UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW … · 2017. 8. 25. · united states...

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

In re:

BERNARD L. MADOFF, Adv. Pro. No. 15-01293 (SMB)

Debtor.

SUSANNE STONE MARSHALL, ADELE FOX, MARSHA PESHKIN, and RUSSELL OASIS,

Appellants,

v. Case No.: 1:17-cv-02230 (VSB) CAPITAL GROWTH COMPANY; DECISIONS, INC.; FAVORITE FUNDS; JA PRIMARY LIMITED PARTNERSHIP; JA SPECIAL LIMITED PARTNERSHIP; JAB PARTNERSHIP; JEMW PARTNERSHIP; JF PARTNERSHIP; JFM INVESTMENT COMPANIES; JLN PARTNERSHIP; JMP LIMITED PARTNERSHIP; JEFFRY M. PICOWER SPECIAL COMPANY; JEFFRY M. PICOWER, P.C.; THE PICOWER FOUNDATION; THE PICOWER INSTITUTE OF MEDICAL RESEARCH; THE TRUST F/B/O GABRIELLE H. PICOWER; BARBARA PICOWER, individually, and as Executor of the Estate of Jeffry M. Picower, and as Trustee for the Picower Foundation and for the Trust f/b/o Gabrielle H. Picower; and IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC,

ORAL ARGUMENT REQUESTED

Appellees.

BRIEF OF APPELLEE IRVING H. PICARD

Baker & Hostetler LLP 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 Attorneys for Appellee Irving H. Picard, Trustee

Case 1:17-cv-02230-VSB Document 22 Filed 08/24/17 of 41

TABLE OF CONTENTS

Page

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COUNTER-STATEMENT OF ISSUE PRESENTED ....................................................................1

COUNTER-STATEMENT OF THE CASE ...................................................................................1

COUNTER-STATEMENT OF STANDARD OF REVIEW ..........................................................3

COUNTER-STATEMENT OF FACTS ..........................................................................................4

I. THIS COURT’S NET EQUITY DECISION ..........................................................4

II. APPELLANTS’ PARTICIPATION IN THE BANKRUPTCY PROCEEDINGS ......................................................................................................5

III. THE TRUSTEE’S AVOIDANCE ACTION ...........................................................6

IV. THE PICOWER SETTLEMENT AND ISSUANCE OF THE INJUNCTION ..........................................................................................................7

V. FOX’S AND MARSHALL’S FIRST CHALLENGE TO THE PERMANENT INJUNCTION ................................................................................7

A. The Bankruptcy Court’s Enforcement of the Permanent Injunction as Against Fox and Marshall ......................................................7

B. The District Court Affirms the Enforcement of the Permanent Injunction as Against Fox and Marshall ....................................8

C. The Second Circuit Affirms the Enforcement of the Permanent Injunction Against Fox and Marshall ........................................9

VI. FOX/MARSHALL II: THE FOX PLAINTIFFS UNSUCCESSFULLY TRY AGAIN TO CIRCUMVENT THE PERMANENT INJUNCTION ................................................................................9

A. The Bankruptcy Court Again Enforces the Permanent Injunction .....................................................................................................9

B. The District Court Affirms the Bankruptcy Court’s Enforcement of the Permanent Injunction as Against Appellants ..................................................................................................11

VII. THE BANKRUPTCY AND DISTRICT COURTS HOLD THE GOLDMAN III CLAIMS DERIVATIVE OF THE TRUSTEE’S CLAIMS ................................................................................................................12

VIII. APPELLANTS SEEK DISCOVERY ON THEIR CLAIMS ................................15

IX. THE FOX/MARSHALL III COMPLAINT.............................................................16


TABLE OF CONTENTS (continued)

Page

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X. THE FOX/MARSHALL III BANKRUPTCY COURT DECISION.......................16

SUMMARY OF ARGUMENT .....................................................................................................19

ARGUMENT: THE PERMANENT INJUNCTION BARS FOX/MARSHALL III ...................................20

I. APPELLANTS’ CLAIMS ARE BARRED BY THE PERMANENT INJUNCTION BECAUSE THEY ARE GENERALIZED CLAIMS THAT ARE DERIVATIVE AND DUPLICATIVE OF THE TRUSTEE’S CLAIMS ................................................20

A. Generalized Claims That Allege No Particularized Conduct Toward The Plaintiffs Nor Any Particularized Injury Are Derivative Claims ......................................................................................20

B. Most of the Appellants’ Allegations Were Previously Held to be Derivative and Barred by the Permanent Injunction .........................21

C. The “New” Allegations Are Barred by the Permanent Injunction ...................................................................................................23

a. The Propping Up Loan Allegations Are Barred ............................24

b. The Counterparty Allegations Are Barred .....................................25

D. Madoff Did Not Testify That Picower Controlled the Fraud at BLMIS or Took Any Actions Outside of His Own Accounts ....................................................................................................27

II. APPELLANTS’ REMAINING ARGUMENTS ARE UNAVAILING ......................................................................................................30

A. The Trustee’s Standing Is Not at Issue ......................................................30

B. Labeling a Claim as a Control Person Claim Does Not Avoid the Permanent Injunction ................................................................31

III. APPELLANTS SHOULD NOT BE ALLOWED TO CIRCUMVENT THE NET EQUITY DECISION ................................................32

CONCLUSION ..............................................................................................................................35


TABLE OF AUTHORITIES

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Page(s)

Cases

A & G Goldman P’ship v. Capital Growth Co. (In re Bernard L. Madoff Inv. Sec. LLC), 565 B.R. 510 (S.D.N.Y. 2017) ......................................................................................... passim

A & G Goldman P’ship v. Picard (In re Bernard L. Madoff Inv. Sec. LLC), No. 12 Civ. 6109 (RJS), 2013 WL 5511027 (S.D.N.Y. Sept. 30, 2013) ......................... passim

Baker v. Dorfman, 239 F.3d 415 (2d Cir. 2000).....................................................................................................22

In re Bernard L. Madoff Inv. Sec. LLC, 424 B.R. 122 (Bankr. S.D.N.Y. 2010) ...................................................................................4, 5

In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011)...........................................................................................1, 4, 5, 9

Bettis v. Kelly, 137 F. App’x 381 (2d Cir. 2005) .............................................................................................22

Cumberland Oil Corp. v. Thropp, 791 F.2d 1037 (2d Cir. 1986)...................................................................................................32

In re First Central Financial Corp., 238 B.R. 9 (Bankr. E.D.N.Y. 1999) .........................................................................................32

Fox v. Picard (In re Bernard L. Madoff), 848 F. Supp. 2d 469 (S.D.N.Y. 2012) .............................................................................. passim

Fox v. Picard (In re Bernard L. Madoff Inv. Sec. LLC), 531 B.R. 345 (S.D.N.Y. 2015) ......................................................................................... passim

Grieve v. Tamerin, 269 F.3d 149 (2d Cir. 2001).....................................................................................................22

H & C Dev. Grp., Inc. v. Miner (In re Miner), 229 B.R. 561 (2d Cir. 1999) ......................................................................................................4

Highland Cap. Mgmt. LP v. Chesapeake Energy Corp. (In re Seven Seas Petroleum), 522 F.3d 575 (5th Cir. 2008) .............................................................................................32, 33

Johns-Manville Corp. v. Chubb Indem. Ins. Co. (In re Johns-Manville Corp.), 517 F.3d 52 (2d Cir. 2008),......................................................................................................21


TABLE OF AUTHORITIES (continued)

Page(s)

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Legnani v. Alitalia Linee Aeree Italiane, S.P.A., 400 F.3d 139 (2d Cir. 2005).....................................................................................................22

In re Lehman Bros. Inc., 519 B.R. 434 (S.D.N.Y. 2014) ...................................................................................................3

Major v. Sony Music Entm’t. Inc., No. 92-CV-2826, 1992 WL 210115 (S.D.N.Y. Aug. 17, 1992) ..............................................22

Marshall v. Capital Growth Co. (In re Bernard L. Madoff), 568 B.R. 203 (Bankr. S.D.N.Y. 2017) ............................................................................. passim

Marshall v. Madoff, No. 15-mc-56 (JGK), 2015 WL 2183939 (S.D.N.Y. May 11, 2015) ......................3, 15, 16, 33

Marshall v. Picard (In re Bernard L. Madoff Inv. Sec. LLC), 740 F.3d 81 (2d Cir. 2014)............................................................................................... passim

Medsker v. Feingold, 307 F. App’x 262 (11th Cir. 2008) ..........................................................................................32

In re Metaldyne Corp., 421 B.R. 620 (S.D.N.Y. 2009) ...............................................................................................3, 4

Picard v. A & G Goldman P’ship (In re Bernard L. Madoff), 546 B.R. 284 (Bankr. S.D.N.Y. 2016) ............................................................................. passim

Picard v. Fox (In re Bernard L. Madoff), 429 B.R. 423 (Bankr. S.D.N.Y. 2010) .......................................................................8, 9, 32, 34

Picard v. JPMorgan Chase & Co. (In re Bernard L. Madoff Inv. Sec. LLC), 721 F.3d 54 (2d Cir. 2014).................................................................................................21, 30

Picard v. Marshall (In re Bernard L. Madoff), 511 B.R. 375 (Bankr. S.D.N.Y. 2014) ............................................................................. passim

Picard v. Marshall, Adv. Pro. No. 14-1840, 2014 WL 5486279 (Bankr. S.D.N.Y. Oct. 31, 2014) .......................15

Picard v. Stahl (In re Bernard L. Madoff), 443 B.R. 295 (Bankr. S.D.N.Y. 2011) .....................................................................................33

Rieger v. Drabinksy (In re Livent, Inc. Noteholders Sec. Litig.), 151 F. Supp. 2d 371 (S.D.N.Y. 2001) ........................................................................................4


TABLE OF AUTHORITIES (continued)

Page(s)

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Ritchie Capital Mgmt. L.L.C. v. General Elec. Capital Corp., 121 F. Supp. 3d 321 (S.D.N.Y. 2015) ......................................................................................32

In re Saint Vincents Catholic Med. Ctrs. of N.Y., 449 B.R. 209 (S.D.N.Y. 2011) ...................................................................................................4

Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff), 477 B.R. 351 (Bankr. S.D.N.Y. 2012) ...........................................................................4, 10, 34

St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989)............................................................................................. passim

In re Third Eighty-Ninth Assocs., 138 B.R. 144 (S.D.N.Y. 1992) ...................................................................................................4

Tronox Inc. v. Kerr-McGee Corp. (In re Tronox), 855 F.3d 84 (2d Cir. 2017)............................................................................................... passim

United States v. Taylor, 644 F.3d 573 (7th Cir. 2011) ...................................................................................................25

Statutes

11 U.S.C. § 105(a) ...........................................................................................................................8

15 U.S.C. § 78fff-2(c)(1) .................................................................................................................5

Securities Exchange Act of 1934, 15 U.S.C. § 78t ..........................................................................2

Securities Exchange Act § 20(a) ............................................................................................ passim

Rules

Fed. R. Bankr. P. 8018 .....................................................................................................................3

Fed. R. Civ. P. 27 .....................................................................................................................15, 16

Other Authorities

Helen Davis Chaitman & Lance Gotthoffer, JP MADOFF: THE UNHOLY ALLIANCE

BETWEEN AMERICA’S BIGGEST BANK AND AMERICA’S BIGGEST CROOK, http://bit.ly/2woMRc7 ..............................................................................................................29

MADOFF VICTIM FUND, http://www.madoffvictimfund.com ...........................................................7


COUNTER-STATEMENT OF ISSUE PRESENTED

Whether the bankruptcy court properly held that Appellants’ putative class action

complaint (“Fox/Marshall III”) was duplicative and derivative of the Trustee’s action against

Jeffry M. Picower (“Picower”) and related individuals and entities ( “Picower Parties”)1 and was

thus barred by a permanent injunction (“Permanent Injunction”) previously issued by the

bankruptcy court and affirmed by the Second Circuit.

COUNTER-STATEMENT OF THE CASE

Since 2010, Appellants Adele Fox and Susanne Marshall have been attempting to

circumvent the Second Circuit’s “Net Equity Decision,” pursuant to which BLMIS customers are

not entitled to their false profits from Madoff’s Ponzi scheme, by bringing third party claims

against the estate of Jeffry M. Picower. In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229,

242 (2d Cir. 2011). As with earlier versions of the complaint, Fox/Marshall III violates the

Permanent Injunction, which enjoins litigants from suing the Picower Parties for claims that are

duplicative or derivative of claims the Trustee brought or could have brought against the Picower

Parties. Appellants themselves now admit—after years of wasteful litigation and unnecessary

cost—that Fox/Marshall I and Fox/Marshall II were properly barred by the Permanent

Injunction. (Fox/Marshall (“F/M”) Br. at 5.)

Appellants contend that Fox/Marshall III is somehow different from its predecessors. Yet

as with prior iterations of the complaint, this version asserts claims that are likewise barred by

the Permanent Injunction, as it continues to assert derivative and duplicative claims. While

1 The “Picower Parties” are: Capital Growth Company; Decisions, Inc.; Favorite Funds; JA Primary Limited Partnership; JA Special Limited Partnership; JAB Partnership; JEMW Partnership; JF Partnership; JFM Investment Companies; JLN Partnership; JMP Limited Partnership; Jeffry M. Picower Special Company; Jeffry M. Picower, P.C.; the Picower Foundation; the Picower Institute of Medical Research; the Trust F/B/O Gabrielle H. Picower; Barbara Picower, individually, and as executor of the estate of Jeffry M. Picower, and as Trustee for the Picower Foundation and for the Trust F/B/O Gabrielle H. Picower.


2

Fox/Marshall III ostensibly relies on the testimony of Bernard Madoff and former BLMIS

employees, the only non-conclusory testimony provides nothing more than that Madoff made the

conscious decision to engage in fraud and that Picower profited from it by engaging in

manipulations within his own accounts. Marshall v. Capital Growth Co. (In re Bernard L.

Madoff), 568 B.R. 203, 213–14 (Bankr. S.D.N.Y. 2017) (hereinafter, F/M III Bankr. Ct. Op.).

Not only did the Trustee plead as much in 2009 and settle with the Picower Parties on the basis

of these claims (as did the government), but the Second Circuit already has held that claims

based on Picower’s own account activity are barred by the Permanent Injunction. Marshall v.

Picard (In re Bernard L. Madoff Inv. Sec. LLC), 740 F.3d 81, 92 (2d Cir. 2014) (hereinafter, F/M

I Second Cir. Op.).

Moreover, the testimony of former BLMIS employees was lifted nearly verbatim from

allegations made by a competing set of class action plaintiffs, the “Goldmans,” and both the

bankruptcy court and this Court have already held that allegations based on that testimony state,

at best, generalized claims that Picower deepened the insolvency by furthering the Ponzi scheme,

harming all creditors. A & G Goldman P’ship v. Capital Growth Co. (In re Bernard L. Madoff

Inv. Sec. LLC), 565 B.R. 510, 523 (S.D.N.Y. 2017) (Woods, J.) (hereinafter, G III Dist. Ct. Op.);

Picard v. A & G Goldman P’ship (In re Bernard L. Madoff), 546 B.R. 284, 300–03 (Bankr.

S.D.N.Y. 2016) (hereinafter, G III Bankr. Ct. Op.). Such derivative claims are barred by the

Permanent Injunction under the well-settled law of this Circuit. See Tronox Inc. v. Kerr-McGee

Corp. (In re Tronox), 855 F.3d 84, 101–02 (2d Cir. 2017); F/M I Second Cir. Op., 740 F.3d at

92–93; St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 705–07 (2d Cir. 1989).

Moreover, while Appellants claim they have alleged that Picower was a “control person”

under the Securities Exchange Act of 1934, 15 U.S.C. § 78t (“Exchange Act”), the bankruptcy


3

court looked beyond the label of the cause of action, as every other court reviewing complaints

that purport to escape the reach of the Permanent Injunction has done, and found that the

Fox/Marshall III allegations did not state a bona fide control person claim. The bankruptcy

court’s factual findings, reviewed for clear error, are supported by the evidence.

Having admitted they failed to state a claim outside the Permanent Injunction in

Fox/Marshall I and II, and fully aware that every reviewing court has likewise found Goldman I,

II, and III to state derivative claims, Appellants nevertheless claim that the bankruptcy court was

biased and used the wrong standard of review. But the bankruptcy court painstakingly reviewed

Fox/Marshall III and its evidentiary basis, and applied the standard for determining a derivative

claim used by every other reviewing court, including the Second Circuit. See, e.g., F/M III

Bankr. Ct. Op., 568 B.R. at 209–10. Finally, while demands for discovery permeate their brief,

Appellants cannot use an otherwise barred action to obtain discovery. Marshall v. Madoff, No.

15-mc-56 (JGK), 2015 WL 2183939, at *3 (S.D.N.Y. May 11, 2015). Counsel for Appellants

have interviewed Madoff multiple times over the years, yet they have failed to identify any claim

against Picower not barred by the Permanent Injunction. (See, e.g., A12.)2

The Court should affirm the bankruptcy court’s order.

COUNTER-STATEMENT OF STANDARD OF REVIEW

In reviewing an order entered by the bankruptcy court, the “district court functions as an

appellate court.” In re Lehman Bros. Inc., 519 B.R. 434, 440 (S.D.N.Y. 2014). The district court

reviews the bankruptcy court’s findings of fact for clear error and its legal conclusions de novo.

In re Metaldyne Corp., 421 B.R. 620, 624 (S.D.N.Y. 2009). A party seeking to overturn the

2 Appellants’ Appendix, ECF No. 19, does not contain many of the items designated by Appellants and counter-designated by Appellees. Nor does it contain a table of contents. See Fed. R. Bankr. P. 8018(b)(1); Fed. R. Bankr. P. 8018(c). For the Court’s convenience, Appellees have submitted a complete appendix. See Fed. R. Bankr. P. 8018(b)(2). The Trustee refers to items contained in Appellees’ appendix as “A_.”


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bankruptcy court’s findings of fact “bears a heavy burden.” H & C Dev. Grp., Inc. v. Miner (In

re Miner), 229 B.R. 561, 565 (2d Cir. 1999). This Court “must be left with a ‘definite and firm

conviction’ that a mistake has been made.” In re Metaldyne, 421 B.R. at 624 (citations omitted).

Courts may evaluate testimony in injunction actions. See, e.g., In re Saint Vincents

Catholic Med. Ctrs. of N.Y., 449 B.R. 209, 215–16 (S.D.N.Y. 2011); In re Third Eighty-Ninth

Assocs., 138 B.R. 144, 146 (S.D.N.Y. 1992). Courts need not accept as true allegations that are

contradicted by the very documents proffered by plaintiffs. See Rieger v. Drabinksy (In re

Livent, Inc. Noteholders Sec. Litig.), 151 F. Supp. 2d 371, 405–06 (S.D.N.Y. 2001).

COUNTER-STATEMENT OF FACTS

The details of Madoff’s Ponzi scheme and the background of the bankruptcy proceedings

have been set forth numerous times and need not be repeated here. See, e.g., F/M I Second Cir.

Op., 740 F.3d at 84–86; Fox v. Picard (In re Bernard L. Madoff), 848 F. Supp. 2d 469, 473–77

(S.D.N.Y. 2012) (hereinafter, F/M I Dist. Ct. Op.).3

I. THIS COURT’S NET EQUITY DECISION

Appellants’ repeated attempts to circumvent the Permanent Injunction stem from their

long-held dissatisfaction with the Second Circuit’s Net Equity Decision. In re Bernard L. Madoff

Inv. Sec. LLC, 654 F.3d at 242. In liquidation proceedings under the Securities Investor

Protection Act (“SIPA”), customers with allowed claims may share pro rata in the estate’s

customer property to the extent of their net equity. In re Bernard L. Madoff Inv. Sec. LLC, 424

3 F/M I Second Cir. Op., 740 F.3d 81 (2d Cir. 2014); G III Dist. Ct. Op., 565 B.R. 510 (S.D.N.Y. 2017); Fox v. Picard (In re Bernard L. Madoff Inv. Sec. LLC), 531 B.R. 345 (S.D.N.Y. 2015) (Koeltl, J.) (hereinafter F/M II Dist. Ct. Op.); A & G Goldman P’ship v. Picard (In re Bernard L. Madoff Inv. Sec. LLC), No. 12 Civ. 6109 (RJS), 2013 WL 5511027 (S.D.N.Y. Sept. 30, 2013) (Sullivan, J.) (hereinafter, G I Dist. Ct. Op.); Picard v. Marshall (In re Bernard L. Madoff), 511 B.R. 375 (Bankr. S.D.N.Y. 2014) (Bernstein, J.) (hereinafter, F/M II—G II Bankr. Ct. Op.); Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff), 477 B.R. 351 (Bankr. S.D.N.Y. 2012) (Lifland, J.) (hereinafter, G I Bankr. Ct. Op.).


