You can try to convince the court it is a squirrel, but if it quacks like a duck …
As a bankruptcy attorney in Mount Vernon, IL for over 25 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.
A & G Goldman P’ship v. Picard (In re Bernard L. Madoff Inv. Sec. LLC), 17-51220(a), 2018 U.S. App. LEXIS 17574 (2d Cir., June 27, 2018)
In an appeal arising from the Securities Investor Protection Act (“SIPA”) liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”), the entity through which Bernard Madoff (“Madoff”) perpetrated his Ponzi scheme, the Second Circuit affirmed the judgment of the district court enjoining an action brought in Florida because it violated an injunction and automatic stay issued in the SIPA liquidation.
On May 12, 2009, Irving H. Picard, the Trustee in the SIPA liquidation (the “Trustee”) filed an adversary proceeding in the SIPA liquidation against the estate of Jeffry Picower (“Picower”) and several entities associated with Picower (together, the “Picower Parties”)
seeking to recover $6.7 billion in withdrawals Picower made from BLMIS and bringing claims for fraudulent transfer, avoidable preferences, and turnover under both the Bankruptcy Code and New York law. The Trustee alleged that Picower benefited from BLMIS’s Ponzi scheme and either knew or should have known that BLMIS’s trading activity was fraudulent and fictitious, due to the closeness between Picower and Madoff and Picower’s knowledge of BLMIS’s operations, among other reasons.
In January 2011, the Trustee and the Picower Parties reached a settlement, pursuant to which the Picower Parties agreed to transfer over $7.2 billion to the government for distribution to Madoff’s victims, $5 billion of which would be returned directly to the BLMIS estate. The bankruptcy court also issued a permanent injunction (the “Injunction”), which barred future claims against the Picower Parties that were duplicative or derivative of the claims brought by the Trustee.
In August 2014, A & G Goldman Partnership and Pamela Goldman (together, “Goldman”), former BLMIS customers, filed a complaint in the United States District Court for the Southern District of Florida (the “Florida action”), bringing a securities fraud claim under § 20(a) of the Securities Exchange Act of 1934 against the Picower Parties. The Picower Parties and the Trustee sought to enjoin the Florida action, contending that it violated the Injunction. The bankruptcy court in the Southern District of New York agreed and enjoined the Florida action, which the district court affirmed. This was Goldman’s third attempt to hold the Picower Parties liable under § 20(a), and it was the third time that the bankruptcy court enjoined Goldman from proceeding under the Injunction.
The complaint in the Florida action made many of the same allegations as the prior two complaints that had been dismissed (which focused primarily on Picower’s use of his own accounts at BLMIS), but further alleged two categories of conduct by Picower unrelated to his own BLMIS accounts. First, Goldman claimed that Picower what two purported loans to BLMIS totaling more than $200 million to help the Madoff Ponzi scheme avoid discovery and collapse, which the Second Circuit referred to as the “propping-up allegations.” Both loan transactions were completed without formal loan documents and were not disclosed to the Financial Institution Regulatory Authority (“FINRA”). Second, in what the Second Circuit referred to as “counterparty allegations,” Goldman claimed that Picower allowed BLMIS to list him in its fabricated books and records as a counterparty for a large volume of fictitious options trading, alleging that this lent credibility to Madoff’s and BLMIS’s fraudulent representations that they were engaged in a high volume of options trading. Finally, Goldman alleged that Picower knew that the foregoing activity would result in BLMIS’s preparation and filing of false financial reports with FINRA, and that such reports would reach BLMIS customers.
The central question in this appeal was whether the complaint in the Florida action violated the Injunction because, despite labeling their claim as a § 20(a) claim for control person liability, Goldman instead brought a disguised fraudulent transfer claim that was derivative of the Trustee’s fraudulent transfer claims. The Second Circuit began its analysis by outlining the differences between the two types of claims, noting that while a fraudulent transfer is a paradigmatic example of a claim that is “general” to all creditors in a bankruptcy (and is often brought by a trustee for the benefit of all creditors), a claim under § 20(a) is a securities fraud claim that is particularized to the injured party or parties.
The elements of a § 20(a) claim are (1) a primary violation of the securities laws by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person’s fraud. Goldman claimed that the Picower Parties were liable under § 20(a) because BLMIS was the primary violator of the securities laws, Picower was a control person of BLMIS, and Picower was a direct participant in BLMIS’s fraud.
The Second Circuit was not persuaded by this argument, finding that the substance of the allegations was essentially a derivative, fraudulent transfer claim, in part because Goldman failed to show that Picower had the power to direct the management or policies of BLMIS. Preliminarily, excepting the propping-up and counterparty allegations, the Second Circuit noted that the majority of Goldman’s complaint centered on the withdrawals that Picower made to himself from his accounts at BLMIS, which the Second Circuit noted caused a direct injury to the estate highly emblematic of a fraudulent transfer. The Second Circuit also noted that such allegations demonstrated no control over the “management and policies” of BLMIS.
The Second Circuit was also not persuaded that the propping-up or counterparty allegations demonstrated that Picower controlled BLMIS within the meaning of § 20(a). First, Goldman asserted that Picower’s contributions to the Ponzi scheme allowed the scheme to continue, and that, had he chosen not to assist BLMIS, the scheme would have collapsed earlier than it did. However, the Second Circuit noted that Goldman was only making conclusory allegations that Picower ever leveraged his allegedly important role in the scheme to direct the “management and policies” of BLMIS, holding that it was not reasonable to infer that Picower had that kind of influence merely because he could have caused BLMIS to collapse earlier than it did.
Next, Goldman contended that the propping-up and counterparty allegations demonstrated Picower’s ability to direct the creation and dissemination of false and misleading trading and financial documentation because he knew his participation would result in false information being incorporated into BLMIS’s financial disclosures. Again, the Second Circuit noted that such allegations demonstrated only Picower’s understanding that his participation would result in the dissemination of false information, not that he actually directed that the dissemination of false information occur or otherwise had control of the primary violator of the securities laws.
Ultimately, the Second Circuit held that the “control” allegations in the complaint amounted to nothing more than an attempt to “plead around” the injunction to assert a claim for fraudulent withdrawal of assets from the estate. Because such claim was a derivative claim that was barred by the Injunction, the Second Circuit affirmed the judgment of the district court.
About the blogger:
Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.
He is also the author of books on finance and bankruptcy available on Kindle through Amazon!
Whether you live in Mount Vernon, Salem, Centralia, McLeansboro or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!
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