PACER - Mark and Andrew Madoff's Motion to have Picard's suit dismissed

8/14/2019 PACER - Mark and Andrew Madoff's Motion to have Picard's suit dismissed

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PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP1285 Avenue of the AmericasNew York, New York 10019Telephone: (212) 373-3000Facsimile: (212) 757-3990

Martin FlumenbaumStephen J. ShimshakAndrew J. EhrlichHannah S. Sholl

Attorneys for Defendants Mark Madoff and Andrew Madoff

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

Hearing Date: June 23, 2010SECURITIES INVESTOR PROTECTIONCORPORATION,

Plaintiff, Adv. Pro. No. 08-01789 (BRL)v.

SIPA LIQUIDATION

BERNARD L. MADOFF INVESTMENTSECURITIES LLC, (Substantively Consolidated)

Defendant.

In re:BERNARD L. MADOFF,

Debtor.

IRVING H. PICARD, Trustee for the Liquidationof Bernard L. Madoff Investment Securities LLC,

Plaintiff, Adv. Pro. No. 09-1503 (BRL)v.

PETER B. MADOFF, MARK D. MADOFF,

ANDREW H. MADOFF, and SHANA D.MADOFF,

Defendants.

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS

MARK AND ANDREW MADOFFS MOTION TO DISMISS


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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES.......................................................................................... iv

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

BACKGROUND.............................................................................................................3

A. The Alleged Transfers ............................................................................... 5

B. Mark And Andrew Madoffs Purported Compliance Responsibilities........... 7

C. The Complaint .......................................................................................... 9

ARGUMENT................................................................................................................ 10

I. THE TRUSTEES COMMON LAW CLAIMS FAIL AS A MATTER OFLAW..................................................................................................................12

A. The Martin Act Preempts The Trustees Claims for Breach OfFiduciary Duty, Conversion, Unjust Enrichment, Negligence, AndConstructive Trust ................................................................................... 12

B. The Complaint Fails To State Claims For Breach Of Fiduciary DutyAnd Negligence ...................................................................................... 14

1. The Trustee Fails To Plead That Mark Or Andrew Breached AnyDuty To BLMIS .......................................................................... 15

2. Bernard Madoffs Massive Fraud Was The Cause Of BLMISsDamages..................................................................................... 16

C. The Trustees Claim for Conversion Fails As A Matter Of LawBecause The Funds Over Which Mark And Andrew MadoffAllegedly Assumed Unauthorized Control Were Not SpecificallyIdentifiable............................................................................................ 17

D. The Trustees Unjust Enrichment Claim Fails As A Matter of LawBecause Mark And Andrew Madoff Did Not Have Any DirectRelationship With Investors..................................................................... 18

E. The Trustees Claims For Constructive Trust And Accounting Fail AsA Matter of Law......................................................................................20


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II. THE TRUSTEES BANKRUPTCY LAW CLAIMS SHOULD BEDISMISSED...................................................................................................... 22

A. The Trustees Turnover And Accounting Claim Is Precluded As AMatter Of Law Because The Transfers Are Not Property of theEstate.................................................................................................... 22

B. The Trustee Fails To State A Claim For Recovery Of The PreferencePeriod Transfers...................................................................................... 23

C. The Trustee Fails To State A Claim For Actual Fraudulent TransfersUnder The Bankruptcy Code ................................................................... 24

1. The Trustees Actual Fraudulent Transfer Claim Must Be DismissedBecause The Alleged Transfers Were For Value And In Good Faith................................................................................................... 25

(a) The Alleged Transfers Were Made For Value ..................... 25

(b) Mark And Andrew Received The Alleged TransfersIn Good Faith .................................................................. 28

2. The Trustee Fails To Identify The Two-Year Transfers WithParticularity................................................................................. 29

3. The Trustee Fails To Plead Actual Intent On Behalf Of The TransferorWith Particularity ........................................................................ 30

D. The Trustee Fails To State A Claim For Constructive Fraudulent

Transfers Under The Bankruptcy Code..................................................... 31

1. The Trustee Fails To Allege Facts Supporting A ConstructiveFraudulent Transfer Claim............................................................ 31

2. The Trustee Has Failed To Allege That BLMIS Did Not ReceiveReasonably Equivalent Value For The Alleged Transfers ............ 33

E. The Trustee Fails To State A Claim For Actual Fraudulent TransfersUnder The New York Debtor And Creditor Law ....................................... 34

1. The Trustee Does Not Identify The Six-Year Transfers WithParticularity................................................................................. 34

2. The Trustee Fails To Plead Actual Intent On Behalf Of The TransferorAnd The Transferees.................................................................... 34


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3. The Trustees Claim Must Be Dismissed Because The AllegedTransfers Were Received For Fair Consideration And WithoutKnowledge................................................................................ 36

F. The Trustee Fails to State a Claim for Constructive FraudulentTransfers Under The New York Debtor and Creditor Law.......................... 36

1. The Trustee Has Failed To Allege That BLMIS Did Not ReceiveFair Consideration For The Alleged Transfers ............................ 37

G. Bankruptcy Code 546(e) Precludes Avoidance of Transfers fromMark and Andrews BLMIS Customer Accounts ...................................... 38

H. The Trustee Cannot Rely On The Discovery Rule To Avoid TransfersThat Occurred More Than Six Years From The Commencement OfThe Adversary Proceeding Or To Obtain Attorneys Fees ........................... 39

1. The Trustees Discovery Rule Claim Fails Because It Does NotIdentify Appropriate Creditors...................................................... 40

2. The Trustees Own Allegations Preclude Any Inference That ACategory Of Investors Exists Who Could Not Have Discovered TheFraud .......................................................................................... 41

3. The Trustees Claim To Recover Attorneys Fees Under DCL Section276-a Fails As A Matter of Law Because The Trustee Has NotAlleged That Mark And Andrew Took The Transfers With ActualIntent To Defraud ........................................................................ 42

I. The Trustees Claim To Avoid Subsequent Transfers Should BeDismissed Because The Trustee Has Not Alleged Any SubsequentTransfers ................................................................................................ 42

J. The Disallowance Claim Must Be Dismissed Because There HasBeen No Adjudication On The Underlying Avoidance Action AndThe Trustee Has Not Demonstrated That A Viable Avoidance ClaimExists ..................................................................................................... 43

K. The Equitable Subordination Claim Must Be Dismissed Because TheTrustee Fails To Adequately Plead Any Underlying Inequitable

Conduct.................................................................................................. 44

III. THE TRUSTEES REQUEST FOR PUNITIVE DAMAGES ISINAPPROPRIATE ............................................................................................. 44

CONCLUSION ............................................................................................................. 45


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iv

TABLE OF AUTHORITIES

Page(s)

CASES

Abbey v. 3F Therapeutics, Inc.,2009 WL 4333819 (S.D.N.Y. Dec. 2, 2009) ........................................................ 12

Abu Dhabi Commercial Bankv. Morgan Stanley & Co. Inc.,651 F. Supp. 2d 155 (S.D.N.Y. 2009) .................................................................. 13

Am. Fin. Intl v. Bennett,2007 WL 1732427 (S.D.N.Y. June 14, 2007)............................................ 14, 15, 19

Andrew Velez Constr. Inc. v. Consol. Edison Co. of New York, Inc.(In re Andrew Velez Constr., Inc.),373 B.R. 262 (Bankr. S.D.N.Y. 2007) ............................................................22, 35

Ashcroftv. Iqbal,129 S.Ct. 1937 (2009) ..................................................................................passim

Assured Guaranty (UK) Ltd. v.J.P. Morgan Inv. Mgmt., Inc.,No. 603755/08 (Sup. Ct. New York County Jan. 28, 2010)................................ 12

Atlanta Shipping Corp. v. Chemical Bank,818 F.2d 240 (2d Cir. 1987)................................................................................ 29

ATSI Commcns Inc. v. Shaar Fund, Ltd.,493 F.3d 87 (2d Cir. 2007).................................................................................. 10

Balaber-Strauss v. Sixty-Five Brokers (In re Churchill Mortgage Inv. Corp.),256 B.R. 664 (Bankr. S.D.N.Y. 2000) ...........................................................passim

Barron v. Igolnikov,No. 09 Civ. 4471 (S.D.N.Y. Mar. 10, 2010)......................................................... 13

Bear, Stearns Sec. Corp. v. Gredd (In reManhattan Inv. Fund, Ltd.),397 B.R. 1 (S.D.N.Y. 2007)............................................................................... 30

Bell Atl. Corp. v. Twombly,

550 U.S. 544 (2007).....................................................................................passim

Berenson v. Natl Surety Co.,260 N.Y. 299 (1932)........................................................................................... 16

Bernheim v.Litt,79 F.3d 318 (2d Cir. 1996).................................................................................. 10


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Brandtv.Am. Natl Bank & Trust Co. (In re Foos),188 B.R. 239 (Bankr. N.D. Ill. 1995) ................................................................. 30

Carey v. Crescenzi,923 F.2d 18 (2d Cir. 1991).................................................................................. 42

Carmona v. Spanish Broad. Sys., Inc.,2009 WL 890054 (S.D.N.Y. Mar. 30, 2009) ......................................................... 18

Castellano v. Young & Rubicam, Inc.,257 F.3d 171 (2d Cir. 2001)............................................................................... 12

Chemtex, LLCv. St. Anthony Enters., Inc.,490 F. Supp. 2d 536 (S.D.N.Y. 2007).............................................................28, 36