5

B.R. 122, 124–25 (Bankr. S.D.N.Y. 2010). Consistent with SIPA, the Trustee determined that

each customer’s net equity should be calculated by crediting the amount of cash the customer

deposited into its BLMIS account, less any amounts withdrawn from the customer’s BLMIS

account, referred to as the “net investment method.” Id. at 125.

The bankruptcy court approved the Trustee’s use of the net investment method to

calculate net equity, and the Second Circuit affirmed that order in its Net Equity Decision. In re

Bernard L. Madoff Inv. Sec. LLC, 654 F.3d at 235. Appellants and others argued that the Trustee

should return their false profits to them, as reported on their last customer statements. But the

Second Circuit reasoned that permitting customers their false profits would “have the absurd

effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal

effect to Madoff’s machinations.” Id.

II. APPELLANTS’ PARTICIPATION IN THE BANKRUPTCY PROCEEDINGS

Each of the Appellants other than Russell Oasis filed customer claims, which were

resolved in the claims resolution process.4 (A1529–30 ¶¶ 3–6.) Marshall’s and Peshkin’s

customer claims were allowed and have been satisfied in full. (A1530 ¶¶ 5, 7.) While Fox’s net

equity claims were denied because she is a “net winner,”5 like all other net winners, she could

still participate in the estate as a general creditor (as could Marshall and Peshkin, for amounts

above their net equity claims) if the Trustee recovers more customer property than is required to

satisfy net equity claims. See SIPA § 78fff-2(c)(1).

4 Oasis was a limited partner in BLMIS Account number 1R0172, held by the RAR Entrepreneurial Fund. (A18 ¶ 22.); Picard v. RAR Entrepreneurial Fund, Ltd. et al., Adv. Pro. No. 10-4352 (Bankr. S.D.N.Y. Nov. 30, 2010), ECF No. 1. Oasis did not file a customer claim with the Trustee. (A1530.)

5 A “net winner” is a customer who has “withdrawn more than she deposited.” F/M I Second Cir. Op., 740 F.3d at 85.


6

III. THE TRUSTEE’S AVOIDANCE ACTION

The Trustee sued Picower (now deceased) and the other Picower Parties on May 12,

2009. (A846–903.) The Trustee’s complaint identified more than $6.7 billion in net withdrawals

(later increased to $7.235 billion) that the Trustee alleged the Picower Parties had received from

BLMIS. (A848.) The complaint alleged that the Picower Parties knew or should have known that

BLMIS was engaged in fraud and the Trustee sought recovery of the entire amount known at the

time of filing to have been transferred from BLMIS to the Picower Parties throughout the history

of the Picower Parties’ BLMIS accounts. (A848, 863–65, 872–85.)

The Trustee’s complaint contained numerous allegations that the Picower Parties directed

backdating in their BLMIS accounts, had actual knowledge of the Ponzi scheme, were

“complicit[] in the fraud,” and were compensated through their accounts for perpetuating the

Ponzi scheme. (A869; see also A863.)

The Trustee’s complaint also included allegations dealing with margin loans. (See, e.g.,

A870 (“In December 2005, BLMIS also created backdated ‘purchases’ on margin . . .”).) It

addressed what Appellants now describe as a $125 million “loan” made in April 2006. As the

Trustee alleged: “On or about April 24, 2006, Decisions opened a sixth account with BLMIS

(‘Decisions 6’) by wire transfer on April 18 of $125 million . . . [b]y the end of April . . . the

purported net equity value of the account was over $164 million . . . .” (A866.) The Trustee

further contended, in opposing Picower’s motion to dismiss, that Picower propped up the Ponzi

scheme by accepting only a fraction of his requested redemptions when Madoff could not pay

the full amount of the redemptions. (A937–38.)

In short, the Trustee brought and settled claims alleging that Picower knew of the Ponzi

scheme, and knowingly invested and maintained funds in BLMIS in order to reap as many

fictitious profits from his accounts as possible.


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IV. THE PICOWER SETTLEMENT AND ISSUANCE OF THE INJUNCTION

After months of negotiations, the Trustee, the Picower Parties, and the Department of

Justice reached a global settlement (“Settlement”). The Picower estate agreed to forfeit and

return $7.235 billion, of which the Trustee received $5 billion for the benefit of the BLMIS

estate and the government retained $2.235 billion.6 (A1125.) Through the Settlement, 100% of

the net withdrawals received by the Picower Parties over the lifetime of their investments with

BLMIS became available for eventual distribution to BLMIS victims, without the need for

litigation. (Id.) The $7.235 billion settlement (and the $5 billion recovery to the Trustee) is, by a

substantial margin, the single largest recovery of customer funds to date.

The bankruptcy court approved the Settlement and issued the Permanent Injunction,

which provides:

[A]ny BLMIS customer or creditor of the BLMIS estate . . . is hereby permanently enjoined from asserting any claim against the Picower BLMIS Accounts or the Picower Releasees that is duplicative or derivative of the claims brought by the Trustee, or which could have been brought by the Trustee against the Picower BLMIS Accounts or the Picower Releasees . . . .

(A713.)

V. FOX’S AND MARSHALL’S FIRST CHALLENGE TO THE PERMANENT INJUNCTION

A. The Bankruptcy Court’s Enforcement of the Permanent Injunction as Against Fox and Marshall

Before issuing the Permanent Injunction, the bankruptcy court held that the Fox/Marshall

I complaints violated the automatic stay and at least one district court stay order. Picard v. Fox

6 The Madoff Victim Fund, established by the United States Attorney for the Southern District of New York and the Asset Forfeiture and Money Laundering Section of the Department of Justice, is responsible for the eventual distribution to BLMIS victims of the $2.235 billion retained by the government. The Madoff Victim Fund is separate from this SIPA liquidation and is administered by Special Master Richard C. Breeden. See MADOFF VICTIM

FUND, http://www.madoffvictimfund.com (last visited Aug. 24, 2017).


8

(In re Bernard L. Madoff), 429 B.R. 423, 437 (Bankr. S.D.N.Y. 2010) (hereinafter, F/M I Bankr.

Ct. Op.).The court declared the actions void ab initio and issued a preliminary injunction under

§ 105(a) of the Bankruptcy Code. Id.

B. The District Court Affirms the Enforcement of the Permanent Injunction as Against Fox and Marshall

Fox and Marshall appealed the bankruptcy court’s order declaring the Fox/Marshall I

actions void, approving the Picower Settlement, and entering the preliminary injunction and

Permanent Injunction. The appeals were consolidated and heard by the Honorable John G. Koeltl

of this Court. See F/M I Dist. Ct. Op., 848 F. Supp. 2d at 472. The district court held that the

Fox/Marshall I complaints were a “transparent effort” to pursue claims that “were duplicative of

claims brought by the Trustee and that belonged to the Trustee on behalf of all creditors of

BLMIS.” Id. at 473.

The district court reasoned that the wrongful acts alleged in the complaints “harmed

every BLMIS investor (and BLMIS itself) in the same way: by withdrawing billions of dollars in

customer funds from BLMIS and thus substantially diminishing the assets available to BLMIS.”

Id. at 480. The district court further rejected Fox’s and Marshall’s attempts to “circumvent this

obvious proposition by arguing that they are seeking different damages” such as the “lost time-

value of their investments as well as any taxes paid on gains that never existed,” because “these

are all the same types of damages that could be claimed by other BLMIS customers in general.”

Id. Finally, the district court held that the “integrity of the SIPA liquidation itself” is protected by

preventing customers from circumventing the Net Equity Decision and undermining the

liquidation plan. Id. at 490.


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C. The Second Circuit Affirms the Enforcement of the Permanent Injunction Against Fox and Marshall

The Second Circuit affirmed the district court’s decision and order. See F/M I Second

Cir. Op., 740 F.3d 96. The Second Circuit held that the Fox/Marshall I actions “impermissibly

attempt to ‘plead around’” the Permanent Injunction. Id. at 84. It held that the actions were

derivative because they alleged no particularized conduct by Picower toward Fox and Marshall.

Id. Other than the unsupported claim that Picower induced them to invest with Madoff—which

the Second Circuit, as the bankruptcy and district courts before it, rejected as conclusory—Fox

and Marshall “allege nothing more than steps necessary to effect the Picower defendants’

fraudulent withdrawals of money from BLMIS, instead of ‘particularized’ conduct directed at

BLMIS customers.” Id. (citing G I Dist. Ct. Op., 2013 WL 5511027, at *7).

The Second Circuit further held that the “alleged injuries are inseparable from, and

predicated upon, a legal injury to the estate namely, the Picower defendants’ fraudulent

withdrawals from their BLMIS accounts of what turned out to be other BLMIS customers’

funds.” Id. at 92. The “claimed damages, also suffered by all BLMIS customers, still remain

mere secondary harms flowing from the Picower defendants’ fraudulent withdrawals and the

resulting depletion of BLMIS funds.” Id. at 93.

