the ‘focus of congressional concern,’ or, in other words, the ‘transactions that the statute seeks to regulate.’” … Courts in this jurisdiction have held that “the focus of the [Bankruptcy Code’s] avoidance and recovery provisions is the initial transfer that depletes the property that would have become property of the estate.” …; accord, Begier v. Internal Revenue Serv., 496 U.S. 53, 58 … (1990) (“[T]he purpose of the avoidance provision is to preserve the property includable within the bankruptcy estate – the property available for distribution to creditors.”); French v. Liebmann (In re French), 440 F.3d 145, 154 (4th Cir. 2006) (“[T]he Code’s avoidance provisions protect creditors by preserving the bankruptcy estate against illegitimate depletions.”)

That analysis is even more meaningful in a SIPA context. The focus of the

avoidance and recovery provisions at issue, against the background of SIPA, its

provisions and purposes, must be on “the initial transfers that deplete the

bankruptcy estate and not on the recipient of the transfers or the subsequent

transfers.” Picard v. Bureau of Labor Insurance (In re Bernard L. Madoff), 480


26

B.R. 501, 524 (Bankr. S.D.N.Y. 2012) (SPA-895). See SIPA Br. at 40-41, 48-54,

The Ponzi scheme occurred in the U.S., and the initial transfers from the Debtor

were in the U.S. Because the conduct relevant to the focus of the Title 11

provisions took place in the U.S., the application of the provisions was domestic,

notwithstanding that the subsequent conduct took place abroad. RJR, __ U.S. __,

136 S. Ct. at 2101. See Absolute Activist Value Master Fund Ltd. v. Ficeto, 677

F.3d 60, 69 (2d Cir. 2012) (that a buyer and seller in a securities transaction are

both foreign entities does not establish that the transaction cannot be considered

domestic). As this Court aptly observed, to conclude otherwise, would allow

unscrupulous securities dealers to “design their transactions with their victims so as

to stay on the side of the line that is outside the reach of the statute.” Parkcentral

Global Hub Ltd. v. Porsche Automobile Holdings, 763 F.3d 198, 221 (2d Cir.

2014) (Leval, J., concurring).

V. NO DEFERENCE IS DUE AS A MATTER OF COMITY

The appellees contend that the District Court and the Bankruptcy Court

engaged in an “exhaustive analysis” in concluding, as a matter of comity, that the

appellees were more entitled to the stolen customer monies than the customers

from whom the monies were stolen. Jt. Br. at 65. Not only was the analysis of the

record unsupported, but the decision to defer to a foreign court was baffling when,


27

at least in the Fairfield case, the foreign court itself had acquiesced in the Trustee’s

pursuit of the avoidance actions.

As an initial matter, neither Court below gave weight to the fact that the

monies at issue were precisely the same monies misappropriated from customers

by BLMIS and transferred to the Funds, and re-transferred to Fund subscribers and

others. The Bankruptcy Court noted that BLMIS engaged in no securities

transactions for customers, and that cash sent to customers came from a

commingled bank account that included other customers’ monies. (SPA-230).7

The District Court observed that in the lone case that it discussed, two of the Funds

had “invested substantially all of their assets with BLMIS, received initial transfers

from BLMIS and subsequently transferred some or all of those funds directly or

indirectly” to the two defendant subscribers. (SPA-238). But neither Court

viewed as significant that the monies transferred were BLMIS customer monies, or

that the Customer Protection Rule, adopted by the SEC to safeguard customer

funds, was enacted at the direction of Congress, pursuant to Section 7(d) of SIPA,

Securities Investor Protection Act, Pub. L. No. 91-598, § 7(d), 84 Stat. 1636, 1653

(1970), which amended the Securities Exchange Act of 1934, or that SIPA serves

important purposes beyond the mere return of cash and securities. See SIPC Br. at 7 Memorandum Decision Regarding Claims to Recover Foreign Subsequent Transfers, entered on November 22, 2016, in SIPC v. BLMIS, Adv. P. No. 08-01789 (SMB) (Bankr. S.D.N.Y.). (SPA-226). References hereinafter to the Memorandum Decision shall be to the applicable page of the Special Appendix.