Citadel Mgmt., Inc. v. Telesis Trust, Inc.,123 F. Supp. 2d 133 (S.D.N.Y. 2000)................................................................ 17

Cohen v. UN-Ltd. Holdings, Inc. (In re Nelco, Ltd.),264 B.R. 790 (Bankr. E.D. Va. 1999) .................................................................. 26

Coty Inc. v. L'Oreal S.A.,2008 WL 331360 (S.D.N.Y. Feb. 4, 2008)......................................................... 18

CPC Intl Inc. v.McKesson Corp.,70 N.Y.2d 268 (1987)........................................................................................ 13

Cullen v. BMW of N. Am., Inc.,691 F.2d 1097 (2d Cir. 1982).............................................................................. 17

DeBlasio v.Merrill Lynch & Co., Inc.,2009 WL 2242605 (S.D.N.Y. July 27, 2009) ....................................................... 14

Ehle v.Howard,2006 WL 948120 (N.Y. Sup. Ct. Apr. 7, 2006) .................................................... 16

Enron Corp. v.Avenue Special Situations Fund II, L.P. (In re Enron Corp.) ,340 B.R. 180 (Bankr. S.D.N.Y. 2006)................................................................ 43

F.C.C. v.NextWave Personal Commcns, Inc. (In re NextWave Personal Commcns,

Inc.),200 F.3d 43 (2d Cir. 1999).................................................................................. 26

FDICv.Hirsch (In re Colonial Realty Co.),980 F.2d 125 (2d Cir. 1992)................................................................................ 22

Fed. Natl Mortgage Assoc. v. Olympia Mortgage Corp.,2006 WL 2802092 (E.D.N.Y. Sept. 28, 2006).................................................30, 34


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Fundacion Museo de Arte v. CBI-TDB Union Bancaire Privee,160 F.3d 146 (2d Cir. 1998)................................................................................ 17

Global Crossing Estate Representative v. Winnick,2006 WL 2212776 (S.D.N.Y. Aug. 3, 2006)........................................................ 40

Gortatv. Capala Bros., Inc.,585 F. Supp. 2d 372 (E.D.N.Y. 2008).................................................................. 16

Granite Partners, L.P. v. Bear Stearns & Co.,Inc.,17 F. Supp. 2d 275 (S.D.N.Y. 1998).................................................................. 13

HBE Leasing Corp. v. Frank,48 F.3d 623 (2d Cir. 1995)....................................................................... 28, 36, 38

Hellerv. Kurz,228 A.D.2d 263 (N.Y. App. Div. 1996)................................................................ 19

IMG Fragrance Brands, LLCv. Houbigant, Inc.,2009 WL 5171741 (S.D.N.Y. Dec. 18, 2009) .................................................... 22

In re 1031 Tax Group, LLC,2009 WL 4342635 (Bankr. S.D.N.Y. Dec. 3, 2009) ............................................. 10

In re Adler Coleman Clearing Corp.,195 B.R. 266 (Bankr. S.D.N.Y. 1996)................................................................ 13

In re Allou Distribs., Inc.,379 B.R. 5 (Bankr. E.D.N.Y. 2007)..................................................................... 35

In re Allou Distribs., Inc.,387 B.R. 365 (Bankr. E.D.N.Y. 2008) ................................................................. 32

In re AppliedTheory Corp.,323 B.R. 838 (Bankr. S.D.N.Y. 2005) ................................................................. 27

In re AppliedTheory Corp.,330 B.R. 362 (S.D.N.Y. 2005) .......................................................................33, 37

In re Bayou Group LLC,

396 B.R. 810 (Bankr. S.D.N.Y. 2008) ............................................................29, 35

In re Bayou Hedge Fund Litig.,534 F. Supp. 2d 405 (S.D.N.Y. 2007).......................................................... 12, 13

In re Caremerica, Inc.,409 B.R. 737 (E.D.N.C. 2009)......................................................................passim


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In re Donahue Secs., Inc.,318 B.R. 667 (Bankr. S.D. Ohio 2004)................................................................ 15

In re Enron Corp.,333 B.R. 205 (Bankr. S.D.N.Y. 2005) ................................................................. 44

In re First Cent. Fin. Corp.,377 F.3d 209 (2d Cir. 2004)................................................................................ 20

In re Gluth Bros. Const., Inc.,2009 WL 4037795 (Bankr. N.D. Ill. Nov. 19, 2009) ......................................... 11

In re Image Masters, Inc.,421 B.R. 164 (Bankr. E.D. Pa. 2009) ...........................................................passim

In re Jacobs,394 B.R. 646 (Bankr. E.D.N.Y. 2008) ................................................................. 42

In re MarketXT Holdings Corp.,361 B.R. 369 (Bankr. S.D.N.Y. 2007) ................................................................. 35

In re Merrill Lynch & Co., Inc. Research Reports Secs. Litig.,2008 WL 2594819 (S.D.N.Y. June 26, 2008)....................................................... 36

In re Metiom, Inc.,301 B.R. 634 (Bankr. S.D.N.Y. 2003) ................................................................. 43

In re Mid Atl. Fund, Inc.,60 B.R. 604 (Bankr. S.D.N.Y. 1986) ................................................................... 43

In re Musicland Holding Corp.,386 B.R. 428 (S.D.N.Y. 2008) ............................................................................ 18

In re Musicland Holding Corp.,398 B.R. 761 (Bankr. S.D.N.Y. 2008) ................................................................. 40

In re New Times Sec. Servs.,371 F.3d 68 (2d Cir. 2004)................................................................................. 13

In re Sharp Intl Corp.,

403 F.3d 43 (2d Cir. 2005)......................................................................30, 34, 38

In re Theatre Row Phase II Assocs.,385 B.R. 511 (Bankr. S.D.N.Y. 2008)................................................................ 41

Jana Master Fund, Ltd. v. JPMorgan Chase & Co.,2008 WL 746540 (N.Y. Sup. Ct. Mar. 12, 2008)................................................ 13


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Joan Hansen & Co., Inc. v.Everlast Worlds Boxing Headquarters Corp.,744 N.Y.S.2d 384 (App. Div. 2002) ...............................................................19, 20

Jordan (Bermuda) Inv. Co., Ltd. v. Hunter Green Invs., Ltd.,2003 WL 1751780 (S.D.N.Y. 2003) .................................................................. 17

Kaiser Steel Corp. v. Pearl Brewing Co. (In re Kaiser Steel Corp.),952 F.2d 1230 (10th Cir. 1991) ........................................................................... 39

Kassoverv. UBS AG,619 F. Supp. 2d 28 (S.D.N.Y. 2008).................................................................. 12

Kaul v.Hanover Direct, Inc.,296 F. Supp. 2d 506 (S.D.N.Y. 2004) .................................................................. 16

Kramerv. Lockwood Pension Servs., Inc.,653 F. Supp. 2d 354 (S.D.N.Y. 2009).............................................................20, 21

Lefkowitz v. Bank of New York,2009 WL 5033951 (S.D.N.Y. Dec. 22, 2009) ................................................... 18

Leveto v. Lapina,258 F.3d 156 (3d Cir. 2001)............................................................................... 25

LNC Invs., Inc. v. First Fidelity Bank, N.A. N.J.,173 F.3d 454 (2d Cir. 1999)................................................................................ 14

Lustig v. Weisz & Assocs. Inc. (In re Unified Commercial Capital, Inc.),260 B.R. 343 (Bankr. W.D.N.Y. 2001) ................................................................ 27

Marcus v. Frome,329 F. Supp. 2d 464 (S.D.N.Y. 2004)................................................................ 12

Matsumura v.Benihana Natl Corp.,542 F. Supp. 2d 245 (S.D.N.Y. 2008) .................................................................. 11

Merrill v.Allen (In re Universal Clearing House Co.),60 B.R. 985 (D. Utah 1986)............................................................................... 26

Nanjing Textiles IMP/EXP Corp., Ltd. v. NCC Sportswear Corp.,

2006 WL 2337186 (S.D.N.Y. Aug. 11, 2006) .................................................19, 20

OConnell v.Arthur Andersen LLP (In re AlphaStar Ins. Group Ltd.),383 B.R. 231 (Bankr. S.D.N.Y. 2008) ............................................................ 11, 44

Official Comm. of Unsecured Creditors of M. Fabrikant & Sons, Inc.v.JPMorgan Chase Bank, N.A. (In re M. Fabrikant & Sons, Inc.),394 B.R. 721 (Bankr. S.D.N.Y. 2008) ................................................................. 29


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Orlickv. Kozyak (In re Fin. Federated Title & Trust, Inc.),309 F.3d 1325 (11th Cir. 2008) ........................................................................... 27

Pani v. Empire Blue Cross Blue Shield,152 F.3d 67 (2d Cir. 1998)................................................................................. 25

Pelkey v. Pelkey,258 N.Y.S. 562 (App. Div. 1932) ........................................................................ 21

Picardv. Taylor (In re Park S. Secs., LLC),326 B.R. 505 (Bankr. S.D.N.Y. 2005) ................................................................. 35

Pro Bono Invs., Inc. v. Gerry,2005 WL 2429787 (S.D.N.Y. Sept. 30, 2005)...................................................... 13

PVM Oil Futures, Inc. v. Banque Paribas,554 N.Y.S.2d 606 (App. Div. 1990) .................................................................... 20