VI. FOX/MARSHALL II: THE FOX PLAINTIFFS UNSUCCESSFULLY TRY AGAIN TO CIRCUMVENT THE PERMANENT INJUNCTION

A. The Bankruptcy Court Again Enforces the Permanent Injunction

On February 5, 2014, Fox and Marshall, together with Peshkin and Oasis, and

purportedly representing a putative class, moved in the United States District Court for the

Southern District of Florida (the “Florida District Court”) to reopen the Fox/Marshall I case and

for leave to file their Fox/Marshall II complaint. (A1018.) On March 17, 2014, the Florida


10

District Court issued an order deferring to the New York bankruptcy court on the question of

whether the Fox/Marshall II complaint violated the Permanent Injunction. (A1024–25.)7

The Fox/Marshall II complaint was an amalgam of the complaints in the Fox/Marshall I

actions and proposed complaints asserted by the Goldmans, who had attempted to plead a control

person securities claim against the Picower Parties under § 20(a) of the Exchange Act. (A841.)

See G I Dist. Ct. Op., 2013 WL 5511027, at *1–2. On June 20, 2012, the bankruptcy court held

that Goldman I violated the Permanent Injunction and the automatic stay of the Bankruptcy

Code. G I Bankr. Ct. Op., 477 B.R. at 352–53. The bankruptcy court held Appellants’ claims to

be “derivative of the Trustee’s” and that the alleged harms are “limited to ‘general direction and

control and action to the detriment of all [BLMIS’s] creditors.’” Id. at 356–57. The Honorable

Richard J. Sullivan of this Court affirmed the bankruptcy court’s order and upheld the Permanent

Injunction in Goldman I. G I Dist. Ct. Op., 2013 WL 5511027, at *1. The district court

determined that the Goldmans’ claims were derivative of the Trustee’s claims and “are not bona

fide securities fraud claims” in any event. Id. at *6–7. By the time Fox/Marshall II was heard in

the bankruptcy court, Goldman I had been decided.

On March 11, 2014, the Trustee moved in bankruptcy court to enjoin Fox/Marshall II

from proceeding. In the same application, the Trustee also sought enforcement of the Permanent

Injunction against the Goldmans, who had separately sought to file a new putative class action in

federal court in Florida, the Goldman II action.

On June 23, 2014, the bankruptcy court issued a decision enforcing the Permanent

Injunction against both Appellants and the Goldmans. F/M II—G II Bankr. Ct. Op., 511 B.R. 375

7 Appellants appealed the Florida District Court’s order to the Eleventh Circuit, which dismissed the appeal as moot. See Fox v. Jeffry [Picower] Estate, et al., Case No. 14-11250, Mandate entered 8/27/14.


11

(Bankr. S.D.N.Y. 2014). The bankruptcy court held that neither set of plaintiffs had alleged

particularized claims as to any customer or creditor: “[R]egardless of the label the plaintiffs

choose to attach to their claims, a claim based on the Picower [Parties’] fraudulent withdrawals

and fraudulent entries in their accounts, without any particularized allegations that the Picower

[Parties] directly participated in any misrepresentation to the customers, is derivative of the

Trustee’s fraudulent conveyance claims against the Picower defendants.” Id. at 390.

B. The District Court Affirms the Bankruptcy Court’s Enforcement of the Permanent Injunction as Against Appellants

Appellants appealed Fox/Marshall II to the district court. The Goldmans, meanwhile, did

not appeal. F/M II Dist. Ct. Op., 531 B.R. at 350 n.3. On May 11, 2015, Judge Koeltl affirmed

the bankruptcy court’s order. F/M II Dist. Ct. Op., 531 B.R. 345. The district court held that the

Fox/Marshall II complaint stated derivative claims and that the bankruptcy court had properly

enjoined Appellants from filing the Fox/Marshall II complaint. Id. at 351–54. Discussing

Appellants’ claim under § 20(a) of the Exchange Act, the district court held that Appellants had

not identified any misrepresentations made by the Picower Parties. Id. at 352. The district court

further held that the allegations that Picower was involved with Madoff’s misrepresentations to

customers were “entirely conclusory” and “simply ‘based on the secondary effects of the

fraudulent transfers to the Picower Defendants’ and thus ‘inseparable from the Trustee’s claim.’”

Id. (quoting F/M II—G II Bankr. Ct. Op., 511 B.R. at 394).

The district court likewise rejected the rest of the claims in the Fox/Marshall II

complaint, determining that “the bankruptcy court was plainly correct in finding those claims to

be derivative” because they did not allege particularized injuries directly traceable to the Picower

Parties’ conduct. Id. at 353. The court concluded that “the [Fox/Marshall Plaintiffs] seek to bring

claims based on legal theories that Judge Sullivan in Goldman [I] and the Second Circuit Court


12

of Appeals in [Fox/Marshall I] explained could qualify theoretically as independent claims.” Id.

at 354. But, the court went on, plaintiffs “have merely repackaged the same facts underlying the

Trustee’s claims without any new particularized injuries. . . that are directly traceable to the

Picower defendants.” Id. As a result, the court held, “the claims in the [Fox/Marshall II

Complaint] ‘impermissibly attempt to “plead around” the bankruptcy court’s injunction barring

all “derivative claims,”’ id. (citing F/M Second Cir. Op., 740 F.3d at 96), and “the bankruptcy

court properly granted the Trustee’s motion to enjoin the filing of the Fox II Complaint in the

Florida district court.” F/M II Dist. Ct. Op., 531 B.R. at 354 Appellants appealed to the Second

Circuit but subsequently withdrew the appeal. Mandate, Marshall v. Madoff, No. 15-1886 (2d

Cir. Oct. 9, 2015), ECF No. 80.

VII. THE BANKRUPTCY AND DISTRICT COURTS HOLD THE GOLDMAN III CLAIMS DERIVATIVE OF THE TRUSTEE’S CLAIMS

On November 17, 2014, the Trustee and the Picower Parties each brought an adversary

proceeding in the bankruptcy court to enforce the Permanent Injunction against the Goldmans for

their proposed Goldman III complaint. Goldman III, which is nearly identical to Fox/Marshall

III, added new allegations about alleged loans Picower made to BLMIS and alleged that Picower

agreed to say he was a BLMIS options counterparty if asked by regulators. On February 17,

2016, the bankruptcy court held that the Permanent Injunction barred the Goldmans from

proceeding in Goldman III. G III Bankr. Ct. Op., 546 B.R. at 287–88.

The bankruptcy court held that nothing in Goldman III changed the applicability of the

Permanent Injunction. The Goldmans alleged only that that Picower perpetuated the Ponzi

scheme, and in so doing, “injured the BLMIS estate and indirectly affected all creditors in the

same way.” Id. at 301. And the court reasoned that the allegation that Picower controlled BLMIS


13

in order to steal $7.2 billion from other customers was “the very claim the Trustee settled” and

that “every investor could assert the same claim.” Id. at 301

The bankruptcy court further held that the Goldmans’ allegations attempting to link

Picower to misrepresentations made by BLMIS were “entirely conclusory,” as were their

allegations that Picower influenced customers to invest in BLMIS. Id. at 293. Citing Judge

Sullivan’s decision, the court held that “the only particularized allegations that Picower gave

express directions to BLMIS employees concerning certain specific transactions . . . relate to

transactions in the Picower Parties’ own accounts, and have been rejected as the basis for a bona

fide section 20(a) claim.” Id. at 302–03 (citing G I Dist. Ct. Decision, 2013 WL 5511027, at *6–

7).

With respect to the loan allegations, the court found that the first alleged loan, said to

have occurred in 1992 or 1993, would have been made more than two years before Appellants

alleged Picower to be a control person. Id. The court further held that the second alleged loan in

2006 was actually a deposit by Picower into his own BLMIS account that was subsequently

withdrawn (along with fictitious profits), and which was part of the Trustee’s claim that Picower

had knowingly received fraudulent transfers. Id. The court also found that the allegations about

Picower’s alleged agreement to serve as a counterparty to phony options trades by BLMIS

lacked particularity: the allegation “doesn’t say when this occurred, how it occurred, whether

Picower lied to anyone about the option trades or whether the phony counterparty information

was ever shared with any customer.” Id.

The bankruptcy court held that Goldman III “in reality seeks to augment a ‘shadow

estate’ that will benefit all net losers the same way. . . .” Id. at 304. Allowing Goldman III to

proceed implicated the viability of the Picower Settlement and future settlements, “providing an


14

avenue for BLMIS customers who are displeased with the Net Equity Decision to undermine that

decision by directly pursuing claims that are wholly derivative of claims already brought by the

Trustee.” Id. (quoting F/M I Dist. Ct. Op., 848 F. Supp. 2d at 490–91).

The Goldmans appealed to the district court. On January 24, 2017, the Honorable

Gregory H. Woods of this Court affirmed, holding that the Permanent Injunction bars the

Goldmans from proceeding with the Goldman III complaint. G III Dist. Ct. Op., 565 B.R. at

526–27. The district court held that Goldman III contained only two new allegations, the

“propping up” loan allegations and the “counterparty” allegations. Id. at 519–20. It held that

while these two new allegations were “pleaded to thread the eye of the needle outlined by prior

decisions in this line of cases,” the Goldman III complaint is “functionally similar to prior

complaints held to have been barred by the Permanent Injunction.” Id. at 523.

At its core, the court held, Goldman III “alleges that Picower engaged in various

categories of fraudulent conduct which had the purpose and effect of further effectuating

Madoff’s Ponzi scheme.” Id. The new allegations in Goldman III relating to loans and

counterparties “amounted to two generalized categories of conduct that ‘pushed the debtor into

bankruptcy.’” Id. at 524 (quoting F/M I Second Cir. Op., 740 F.3d at 89).

Further, the court held that Goldman III failed to allege any “particular instances in which

Picower, through the conduct described in the complaint, directed BLMIS to provide false or

misleading information to appellants (or the proposed class members) in particular,” and instead

alleged claims that “are at bottom, general one[s] . . . .” Id. (quoting St. Paul, 884 F.2d at 701

(internal quotations omitted)). Although the Goldmans argued that they suffered injuries at

different times from BLMIS, the court held that such a distinction does “does not serve to


15

transform Picower’s ‘single set of actions’ into a set of actions particularly aimed at Appellants,”

nor does it “support the conclusion that their claim was particularized rather than general.” Id.

The district court thus affirmed the bankruptcy court’s order. Id. at 526–27. The

Goldmans appealed to the Second Circuit, and their appeal is pending. In re Bernard L. Madoff

Inv. Sec. LLC, No. 17-0512-bk (2d Cir. filed Feb. 22, 2017).