28

22-28. In short, neither Court weighed the interests of the U.S. versus those of the

foreign entities, simply reducing - in the case of the Bankruptcy Court - the interest

of the U.S. to a “purely remedial” one. (SPA-260). But even assuming, arguendo,

that the U.S. interest was “purely remedial,” “[r]egard for [the] purposes [of the

legislation] should infuse construction of the legislation if it is to be treated as a

working instrument of government and not merely as a collection of English

words.” United States v. Dotterweich, 320 U.S. 277, 280 (1943). This, the lower

Courts failed to do.

Rather than analyze where the interests of the U.S. resided, the lower Courts

based their decisions on incomplete facts that were contradicted by the record.

For example:

• The appellees note that the Bankruptcy Court considered that the Funds

were formed under foreign law. Jt. Br. at 66.

But the Fairfield Funds were created, operated, controlled and marketed

by the Fairfield Greenwich Group, all based in New York. (A-5448; A-

5548; A-5555; A-5820; A-5824; A-5954-55; A-6062; A-6289; A-6852;

A-8519; A-8970; A-12275; A-16102-03; A-16224; A-19344; A-21638;

A-21930; A-24227; A-25104).

Fairfield Sentry and Fairfield Sigma were shell companies present in the

BVI only on paper. They had no employees and no office in the BVI,


29

being operated wholly out of New York. Their address in the BVI was a

post office box. (A-5326; A-5333; A-5446; A-5553; A-5698; A-5952; A-

6059; A-6293; A-8167; A-10414-15; A-11258; A-16213; A-19345; A-

19595; A-19747; A-21470; A-21653; A-21935-36; A-23396-97; A-

24510; A-25108).

In spite of having registered addresses in the BVI, the Kingate Funds had

no offices or employees there. (A-10994; A-12135; A-18788; A-19352).

Instead, the Kingate Funds were managed from New York. (A-5320; A-

5336; A-5706-07; A-10996; A-12135; A-18789; A-19352; A-21481-82;

A-21663; A-24047). Their manager, consultant, and service providers,

operated in New York. (A-5336; A-10064; A-21663; A-23569; A-23928;

A-25779). Their only business was centered in New York and all deposits

with, and withdrawals from, BLMIS were made in New York. The

Kingate Funds used New York banks to deposit funds with BLMIS, to

transfer investor funds to, and obtain money from the BLMIS account at

JP Morgan Chase Bank. (A-10066; A-10997; A-12138; A-18791; A-

19355; A-21186; A-21483; A-21666; A-22950; A-23572; A-23930).

• The appellees note that the District Court concluded that the investors in

the Funds had no reason to believe that their relationships with the Funds

would be governed by U.S. law. Jt. Br. at 65.


30

But Information Memoranda issued by Fairfield entities advised that

BLMIS in New York executed trades for the firm, acted as a principal in

connection with the purchase and sale of securities for the firms, and

custodied the investments in New York (A-5321; A-5322; A-22785-86;

A-24334).

Under Fairfield subscription agreements, subscribers agreed that the

agreements would be governed by and enforced in accordance with New

York law. The subscribers agreed irrevocably to submit themselves to the

jurisdiction of New York courts and to submit to venue in New York (A-

5323; A-5444; A-5550; A-5817; A-5825; A-5949; A-6056; A-6283; A-

6421; A-6847; A-6848; A-8163-64; A-8164; A-8285; A-8392; A-8507;

A-8963; A-9710; A-11253-54; A-12278; A-18774; A-19199; A-19594;

A-19744; A-21461; A-21645; A-21818; A-21932; A-22786; A-23556; A-

24335; A25097; A-25244). In the subscription agreements, New York

banks were designated as the banks both to send subscription payments

and receive redemption payments. (A-5323; A-5443; A-5550; A-5696;

A-5818-19; A-5949; A-6057; A-6284; A-6422; A-6848; A-6999; A-8284;

A-8509; A-8964-65; A-10172; A-10521; A-10636; A-14903; A-16099;

A-16219-20; A-19593; A-19745; A-19856; A-21647; A-21933; A-22937;

A-23394-5; A-24223; A-25097; A-25245-46).