Rhythms NetConnections, Inc. v. Cisco Systems, Inc. (In re RhythmsNetConnections),300 B.R. 404 (Bankr. S.D.N.Y. 2003) ................................................................. 43

Roden v.Dans Papers, Inc.,2006 WL 3437528 (N.Y. Sup. Ct. App. Term Nov. 9, 2006)................................. 16

Savage & Assocs., P.C. v.BLR Servs. SAS (In re Teligent, Inc.),307 B.R. 744 (Bankr. S.D.N.Y. 2004) ................................................................. 22

Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC,

2010 Bankr. LEXIS 495 (Bankr. S.D.N.Y. Mar. 1, 2010) ....................................... 7

SECv. Cohmad Secs. Corp.,2010 WL 363844 (S.D.N.Y. Feb. 2, 2010)......................................................10, 17

Sedona Corp. v. Ladenburg Thalmann & Co., Inc.,2005 WL 1902780 (S.D.N.Y. Aug. 9, 2005)........................................................ 12

Seta Corp. v.Atl. Computer Sys. (In re Atlantic Computer Sys.),173 B.R. 858 (S.D.N.Y. 1994) ............................................................................ 43

Silverman v.Actrade Capital Inc. (In re Actrade Fin. Techs., Ltd.),337 B.R. 791 (Bankr. S.D.N.Y. 2005).......................................................... 35, 38

Staehrv. Hartford Fin. Servs. Group, Inc.,547 F.3d 406 (2d Cir. 2008)................................................................................. 3

Sugarman v. Weisz,310 N.Y.S.2d 394 (App. Div. 1970) ................................................................... 20


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Summerville v. Lipsig,704 N.Y.S.2d 598 (App. Div. 2000) .................................................................... 45

Thyroffv. Nationwide Mutual Ins. Co.,2010 WL 76154 (2d Cir. Jan. 11, 2010) ............................................................. 18

Trepel v.Abdoulaye,185 F. Supp. 2d 308 (S.D.N.Y. 2002) .................................................................. 45

Van Bruntv. Rauschenberg,799 F. Supp. 1467 (S.D.N.Y. 1992)..................................................................... 21

Wachovia Sec., LLCv. Joseph,866 N.Y.S.2d 651 (App. Div. 2008) .................................................................... 20

Waldman v. Englishtown Sportswear, Ltd.,460 N.Y.S.2d 552 (App. Div. 1983) .................................................................... 21

Weizmann Inst. of Science v. Neschis,229 F. Supp. 2d 234 (S.D.N.Y. 2002) .................................................................. 21

Welch v. TD Ameritrade Holding Corp.,2009 WL 2356131 (S.D.N.Y. July 27, 2009) ....................................................... 11

Whitehall Tenants Corp. v. Estate of Olnick,623 N.Y.S.2d 585 (App. Div. 1995)................................................................... 12

FEDERAL STATUTES AND RULES

11 U.S.C. 101(53A) ................................................................................................... 39

11 U.S.C. 105(a) .......................................................................................................... 9

11 U.S.C. 502......................................................................................................... 9, 43

11 U.S.C. 542....................................................................................................9, 22, 23

11 U.S.C. 544.......................................................................................................passim

11 U.S.C. 546............................................................................................................. 39

11 U.S.C. 547 .............................................................................................. 9, 24, 25, 26

11 U.S.C. 548 .......................................................................................................passim

11 U.S.C. 550 ............................................................................................................... 9

11 U.S.C. 551 ............................................................................................................... 9


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11 U.S.C. 741....................................................................................................... 39, 42

15 U.S.C. 78fff(b) ........................................................................................................ 9

15 U.S.C. 78fff-1(a)...................................................................................................... 9

15 U.S.C. 78fff-2(c)(3).............................................................................................9, 22

Fed. R. Bankr. P. 7008 ..................................................................................................... 1

Fed. R. Bankr. P. 7009 ..................................................................................................... 1

Fed. R. Bankr. P. 7012(b)............................................................................................1, 10

Fed. R. Civ. P. 8 .......................................................................................................passim

Fed. R. Civ. P. 9(b)...................................................................................................passim

Fed. R. Civ. P. 12(b)(6) ...............................................................................................1, 10

STATE STATUTES AND RULES

N.Y. Gen. Bus. Law 352...................................................................................12, 13, 14

N.Y. C.P.L.R. 203(f).................................................................................................... 40

N.Y. C.P.L.R. 213(8)................................................................................................... 40

N.Y. Debt. & Cred. Law 270......................................................................................... 9

N.Y. Debt. & Cred. Law 272....................................................................................... 38

N.Y. Debt. & Cred. Law 276 ..................................................................................34, 39

N.Y. Debt. & Cred. Law 276-a ......................................................................... 34, 39, 42

N.Y. Debt. & Cred. Law 278....................................................................................... 36

OTHER AUTHORITIES

Wright & Miller, Federal Practice and Procedure 1357 (3d ed. 2009)....................... 25


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Defendants Mark and Andrew Madoff respectfully submit this memorandum of law in

support of their motion to dismiss the Complaint in its entirety, pursuant to Federal Rules of Civil

Procedure 8, 9(b), and 12(b)(6), and Federal Rules of Bankruptcy Procedure 7008, 7009, and 7012(b).

PRELIMINARY STATEMENT

On December 10, 2008, Bernard L. Madoff revealed to his sons his massive betrayal of

the markets, of his investorsand of them. They acted immediately. Within hours, they reported his

crimes to the authorities, and thereby prevented the dissipation of $170 million more in customer

funds. Their revelation of their fathers crimes led to the collapse of the profitableand concededly

legitimatemarket-making and trading businesses that they had spent their professional lives

building. For this, among many other reasons, they rank among the numerous victims of their fathers

terrible crimes.

Notwithstanding all of this, the Trustee now brings this lawsuit, seeking tort damages

from them, as well as to avoid a variety of transfersincluding their duly earned compensation for

running the market-making and trading businesses. It is an exercise in gross overreaching. Long on

rhetoric, but short on legal or factual support, this is a case that as a matter of fairness never should

have been brought, and as a matter of law should be dismissed.

Nearly all of the common-law claims are due to be dismissed because they are

preempted by the Martin Act. Under black-letter New York law, common-law tort claims of this kind,

which pertain to securities, are in the exclusive province of the Attorney General. And, precedent

makes clear that the broad preemptive sweep of the Martin Act extends to trustees in bankruptcy like

the Plaintiff here.

Even if these claims were not preempted, they reach too far in other ways. For

example, many of the claims are predicated on purported duties the Trustee alleges that Mark and

Andrew Madoff owed to Bernard Madoffs investment advisory (IA) clients. But the Trustees own


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pleading makes clear that Mark and Andrew Madoffs role at BLMIS was to run the market-making

and trading businessesthereby rendering it totally illogical that either Mark or Andrew could have a

legal duty to customers of a business that they had nothing to do with. The sole allegation in the

Complaint purporting to tie Mark and Andrew to the IA business is the most conclusory assertion that

Mark and Andrew met with IA clientsciting not a single example, even though the Trustee has had

access to the books and records of BLMIS for over a year. Under the pleading standards set forth by

the Supreme Court inIqbal and Twombly, this kind of bare, ipse dixitallegation must collapse under

the weight that the Trustee tries to rest upon it.

The Complaint also sweeps too far insofar as it is predicated on the faulty assumption

that Mark and Andrew Madoff are in breach of duties because they exercised some kind of compliance

function at the IA business. They in fact had no such function, and a careful reading of the Complaint

makes clear that any assertion otherwise is mere say-so of the kind that cannot sustain a complaint.

The mere repetition of the allegation cannot make it so. The Trustee cites numerous policy documents

internal to BLMIS, but none of them actually supports the conclusion that Mark and Andrew fulfilled a

compliance role at the firm at allmuch less in connection with the IA business. Notably, although

the Complaint does cite one IA compliance manual, it cites no passage in which Mark and Andrew are

held out as having a compliance role.

The Trustees various claims under the Bankruptcy Code overreach as well. For

instance, the Trustee seeks to avoid transfers made in excess of six years before this adversary

proceeding, despite having no basis in law for doing so. With respect to transfers within the last six

years, the Complaint is entirely conclusory, pleading undifferentiated lump sums, notwithstanding the

stringent requirements of Rule 9(b). And with respect to those claims requiring proof of intent, the

Complaint does not even remotely approach the pleading burden. In this regard, the Complaint

appears to have adopted the reasoning that theyre the sonsthey must have known, which may


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suffice for a press release or a talk show, but is patently insufficient to satisfy the more sober review

that this Courts pleading standards demand.

Perhaps most egregiously, the Trustee seeks to recover the salary and bonus that Mark

and Andrew earned from running the market-making and trading businesses, despite conceding in his

Complaint both that they ran these businesses for years, and that the businesses were legitimate. In

point of fact, the Trustee sold Mark and Andrews business for $25 million, which will help

compensate victims of Bernard Madoffs fraud. It turns logicand fairnesson its head to then seek

to claw back the compensation Mark and Andrew received in consideration for building that business.

For all of these reasons, and the many others set forth below, all of the claims against

Mark and Andrew Madoff should be dismissed.