VIII. APPELLANTS SEEK DISCOVERY ON THEIR CLAIMS

Appellants Fox and Marshall sought discovery in each case they filed. See, e.g., F/M I

Dist. Ct. Op., 848 F. Supp. 2d at 489 n.7; Picard v. Marshall, Adv. Pro. No. 14-1840, 2014 WL

5486279, at *2 (Bankr. S.D.N.Y. Oct. 31, 2014). Each court has rejected their requests. Within a

few days of their appeal of the bankruptcy court’s Fox/Marshall II decision to the district court,

Appellants simultaneously sought to short-circuit that review and proceed with the case by

moving for discovery, including the deposition testimony of Madoff under Fed. R. Civ. P. 27(a).

(See Notice of Motion, Picard v. Marshall, Adv. Pro. No. 14-01840 (Bankr. S.D.N.Y. filed Aug.

18, 2014), ECF No. 63.) The bankruptcy court held that it lacked jurisdiction to rule on the Rule

27(a) portion of the motion and rejected Appellants’ other discovery requests. See Marshall,

2014 WL 5486279, at *4–5.

Shortly thereafter, while the appeal of Fox/Marshall II was pending before Judge Koeltl,

Appellants petitioned the United States District Court for the District of Delaware to take

Madoff’s deposition under Rule 27(a). (See Marshall v. Madoff, 15-CV-1 (D. Del. filed Jan. 2,

2015.)) The Delaware district court granted the Trustee and Picower Parties’ joint motion to

transfer venue to the Southern District of New York. See Marshall v. Madoff, No. 15-mc-56

(JGK), 2015 WL 2183939, at *2 (S.D.N.Y. May 11, 2015). Appellants then filed a petition for a

writ of mandamus in the Third Circuit, which summarily denied the petition. Id. at *2 n.1. Judge


16

Koeltl subsequently denied the Rule 27 petition, holding, among other things, that Appellants

appeared to be bringing their petition for the improper purpose of framing a complaint. Id. at *4.

IX. THE FOX/MARSHALL III COMPLAINT

Having lost in the bankruptcy court, in district courts in New York, Delaware, and

Florida, and the Second, Third and Eleventh Circuits, Appellants then brought a declaratory

judgment action in the bankruptcy court against the Picower Parties and the Trustee, seeking a

declaration that neither the Permanent Injunction nor the automatic stay barred the Fox/Marshall

III complaint. (A1–9.)

The Fox/Marshall III complaint again alleges that Picower was a control person of

BLMIS under § 20(a) of the Exchange Act, and was therefore responsible for misrepresentations

and omissions by BLMIS to BLMIS customers that induced customers to invest and stay

invested with BLMIS. (A12 ¶ 3.) Fox/Marshall III also contains allegations about loans Picower

made to BLMIS and alleged that Picower agreed to say he was a BLMIS options counterparty if

asked by regulators. (A27–28 ¶¶ 65–71.)

X. THE FOX/MARSHALL III BANKRUPTCY COURT DECISION

On March 7, 2017, the bankruptcy court enjoined Appellants from proceeding with the

Fox/Marshall III complaint, finding the claims duplicative and derivative of the Trustee’s claims.

F/M III Bankr. Ct. Op., 568 B.R. at 216–17. With respect to the bulk of the Fox/Marshall III

allegations, the bankruptcy court, citing the district court decision in Fox II, held that these

allegations were “conclusory and based on the [Picower Parties’] ability to withdraw funds and

cause BLMIS to doctor the records of their own accounts.” Id. at 210. (citing F/M II—G II

Bankr. Ct. Op., 511 B.R. at 394.)

As to the purportedly new allegations dealing with alleged loans and counterparty

representations, the court stated that these allegations were essentially lifted from Goldman III,


17

which the district court and bankruptcy court had already held violated the Permanent Injunction.

Id. at 207–08. The bankruptcy court held that, just as was true for Goldman III, “the loan and

counterparty allegations were incidental to Picower’s fraudulent withdrawals and ‘amounted to

two generalized categories that pushed the debtor into bankruptcy . . .’ Simply put, the ‘alleged

wrongful acts harmed every BLMIS investor (and BLMIS itself) in the same way.’ Furthermore,

the allegations of reliance were wholly conclusory.” Id. at 213 (internal citations omitted).

The bankruptcy court also examined the allegations and held that they did not allege a

direct control person claim. The court held that as in Goldman III, Fox/Marshall III improperly

relied on the prosecutor’s questions, not the witness’s responses, with respect to the allegation

that Picower lent Madoff $200 million in loans to keep the Ponzi scheme alive. Id. With respect

to the counterparty allegations, the court held that Fox/Marshall III ignored Frank DiPascali’s

testimony that Madoff acted unilaterally. Id.

The court also rejected Appellants’ contention that Madoff’s deposition testimony in In

re Optimal U.S. Litigation, 10-CV-4095 (SAS) (S.D.N.Y.) (“Optimal Testimony”), demonstrated

that “Madoff stated that the fraud was started at Picower’s behest, for Picower’s benefit, and to

cover losses that Picower had sustained.” Id. The bankruptcy court held that “[t]he Fox Parties’

misstate Madoff’s testimony.” Id. As the bankruptcy court found:

Madoff never testified that Picower devised the Ponzi scheme, participated in its execution or assisted him in defrauding other BLMIS customers. Instead, Madoff described how he assured the Domestic Investors [including Picower] of hedged short positions to maintain good relations with [a] . . . French Bank, a move that turned out to be a financial disaster when the markets rose and Madoff had to deliver stock he did not own to cover the short positions. To compensate, he began accepting hedge fund investments, but when the hedge funds became dissatisfied with meager two percent returns, Madoff began to report fictitious trades and higher profits, presumably to dissuade them from withdrawing their investments with BLMIS. The fictitious trading that


18

Madoff viewed as a temporary fix snowballed into the full-fledged Ponzi scheme revealed in 2008.

Id. at 215.

The bankruptcy court further rejected Appellants’ claim that Madoff thought Picower

was “complicit” in the Ponzi scheme: “Madoff’s reference to Picower’s ‘complicity’ had nothing

to do with the Ponzi scheme. It referred to tax fraud relating to the manipulation of the records in

Picower’s own accounts . . . These allegations are not new; the Fox Parties made the same

assertion previously . . . Similar allegations appeared in the Trustee’s 2009 complaint . . . .” Id. at

216.

Finally, the court held that cryptic statements in a declaration supposedly made by

Madoff (“Madoff Declaration”) in an action concerning BLMIS customer Aaron Blecker that

Picower “created” the fraud and bore “responsibility” for it were “conclusory and lack[ed]

specificity.” Id. at 216–17. 8 The court further held that the Madoff Declaration conflicted with

Madoff’s Optimal Testimony, “in which Madoff accepted sole responsibility for the Ponzi

scheme.” Id. at 216. As the court found, “Madoff never suggested that any of the Domestic

Investors [including Picower] ‘created’ the Ponzi scheme or forced him to start it. It was his idea

of a ‘temporary fix’ to a liquidity problem. Furthermore, the assertion that Picower was the

primary beneficiary of the fraud is just another way of saying that he withdrew more fictitious

profits from BLMIS than anyone else. This is duplicative of the fraudulent transfer claim that the

Trustee settled.” Id. at 216–17.

In short, the court held, “[t]he Fox Parties here . . . failed to identify a particularized

injury suffered by any putative class member. All of the BLMIS investors suffered the same

8 The Trustee and the Picower Parties objected to the admission of the Madoff Declaration because, among other reasons, it was submitted in Blecker’s customer claim matter and contained a few oblique references to Picower having nothing to do with Blecker’s customer claim. (A1941–46.)


19

indirect injury resulting from the theft of the customer property and the demise of BLMIS and

could assert the same claim.” Id. at 217.

In addition to the § 20(a) claim, the Fox/Marshall III complaint also asserted federal and

state RICO claims and common-law claims, just as in Fox/Marshall II. Appellants did not argue

before the bankruptcy court that these claims were independent, as they had previously been held

derivative of the Trustee’s claims. Id.

Significantly, the bankruptcy court cautioned Appellants that the Trustee and the Picower

Parties could seek sanctions should Appellants file a new complaint. Id.

SUMMARY OF ARGUMENT

Every reviewing court has enforced the Permanent Injunction against Appellants and the

Goldmans. As with all of the claims in all of the prior complaints, the claims in Fox/Marshall III

are generalized, and derivative and duplicative of the claims brought by the Trustee. Regardless

of how Appellants attempt to reframe their allegations, they are still, fundamentally, a claim that

Picower engaged in acts that sought to maximize his fraudulent transfers from the BLMIS Ponzi

scheme. They allege generalized conduct toward BLMIS customers and generalized harm from

perpetuating the Ponzi scheme, rather than particularized injuries to specific plaintiffs. These are

quintessentially derivative claims under Second Circuit law. See Tronox, 855 F.3d at 99–100;

F/M I Second Cir. Op., 740 F.3d at 89; St. Paul, 884 F.2d at 704. Appellants should not be

allowed to subvert the Net Equity Decision, which cabins them to their actual losses and denies

them their fictitious profits, based on claims that are derivative and duplicative of the Trustee’s

claims. The Court should affirm the judgment below.


20

ARGUMENT

THE PERMANENT INJUNCTION BARS FOX/MARSHALL III

I. APPELLANTS’ CLAIMS ARE BARRED BY THE PERMANENT INJUNCTION BECAUSE THEY ARE GENERALIZED CLAIMS THAT ARE DERIVATIVE AND DUPLICATIVE OF THE TRUSTEE’S CLAIMS

A. Generalized Claims That Allege No Particularized Conduct Toward The Plaintiffs Nor Any Particularized Injury Are Derivative Claims

Derivative claims in the context of a bankruptcy are “ones that ‘arise from harm done to

the estate’ and that ‘seek relief against third parties that pushed the debtor into bankruptcy.’”

Tronox, 855 F.3d at 99; F/M I Second Cir. Op, 740 F.3d at 89.