31

New York bank accounts were used to transfer funds to and from the

Kingate Funds. (A-5695-97; A-8029; A-8679-80; A-11914-15; A-

19593-94; A-22803; A-24050; A-25781-82).

Fairfield Sentry subscribers acknowledged receipt of the Private

Placement Memoranda (“PPM”) which disclosed that the Fund’s assets

were in accounts at BLMIS and were invested by BLMIS. (A-5449; A-

5549; A-5701; A-6062; A-6429; A-8170; A-8391; A-9707-08; A-10411;

A-10418; A-11102; A-11912-13; A-18607; A-19338; A-19451; A-19743;

A-23047; A-23167; A-24333-34; A-25095-96; A-25243-44). The

Fairfield PPM described how BLMIS was essential to Fairfield as an

investment advisor, custodian, and broker-dealer. (A-11254; A-11386; A-

12276-77; A-16097; A-16104; A-16225; A-18607; A-18773; A-19339;

A-19451-52; A-19743-44).

The Kingate Funds’ Information Memoranda contained essentially the

same information as the Fairfield PPM. (A-8678; A-9894-95; A-21645-

46; A-24037).

The Kingate Funds’ Offering Memoranda warned that actual custody of

the assets resided with the Investment Advisor (BLMIS) and its affiliated

broker-dealer and that there always was the risk that the assets with the

Investment Advisor could be misappropriated. (A-9895; A-11252; A-


32

12122; A-16097; A-24038-39). Similarly, Fairfield PPM cautioned that

because BLMIS was the custodian of Fairfield assets, there was “always

the risk” that BLMIS could misappropriate the assets or securities. (A-

214788; A-21661; A-21943).

The subscribers invested in the Funds for the express purpose of receiving

returns on U.S. based investments from BLMIS. (A-5948; A-6055; A-

6845; A-8505; A-8677; A-8961; A-10973; A-16215; A-18599-600; A-

19338; A-21168; A-21459; A-22784-85; A-23047; A-25095).

Certain subscribers themselves were present outside of the U.S. only on

paper, while maintaining their principal place of business in New York

and being operated entirely from New York or elsewhere in the U.S. (A-

7330; A-8280; A-10972; A-25792.). Other subscribers maintained

offices in New York (A-10623; A-12116; A-16214; A-18598).

• The appellees contend that the Bankruptcy Court took into consideration

the details of the foreign liquidation proceedings. Jt. Br. at 66.

Yet, the foreign liquidation proceedings were not of BLMIS, but were of

certain Funds. The monies were never part of the Funds’ estate since they

were monies misappropriated from BLMIS customers. When the

Fairfield Joint Liquidators sued to recapture payments made by the Funds

to subscribers, the decision by the BVI Court was based not on


33

bankruptcy avoidance grounds, but on an interpretation of contract rights.

(See SPA-967 –SPA-980.) When the District Court below compared the

outcome reached in the BVI against the Trustee’s avoidance actions, and

concluded that a conflict existed, it did so based on a comparison of

claims of different natures. As the District Court remarked:

Indeed, the BVI courts have already determined that Fairfield Sentry could not reclaim transfers made to its customers under certain common-law theories – a determination in conflict with what the Trustee seeks to accomplish here.

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 513 B. R.

222, 232 (S.D.N.Y. 2014) (SPA-220).

Instead of being in conflict, in 2017, the Court of Appeal of the Eastern

Caribbean Supreme Court denied a motion to enjoin the Foreign

Representatives from pursuing avoidance action under BVI law in the

U.S. See SPA-1053. Moreover, by approving the settlement agreement

between the Trustee and the Fairfield Liquidators and authorizing the

Liquidators “to take any and all actions to comply with and carry out the

terms of the Agreement,” (SPA-877), which included prosecution by the

Trustee of subsequent transferee claims, the BVI Court made clear that the

conflict perceived herein by the Courts below did not exist.