BACKGROUND1

Mark and Andrew Madoff spent their entire professional careers building the market-

making and proprietary trading businesses at Bernard L. Madoff Investment Securities LLC

(BLMIS). (Cplt. 7-8.) Under Mark and Andrews management, BLMIS became one of the

largest and most well-regarded market makers in the securities industry; by the early-1990s, it was

responsible for approximately 10 percent of all trades of NYSE-listed stocks. (Ex. A.) And, by 1997,

BLMIS was executing 40,000 trades daily on NASDAQ, making markets for 500 customers in over

800 publicly traded stocks. (Ex. B.) At all times, BLMIS was a leader in technological innovation,

including offering innovations such as internet access to its services, providing more off-board

1 Although Mark and Andrew Madoff vigorously dispute many of the allegations of the Trustees

Complaint, we assume for now the truth solely of the well-pleaded facts therein, supplemented by

publicly available documents that this Court may consider on a motion to dismiss. See, e.g., Staehrv.

Hartford Fin. Servs. Group, Inc., 547 F.3d 406, 425 (2d Cir. 2008) (judicial notice of the fact that

press coverage, prior lawsuits, or regulatory filings contained certain information, without regard to the

truth of their contents is appropriate on a motion to dismiss). These documents are contained in the

Declaration of Martin Flumenbaum, dated March 15, 2010, and cited hereafter as Ex. __.


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executions of listed order flow than any of its estimated eighty competitors, and allowing customers

the option to purchase large blocks of securities in a single transaction with the opportunity to cancel

the order if they were dissatisfied with the average price per security. (Id.) In 1999, BLMIS, then

considered a third trading market giant, made markets in approximately 1,000 securities (Ex. C.)

Based on the businesss stellar reputation, fast order execution, and vast trading volume, experts

reportedly valued the market making business at $200-$400 million in 2008. (Exs. D-E.)2

Of course, the legitimate market making and proprietary trading businesses managed

by Mark and Andrew Madoff were only two of the three business units at BLMIS. (Cplt. 24.) As the

world now knows, Bernard Madoff operated a third business, the investment advisory business, two

floors below the legitimate operations that the Trustee himself has acknowledged had nothing to do

with the investment advisory business. (Ex. G at 97.)

On December 10, 2008, Bernard Madoff confessed to his sons that the IA business

was, in fact, a Ponzi scheme of epic proportions. (Ex. H.) Mark and Andrew contacted the federal

authorities within hours of learning of their fathers betrayal of their trust (and that of his investors).

Bernard Madoff was arrested the following morning, before he could further dispose of his investors

assets. (Id.; Ex. I.) Indeed, it was later revealed that there were $173 million of checks to investors

sitting in Madoffs drawer, additional customer funds that would havebut for Mark and Andrews

timely actionbeen dissipated. (Ex. J.) Bernard Madoffs criminal complaint, guilty plea, and

sentencing followed, and he is now serving a 150-year sentence. (Ex. K.)

Although the name Bernard Madoff is now synonymous with scandal, prior to

December 10, 2008, all of this was unthinkable. Bernard Madoff was a leader in the securities

2 Even after Bernard Madoff destroyed the firms reputation, the Trustee was able to sell the business toan independent investor for approximately $25 million. (Ex. F, Second Amended and Restated Asset

Purchase Agreement 4.1(a)-(b).)


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industry and a prominent philanthropist. (See Ex. L.) He had been the chairman of NASDAQ, and

had propelled BLMISs innovations in the market making business since the 1970s. (Ex. M.) He was

a titan in the securities industry, widely-respectedand no more so than by his sons. It is easy to now

say in hindsight, as the Trustee does, that the consistent returns of the IA business should have been

cause for concern; however, as has now been widely reported, that business had been examined on

numerous occasions by the SEC and cleared without incident. (Exs. N-P.) It was also vetted by

numerous widely-known individual and institutional investors of outstanding reputation who were IA

clients, none of whom detected the fraud. (Ex. Q.) What is more, several prominent and apparently

legitimate investors have achieved results similar to those reported by Madoff.3 Like the rest of the

world, and indeed more so, Mark and Andrew viewed the success of the IA business as an outgrowth

of their fathers legendary trading skills, and had no reason to question his honesty or integrity before

December 10, 2008. And to be clear, although the Trustees allegations must be treated as true for

purposes of this motion, Mark and Andrew dispute each and every allegation even suggesting that they

had knowledge of their fathers fraud before he revealed it to them on December 10, 2008.

A. The Alleged TransfersThe Complaint alleges that Mark and Andrew Madoff received a series of transfers

from BLMIS, amounting to $66,859,311 and $60,644,821 respectively, that should be avoided. (Cplt.

74, 85.) These alleged transfers fall into four categories: (1) salary and bonuses received from

2001 to 2008 (Cplt. 74, 85); (2) proceeds from allegedly fictitious stock trades in investment

advisory accounts purportedly under their control (Cplt. 76-82; 86-92); (3) proceeds from loans

3 To cite some examples: Warren Buffetts Berkshire Hathaway has averaged annual returns in excess of

20% after taxes for the past 43 years (Ex. R at 2), James Simons Medallion Fund has returned an

average of over 35% annually since 1989 (Ex. S), George Soros averaged annual returns of 30% in his

Quantum Fund from 1970 to 2000 (Ex. T), and in 2007 Paulson & Co. reported four different funds

with returns in excess of 100%, including one earning nearly 590% during that year. (Ex. U.)


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allegedly paid out of BLMIS funds (Cplt. 84, 94); and (4) personal expenses charged to the BLMIS

credit card. (Id.) The Complaint also seeks money damages and equitable relief. (See Cplt. 112-

214.) Although these amounts may appear sinister in hindsight because the IA fraud now overshadows

all of the operations at BLMIS, Mark and Andrew Madoff dedicated their entire professional lives

some two decades eachto the legitimate trading businesses of BLMIS, and they received each of

these transfers in good faith.

Compensation: The Trustee claims that Mark and Andrew earned astronomical

compensation of $29,320,830 and $31,105,505, respectively, from 2001 to 2008. (Cplt. 74, 85.)

Salaries and bonuses over this period of time and of this magnitude are fully consistent with the

amount of remuneration regularly paid to top traders in the financial industry. (Exs. V-W.) The

success and respect earned by the proprietary trading and market making businesses managed by Mark

and Andrew has been well-documented and the value those businesses created easily situates Mark

and Andrew well within the range of comparable traders at peer firms who earned similar or greater

compensation. (Exs. V-W.) The Trustee derides that Mark and Andrew lived comfortable, public

lifestyles (Cplt. 74, 85), but they had nothing to hide. In addition to their salaries and bonuses,

Mark and Andrew also earned money that was placed in deferred compensation accounts at BLMIS.

As the Trustee notes, Mark submitted a claim for $44,815,520 to this Court and Andrew submitted a

claim for $40,624,525, in order to preserve their rights to recover such deferred compensation. (Cplt.

75, 85.) Mark and Andrew were promised these amounts as part of their compensation for their

years of service to BLMIS, but had not received them at the time of the firms collapse.

Investments: The Trustee alleges that Mark and Andrew reaped massive gains from

brazenly fabricated transactions in their IA customer accounts. (Cplt. 76, 88.) Over the course of

more than a decade, Mark and Andrew did earn significant returns on investments made by their father

in their personal investment accounts at BLMIS, which they believed to be legitimate. So too did


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thousands of other IA clients. The Trustee alleges that Mark and Andrew knew, or should have

known, that the amounts withdrawn from [their] accounts were the product of fictitious and backdated

trading activity because of their level of financial experience and sophistication and [their]

supervisory position at BLMIS. (Cplt. 83.) Of course, the Trustee notably does notallege that

Mark and Andrew maintained a supervisory position over the IA businessand as for financial

sophistication, the same could be said of hundreds of other IA investors, as well as the regulators that

failed to detect fictitious trading patterns.

Loans: Although the Complaint identifies certain loans made to Mark and Andrew

Madoff (Cplt. 84, 94), the Trustee fails to note anything sinister about the loans, omits that Mark

and Andrew executed promissory notes in favor of the lender, and does not contend that loans from the

owner of a family to two of its successful traders generally would be improper.

Credit Cards: The Trustee alleges that BLMIS funds were used to pay for personal

expenses charged on Mark and Andrews corporate American Express credit cards. (Cplt. 84, 94.)

The Complaint contains no allegations that such charges were not authorized by BLMIS.

B. Mark And Andrew Madoffs Purported Compliance ResponsibilitiesAlthough Mark and Andrew had no oversight or compliance responsibilities in the IA

business, the Complaint alleges that they failed to perform supervisory tasks that would have

uncovered a fraud that repeated SEC examinations could not. (See, e.g., Cplt. 28-36.) As the

Complaint acknowledges, Mark and Andrew Madoff had important roles in BLMISs market-making

business and at its proprietary trading desk, but the Complaint also acknowledgesas this Court has

similarly acknowledged in Securities Investment Protection Corp. v. Bernard L. Madoff Investment

Securities LLC, 2010 Bankr. LEXIS 495, at *12 (Bankr. S.D.N.Y. Mar. 1, 2010)that these legitimate

divisions of the company were separate and distinct from the fraudulent IA business. (Cplt. 49.)

Though the Complaint also alleges upon information and belief that Mark and Andrew had direct


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contact with unspecified investors of the IA, the Trustee offers absolutely no supporting allegations for

this entirely general assertion. Id. The paucity of this allegation is telling, given the Trustees many

months of access to the books and records ofall components of the BLMIS enterprise, including the

IA business. With the wealth of information available to him, the Trustee still has not connected Mark

and Andrew to the IA businessbecause there is no connection to be made.