Following the analysis applied by every reviewing court, the bankruptcy court correctly

found that Appellants allege no particularized conduct toward Appellants or particularized injury

suffered by them. Rather, they allege that Picower made the loans to facilitate his own fraudulent

transfers, and had no interaction with Appellants whatsoever. Moreover, the harm Appellants

allege is that Picower’s actions furthered the fraud and depleted BLMIS’s ability to pay

creditors, indirectly injuring them (and all other BLMIS creditors as well). Such a secondary

effect “aris[ing] from harm done to the estate” is the very definition of a derivative claim.

Tronox, 855 F.3d at 110 (quoting F/M I Second Cir. Op., 740 F.3d at 89).

In Tronox, the Second Circuit enforced an injunction that mirrored the injunction here.

There, the injunction was enforced against third party plaintiffs who sought to bring alter ego

claims against a debtor’s successor entity for personal injury allegedly caused by the debtor.

Tronox, 855 F.3d at 107–12. The Second Circuit held that the third party plaintiffs’ claims were

generalized as to all creditors and were derivative and barred by the Permanent Injunction, and

cited approvingly to its analysis and decision in Fox/Marshall I.


21

Tronox extensively discussed, applied, and harmonized the Second Circuit’s prior

decisions in Fox/Marshall I, St. Paul, JPMorgan, and Manville III,9 and held that even if

plaintiffs bring claims they allege are based on particularized harm, if that harm “is the same

harm general to all [the debtor’s] creditors” and could have been asserted by other creditors, then

the claims are generalized, derivative claims. See id. at 106. “Non-derivative claims are personal

to the individual creditor and of no interest to the others.” Id. at 100.

B. Most of the Appellants’ Allegations Were Previously Held to be Derivative and Barred by the Permanent Injunction

Fox/Marshall III alleges that the Picower Parties backdated trades in their own accounts,

took out margin loans, knew about false information in BLMIS’s FOCUS Report financial

disclosures, and referred unspecified clients to Madoff. (A14 ¶¶ 9(a)–9(c); A26 ¶¶ 57–59; A27

¶¶ 62–64; A30–33 ¶¶ 82–95; A51 ¶ 189.) These allegations are substantively identical to

allegations in previous versions of the Fox/Marshall complaints and the Goldman complaints

that have been barred by this Court and the bankruptcy court as either derivative of the Trustee’s

claims or conclusory. See, e.g., F/M II—G II Bankr. Ct. Op., 511 B.R. at 391–95 (rejecting

allegations that Picower induced others or referred clients to BLMIS as “wholly conclusory” and

rejecting allegations that Picower knew of false financial information as “inseparable” from the

Trustee’s claim); F/M I Second Cir. Op., 740 F.3d at 91–93; (rejecting backdating and margin

loan allegations as derivative); F/M II Dist. Ct. Op., 531 B.R. at 353–54 (complaint was “replete

with derivative allegations” that Picower took actions in his own accounts and solicited or

9 St. Paul, 884 F.2d 688 (2d Cir. 1989); Picard v. JPMorgan Chase & Co., (In re Bernard L. Madoff Inv. Sec. LLC), 721 F.3d 54 (2d Cir. 2014); Johns-Manville Corp. v. Chubb Indem. Ins. Co. (In re Johns-Manville Corp.), 517 F.3d 52 (2d Cir. 2008) (“Manville III”), rev’d on other grounds sub nom. Travelers Indem. Co. v. Bailey, 557 U.S. 137 (2009); F/M I Second Cir. Op., 740 F.3d 81 (2d Cir. 2014).


22

induced investors); F/M III Bankr. Ct. Op., 568 B.R. at 210–13 (“identical” allegations in

Fox/Marshall II and Fox/Marshall III complaint were conclusory and derivative).

Having failed to prosecute Fox/Marshall II in the Second Circuit, Appellants should not

be heard to challenge these findings. See, e.g., Grieve v. Tamerin, 269 F.3d 149, 154 (2d Cir.

2001); Major v. Sony Music Entm’t. Inc., No. 92-CV-2826, 1992 WL 210115, at *4 (S.D.N.Y.

Aug. 17, 1992); Legnani v. Alitalia Linee Aeree Italiane, S.P.A., 400 F.3d 139, 141 (2d Cir.

2005); Bettis v. Kelly, 137 F. App’x 381, 382 (2d Cir. 2005); see also Baker v. Dorfman, 239

F.3d 415, 426 n.6 (2d Cir. 2000).

Moreover, each of these allegations hinges on efforts by Picower to maximize the

fraudulent transfers in his own accounts, which affected Appellants only indirectly, as a

secondary harm to the injury suffered by the estate as a whole. The complaint alleges no

particularized activity by Picower toward any of Appellants, nor any individualized harm caused

to them by Picower’s actions. While Appellants allege that Picower induced certain individuals

to invest in BLMIS, they fail to identify a single customer that Picower allegedly recruited, much

less the how and when such alleged recruitment occurred. (A27 ¶ 65.) The bankruptcy court and

district court declined to credit these same allegations in Fox/Marshall II because they were

“wholly conclusory.” F/M II Dist. Ct. Op., 531 B.R. at 353, F/M II—G II Bankr. Ct. Op., 511

B.R. at 394. The bankruptcy court likewise held that the “recruiting” allegations in Fox III were

entirely conclusory. Fox III Bankr. Ct. Op., 568 B.R. at 210–11. And while Appellants maintain

that the bankruptcy court improperly “ignored” allegations that Picower ordered Madoff

employees to violate the law (F/M Br. at 21), the court found that these allegations pled nothing

more than that Picower directed activity in his own accounts. F/M III Bankr. Ct. Op., 568 B.R. at

210.


23

Absent a non-conclusory allegation that Picower directed or was involved in the creation

and dissemination of statements to other BLMIS customers, the alleged harm to Appellants

caused by Picower’s trading in his own accounts is a derivative one, arising from harm to the

estate generally, which could be said of any withdrawal by any other BLMIS customer. F/M II—

G II Bankr. Ct. Op., 511 B.R. at 392–93 (citing F/M I Second Cir. Op., 740 F.3d at 92); see F/M

II Dist. Ct. Op., 531 B.R. at 352 (citing 511 B.R. at 394) (rejecting similar claims in

Fox/Marshall II complaint as “based on the secondary effects of the fraudulent transfers to the

Picower Defendants” and thus “inseparable from the Trustee’s claim”). For this reason, the

courts reviewing essentially the same allegations in Goldman III likewise properly declined to

credit these allegations. Goldman III Dist. Ct. Op., 565 B.R. at 525–26; Goldman III Bankr. Ct.

Op., 546 B.R. at 300–01. These claims are, at their core, derivative. See Tronox, 855 F.3d at 99.

Appellants argue that the bankruptcy court failed to review their complaint “holistically.”

(F/M Br. at 11.) They argue, on the one hand, that if they have stated a control person claim, ipso

facto, they should be permitted to proceed. (F/M Br. at 20.) On the other hand, they contend that

the bankruptcy court conducted a “pseudo merits” analysis, crossing the line into a motion to

dismiss analysis. But, as Judge Sullivan of this Court recognized, “Trying to figure out what

‘derivative’ means and how it applies sort of feels like assessing the merits of the pleading for a

securities claim under 12(b)(6). Feels like it. But they are distinct analyses.” (A1374.) See G I

Dist. Ct. Op., 2013 WL 5511027, at *6.

C. The “New” Allegations Are Barred by the Permanent Injunction

The Fox/Marshall III complaint has two “new” allegations—allegations copied from the

Goldman III complaint—that Picower made loans to BLMIS to bolster the Ponzi scheme, A28

¶ 71, and that Picower agreed to be identified as a counterparty to BLMIS transactions in order to

conceal the fraud, A28 ¶¶ 67–69. But nothing in these allegations changes the derivative nature


24

of the claims. They allege nothing more than that Picower bolstered the fraud to personally

benefit from it through his fraudulent transfers, and that his conduct only secondarily harmed

BLMIS customers through harm to the estate. Moreover, as the bankruptcy court found,

Appellants do not allege a bona fide control person claim.

a. The Propping Up Loan Allegations Are Barred

Appellants claim that Picower furthered the Ponzi scheme by providing two loans to

BLMIS, in 1992 and 2006. (A28 ¶ 71; A29–30 ¶ 76.) They also allege that these loans

demonstrated Picower’s control over BLMIS and caused misrepresentations to BLMIS

customers. (A30 ¶ 81.)

These allegations are just as derivative as the earlier, barred claims. As in Tronox,

Appellants allege no particularized conduct toward Appellants or particularized injury suffered

by them in connection with the alleged loans. Rather, they allege that Picower made the loans to

facilitate his own fraudulent transfers, and did not have any interaction with Appellants or direct

BLMIS’s interactions that resulted in alleged misrepresentations made to Appellants, much less

misrepresentations made to Appellants in particular.

In 1992, Picower allegedly lent money to BLMIS in connection with the SEC’s

investigation of BLMIS feeder fund Avellino & Bienes. (A28–29 ¶¶ 71–75.) Appellants

maintain that this loan was unrelated to activity in Picower’s accounts, but this contention is

contradicted by the very testimony they rely on. Frank DiPascali, Jr. testified that Madoff had

directed that the alleged “loan” be placed in Picower’s account. (See Transcript of Proceedings,

United States v. Bonventre, Case No. 10 Cr. 228 (LTS) (S.D.N.Y. Apr. 3, 2014), ECF No. 856, at

4706–07 (“[Madoff] instructed Annette receive [the securities] into Mr. Picower’s account at

Madoff . . . .”).) The “loan” was thus a deposit by Picower into his own account, from which he

then withdrew fictitious profits. (A848.)


25

The 2006 “loan,” meanwhile, was not a loan at all—it was a $125 million deposit into

one of Picower’s own BLMIS accounts, which Picower later withdrew after BLMIS

manufactured fictitious trading activity in the account. The $125 million deposit and withdrawal

was alleged by the Trustee in his complaint against the Picower Parties and was settled by the

Trustee in the Settlement. (A866.) Accordingly, this Court and the lower courts have found this

allegation to be derivative of the Trustee’s own claims. See F/M I Second Cir. Op., 740 F.3d at

93; F/M I Dist. Ct. Op., 848 F. Supp. 2d at 481.