34

• The appellees contend that the Bankruptcy Court considered the

respective interests of the United States and the foreign jurisdictions. Jt.

Br. at 66.

But, as discussed above, the lower Courts summarily dismissed the

interests of the United States, and failed to accord them due weight,

particularly, in the case of the Fairfield Funds, in light of the actions of the

BVI Courts.

• The appellees contend that the Bankruptcy Court considered that the

redemptions were not governed by U.S. law. Jt. Br. at 67.

But although the subscribers were not “customers” under SIPA, the

Bankruptcy Court ignored that the subscribers invested in the Funds, and

received what they invested in, namely, an interest in the Funds. What

they received, in addition, was a return on their investment in the form of

fictitious profit consisting of misappropriated BLMIS customer funds. In

contrast, the BLMIS customers had no securities to show for their

investment; instead, their monies were stolen to pay such non-customers.

Moreover, even though the subscribers were not customers under SIPA, as

evidenced by the payments that the Trustee now seeks to recapture, they

would share in the amounts paid to the Funds, as “customers,” on the

Funds’ allowed customer claims which would include any advance from


35

SIPC and a pro rata share of customer property. They also would share in

the $4 billion forfeiture fund administered through the U.S. Department of

Justice. See SIPC Br. at 37.

VI. THE ASSERTED FOREIGN INTERESTS DO NOT TRUMP THOSE OF THE U.S.

Although the appellees contend that foreign interests outweigh those of the

U.S. in these matters, they identify no interest justifying why foreign transferees

have a greater interest in misappropriated monies than the customers from whom

those monies were misappropriated. This is particularly beyond comprehension

inasmuch as the foreign jurisdiction involving many of the cases at hand has

permitted the suits to go forward, while the U.S. Courts have not.

The appellees concede that “at the heart of the international comity inquiry

are the relative interests of the competing jurisdictions….” Jt. Br. at 76. In these

cases, the interest of the U.S. in fostering strong capital markets plainly outweighs

the interest of any foreign transferees that seek to perpetuate and reap the benefits

of a fraudulent scheme. As this Court remarked in Bank of New York v. Treco (In

re Treco), 240 F.3d 148, 157 (2d Cir. 2001), “[t]he principle of comity has never

meant categorical deference to foreign proceedings. It is implicit in the concept

that deference should be withheld where appropriate to avoid the violation of the

laws, public policies, or rights of the citizens of the United States.”


36

The objective of SIPA is “to protect the public customers of securities

dealers from suffering the consequences of financial instability in the brokerage

industry.” SEC v. F. O. Baroff Co., 497 F.2d 280, 281 (2d Cir. 1974). The

objective is not a modest one. As the Supreme Court has observed:

Following a period of great expansion in the 1960’s, the securities industry experienced a business contraction that led to the failure or instability of a significant number of brokerage firms. Customers of failed firms found their cash and securities on deposit either dissipated or tied up in lengthy bankruptcy proceedings. In addition to its disastrous effects on customer assets and investor confidence, this situation also threatened a ‘domino effect’ involving otherwise solvent brokers that had substantial open transactions with firms that failed. Congress enacted the SIPA to arrest this process, restore investor confidence in the capital markets, and upgrade the financial responsibility requirements for registered brokers and dealers. [citations omitted].

SIPC v. Barbour, 421 U.S. 412, 415 (1975).


37

CONCLUSION

For the additional reasons stated herein, the decision of the Bankruptcy

Court should be REVERSED.

Respectfully submitted, /s/ Josephine Wang JOSEPHINE WANG General Counsel KEVIN H. BELL Senior Associate General Counsel for Dispute Resolution NATHANAEL S. KELLEY Associate General Counsel SECURITIES INVESTOR PROTECTION CORPORATION 1667 K Street, N.W. Suite 1000 Washington, D.C. 20006 Telephone: (202) 371-8300 Email: [email protected] E-mail: [email protected] Email: [email protected] Dated: May 8, 2018 Washington, D.C.