In the absence of any plausible connection to the IA business, the Trustee posits that

Mark and Andrew had some general, unspecified supervisory duty towards the company as a whole.

This theory is not supported even by bare allegations. The Complaint makes repeated references to

BLMIS compliance materials. The abundance of these references, however, cannot alter their

irrelevance to Mark and Andrew Madoffs clearly defined roles at BLMIS. The Complaint alleges

only one particular compliance manual, dating from 1998, that even mentions either Defendant by

name, and this provision merely lists Mark Madoff as responsible for carrying on the Firms policy

as a matter of last resort, should the companys first two choices be indisposed. (Cplt. 35.) Other

than this single, decade-old document, the Trustee merely alleges unspecified later manuals that also

allegedly designate Mark and Andrew with vague fallback responsibilities. Id. The numerous other

compliance materials cited by the Trustee that do not mention either Mark or Andrew also do not

impose some generalized compliance duty on them over the IA business by virtue of their roles

managing BLMISs separate, legitimate businesses. (Cplt. 28, 32.) Notably, the Complaint

references the manual that governed the IA business, but fails entirely to acknowledge that this

document makes no mention whatsoever of either Mark or Andrew. (Cplt. 31.)4

4 The Complaints selective inclusion of compliance-related evidence is also telling. It is well

documented in publicly available information that BLMIS underwent numerous audits by objective

third parties (such as FINRA and the SEC), yet the Complaint makes no mention of the fact that these

third party securities experts were satisfied with the companys compliance activities. (Ex. N-P.)


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The most that the Trustee alleges specifically with regard to Mark and Andrews

purported compliance duties is that each are FINRA-registered securities principals by virtue of their

having taken the FINRA Series 24 examination. (Cplt. 47-48.) Yet merely taking this exam and

obtaining the resulting license does not automatically impose supervisory responsibilities with regard

to an entire diversified company. As employees of BLMISs legitimate trading operations, Mark and

Andrew Madoff did not assume supervisory responsibilities as to the company as a whole or to the IA

business, and the Complaints mere repetition ad nauseum of bald assertions that lack any support

cannot make it so.

C. The ComplaintOn or about October 2, 2009, the Trustee filed a Complaint in this adversary

proceeding pursuant to 15 U.S.C. 78fff(b), 78fff-1(a), and 78fff-2(c)(3), and 11 U.S.C. 105(a),

502(d), 542, 544, 547, 548(a), 550(a), and 551 (together, the Bankruptcy Code), the New York

Fraudulent Conveyance Act (N.Y. Debt. & Cred. Law 270 et. seq.), and other applicable law,

against Mark and Andrew Madoff, along with their uncle, Peter Madoff, and cousin, Shana Madoff

Swanson. The Complaint asserts eighteen causes of action, including one count for turnover and

accounting, nine counts to avoid transfers under different provisions of the Bankruptcy Code and the

New York Debtor and Creditor Law, one count objecting to Mark and Andrews bankruptcy claims

and one count seeking equitable subordination of those claims. The Trustee also asserts common-law

claims for breach of fiduciary duty, conversion, unjust enrichment, negligence, constructive trust and

accounting.

Notably, the Complaint does notacknowledge that thousands of sophisticated investors

as well as numerous SEC examinations missed the very fraud that Mark and Andrew were alleged to

have missed as well. Indeed, Judge Stanton recently concluded that Bernard Madoff's investment

advisory business did not give notice of fraud, even to long-time associates of Madoff at Cohmad


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Securities Corp. who worked in BLMISs offices directly with Madoff and his investment advisory

staff. SECv. Cohmad Secs. Corp., 2010 WL 363844, at *4 (S.D.N.Y. Feb. 2, 2010). Furthermore,

Britains Serious Fraud Office recently concluded that it would not pursue legal action against MSIL or

its directors (which included Mark and Andrew) due to lack of evidence of wrongdoing. (Ex. X.)

ARGUMENT

To survive a motion to dismiss, the Trustee must raise a right to relief above the

speculative level. ATSI Commcns Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). As the Supreme Court has repeatedly

emphasized in recent years, only a complaint that states a plausible claim for relief [will] survive a

motion to dismiss. Ashcroftv. Iqbal, 129 S.Ct. 1937, 1949-50 (2009). This plausibility standard

requires more than a sheer possibility that a defendant has acted unlawfully, and more than an

unadorned, the defendant-unlawfully-harmed-me accusation. Id. at 1949; see also Twombly, 550 U.S.

at 555 (a plaintiffs obligation to provide the grounds of his entitlement to relief requires more than

labels and conclusions).

In applying these standards under Federal Rule of Civil Procedure 12(b)(6), which

applies here pursuant to Rule 7012(b) of the Federal Rules of Bankruptcy Procedure, a court must

accept as true well-pleaded factual allegations. Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996).

However, allegations consisting of a formulaic recitation of the elements of a cause of action will not

do. Twombly, 550 U.S. at 555. Conclusions unsupported by the facts alleged, legal conclusions, bald

assertions or unwarranted inferences do not survive a motion to dismiss. Id.

The heightened pleading standard announced inIqbal and Twombly applies equally to

bankruptcy trustees and civil plaintiffs. See, e.g., In re 1031 Tax Group, LLC, 2009 WL 4342635

(Bankr. S.D.N.Y. Dec. 3, 2009);In re Caremerica, Inc., 409 B.R. 737 (E.D.N.C. 2009). In fact, the

trustee is certainly more likely to have access to [] information than the antitrust plaintiffs in Twombly


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or the Pakistani detainee inIqbal. If these claimants were held to a heightened pleading standard, so

too can a trustee in bankruptcy. In re Caremerica, Inc., 409 B.R. at 754. The trustee, after all, has

access to the Debtors books and records and the full discovery powers of the Court through the

bankruptcy court procedures. Id.; see also In re Gluth Bros. Const., Inc., 2009 WL 4037795, at *6

(Bankr. N.D. Ill. Nov. 19, 2009) ([a]s the creditor trustee, the Plaintiff should have enough access to

information on the Debtors finances to be able to allege at least some minimal factual support for its

allegation.).

Moreover, for claims based in fraud, the even higher standard of Rule 9(b) of the

Federal Rules of Civil Procedure applies. OConnell v. Arthur Andersen LLP (In re AlphaStar Ins.

Group Ltd.), 383 B.R. 231, 257 (Bankr. S.D.N.Y. 2008) (Even where fraud is not an element of the

claim, the allegations must satisfy Fed. R. Civ. P. 9(b) if the claim is based on fraudulent conduct.);

Matsumura v. Benihana Natl Corp., 542 F. Supp. 2d 245, 251 (S.D.N.Y. 2008) ([C]ourts in the

Second Circuit have applied Rule 9(b) to any cause of action that bears a close legal relationship to

fraud or mistake . . . .). As a result, Rule 9(b) applies to each of the Trustees claims containing a

quintessential averment of fraud. Id. at 252; Welch v. TD Ameritrade Holding Corp., 2009 WL

2356131, at *22-24 (S.D.N.Y. July 27, 2009) (applying Rule 9(b) to, inter alia, breach of fiduciary

duty, negligence and unjust enrichment claims where claims were based on allegations of fraud

described throughout the complaint and each claim incorporated by reference all of the allegations in

the complaint). To the extent the Trustee pleads a non-fraud predicate for any of his claims, he does

not meaningfully distinguish his fraud allegations and, instead, incorporates by reference all

allegations in every count. Therefore, the Trustees Complaint is required to pass muster under the

rigorous pleading standard of Rule 9(b) as well as under Rule 8 of the Federal Rules of Civil

Procedure.


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Here, ten months passed from the Trustees December 15, 2008 appointment to the

filing of this Complaint. During that interval, the Trustee had access to all of BLMISs books and

records, and had vast amounts of information subpoenaed from financial institutions around the world.

Despite the Trustees unique position to summon information to bring these claims, the Trustee fails to

allege sufficient facts to maintain claims of any kind against Mark and Andrew.

I. THE TRUSTEES COMMON LAW CLAIMS FAIL AS A MATTER OF LAW

A. The Martin Act Preempts The Trustees Claims for Breach Of Fiduciary Duty,Conversion, Unjust Enrichment, Negligence, And Constructive Trust

The Trustees common law claims fail as a matter of law because they are precluded by

the Martin Act, New Yorks statutory mechanism for regulating the securities industry. The Martin

Act, N.Y. Gen. Bus. Law 352, et. seq., grants the New York State Attorney General exclusive

enforcement power over claims arising out of securities transactions. To allow private plaintiffs to

bring common law claims related to the Martin Act would detract from the New York State Attorney

Generals exclusive enforcement power over the Act, which does not allow for private rights of action.