Appellants purport to rely on the testimony from the criminal trial of other BLMIS

employees to support their claim that this was a loan. But as the Goldmans’ counsel admitted

during the February 5, 2015 hearing before the bankruptcy court on the Goldman III complaint,

and as shown in the testimony itself, these allegations are not drawn from the defendants’

testimony, but from the prosecutors’ questions. (A404–05, 417.) F/M III Bankr. Ct. Op., 568

B.R. at 213 (recognizing Fox/Marshall III allegations based on prosecutors’ questions). (See

Transcript of Proceedings United States v. Bonventre, Case No. 10 Cr. 228 (LTS) (S.D.N.Y. Apr.

3, 2014), ECF No. 928, at 10436:25–10437:24.)10

b. The Counterparty Allegations Are Barred

The “counterparty” allegations claim that Picower agreed to be identified in BLMIS’s

books and records as a counterparty for purported options trades if regulators were to ask, and

that by so agreeing, Picower was responsible for the dissemination of misrepresentations and

omissions to BLMIS, inducing investment. (A26–27 ¶¶ 66–69.)

10 Appellants argue that a prosecutor’s questions can substitute for a witness’s answers because prosecutors presumably have a good faith basis for their questions, citing United States v. Taylor, 644 F.3d 573 (7th Cir. 2011). (F/M Br. at 25.) But there is a difference between a question with a good faith basis and the answer to it. Only the latter has evidentiary value.


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The bankruptcy court properly did not credit these conclusory allegations. F/M III Bankr.

Ct. Op., 568 B.R. at 212–13; see also G III Dist. Ct. Op., 565 B.R. at 523; G III Bankr. Ct. Op.,

546 B.R. at 295–96. The proposed complaint fails to identify any instance where Picower talked

to any regulator and provides no specifics as to any misrepresentation or omission. And Frank

DiPascali’s testimony, on which the allegation is ostensibly based, does not reflect that Picower

agreed to serve as a counterparty or even knew that Madoff would use his name. (See, e.g.,

(Transcript of Proceedings at 5825:16–21, United States v. Bonventre, Case No. 10 Cr. 228

(LTS) (S.D.N.Y. Dec. 16, 2013), ECF No. 870.) Moreover, the testimony relating to the use of

customers as counterparties that was adduced at the criminal trial, upon which Appellants

purport to rely, relates to the deposit of fictitious treasury bills in the customers’ own accounts.

(See, e.g., Transcript of Proceedings at 5341–46, United States v. Bonventre, Case No. 10 Cr.

228 (LTS) (S.D.N.Y. Apr. 3, 2014), ECF No. 862 (discussing Madoff’s instruction to DiPascali

to internalize option trades by placing “treasury bills” in client accounts).) See F/M III Bankr. Ct.

Op., 568 B.R. at 213 (finding that the criminal trial testimony is contrary to complaint’s

allegations). As held by the Second Circuit, allegations concerning Picower’s own account

activity are derivative in nature. F/M I Second Cir. Op., 740 F.3d at 93.

In addition, the Fox/Marshall III class action complaint lacks any “linking” allegations

that would connect misrepresentations by Madoff to Picower’s purported agreement to serve as a

counterparty. See F/M III Bankr. Ct. Op., 568 B.R. at 212–13; G III Bankr. Ct. Op., 546 B.R. at

301; G I Dist. Ct. Op., 2013 WL 5511027, at *9. Similarly, Appellants allege only that Picower’s

manipulation of his own BLMIS accounts had an indirect effect on information sent to BLMIS

customers. F/M III Bankr. Ct. Op., 568 B.R. at 210; G III Bankr. Ct. Op., 546 B.R. at 302. Such

allegations do not support the inference that Picower was a control person of BLMIS.


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More importantly, as with the loan allegations, the counterparty allegations do not allege

any particularized conduct directed at Appellants or particularized injury suffered by them. There

are no allegations that Picower made any direct misrepresentations to Appellants or any member

of the class; interacted in any way with any member of the class; or prepared, disseminated or

directed the preparation or dissemination of any statements sent to customers, or otherwise.

Indeed, Picower is not alleged to have been an officer of BLMIS, a feeder fund manager, or in

any other relationship with the Appellants that would facilitate such direct contact.

Absent any non-conclusory allegation of direct misrepresentations, a direct relationship

between the Appellants and Picower, or a particularized harm suffered by Appellants, any

alleged harm suffered by Appellants from Picower’s ostensible agreement to act as a

counterparty would be a secondary effect of harm to BLMIS and all BLMIS customers, and

would yield classic derivative claims, barred by the Permanent Injunction. See F/M I Second Cir.

Op., 740 F.3d at 92, 93; Tronox, 855 F.3d at 101–02.

D. Madoff Did Not Testify That Picower Controlled the Fraud at BLMIS or Took Any Actions Outside of His Own Accounts

Appellants rely on the criminal testimony of former BLMIS employees, Madoff’s

Optimal Testimony, and the Madoff Declaration. But as the bankruptcy court found, there is

nothing in any of that testimony that supports a control person claim. F/M III Bankr. Ct. Op., 568

B.R. at 213–17.

Putting aside the fact that statements by Madoff, a notorious liar and convicted felon, are

inherently unreliable, Madoff did not say what Appellants portray him as saying. Madoff

testified that Picower and others agreed to enter into actual securities transactions with French

banks on the other side, but then decided to back out of the transactions when they thought the

market was turning. (A66 at 39:4–40:8.) Madoff did not want to unwind the transactions and ruin


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his relationship with the French bank counterparties, so he stepped into the place of Picower and

the others, assuming their risk. (A67–68 at 45:15–47:4.) Picower and the others assured Madoff

that he would not suffer any losses, but if he did, Picower and the others would make them up to

him. (A68 at 48:3–5.) Madoff supposedly trusted them because they were “like family.” (Id. at

47:15.) But as time went by, Picower complained to Madoff that he had lost most of his fortune,

and Madoff became concerned that Picower would not be able to cover Madoff’s losses. (A68–

69 at 49:25–53:17.) According to Madoff, that is why he decided to start the largest Ponzi

scheme in history. (A70 at 55:24; A84 at 111:18–20.) Madoff’s problem with Picower is that

when it turned out Picower’s estate was able to write a $7.235 billion check to settle with the

Trustee and the government, Madoff felt betrayed by Picower because he believed that Picower

had had plenty of money all along. (A84 at 111:14–23.)

Madoff’s testimony about his relationship with Picower, as with the evidence of

Picower’s actions within his own accounts, does not support the allegation that he controlled the

BLMIS fraud. See F/M III Bankr. Ct. Op., 568 B.R. at 215 (“Madoff never testified that Picower

devised the Ponzi scheme, participated in its execution or assisted him in defrauding other

BLMIS customers.”).

As to Picower’s involvement in the BLMIS scheme, Appellants rely primarily on

Madoff’s statement that Picower and others were “complicit in the crime.” But when asked why

they were complicit, Madoff stated only that they had violated tax laws by profiting from the

Ponzi scheme. (A83 at 108; see also A67–69 at 43–52 (discussing Picower’s losses in his own

accounts).) The bankruptcy court found that: “Madoff’s reference to Picower’s ‘complicity’ had

nothing to do with the Ponzi scheme. It referred to tax fraud relating to the manipulation of the

records in Picower’s own accounts.” F/M III Bankr. Ct. Op., 568 B.R. at 216.


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The allegation that there was fraudulent activity in the Picower accounts has been the

staple of Appellants’ complaints (and of the Trustee’s) from the very beginning. Even with the

benefit of Madoff’s deposition testimony and Appellants’ counsel’s purported hours of

interviews with Madoff,11 the bankruptcy court properly held that Appellants could not articulate

specific allegations that would support the conclusion that Picower was a control person of

Madoff. See F/M III Bankr. Ct. Op., 568 B.R. at 215 (“The Madoff Deposition does not supply

factual material supporting non-derivative claims . . . .”).

As the bankruptcy court found after careful review of the evidence supporting the

Fox/Marshall III allegations, Appellants have distorted the meaning of the Optimal Testimony.

The testimony does nothing to take the Fox/Marshall III allegations out of the ambit of the

Permanent Injunction.

Appellants also rely on the Madoff Declaration to argue that Picower was a control

person. Leaving aside the suspicious nature of the Declaration, in which a few sentences about

Picower are slipped into a declaration concerning entirely different issues in a different matter, as

the bankruptcy court found, the statements in the Declaration are conclusory. F/M III Bankr. Ct.

Op., 568 Br. at 216. They merely state that Picower “created” the fraud and bore “responsibility

for it.” Id. As the bankruptcy court also found, these statements fly in the face of the Optimal

Testimony, in which Madoff “accepted sole responsibility for the Ponzi scheme.” Id. at 216. 12

11 See Transcript of January 22, 2015 Teleconference at 13:23–25, In re Marshall, 15-MC-0001 (D. Del.), ECF No. 23 (counsel for Fox Plaintiffs representing to the Chief Judge of the Delaware District Court that he has interviewed Madoff); see also Helen Davis Chaitman & Lance Gotthoffer, JP MADOFF: THE UNHOLY ALLIANCE BETWEEN

AMERICA’S BIGGEST BANK AND AMERICA’S BIGGEST CROOK, http://bit.ly/2woMRc7 (last visited Aug. 23, 2017), Chapter 2 (stating Appellants’ counsel has had “numerous” telephone conversations with Madoff).

12 Appellants take issue with the bankruptcy court’s findings, arguing that the court’s determination was comparable to a court on a summary judgment motion rejecting a defendant’s sworn admission as conclusory. (F/M Br. at 26.) But not only is this not a summary judgment motion, the statements were not made by Picower and are not admissions. Moreover, Appellants incorrectly argue that the bankruptcy court determined whether their claim was “plausible.” (F/M Br. at 24 n.2.) However, the bankruptcy court did no such thing. Instead, following Judge Sullivan and the other courts that have reviewed these sorts of claims, see, e.g., G I Dist. Ct. Op., 2013 WL 5511027, at *6,


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II. APPELLANTS’ REMAINING ARGUMENTS ARE UNAVAILING

A. The Trustee’s Standing Is Not at Issue

Appellants argue that the Permanent Injunction does not bar their claims because the

Trustee would lack standing to assert them, citing the Second Circuit’s decision in JPMorgan.