38

CERTIFICATE OF COMPLIANCE With Type Volume Limit, Typeface Requirements

And Type-Style Requirements

This document complies with the type-volume limitation under Fed. R. App.

P. 32(a)(7)(B)(i), as modified by Rule 32.1 of the Local Rules of the Court of

Appeals for the Second Circuit, and the Order of this Court issued herein on April

6, 2018 (Doc. No. 917) because the document contains 8,561 words.

This document complies with the typeface requirements of Fed. R. App. P.

32(a)(5) and the type-style requirements of Fed. R. App. P. 32(a)(6) because this

document has been prepared in a proportionally spaced typeface using Microsoft

Word 2010, in 14-point Times New Roman style.

/s/ Kevin H. Bell KEVIN H. BELL Senior Associate General Counsel for Dispute Resolution

SECURITIES INVESTOR PROTECTION CORPORATION Dated: May 8, 2018


17-2992(L) 17-2995(CON), 17-2996(CON), 17-2999(CON), 17-3003(CON), 17-3004(CON), 17-3005(CON), 17-3006(CON), 17-3007(CON), 17-3008(CON), 17-3009(CON), 17-3010(CON), 17-3011(CON), 17-3012(CON), 17-3013(CON), 17-3014(CON), 17-3016(CON), 17-3018(CON), 17-3019(CON), 17-3020(CON), 17-3021(CON), 17-3023(CON), 17-3024(CON), 17-3025(CON), 17-3026(CON), 17-3029(CON), 17-3032(CON), 17-3033(CON), 17-3034(CON), 17-3035(CON), 17-3038(CON), 17-3039(CON), 17-3040(CON), 17-3041(CON), 17-3042(CON), 17-3043(CON), 17-3044(CON), 17-3047(CON), 17-3050(CON), 17-3054(CON), 17-3057(CON), 17-3058(CON), 17-3059(CON), 17-3060(CON), 17-3062(CON), 17-3064(CON), 17-3065(CON), 17-3066(CON), 17-3067(CON), 17-3068(CON), 17-3069(CON), 17-3070(CON), 17-3071(CON), 17-3072(CON), 17-3073(CON), 17-3074(CON), 17-3075(CON), 17-3076(CON), 17-3077(CON), 17-3078(CON), 17-3080(CON), 17-3083(CON), 17-3084(CON), 17-3086(CON), 17-3087(CON), 17-3088(CON), 17-3091(CON), 17-3100(CON), 17-3101(CON), 17-3102(CON), 17-3106(CON), 17-3109(CON), 17-3112(CON), 17-3113(CON), 17-3115(CON), 17-3117(CON), 17-3122(CON), 17-3126(CON), 17-3129(CON), 17-3132(CON), 17-3134(CON), 17-3136(CON), 17-3139(CON), 17-3140(CON), 17-3141(CON), 17-3143(CON), 17-3144(CON), 17-3862(CON)

United States Court of Appeals FOR THE SECOND CIRCUIT

IN RE: IRVING H. PICARD, TRUSTEE FOR THE LIQUIDATION OF

BERNARD L. MADOFF INVESTMENT SECURITIES LLC

On Appeal from a Final Judgment of the United States Bankruptcy Court for the Southern

District of New York

CERTIFICATE OF SERVICE AND CM/ECF FILING

I, Kevin H. Bell, hereby certify that on May 8, 2018, I caused true and

correct copies of the foregoing Reply Brief of Intervenor Securities Investor


2

Protection Corporation to be served upon those parties who receive electronic

service through ECF in the within appeal.

I further certify that on May 8, 2018, an electronic copy of the

aforementioned Brief was uploaded to the Court’s electronic filing system, and that

six hard copies of the Brief were sent to the Clerk’s office, by prepaid Federal

Express, addressed as follows:

Clerk of Court United States Court of Appeals for the Second Circuit

United States Courthouse 500 Pearl Street, 3rd Floor

New York, NY 10007

/s/ Kevin H. Bell Kevin H. Bell


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