Abbey v. 3F Therapeutics, Inc., 2009 WL 4333819, at *14 (S.D.N.Y. Dec. 2, 2009) (dismissing

negligent misrepresentation claim pursuant to Martin Act preemption); Sedona Corp. v. Ladenburg

Thalmann & Co., Inc., 2005 WL 1902780, at *21-23 (S.D.N.Y. Aug. 9, 2005) (dismissing breach of

fiduciary duty and negligence claims).5

5 The vast majority of state and federal courts hold that causes of action related to securities fraud

claims that do not include scienter as an essential element of the claim are preempted by the Martin

Act. In re Bayou Hedge Fund Litig., 534 F. Supp. 2d 405, 421 (S.D.N.Y. 2007); see, e.g., Assured

Guaranty (UK) Ltd. v.J.P. Morgan Inv. Mgmt., Inc., No. 603755/08, 12 (N.Y. Sup. Ct. Jan. 28, 2010)

(dismissing fiduciary duty and gross negligence claims as preempted by Martin Act) (Ex. Y): Kassover

v. UBS AG, 619 F. Supp. 2d 28, 35-39 (S.D.N.Y. 2008) (dismissing various state and common law

claims as precluded by the Martin Act); Marcus v. Frome, 329 F. Supp. 2d 464, 476 (S.D.N.Y. 2004);

Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 190 (2d Cir. 2001) (affirming Martin Act

preemption of breach of fiduciary duty claim); Whitehall Tenants Corp. v. Estate of Olnick, 623

N.Y.S.2d 585, 585 (App. Div. 1995) ([P]rivate plaintiffs will not be permitted through artful pleading


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This preclusionary rule applies to all common law claims that resemble claims the

Attorney General could assert under the Martin Act, which includes five out of the six common law

claims alleged in the Complaint: breach of fiduciary duty, conversion, unjust enrichment, negligence,

and constructive trust. SeePro Bono Invs., Inc. v. Gerry, 2005 WL 2429787, at *16 (S.D.N.Y. Sept.

30, 2005);Abu Dhabi Commercial Bankv. Morgan Stanley & Co. Inc.,651 F. Supp. 2d 155, 182

(S.D.N.Y. 2009). Indeed, a court has recently held that the Martin Acts preclusion of related claims

applies specifically to claims arising out of Bernard Madoffs fraudulent IA business. Barron v.

Igolnikov, No. 09 Civ. 4471, at 11-13 (S.D.N.Y. Mar. 10, 2010) (Ex. Z); see alsoIn re Bayou Hedge

Fund Litig., 534 F. Supp. 2d 405, 407, 422 (S.D.N.Y. 2007) (dismissing fiduciary duty claim against

investment advisor that allegedly did not conduct due diligence for fund that was a Ponzi scheme

because Martin Act preempted the claim). And, there can be no question that the Martin Acts

preemption provisions apply to causes of action brought by a bankruptcy trustee.6 Thus, the Trustee

here must be considered akin to a private plaintiff whose common law claims are nothing more than

to press any claim based on the sort of wrong covered by the Martin Act); Jana Master Fund, Ltd. v.

JPMorgan Chase & Co., 2008 WL 746540, at *5 (N.Y. Sup. Ct. Mar. 12, 2008); CPC Intl Inc. v.

McKesson Corp., 70 N.Y.2d 268, 276-77 (1987).

6 SeeGranite Partners, L.P. v. Bear Stearns & Co., Inc., 17 F. Supp. 2d 275, 282, 291-92 (S.D.N.Y.

1998). In Granite Partners, the court found that common law claims were preempted by the Martin

Act when they were brought by the Litigation Advisory Board, an entity appointed by the court to

succeed the prior bankruptcy trustee and have exclusive authority on behalf of and in the name of the

bankrupt funds. So too here, under the approval of the very same court, the SIPA Trustee was

appointed the Trustee for the liquidation of the business of BLMIS . . . for the benefit of the estate andits creditors. (Cplt. 16-17, 19.) The Securities Investor Protection Corporation (SIPC), which

chooses and works closely with the SIPA Trustee, is a nonprofit, private membership corporation to

which most registered brokers and dealers are required to belong. In re New Times Sec. Servs., 371

F.3d 68, 72 n.3 (2d Cir. 2004) (internal citation omitted); 15 U.S.C. 78fff(b) (stating SIPA

liquidations are conducted as though they are liquidations under the Bankruptcy Code); In re Adler

Coleman Clearing Corp., 195 B.R. 266, 269 (Bankr. S.D.N.Y. 1996) (holding SIPC is a non-profit

corporation and a SIPA liquidation is essentially a bankruptcy liquidation).


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attempts to plead Martin Act claims in common law form, and are therefore preempted by the statute.

(See Cplt. 183-84, 190, 195, 201, 207.)

B. The Complaint Fails To State Claims For Breach Of Fiduciary Duty And NegligenceCounts Thirteen and Sixteen of the Complaint, for breach of fiduciary duty and

negligence, suffer from additional defects that independently require dismissal. The Complaint

includes no allegations even suggesting that Mark and Andrew had a fiduciary relationship with IA

customers, nor could it. Moreover, the Trustee fails to allege any breach of the duties Mark and

Andrew owed to BLMIS and as a matter of law, Bernard Madoffs massive and unforeseeable fraud,

not any action of Mark or Andrew Madoff, caused the damages to BLMIS that the Trustee seeks to

recover.

Under New York law, a claim for breach of fiduciary duty requires threeelements:

breach by a fiduciary of a duty owed to plaintiff; defendants knowing participation in the breach; and

damages. Am. Fin. Intl v. Bennett, 2007 WL 1732427, at *4 (S.D.N.Y. June 14, 2007) (quoting SCS

Commcns, Inc. v. Herrick Co., Inc., 360 F.3d 329, 342 (2d Cir. 2004)). [W]here damages are sought

for breach of fiduciary duty under New York law, the plaintiff must demonstrate that the defendants

conduct proximately caused injury in order to establish liability. LNC Invs., Inc. v. First Fidelity

Bank, N.A. N.J., 173 F.3d 454, 465 (2d Cir. 1999). The elements of a claim for negligence under New

York law are similar: (i) a duty owed to the plaintiff by the defendant; (ii) breach of that duty; and

(iii) injury substantially caused by that breach. DeBlasio v. Merrill Lynch & Co., Inc., 2009 WL

2242605, at *35 (S.D.N.Y. July 27, 2009) (quotingLombardv. Booz Allen & Hamilton, Inc., 280 F.3d

209, 215) (2d Cir. 2002)).

Although the Trustee purports to bring breach of fiduciary duty and negligence claims

on behalf of both BLMIS and Bernard Madoffs investors, Mark and Andrew Madoff owed a duty to

BLMIS only, and not to its IA customers. As a matter of law, there is no fiduciary duty owed to the


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investing public, or to the customers of a corporation by a controlling shareholder, officer, or director

of a corporation. Am. Fin., 2007 WL 1732427, at *4 (citations omitted). Nor do corporate

employees have any general fiduciary duties to the investing public. In re Donahue Secs., Inc., 318

B.R. 667, 676-77 (Bankr. S.D. Ohio 2004), affd, Lutz v. Chitwood, 337 B.R. 160 (S.D. Ohio 2005).

The Trustees allegations that Mark and Andrew were general securities principals pursuant to the

FINRA Securities 24 examination (Cplt. 48) similarly fail to give rise to a fiduciary responsibility to

the IA customers. There is no caselaw to support the illogical inference that simply by virtue of

passing certain FINRA exams, Mark and Andrew Madoff had a fiduciary responsibility for the

operation of the entire diversified securities firm, including aspects of the firm, such as the IA

business, over which the Complaint does not even contend that they had actual responsibility.

As BLMIS employees who ran the legitimate and profitable market making and

proprietary trading desks (Cplt. 7-8), Mark and Andrew Madoff owed a duty to BLMIS to properly

manage those operations. The Trustee does notand cannotallege that Mark or Andrew failed to

properly manage the market making or proprietary trading desks. Indeed, the Trustees sale of the

legitimate market making business was one of his first recoveries for IA customers.

1. The Trustee Fails To Plead That Mark Or Andrew Breached Any Duty To BLMISThe Trustees breach of duty claims consist of two basic allegations: (1) that Mark and

Andrew failed to carry out compliance and supervisory responsibilities; and (2) that Mark and Andrew

received corporate assets for their personal use. (Cplt. 184, 201.) Neither constitutes a breach of

duties Mark and Andrew owed to BLMIS; they thus should be dismissed as a matter of law. As stated

in Section I.B and pages 7-9, above, the Trustee has not alleged that Mark and Andrew failed to carry

out their actual responsibilities over the market making and proprietary trading desks. Instead, the

Trustee misstates the scope and nature of Mark and Andrews responsibilities at BLMIS (of which this

Court may take notice, because such misstatements stand in flat contradiction to the very documents


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the Trustee himself cites in the Complaint), then claims that Mark and Andrew failed to attend to the

responsibilities he retroactively assigns them.

The Trustees claims related to the alleged transfers of corporate assets to Mark and

Andrew Madoff fail as breaches of fiduciary duty because each of the alleged transfers, including the

payment of salaries and bonuses and use of the companys credit card, would have been initiated or

approved by BLMIS through its sole shareholder, Bernard Madoff. By initiating or approving the

transactions, BLMIS waived any claims against Mark or Andrew Madoff for breach of fiduciary duty.

See Roden v. Dans Papers, Inc., 2006 WL 3437528, at *2 (N.Y. Sup. Ct. App. Term Nov. 9, 2006)

(employers approval of employees conduct waived employers counterclaims for breach of

employees duty of loyalty related to that conduct); Kaul v.Hanover Direct, Inc., 296 F. Supp. 2d 506,

542 (S.D.N.Y. 2004) (no breach of fiduciary duty for employees acceptance of car allowance payment

when senior management authorized the transaction). Because any alleged transfers of corporate

assets to Mark or Andrew Madoff would have been approved by BLMIS, Mark and Andrew did not

act[] in any manner inconsistent with [their] agency or trust. Gortatv. Capala Bros., Inc., 585 F.