(F/M Br. at 17.) But while the Second Circuit held that the Trustee lacked standing to assert

certain common law claims, the court distinguished that issue from the Trustee’s authority to

enforce an injunction against third party claims that are derivative of the Trustee’s claims,

explicitly condoning the district court’s decision to enforce the very Permanent Injunction at

issue here. JPMorgan, 721 F.3d at 71 n.20 (“The customer claims were duplicative and

derivative of the Trustee’s fraudulent transfer claim. Accordingly, the court found those claims

to be general in that they arose from a single set of actions that harmed BLMIS and all BLMIS

customers in the same way.”) (internal quotations omitted). Importantly, shortly after the Second

Circuit decided JPMorgan, it decided Fox/Marshall I, in which it affirmed the enforcement of

the Permanent Injunction. F/M I Second Cir. Op., 740 F.3d at 90 (distinguishing JPMorgan).

Indeed, Appellants conflate the questions of standing and derivative status. The question

here is whether the Permanent Injunction can bar Appellants from bringing a claim that is

derivative or duplicative of the claims the Trustee brought or could have brought, not whether

the Trustee could have brought the claims Appellants seek to bring. As such, as the Second

Circuit held in Fox/Marshall I, the standing question is irrelevant. “[B]ecause we find that

appellants’ claims are derivative of the Trustee’s claims for fraudulent withdrawals, the fact that

the Trustee lacks standing to bring bona fide conspiracy claims on behalf of BLMIS customers

the bankruptcy court determined whether Appellants had stated a bona fide control person claim. See F/M III Bankr. Ct. Op., 568 B.R. at 209–10.


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under JPMorgan Chase is irrelevant.” F/M I Second Cir. Op., 740 F.3d at 93 n.12. Other courts

concur. G III Dist. Ct. Op., 565 B.R. at 526; F/M I Dist. Ct. Op., 848 F. Supp. 2d at 484; G I

Dist. Ct. Op., 2013 WL 5511027, at *10. Similarly irrelevant is the fact that Appellants seek

different damages or claim different damages from one another, as all such damages are

derivative, “mere secondary harms flowing from the Picower defendants’ fraudulent withdrawals

and the resulting depletion of BLMIS funds.” F/M Second Cir. Op., 740 F.3d at 93.

B. Labeling a Claim as a Control Person Claim Does Not Avoid the Permanent Injunction

Appellants contend that simply because they have attempted to plead a control person

claim, that claim necessarily falls outside the Permanent Injunction. (F/M Br. at 11, 20.) Yet

courts uniformly hold that the label of a particular cause of action is irrelevant to whether the

claim is derivative. See, e.g., Tronox, 855 F.3d at 102; F/M I Second Cir. Op., 740 F.3d at 84.

What is relevant is whether there has been particularized conduct alleged toward Appellants or

particularized harm suffered by them. Tronox, 855 F.3d at 102; F/M I Second Cir. Op., 740 F.3d

at 84. There is no such allegation here.13

Appellants rely on Highland Cap. Mgmt. LP v. Chesapeake Energy Corp. (In re Seven

Seas Petroleum), 522 F.3d 575 (5th Cir. 2008), to contend that their claims are particularized.

But the bankruptcy court, this Court, and the Second Circuit have all rejected the application of

Seven Seas to the earlier versions of Appellants’ complaint precisely because Appellants’ claims

are generalized. F/M I Bankr. Ct. Op., 429 B.R. at 432–33; F/M I Second Cir. Op., 740 F.3d at

92–93 (allegations of inducement in Seven Seas were non-conclusory and based on specific

misrepresentations made to the bondholders on specific dates); see Ritchie Capital Mgmt. L.L.C.

13 The Trustee incorporates and adopts the arguments of the Picower Parties as to why Appellants’ control person arguments lack merit.


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v. General Elec. Capital Corp., 121 F. Supp. 3d 321, 334 (S.D.N.Y. 2015) (distinguishing Seven

Seas where plaintiffs made non-conclusory allegations that a secured creditor knowingly used

misleading financial information to induce them to purchase unsecured notes issued by the

debtor). Appellants similarly rely on Medsker v. Feingold, 307 F. App’x 262 (11th Cir. 2008), to

argue the adequacy of their control person claims. (F/M Br. at 14, 16.) However, this Court and

the bankruptcy court have held that Medsker is inapposite, as that case contained specific

allegations that were not conclusory and alleged specific actions directed towards the plaintiffs.

F/M II—G II Bankr. Ct. Op., 511 B.R. at 393 (rejecting application of Medsker); F/M II Dist. Ct.

Op., 531 B.R. at 352 (same). Appellants also rely on Cumberland Oil Corp. v. Thropp, 791 F.2d

1037 (2d Cir. 1986) and In re First Central Financial Corp., 238 B.R. 9 (Bankr. E.D.N.Y. 1999),

(F/M Br. at 16), but these cases, too, involved individualized misrepresentations or dealt with the

collateral estoppel effect of the third party claims on the debtor.

Appellants further argue that, under § 20(a), Picower owed them an independent duty as a

control person of BLMIS, making these claims independent. (F/M Br. at 12.) Were that the case,

however, the Fox/Marshall II complaint, which similarly asserted a § 20(a) claim, would not

have been enjoined. But it was enjoined, as the derivative nature of the claims does not hinge

upon the cause of action asserted.

III. APPELLANTS SHOULD NOT BE ALLOWED TO CIRCUMVENT THE NET EQUITY DECISION

As the bankruptcy court held in Picard v. Stahl, “[t]here is simply no basis for certain

customers . . . to receive more than their fair share . . . by suing [third parties] for fictitious

profits and other damages, with no independent basis for their claims.” Picard v. Stahl (In re

Bernard L. Madoff), 443 B.R. 295, 310 (Bankr. S.D.N.Y. 2011). Yet that is precisely what

Appellants are attempting to do here—and for the third time. Appellants seek $64 billion in


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damages, the amount of loss that includes customers’ false profits. (A34–35 ¶¶ 101–03.)

Appellants thus seek to represent a “shadow estate” to provide every net loser an additional

claim beyond their claim in the BLMIS proceeding. See F/M I Dist. Ct. Op., 848 F. Supp. 2d at

490–91. Such a result would circumvent the Net Equity Decision and erode the Trustee’s

authority to settle claims. Id. at 490–91. Notably, Appellants, to the extent they could recover

from the estate, received the benefit of the Trustee’s settlement of the Picower claims. See

Tronox, 855 F.3d at 111 (citing St. Paul).

“The whole point of channeling claims through bankruptcy is to avoid creditors getting

ahead of others in line . . . to promote an equitable distribution of debtor assets.” Id. at 106.

Attempts by Appellants and the Goldmans to bring third party actions seeking to upend the net

equity distribution scheme have been unanimously rejected by numerous courts, and should be

rejected here. See, e.g., F/M I Dist. Ct. Op., 848 F. Supp. 2d at 490–91; Goldman I Bankr. Ct.

Op., 477 B.R. at 357.14

Even if the derivative nature of the proposed complaint were debatable, the Settlement

involves “truly unusual circumstances” justifying enjoining the Appellants. See F/M I Dist. Ct.

Op., 848 F. Supp. 2d at 490 (citing In re Metromedia Fiber Network, Inc., 416 F.3d 136, 143 (2d

Cir. 2005)).

Finally, Appellants point out that the Second Circuit noted that “[t]here is conceivably

some particularized conspiracy claim appellants could assert that would not be derivative of

14 The bankruptcy court did not reach the issue of whether Fox/Marshall III violates the automatic stay, but the stay is applicable as it is co-extensive with the Permanent Injunction. Picard v. Marshall, Transcript of May 7, 2014 Hearing, Adv. Pro. No. 14-01840, ECF No. 33, at 26:15–16 (the bankruptcy court recognizing that “[i]f it’s a derivative claim, it violates the automatic stay and it violates the injunction.”) The Injunction also made the automatic stay permanent as to duplicative and derivative claims brought against Picower. See In re Dreier LLP, 429 B.R. 112, 133 (Bankr. S.D.N.Y. 2010); F/M I Dist. Ct. Op., 848 F. Supp. 2d at 479. It also violates stay orders entered by the district court. (See December 15 Stay Order ¶ IV, SEC v. Bernard L. Madoff, No. 08-CIV-10791, ECF No. 4; see also December 18 Stay Order ¶ IX, ECF No. 8; February 9 Stay Order ¶ IV, ECF No. 18.) See F/M I Bankr. Ct. Op., 429 B.R. at 433.


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those asserted by the Trustee.” (F/M Br. at 2–3.) But they have not done so. The Second

Circuit’s statement in Fox/Marshall I should not be read “as an invitation for plaintiffs to

limitlessly re-plead theories to circumvent the reach of an injunction.” Tronox, 855 F.3d at 112.15

Moreover, Appellants are not entitled to discovery to frame a complaint, as they now appear to

urge.16 (F/M Br. at 22, 24). See Marshall, 2015 WL 2183939, at *3 (denying Appellants’ request

for discovery brought for the “improper purpose” of “fram[ing] their third amended

complaint . . . .”).

The Permanent Injunction should be enforced.

15 The Trustee concurs with the Picower Parties’ arguments as to why, under Tronox, 355 F.3d at 112, they are entitled to finality.

16 The Trustee incorporates and adopts the arguments made by the Picower Parties as to why discovery is inappropriate.


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CONCLUSION

For the foregoing reasons, the Trustee respectfully requests that the Court affirm the

judgment of the bankruptcy court.

Dated: August 24, 2017 New York, New York

Respectfully submitted,

Baker & Hostetler LLP

By: /s/ Deborah H. Renner Of Counsel: Thomas D. Warren Baker & Hostetler LLP Key Tower 127 Public Square, Suite 2000 Cleveland, OH 44114 [email protected] Telephone: (216) 621-0200 Facsimile: (216) 696-0740

David J. Sheehan [email protected] Deborah H. Renner [email protected] Ferve E. Ozturk [email protected] Samuel M. Light [email protected] 45 Rockefeller Plaza New York, NY 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and the Estate of Bernard L. Madoff


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