Supp. 2d 372, 366 (E.D.N.Y. 2008).

2. Bernard Madoffs Massive Fraud Was The Cause Of BLMISs DamagesEven if the Trustee had adequately alleged a breach of a duty owed to BLMIS by Mark

or Andrew, this purported breach was not the cause of its alleged losses: Bernard Madoffs massive

and unforeseeable fraud caused BLMIS to collapse. Under ordinary circumstances no one is

chargeable with damages because he has not anticipated the commission of a crime by some third

party. Berenson v. Natl Surety Co., 260 N.Y. 299, 303 (1932) (citations omitted). Here, the criminal

conduct of Bernard Madoff destroyed the causal relationship between any purported negligent conduct

by Mark or Andrew Madoff and the injuries suffered by investors. Seeid.; Ehle v.Howard, 2006 WL

948120, at *1 (N.Y. Sup. Ct. Apr. 7, 2006) (dismissing claim where, inter alia, intervening criminal


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acts of a third-party supersede[d] the claimed negligence). Because negligence liability and a

fiduciary duty claim for damages require that a plaintiffs injury must be a foreseeable result of the

defendants conduct, an intervening act, tortious or criminal, will ordinarily insulate a negligent

defendant from liability when the subsequent act could not have been reasonably anticipated by the

defendant. Cullen v. BMW of N. Am., Inc., 691 F.2d 1097, 1101 (2d Cir. 1982) (holding that the

defendant automobile distributor was not negligent in failing to more carefully supervise one of its

franchises because it was not reasonably foreseeable that the franchises majority owner would steal a

customers payment.) Bernard Madoffs fraud in the present case is all the more unforeseeable and

beyond the realm of ordinary events. See S.E.C. v. Cohmad Secs. Corp., 2010 WL 363844, at *2

(S.D.N.Y. Feb. 2, 2010).

C. The Trustees Claim for Conversion Fails As A Matter Of Law Because The Funds OverWhich Mark And Andrew Madoff Allegedly Assumed Unauthorized Control Were Not

Specifically Identifiable

In yet another example of overreaching, the Trustee purports to assert a conversion

claim, as if a conversion claim is simply equivalent to a claim for money damages. It is not, and the

Trustee fails to meet the requisite standards for this equitable claim. Funds deposited in a personal

bank or investment account must be sufficiently specific and identifiable in relation to the

institutions other funds in order to be subject to conversion claims. Fundacion Museo de Arte v. CBI-

TDB Union Bancaire Privee, 160 F.3d 146, 148 (2d Cir. 1998) (affirming dismissal of conversion

claim).7 The Trustees pleading identifies no such specific funds, and this claim therefore should be

dismissed.

7 See also Jordan (Bermuda) Inv. Co., Ltd. v. Hunter Green Invs., Ltd., 2003 WL 1751780, at *5, 14

(S.D.N.Y. 2003) (dismissing conversion claim because money at issue was incapable of being

described or identified in the same manner as a specific chattel since it was deposited into a general

account rather than maintained separately) (quotingHigh View Fund, L.P. v. Hall, 27 F. Supp. 2d 420,

429 (S.D.N.Y. 1998)); Citadel Mgmt., Inc. v. Telesis Trust, Inc., 123 F. Supp. 2d 133, 148 n.4, 151


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The Trustees allegation that investment funds of IA customers were generally used for

loans, payments, and other transfers does not allege any facts tying specific sums deposited by

particular customers of the IA business to identifiable amounts received by Mark or Andrew Madoff.

(Cplt. 190.) The Trustee cannot even tie the alleged transfers to the IA business, much less to

specific IA customers. BLMIS had numerous substantial sources of income deriving from its

legitimate market making and proprietary trading businesses. (Exs. D-E, G.) The Trustee does not

offer any facts supporting the contention that the amounts allegedly received by Mark and Andrew

originated from deposits by IA customers rather than from these other sources of revenue. SeeIn re

Musicland Holding Corp., 386 B.R. 428, 440 (S.D.N.Y. 2008) (affirming bankruptcy courts dismissal

of conversion claim because funds were not specifically identifiable where appellee might have been

paid from loan advance rather from the proceeds of appellants collateral). The Trustees conversion

claim therefore fails as a matter of law.8

D. The Trustees Unjust Enrichment Claim Fails As A Matter of Law Because Mark AndAndrew Madoff Did Not Have Any Direct Relationship With Investors

Under New York law, claims for unjust enrichment require the plaintiff to have an

actual, substantive relationship with the defendant. See, e.g., Carmona v. Spanish Broad. Sys., Inc.,

2009 WL 890054, at *6 (S.D.N.Y. Mar. 30, 2009) (requiring direct dealing between plaintiff radio

(S.D.N.Y. 2000) (dismissing conversion claim because funds were not segregated or earmarked in a

distinct account).

8 This claim fails for two additional reasons. First, the Trustee failed to make a formal demand that

Mark and Andrew return the money at issue. SeeCoty Inc. v. L'Oreal S.A., 2008 WL 331360, at *5

(S.D.N.Y. Feb. 4, 2008) (where demand has not been made, the court must dismiss claim ofconversion); Thyroff v. Nationwide Mutual Ins. Co., 2010 WL 76154, at *2 (2d Cir. Jan. 11, 2010)

(affirming dismissal of conversion claim for failure to produce sufficient evidence of demand).

Second, Mark and Andrew did not receive any unauthorized transfers subject to conversion. See

Lefkowitz v. Bank of New York, 2009 WL 5033951, at *17-18 (S.D.N.Y. Dec. 22, 2009) (dismissing

conversion claim because bank acted with authority to set aside money to satisfy plaintiffs

obligations). The Trustee does not allege that any transfers were unauthorized by either BLMIS or its

sole shareholder, Bernard Madoff.


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station listener who responded to on-air trivia contest and defendant radio station); Nanjing Textiles

IMP/EXP Corp., Ltd. v. NCC Sportswear Corp., 2006 WL 2337186, at *12 (S.D.N.Y. Aug. 11, 2006)

(dismissing unjust enrichment claim because apparel provider did not have direct dealing with

defendant, but rather sold to defendant through an intermediary). Even crediting the Trustees bare

factual allegations, they are insufficient to establish any actual, substantive relationship between the IA

customers, and Mark and Andrew.

Additionally, corporate employees and officers are not personally liable for unjust

enrichment claims based on benefits conferred on a corporation. Hellerv. Kurz, 228 A.D.2d 263, 264

(N.Y. App. Div. 1996);Joan Hansen & Co., Inc. v.Everlast Worlds Boxing Headquarters Corp., 744

N.Y.S.2d 384, 389 (App. Div. 2002). Even where a defendant is actively involved in a corporations

affairswhich was not the case here because Mark and Andrew had no involvement whatsoever in the

IA business, or in the overall management of BLMISa claim for unjust enrichment fails if the

plaintiff points to no service that was rendered to defendant . . . for which plaintiff can reasonably

expect compensation. Joan Hansen, 744 N.Y.S.2d at 389.9 Receiving compensation as an employee

of a corporation, even if the corporation undertook wrongful actions, is not a sufficient basis for an

unjust enrichment claim. Am. Fin. Intl v. Bennett, 2007 WL 1732427, at *3 (S.D.N.Y. June 14, 2007)

(dismissing unjust enrichment claim). Because IA customers transferred funds to BLMIS rather than

to Mark and Andrew Madoff personally, the Trustees claim for unjust enrichment against Mark and

Andrew fails as a matter of law.

The Trustees unjust enrichment claim also fails because such a claim must be based on

an unfulfilled expectation of services. Heller, 228 A.D.2d at 265 (affirming dismissal of claim against

9 Even these cases deal with high level officers of the corporations at issue. Mark and Andrew ran

BLMISs proprietary trading and market making businesses, but there is no allegation that they were

high-level employees of BLMIS overall, and certainly not of the IA business. They therefore are even

less connected to the actions of the corporation than the defendants in the cases cited above.


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individual shareholders where corporations underwriter made no showing that he performed any

additional services for the individual defendants for which he reasonably expected compensation from

them);Nanjing Textiles, 2006 WL 2337186, at *12;Joan Hansen, 744 N.Y.S.2d at 389. BLMIS had

no expectation that Mark and Andrew would provide any services to the company beyond their

responsibilities in the proprietary trading and market making businesses, which Mark and Andrew

dutifully carried out.

E. The Trustees Claims For Constructive Trust And Accounting Fail As A Matter of LawFour elements are required in order to obtain a constructive trust under New York law:

(1) a confidential or fiduciary relationship; (2) a promise, express or implied; (3) a transfer of the

subject res made in reliance on that promise; and (4) unjust enrichment. In re First Cent. Fin. Corp.,

377 F.3d 209, 212 (2d Cir. 2004) (internal citations omitted). Similarly, the right to an accounting also

rests on existence of a fiduciary and confidential relationship between the parties. PVM Oil Futures,

Inc. v. Banque Paribas, 554 N.Y.S.2d 606, 608 (App. Div. 1990) (affirming dismissal of accounting

claim) (citing Kaminsky v. Kahn, 20 N.Y.2d 573, 582 (1967)); Kramerv. Lockwood Pension Servs.,

Inc., 653 F. Supp. 2d 354, 396 (S.D.N.Y. 2009) (In order to sustain an equitable action for accounting

under New York law, a plaintiff must show either a fiduciary or confidential relationship with the

defendant).

As explained above, Mark and Andrew did not have any fiduciary duties or general

compliance responsibilities towards BLMIS as a whole or to the IA customers (see supra Section I.B).

Because the existence of such duties is an essential element of claims for a constructive trust and an

accounting, these causes of action fail as a matter of law. Wachovia Sec., LLCv. Joseph, 866 N.Y.S.2d

651, 653 (App. Div. 2008) (holding absence of a fiduciary relationship precludes entitlement to a

constructive trust); Sugarman v. Weisz, 310 N.Y.S.2d 394, 394 (App. Div. 1970) (reversing order

directing an accounting because of absence of fiduciary relationship between the parties). Moreover,


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the absence of any unjust enrichment by Mark and Andrew also negates the unjust enrichment element

of the Trustees constructive trust claim. (Cplt. 209.) Because the Trustees unjust enrichment claim

fails as a matter of law (see supra Section I.D), so does his attempt to impose a constructive trust.10

The Trustees constructive trust claim also fails as a matter of law because the

Complaint does not allege a promise or a transfer of property in reliance thereof. Weizmann Inst.

of Science v. Neschis, 229 F. Supp. 2d 234, 258 (S.D.N.Y. 2002) (dismissing claim for a constructive

trust because of plaintiffs failure to allege either a promise or a transfer of any property in reliance on

a promise); Van Brunt v. Rauschenberg, 799 F. Supp. 1467, 1474 (S.D.N.Y. 1992) (Without a

transfer of property in reliance of a promise or agreement, there cannot be a constructive trust.). The

Trustee does not allege that Mark and Andrew made unfulfilled promises to BLMIS or to customers of

the IA business, nor does the Trustee allege that BLMIS or IA customers transferred property in

reliance on any such unfulfilled promises. The same rationale dooms the accounting claim. Waldman

v. Englishtown Sportswear, Ltd., 460 N.Y.S.2d 552, 556 (App. Div. 1983) (holding an employment

relationship is insufficient to establish an accounting).

The Trustees accounting claim also fails because the Trustee has not alleged that Mark

and Andrew were intrusted with the custody and control of the property of another and that they

exercised such powers for the owner. Pelkey v. Pelkey, 258 N.Y.S. 562, 563 (App. Div. 1932);

Kramer, 653 F. Supp. 2d at 396 (dismissing claim for accounting because there is no allegation that

[plaintiff] entrusted property to [defendant]). The Trustee has not even alleged that Mark and Andrew

received funds deposited by IA customers (see supra Section I.C), much less that the IA customers

trusted Mark and Andrew with control of their property. Similarly, any amounts that Mark and

10 Additionally, bankruptcy courts are reluctant to impose a constructive trust unless there is a special needfor doing so because by creating a separate allocation mechanism outside the scope of the bankruptcysystem, the constructive trust doctrine can wreak . . . havoc with the priority system ordained by theBankruptcy Code. In re First Cent. Fin. Corp., 377 F.3d at 217 (citations omitted).


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Constr. Inc. v. Consol. Edison Co. of New York, Inc. (In re Andrew Velez Constr., Inc.),373 B.R. 262,

273 (Bankr. S.D.N.Y. 2007) (same).12 To recover any transfers, the Trustee first must avoid the

transfers under Sections 544, 547 or 548, and then establish a basis for recovery under Section 550.

Teligent, 307 B.R. at 749 (The Code separates the avoidance of a fraudulent transfer from the

recovery of a fraudulent transfer.). Once the grounds for setting aside a transfer have been shown,

the Trustee faces the second hurdle of establishing a means of recovery under 550(a), the remedies

section. Id. (citations omitted). Because the Trustee has ignored these procedures, the Section 542

turnover and accounting claim should be dismissed.

B. The Trustee Fails To State A Claim For Recovery Of The Preference Period TransfersCount Two seeks to recover compensation payments made to Mark and Andrew

Madoff, as insiders, during the one year period before the Filing Date pursuant to Section 547 of the

Bankruptcy Code. (Cplt. 116-26.) However, Count Two fails because the Trustees allegations lack

any semblance of the specificity required under Rules 8 or 9(b). Rather than specifying the transferee,

the amount of the transfer, and the date on which the transfer occurred, the Trustee lumps together the

entire amount of compensation that Mark and Andrew allegedly received over seven years (Cplt.

74, 85) with the entire amount of compensation that all four so-called Family Defendants

received during the one-year preference period. (Cplt. 108.) These aggregated allegations lack

sufficient factual detail and thus should be dismissed.13

12 SIPAs relevant language is consistent with this interpretation and authorizes the trustee to recover

property transferred by the debtor only if and to the extent that such transfer is voidable or void under

the provisions of Title 11 . . . . 15 U.S.C. 78fff-2(c)(3).

13 Contra In re Caremerica, Inc., 409 B.R. 737, 750-51 (Bankr. E.D.N.C. 2009) (table of transfers listing

the transferees, amounts, and dates of each transfer provided sufficient factual support under Twombly

andIqbal that allegedly preferential transfers were made to defendants);In re Gluth Bros. Const., Inc.,

2009 WL 4110122, at *12-13 (Bankr. N.D. Ill. Nov. 25, 2009) (allegations that the debtor made

interest payments to the Defendant on the loan, including payments of $12,775.57 on March 9, 2007,


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The Complaint also fails to allege the nature and amount of the antecedent debt that

BLMIS owed to each of Mark and Andrew Madoff. As one court explained, In order to satisfy the

pleading requirements underIqbal, the court finds that the trustee is obligated to allege facts regarding

the nature and amount of the antecedent debt which, if true, would render plausible the assertion that a

transfer was made for or on account of such antecedent debt. In re Caremerica, Inc., 409 B.R. at 751.

In addition, facts supporting the remaining elements of a Section 547 claima transfer made to or for

the benefit of a creditor, the insolvency of the transferor on the date of the transfers outside the 90-day

period, and the receipt of more through the alleged preferential transfer than available under a Chapter

7 liquidationappear nowhere in the Complaint. See 11 U.S.C. 547(b)(1), (3), (4), (5); In re

Caremerica, 409 B.R. at 750-54 (applying Iqbal pleading standards to each element). Instead, the

Trustees allegations merely mimic the elements of Section 547(b) (Cplt. 119-24), and should be

dismissed. See Twombly, 550 U.S. at 555 (a formulaic recitation of the elements of a cause of action

will not do).

C. The Trustee Fails To State A Claim For Actual Fraudulent Transfers Under TheBankruptcy Code

Pursuant to Bankruptcy Code Section 548(a)(1)(A), Count Three seeks to recover

transfers made to Mark and Andrew Madoff within the two years before the petition date on the

ground that such transfers constitute actual fraudulent transfers. (Cplt. 127-31.) Count Three fails

because the Complaint itself shows the transfers were made for value and in good faith, and in all

events, the Trustee fails to plead fraud with the particularity required by Rule 9(b).

$14,144.39 on April 2, 2007, and $13,688.12 on May 10, 2007 were sufficient to plead a preference

claim under Twombly/Iqbal).


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1. The Trustees Actual Fraudulent Transfer Claim Must Be Dismissed Because TheAlleged Transfers Were For Value And In Good Faith

The Trustees actual fraudulent transfer claim under the Bankruptcy Code should be

dismissed because Mark and Andrew received the transfers for value and in good faith in accordance

with Section 548(c). SeeBalaber-Strauss v. Sixty-Five Brokers (In re Churchill Mortgage Inv. Corp.),

256 B.R. 664, 676 (Bankr. S.D.N.Y. 2000) (dismissing actual fraudulent conveyance claims because

trustee made no allegations that transfers were not for value and in good faith), affd, Balaber-

Strauss v. Lawrence, 264 B.R. 303, 308 (S.D.N.Y. 2001).14 Because the statute only targets transfers

connected to the fraud, [n]ot every transaction which has the effect of exacerbating the harm to

creditors by increasing the amount of claims while diminishing the debtors estate is a fraudulent

conveyance. Churchill, 256 B.R. at 681. Courts readily dismiss complaints that demonstrate for

value and in good faith. Id. at 680, 682;In re Image Masters, 421 B.R. 164, 180 n.19, 183 (Bankr.

E.D. Pa. 2009) (dismissing actual fraud claims where allegations in the complaint established that

transfers were made for equivalent value and in good faith).

(a) The Alleged Transfers Were Made For ValueThe statute governing actual fraudulent transfers (11 U.S.C. 548) is not a catch-all

provision indiscriminately covering all transfers that diminish the estate. Churchill, 256 B.R. at 681.

Rather, transfers that are made for value may not be avoided because the company received

consideration in exchange and benefited from that value. Id. at 680. The for value assessment

14

Even if the rule permitting fraudulent transfers made for value and in good faith is considered anaffirmative defense, the cases cited above demonstrate that where the defense appears on the face of

the complaint, it may mandate dismissal of a complaint. Pani v. Empire Blue Cross Blue Shield, 152

F.3d 67, 74 (2d Cir. 1998); Leveto v. Lapina, 258 F.3d 156, 161 (3d Cir. 2001) (holding a complaint

may be dismissed under Rule 12(b)(6) if an affirmative defense is apparent on the face of the

complaint); see also 5B Wright & Miller, Federal Practice and Procedure 1357 (3d ed. 2009)

(stating case law is clear that a complaint is subject to dismissal

PACER - Mark and Andrew Madoff's Motion to have Picard's suit dismissed

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